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: 2007

: ...................................................................................................................1 ...............................................................................................2 ......................................................................................................................3 ..............................................................................................................................4 A Fortiori Pricing, Ability To Pay Principle In Taxation, Abnormal Return, Absolute Risk Aversion, Absorptive Capacity, Abstracting From, Accelerator Principle, Acceptance Region.5 Adapted, Active Measures, Adverse Selection, Affiliated, Affine, AGI, AFQT, Aggregate Demand, Affine Pricing6 Aggregate Supply, Akaikes Information Criterion, Alienation, Almost Surely, Annihilator Operator, Analytic, Alternative Hypothesis7 Americanist, Annuity, Annuity Formula, Anti- Trust Legislation, ANOVA, ARCH, Arbitrage Opportunity, Arbitrage Pricing Theory, AR(1).8 ARIMA, Asset Pricing Functions, Arrovian Uncertainty, Arrow- Debreu Equilibrium, Arrow- Pratt Measure, ARMA...9 Asymptotically Unbiased, Asymptotic, Asymptotic Normality, Asymptotic Variance, Asymptotically Equivalent, Asset Pricing Models..10 Attractor, Autoregressive, Austrian Economics, Autarky, Autocorrelation, Autocovariance, Autocovariance Matrix, Augmented Dickey- Fuller Test11 Avar, Average Propensity To Consume, Average Propensity To Save, Average Total Cost, B1, Bads, Balance Of Payments, Balanced Budget, Balanced Growth, Banach Space13 Bellman Equation, Bertrand Competition, Bertrand Duopoly, Bertrand Game, Beveridge Curve, BHHH, Bias, Bidding Function, Bill Of Exchange....14 Billon, Bimetallism, Black- Scholes Equation, Blue Chip, Bond, Bond Rating, Bonferroni Criterion.15 Bootstrapping Criterion, Borel Set, Borel- Sigma Algebra, Bounded Rationality, BoxCox Transformation.16 Box- Jenkins, Brent Method, Bretton- Woods System, Breusch- Pagan Statistic, Bubbles.17 Budget, Budget Line, Budget Set, Bull Market, Bureaucracy, Burr Distribution, Business Cycle Frequency, Buyers Market18 Calculus Of Voting, Calibration, Call Options, Capital, Capital Consumption, Capital Deepening.19 Capital Intensity, Capital Ratio, Capital Structure, Capital- Augmenting, Capitation, Cash-in-advance Constraint, Cartels, Cauchy Distribution..20 CDF, Censored Dependent Variables, Certainty Equivalence Principle, Censored Least Absolute Deviations, Central Banks, Center for Research in Security Prices21 Certainty Equivalent, Ceteris Paribus, CES Technology, CES Utility, CES Production Function....22 ................................................................................................23

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A
A Fortiori Pricing- Latin for "even stronger". Can be used to compare two theorems or proofs. Could be interpreted to mean "in the same way." . Ability To Pay Principle In Taxation - The widely held view that the amount of taxes someone pays should increase as their income increases . , , . Abnormal Returns- Used in the context of stock returns; abnormal returns means the return to a portfolio in excess of the return to a market portfolio. Contrast excess returns which means something else. Note that abnormal returns can be negative. Example: Suppose average market return to a stock was 10% for some calendar year, meaning stocks overall were 10% higher at the end of the year than at the beginning, and suppose that stock S had risen 12% in that period. Then stock S's abnormal return was 2%. . ( ). Absolute Risk Aversion- Absolute risk aversion is an attribute of a utility function. , . Absorptive Capacity- Absorptive capacity is a limit to the rate or quantity of scientific or technological information that a firm can absorb. If such limits exist they provide one explanation for firms to develop internal R&D capacities. R&D departments can not only conduct development along lines they are already familiar with, but they have formal training and external professional connections that make it possible for them to evaluate and incorporate externally generated technical knowledge into the firm better than others in the firm can. In other words a partial explanation for R&D investments by firms is to work around the absorptive capacity constraint. . Abstracting From- Abstracting from is a phrase that generally means "leaving out". A model abstracts from some elements of the real world in its demonstration of some specific force. , . Accelerator Principle- The accelerator principle is the growth of output that induces continuing net investment. That is, net investment is a function of the change in output not its level. ( ). Acceptance Region- The acceptance region occurs in the context of hypothesis testing. Let T be a test statistic. Possible values of T can be divided into two regions, the acceptance region and the rejection region. If the value of T comes out to be in the acceptance region, the null hypothesis being tested is not rejected. If T falls in the rejection region, the null hypothesis is rejected. ( ).

