Working papers results

Now in:
European Economic Review, 1999 (forthcoming)

This paper analyses how to extract market expectations from asset prices, with a particular example: using the term structure of interest rates to estimate the probability the market attaches to the event that a country, Italy, joins the European Monetary Union at a given date. The extraction of such a probability from the term structure is based on the presumption that the term structure contains valuable information regarding the markets assessment of a countrys chances to join the EMU. The case of Italy is interesting because in the survey regularly conducted by Reuters the probability of joining EMU in 1999 fluctuated between 0.07 and 0.15, while, during the same period, the measures of computed by financial houses -- also based on the term structure of interest rates -- have ranged between 0.5 and 0.8. The paper proposes a new method for computing these probabilities, and shows that the discrepancies between survey and market-based measures are not the result of market ine fficiencies, but depend on an incorrect use of the term structure to compute probabilities. The technique proposed in the paper can also be used to distinguish between convergence of probabilities and convergence of fundamentals, that is to find out whether an observed reduction in interest rate spreads signals a higher probability of joining EMU at a given time, or simply reflects improved fundamentals.

This paper analyses the dynamics of wives labour force participation in Spain during the late 1980s from a non-parametric descriptive perspective. This research is motivated by two basic facts: One, there is evidence that female labour supply behaviour in Spain is changing since the late 1980s. Two, while the analysis of participation stocks is covered in the literature, there is no published research on mobility or flows. In the first part of this paper there is a description of the three-monts transition rates over two-waves. The underlying assumption is the First Order Markov Hypothesis. In the second part, the Markov assumption is questioned. This is done by carrying out an analysis of survival over 7 waves in which re-entries are ignored. Moreover, there is also an analysis of mobility contingent on past labour market state, which includes re-entries in the analysis. This allows me to study the likelihood of relapsing in a particular state, or the likelihood of surviving contingent on past labour market states. The results are interesting because they reveal features of female labour market behaviour unknown to date.

We show how to extend the construction of infinite hierachies of beliefs (Mertens and Zamir (1985), Brandenburger and Dekel (1993)) from the case of probability measures to the case of conditional probability systems (CPSs) defined with respect to a fixed collection of relevant hypotheses. The set of hierarchies of CPSs satisfying common certainty of coherency conditional on every relevant hypothesis corresponds to a universal type space. This construction provides a unified framework to analyze the epistemic foundations of solution concepts for dynamic games. As an illustration, we derive some results about conditional common certainty of rationality and rationalizability in multistage games with observed actions.