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.

Fixed-term contracts and the duration distribution of unemployment

In the mid-1980s, many European countries introduced fixed-term contracts.Since then their labor markets have become more dynamic. This paper studiesthe implications of such reforms for the duration distribution ofunemployment, with particular emphasis on the changes in the durationdependence. I estimate a parametric duration model using cross-sectionaldata drawn from the Spanish Labor Force Survey from 1980 to 1994 to analyzethe chances of leaving unemployment before and after the introduction offixed-term contracts. I find that duration dependence has increased sincesuch reform. Semi-parametric estimation of the model also shows that forlong spells, the probability of leaving unemployment has decreased sincesuch reform.

The impact of interest-rate subsidies on long-term household debt: Evidence from a large program

The responsiveness of long-term household debt to the interest rate is acrucial parameter for assessing the effectiveness of public policies aimedat promoting specific types of saving. This paper estimates the effect ofa reform of Credito Bonificado, a large program in Portugal that subsidizedmortgage interest rates, on long-term household debt. The reform establisheda ceiling in the price of the house that could be financed through theprogram, and provides plausibly exogenous variation in incentives. Usinga unique dataset of matched household survey data and administrative recordsof debt, we document a large decrease in the probability of signing a newloan after the removal of the subsidy.

Short-term investment and equilibrium multiplicity

I study the effects of the heterogeneity of traders'horizon in the context of a 2-period NREE model whereall traders are risk averse. Owing to inventory effects,myopic trading behavior generates multiplicity ofequilibria. In particular, two distinct patterns arise.Along the first equilibrium, short term tradersanticipate higher second period price reaction toinformation arrival and, owing to risk aversion,scale back their trading intensity. This, in turn,reduces both risk sharing and information impoundinginto prices enforcing a high returns' volatility-lowprice informativeness equilibrium. In the second one,the opposite happens and a low volatility-high priceinformativeness equilibrium arises.

The long term effects of legalizing divorce on children

We estimate the effect of divorce legalization on the long-term well-being ofchildren. Our identification strategy relies on exploiting the different timing of divorcelegalization across European countries. Using European Community Household Paneldata, we compare the adult outcomes of cohorts who were raised in an environmentwhere divorce was banned with cohorts raised after divorce was legalized in the samecountry. We also have control countries where all cohorts were exposed (or notexposed) to divorce as children, thus leading to a difference-in-differences approach. Wefind that women who grew up under legal divorce have lower earnings and income aswell as worse health as adults compared with women who grew up under illegal divorce.These effects are not found for men. We find no effects of divorce legalization onchildren s family formation or dissolution patterns.

Stock returns, term structure, inflation and real activity: An international perspective

This paper analyses the empirical interdependences among assetreturns, real activity and inflation from a multicountry and internationalpoint of view. We find that nominal stock returns are significantly relatedto inflation only in the US, that the US term structure of interest ratespredicts both domestic and foreign inflation rates while foreign termstructures do not have this predictive power and that innovations in inflationand exchange rates induce insignificant responses of real and financialvariables. An interpretation of the dynamics and some policy implicationsof the results are provided.

Hiring and firing costs, adverse selection and long-term unemployment

In this paper, we present a matching model with adverse selection that explains why flows into and out of unemployment are much lower in Europe compared to North America, while employment-to-employment flows are similar in the two continents. In the model,firms use discretion in terms of whom to fire and, thus, low quality workers are more likely to be dismissed than high quality workers. Moreover, as hiring and firing costs increase, firms find it more costly to hire a bad worker and, thus, they prefer to hire out of the pool of employed job seekers rather than out of the pool of the unemployed, who are more likely to turn out to be 'lemons'. We use microdata for Spain and the U.S. and find that the ratio of the job finding probability of the unemployed to the job finding probability of employed job seekers was smaller in Spain than in the U.S. Furthermore, using U.S. data, we find that the discrimination of the unemployed increased over the 1980's in those states that raised firing costs by introducing exceptions to the employment-at-will doctrine.

Speculative dynamics in the term structure of interest rates

When long maturity bonds are traded frequently and traders have non-nestedinformation sets, speculative behavior in the sense of Harrison and Kreps (1978) arises.Using a term structure model displaying such speculative behavior, this paper proposesa conceptually and observationally distinct new mechanism generating time varying predictableexcess returns. It is demonstrated that (i) dispersion of expectations about futureshort rates is sufficient for individual traders to systematically predict excess returns and(ii) the new term structure dynamics driven by speculative trade is orthogonal to publicinformation in real time, but (iii) can nevertheless be quantified using only publicly availableyield data. The model is estimated using monthly data on US short to medium termTreasuries from 1964 to 2007 and it provides a good fit of the data. Speculative dynamicsare found to be quantitatively important, potentially accounting for a substantial fractionof the variation of bond yields and appears to be more important at long maturities.

Long term debt with hidden borrowing

We consider borrowers with the opportunity to raise funds from a competitive baking sector,that shares information about borrowers, and an alternative hidden lender. We highlight thatthe presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.

Why do emerging economies borrow short term?

