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Recent Submissions

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    Continuous empirical characteristic function estimation of mixtures of normal parameters
    (University of Waterloo, 2008) Xu, Dinghai; Knight, John
    This paper develops an efficient method for estimating the discrete mixtures of normal family based on the continuous empirical characteristic function (CECF). An iterated estimation procedure based on the closed form objective distance function is proposed to improve the estimation efficiency. The results from the Monte Carlo simulation reveal that the CECF estimator produces good finite sample properties. In particular, it outperforms the discrete type of methods when the maximum likelihood estimation fails to converge. An empirical example is provided for illustrative purposes.
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    Wage posting without full commitment
    (University of Waterloo, 2008-09) Doyle, Matthew; Wong, Jacob
    Wage posting models of job search typically assume that firms can commit to paying workers the posted wage. This paper investigates the consequences of relaxing this assumption. Under "downward" commitment, firms can commit only to paying at least their advertised wage. We show that wage posting is always an equilibrium, although in special cases other equilibria can exist. Surprisingly, the wage posting equilibrium in our economy is identical to the equilibrium when firms can commit to paying exactly their posted wage. When firms cannot even commit to paying at least their advertised wage, equilibrium exhibits job auctions with wage dispersion which generally is not constrained efficient.
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    Regime switching in stochastic models of commodity prices: An application to an optimal tree harvesting problem
    (University of Waterloo, 2008-08-28) Chen, Shan; Insley, Margaret
    This paper investigates a regime switching model of stochastic lumber prices in the context of an optimal tree harvesting problem. Using lumber derivatives prices, two lumber price models are calibrated: a regime switching model and a single regime model. In the regime switching model, the lumber price can be in one of two regimes in which different mean reverting price process prevail. An optimal tree harvesting problem is specified in terms of a linear complementarity problem which is solved using a fully implicit finite difference, fully-coupled, numerical approach. The land value and critical harvesting prices are found to be significantly different depending on which price model is used. The regime switching model shows promise as a parsimonious model of timber prices that can be incorporated into forestry investment problems.
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    Contrasting two approaches in real options valuation: contingent claims versus dynamic programming
    (University of Waterloo, 2008-07-24) Insley, M. C.; Wirjanto, T. S.
    This paper compares two well-known approaches for valuing a risky investment using real options theory: contingent claims (CC) with risk neutral valuation and dynamic programming (DP) using a constant risk adjusted discount rate. Both approaches have been used in valuing forest assets. A proof is presented which shows that, except under certain restrictive assumptions, DP using a constant discount rate and CC will not yield the same answers for investment value. A few special cases are considered for which CC and DP with a constant discount rate are consistent with each other. An optimal tree harvesting example is presented to illustrate that the values obtained using the two approaches can differ when we depart from these special cases to a more realistic scenario. Further, the implied risk adjusted discount rate calculated from CC is found to vary with the stochastic state variable and stand age. We conclude that for real options problems with CC approach should be used.
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    The applications of mixtures of normal distributions on empirical finance: A selected survey
    (University of Waterloo, 2009) Wirjanto, Tony S.; Xu, Dinghai
    This paper provides a selected review of the recent developments and applications of mixtures of normal (MN) distribution models in empirical finance. One attractive property of the MN model is that it is flexible enough to accommodate various shapes of continuous distributions, and able to capture leptokurtic, skewed and multimodal characteristics of financial time series data. In addition, the MN-based analysis fits well with the related regime-switching literature. The survey is conducted under two broad themes: (1) minimum-distance estimation methods, and (2) financial modeling and its applications.