Mortgage Terminations: The Role of Conditional Volatility

This article is the winner of the Real Estate Finance manuscript prize (sponsored by Fannie Mae Foundation) presented at the 2001 American Real Estate Society Annual Meeting. Studies of mortgage termination decisions typically rely on a competing risks framework comparing defaults and prepayments. While useful tools have been developed to approximate the values of these competing default and prepayment options, the available metrics do not adequately account for the role of the conditional volatility of interest rates and housing prices in option valuation. Using a sample of 1,428 mortgage loan payment histories, this study finds that exponential GARCH estimates of the conditional volatility of housing prices and interest rates influence mortgage termination decisions in a predictable manner. Specifically, increased housing price volatility is shown to enhance default option values, while increased interest rate volatility is shown to enhance prepayment option values. Therefore, it would appear that conditional volatility represents a more refined input into the competing risks option framework.

Journal publishing with Acrobat: the CAJUN project

The publication of material in electronic form should ideally preserve, in a unified document representation, all of the richness of the printed document while maintaining enough of its underlying structure to enable searching and other forms of semantic processing. Until recently it has been hard to find a document representation which combined these attributes and which also stood some chance of becoming a de facto multi-platform standard. This paper sets out experience gained within the Electronic Publishing Research Group at the University of Nottingham in using Adobe Acrobat software and its underlying PDF (Portable Document Format) notation. The CAJUN project1 (CD-ROM Acrobat Journals Using Networks) began in 1993 and has used Acrobat software to produce electronic versions of journal papers for network and CD-ROM dissemination. The paper describes the project's progress so far and also gives a brief assessment of PDF's suitability as a universal document interchange standard

Economic implications for Turkey of a customs union with the European Union

Turkey and the European Union (EU) have agreed to implement a customs union. This means Turkey will eliminate its tariffs and levies on imports on manufactured products from the EU. Turkey will also apply EU's"common external tariff"on imports from third countries. Turkey will be obligated by 20001 to provide preferential access to its markets to all countries to which the EU grants such access. Since Turkey is both eliminating tariffs on EU imports and reducing tariffs on imports from third countries, it will become a rather open economy in nonagricultural sectors. And since preferential access agreements with third countries will typically be reciprocal, Turkish exporters can expect improved access to those markets. According to the authors, Turkey's biggest gains from the customs union arrangement will come from this improved access to third country markets. Using a comparative static computable general equilibrium model of Turkey, they estimate that Turkey stands to gain between 1 and 1.5 percent of gross domestic product (GDP) annually from the customs union arrangement with the EU, depending on what complementary policies it adopts. They also estimate that lost tariff revenues will amount to 1.4 percent of GDP. For Turkey to avoid worsening its fiscal deficit, it must find ways to reduce expenditures or increase revenues. Its best choice is to reduce expenditures through accelerating privatization of state-owned enterprises which will generate a number of macroeconomic and efficiency benefits in addition to the fiscal benefits. If a value-added tax (VAT) is used as a replacement tax, they estimate that VAT rates must increase 16.2 percent in each sector to compensate for the revenue losses from implementing the full customs union. But uniform application of the VAT would allow the VAT rates to fall while still compensating for the loss from reduced tariffs and would increase the welfare gain from the customs union.Economic Theory&Research,Environmental Economics&Policies,Trade Policy,Export Competitiveness,Trade Finance and Investment,Trade and Regional Integration,Trade Policy,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Environmental Economics&Policies

Piecemeal trade reform in partially liberalized economies : an evaluation for Turkey

Turkey undertook a major liberalization of trade policy in the 1980s. Import quotas disappeared, the Turkish lira was made convertible, and tariffs are generally lower. Those changes and the export subsidies that remain have removed the anti-export bias from Turkey's external incentive regime. Using a 40-sector computable general equilibrium model, the authors consider several more trade liberalization options available to the Turkish government. They conclude that uniformity of tariffs and export subsidies would substantially improve Turkey's welfare. Although the"Ramsey"optimal import taxation would call for non-uniform import taxes inversely proportional to the elasticity of import demand in each sector, the observed dispersion of tariff structure in Turkey is inconsistent with optimal departures from uniform protection. In fact, uniformity achieves an extremely high proportion of the benefits of full trade liberalization because, in the absence of a general anti-export bias, theprincipal distortion remaining in the trade regime derives from dispersion of the tariff and, especially the export subsidy structure. An increasing number of developing countries - including Chile, Indonesia, Mexico, and Poland - have in recent years undertaken extensive trade liberalization. It is no longer clear that these economies retain an anti-export bias in their trade regime. Perhaps the most important policy conclusion the authors reach is that one must be wary of advocating piecemeal reform of tariffs or export subsidies alone. Piecemeal across-the-board tariff reductions do not always improve welfare; they must generally be coordinated with reductions in export subsidies to ensure improved welfare. The authors counterfactually assume that Turkey's tariffs are at the 1985 level which reintroduces an anti-export bias of import tariffs. In this case, piecemeal tariff reduction to the 1989 level is beneficial. Even small export subsidies are not always beneficial, despite the rule of thumb that small export subsidies are a welfare-enhancing offset to the anti-export bias of import tariffs. Export subsidies in Turkey are highly dispersed, and piecemeal reductions in the export subsidies reduce that dispersion. When the authors counterfactually impose uniformity of tariffs and export subsidies, they note that small export subsidies are beneficial as a piecemeal policy for offsetting the anti-export bias. Policymakers in developing countries have occasionally applied export subsidies in individual sectors with high tariffs as a means of encouraging exports in a sector that may otherwise rely on the highly protected domestic market. The authors show that in Turkey high export subsidies in sectors with high tariffs are particularly counterproductive - because at the multisector level the distortion introduced by the export subsidy dominates the reduction in anti-export bias. Turkey's proposed policy of harmonizing its tariff to the European Community's (EC's) common external tariff would yield only small welfare changes. Harmonizing the EC tariffs will require lowering tariffs below already low levels, in the presence of export subsidies almost as large as the existing average effective tariff rate. However harmonizing to the EC tariff structure can be beneficial if at the same time export subsidies are removed or reduced.Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Tax Law,Trade Policy

