Research Methodology, Security market model, Prediction errors, Daily returns data

Research Methodology, Market model prediction errors, Omitted variables

Edward C. Blomeyer, An Analytic Approximation for the American Put Price for Options on Stocks with Dividends, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 2 (Jun., 1986), pp. 229-233

The advance of the theory of contingent claim pricing has made it possible to model and analyze very complex financial claims. When the value of the firm can be represented as a contingent claim, then the firm's optimal financial policy can be determined with only a slight modification in standard solution techniques for contingent claims. In this paper, stochastic control theory is used to determine a dynamic investment policy for the valuemaximizing firm. The value of future, stochastic economic rents (i.e., the net present value of the firm), and the firm's optimal investment policy must reflect a rational reaction on behalf of its competitors. A computationally efficient methodology is presented for solving the simultaneous investment-valuation problem for an n-firm game.

In the Lucas-Rapping (1969) model of the labour market, fluctuations in unemployment represent individuals optimally adjusting their labour supply behaviour in response to fluctuations in wage rates over the business cycle. In this paper I propose and implement a misspecification test of the Lucas-Rapping treatment of unemployment as labour supply behaviour using panel data. This test extends previous such work with micro data by simultaneously allowing for intertemporal substitution, uncertainty and endogenous unemployment. Using the standard specification of intertemporal labour supply behaviour, I find strong evidence against this interpretation of unemployment. There are two possible interpretations of the test results. The first is that it is necessary to turn to alternative models of the labour market in which unemployed workers are off a supply function. The second is that the test results indicate the necessity of moving to more complex models of intertemporal substitution. However, given current econometric techniques and data sets, these alternative models of intertemporal substitution will be extremely difficult to test.

In this note we show that the conditions that guarantee uniqueness and optimality of Walrasian equilibrium under uncertainty are not sufficient to guarantee these results for non-noisy rational expectations equilibrium under asymmetric information.

This paper argues that adverse selection in the labour market, when viewed as part of a three-way interaction among workers, their current employers and a universe of alternative employers, may seriously impair a worker's freedom to change jobs. When current employers are better informed about the abilities of their workers than potential alternative employers, they will presumably concentrate their efforts to prevent turnover on their better workers. If these efforts lead to fewer quits among better workers, the stream of job changers should be composed disproportionately of less able ones. This will inhibit turnover in two ways. First, firms should be unwilling to hire from the job-changing pool except at low wages. Second, workers who change jobs are marked by being part of an inferior group, which lowers their future bargaining power and wages. Models of these phenomena can be made to account for many aspects of observed labour market behaviour.

[Macroeconomic models with rational expectations find a new justification if these models appear as limits of some learning procedures. In this paper we consider the case in which, during the learning period, the predictions are obtained by regression. We exhibit the necessary and sufficient condition on the parameter of the model ensuring the convergence of the learning process. The limit is the solution of a rational expectations model in which the information set only includes the exogenous variables used in the auxiliary regression.]

Two new features are introduced in a standard model of forward vertical integration by an intermediate good monopolist into a contestable downstream industry. First, U-shaped average costs replace constant returns in the downstream industry. Second, the effect of subjecting the monopolist to the pressure of upstream entry is explored. It is found that monopoly pricing of the intermediate good can distort the scale as well as the input proportions of the downstream firms. Either distortion leads to integration, but here integration may be partial rather than full. Prices rise with partial integration when there is no upstream entry, but prices fall when upstream entry is free.

The objective of this paper is to demonstrate that the nonunion wage differential consists of two effects. The first represents the differential between the wage of a nonunion worker in a collective bargaining unit and the wage paid to a comparable worker not covered by a bargaining agreement. This effect arises from the monopoly power of organized labor. The second is the wage differential between union and nonunion workers in collective bargaining units. This latter effect is attributed to economic benefits that unionism brings to its members. Empirical evidence is presented in support of both effects.