We argue that one reason why emerging economies borrow short term is that it is cheaperthan borrowing long term. This is especially the case during crises, as in these episodes therelative cost of long-term borrowing increases. We construct a unique database of sovereignbond prices, returns, and issuances at di¤erent maturities for 11 emerging economies from 1990to 2009 and present a set of new stylized facts. On average, these countries pay a higher riskpremium on long-term than on short-term bonds. During crises, the di¤erence between the tworisk premia increases and issuance shifts towards shorter maturities. To illustrate our argument,we present a simple model in which the maturity structure is the outcome of a risk sharingproblem between an emerging economy subject to rollover crises and risk averse internationalinvestors.

Risk management under a two-factor model of the term structure of interest rates

This paper presents several applications to interest rate risk managementbased on a two-factor continuous-time model of the term structure of interestrates previously presented in Moreno (1996). This model assumes that defaultfree discount bond prices are determined by the time to maturity and twofactors, the long-term interest rate and the spread (difference between thelong-term rate and the short-term (instantaneous) riskless rate). Several newmeasures of ``generalized duration" are presented and applied in differentsituations in order to manage market risk and yield curve risk. By means ofthese measures, we are able to compute the hedging ratios that allows us toimmunize a bond portfolio by means of options on bonds. Focusing on thehedging problem, it is shown that these new measures allow us to immunize abond portfolio against changes (parallel and/or in the slope) in the yieldcurve. Finally, a proposal of solution of the limitations of conventionalduration by means of these new measures is presented and illustratednumerically.

A two-mean reverting-factor model of the term structure of interest rates

This paper presents a two--factor model of the term structure ofinterest rates. We assume that default free discount bond prices aredetermined by the time to maturity and two factors, the long--term interestrate and the spread (difference between the long--term rate and theshort--term (instantaneous) riskless rate). Assuming that both factorsfollow a joint Ornstein--Uhlenbeck process, a general bond pricing equationis derived. We obtain a closed--form expression for bond prices andexamine its implications for the term structure of interest rates. We alsoderive a closed--form solution for interest rate derivatives prices. Thisexpression is applied to price European options on discount bonds andmore complex types of options. Finally, empirical evidence of the model'sperformance is presented.

Financing constraints and fixed-term employment contracts

This paper studies the interactions between financing constraints and theemployment decisions of firms when both fixed-term and permanent employmentcontracts are available. We first develop a dynamic model that shows theeffects of financing constraints and firing costs on employment decisions. Oncecalibrated, the model shows that financially constrained firms tend to use moreintensely fixed term workers, and to make them absorb a larger fraction of thetotal employment volatility than financially unconstrained firms do. We testand confirm the predictions of the model on a unique panel data of Italian manufacturingfirms with detailed information about the type of workers employedby the firms and about firm financing constraints.

Regulation of GABA(A) and glutamate receptor expression, synaptic facilitation and long-term potentiation in the hippocampus of prion mutant mice

Background: Prionopathies are characterized by spongiform brain degeneration, myoclonia, dementia, and periodic electroencephalographic (EEG) disturbances. The hallmark of prioniopathies is the presence of an abnormal conformational isoform (PrP(sc)) of the natural cellular prion protein (PrP(c)) encoded by the Prnp gene. Although several roles have been attributed to PrP(c), its putative functions in neuronal excitability are unknown. Although early studies of the behavior of Prnp knockout mice described minor changes, later studies report altered behavior. To date, most functional PrP(c) studies on synaptic plasticity have been performed in vitro. To our knowledge, only one electrophysiological study has been performed in vivo in anesthetized mice, by Curtis and coworkers. They reported no significant differences in paired-pulse facilitation or LTP in the CA1 region after Schaffer collateral/commissural pathway stimulation. Principal Findings: Here we explore the role of PrP(c) expression in neurotransmission and neural excitability using wild-type, Prnp -/- and PrP(c)-overexpressing mice (Tg20 strain). By correlating histopathology with electrophysiology in living behaving mice, we demonstrate that both Prnp -/- mice but, more relevantly Tg20 mice show increased susceptibility to KA, leading to significant cell death in the hippocampus. This finding correlates with enhanced synaptic facilitation in paired-pulse experiments and hippocampal LTP in living behaving mutant mice. Gene expression profiling using Illumina microarrays and Ingenuity pathways analysis showed that 129 genes involved in canonical pathways such as Ubiquitination or Neurotransmission were co-regulated in Prnp -/- and Tg20 mice. Lastly, RT-qPCR of neurotransmission-related genes indicated that subunits of GABA(A) and AMPA-kainate receptors are co-regulated in both Prnp -/- and Tg20 mice. Conclusions/Significance: Present results demonstrate that PrP(c) is necessary for the proper homeostatic functioning of hippocampal circuits, because of its relationships with GABA(A) and AMPA-Kainate neurotransmission. New PrP(c) functions have recently been described, which point to PrP(c) as a target for putative therapies in Alzheimer's disease. However, our results indicate that a "gain of function" strategy in Alzheimer's disease, or a "loss of function" in prionopathies, may impair PrP(c) function, with devastating effects. In conclusion, we believe that present data should be taken into account in the development of future therapies.