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Recent Submissions

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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.
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    An efficient estimation for switching regression models: A Monte Carlo study
    (University of Waterloo, 2009) Xu, Dinghai
    This paper investigates an efficient estimation method for a class of switching regressions based on the characteristic function (CF). We show that the exponential weighting function, the CF based estimator can be achieved from minimizing a closed form distance measure. Due to the availability of the analytical structure of the asymptotic covariance, an iterative estimation procedure is developed involving the minimization of a precision measure of the asymptotic covariance matrix. Numerical examples are illustrated via a set of Monte Carlo experiments examining the implentability, finite sample property and efficiency of the proposed estimator.
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    Do asymmetric central bank preferences help explain observed inflation outcomes?
    (University of Waterloo, 2009-02-25) Doyle, Matthew; Falk, Barry
    When the central banker's loss function is asymmetric, changes in the volatility of inflation and/or unemployment affect equilibrium inflation. This suggests that changing macroeconomic volatilities may be an important driving force behind trends in observed inflation. Previous evidence, which has offered support for this idea, suffers from a spurious regression problem. Once this problem is controlled for, the evidence suggests that the volatility of unemployment doe snot help explain inflation outcomes. There is some evidence of a relationship between inflation and its volatility, but overall the data does not support the view that changing economic volatility, as filtered through asymmetric central bank preferences, is an important driver of inflation trends.
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    The effect of physician supply on health status as measured in the NPHS
    (University of Waterloo, 2009) Pierard, Emmanuelle
    We use data from the Canadian National Population Health Survey and the Canadian Institute for Health Information to estimate the relationship between per capita supply of physicians, both general practitioners and specialists, on health status. Measures of quality of life, self-assessed health status and the Health Utility Index are explored. The sample consists of all individuals who were age 18 or over at the beginning of the survey in 1994, and the sub-sample includes only individuals who were not diagnosed with a chronic condition for the first four years. Most previous studies of the effect of physician supply on health status used data only on individual who had specific health problems, and many of them used outcomes related to the length of life of the patient. Random effects ordered probits are used to model self assessed health status and quantile regressions are used for the Health Utility Index. A higher supply of specialists is correlated with worse health outcomes, while a higher supply of general practitioners is correlated with better health outcomes as measured by both measures of health status.