The effects of a universal child benefit

I study the impact of a universal child benefit on fertility and family well-being. I exploitthe unanticipated introduction of a new, sizeable, unconditional child benefit in Spain in2007, granted to all mothers giving birth on or after July 1, 2007. The regressiondiscontinuity-type design allows for a credible identification of the causal effects. I find thatthe benefit did lead to a significant increase in fertility, as intended, part of it coming froman immediate reduction in abortions. On the unintended side, I find that families whoreceived the benefit did not increase their overall expenditure or their consumption ofdirectly child-related goods and services. Instead, eligible mothers stayed out of the laborforce significantly longer after giving birth, which in turn led to their children spending lesstime in formal child care and more time with their mother during their first year of life. Ialso find that couples who received the benefit were less likely to break up the year afterhaving the child, although this effect was only short-term. Taken together, the resultssuggest that child benefits of this kind may successfully increase fertility, as well asaffecting family well-being through their impact on maternal time at home and familystability.

Fiscal policy, pricing frictions and monetary accommodation

We investigate the theoretical conditions for effectiveness of government consumptionexpenditure expansions using US, Euro area and UK data. Fiscal expansions taking placewhen monetary policy is accommodative lead to large output multipliers in normal times.The 2009-2010 packages need not produce significant output multipliers, may havemoderate debt effects, and only generate temporary inflation. Expenditure expansionsaccompanied by deficit/debt consolidations schemes may lead to short run output gains buttheir success depends on how monetary policy and expectations behave. Trade opennessand the cyclicality of the labor wedge explain cross-country differences in the magnitude ofthe multipliers.

On the term structure of Interbank interest rates: Jump-diffusion processes and option pricing

In this paper we study the dynamic behavior of the term structureof Interbank interest rates and the pricing of options on interest ratesensitive securities. We posit a generalized single factor model withjumps to take into account external influences in the market. Daily datais used to test for jump effects. Qualitative examination of the linkagebetween Monetary Authorities' interventions and jumps are studied. Pricingresults suggests a systematic underpricing in bonds and call options ifthe jumps component is not included. However, the pricing of put optionson bonds presents indeterminacies.

Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No

This note elaborates on a recent article by Chan, Greenbaum and Thakor(1992) who contend that fairly priced deposit insurance is incompatiblewithfree competition in the banking sector, in the presence of adverseselection.We show here that at soon as one introduces a real economic motivationfromprivate banks to manage the deposits from the public, then fairly priceddeposit insurance becomes possible. However, we also show that sucha fairlypriced insurance is never desirable, precisely because of adverseselection.We compute the characteristics of the optimal premium schedule, whichtradesoff between the cost of adverse selection and the cost of ``unfaircompetition ''.

On the cultural transmission of corruption

We provide a cultural explanation to the phenomenon of corruption in the framework of an overlapping generations model with intergenerational transmissionof values. We show that the economy has two steady states with different levels of corruption. The driving force in the equilibrium selection process is the education effort exerted by parents which depends on the distribution of ethics in the population and on expectations about future policies. We propose some policy interventions which via parents' efforts have long-lasting effects on corruption and show the success of intensive education campaigns. Educating the young is a key element in reducing corruption successfully.

Solving non-linear stochastic models by parameterizing expectations: An application to asset pricing with production

A new algorithm called the parameterized expectations approach(PEA) for solving dynamic stochastic models under rational expectationsis developed and its advantages and disadvantages are discussed. Thisalgorithm can, in principle, approximate the true equilibrium arbitrarilywell. Also, this algorithm works from the Euler equations, so that theequilibrium does not have to be cast in the form of a planner's problem.Monte--Carlo integration and the absence of grids on the state variables,cause the computation costs not to go up exponentially when the numberof state variables or the exogenous shocks in the economy increase. \\As an application we analyze an asset pricing model with endogenousproduction. We analyze its implications for time dependence of volatilityof stock returns and the term structure of interest rates. We argue thatthis model can generate hump--shaped term structures.

Option pricing under stochastic volatility and stochastic interest rate in the Spanish case

Among the underlying assumptions of the Black-Scholes option pricingmodel, those of a fixed volatility of the underlying asset and of aconstantshort-term riskless interest rate, cause the largest empirical biases. Onlyrecently has attention been paid to the simultaneous effects of thestochasticnature of both variables on the pricing of options. This paper has tried toestimate the effects of a stochastic volatility and a stochastic interestrate inthe Spanish option market. A discrete approach was used. Symmetricand asymmetricGARCH models were tried. The presence of in-the-mean and seasonalityeffectswas allowed. The stochastic processes of the MIBOR90, a Spanishshort-terminterest rate, from March 19, 1990 to May 31, 1994 and of the volatilityofthe returns of the most important Spanish stock index (IBEX-35) fromOctober1, 1987 to January 20, 1994, were estimated. These estimators wereused onpricing Call options on the stock index, from November 30, 1993 to May30, 1994.Hull-White and Amin-Ng pricing formulas were used. These prices werecomparedwith actual prices and with those derived from the Black-Scholesformula,trying to detect the biases reported previously in the literature. Whereasthe conditional variance of the MIBOR90 interest rate seemed to be freeofARCH effects, an asymmetric GARCH with in-the-mean and seasonalityeffectsand some evidence of persistence in variance (IEGARCH(1,2)-M-S) wasfoundto be the model that best represent the behavior of the stochasticvolatilityof the IBEX-35 stock returns. All the biases reported previously in theliterature were found. All the formulas overpriced the options inNear-the-Moneycase and underpriced the options otherwise. Furthermore, in most optiontrading, Black-Scholes overpriced the options and, because of thetime-to-maturityeffect, implied volatility computed from the Black-Scholes formula,underestimatedthe actual volatility.

