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.

The persistence of inflation in OECD countries: A fractionally integrated approach

The statistical properties of inflation and, in particular, its degree of persistence and stability over time is a subject of intense debate and no consensus has been achieved yet. The goal of this paper is to analyze this controversy using a general approach, with the aim of providing a plausible explanation for the existing contradictory results. We consider the inflation rates of 21 OECD countries which are modelled as fractionally integrated (FI) processes. First, we show analytically that FI can appear in inflation rates after aggregating individual prices from firms that face different costs of adjusting their prices. Then, we provide robust empirical evidence supporting the FI hypothesis using both classical and Bayesian techniques. Next, we estimate impulse response functions and other scalar measures of persistence, achieving an accurate picture of this property and its variation across countries. It is shown that the application of some popular tools for measuring persistence, such as the sum of the AR coefficients, could lead to erroneous conclusions if fractional integration is present. Finally, we explore the existence of changes in inflation inertia using a novel approach. We conclude that the persistence of inflation is very high (although non-permanent) in most post-industrial countries and that it has remained basically unchanged over the last four decades.

Adaptive model selection using empirical complexities

Given $n$ independent replicates of a jointly distributed pair $(X,Y)\in {\cal R}^d \times {\cal R}$, we wish to select from a fixed sequence of model classes ${\cal F}_1, {\cal F}_2, \ldots$ a deterministic prediction rule $f: {\cal R}^d \to {\cal R}$ whose risk is small. We investigate the possibility of empirically assessingthe {\em complexity} of each model class, that is, the actual difficulty of the estimation problem within each class. The estimated complexities are in turn used to define an adaptive model selection procedure, which is based on complexity penalized empirical risk.The available data are divided into two parts. The first is used to form an empirical cover of each model class, and the second is used to select a candidate rule from each cover based on empirical risk. The covering radii are determined empirically to optimize a tight upper bound on the estimation error. An estimate is chosen from the list of candidates in order to minimize the sum of class complexity and empirical risk. A distinguishing feature of the approach is that the complexity of each model class is assessed empirically, based on the size of its empirical cover.Finite sample performance bounds are established for the estimates, and these bounds are applied to several non-parametric estimation problems. The estimates are shown to achieve a favorable tradeoff between approximation and estimation error, and to perform as well as if the distribution-dependent complexities of the model classes were known beforehand. In addition, it is shown that the estimate can be consistent,and even possess near optimal rates of convergence, when each model class has an infinite VC or pseudo dimension.For regression estimation with squared loss we modify our estimate to achieve a faster rate of convergence.

The importance of individual heterogeneity in the decomposition of measures of socioeconomic inequality in health: An approach based on quantile regression

This paper shows how recently developed regression-based methods for thedecomposition of health inequality can be extended to incorporateindividual heterogeneity in the responses of health to the explanatoryvariables. We illustrate our method with an application to the CanadianNPHS of 1994. Our strategy for the estimation of heterogeneous responsesis based on the quantile regression model. The results suggest that thereis an important degree of heterogeneity in the association of health toexplanatory variables which, in turn, accounts for a substantial percentageof inequality in observed health. A particularly interesting finding isthat the marginal response of health to income is zero for healthyindividuals but positive and significant for unhealthy individuals. Theheterogeneity in the income response reduces both overall health inequalityand income related health inequality.

An approach to costs and energy consumption in private urban Spanish Mediterranean landscapes from a simplified model in sprinkle irrigation

The number of private gardens has increased in recent years, creating a more pleasant urban model, but not without having an environmental impact, including increased energy consumption, which is the focus of this study. The estimation of costs and energy consumption for the generic typology of private urban gardens is based on two simplifying assumptions: square geometry with surface areas from 25 to 500 m2 and hydraulic design with a single pipe. In total, eight sprinkler models have been considered, along with their possible working pressures, and 31 pumping units grouped into 5 series that adequately cover the range of required flow rates and pressures, resultin in 495 hydraulic designs repeated for two climatically different locations in the Spanish Mediterranean area (Girona and Elche). Mean total irrigation costs for the locality with lower water needs (Girona) and greater needs (Elche) were € 2,974 ha-¹ yr-¹ and € 3,383 ha-¹ yr-¹, respectively. Energy costs accounted for 11.4% of the total cost for the first location, and 23.0% for the second. While a suitable choice of the hydraulic elements of the setup is essential, as it may provide average energy savings of 77%, due to the low energy cost in relation to the cost of installation, the potential energy savings do not constitute a significant incentive for the irrigation system design. The low efficiency of the pumping units used in this type of garden is the biggest obstacle and constraint to achieving a high quality energy solution

The so-called "Spanish model" - Tobacco industry strategies and its impact in Europe and Latin America

Background To demonstrate the tobacco industry rationale behind the "Spanish model" on non-smokers' protection in hospitality venues and the impact it had on some European and Latin American countries between 2006 and 2011. Methods Tobacco industry documents research triangulated against news and media reports. Results As an alternative to the successful implementation of 100% smoke-free policies, several European and Latin American countries introduced partial smoking bans based on the so-called "Spanish model", a legal framework widely advocated by parts of the hospitality industry with striking similarities to "accommodation programmes" promoted by the tobacco industry in the late 1990s. These developments started with the implementation of the Spanish tobacco control law (Ley 28/2005) in 2006 and have increased since then. Conclusion The Spanish experience demonstrates that partial smoking bans often resemble tobacco industry strategies and are used to spread a failed approach on international level. Researchers, advocates and policy makers should be aware of this ineffective policy.