Active Measures- In the context of combating unemployment: active measures are policies designed to improve the access of the unemployed to the labour market and jobs, job-related skills, and the functioning of the labour market. Contrast passive measures. ( ). Adapted- The stochastic process {Xt} and information sets {Yt} are adapted if {Xt} is a martingale difference sequence with respect to {Yt}. Adverse Selection- in a market where buyers cannot accurately gauge the quality of the product that they are buying, it is likely that the marketplace will contain generally poor quality products. Adverse selection was first noted by Nobel Laureate George Akerlof in 1970. ( , ). Affiliated- Bidders' valuations of a good being auctioned are affiliated if, roughly: &quot a high value of one bidder's estimate makes high values of the others' estimates more likely.&quot. There may well be good reasons not to use the word correlated in place of affiliated. This editor is advised that there is some mathematical difference. Affine- Affine is an adjective, describing a function with a constant slope. Distinguished from linear which sometimes is meant to imply that the function has no constant term; that it is zero when the independent variables are zero. An affine function may have a nonzero value when the independent variables are zero. Examples: y = 2x is linear in x, whereas y = 2x + 7 is an affine function of x. And y = 2x + z2 is affine in x but not in z. . Affine Pricing- Affine pricing is a pricing schedule where there is a fixed cost or benefit to the consumer for buying more than zero, and a constant per-unit cost per unit beyond that. Formally, the mapping from quantity purchased to total price is an affine function of quantity. Using, mostly, Tirole's notation, let q be the quantity in units purchased, T(q) be the total price paid, p be a constant price per unit, and k be the fixed cost, an example of an affine price schedule is T(q)=k+pq. ( ). AFQT- AFQT is short for the Armed Forces Qualifications Test -- a test given to new recruits in the U.S. armed forces. Results from this test are used in regressions of labour market outcomes on possible causes of those outcomes, to control for other causes. . Aggregate Demand- Aggregate demand is the sum of all demand in an economy. This can be computed by adding the expenditure on consumer goods and services, investment, and not exports (total exports minus total imports). ( ). AGI- AGI is an abbreviation for Adjusted Gross Income, a line item which appears on the U.S. taxpayer's tax return and is sometimes used as a measure of income which

is consistent across taxpayers. AGI does not include any accounting for deductions from income that reduce the tax due, e.g. for family size. . Aggregate Supply- Aggregate supply is the total value of the goods and services produced in a country, plus the value of imported goods less the value of exports. . Akaikes Information Criterion- Akaike's Information Criterion is a criterion for selecting among nested econometric models. The AIC is a number associated with each model: AIC=ln (sm2) + 2m/T where m is the number of parameters in the model, and s m2 is (in an AR(m) example) the estimated residual variance: sm2 = (sum of squared residuals for model m)/T. That is, the average squared residual for model m. The criterion may be minimized over choices of m to form a trade off between the fit of the model (which lowers the sum of squared residuals) and the model's complexity, which is measured by m. Thus an AR(m) model versus an AR(m+1) can be compared by this criterion for a given batch of data. An equivalent formulation is this one: AIC=T ln(RSS) + 2K where K is the number of regressors, T the number of obserations, and RSS the residual sum of squares; minimize over K to pick K. . Alienation- Alienation is a Marxist term. Alienation is the subjugation of people by the artificial creations of people "which have assumed the guise of independent things." Because products are thought of as commodities with money prices, the social process of trade and exchange becomes driven by forces operating independently of human will like natural laws. , , . Almost Surely- Almost surely is with probability one. In particular, the statement that a series {Wn} limits to W as n goes to infinity, means that Pr{W n->W}=1 1. Alternative Hypothesis- Alternative hypothesis is the "hypothesis that the restriction or set of restrictions to be tested does NOT hold." Often denoted H1. Synonym for 'maintained hypothesis. Analytic- Analytic often means 'algebraic', as opposed to 'numeric'. E.g., in the context of taking a derivative, which could sometimes be calculated numerically on a computer, but is usually done analytically by finding an algebraic expression for the derivative. ( , ). Annihilator Operator- The annihilator operator is denoted []+ with a lag operator polynomial in the brackets. Has the effect of removing the terms with an L to a

