Seungmook Choi

A Monte Carlo Study of Tests of Blockwise Weak Separability

Separability assumptions on functional structure have received a great deal of attention from econometricians and economic theorists because (1) separability provides the fundamental linkage between aggregation over goods and the maximization principles in economic theory, (2) separability provides the theoretical basis for partitioning the economys structure into sectors and (3) separability provides a theoretical hypothesis, which can produce parameter restrictions, permitting great simplification in estimation of large demand systems. The power of the various available tests for separability has never been determined, however. We conduct Monte Carlo studies to examine the capability of currently available methods to provide correct inferences about separability.

On the use of boundary conditions for variational formulations arising in financial mathematics

The general intractability of derivative security valuation models to present techniques, both analytic and numerical, arguably remains one of the preeminant problem of mathematical finance. It is the focus of this paper to examine the applicability of a promising recent development, namely Radial Basis Functions (RBF), to the problem of option valuation. A Black-Scholes framework is considered for American and European options written on a one and two risky assets. The performance of RBF and Finite-Differencing algorithms are examined with respect to artificial boundary conditions, computational domain, domain decomposition, and mesh scaling.

Testing for Structural Change: The Demand for Meat

Recent research on meat demand demonstrates the importance in empirical demand analyses of identifying and measuring structural changes. This paper develops and applies a method of analyzing structural changes in preferences using parameters from empirical demand equations derived from an underlying utility function. Structural changes alter the marginal rate of substitution between goods at fixed points of prices and quantities. The evolution of preference changes is measured by time-varying multiplicative terms in a translog utility function. The application to meat concludes that structural change occurred in the 1970s and provides measures of the time pattern of demand shifts.

The Property/Liability Insurance Cycle: A Comparison of Alternative Models

The objective of this paper is to compare alternative models of insurance pricing as theories of the property-liability underwriting cycle. The existing literature has focused on comparing two models, the financial pricing and capacity constraint models. However, these are not the only relevant models. We show that six alternative models imply the same general form of the pricing equation. We apply the model to data on stock property-liability insurers for the period 1935–1997. We find that the actuarial model and the capacity constraint hypothesis are the only theoretical models that are consistent with the data.

Structural Change in the Demand for Money

A two-stage nonparametric and parametric approach to identifying structural change in the underlying utility function for monetary assets proves useful in exploring the existence, timing, direction, and extent of structural breaks over the 1969-85 period. Divisia monetary aggregates were constructed after applying the generalized axiom of revealed preference to identify least violation subutility functions. The nonparametric procedure shows utility function inconsistencies in 1975.IV and 1982.III. A translog utility function with structural change represented by time-varying multiplicative parameters was developed and estimated. The results show that the breaks were statistically significant and measure the impacts on monetary asset demand over the period. Copyright 1992 by Ohio State University Press.

The valuation of foreign currency options under stochastic interest rates

Abstract We consider the valuation of options written on a foreign currency when interest rates are stochastic and the matrix of the diffusion representing the global economy is strongly coercive. We solve the associated variational inequality for the value function numerically by the finite element method. In the European case, a comparison is made to the exact solution. The corresponding result for the American option is also presented.

A Numerical Approach to American Currency Option Valuation

Option theory has produced models of increasing richness that are capable of incorporating many sources of randomness (“stochastic state variables,” as theorists would say). For interest rate dependent instruments, the highly flexible Heath-Jarrow-Morton (HJM) family provides some of the most widely used models. However, implementation of HJM models typically runs into serious computational problems as the number of state variables increases. Pricing a currency option, for example, requires at least three state variables, one for each countrys interest rate and one for the exchange rate. American exercise makes the problem harder still. In this article, Choi and Marcozzi describe a numerical technique based on approximating the option value with radial basis functions that offers considerable efficiency improvement. They illustrate its use on HJM-style currency options. One large advantage of this approach is that the approximating functions are analytic, so that the Greek letter risk exposures can be obtained directly using calculus rather than requiring multiple runs through a pricing lattice to approximate them.

Monetary policy regime changes and the risk premium in the foreign exchange markets : A GARCH application

Abstract This paper reports an empirical relationship between conduct of monetary policy and the foreign exchange risk premium, using GARCH(1, 1). The time-variation of the risk premium is shown to depend significantly on the changes in the monetary policy regime.

Have Absolute Price Levels Converged for Developed Economies? The Evidence since 1870

We compare price level and income convergence since 1870 for eleven developed economies using implicit price deflators derived from the GDP data of Maddison (1995, 2001, 2003). We find that sigma and beta convergence for prices occurs later and to a lesser extent than income. Price levels converge after 1950 while income convergence begins in the 1880s. We find no evidence for stochastic price convergence or for club price convergence.

The performance of the gph estimator of the fractional difference parameter: Simulation results

This paper investigates the behavior of the GPH estimator of the fractional difference parameter suggested by Geweke and Porter-Hudak (1983), through Monte Carlo simulations. The simulation results indicate that when considering a stationary AR(1) generating process the GPH estimator of the fractional difference parameter has serious bias which increases with the value of the autoregressive parameter, even for relatively large samples. The results suggest that tests and point estimates based on this procedure can be seriously misleading with hypothesis ests yielding incorrect inferences and thus must be used with great care.