Chile's regional arrangements and the Free Trade Agreement of the Americas : the importance of market access

Using a multisector, computable general equilibrium model, the authors examine Chile's strategy of negotiating bilateral free trade agreements with all of its significant trading partners (referring to this policy as additive regionalism). They also evaluate the Free Trade Agreement of the Americas (FTAA) and global free trade. Among Chile's bilateral regional agreements, only Chile's agreements with"Northern"partners provide enough market access to offset the costs to Chile of trade diversion. Because of preferential market access, however, additive regionalism is likely to provide Chile with many times as many gains as the static welfare gains from unilateral free trade. The authors find that at least one partner country loses from each of the regional trade agreements they consider, and excluded countries as a group they always lose. They estimate that the FTAA produces large welfare gains for the members, with the European Union being the big loser. Gains to the world from global free trade are estimated to be at least 36 times greater than gains from the FTAA. Even countries of the Americas in aggregate gain more from global free trade than from the FTAA.Rules of Origin,Economic Theory&Research,Environmental Economics&Policies,Trade Policy,Payment Systems&Infrastructure,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade and Regional Integration,Economic Theory&Research,Environmental Economics&Policies,Rules of Origin

Trade policy options for Chile : a quantitative evaluation

Chile is currently evaluating a wide range of possible trade policies. Using a global computable general equilibrium model, the authors examine a range of trade policy and complementary tax policy options for Chile. They focus on Chile's principal preferential trade policy options: a free-trade area with MERCOSUR, a customs union with MERCOSUR, and a free trade area with NAFTA. They also examine such options as complementary tariff reduction with nonpartner countries in combination with implementing the free trade area options; unilateral or global trade liberalization; and the optimum unilateral tariff. Their principal policy conclusions: lowering Chile's tariffs preferentially or multilaterally leads to only small gains as Chile starts with a rather efficient external trade regime, uniform tariffs of 11 percent. Largely because of its efficient uniform tariff, preferential tariff reduction will reduce Chilean welfare through trade diversion, unless Chile can improve its access in the markets of partner countries. NAFTA offers enough access to benefit Chile; MERCOSUR does not, once the trade diversion costs of MERCOSUR are taken into account. Under their preferred-elasticity scenario, Chile can convert the MERCOSUR agreement from a loss to a gain if it lowers its external tariff to between 6 and 8 percent. Doing so will also increase the gains from a potential agreement with NAFTA. Chile's current value-added tax imposes distortionary costs because collection rates are nor uniform. Chile will gain if it can collect the VAT more uniformly. Tariff reductions from trade reform will require an increase in domestic taxes, so greater uniformity in domestic taxes (less distortion in replacement taxes) will maximize the benefits from trade reform. Welfare will be improved by moving toward unifromity in the VAT and lowering the Chilean tariff to between 6 and 8 percent. This model ignores dynamic gains from trade liberalization, the result of importing either a greater variety of products or more technologically advanced products.TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,Trade and Regional Integration,Economic Theory&Research,Trade Policy

Trade Policy and Poverty Reduction in Brazil

Using a multi-region CGE model, we evaluate the regional, multilateral and unilateral trade policy options of MERCOSUR from the perspective of the welfare of all potential partners. In Brazil, we focus on poverty impacts. We find that the poorest households in Brazil experience percentage gains of between 1.5 to 5.5 percent of their consumption, which is about three to four times the average for Brazil. Protection in Brazil favors capital intensive manufacturing relative to unskilled labor intensive agriculture and manufacturing. So trade liberalization raises the return to unskilled labor relative to capital, thereby helping the poor.

A comparison of ISCCP and FIRE satellite cloud parameters

One of the goals of the First ISCCP Regional Experiment (FIRE) is the quantification of the uncertainties in the cloud parameter products derived by the International Satellite Cloud Climatology Project (ISCCP). This validation effort has many facets including sensitivity analyses and comparisons to similar data or theoretical results with known accuracies. The FIRE provides cloud-truth data at particular points or along particular lines from surface and aircraft measurement systems. Relating these data to the larger, area-averaged ISCCP results requires intermediate steps using higher resolution satellite data analyses. Errors in the cloud products derived with a particular method can be determined by performing analyses of high resolution satellite data over the area surrounding the point or line measurement. This same analysis technique may then be used to derive cloud parameters over a larger area containing similar cloud fields. It is assumed that the uncertainties found for the small scale analyses are the same for the large scale so that the method has been calibrated for the particular cloud type; i.e., its accuracy is known. Differences between the large scale results using the ISCCP technique and the calibrated method can be computed and used to determine if any significant biases or rms errors occur in the ISCCP results. Selected ISCCP results are compared to cloud parameters derived using the hybrid bispectral threshold method over the FIRE IFO and extended observation areas