The challenge of leadership is to look beyond the current expansion to consider the long–term outlook for the U. S. economy. My good friend Paul W. McCracken once described this process as looking across the valley to see what is on the other side. His message was: “What will be different on the other side of the valley is far more relevant to business planning than the valley itself.” Such advice is particularly meaningful at this time because of the basic need for more stability in our economic policies.

Value-at-risk methods which employ a linear (“delta only”) approximation to the relation between instrument values and the underlying risk factors are unlikely to be robust when applied to portfolios containing non-linear contracts such as options. The most widely used alternative to the delta-only approach involves revaluing each contract for a large number of simulated values of the underlying factors. In this paper we explore an alternative approach which uses a quadratic approximation to the relation between asset values and the risk factors. This method (i) is likely to be better adapted than the linear method to the problem of assessing risk in portfolios containing non-linear assets, (ii) is less computationally intensive than simulation using full-revaluation and (iii) in common with the delta-only method, operates at the level of portfolio characteristics (deltas and gammas) rather than individual instruments.

Journal Article Comparative Advantage and the Theory of Tariffs: A Multi-Country, Multi-Commodity Model Get access Ronald W. Jones Ronald W. Jones Rochester, N.Y. Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 28, Issue 3, June 1961, Pages 161–175, https://doi.org/10.2307/2295945 Published: 01 June 1961

Using a new Bayesian method for the analysis of diffusion processes, this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative. The assumption of stationarity, which is common in the literature, represents a nontrivial prior belief about the shape of the drift function. This belief and the use of "flat" priors contribute strongly to the finding of nonlinear mean reversion. Implementation of an approximate Jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed. Finally, the article documents that nonlinear drift is primarily a feature of daily rather than monthly data, and that these data contain a transitory element that is not reflected in the volatility of longer-maturity yields.

We examine the effects of structural change in the U.S. banking industry, as well as key regulatory changes, including recently enacted deposit insurance reform legislation, on the resiliency of the FDIC-administered bank insurance fund (BIF) by estimating and comparing the probability of BIF insolvency over time. We do this using a Markov-switching model that relies on historical patterns of BIF disbursements to define the probability of switching among three “states” of the banking industry's financial health. Monte Carlo simulations are then performed to project the financial condition of the BIF over a 50-year period. Our results indicate that the insolvency risk to the bank insurance fund has increased significantly due to industry consolidation, and is mainly due to the concentration of deposits in the 10 largest U.S. banking companies. We also find that recent deposit insurance reforms will cause only a marginal reduction in the risk of BIF insolvency. The increased risk associated with a more concentrated industry structure simply dominates the reform effect.

M. W. Jones-Lee, A Note on a Property of the Inverse of a Bordered Matrix and Its Implication for the Theory of Portfolio Selection, The Journal of Financial and Quantitative Analysis, Vol. 9, No. 6 (Dec., 1974), pp. 1081-1087

This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations.The shape of this production function is governed by the distribution of ideas.If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting.Kortum (1997) showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth.Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change.

This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change