Constant interest rate projections without the curse of indeterminacy

Constant interest rate (CIR) projections are often criticized on the grounds that they are inconsistent with the existence of a unique equilibrium in a variety of forward-looking models. This note shows howto construct CIR projections that are not subject to that criticism, using a standard New Keynesian model as a reference framework.

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.

How well do individuals predict the selling prices of their homes?

Self-reported home values are widely used as a measure of housing wealth by researchers employing a variety of data sets and studying a number of different individual and household level decisions. The accuracy of this measure is an open empirical question, and requires some type of market assessment of the values reported. In this research, we study the predictive power of self-reported housing wealth when estimating sales prices utilizing the Health and Retirement Study. We find that homeowners, on average, overestimate the value of their properties by between 5% and 10%. More importantly, we are the first to document a strong correlation between accuracy and the economic conditions at the time of the purchase of the property (measured by the prevalent interest rate, the growth of household income, and the growth of median housing prices). While most individuals overestimate the value of their properties, those who bought during more difficult economic times tend to be more accurate, and in some cases even underestimate the value of their house. These results establish a surprisingly strong, likely permanent, and in many cases long-lived, effect of the initial conditions surrounding the purchases of properties, on how individuals value them. This cyclicality of the overestimation of house prices can provide some explanations for the difficulties currently faced by many homeowners, who were expecting large appreciations in home value to rescue them in case of increases in interest rates which could jeopardize their ability to live up to their financial commitments.

On the timing of balance of payments crises: Disaggregated information and interest rate policy

This paper proposes a dynamic framework to study the timing of balance of paymentscrises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be eective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

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.

Subsampling inference in threshold autoregressive models

This paper discusses inference in self exciting threshold autoregressive (SETAR)models. Of main interest is inference for the threshold parameter. It iswell-known that the asymptotics of the corresponding estimator depend uponwhether the SETAR model is continuous or not. In the continuous case, thelimiting distribution is normal and standard inference is possible. Inthe discontinuous case, the limiting distribution is non-normal and cannotbe estimated consistently. We show valid inference can be drawn by theuse of the subsampling method. Moreover, the method can even be extendedto situations where the (dis)continuity of the model is unknown. In thiscase, also the inference for the regression parameters of the modelbecomes difficult and subsampling can be used advantageously there aswell. In addition, we consider an hypothesis test for the continuity ofthe SETAR model. A simulation study examines small sample performance.

Conflicts of interest, information provision and competition in banking

In some markets, such as the market for drugs or for financial services, sellers have better information than buyersregarding the matching between the buyer's needs and the good's actual characteristics. Depending on the market structure,this may lead to conflicts of interest and/or the underprovision of information by the seller. This paper studies this issuein the market for financial services. The analysis presents a new model of competition between banks, as banks' pricecompetition influences the ensuing incentives for truthful information revelation. We compare two different firm structures,specialized banking, where financial institutions provide a unique financial product, and one-stop banking, where a financialinstitution is able to provide several financial products which are horizontally differentiated. We show first that, althoughconflicts of interest may prevent information disclosure under monopoly, competition forces full information provision forsufficiently high reputation costs. Second, in the presence of market power, one-stop banks will use information strategicallyto increase product differentiation and therefore will always provide reliable information and charge higher rices thanspecialized banks, thus providing a new justification for the creation of one-stop banks. Finally, we show that, ifindependent financial advisers are able to provide reliable information, this increases product differentiation and thereforemarket power, so that it is in the interest of financial intermediaries to promote external independent financial advice.

Concentration and self-censorship in commercial media

Within a simple model of non-localized, Hotelling-type competitionamong arbitrary numbers of media outlets we characterize qualityand content of media under different ownership structures. Assumingadvertising-sponsored, profit-maximizing outlets, we show that (i) topicssensitive to advertisers can be underreported (self-censored) by alloutlets in the market, (ii) self-censorship increases with the concentrationof ownership, (iii) adding outlets, while keeping the number ofowners fixed, may even increase self-censorship; the latter result relieson consumers' most preferred outlets being potentially owned by thesame media companies. We argue that externalities resulting fromself-censorship could be empirically large.

Identification of geometrically consistent interest points for 3D scene reconstruction

We propose an algorithm that extracts image features that are consistent with the 3D structure of the scene. The features can be robustly tracked over multiple views and serve as vertices of planar patches that suitably represent scene surfaces, while reducing the redundancy in the description of 3D shapes. In other words, the extracted features will off er good tracking properties while providing the basis for 3D reconstruction with minimum model complexity

Two component Emden sphere

The theory of a self-gravitating gas sphere is given. The gravitational field is generated by two components, each of which is an independent isothermal gas. Various quantities of interest, such as density profiles, core radii of both components, masses, free-free luminosity, surface brightness, central surface density, and overestimate of central mass density, are given for different values of both parameters which arise naturally (ratio of central densities, ratio of rms velocities). Fundamental changes appear when comparison is made with a theory in which the second component is a 'test component'. Procedures are given for the complete analysis of real astrophysical configurations such as clusters of galaxies or globular clusters.

Genesis of self-organized zebra textures in burial dolomites: Displacive veins, induced stress, and dolomitization

The dolomite veins making up rhythmites common in burial dolomites are not cement infillings of supposed cavities, as in the prevailing view, but are instead displacive veins, veins that pushed aside the host dolostone as they grew. Evidence that the veins are displacive includes a) small transform-fault-like displacements that could not have taken place if the veins were passive cements, and b) stylolites in host rock that formed as the veins grew in order to compensate for the volume added by the veins. Each zebra vein consists of crystals that grow inward from both sides, and displaces its walls via the local induced stress generated by the crystal growth itself. The petrographic criterion used in recent literature to interpret zebra veins in dolomites as cements - namely, that euhedral crystals can grow only in a prior void - disregards evidence to the contrary. The idea that flat voids did form in dolostones is incompatible with the observed optical continuity between the saddle dolomite euhedra of a vein and the replacive dolomite crystals of the host. The induced stress is also the key to the self-organization of zebra veins: In a set of many incipient, randomly-spaced, parallel veins just starting to grow in a host dolostone, each vein¿s induced stress prevents too-close neighbor veins from nucleating, or redissolves them by pressure-solution. The veins that survive this triage are those just outside their neighbors¿s induced stress haloes, now forming a set of equidistant veins, as observed.

New evidence of the real interest rate parity for OECD countries using panel unit root tests with breaks

This paper tests for real interest parity (RIRP) among the nineteen major OECD countries over the period 1978:Q2-1998:Q4. The econometric methods applied consist of combining the use of several unit root or stationarity tests designed for panels valid under cross-section dependence and presence of multiple structural breaks. Our results strongly support the fulfilment of the weak version of the RIRP for the studied period once dependence and structural breaks are accounted for.

Gas identification with tin oxide sensor array and self-organizing maps: adaptive correction of sensor drifts

Low-cost tin oxide gas sensors are inherently nonspecific. In addition, they have several undesirable characteristics such as slow response, nonlinearities, and long-term drifts. This paper shows that the combination of a gas-sensor array together with self-organizing maps (SOM's) permit success in gas classification problems. The system is able to determine the gas present in an atmosphere with error rates lower than 3%. Correction of the sensor's drift with an adaptive SOM has also been investigated