A unifying approach to the empirical evaluation of asset pricing models

Two main approaches are commonly used to empirically evaluate linear factor pricingmodels: regression and SDF methods, with centred and uncentred versions of the latter.We show that unlike standard two-step or iterated GMM procedures, single-step estimatorssuch as continuously updated GMM yield numerically identical values for prices of risk,pricing errors, Jensen s alphas and overidentifying restrictions tests irrespective of the modelvalidity. Therefore, there is arguably a single approach regardless of the factors being tradedor not, or the use of excess or gross returns. We illustrate our results by revisiting Lustigand Verdelhan s (2007) empirical analysis of currency returns.

Competitive location and pricing on networks

In this paper we consider a location and pricing model for a retail firm that wants to enter a spatial market where a competitor firm is already operating as a monopoly with several outlets. The entering firms seeks to determine the optimal uniform mill price and its servers' locations that maximizes profits given the reaction in price of the competitor firm to its entrance. A tabu search procedure is presentedto solve the model together with computational experience.

Earnings management and audit adjustments: An empirical study of IBEX 35 constituents

Doubts about the reliability of a company's qualitative financial disclosure increase market participant expectations from the auditor's report. The auditing process is supposed to serve as a monitoring device that reduces management incentives to manipulate reported earnings. Empirical research confirms that it could be an efficient device under some circumstancesand recognizes that our estimates of the informativeness of audit reports are unavoidably biased (e.g., because of a client's anticipation of the auditing process). This empirical study supports the significant role of auditors in the financial market, in particular in the prevention of earnings management practice. We focus on earnings misstatements, which auditors correct with anadjustment, using a sample of past and current constituents of the benchmark market index in Spain, IBEX 35, and manually collected audit adjustments reported over the 1997-2004 period (42 companies, 336 annual reports, 75 earnings misstatements). Our findings confirm that companies more often overstate than understate their earnings. An investor may foresee earningsmisreporting, as manipulators have a similar profile (e.g., more leveraged and with lower sales). However, he may receive valuable information from the audit adjustment on the size of earnings misstatement, which can be significantly large (i.e., material in almost all cases). We suggest that the magnitude of an audit adjustment depends, other things constant, on annual revenues and free cash levels. We also examine how the audit adjustment relates to the observed market price, trading volume and stock returns. Our findings are that earnings manipulators have a lower price and larger trading volume compared to their rivals. Their returns are positively associated with the magnitude of earnings misreporting, which is not consistent with the possible pricing of audit information.

A generalization of Hull and White formula and applications to option pricing approximation

By means of Malliavin Calculus we see that the classical Hull and White formulafor option pricing can be extended to the case where the noise driving thevolatility process is correlated with the noise driving the stock prices. Thisextension will allow us to construct option pricing approximation formulas.Numerical examples are presented.

On the relevance of modeling volatility for pricing purposes

This paper presents a two-factor (Vasicek-CIR) model of the term structure of interest rates and develops its pricing and empirical properties. We assume that default free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate and the spread. Assuming a certain process for both factors, a general bond pricing equation is derived and a closed-form expression for bond prices is obtained. Empirical evidence of the model's performance in comparisson with a double Vasicek model is presented. The main conclusion is that the modeling of the volatility in the long-term rate process can help (in a large amount) to fit the observed data can improve - in a reasonable quantity - the prediction of the future movements in the medium- and long-term interest rates. However, for shorter maturities, it is shown that the pricing errors are, basically, negligible and it is not so clear which is the best model to be used.

The determinants of pricing in pharmaceuticals: Are U.S. prices really higher than those of Canada?

This paper studies price determination in pharmaceutical markets using data for 25 countries, six years and a comprehensive list of products from the MIDAS IMS database. We show that market power and the quality of the product has a significantly positive impact of prices. The nationality of the producer appears to have a small and often insignificant impact on prices, which suggests that countries which regulates prices have relatively little power to do it in a way that advances narrow national interest. We produce a theoretical explanation for this phenomenon based on the fact that low negotiated prices in a country would have a knock-on effect in other markets, and is thus strongly resisted by producers.Another key finding is that the U.S. has prices that are not significantly higher than those of countries with similar income levels. This, together with the former observation on the effect of the nationality of producers casts doubt on the ability of countries to pursue "free-riding" regulation.

Review of the literature on reference pricing

This paper reviews the literature on reference pricing (RP) in pharmaceutical markets. The RP strategy for cost containment of expenditure on drugs is analyzed as part of the procurement mechanism. We review the existing literature and the state-of-the-art regarding RP by focusing on its economic effects. In particular, we consider: (1) the institutional context and problem-related factors which appear to underline the need to implement an RP strategy; i.e., its nature, characteristics and the sort of health care problems commonly addressed; (2) how RP operates in practice; that is, how third party-payers (the insurers/buyers) have established the RP systems existing on the international scene (i.e., information methods, monitoring procedures and legislative provisions); (3)the range of effects resulting from particular RP strategies (including effects on choice of appropriate pharmaceuticals, insurer savings, total drug expenditures, prices of referenced and non-referenced products and dynamic efficiency; (4) the market failures which an RP policy is supposed to address and the main advantages and drawbacks which emerge from an analysis of its effects. Results suggest that RP systems achieve better their postulated goals (1) if cost inflation in pharmaceuticals is due to high prices rather than to the excess of prescription rates, (2) when the larger is the existing difference in prices among equivalent drugs, and (3) more important is the actual market for generics.