negative power; that is, future values in the expression. Their expected value is assumed to be zero by whoever applies the operator. Americanist- An Americanist is a member of a certain subfield of political science. . Annuity- An annuity is an asset that pays a constant amount each year to the holder until the annuity expires and/or the holder of the annuity passes away. , Annuity Formula- If annuity payments over time are (0,P,P,...P) for n periods, and the constant interest rate r>0, then the net present value to the recipient of the annuity can be calculated by the annuity formula: NPV(A) = (1-(1+r)-n)P/r , . Anti- Trust Legislation- Anti-trust legislation is legislation designed to break up existing monopolies and prevent the formation of new monopolies to increase competition and societal welfare. . ANOVA- ANOVA stands for analysis-of-variance, a statistical model meant to analyze data. Generally the variables in an ANOVA analysis are categorical, not continuous. The term main effect is used in the ANOVA context. The main effect of x seems to mean the result of an F test to see if the different categories of x have any detectable effect on the dependent variable on average. ANOVA is used often in sociology, but rarely in economics as far as this editor can tell. The terms ANCOVA and ANOCOVA mean analysis-of-covariance. , . AR(1)- AR(1) is a first-order autoregressive process. . Arbitrage Opportunity- An arbitrage opportunity is the opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price. ( ). Arbitrage Pricing Theory- APT is short for Arbitrage Pricing Theory; from Stephen Ross, 1976-78. Quoting Sargent, "Ross posited a particular statistical process for asset returns, then derived the restrictions on the process that are implied by the hypothesis that there exist no arbitrage possibilities." . ARCH- ARCH stands for Autoregressive Conditional Heteroskedasticity. It is a technique used in finance to model asset price volatility over time. It is observed in much time series data on asset prices that there are periods when variance is high and periods where variance is low. The ARCH econometric model for this (introduced by Engle (1982)) is that the variance of the series itself is an AR (autoregressive) time series, often a linear one. Formally, per Bollerslev et al 1992 and Engle (1982):

An ARCH model is a discrete time stochastic process {et} of the form: et = ztst where the zt's are iid over time, E(zt)=0, var(zt)=1, and st is positive and time-varying. Usually st is further modeled to be an autoregressive process. According to Andersen and Bollerslev 1995/6/7, "ARCH models are usually estimated by maximum likelihood techniques." They almost always give a leptokurtic distrbution of asset returns even if one assumes that each period's returns are normal, because the variance is not the same each period. Even ARCH models, however, do not usually generate enough kurtosis in equity returns to match U.S. . ARIMA- ARIMA describes a stochastic process or a model of one. Stands for "autoregressive integrated moving-average". An ARIMA process is made up of sums of autoregressive and moving-average components, and may not be stationary. ARMA- Describes a stochastic process or a model of one. Stands for "autoregressive moving-average". An ARMA process is a stationary one made up of sums of autoregressive and moving-average components. Arrovian Uncertainty- Arrovian uncertainty is measurable risk, that is, measurable variation in possible outcomes, on the basis of knowledge or believed assumptions in advance. Contrast Knightian uncertainty. / /. Arrow- Debreu Equilibrium- Arrow-Debreu equilibrium means, in practice, competitive equilibrium of the kind shown in Debreu's Theory of Value. Occasionally referred to as Arrow-Debreu-McKenzie equilibrium. - . Arrow- Pratt Measure- The Arrow-Pratt measure is an attribute of a utility function. Denote a utility function by u(c). The Arrow-Pratt measure of absolute risk aversion is defined by: RA=-u''(c)/u'(c) This is a measure of the curvature of the utility function. This measure is invariant to affine transformation of the utility function, which is a useful attributed because such transformation do not affect the preferences expressed by u(). If RA() is decreasing in c, then u() displays decreasing absolute risk aversion. If RA() is increasing in c, then u() displays increasing absolute risk aversion. If RA() is constant with respect to changes in c, then u() displays constant absolute risk aversion. - . Asset Pricing Functions- An asset-pricing function maps the state of the economy at time t into the price of a capital asset at time t. ().

