Working Papers

This paper analyses multivariate high frequency financial data using realised covariation. We provide a new asymptotic distribution theory for standard methods such as regression, correlation analysis and covariance. It will be based on a fixed interval of time (e.g. a day or week), allowing the number of high frequency returns during this period to go to infinity. Our analysis allows us to study how high frequency correlations, regressions and covariances change through time. In particular we provide confidence intervals for each of these quantities.

Keywords: Power Variation, Realised correlation, Realised covolatility, Realised regression, Realised variance, semimartingales, Covolatility

Reference: 2002-FE-03

Authors: Margaret Stevens

Mar 2002

Although a number of different models have been suggested for the process that brings workers and firms together in the labour market, none of these performs well in empirical studies of the aggregate matching function. Empirically, the most successful functional form is Cobb-Douglas, for which there are no microfoundations in the existing literature. I present a new model for the matching process, based on a `telephone line` Poisson queuing process. This implies a CES matching function, approximately Cobb-Douglas when marginal search costs are approximately constant. The model provides an interpretation for empirical evidence, and insight into the theoretical efficiency conditions for matching models.

JEL Codes: J41

Keywords: search, matching function

Reference: 95

Individual View

Authors: Alan Beggs

Mar 2002

This paper examines the convergence of payoffs and strategies in Erev and Roth`s model of reinforcement learning. When all players use this rule it eliminates iteratively dominated strategies and in two-person constant-sum games average payoffs converge to the value of the game. Strategies converge in constant-sum games with unique equilibria if they are pure or in 2

JEL Codes: C72, D83

Keywords: reinforcement learning, games

Reference: 96

Authors: David P. Myatt, Chris Wallace

Mar 2002

Equilibrium selection in coordination games has generated a large literature. Kandori, Mailath and Rob (1993) and Young (1993) studied dynamic models of aggregate behaviour in which agents choose best responses to observations of population play. Crucially, infrequent mistakes (`mutations`) allow agents to take actions contrary to current trends and prevent initial configurations from determining long run play. An alternative approach is offered here: Harsanyian trembles are added to agents` payoffs so that with some probability it is optimal to act against the flow of play. The long run distribution of population behaviour is characterised - modes correspond to stable Bayesian Nash equilibria. Allowing the variance of payoff trembles to vanish, via a purification process, a single equilibrium is played almost always in the long run. Kandori et al and Young show that the number of contrarian actions required to escape an equilibrium determines selection; here, the likelihood that such actions are taken is of equal importance.

JEL Codes: C72, C73

Keywords: adaptive dynamics, payoff idiosyncrasy, evolution, equilibrium selection

Reference: 89

Individual View

Authors: Kamakshya Trivedi

Mar 2002

This paper examines the long-run (steady-state) relationship between levels of educational human capital and levels of income for the 15 major states of India between 1965 and 1992. The relationship is estimated using the Pooled Mean Groups (PMG) technique; which produces common long-run coefficients but allows heterogeneity of the short-run adjustment parameters, and is well-suited to approximately square panels. The results suggest that levels of educational human capital, proxied by secondary school enrollment rates, have a robust positive impact on steady-state levels of income. This is true for male and female education, and the regressions also suggest that states which have larger gender-gaps in education have lower steady-state incomes. The estimated relationship is robust to the inclusion of alternative measures, added controls, and variation in the degree of state coverage.

JEL Codes: O11, O53, I29

Keywords: growth, India, education, panel data

Reference: 97

Individual View

Authors: Avner Offer

Mar 2002

The public sector allocates 40 percent of expenditure in Britain. Why do affluent consumers acquire so much welfare outside the market? If choice is affected by myopic bias, optimisation is costly, consumer choice is fallible, and collective consumption provides a commitment device. For a century after 1870, collective investment gave superior payoffs, and collective consumption grew faster than the economy. Public/private standoffs were resolved against entrepreneurs. By the 1970s, prudential saturation set in, as public investment soared. Rising incomes, new goods, and falling prices shifted consumer preferences towards market provision, and crowded out the public sector. This shift supported investor capture of government, privatisation and de-regulation. Consumer expenditure increased, while prudential investment declined sharply. In consequence, Victorian-style public/private standoffs have emerged again, with prudential crises in pensions, education, health, communications, and transport. These will need to be resolved once again by means of political competition.

