Abstracts 2001	Department of Economics

No. 01-1 R. Glen Donaldson, Mark Kamstra
"Volatility Forecasts, Trading Volume and the ARCH vs. Option-Implied Volatility Tradeoff"

Market expectations of future return volatility play a crucial role in finance; so too does our understanding of the process by which information is incorporated in security prices through the trading process.  This paper seeks to learn something about both of these issues by investigating empirically the role of trading volume (a) in predicting the relative informativeness of volatility forecasts produced by ARCH models versus the volatility forecasts derived from option prices, and (b) in improving volatility forecasts produced by ARCH and option models and combinations of models.  We find that if trading volume was low during period t-1 then ARCH is much more important than options for forecasting future stock market volatility.  Conversely, if volume was high during period t-1, then option-implied volatility is much more important than ARCH for forecasting future volatility.  Our findings reveal an important regime-switching role for trading volume states.  Results from various tests also uncover possible sources of volume-related nonlinearity in the relationship between past and future return innovations as captured by asymmetric ARCH models.
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No. 01-2 Abdala Mansour, Nicolas Marceau, Steeve Mongrain
" Gangs and Crime Deterrence"

A framework is developed in which the formation of gang - the criminal market structure - is andogenous.  We examine the impact of crime deterrence in this framework.  It is shown that for a given gang structure, an increase in deterrence reduces criminal output.  However, under identifiable circumstances, an increase in deterrence can also lead to an increase in the number of competing criminal gangs and to an increase in total illegal output.
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No. 01-3 J. Atsu Amegashie, Joe Amoaka-Tuffour
"Price Bargaining and Quantity Bonus in Developing Economies"

The paper models a trading practice, prevalent in markets of agricultural produce in developing countries, where there is price bargaining and the buyer also receives extra units of the commodity for free after both parties have agreed on the price.  We call these extra units quantity bonus.  We model quantity bonus as a profit tax on the seller and show that the practice increases the bargained price.  We endogenize the quantity bonus and argue that it is used by sellers as a competitive device; quantity bonus is then a self-sustaining social norm.  Although price can replicate the use of quantity bonus as a competitive tool, we argue that the price bargaining limits the extent to which price can be used as a competitive tool.  The analysis sheds light on why market women allow for price bargaining and opportunity for quantity bonus while supermarkets offer neither of both.
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No. 01-4  Toru Kikuchi, J. Atsu Amegahie
"Trade Liberalization and Union Bargaining"

The present note builds a two-country model of oligopoly with country-specific labour unions.  The impact of trade liberalization on wages and its consequent impact on union bargaining and trade patterns are examined.  We show that the union with relatively lower number of firms will face the stronger pressure for wage moderation when trade is liberalized.  We use this result to construct a simple example in which a country with high autarky price becomes net exporter of that good.
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