Asset Pricing Models- Asset pricing models are a way of mapping from abstract states of the world into the prices of financial assets like stocks and bonds. The prices are always conceived of as endogenous; that is, the states of the world cause them, not the other way around, in an asset pricing model. Several general types are discussed in the research literature. The CAPM is one, distinguished from three that Fama (1991) identifies: (a) the Sharpe-Lintner-Black class of models, (b) the multifactor models like the APT of Ross (1976), and (c) the consumption based models such as Lucas (1978). An asset pricing model might or might not include the possibility of fads or bubbles. . Asymptotic- Asymptotic is an adjective meaning 'of a probability distribution as some variable or parameter of it (usually, the size of the sample from another distribution) goes to infinity. Asymptotic Normality- Asymptotic normality is a property of the limiting distributions of some estimators. This is usually proven with a mean value expansion of the score at the estimated parameter value. Asymptotic Variance- Definition of the asymptotic variance of an estimator may vary from author to author or situation to situation. One standard definition is given in Greene, p 109, equation (4-39) and is described there as "sufficient for nearly all applications." It's: asy var(t_hat) = (1/n) * limn->infinity E[ {t_hat - limn->infinity E[t_hat] }2 ] . Asymptotically Equivalent- Estimators are asymptotically equivalent if they have the same asymptotic distribution. . Asymptotically Unbiased- "There are at least three possible definitions of asymptotic unbiasedness: 1. The mean of the limiting distribution of n.5(t_hat - t) is zero. 2. limn->infinity E[t_hat] = t. 3. plim t_hat = t." Usually an estimator will have all three of these or none of them. Cases exist however in which left hand sides of those three are different. "There is no general agreement among authors as to the precise meaning of asymptotic unbiasedness, perhaps because the term is misleading at the outset; asymptotic refers to an approximation, while unbiasedness is an exact result. Nonetheless the majority view seems to be that (2) is the proper definition of asymptotic unbiasedness. Note, though, that this definition relies upon quantities that are generally unknown and that may not exist." -- Greene, p 107. .

Attractor- An attractor is a kind of steady state in a dynamical system. There are three types of attractor: stable steady states, cyclical attractors, and chaotic attractors. . Augmented Dickey- Fuller Test- An augmented Dickey-Fuller test is a test for a unit root in a time series sample. An augmented Dickey-Fuller test is a version of the Dickey-Fuller test for a larger and more complicated set of time series models. The augmented Dickey-Fuller (ADF) statistic, used in the test, is a negative number. The more negative it is, the stronger the rejection of the hypothesis that there is a unit root at some level of confidence. In one example, with three lags, a value of -3.17 constituted rejection at the p-value of .10. - . Austrian Economics- Austrian Economics is a school of thought that is associated with little government interference in the marketplace, the primacy of property rights and is generally associated with libertarian ideology. . Autarky- Autarky is the state of an individual who does not trade with anyone. . Autocorrelation- The jth autocorrelation of a covariance-stationary process is defined as its jth autocovariance divided by its variance. In a sample, the kth autocorrelation is the OLS estimate that results from the regression of the data on the kth lags of the data. . Autocovariance- The jth autocovariance of a stochastic process yt is the covariance between its time t value and the value at time t-j. It is denoted gamma below, and E[] means expectation, or mean: gammajt = E[(yt - Ey)(yt-j-Ey)] In that equation the process is assumed to be covariance stationary. If there is a trend, then the second Ey should be the expected value of at the time t-j. . Autocovariance Matrix- he autocovariance matrix is defined for a vector random process, denoted yt here. The ij'th element of the autocovariance matrix is cov(yit, yj,t-k) . Autoregressive- AR stands for "autoregressive." Describes a stochastic process (denote here, et) that can be described by a weighted sum of its previous values and a white noise error. An AR(1) process is a first-order one process, meaning that only the immediately previous value has a direct effect on the current value: et = ret-1 + ut where r is a constant that has absolute value less than one, and u t is drawn from a distribution with mean zero and finite variance, often a normal distribution. An AR(2) would have the form:

