Knowledge that Transforms

Four foreign exchange spot rate series, recorded on an hourly basis for a six-month period in 1986 are examined. A seasonal GARCH model is developed to describe the time-dependent volatility apparent in the percentage nominal return of each currency. Hourly patterns in volatility are found to be remarkably similar across currencies and appear to be related to the opening and closing of the worlds major markets. Robust LM tests designed to deal with the extreme leptokurtosis in the data fails to uncover any evidence of misspecification or the presence of volatility spillover effects between the currencies or across markets.

This paper extends earlier work on unsustainable monetary policies by endogenizing the regime switch that ultimately restores sustainability. Within this framework we analyse exchange rate based stabilization programmes and show how constraints on Central Bank borrowing during an exchange crisis influence timing and nature of the post-collapse equilibrium. Such constraints introduce non-neutralities; more restrictive pre-collapse credit policies increase the post-collapse inflation rate. External shocks can destroy consistency between fiscal programmes and inflation targets, causing reserve losses, exchange rate changes and higher inflation. Balance of Payments crises are the mechanism through which fiscal imbalances translate into higher inflation rather than an alternative explanation of it.

This paper addresses two topics. First, it nests the consumption and static capital asset pricing model in a unified framework. Second, it tests for market efficiency. The first test is based on the idea that different models price risk on the basis of the covariance with different benchmark portfolios. The test of market efficiency is based on the idea that excess returns should be predictable only if risk and, therefore, second moments are predictable. The empirical results show that the static capital asset pricing model performs better than the consumption capital asset pricing model and that the former model accounts for the effects of dividend yields on expected returns. Copyright 1991 by The Review of Economic Studies Limited.

This paper presents and implements statistical tests of stock-market forecastability and volatility that are immune from the severe statistical problems of earlier tests. It finds that although the null hypothesis of market efficiency is rejected, the rejections are only marginal. The paper also shows how volatility tests and recent regression tests are closely related, and demonstrates that when finite sample biases are taken into account, regression tests also fail to provide strong evidence of violations of the conventional valuation model. Copyright 1991 by The Review of Economic Studies Limited.

This paper reexamines the empirical evidence for mean-reverting behavior in stock prices. Comparison of data before and after World War II shows that mean reversion is entirely a prewar phenomenon. Using randomization methods to calculate significance levels, the authors find that the full sample evidence for mean reversion is weaker than previously indicated by Monte Carlo methods under a normal assumption. Further, the switch to mean-averting behavior after the war is about to be too strong to be compatible with sampling variation. The authors interpret these findings as evidence of a fundamental change in the stock returns process. Copyright 1991 by The Review of Economic Studies Limited.

We present estimates of the union wage effect controlling for unmeasured individual effects, and subject the conventional fixed-effects model to specification tests. For PSID men the union wage effect is 5-8% after controlling for person effects, as opposed to 20% in cross-section. Omnibus tests based on an unrestricted reduced form and instrumental variables tests based on differencing are consistent with conventional models. Tests based on comparing those who enter and leave union coverage provide evidence against the usual model. We find evidence for interactions between union status and other variables even after controlling for person effects.

This paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi-period (including infinite-period), continuum-agent, unobservedeffort economy. Actual solutions are displayed illustrating cross-sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time. The optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full-information economy and various restricted-contracting regimes.

A. Postlewaite (1979) and W. Thomson (1987) showed that every individually-rational and Pareto-optimal allocation mechanism is subject to the problem of withholding with full recovery (Postlewaite) or partial recovery (Thomson). The author generalizes these results and show that the assumption of individual rationality can be disposed of in both results: the problem of withholding is present for any allocation mechanism in the class of Pareto-optimal mechanisms, whether it is individually rational or not and whether agents are able to recover the withheld bundle fully or only partially. Copyright 1991 by The Review of Economic Studies Limited.

This paper extends recent developments in general equilibrium theory and applies them to the problem of measuring the real output of an economy's insurance sector. These developments permit a priced commodity to be a complex incentive-compatible contract. These contracts are not bundles of more basic commodities. These contracts are elementary in the same sense that event-contingent goods deliveries are elementary in the Arrow- Debreu framework.

In this paper, the author considers a risk-neutral competitive firm which is uncertain about the true state of demand. He builds upon K. J. Arrow (1968) by demonstrating that the irreversibility of investment in physical capital together with the anticipation of receiving information and of learning the state of demand lead to (1) cautious investment behavior and, hence, to lower investment levels; (2) a time-varying risk premium or marginal "adjustment cost"; and (3) a gradual adjustment of the capital stock to the desired level. Copyright 1991 by The Review of Economic Studies Limited.