Linearity-Generating Processes: A Modelling Tool Yielding Closed Forms for Asset Prices

This methodological paper presents a class of stochastic processes with appealing properties for theoretical or empirical work in finance and macroeconomics, the "linearity-generating" class. Its key property is that it yields simple exact closed-form expressions for stocks and bonds, with an arbitrary number of factors. It operates in discrete and continuous time. It has a number of economic modeling applications. These include macroeconomic situations with changing trend growth rates, or stochastic probability of disaster, asset pricing with stochastic risk premia or stochastic dividend growth rates, and yield curve analysis that allows flexibility and transparency. Many research questions may be addressed more simply and in closed form by using the linearity-generating class.

Industry views on water resources planning methods – prospects for change in England and Wales

This paper describes a qualitative study of practitioner perspectives on regulated water resources planning practice in England and Wales. The study focuses on strengths and weaknesses of existing practice and the case for change towards a risk-based approach informed by stochastic modelling assessments. In-depth, structured interviews were conducted to capture the views of planners, regulators and consultants closely involved in the planning process. We found broad agreement that the existing water availability assessment methods are fallible; they lack transparency, are often highly subjective and may fail to adequately expose problems of resilience. While most practitioners believe these issues warrant a more detailed examination of risk in the planning process, few believe there is a strong case for a fundamental shift towards risk-based planning informed by stochastic modelling assessments. The study identifies perceived business risks associated with change and exposes widespread scepticism of stochastic methods

The Mystique of Central Bank Speak

Despite the recent trend toward greater transparency of monetary policy, in many respects mystique still prevails in central bank speak. This paper shows that the resulting perception of ambiguity could be desirable. Under the plausible assumption of imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial, while it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak

Quantum trajectories for the realistic measurement of a solid-state charge qubit

We present a new model for the continuous measurement of a coupled quantum dot charge qubit. We model the effects of a realistic measurement, namely adding noise to, and filtering, the current through the detector. This is achieved by embedding the detector in an equivalent circuit for measurement. Our aim is to describe the evolution of the qubit state conditioned on the macroscopic output of the external circuit. We achieve this by generalizing a recently developed quantum trajectory theory for realistic photodetectors [P. Warszawski, H. M. Wiseman and H. Mabuchi, Phys. Rev. A_65_ 023802 (2002)] to treat solid-state detectors. This yields stochastic equations whose (numerical) solutions are the ``realistic quantum trajectories'' of the conditioned qubit state. We derive our general theory in the context of a low transparency quantum point contact. Areas of application for our theory and its relation to previous work are discussed.Comment: 7 pages, 2 figures. Shorter, significantly modified, updated versio

Stochastic conversions of TeV photons into axion-like particles in extragalactic magnetic fields

Very-high energy photons emitted by distant cosmic sources are absorbed on the extragalactic background light (EBL) during their propagation. This effect can be characterized in terms of a photon transfer function at Earth. The presence of extragalactic magnetic fields could also induce conversions between very high-energy photons and hypothetical axion-like particles (ALPs). The turbulent structure of the extragalactic magnetic fields would produce a stochastic behaviour in these conversions, leading to a statistical distribution of the photon transfer functions for the different realizations of the random magnetic fields. To characterize this effect, we derive new equations to calculate the mean and the variance of this distribution. We find that, in presence of ALP conversions, the photon transfer functions on different lines of sight could have relevant deviations with respect to the mean value, producing both an enhancement or a suppression in the observable photon flux with respect to the expectations with only absorption. As a consequence, the most striking signature of the mixing with ALPs would be a reconstructed EBL density from TeV photon observations which appears to vary over different directions of the sky: consistent with standard expectations in some regions, but inconsistent in others.Comment: v2: 22 pages, 5 eps figures. Minor changes. A reference added. Matches the version published on JCA

Inflation Target Transparency and the Macroeconomy

We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target.Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning