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Farley Grubb's recent article in the Financial History Review contains econometric results designed to support his theoretical propositions concerning the paper money of the American colonies. This comment demonstrates that some of his results are spurious and the rest are based on using incorrect testing procedures and incorrect critical values of test statistics.
Colonial Virginia's legislature introduced an inside paper money into its domestic economy that was, at that time, primarily a barter economy without any government or bank-issued inside paper monies in circulation. I decompose Virginia's paper money into its expected real-asset present value, risk discount and transaction premium. The value of Virginia's paper money was determined primarily by its real-asset present value. The transaction premium was small. Positive risk discounts occurred in years when monetary troubles were suspected, namely worries that the government would not redeem the paper money as promised. Counterfeiting, however, was not one of these worries. The legislature had the tools and used them effectively to mitigate the effects of counterfeiting on the value of its paper money. Colonial Virginia's paper money was not a fiat currency, but a barter asset, with just enough transaction premium to make it the preferred medium of exchange for local transactions. It functioned like a zero-coupon bond and traded below face value due to time-discounting, not depreciation.
This study contributes to the literature by using a spillover index method to examine the changing interrelations in volatility among corn and energy future prices. This methodology allows us to account for endogenously determined economic fundamentals and market speculation. After controlling for market trends and seasonality, we find relative large increases in volatility spillovers between corn, crude oil, and ethanol futures prices. Our results suggest that the cross-commodity spillovers provide useful incremental information in determining future price volatility; however, a commodity's own dynamics explain the largest portion of volatility spillovers.
This paper introduces the Fourier Space Time-Stepping algorithm to the valuation of variable annuity (VA) contracts embedded with guaranteed minimum withdrawal benefit (GMWB) riders when the underlying fund dynamics evolve under the influence of a regime-switching model. Mortality risk is introduced to the valuation framework by incorporating a two-factor affine stochastic mortality model proposed in Blackburn and Sherris (2013). The paper considers both, static and dynamic policyholder withdrawal behaviour associated with GMWB riders and assesses how model parameters influence the fees levied on providing such guarantees. Our numerical experiments reveal that the GMWB fees are very sensitive to regime-switching parameters; a percentage increase in the force of interest results in significant decrease in guarantee fees. The guarantee fees increase substantially with increasing volatility levels. Numerical experiments also highlight an increasing importance of mortality as maturity of the VA contract increases. Mortality has less impact on shorter maturity contracts regardless of the policyholder's withdrawal behaviour. As much as mortality influences pricing results for long maturities, the associated guarantee fees are decreasing functions of maturities for the VA contracts. Robustness checks of the Fourier Space Time-Stepping algorithm are performed by making numerical comparisons with several existing valuation approaches.
A previously unknown pricing anomaly existed for a few years in the late 1840s in the British government bond market, in which the larger and more liquid of two very large bonds was underpriced. None of the published mechanisms explains this phenomenon. It may be related to another pricing anomaly that existed for much of the nineteenth century in which terminable annuities were significantly underpriced relative to so-called ‘perpetual’ annuities that dominated the government bond market. The reasons for these mispricings seem to lie in the early Victorian culture, since the basic economic incentives as well as laws and institutions were essentially the familiar modern ones. This provides new perspectives on the origins and nature of modern corporate capitalism.
Investment decision rules in risk situations have been extensively analyzed for firms. Most research focus on financial options and the wide range of methods based on dynamic programming currently used by firms to decide on whether and when to implement an irreversible investment under uncertainty. The situation is quite different for public investments, which are decided and largely funded by public authorities. These investments are assessed by public authorities, not through market criteria, but through public Cost-Benefit Analysis (CBA) procedures. Strangely enough, these procedures pay little attention to risk and uncertainty. The present text aims at filling this gap. We address the classic problem of whether and when an investment should be implemented. This stopping time problem is established in a framework where the discount rate is typically linked to GDP, which follows a Brownian motion, and where the benefits and cost of implementation follow linked Brownian motions. We find that the decision rule depends on a threshold value of the First Year Advantage/Cost ratio. This threshold can be expressed in a closed form including the means, standard deviations and correlations of the stochastic variables. Simulations with sensible current values of these parameters show that the systemic risk, coming from the correlation between the benefits of the investment and economic growth, is not that high, and that more attention should be paid to risks relating to the construction cost of the investment; furthermore, simple rules of thumb are designed for estimating the above-mentioned threshold. Some extensions are explored. Others are suggested for further research.