et = r1et-1 + r2et-2 + ut and so on. . Avar- Avar is an abbreviation or symbol for the operation of taking the asymptotic variance of an expression, thus: avar(). Average Propensity To Consume- The average propensity to consume is the proportion of income the average family spends on goods and services. . Average Propensity To Save- The average propensity to save is the proportion of income the average family saves (does not spend on consumption). . Average Total Cost- Average total cost is the sum of all the production costs divided by the number of units produced. ..

B
B1- B1 denotes the Borel sigma-algebra of the real line. It will contain every open interval by definition, which implies that it contains every closed interval and every countable union of open, half-open, and closed intervals. What won't it contain? In practice, only obscure sets. Here's an example: Define the equivalence class ~ on the real line such that x~y (read: x is in the same equivalence class as y) if x-y is a rational number. Now consider the set of all numbers in [0,1] such that none of them are in the same equivalence class. How many members of that set are there? Well, it's not a countable number. This set is not in B1 Bads- Bads are the opposite of "goods". Bads are most often physical items that people will usually pay money to dispose of like toxic waste. . Balance Of Payments- A country's balance of payments is the quantity of its own currency flowing out of of the country (for purchases, for example, but also for gifts and intrafirm transfers) minus the amount flowing in. . Balanced Budget- A balanced budget occurs when the total sum of money a government collects in a year is equal to the amount it spends on goods, services, and debt interest. . Balanced Growth- A macroeconomics model exhibits balanced growth if consumption, investment, and capital grow at a constant rate while hours of work per time period stays constant. . Banach Space- Any complete normed vector space is a Banach space.

Bandwidth- In kernel estimation, a scalar argument to the kernel function that determines what range of the nearby data points will be heavily weighted in making an estimate. The choice of bandwidth represents a tradeoff between bias (which is intrinsic to a kernel estimator, and which increases with bandwidth), and variance of the estimates from the data (which decreases with bandwidth). Cross-validation is one way to choose the bandwidth as a function of the data. Has a variety of similar definitions in spectral analysis. Generally, a bandwidth is some way of defining the range of frequencies that will be included by the estimation process. In some estimations it is an argument to the estimation process. Bank Note- In periods of free banking, such as most states in the U.S. from 18391863, banks could issue their own money, called bank notes. A bank note was a risky, perpetual debt claim on a bank which paid no interest, and could be redeemed on demand at the original bank, usually in gold. There was a risk that the bank would not be able or willing to redeem it. . Bank Run- A bank run takes place when the customers of a bank fear that the bank will become insolvent. Customers rush to the bank to take out their money as quickly as possible to avoid losing it. Federal Deposit Insurance has ended the phenomenon of bank runs. ( ). Barter Economy- A barter economy is an economy that lacks a commonly accepted currency, so all exchanges must be made with goods and services because money does not exist in these economies. ( ). Base Point Pricing- Base pointing pricing is the practice of firms setting prices as if their transportation costs to all locations were the same, even if all the vendors are distant from one another and have substantially different costs of transportation to each location. One might interpret this as a form of monitored collusion between the vendor firms. , . Basin Of Attraction- The basin of attraction is the region of states, in a dynamical system, around a particular stable steady state, that lead to trajectories going to the stable steady state. (E.g. the region inside the event horizon around a black hole.) Basis Point- A basis point is one-hundredth of a percentage point. Used in the context of interest rates. Basket- A basket is a known set of fixed quantites of known goods, needed for defining a price index. . Bear Market- A bear market occurs when almost all stock prices are falling. The term bear market comes from the image of a bear pawing something to the ground. .

