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Anderson Graduate School of Management (5) Finance (5)

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## Scholarly Works (11 results)

This paper investigates the time series estimation of Cox, Ingersoll, and Ross's square root, mean-reverting specification for interest rate dynamics. For a priori resonable mean reversion, the stochastic behavior of interest rates is sufficiently close to a non-stationary process with a unit root so that least squares, the generalized method of moments, as well as maximum likelihood estimation provide upward biased estimates of the model's speed of adjustment coefficient. Corresponding bond yields, as a result, exhibit excessive mean reversion. In addition, estimates of the specification's long-term mean interest rate are seen to display erratic behavior when near a unit root. These conclusions are robust to assuming multiple state variable specifications, such as Brennan and Schwartz's two factor model of interest rate dynamics. We also document conditions under which this unit root problem can be alleviated when the cross-sectional restrictions of the Cox, Ingersoll, and Ross single factor term structure model are imposed.

This paper investigates the behavior of the term structure of interest rates over the business cycle. In contrast to the simple change in aggregate economic activity used in previous research, we use a more appropiate measure of the business cycle: the deviation of aggregate economic activity from its potentially stochastic trend. Stochastically detrending Gross Domestic Product (GDP) by Watson's [1986] UC-ARMA methodology significantly improves the term spread's informativeness regarding future economic activity. We also investigage the implications of the UC-ARIMA representation of aggregate consumption dynamics for a linear consumption based model of the term structure. The presence of an unobserved by independent cyclical component in aggregate consumption also allows for the more efficient estimation of consumption asset pricing models.

vThe consumption asset pricing framework implies that asset prices may be used to investigate the properties of consumption. An important property of consumption is its elasticity of intertemporal substitution which measures the willingness of individuals to move consumption between time periods in response to changes in interest rates and has important implications for the effectiveness of monetary policy and the behavior of the business cycle. However, consumption asset pricing models typically assume a power utility function in which the elasticity of intertemporal substitution cannot be disentangled from the coefficient of relative risk aversion. While the Epstein-Zin utility function breaks this link, extant empirical tests of this specification have not been able to disentangle these parameter. We argue that this failure arises because data previously used does not properly capture the time dimension needed to accurately estimate the elasticity of intertemporal substitution. We use term structure data, in particular “forward” portfolios which more accurately measure movements across points on the term structure. We find that the Epstein-Zin specification is consistent with out term structure data and we are able to clearly disentangle the elasticity of intertemporal substitution from the coefficient of relative risk aversion.

Chan, Karolyi, Longstaff, and Sanders [1992] find no evidence that the October 1979 change in Federal Reserve operating policy resulted in a once-and-for-all deterministic break in the behavior of short term riskless interest rates. In contrast, we provide evidence of such a regime shift even after allowing the volatility of interest rate changes to depend on the level of interest rates. However, rather than modeling this regime-shift as a permanent event with no further shifts possible, it is more realistic to model the change in regimes itself as a random variable. Accordingly, we put forward a stochastic volatility interest rate model which generalizes previous specifications of interest rate dynamics and allowed testing for stochastic regime shifts. This Markov regime shifting model provides a more accurate description of the behavior of U.S. short term riskless interest rates. We also consider a specification that allows interest rate volatility to follow a diffusion proves and we provide a statistically efficient integration-based filtering procedure to estimate its parameters. Five U.S. short term riskless interest rate data, we cannot statistically distinguish between these alternative models. In either case, once the stochastic nature of interest rate volatility is taken in account, we find little or no evidence of a deterministic structural break in corresponding stochastic volatility interest rate dynamics around October 1979.

This paper examines the correlation across a number of international stock market indices. As correlation is not observable, we assume it to be a latent variable whose dynamics must be estimated using data on observables. To do so, we use ¯ltering methods to extract stochastic correlation from returns data. We ¯nd evidence that the estimated correlation structure is dynamically changing over time. We also investigate the link between stochastic correlation and volatility. In general, stochastic correlation tends to increase in response to higher volatility but the e®ect is by no means consistent. These results have important implications for portfolio theory as well as risk management.

Magnetic helicity, a measure of the linkage of magnetic field lines, has long been used in the contexts of astrophysical and experimental plasmas because, for highly conductive plasmas, it is a conserved quantity. In this experimental study, the dynamics of two magnetic flux ropes and the magnetic reconnection that occurs between them is used as a proving ground for helicity conservation theory. A magnetic flux rope is a twisted bundle of magnetic field lines that is ubiquitous in space and solar plasmas. Two magnetic flux ropes are created in the Large Plasma Device (LAPD) using a lanthanum hexaboride (LaB6) cathode that injects current along a background, magnetic field. The flux ropes are kink unstable, causing them to collide. As they collide, the field lines diverge, and a quasi-separatrix layer (QSL) forms. The QSL is an indicator of magnetic field line reconnection. Helicity conservation is examined inside the QSL. Two types of helicity are considered: relative magnetic helicity, which is a standard formulation, and relative canonical helicity, an extension. Three-dimensional measurements of plasma density (ne), electron temperature (Te), plasma potential (ϕp), the magnetic field (B), and ion flow (vflow) are required to evaluate each terms that appear in the extended formulation of helicity. In the magnetohydrodynamic (MHD) limit, the transport of relative magnetic helicity and the dissipation of relative magnetic helicity do not balance. Using relative canonical helicity, the dissipation of relative canonical helicity is balanced by the transport of relative canonical helicity into the QSL – such that the temporal derivative of the quantity is zero. The electrostatic field is the key term that balances helicity. It is ignored in the standard model of helicity. In this experiment, the electrostatic component of the electric field is large compared to the induced electric field produced by reconnection; and therefore, it should not be ignored in other circumstances.

Drawing on data collected through clinical practice and ethnographic fieldwork, this study examines the experience of injury, illness and disability among undocumented Latino day laborers in San Francisco. We demonstrate how constructions of masculine identity organize the experience of embodied social suffering among workers who are rendered vulnerable by the structural conditions of undocumented immigrant status. Theoretical concepts from critical medical anthropology and gender studies extend the scholarly analysis of structural violence beyond the primarily economic to uncover how it is embodied at the intimate level as a gendered experience of personal and familial crisis, involving love, respect, betrayal and patriarchal failure. A clinical ethnographic focus on socially structured patriarchal suffering elucidates the causal relationship between rnacro-forces and individual action with a fuller appreciation of the impact of culture and everyday lived experience. (C) 2003 Elsevier Ltd. All rights reserved.