Alfonso Novales

Optimal hedging under departures from the cost-of-carry valuation: Evidence from the Spanish stock index futures market

We provide an analytical discussion of the optimal hedge ratio under discrepancies between the futures market price and its theoretical valuation according to the cost-of-carry model. Assuming a geometric Brownian motion for spot prices, we model mispricing as a speci…c noise component in the dynamics of futures market prices. Empirical evidence on the model is provided for the Spanish stock index futures. Ex-ante simulations with actual data reveal that hedge ratios that take into account the estimated, time-varying, correlation between the common and specific disturbances, lead to using a lower number of futures contracts than under a systematic unit ratio, without generally losing hedging e¤ectiveness, while reducing transaction costs and capital requirements. Besides, the reduction in the number of contracts can be substantial over some periods. Finally, a meanvariance expected utility function suggests that the economic benefits from an optimal hedge are substantial.

Dynamic Laffer curves

In an endogenous growth model with human capital accumulation, we discuss the possibility of welfare improving changes on the 1scal policy stance in some actual economies. First, we characterize the extent to which the initial fall in revenues produced by a permanent tax cut can be compensated by an increase in the tax base, due to a dynamic La#er curve efect, showing that there is, in fact, a non-trivial margin for substituting debt for taxes on labor and capital income. Second, we show that the largest feasible reduction in labor income tax rates may easily produce a higher welfare gain than the largest feasible reduction in capital income tax rates. Two qualifications: (a) feasible tax cuts exist only for a relatively high elasticity of intertemporal substitution of consumption, and (b) the preference for the largest feasible tax cut on labor income rather than that on capital income reverses for a low appreciation for leisure, relative to consumption, in the preferences of the representative agent.

Testing the expectations hypothesis in Eurodeposits

Abstract Analyzing data on Euro-rates for 1978–1998, we find some consistent evidence in favor of the Expectations Hypothesis (EH) of the term structure: a) interest rates offered on deposits in a given currency form a cointegrated system, b) the restrictions of the EH on the cointegrating relationships are not rejected, c) forward rates contain significant explanatory power on future interest rates, unbiasedness being an acceptable hypothesis as a cointegrating relationship between forward rates and the appropriate future value of the corresponding short term interest rate. However, we also provide evidence that past rates contain information additional to that in forward rates to predict future short-term rates, against the rational expectations version of the EH and market efficiency.

Is It Worth Refining Linear Approximations to Non-LinearRational Expectations Models?

We characterize the balanced growth path of the basic neoclassical growth economy using standard numerical solution methods which solve a linear or log-linear approximation to the economic model, as well as methods which preserve the nonlinearity in the original model. We also apply the same methods adding indivisible labor to the basic model, and to a monetary version of that economy, subject to a cash-in-advance constraint. In a unified framework, we show that log-linear approximations should generally be preferred to linear approximations. We also provide evidence that preserving the original nonlinear structure of the model when computing the numerical solution generally yields minor gains in accuracy. Methods that use either a linear or a log-linear approximation to the model can produce solutions as accurate as the parameterized expectations method. However, in extreme parametric cases, the solution may be rather sensible to small numerical errors, and even a log-linear approximation may then be inappropriate. Methods using the nonlinear structure of the original model can then perform significantly better.

Forecasting with periodic models A comparison with time invariant coefficient models

Abstract Working with seventeen quarterly UK macroeconomic variables, characterized as periodically integrated in Franses and Romijn (1993), we have found that unconstrained periodic models do not beat time invariant alternatives in forecasting, even when cointegrating relationships among the seasons are taken into account. However, when appropriately constrained, the forecasting performance of periodic models can be much better than that of non-periodic models. Homogeneity restrictions among some seasons seem to be very important in that respect, which motivates us to propose switching for specific quarters between a periodic model and a non-periodic univariate AR to better capture the behaviour of these variables. Once season homogeneity is taken into account, incorporating the cointegrating relationships among the seasons through periodic error correction models achieves a substantial additional forecasting improvement.

Indeterminacy under non-separability of public consumption and leisure in the utility function

Abstract In a one sector growth model with public consumption in the utility function, the competitive equilibrium can be indeterminate for plausible values of the elasticity of intertemporal substitution of consumption, under constant returns to scale and endogenous government expenditures. Non-separability between public consumption and leisure in the utility function is crucial for this result.

Endogenous Growth Models

The AK model, introduced by Rebelo [6], is characterized by a constant returns to scale technology, linear in physical capital

Are volatility indices in international stock markets forward looking

\displaystyle{ Y _{t} = AK_{t}, }