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This study examines the effects of time-varying volatility and transaction costs on replication of foreign currency futures options. Evidence in various financial markets, including currency and currency futures markets, clearly indicates that the constant volatility model is inadequate. This evidence motivates us to consider alternatives to the constant volatility model. I consider three models two of which assume that the volatility process follows GARCH(1,1) model and the third alternative assumes that volatility is a mean-reverting process. I construct replicating portfolios, which are rebalanced dynamically, and test if payoff of options is met. To construct the replicating portfolios, I use the derivatives with respect to futures price (delta) and the volatility (vega) prescribed by the models. My results indicate that the models generally replicate smaller strike options fairly accurately while producing somewhat larger errors for larger strike options and that the hypothetical futures contract on a hypothetical volatility index is useful hedging instrument. Of the three alternative models considered, I find that error correction model with GARCH(1,1) volatility is the best model. Since dynamic rebalancing of the replicating portfolio is quite expensive when there are proportional transaction costs, an acceptable alternative should provide optimal tradeoff between transaction costs and replication error. I consider three alternative rebalancing strategies using Black (1976) model and Monte Carlo simulation to examine the transaction costs and replication error with the objective of determining profit or loss from each simulation run. After 10,000 simulation runs, based on the 95th percentile profit, I determined that the rebalancing strategy based on the no-transaction bound on delta of the option suggested by Whalley and Wilmott (1993) gives the best results in terms of profits. Another form of transaction cost is bid-ask spread in the markets for assets underlying options. This spread results in different option prices for buyers and sellers of options; that is, the bid price of the option should be less than or equal to the ask price of the replicating portfolio while the ask price of the option should be greater than or equal to the bid price of the replicating portfolio. I test these equilibrium bounds, violations of which provide arbitrage opportunities, using actual market bid-ask data on both underlying futures and options obtained from Chicago Mercantile Exchange. The market prices generally satisfy the equilibrium bounds though I find in my analysis that choice of volatility used as input for simulation can be critical.

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This dissertation develops a supply and demand based theory of equity price determination to investigate the unprecedented run-up in U.S. equity values during 1982–1999. The model draws insight from both fundamental valuation analysis, and various speculative market theories. It also incorporates aspects of portfolio theory, Shiller's (1984, 1989) model of fads, fashions and bubbles, Toporowski's (1999) theory of capital market inflation and Minsky's (1982) model of financial fragility. Based on the theoretical model and empirical evidence it is concluded that the bull market, while originating in increased corporate profitability, was driven to a larger extent by the significant reduction in the supply of equity and the enormous inflow of domestic and foreign funds into the stock market. In contrast, three influential theories regarding the bull market can be gleaned from the academic literature and business press: (1) the “new economy” hypothesis maintains that the boom was justified purely on the basis of discounted future dividends, (2) the declining risk premium theory holds that the required rate of return has fallen dramatically and (3) the speculative bubble hypothesis argues investors have underpriced risk and overestimated the profit potential of U.S. corporations. Our findings show these intuitively appealing answers to be incomplete. The quantitative analysis exploits the vector autoregressive technique, OLS, and the instrumental variables methodology. The evidence from Granger-causality tests, innovation accounting and the structural model approach is consistent with the hypothesis that net flows effectively set prices. The finding that mutual fund flows explain stock prices, even when controlling for fundamentals, suggests the validity of the “irrational exuberance” theory. Similarly, foreign portfolio flows impacting U.S. equity prices is consistent with the notion that internationalization has transformed financial markets. The significance of share issuance in explaining price movements contradicts both the notion that changes in the supply of equity are inconsequential for market valuation, and the theory that exuberant expectations alone explains the ascent in stock prices. Thus, we maintain that in 1999 U.S. equity valuations were unwarranted by fundamentals and the general case for the efficient market hypothesis, which marginalizes supply and demand changes, has been overstated.

