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Dynamic Option Adjusted Spread and the Value of Mortgage Backed Securities (Draft 2)
Get PDFWe extend a reduced form model for pricing pass-through mortgage backed securities
(MBS) and provide a novel hedging tool for investors in this market. To calculate the
price of an MBS, traders use what is known as option-adjusted spread (OAS). The
resulting OAS value represents the required basis points adjustment to reference curve
discounting rates needed to match an observed market price. The OAS suffers from
some drawbacks. For example, it remains constant until the maturity of the bond
(thirty years in mortgage-backed securities), and does not incorporate interest rate volatility. We suggest instead what we call dynamic option adjusted spread (DOAS), which allows investors in the mortgage market to account for both prepayment risk and changes of the yield curve
A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks
Get PDFWe test the real interest rate parity hypothesis using data for the G7 countries over the period 1970-2008. Our contribution is two-fold. First, we utilize the ARDL bounds approach of Pesaran et al. (2001) which allows us to overcome uncertainty about the order of integration of real
interest rates. Second, we test for structural breaks in the underlying relationship using the multiple structural breaks test of Bai and Perron (1998, 2003). Our results indicate significant
parameter instability and suggest that, despite the advances in economic and financial integration, real interest rate parity has not fully recovered from a breakdown in the 1980s
Harmful competition in the insurance markets
Get PDFThere is a general presumption that competition is a good thing. In this paper we
show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms
from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for di erent distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is
generally poorer than monopoly
Responsibility for regional waste generation: A single region extended input-output analysis with uni-directional trade flows
Get PDFThe paper uses a regional input-output (IO) framework and data derived on waste generation by industry to examine regional accountability for waste generation. In addition to estimating a series of industry output-waste coefficients, the paper considers two methods for waste attribution but focuses first on one (trade endogenised linear attribution system (TELAS)) that permits a greater focus on private and public final consumption as the main exogenous driver of waste generation. Second, the paper uses a domestic technology assumption (DTA) to consider a regional ‘waste footprint’ where local consumption requirements are assumed to be met through domestic production
A Soft Edge Target Zone Model: Theory And Application To Hong Kong
Get PDFHong Kong’s currency is pegged to the US dollar in a currency board arrangement. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that
the currency board would be abandoned. In the wake of this appreciation, the monetary authorities revamped the one-sided currency board mechanism into a symmetric two-sided system with a narrow exchange rate band. This paper reviews the characteristics of the new currency board arrangement and embeds a theoretical soft edge target zone model typifying many intermediate
regimes, to explain the notable achievement of speculative peace and credibility since May 2005
The Rebound Effect with Energy Production: A Partial Equilibrium Analysis
Get PDFRebound is the extent to which improvements in energy efficiency fail to translate fully into reductions in energy use because of the implicit fall in the price of energy, when measured in efficiency units. This paper discusses aspects of the rebound effect that are introduced once energy is considered as a domestically produced commodity. A partial equilibrium approach is adopted in order to incorporate both energy use and production in a conceptually tractable way. The paper explores analytically two interesting results revealed in previous numerical simulations. The first is the possibility that energy use could fall by more than the implied improvement in efficiency. This corresponds to negative rebound. The second is the finding that the short-run rebound value can be greater than the corresponding long-run value
Bilateral oligopoly and quantity competition
Get PDFBilateral oligopoly is a strategic market game with two commodities, allowing strategic behavior on both sides of the market. When the number of buyers is large, such a game approximates a game of quantity competition played by sellers. We present examples which show that this is not typically a Cournot game. Rather, we introduce an alternative game of quantity competition (the market share game) and, appealing to results in the literature on contests, show that this yields the same equilibria as the many-buyer limit of bilateral oligopoly, under standard assumptions on costs and preferences. We also show that the market share and Cournot games have the same equilibria if and only if the price elasticity of the latter is one. These results lead to necessary and sufficient conditions for the Cournot game to be a good approximation to bilateral oligopoly with many buyers and to an ordering of total output when they are not satisfied
The economics of power and control
Get PDFJohn Hardman Moore outlines his joint
research with Oliver Hart, looking at
the economics of power and control
and the foundations of contractual
incompletenes
Incentivising Investment in the UKCS: a Response to Supporting Investment: a Consultation on the North Sea Fiscal Regime
Get PDFNORTH SEA STUDY OCCASIONAL PAPER
No. 11
Money and Liquidity
Get PDFJohn Hardman Moore outlines his joint research with Nobu Kiyotaki on the macroeconomic questions to do with the nature of money and liquidity, and the interplay between the financial system and the aggregate economy