British government bonds formed the deepest, most liquid and most transparent financial market of the nineteenth century. This article shows that those bonds had long periods, extending over decades, of anomalous behavior, in which Consols, the largest and best known of these instruments, were noticeably overpriced relative to equivalent securities which offered the same interest rate and the same guarantee of payment. This finding and similar ones for other comparable pairs of British gilts appear to provide the most extreme counterexamples documented so far to the Efficient Markets Hypothesis and to the Law of One Price, and point the way to further investigations on the origins and nature of the modern economy.
The occurrence and unpredictability of speculative bubbles on financial markets, and their accompanying crashes, have confounded economists and economic historians worldwide. We examine the ability of the log-periodic power law model (LPPL-model) to accurately predict the end dates of speculative bubbles on financial markets through modeling of asset price dynamics on a selection of historical bubbles. The method is based on a nonlinear least squares estimation that yields predictions of when the bubble will change regime. Previous studies have only presented results where the predictions turn out to be successful. This study is the first to highlight both the potential and the limitations of the LPPL-model. We find evidence that supports the characteristic patterns as proposed by the LPPL-framework leading up to the change in regime; asset prices during bubble periods seem to oscillate around a faster-than-exponential growth. In most cases the estimation yields accurate predictions, although we conclude that the predictions are quite dependent on the point in time at which they are conducted. We also find that the end of a speculative bubble seems to be influenced by both endogenous speculative growth and exogenous factors. For this reason we propose a new way of interpreting the predictions of the model, where the end dates should be interpreted as the start of a time period where the asset prices are especially sensitive to exogenous events. We propose that negative news during this time period results in a regime shift and the bursting of the bubble. Thus, the model has the ability to predict sensitivity to exogenous events ex ante.
Genotype G12 strains are now considered to be the sixth most prevalent human rotaviruses worldwide. In two Sicilian cities, Palermo and Messina, surveillance of rotavirus circulation performed since 1985 and 2009, respectively, did not detect G12 strains until 2012. From 2012 to 2014 rotavirus infection was detected in 29·7% of 1647 stool samples collected from children admitted for acute gastroenteritis to three Sicilian hospitals in Palermo, Messina and Ragusa. In 2012, G12P was first detected in Palermo and then in Messina where it represented the second most frequent genotype (20% prevalence) after G1P. Thereafter, G12 strains continued to circulate in Sicily, showing a marked prevalence in Ragusa (27·8%) in 2013 and in Palermo (21%) and Messina (16·6%) in 2014. All but one of the Sicilian G12 strains carried a P VP4 genotype, whereas the single non-P rotavirus strain was genotyped as G12P. Phylogenetic analysis of the VP7 and VP4 sequences allowed distinction of several genetic lineages and separation of the G12P strains into three cluster combinations. These findings indicate independent introductions of G12 rotavirus strains in Sicily in recent years.
An economic setting of ancient Jewish law is analyzed and reinterpreted in light of a modern formal financial model. Certain real estate transactions in ancient Israel, as stipulated in the Bible, involved embedded financial options that seem to have been overlooked by the commentators. This article interprets, utilizing modern financial theory, the biblical text and sheds light on a phrase used in stipulating these rules that has puzzled some commentators. The option's value and the complexity of the pricing system that would have been needed in order to capture true market prices of these assets are demonstrated.
The liquidity premium on corporate bonds has been high on the agenda of Solvency regulators owing to its potential relationship to an additional discount factor on long-dated insurance liabilities. We analyse components of the credit spread as a function of standard bond characteristics during 2003–2014 on a daily basis by regression analyses, after introducing a new liquidity proxy. We derive daily distributions of illiquidity contributions to the credit spread at the individual bond level and find that liquidity premia were close to zero just before the financial crisis. We observe the time-varying nature of liquidity premia as well as a widening in the daily distribution in the years after the credit crunch. We find evidence to support higher liquidity premia, on average, on bonds of lower credit quality. The evolution of model parameters is economically intuitive and brings additional insight into investors’ behaviour. The frequent and bond-level estimation of liquidity premia, combined with few data restrictions makes the approach suitable for ALM modelling, especially when future work is directed towards arriving at forward-looking estimates at both the aggregate and bond-specific level.
Financial economics holds that payment streams should be valued using discount rates that reflect the cash flows’ risks. In the case of pension liabilities, the appropriate discount rate for a pension fund's liabilities is the expected rate of return on a portfolio that would be held under a liability-driven investment policy. The valuation of defined benefit pension obligations involves choices revolving around deciding: (1) what future benefit payments to recognize today (i.e., which liability concept to use); and (2) from whose point of view to value the liabilities. Moving towards modeling, the distribution of future liabilities using a ‘risk-neutral’ framework, would allow for calculating the present value of the future liabilities more accurately. This would provide policymakers with information more relevant for the decision-making, and it would also permit easier communication of the risks facing the Pension Benefit Guaranty Corporation's PIMS model via a single univariate statistic.