The stylized facts of international trade suggest that intra-industry trade predominates precisely where quality enforcement is a serious problem. To explain this phenomenon, I rely on a model of product quality assurance. Intra-industry trade flows between two identical countries are explained, without relying on negatively sloped firm level demand curves, differentiated products or technologically determined firm size. Buyers, knowing only the average market quality, purchase goods whose quality can only be assessed through use and switch firms when dissatisfied with the quality of their purchase. Repeat purchasing provides an incentive to firms to provide the quality anticipated by the buyer. Firms are quantity constrained and enjoy a markup over marginal cost, but cannot adjust price to increase demand. Customers realize that the rent firms receive in equilibrium ensures that an adequate level of quality will be forthcoming. Trade occurs even in the presence of positive transportation costs because firms are quantity constrained and are ex ante purchase indistinguishable to buyers. Production occurs under constant returns to scale and though economies of scale are not inconsistent with they are not necessary for my result. Incorporating this approach in a factor proportions theory of inter-industry trade reproduces many of the important results of the existing literature without requiring Spence-Dixit-Stiglitz preferences and economies of scale technology. For example, even though goods are homogeneous and production occurs under constant returns to scale there exists a link between the volume of trade and relative country size. For a given relative country size the volume of trade is larger the larger the difference in relative factor endowments and the more similar in size are countries the greater is the volume of trade. Demand smoothing provides another rationale for trade in the same good. Firms operate in a stochastic world in which demand fluctuations increase the probability of firm extinction and decrease expected profits as compared to a world with certainty. Firms may choose to engage in intra-industry trade because it reduces the probability of firm death and raises expected profits, even when transport costs are positive. Thus, demand smoothing is a cause of intra-industry trade.

Many economists have heralded markets as institutions promoting individual freedom, liberty and expanding wealth while others have condemned them for generating avarice, economic inequality and crises. Exchanging Entailments critically evaluates how prominent economic theorists link these various associations, called here entailments, to the exchange process and the theoretical and policy implications which result. In contrast, Exchanging Entailments argues that what commodity exchange entails always depends upon the broader constellation of social relations and beliefs situating it within any particular context. Aristotle pioneered such an insight by arguing exchange may positively or negatively impact society depending upon the beliefs and norms motivating the buying and selling of commodities. Adam Smith famously linked exchange motivated by individual gain with liberty, freedom and expanding wealth but also produced a knowledge of what ‘constrained’ exchange entails which constitute rhetorical motifs resonating within much of economic discourse today. Marx challenged the representation of Smith's understanding of exchange popular as ‘one-sided’ and provided an immanent critique, demonstrating that the very rationale behind linking freedom, liberty and economic expansion to exchange also implies unfreedom, dependence, and economic crisis. Such a dialectic haunts commodity exchange within any social context, providing fodder for the celebrants and critics of markets alike. Besides exploring the significance of exchange within ‘traditional’ liberal bounds, Marx also articulated various class processes behind the production of commodities and merchant capital to exchange, reformulating its meaning in the process. Exchanging Entailments concludes with an exploration into the role ascribed to commodity exchange within the globalization debates today and maintains that the rhetoric Smith developed surrounding exchange play no some role in the debate. Many pro-globalization theorists, while employing a very different theory, still echo Smith's associations of trade with wealth and harmony. Many critics of the international economic environment also rely upon his exchange entailments as well, albeit unwittingly, with they associate the ills of today with restricted exchange and/or favoritism in trade agreements. To challenge the constrained terrain upon which the globalization debate takes place, a crucial need exists today to challenge the rhetoric behind what exchange supposedly entails for society.

The first essay explores the impact of gender norms on time allocation to housework by asking whether individual attitudes towards the gendered division of labor between paid employment and family care mediate the relationship between wives' income share and time spent on housework. I hypothesize that patriarchal attitudes can impose a "psychic transactions cost" on individuals that impedes efficient allocation of time and introduces frictions into household bargaining. Regression analysis of the 2004 Korean Time Use Survey which collected data on both attitudes and time allocation of married couples shows that husbands' egalitarian attitudes play a particularly important role in increasing their own housework and decreasing their wives' level and share of housework, particularly within households where wives also reveal egalitarian attitudes. The second essay develops and compares input and output-based replacement-cost estimates of the value of parental child care services in the U.S. in 2003-2006. My estimates build on the previous literature on the value of child care in the U.S. in the following ways: (1) I define child care broadly to include supervisory and on-call responsibilities and (2) I explore the sensitivity of valuation to assumptions regarding the effect of adult/child ratios that are likely to affect labor intensity and care quality. The results suggest that the input approach is likely to underestimate productivities of child care time for mothers relative to fathers, multiple-child families relative to one-child families. They also show the significant impact of the indirect child care time and labor intensity/care quality on values of child care time, calling careful attention to this issue in valuing unpaid parental child care time. The third essay develops an "output consumption" approach, illustrating the effect of different assumptions regarding the degree of rivalry in the time devoted to household production. With an analysis of the 2003-2006 American Time Use Surveys (ATUS), the findings suggest that prior empirical studies on the "time costs" of children, which focused on time inputs only and ignore the degree of rivalry in household consumption in concluding significant economies of scale in raising children, have overestimated the extent of economies of scale in childrearing. Keywords. Time allocation, gender norm, housework, valuation of parental child care, input versus output approach, household production, time costs of children, Korean Time Use Survey, American Time Use Survey.