Correcting the errors: Volatility forecast evaluation using high-frequency data and realized volatilities

We develop general model-free adjustment procedures for the calculation of unbiased volatility loss functions based on practically feasible realized volatility benchmarks. The procedures, which exploit recent nonparametric asymptotic distributional results, are both easy-to-implement and highly accurate in empirically realistic situations. We also illustrate that properly accounting for the measurement errors in the volatility forecast evaluations reported in the existing literature can result in markedly higher estimates for the true degree of return volatility predictability.

Estimating equilibrium models of sorting across locations

While there is growing interest in measuring the size and scope of local spillovers, it is well understood that such spillovers cannot be distinguished from unobservable local attributes using solely the observed location decisions of individuals or firms. We propose an empirical strategy for recovering estimates of spillovers in the presence of unobserved local attributes for a broadly applicable class of equilibrium sorting models. Our approach relies on an IV strategy derived from the internal logic of the sorting model itself. We show practically how the strategy is implemented, provide intuition for our instruments, discuss the role of effective choice-set variation in identifying the model, and carry-out a series of Monte Carlo simulations to demonstrate performance in small samples. © 2007 The Author(s). Journal compilation Royal Economic Society 2007.

If smoking increases absences, does quitting reduce them?

OBJECTIVE: This study examined the impact of smoking, quitting, and time since quit on absences from work. METHODS: Data from the nationally representative Tobacco Use Supplements of the 1992/93, 1995/96, and 1998/99 Current Population Surveys were used. The study included full time workers aged between 18-64 years, yielding a sample size of 383 778 workers. A binary indicator of absence due to sickness in the last week was analysed as a function of smoking status including time since quit for former smokers. Extensive demographic variables were included as controls in all models. RESULTS: In initial comparisons between current and former smokers, smoking increased absences, but quitting did not reduce them. However, when length of time since quit was examined, it was discovered that those who quit within the last year, and especially the last three months, had a much greater probability of absences than did current smokers. As the time since quitting increased, absences returned to a rate somewhere between that of never and current smokers. Interactions between health and smoking status significantly improved the fit of the model. CONCLUSIONS: Smokers who quit reduced their absences over time but increase their absences immediately after quitting. Quitting ill may account for some but not all of this short run impact.

Dimensions, issues, and bills: Appropriations voting on the house floor

One of the fundamental findings in the congressional literature is that one or sometimes two dimensions can successfully describe roll-call voting. In this paper we investigate if we can reach the same conclusions about low dimensionality when we divide the roll-call agenda into subsets of relatively homogeneous subject matter. We are primarily interested in the degree to which the same ordering of representatives is yielded across these different groups of votes. To conduct our analysis we focus on all roll calls on the 13 annual appropriations bills across eight congresses. When we concentrate on these smaller issue areas, we find that voting is multidimensional and members do not vote in a consistent ideological fashion across all issue areas. Copyright © Southern Political Science Association 2010.

The cost of biopharmaceutical R&D: Is biotech different?

The costs of developing the types of new drugs that have been pursued by traditional pharmaceutical firms have been estimated in a number of studies. However, similar analyses have not been published on the costs of developing the types of molecules on which biotech firms have focused. This study represents a first attempt to get a sense for the magnitude of the R&D costs associated with the discovery and development of new therapeutic biopharmaceuticals (specifically, recombinant proteins and monoclonal antibodies [mAbs]). We utilize drug-specific data on cash outlays, development times, and success in obtaining regulatory marketing approval to estimate the average pre-tax R&D resource cost for biopharmaceuticals up to the point of initial US marketing approval (in year 2005 dollars). We found average out-of-pocket (cash outlay) cost estimates per approved biopharmaceutical of $198 million, $361 million, and $559 million for the preclinical period, the clinical period, and in total, respectively. Including the time costs associated with biopharmaceutical R&D, we found average capitalized cost estimates per approved biopharmaceutical of $615 million, $626 million, and $1241 million for the preclinical period, the clinical period, and in total, respectively. Adjusting previously published estimates of R&D costs for traditional pharmaceutical firms by using past growth rates for pharmaceutical company costs to correspond to the more recent period to which our biopharmaceutical data apply, we found that total out-of-pocket cost per approved biopharmaceutical was somewhat lower than for the pharmaceutical company data ($559 million vs $672 million). However, estimated total capitalized cost per approved new molecule was nearly the same for biopharmaceuticals as for the adjusted pharmaceutical company data ($1241 million versus $1318 million). The results should be viewed with some caution for now given a limited number of biopharmaceutical molecules with data on cash outlays, different therapeutic class distributions for biopharmaceuticals and for pharmaceutical company drugs, and uncertainty about whether recent growth rates in pharmaceutical company costs are different from immediate past growth rates. Copyright © 2007 John Wiley & Sons, Ltd.

Entry and competition in generic biologics

Patents for several blockbuster biological products are expected to expire soon. The Food and Drug Administration is examining whether biologies can and should be treated like pharmaceuticals with regard to generics. In contrast with pharmaceuticals, which are manufactured through chemical synthesis, biologies are manufactured through fermentation, a process that is more variable and costly. Regulators might require extensive clinical testing of generic biologies to demonstrate equivalence to the branded product. The focus of the debate on generic biologies has been on legal and health concerns, but there are important economic implications. We combine a theoretical model of generic biologies with regression estimates from generic pharmaceuticals to estimate market entry and prices in the generic biologic market. We find that generic biologies will have high fixed costs from clinical testing and from manufacturing, so there will be less entry than would be expected for generic pharmaceuticals. With fewer generic competitors, generic biologies will be relatively close in price to branded biologies. Policy makers should be prudent in estimating financial benefits of generic biologies for consumers and payers. We also examine possible government strategies to promote generic competition. Copyright © 2007 John Wiley & Sons, Ltd.