
on Financial Markets 
Issue of 2007‒11‒24
six papers chosen by 
By:  Lars Peter Hansen; Jose A Sheinkman 
Date:  2007–11–15 
URL:  http://d.repec.org/n?u=RePEc:cla:levrem:122247000000001669&r=fmk 
By:  Robert J Shiller 
Date:  2007–11–15 
URL:  http://d.repec.org/n?u=RePEc:cla:levrem:122247000000001682&r=fmk 
By:  Glenn D. Rudebusch; Eric T. Swanson 
Abstract:  The basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the "bond premium puzzle." We show that the term premium on longterm bonds in the canonical dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to the data. We find that introducing longmemory habits in consumption as well as labor market frictions can help fit the term premium, but only by seriously distorting the DSGE model's ability to fit other macroeconomic variables, such as the real wage; therefore, the bond premium puzzle remains. 
Keywords:  Interest rates ; Econometric models 
Date:  2007 
URL:  http://d.repec.org/n?u=RePEc:fip:fedfwp:200725&r=fmk 
By:  Tak Kuen Siu; Hailiang Yang Unim; John W Lau 
Abstract:  Recently, there has been considerable interest in investigating option valuation problem in the context of regimeswitching models. However, most of the literature consider the case that the risk due to switching regimes is not priced. Relatively little attention has been paid to investigate the impact of switching regimes on the option price when this source of risk is priced. In this paper, we shall articulate this important problem and consider the pricing of an option when the price dynamic of the underlying risky asset is governed by a Markovmodulated geometric Brownian motion. We suppose that the drift and volatility of the underlying risky asset switch over time according to the state of an economy, which is modeled by a continuoustime hidden Markov chain. We shall develop a twostage pricing model which can price both the diffusion risk and the regimeswitching risk based on the Esscher transform and the minimization of the maximum entropy between an equivalent martingale measure and the realworld probability measure over different states. The latter is called a minmax entropy problem. We shall conduct numerical experiments to illustrate the effect of pricing regimeswitching risk. The results of the numerical experiments reveal that the impact of pricing regimeswitching risk on the option prices is significant. 
Keywords:  Option valuation; Regimeswitching risk; Twostage pricing procedure; Esscher trans form; Martingale restriction; Minmax entropy problem. 
JEL:  G10 G12 
Date:  2007–11 
URL:  http://d.repec.org/n?u=RePEc:san:crieff:0713&r=fmk 
By:  B. Luppi; M. Marzo; E. Scorcu 
Date:  2007–07 
URL:  http://d.repec.org/n?u=RePEc:bol:bodewp:600&r=fmk 
By:  B. Luppi; M. Marzo; E. Scorcu 
Date:  2007–07 
URL:  http://d.repec.org/n?u=RePEc:bol:bodewp:601&r=fmk 