In this paper, we study the initial-conditions problem, a complication associated with left-censored or interrupted spells in the econometric analysis of labor market transitions. In the presence of unobserved individual-specific heterogeneity, no consistent estimators have been previously constructed. This paper proposes such an estimator using indirect inference (II). The II procedure simulates the structural model and “matches” the simulated data with the actual data via the implementation of an informative auxiliary model. Consistency and asymptotic normality of the II estimator are proved. Monte Carlo experiments as well as a real data set are used to illustrate the small-sample performance of the II estimator. These results show that the II estimator is insensitive to the alternative auxiliary models chosen for the II estimation.

Unexpected earnings, Unexpected returns, Forecast revisions, ERC

Jarl G. Kallberg, Crocker L. Liu, Charles Trzcinka, The Value Added from Investment Managers: An Examination of Funds of REITs, The Journal of Financial and Quantitative Analysis, Vol. 35, No. 3 (Sep., 2000), pp. 387-408

In Hong Kong, 35% of residential mortgage loans are adjustable rate mortgages with variable tenor (VRT). That is, with a change in interest rates, the loan adjusts its maturity and principal payment such that the monthly installment remains the same. In other words, instead of bearing a volatility on monthly payments as in a fixed-tenor variable payment (VRP) mortgage, VRT mortgagors bear interest rate risk by bearing a tenor risk. In this paper, we analyze the valuation of this type of mortgages and the results are compared with the conventional VRP mortgages. We find VRT loans are less expensive from a borrower's perspective than VRP loans, but the difference between the loans becomes less significant if a tenor cap is added to the VRT loan.

This paper investigates the impact of risk and quality factors on banks’ cost by using the stochastic cost frontier methodology to evaluate scale and X-inefficiencies, as well as technical change for a sample of Japanese commercial banks between 1993 and 1996. Loan-loss provisions are included in the cost frontier model to control for output quality, with a financial capital and a liquidity ratio included to control risk. Following the approach suggested in Mester (1996) we show that if risk and quality factors are not taken into account optimal bank size tends to be overstated. That is, optimal bank size is considerably smaller when risk and quality factors are taken into account when modelling the cost characteristics of Japanese banks. We also find that the level of financial capital has the biggest influence on the scale efficiency estimates. X-inefficiency estimates, in contrast, appear less sensitive to risk and quality factors. Our results also suggest that scale inefficiencies dominate X-inefficiencies. These are important findings because they contrast with the results of previous studies on Japanese banking. In particular, the results indicate an alternative policy prescription, namely, that the largest banks should shrink to benefit from scale advantages. It also seems that financial capital has the largest influence on optimal bank size.