Investors Impacts on Currency Returns: Theory versus Practice.

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Immigrant Returns to Education and Experience: Analysis of Skill Discounting in Canada.

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Can business & monetary conditions predict variations in expected stock returns?

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Latent Variable Models for Stochastic Discount Factors.

Latent variable models in finance originate both from asset pricing theory and time series analysis. These two strands of literature appeal to two different concepts of latent structures, which are both useful to reduce the dimension of a statistical model specified for a multivariate time series of asset prices. In the CAPM or APT beta pricing models, the dimension reduction is cross-sectional in nature, while in time-series state-space models, dimension is reduced longitudinally by assuming conditional independence between consecutive returns, given a small number of state variables. In this paper, we use the concept of Stochastic Discount Factor (SDF) or pricing kernel as a unifying principle to integrate these two concepts of latent variables. Beta pricing relations amount to characterize the factors as a basis of a vectorial space for the SDF. The coefficients of the SDF with respect to the factors are specified as deterministic functions of some state variables which summarize their dynamics. In beta pricing models, it is often said that only the factorial risk is compensated since the remaining idiosyncratic risk is diversifiable. Implicitly, this argument can be interpreted as a conditional cross-sectional factor structure, that is, a conditional independence between contemporaneous returns of a large number of assets, given a small number of factors, like in standard Factor Analysis. We provide this unifying analysis in the context of conditional equilibrium beta pricing as well as asset pricing with stochastic volatility, stochastic interest rates and other state variables. We address the general issue of econometric specifications of dynamic asset pricing models, which cover the modern literature on conditionally heteroskedastic factor models as well as equilibrium-based asset pricing models with an intertemporal specification of preferences and market fundamentals. We interpret various instantaneous causality relationships between state variables and market fundamentals as leverage effects and discuss their central role relative to the validity of standard CAPM-like stock pricing and preference-free option pricing.

A Theoretical Comparison Between Integrated and Realized Volatilies

In this paper, we provide both qualitative and quantitative measures of the cost of measuring the integrated volatility by the realized volatility when the frequency of observation is fixed. We start by characterizing for a general diffusion the difference between the realized and the integrated volatilities for a given frequency of observations. Then, we compute the mean and variance of this noise and the correlation between the noise and the integrated volatility in the Eigenfunction Stochastic Volatility model of Meddahi (2001a). This model has, as special examples, log-normal, affine, and GARCH diffusion models. Using some previous empirical works, we show that the standard deviation of the noise is not negligible with respect to the mean and the standard deviation of the integrated volatility, even if one considers returns at five minutes. We also propose a simple approach to capture the information about the integrated volatility contained in the returns through the leverage effect.

An Eigenfunction Approach for Volatility Modeling.

In this paper, we introduce a new approach for volatility modeling in discrete and continuous time. We follow the stochastic volatility literature by assuming that the variance is a function of a state variable. However, instead of assuming that the loading function is ad hoc (e.g., exponential or affine), we assume that it is a linear combination of the eigenfunctions of the conditional expectation (resp. infinitesimal generator) operator associated to the state variable in discrete (resp. continuous) time. Special examples are the popular log-normal and square-root models where the eigenfunctions are the Hermite and Laguerre polynomials respectively. The eigenfunction approach has at least six advantages: i) it is general since any square integrable function may be written as a linear combination of the eigenfunctions; ii) the orthogonality of the eigenfunctions leads to the traditional interpretations of the linear principal components analysis; iii) the implied dynamics of the variance and squared return processes are ARMA and, hence, simple for forecasting and inference purposes; (iv) more importantly, this generates fat tails for the variance and returns processes; v) in contrast to popular models, the variance of the variance is a flexible function of the variance; vi) these models are closed under temporal aggregation.

Industrial Adjustment: Context, Causes, Impacts and Methods for Analysis

Adjustement is an ongoing process by which factors of reallocated to equalize their returns in different uses. Adjustment occurs though market mechanisms or intrafirm reallocation of resources as a result of changes in terms of trade, government policies, resource availability, technological change, etc. These changes alter production opportunities and production, transaction and information costs, and consequently modify production functions, organizational design, etc. In this paper we define adjustment (section 2); review empirical estimates of the extent of adjustment in Canada and abroad (section 3); review selected features of the trade policy and adjustment context of relevance for policy formulation among which: slow growth, a shift to services, a shift to the Pacific Rim, the internationalization of production, investment distribution communications the growing use of NTB's, changes in foreign direct investment patterns, intrafirm and intraindustry trade, interregional trade flows, differences in micro economic adjustment processes of adjustment as between subsidiaries and Canadian companies (section 4); examine methodologies and results of studies of the impact of trade liberalization on jobs (section 5); and review the R. Harris general equilibrium model (section 6). Our conclusion emphasizes the importance of harmonizing commercial and domestic policies dealing with adjustment (section 7). We close with a bibliography of relevant publications.

Governments and the Decentralization

The Purpose of This Article Is to Show How Costs and Benefits of Geographical Decentralization of R&D Can Be Identified and Compared. the Benefits for the Region That Receives R&D Activities Are Studied in Section 1. They Stem From the Short-Run Multiplier Effect, the Amelioration of Human Capital and the Possible Modernization of the Local Industrial Structure. on the Cost Side Examined in Section 2, the Observable Impacts of the Decentralization of R&D Concern the Loss of Returns to Scale and of the Production of the R&D Output. It Is Shown, in Section 3, That the Flows of Costs and Benefits Must Be Discounted by the Social Cost of Capital. the Main Conclusion of This Article Is That the Decentralization of R&D in a Large Sparsely Populated Country Entails Social Cost and Would Weaken Its Competitive Position in World Commerce. on the Other Hand, the Issue of Decentralization Is More Crucial for Small Countries (In Terms of Population and Economic Size) Than for Large Ones, Like the U.S., Where Critical Masses of Research Efforts Cna Be Simulataneously Attained in Many Fields and in Many Places.

Land Ownership, Working Capital, and the Agricultural Output: Egypt, 1913-1958.

A simple model is constructed in which short-term credit is needed to finance the purchase of inputs, in which there is bankruptcy risk, and in which we argue were important characteristics of Egyptian agriculture during the first half of this century, result in aggregate agricultural output being dependant on the distribution of land ownership. The main theorical insight is that aggregate agricultural output will be increased by a decrease in the inequality of the distribution of land ownership when returns to scale are decreasing. Testable short- and long-run empirical propositions are formulated and carefully tested on Egyptian data for the 1913-1958 period. We find that, controlling for factor inputs, there is no tradeoff between equity and efficiency for Egyptian agriculture - they go hand in hand in the short run.

Tests of Conditional Asset Pricing Models in the Brazilian Stock Market

In this paper, we test a version of the conditional CAPM with respect to a local market portfolio, proxied by the Brazilian stock index during the 1976-1992 period. We also test a conditional APT model by using the difference between the 30-day rate (Cdb) and the overnight rate as a second factor in addition to the market portfolio in order to capture the large inflation risk present during this period. The conditional CAPM and APT models are estimated by the Generalized Method of Moments (GMM) and tested on a set of size portfolios created from a total of 25 securities exchanged on the Brazilian markets. The inclusion of this second factor proves to be crucial for the appropriate pricing of the portfolios.