Bellman Equation- A Bellman equaion is any value or flow value equation. For a discrete problem it can generally be of the form: v(k) = max over k' of { u(k,k') + b*v(k') } where: u() is the one-period return function (e.g., a utility function) and v() is the value function and k is the current state and k' is the state to be chosen and b is a scalar real parameter, the discount rate, generally slightly less than one. Bertrand Competition- A Bertrand competition is a bidding war in which the bidders end up at a zero-profit price. . Bertrand Duopoly- A bertrand duopoly is a bidding war in which the bidders end up at a zero-profit price. . Bertrand Game- A Bertrand game is a model of a bidding war between firms each of which can offer to sell a certain good (say, widgets), but no other firms can. Each firm may choose a price to sell widgets at, and must then supply as many as are demanded. Consumers are assumed to buy the cheaper one, or to purchase half from each if the prices are the same. Best for the firms (both collectively and individually) is to cooperate, charge monopoly price, and split the profits. Each firm could seize the whole market by lowering price slightly, however, and the noncooperative Nash equilibrium outcome of a Bertrand game is that both charge a zero-profit price. . Beveridge Curve- A Beveridge curve is the graph of the inverse relation of unemployment to job vacancies. . BHHH- BHHH is a numerical optimization method from Berndt, Hall, Hall, and Hausman (1974). Used in Gauss, for example. , , . Bias- Bias is the difference between the parameter and the expected value of the estimator of the parameter. . Bidding Function- In an auction analysis, a bidding function (often denoted b()) is a function whose value is the bid that a particular player should make. Often it is a function of the player's value, v, of the good being auctioned. Thus the common notation b(v). . Bill Of Exchange- A bill of exchange is from the late Middle Ages. A bill of exchange is a contract entitling an exporter to receive immediate payment in the local currency for goods that would be shipped elsewhere. Time would elapse between payment in one currency and repayment in another, so the interest rate would also be

brought into the transaction. , . Billon- Billon is a mixture of silver and copper, from which small coins were made in medieval Europe. Larger coins were made of silver or gold. ( ). Bimetallism- Bimetallism is a commodity money regime in which there is concurrent circulation of coins made from each of two metals and a fixed exchange rate between them. Historically the metals have almost always been gold and silver. Bimetallism was tried many times with varying success but since about 1873 the practice has been generally abandoned. . Black- Scholes Equation- The Black-Scholes equation is an equation for option securities prices on the basis of an assumed stochastic process for stock prices. The Black-Scholes algorithm can produce an estimate the value of a call on a stock, using as input:

an estimate of the risk-free interest rate now and in the near future current price of the stock exercise price of the option (strike price) expiration date of the option an estimate of the volatility of the stock's price

From the Black-Scholes equation one can derive the price of an option. Blue Chip- The term blue chip usually refers to a stock, but could in theory apply to any financial asset with potential risk. A blue chip stock is one that entails unusually small risk (risk being a subjective judgment). Stocks that are considered "blue chip" are issued by large stable corporations like IBM. , . Bond- A bond is a fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities. Bonds pay the bearer a fixed amount a specified end date. A discount bond pays the bearer only at the ending date, while a coupon bond pays the bearer a fixed amount over a specified interval (month, year, etc.) as well as paying a fixed amount at the end date. . Bond Rating- Organizations like Standard and Poor's and Moody's rate the riskiness of corporate, municipal, and government issued securities and gives each security a Bond Rating. The bond rating, or more accurately the risk, is based on two elements: the probability the organization will file for bankruptcy before the final bond payment is due and what percentage of the bondholder's clams creditors will receive if a bankruptcy takes place. Bonferroni Criterion- Suppose a certain treatment of a patient has no effect. If one runs a test of statistical significance on enough randomly selected subsets of the patient base, one would find some subsets in which statistically significant differences were apparently distinguished by the treatment. The Bonferroni criterion is a