Growth, convergence and public investment : a bayesian model averaging approach

The aim of this paper is twofold. First, we study the determinants of economic growth among a wide set of potential variables for the Spanish provinces (NUTS3). Among others, we include various types of private, public and human capital in the group of growth factors. Also,we analyse whether Spanish provinces have converged in economic terms in recent decades. Thesecond objective is to obtain cross-section and panel data parameter estimates that are robustto model speci¯cation. For this purpose, we use a Bayesian Model Averaging (BMA) approach.Bayesian methodology constructs parameter estimates as a weighted average of linear regression estimates for every possible combination of included variables. The weight of each regression estimate is given by the posterior probability of each model.

Non-constant discounting in finite horizon: The free terminal time case

This paper derives the HJB (Hamilton-Jacobi-Bellman) equation for sophisticated agents in a finite horizon dynamic optimization problem with non-constant discounting in a continuous setting, by using a dynamic programming approach. A simple example is used in order to illustrate the applicability of this HJB equation, by suggesting a method for constructing the subgame perfect equilibrium solution to the problem.Conditions for the observational equivalence with an associated problem with constantdiscounting are analyzed. Special attention is paid to the case of free terminal time. Strotz¿s model (an eating cake problem of a nonrenewable resource with non-constant discounting) is revisited.

Growth, convergence and public investment : a bayesian model averaging approach

The aim of this paper is twofold. First, we study the determinants of economic growth among a wide set of potential variables for the Spanish provinces (NUTS3). Among others, we include various types of private, public and human capital in the group of growth factors. Also,we analyse whether Spanish provinces have converged in economic terms in recent decades. Thesecond objective is to obtain cross-section and panel data parameter estimates that are robustto model speci¯cation. For this purpose, we use a Bayesian Model Averaging (BMA) approach.Bayesian methodology constructs parameter estimates as a weighted average of linear regression estimates for every possible combination of included variables. The weight of each regression estimate is given by the posterior probability of each model.

Relaxation times of non-Markovian processes

We consider a general class of non-Markovian processes defined by stochastic differential equations with Ornstein-Uhlenbeck noise. We present a general formalism to evaluate relaxation times associated with correlation functions in the steady state. This formalism is a generalization of a previous approach for Markovian processes. The theoretical results are shown to be in satisfactory agreement both with experimental data for a cubic bistable system and also with a computer simulation of the Stratonovich model. We comment on the dynamical role of the non-Markovianicity in different situations.

Influence of the driving mechanism on the response of systems with athermal dynamics: The example of the random-field Ising model

We investigate the influence of the driving mechanism on the hysteretic response of systems with athermal dynamics. In the framework of local mean-field theory at finite temperature (but neglecting thermally activated processes), we compare the rate-independent hysteresis loops obtained in the random field Ising model when controlling either the external magnetic field H or the extensive magnetization M. Two distinct behaviors are observed, depending on disorder strength. At large disorder, the H-driven and M-driven protocols yield identical hysteresis loops in the thermodynamic limit. At low disorder, when the H-driven magnetization curve is discontinuous (due to the presence of a macroscopic avalanche), the M-driven loop is reentrant while the induced field exhibits strong intermittent fluctuations and is only weakly self-averaging. The relevance of these results to the experimental observations in ferromagnetic materials, shape memory alloys, and other disordered systems is discussed.

Dynamics of the two-dimensional gonihedric spin model

In this paper, we study dynamical aspects of the two-dimensional (2D) gonihedric spin model using both numerical and analytical methods. This spin model has vanishing microscopic surface tension and it actually describes an ensemble of loops living on a 2D surface. The self-avoidance of loops is parametrized by a parameter ¿. The ¿=0 model can be mapped to one of the six-vertex models discussed by Baxter, and it does not have critical behavior. We have found that allowing for ¿¿0 does not lead to critical behavior either. Finite-size effects are rather severe, and in order to understand these effects, a finite-volume calculation for non-self-avoiding loops is presented. This model, like his 3D counterpart, exhibits very slow dynamics, but a careful analysis of dynamical observables reveals nonglassy evolution (unlike its 3D counterpart). We find, also in this ¿=0 case, the law that governs the long-time, low-temperature evolution of the system, through a dual description in terms of defects. A power, rather than logarithmic, law for the approach to equilibrium has been found.

Phase-field model for Hele-Shaw flows with arabitrary contrast II: numerical approach

We present a phase-field model for the dynamics of the interface between two inmiscible fluids with arbitrary viscosity contrast in a rectangular Hele-Shaw cell. With asymptotic matching techniques we check the model to yield the right Hele-Shaw equations in the sharp-interface limit, and compute the corrections to these equations to first order in the interface thickness. We also compute the effect of such corrections on the linear dispersion relation of the planar interface. We discuss in detail the conditions on the interface thickness to control the accuracy and convergence of the phase-field model to the limiting Hele-Shaw dynamics. In particular, the convergence appears to be slower for high viscosity contrasts.