Reference: 044

Individual View

Authors: David P. Myatt, Chris Wallace

Mar 2002

A strategy revision process in symmetric normal form games is proposed. Following Kandori, Mailath, and Rob (1993), members of a population periodically revise their strategy choice, and choose a myopic best response to currently observed play. Their payoffs are perturbed by normally distributed Harsanyian (1973) trembles, so that strategies are chosen according to multinomial probit probabilities. As the variance of payoffs is allowed to vanish, the graph theoretic methods of the earlier literature continue to apply. The distributional assumption enables a convenient closed form characterisation for the weights of the rooted trees. An illustration of the approach is offered, via a consideration of the role of dominated strategies in equilibrium selection.

JEL Codes: C72, C73

Keywords: multinational probit, stochastic evolution, idiosyncrasy, dominated strategies

Reference: 90

Individual View

Authors: Gerardo A. Guerra

Mar 2002

Through an experiment this study investigates the effects that verification has on honest traders. This paper demonstrates that by reducing the scope for trust verification can have a negative effect on the behaviour of honest individuals. Specifically, the analysis shows that trustworthy agents are willing to punish or seek compensation from those that deprive them of trust opportunities through the use of verification. Regulatory implications are discussed.

JEL Codes: C72, C78, C90, D18, D82, L86

Keywords: verification, trust, ultimatum bargaining, experiments

Reference: 98

Individual View

Authors: Daniel John Zizzo

Mar 2002

This paper presents the results of an experiment where people can reduce (`burn`) other subjects` money at a cost to their own, with the decisions of one of them (randomly chosen after all decisions are made) getting implemented to determine final winnings. Almost 50% of the subjects engage in money burning, eliminating some 23% of the earnings of the other subjects. The price elasticity of burning is estimated, and found to be less than one up to a lower boundary price of about 0.22. Three subjects out of four appear rank egalitarian, providing support to theories of interdependent preferences that predict that agents care about how money is divided among other agents. Relatively poor and disadvantaged agents burn at least as much as the others. Overall, money burning appears a genuine phenomenon, mirroring the institutional realities of some transition and underdeveloped economies where `the evil eye` can induce behaviour closely resembling money burning, and which may hinder economic growth. Some implications for developed countries are also discussed.

JEL Codes: C91, D11

Keywords: consumer choice, money burning, envy, egalitarianism

Reference: 91

Individual View

Authors: Gerardo A. Guerra, Daniel John Zizzo

Mar 2002

Trust responsiveness is the tendency to fulfill trust because you believe that it has been placed on you. The experiment presented in this paper uses two simple trust games to measure directly or indirectly the robustness of trust responsiveness in three conditions: when beliefs are elicited and a summary of these beliefs is transmitted; when beliefs are elicited but not transmitted, when beliefs are not elicited. Insofar as we can tell, trust responsiveness is robust to our belief manipulations: this strengthens the case for the real-world significance of trust responsiveness. Shame provides a possible explanation for unexpected trusters` choices.

JEL Codes: C72, C91, Z13

Keywords: trust, trust responsiveness, belief elicitation, shame

Reference: 99

Individual View

Authors: Andrew Glyn, Robert Rowthorn, Faculty of Economics and Politics, Cambridge University

Mar 2002

It is widely believed that regional labour markets in the USA are highly flexible, so that employment shocks have only transitory effects on joblessness since induced migration quickly offsets much of the initial impact. However time-series analysis of the response to shocks is very sensitive to errors of measurement in labour market data, and such errors are large in some widely used series which depend on household surveys of limited size. Adjusting for the likelihood magnitude of such errors with some novel statistical approaches, and using a range of data sources, we show that the responsiveness of employment rates to shocks has been rather weak in the USA over the past 30 years, though probably stronger in the 1950s and 1960s. This suggests that flexible regional adjustment is not a major factor behind the contemporary success of monetary union in the USA.

JEL Codes: C1, J6, N9, R1

Keywords: regional employment, convergence, measurement errors, regional adjustment

Reference: 92

Individual View

Authors: Simon GB Cowan, Simon Cowan

Mar 2002

The paper assesses the welfare effects of different ways of allocating input price risk between a regulated utility, consumers and speculators in a futures market. A risk-averse utility setting a fixed retail price requires a price that exceeds expected marginal cost, unless an efficient futures market is available. The firm bears no risk when input price risk is transferred to consumers, but consumers may not like price risk. When a futures market is available to consumers marginal cost pricing is always preferable to a fixed retail price. The policy conclusion is that marginal cost pricing should be combined with the development of futures markets in which consumers can hedge.

