ABSTRACT This paper presents a method for constructing the term structure of interest rate spreads for two currencies in the context of a country’s entry into a monetary union. We propose a special type of process that ensures the convergence of the short-term interest rate spread to zero by a fixed moment in time, which we call the discrete-time Brownian bridge process. Using this process and the conventional pricing kernel framework, we derive double recursive formulas for computing the affine coefficients for the term structure of interest rate spread. The estimated model counterpart, which is based on the pre-EMU interest rate spread data for the interest rates of the German mark and Italian lira, fits the data reasonably well and captures the stylized empirical facts. Namely, spreads for all maturities have downward trends, and the longer the maturity is, the less spread there is.
We present a nonparametric method for fitting the term structure of interest rates from bond prices. Our method is a variant of the smoothing spline approach, but within our framework we are able to determine the smoothing coefficient automatically from data using the generalized cross-validation or maximum likelihood estimates. We present an effective numerical algorithm to simultaneously find the term structure and the optimal smoothing coefficient. Finally, we compare the proposed nonparametric fitting method with other parametric and nonparametric methods to find its superior performance. We find that existing term structure fitting methods perform well in liquid markets while illiquid markets present new challenges, which we address in this article.
Social influence is an important factor in learning and decision-making. We estimate peer influence on student choice of specialization using data on undergraduate students of a Russian university. Information about individual social ties has been gathered from a questionnaire survey. We show that specialization choice is significantly influenced by friends as well as by study partners. The strongest effect is produced by friends who are study partners and those who have similar academic achievements. Reciprocal friendship ties have a stronger influence on the choice than nonreciprocal ones. Also, the decision is affected by classmates with similar academic achievement. The results allow us to better understand the mechanisms of peer effects in the specialization choice.
Applying bootstrapped quantile regression to the Russian Longitudinal Monitoring Survey (RLMS) data, we examine the channels through which individuals experience and seek to cope with changes in consumption. We find that married individuals living in small households, with educated heads in urban areas are better equipped to smooth consumption. Investigating the impact of idiosyncratic shocks, we find that the labour market is an important transmission mechanism allowing households to smooth their consumption but also exposing them to risk, mainly through job loss. Outside of pension payments the formal social safety net does not facilitate consumption smoothing, thus heightening the importance of informal coping institutions. It transpires that both support from relatives/friends and home production act as important insurance mechanisms for the most vulnerable.
Did the exchange rate (ER) regime change that was announced by the Chinese government in 2005 lead to an increased sensitivity of Chinese multinational companies (MNCs) to ER fluctua- tions? To answer this question our article considers the effect of ER level, volatility and expecta- tion on the Chinese outward foreign direct investment (OFDI) activities in 119 countries for a period of 2003–2013. We find striking evidence that Chinese Renminbi appreciation has a negative impact on Chinese outward FDI flows, and both higher ER volatility and expected depreciation encourage Chinese outward FDI flows. We introduce two complementary effects that explain these findings: repatriation effect and mercantilist effect. In view of the recent debate about the growing importance of Chinese Renminbi in the international transactions we believe that our research results shed light on the possible impact of ER policies on Chinese MNCs behaviour and global FDI distribution.
The article proposes a combination of finite mixture models and matching estimators to account for heterogeneous and nonlinear effects of the coinsurance rate on healthcare expenditure. The analysis with panel data for adult Japanese consumers in 2008-2010 and for female consumers in 2000-2010 demonstrates the presence of subpopulations with high, medium and low healthcare expenditure, and subpopulation membership is explained by lifestyle variables. Generalized finite mixtures provide adequate fit compared to loglinear model. Conditional average treatment effect estimations reveal the existence of nonlinear effects of the coinsurance rate in the subpopulation with high expenditure.
We use eSports data to construct an empirical model to measure the effect of diversity on team performance. Different kinds of diversities are considered, diversity of culture, diversity of language and diversity of skill. Our main results are that cultural diversity is beneficial for team performance: the absence of diversity reduces performance by 30%. However, language and experience diversity negatively affect results. Taking the difference in the results into account, we conclude that firms should not thoughtlessly maximize team diversity: different kinds of diversity have different integration and communication costs.
We relate differences in problem drinking symptoms within pairs of identical twins to their respective differences in years of schooling. Isolating in this way the influences of family background and genes, we find that an increase in schooling attainment results in a significantly lower incidence of problem drinking for men. Thus, an extra year of schooling reduces the number of health problems caused by drinking by 0.14, and the probability of developing symptoms of Alcohol Dependence (AD) by 0.06. This negative link is robust to a variety of modifications to the identifying assumptions underlying our statistical analysis. Socio-economic implications of our findings are discussed.
In this article, we examine whether the local indicators are able to predict the city-level housing prices and rents better than national indicators. For this purpose, we assess the forecasting ability of 126 indicators and 21 types of forecast combinations using a sample of 71 large German cities. There are several predictors that are especially useful, namely price-to-rent ratios, national-level business confidence, and consumer surveys. We also find that combinations of individual forecasts are among the top forecasting models. On average, the forecast improvements attain about 20%, measured by a reduction in root mean square error, compared to the naive models.