This paper presents the course taken by the Cuban economy from the early twentieth century until the outbreak of the Revolution, seen from the perspective of what happened in the stock market. I have therefore prepared an index of Havana Stock Exchange listings which shows strong dependence on what happened in the sugar market, particularly in sugar exports. However, my research highlights the weakness of this institution, conceived more as an instrument of speculative enrichment rather than one of financing, the evolution of which reveals the fragility of the Cuban economy and particularly the poor development of its capital markets.
This article argues that the promotion boom which occurred in the railway industry during the mid 1840s was amplified by the issue of derivative-like assets, which let investors take highly leveraged positions in the shares of new railway companies. The partially paid shares which the new railway companies issued allowed investors to obtain exposure to an asset by paying only a small initial deposit. The consequence of this arrangement was that investor returns were substantially amplified, and many schemes could be financed simultaneously. However, when investors were required to make further payments it put a negative downward pressure on prices.
This article undertakes a comparative study of the effects of three wars upon the French stock market. Periods of war are highly turbulent financial times and trigger multiple factors to act upon stock prices. The article presents evidence suggesting that stock price behaviour is influenced by the specific way each war is financed. Financed solely by regular long-term debt, the Franco-Prussian War exhibited stock prices that only reflected real activity. On the other hand, both world wars were partially financed by monetary creation but differed with regard to the extent of financial repression. In the case of World War II, monetary creation within a closed repressed economy led to a paradoxical, short-lived increase in stock prices. The article also examines how war affected the characteristics of the market. The Franco-Prussian War caused a durable high interest rate; World War I smoothed out most of the public services firms and increased volatility; whilst World War II affected the components of the stock market. Overall, mainly due to market values being destroyed during the world wars, the importance of the stock market in the economy decreased.
The first decade of the 21st century has perhaps witnessed more structural change in commodity futures markets than all previous decades combined. Not only have trading volumes and open interest increased markedly, but this time period also saw historic changes in both trading and participants. The available literature indicates that the irrational and harmful impacts of the structural changes in commodity futures markets over the last decade have been minimal. In particular, there is little evidence that passive index investment caused a massive bubble in commodity futures prices. There is intriguing evidence of several other rational and beneficial impacts of the structural changes over the last decade. In particular, the expanding market participation may have decreased risk premiums, and hence, the cost of hedging, reduced price volatility, and better integrated commodity markets with financial markets.
Between July 2009 and June 2011, rotavirus was detected in 507 of 4597 episodes of acute gastroenteritis in children aged <3 years in Gipuzkoa (Basque Country, Spain), of which the G-type was determined in 458 (90·3%). During the annual seasonal epidemic of 2010–2011, the unusual G-type 12 was predominant, causing 65% (145/223) of cases of rotavirus gastroenteritis. All the G12 strains were clustered in lineage III and were preferentially associated with P-type 8. This epidemic was characterized by broad geographical distribution (rural and urban) and, over 7 months, affected both infants and children, the most frequently affected being children between 4 and 24 months. Of children with rotavirus G12, 16% required hospital admission, the admission rate in children aged <2 years being 20·7 cases/10 000 children. The sudden emergence and predominance of G12 rotaviruses documented in this winter outbreak suggest that they may soon become a major human rotavirus genotype.
Although previous work shows strong relationships between oil prices and economic activity, the empirical evidence on the impact of oil prices on stock market returns has been mixed. This article investigates the existence of long-term relationships between oil prices and stock market indices in Europe using both aggregate and sector indices and linear and asymmetric cointegration. Our findings show that the response of stock prices to oil price depends greatly on the sector of activity and that oil prices affect stock returns in an asymmetric fashion.
This article tests the efficiency of the hog options market and assesses the impact of the 1996 contract redesign on efficiency. We find that the hog options market is efficient, but some options yielded excess returns during the live hogs period but not during the lean hogs period. Our findings indicate that the hog options market is efficient and is consistent with the new contract improving the efficiency of the market. However, other market conditions such as lower transaction costs during the lean hogs period can also contribute to reduce expected option returns during the latter period.
The formulation of legal rules is a challenging issue for lawmakers. Tradeoffs are inevitable between providing more guidance by specific rules and enlarging the scope by general rules. Using real options theory we show that the degree of precision should be considered as a degree of flexibility which increases the value of the text. Thus, we derive a normative principle for a draftsman to choose between rules versus standards and to decide when the law should be enacted. In highly innovating environments, delaying the enactment allows lawmakers to obtain more information. Therefore, the lower the degree of precision of the law, the shorter the delay.
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