redefinition of the statistical signficance criterion for the testing of many subgroups: e.g. if there are five subgroups and one of them shows an effect of the treatment at the .01 significance level, the overall finding is significant at the .05 level. . Bootstrapping Criterion- Bootstrapping is the activity of applying estimators to each of many subsamples of a data sample, in the hope that the distribution of the estimator applied to these subsamples is similar to the distribution of the estimator when applied to the distribution that generated the sample. It is a method that gives a sense of the sampling variability of an estimator. "After the set of coefficients b0 is computed, M randomly drawn samples of T observations are drawn from the original data set with replacement. T may be less than or equal to n, the sample size. With each such sample the ... estimator is recomputed." -- Greene, p 658-9. The properties of this distribution of estimates of b0 can then be characterized, e.g. its variance. If the estimates are highly variable, the investigator knows not to think of the estimate of b0 as precise. Bootstrapping could also be used to estimate by simulation, or empirically, the variance of an estimation procedure for which no algebraic expression for the variance exists. Borel Set- A Borel set is any element of a Borel sigma-algebra. . Borel- Sigma Algebra- The Borel sigma-algebra of a set S is the smallest sigmaalgebra of S that contains all of the open balls in S. Any element of a Borel sigmaalgebra is a Borel Set. Example: The set B1 is the Borel sigma-algebra of the real line, and thus contains every open interval. Example: Consider a filled circle in the unit square. It can be constructed by a countable number of non-overlapping open rectangles (since a series of such rectangles can be defined that would cover every point in the circle but no point outside of it. Therefore it is in the smallest sigma-algebra of open subsets of the unit square. - . Bounded Rationality- Models of bounded rationality are defined in a recent book by Ariel Rubinstein as those in which some aspect of the process of choice is explicitly modelled. Box- Cox Transformation- The Box-Cox transformation, below, can be applied to a regressor, a combination of regressors, and/or to the dependent variable in a regression. The objective of doing so is usually to make the residuals of the regression more homoskedastic and closer to a normal distribution: y(l) = ((y^L) - 1) / l for l not equal to zero y(l)=log(y)L=0 Box and Cox (1964) developed the transformation.

Estimation of any Box-Cox parameters is by maximum likelihood. Box and Cox (1964) offered an example in which the data had the form of survival times but the underlying biological structure was of hazard rates, and the transformation identified this. - . Box- Jenkins- Box-Jenkins is a "methodology for identifying, estimating, and forecasting" ARMA models. (Enders, 1996, p 23). The reference in the name is to Box and Jenkins, 1976. Box- Pierce Statistic- The Box-Pierce statistic is defined on a time series sample for each natural number k by the sum of the squares of the first k sample autocorrelations. The kth sample autocorrelation is denoted r: k BP(k)=Ss=1 [rs2] Used to tell if a time series is nonstationary. - Brent Method- The Brent method is an algorithm for choosing the step lengths when numerically calculating maximum likelihood estimates. . Bretton- Woods System- The Bretton Woods system was a international monetary framework of fixed exchange rates after World War II. Drawn up by the U.S. and Britain in 1944. Keynes was one of the architects. The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. At that point for the first time in history, formal links between the major world currencies and real commodities were severed. - . Breusch- Pagan Statistic- A diagnostic test of a regression. It is a statistic for testing whether dependent variable y is heteroskedastic as a function of regressors X. If it is, that suggests use of GLS or SUR estimation in place of OLS. The test statistic is always nonnegative. Large values of test statistic reject the hypothesis that y is homoskedastic in X. The meaning of 'large' varies with the number of variables in X. Quoting almost directly from the Stata manual: The Breusch and Pagan (1980) chisquared statistic -- a Lagrange multiplier statistic -- is given by l = T * [Sm=1m=M [Sn=1n=m-1 [rmn2 ]] where rmn2 is the estimated correlation between the residuals of the M equations and T is the number of observations. Bubbles- The existence of bubbles is the conjecture that market prices for securities take self-fulfilling swings away from any model of their fundamental values. Bubbles are often described as speculative and it is conjectured that bubbles could be risky ventures for speculators who earn a fair rate of return on them.

