Jump-diffusion model of exchange rate dynamics : estimation via indirect inference

This paper investigates asymmetric effects of monetary policy over the business cycle. A two-state Markov Switching Model is employed to model both recessions and expansions. For the United States and Germany, strong evidence is found that monetary policy is more effective in a recession than during a boom. Also some evidence is found for asymmetry in the United Kingdom and Belgium. In the Netherlands, monetary policy is not very effective in either regime.

Nash Equilibrium and Robust Stability in Dynamic Games: A Small-Gain Perspective

This paper develops a novel methodology to study robust stability properties of Nash equilibrium points in dynamic games. Small-gain techniques in modern mathematical control theory are used for the first time to derive conditions guaranteeing uniqueness and global asymptotic stability of Nash equilibrium point for economic models described by functional difference equations. Specification to a Cournot oligopoly game is studied in detail to demonstrate the power of the proposed methodology

The financing behavior of Dutch firms

This paper investigates the financing behaviour of Dutch firms by testing whether a firm’s financing decisions are determined by certain factors identified in various theories. Since a firm’s financing decision is reflected in the changes of its leverage, our research focuses on the relationship between a firm’s debt ratio change and the changes in certain factors. The approach used in the paper is the structural equation modeling (SEM) technique. The model identifies various important factors that are related to Dutch firms’ financing decisions. The empirical results provide moderate support for the static trade-off theory, the pecking-order hypothesis, as well as the dynamic capital structure model. However, our data set is insuffi- cient to confirm the static trade-off theory, and our results provide little evidence to back the asymmetric information argument behind the pecking-order hypothesis.

The determinants of Dutch capital structure choice

This paper uses the structural equation modeling (SEM) technique to empirically test the determinants of capital structure choice for Dutch firms. We include major factors identified by capital structure theories and construct proxies for these factors with consideration of specific institutional settings in the Netherlands. We also carefully rescale the observed variables in order to conform with the linear structure of the model and the multivariate normality assumption. Our empirical results shed many important insights on Dutch firms’ financing behavior. In particular, we identified important factors that have so far been ignored in the literature for the Dutch capital structure choice. Furthermore our results provide evidence supporting the “static trade-off" hypothesis. While the “pecking-order" behavior is observed for Dutch firms, our results cast doubt on the rationale of asymmetric information behind the “pecking-order" hypothesis. We also point out that the static cross-section evidence is not sufficient to conclude whether or not the management of Dutch firms is entrenched. Models based on the dynamic behavior of firms’ capital structure choice are called for such tests.

Information Shocks, Jumps, and Price Discovery -- Evidence from the U.S. Treasury Market

We examine large price changes, known as jumps, in the U.S. Treasury market. Using recently developed statistical tools, we identify price jumps in the 2-, 3-, 5-, 10-year notes and 30-year bond during the period of 2005-2006. Our results show that jumps mostly occur during prescheduled macroeconomic announcements or events. Nevertheless, market surprise based on preannouncement surveys is an imperfect predictor of bond price jumps. We find that a macroeconomic news announcement is often preceeded by an increase in market volatility and a withdrawal of liquidity, and that liquidity shocks play an important role for price jumps in U.S. Treasury market. More importantly, we present evidence that jumps serve as a dramatic form of price discovery in the sense that they help to quickly incorporate market information into bond prices.Financial markets

Nash Equilibrium and Robust Stability in Dynamic Games: A Small-Gain Perspective

This paper develops a novel methodology to study robust stability properties of Nash equilibrium points in dynamic games. Small-gain techniques in modern mathematical control theory are used for the first time to derive conditions guaranteeing uniqueness and global asymptotic stability of Nash equilibrium point for economic models described by functional difference equations. Specification to a Cournot oligopoly game is studied in detail to demonstrate the power of the proposed methodology.Dynamic game; Cournot oligopoly; Nash equilibrium; Robust stability; Small gain

Pricing stock options under stochastic volatility and interest rates with efficient method of moments estimation

While the stochastic volatility (SV) generalization has been shown to improve the explanatory power over the Black-Scholes model, empirical implications of SV models on option pricing have not yet been adequately tested. The purpose of this paper is to first estimate a multivariate SV model using the efficient method of moments (EMM) technique from observations of underlying state variables and then investigate the respective effect of stochastic interest rates, systematic volatility and idiosyncratic volatility on option prices. We compute option prices using reprojected underlying historical volatilities and implied stochastic volatility risk to gauge each model’s performance through direct comparison with observed market option prices. Our major empirical findings are summarized as follows. First, while theory predicts that the short-term interest rates are strongly related to the systematic volatility of the consumption process, our estimation results suggest that the short-term interest rate fails to be a good proxy of the systematic volatility factor; Second, while allowing for stochastic volatility can reduce the pricing errors and allowing for asymmetric volatility or leverage effect does help to explain the skewness of the volatility smile, allowing for stochastic interest rates has minimal impact on option prices in our case; Third, similar to Melino and Turnbull (1990), our empirical findings strongly suggest the existence of a non-zero risk premium for stochastic volatility of stock returns. Based on implied volatility risk, the SV models can largely reduce the option pricing errors, suggesting the importance of incorporating the information in the options market in pricing options; Finally, both the model diagnostics and option pricing errors in our study suggest that the Gaussian SV model is not sufficient in modeling short-term kurtosis of asset returns, a SV model with fatter-tailed noise or jump component may have better explanatory power.

Microfluidic polymerase chain reaction

We implement microfluidic technology to miniaturize a thermal cycling system for amplifying DNA fragments. By using a microfluidic thermal heat exchanger to cool a Peltier junction, we have demonstrated rapid heating and cooling of small volumes of solution. We use a miniature K-type thermocouple to provide a means for in situ sensing of the temperature inside the microrefrigeration system. By combining the thermocouple, two power supplies controlled by a relay system, and computer automation, we reproduce the function of a commercial polymerase chain reaction thermal cycler and demonstrate amplification of a DNA sample of about 1000 base pairs