JEL Codes: D11, D42, D80, L51.

Keywords: price risk, utility regulation, futures markets

Reference: 100

Authors: Daniel John Zizzo

Mar 2002

The conjunction fallacy occurs whenever probability compounds are thought of as more likely than its component probabilities alone. In the experiment we present, subjects chose between simple and compound lotteries after some practice. Depending on the condition, they were given more or less information about the nature of probability compounds. The conjunction fallacy was surprisingly robust. There was, however, a puzzling dissociation between probability compounding in words and in practice: verbal ranking responses were sensitive, but actual choices entirely insensitive, to the amount of verbal instructions being provided. This might reflect a dichotomy between implicit and explicit knowledge.

JEL Codes: C91, D81, D83

Keywords: conjunction fallacy, heuristics, probability compounding, implicit knowledge, explicit knowledge

Reference: 88

Authors: David P. Myatt

Mar 2002

Reference: 93

Authors: Alexander Guembel, Itay Goldstein

Feb 2002

We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.

JEL Codes: D62, D82, D84, G14

Keywords: Manipulation, speculation, market efficiency, production externalities.

Reference: 2002-FE-02

Authors: Alan Morrison, Lucy White

Feb 2002

We analyse a general equilibrium model in which there is both adverse selection of and moral hazard by banks. The regulator has several tools at her disposal to combat these problems. She can audit banks to learn their type prior to giving them a licence, she can audit them ex post to learn the success probability of their projects, and she can impose capital adequacy requirements. When the regulator has a strong reputation for ex ante auditing she uses capital requirements to combat moral hazard problems. For less competent regulators, capital requirements substitute for ex ante auditing ability. In this case the banking system exhibits multiple equilibria so that crises of confidence in the banking system can occur. Contrary to conventional wisdom, the appropriate response to a crisis of confidence may be to tighten capital requirements to improve the quality of surviving banks.

Reference: 2002-FE-05

Authors: Gerardo A. Guerra

Feb 2002

Ultimatum games have been extensively used in experimental studies. By studying the consequences that restrictions shared by ultimatum games have in subject`s behaviour, this paper argues that some results are falsified by design constraints. This paper also presets a taxonomy of certification, and provides experimental evidence supporting the commonly observed use of rankings in certificates, as well as the restriction of awareness by certifiers to increase revenue. Regulatory implications are discussed.

JEL Codes: C72, C78, C90, D18, D63, D82, L15, L86

Keywords: ultimatum, bargaining, experiments, certification, asymmetric information

Reference: 87

Individual View

Authors: Tony Atkinson

Jan 2002

Abstract: In 1909 the United Kingdom Government introduced “super-tax”, which was an additional income tax levied on top incomes. This provided information on the distribution of total incomes that had not previously been available on a regular basis, since under the ordinary income tax, the authorities did not know the total income of individuals, which could be the subject of several separate assessments. Super-tax remained in existence until 1972, by which time other income tax sources (the Survey of Personal Incomes) were in place to allow the series to be continued. The aim of this paper is to examine what can be said from the published super-tax statistics about the evolution of top incomes in the United Kingdom. The paper spells out the limitations of the super-tax information, and the problems in establishing control totals for total population and total income, but argues that it provides a unique source of evidence about the distribution of top incomes covering virtually the whole of the twentieth century. The resulting picture, if blurred in places, allows us to draw broad conclusions about developments over the twentieth century. There is no longer the extent of inequality to be found before the First World War, with the Upper Ten Thousand receiving nearly a tenth of total income. The magnitude of the change may be need to be qualified in the light of fiscal re-arrangement, but there have been distinct periods of equalisation, notably during the two world wars, from 1946–1957 and from 1965–1972. But there is no steady trend. There have been plateaux. Since 1979, we have seen a reversal, with shares of the top income groups returning to their position of fifty years earlier. The equalisation of the post-war period has been lost.

Reference: 043

Individual View

Authors: James Malcomson, James W. Maw, University of Swansea Wales,Barry McCormick, University of Southampton

Jan 2002

Workers will not pay for general on-the-job training if contracts are not enforceable. Firms may if there are mobility frictions. Private information about worker productivities, however, prevents workers who quit receiving their marginal products elsewhere. Their new employers then receive external benefits from their training. In this paper, training firms increase profits by offering apprenticeships which commit firms to high wages for those trainees retained on completion. At these high wages, only good workers are retained. This signals their productivity and reduces the external benefits if they subsequently quit. Regulation of apprenticeship length (a historically important feature) enhances efficiency. Appropriate subsidies enhance it further.

This paper is now published at the reference given below, however the unpublished appendices are available to be downloaded.

JEL Codes: J24, J38

Keywords: contract enforceability, apprenticeships, regulation

Reference: 86

Authors: William Wilhelm, Lawrence M. Benveniste, Alexander Ljungqvist, Xiaoyun Yu

Jan 2002

We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.

Reference: 2002-FE-06

Authors: Neil Shephard, Tina Hviid Rydberg

Jan 2002

In this paper we introduce a decomposition of the joint distribution of price changes of assets recorded trade-by-trade. Our decomposition means that we can model the dynamics of price changes using quite simple and interpretable models which are easily extended in a great number of directions, including using durations and volume as explanatory variables. Thus we provide an econometric basis for empirical work on market microstructure using time series of transactions data. We use maximum likelihood estimation and testing methods to assess the fit of the model to a year of IBM stock price data taken from the New York Stock Exchange.

Keywords: Activity, autologistic, conditional independence, decomposition, directions, durations, forecasting, GLARMA, logarithmic distribution, prediction decomposition, size, transactions data

Reference: 2002-FE-04

Authors: Walter  Eltis

Dec 2001

Authors: Linda Y. Yueh

Dec 2001

The move to a more market-oriented economy is associated with evidence of increased inequality in the incomes earned by men and women. The context of our study of this question is the recent large-scale reform of the inefficient state sector, which has caused layoffs of urban workers that dramatically changed the state of employment in urban China. One factor in determining success in an imperfect labour market could be related to guanxi, the Chinese variant of social capital. We develop a model of social capital in which the decision to invest in guanxi is a function of time and resources expended, which may reflect and cause gender differences. Our original measures of social capital are created with a data set administered in urban China in early 2000. We find that there are gender differences in the stock of social capital and returns within the labour market. Women have less social capital than men and also lower economic returns in terms of earned income.

JEL Codes: D0, J16, J22, J71, O53

Keywords: general microeconomics, gender, discrimination, social capital, China

Reference: 83

Individual View

Authors: Paul A. Davi, dDominique Foray, CNRS and Institut pour le Management de la Recherche et de l`Innovation, Paris-Dauphine University

Dec 2001

This introductory article reviews the main themes relating to the development of new knowledge-based economies. After placing their emergence in historical perspective and proposing a theoretical framework which distinguishes knowledge from information, the authors characterize the specific nature of such economies. They go on to deal with some of the major issues concerning the new skills and abilities required for integration into the knowledge-based economy; the new geography that is taking shape (where physical distance ceases to be such an influential constraint); the conditions governing access to both information and knowledge, not least for developing countries; the uneven development of scientific, technological (including organizational) knowledge across different sectors of activity; problems concerning intellectual property rights and the privatization of knowledge; and the issues of trust, memory and the fragmentation of knowledge.

JEL Codes: D80, O31, O34

Keywords: knowledge, information, codification, intellectual property

Reference: 84

Individual View

Authors: Vijay Joshi, Mary Sissons Joshi, Psychology Department, Oxford Brookes University Roger Lamb, Psychology Department, Oxford Brookes University

Dec 2001

It is commonly asserted that such problems as inner-city traffic congestion and pollution can be understood as examples of the Prisoner`s Dilemma Game (PD), but there is a dearth of empirical research that tests this assertion. 587 car owners in Oxford City were presented with three pairs of alternatives designed as traffic versions of the four outcomes of the PD, and asked to state which alternative in each pair they preferred. Only 2% of respondents showed the full set of preferences which fit the PD. Four sets of preferences accounted for 93% of responses suggesting that no single canonical game structure can represent the traffic problem. The most common set of preferences, shown by 48% of respondents fitted as `Assurance Game`. The results imply that the current traffic problem may be due to lack of assurance and trust rather than raw self-interest. The public policy implications of the data are discussed.

Reference: 85

Individual View


Loading Papers...