We present an algorithm and software routines for computing nth-order approximate solutions to dynamic, discrete-time rational expectations models around a nonstochastic steady state. We apply these routines to investigate the optimal monetary policy with commitment (and from a ``timeless...

The paper applies methods of functional data analysis – functional auto-regression, principal components and canonical correlations – to the study of the dynamics of interest rate curve. In addition, it introduces a novel statistical tool based on the singular value decomposition...

This paper incorporates the systematic risk of regime shifts into a general equilibrium model of the term structure of interest rates. The model shows that there is a new source of time-variation in bond term premiums in the presence of regime shifts. This new component is a regime-switching...

This paper uses the flexible approach of Hamilton (2001) to investigate the nature of nonlinearities in the term structure. The paper reports clear evidence of nonlinearity, in contrast to the affine term structure model and consistent with recent claims in the literature. We find that there is...

This paper integrates two strands of studies on consumer demand and consumption and provides a unified framework for analyzing consumer behavior employing an intertemporal two-stage budgeting procedure. We take a modified AIDS framework for the demand system and derive a general Euler equation...

Several studies incorporating estimated volatilities into option pricing formulas have appeared in the literature. However, the models described in these studies tend to perform quite poorly in out-of-sample tests. In particular, significant departures from the observed prices can be seen for...

We consider the behavior of the price of a continuously stored commodity, for which discounted price is a non-constant martingale, and thus not-predictable. We prove that the discounted price realization is within any given neighborhood of zero, with any given probability less than 1, beyond a...

This article analyzes the specifications of option pricing models based on time-changed Levy processes. We classify option pricing models based on (i) the structure of the jump component in the underlying return process, (ii) the source of stochastic volatility, and (iii) the specification of...

The aim of this work is to study the pricing problem for derivatives depending on two stocks driven by a bidimensional Lévy process. The main idea is to apply Girsanov's Theorem for Lévy processes, in order to reduce the posed problem to the pricing of a one Lévy driven stock in an auxiliary...

We study unofficial dollarization, i.e., the use of foreign money alongside the domestic currency, in an environment where spatial separation and limited communication create a role for currency and banks arise endogenously to provide insurance against liquidity preference shocks. Unofficial...