Budget- A budget is a description of a financial plan. It is a list of estimates of revenues to and expenditures by an agent for a stated period of time. Normally a budget describes a period in the future not the past. . Budget Line- A consumer's budget line characterizes on a graph the maximum amounts of goods that the consumer can afford. In a two good case, we can think of quantities of good X on the horizontal axis and quantities of good Y on the vertical axis. The term is often used when there are many goods, and without reference to any actual graph. . Budget Set- The budget set is the set of bundles of goods an agent can afford. This set is a function of the prices of goods and the agents endownment. Assuming the agent cannot have a negative quantity of any good, the budget set can be characterized this way. Let e be a vector representing the quantities of the agent's endowment of each possible good, and p be a vector of prices for those goods. Let B(p,e) be the budget set. Let x be an element of R+L; that is, the space of nonnegative reals of dimension L, the number of possible goods. Then: B(p,e) = {x: px <= pe} . Bull Market- A bull market occurs when almost all stock prices are on the rise. The term bull market comes from the image of a bull flinging things into the air with his horns. . Bureaucracy- A bureaucracy is a form of organization in which officeholders have defined positions and (usually) titles. Formal rules specify the duties of the officeholders. Personalistic distinctions are usually discouraged by the rules. . Burr Distribution- A Burr distibution has density function (pdf): f(x) = ckxc-1(1+xc)k+1 for constants c>0, k>0, and for x>0. Has distribution function (cdf): F(x) = 1 - (1+xc)-k Business Cycle Frequency- The business cycle frequency is considered to be three to five years. Called the business cycle frequency by Burns and Mitchell (1946), and this became standard language. . Buyers Market- A buyer's market is a market for a good (stocks, housing, etc.) where prices are falling and there are more parties interested in selling than in buying. , .

C
Calculus Of Voting- The calculus of voting is a model of political voting behavior in which a citizen chooses to vote if the costs of doing so are outweighed by the strength of the citizen's preference for one candidate weighted by the anticipated probability that the citizen's vote will be decisive in the election. . Calibration- 1. Calibration is the estimation of some parameters of a model, under the assumption that the model is correct, as a middle step in the study of other parameters. Use of this word suggests that the investigator wishes to give those other parameters of the model a 'fair chance' to describe the data, not to get stuck in a side discussion about whether the calibrated parameters are ideally modeled or estimated. 2. Calibration is taking parameters that have been estimated for a similar model into one's own model, solving one's own model numerically, and simulating. Attributed to Edward Prescott. . Call Options- A call option is a contract that gives the bearer the right to buy a share at a given price. Usually these options expire after a certain date. . Capital- Capital is something owned which provides ongoing services. In the national accounts, or to firms, capital is made up of durable investment goods, normally summed in units of money. Broadly: land plus physical structures plus equipment. The idea is used in models and in the national accounts. . Capital Consumption- In national accounts, capital consumption is the amount by which gross investment exceeds net investment. It is the same as replacement investment. . Capital Deepening- Capital deepening is an increase in capital intensity, normally in a macro context where it is measured by something analogous to the capital stock available per labor hour spent. In a micro context, it could mean the amount of capital available for a worker to use, but this use is rare. Capital deepening is a macroeconomic concept, of a faster-growing magnitude of capital in production than in labor. Industrialization involved capital deepening - that is, more and more expensive equipment with a lesser corresponding rise in wage expenses. Capital deepening of a certain input (e.g. a certain kind of capital input, a recent key example being computer equipment) can be measured in the following way. Estimate the growth of the services provided by this input, per unit of labour input, in year T and in year T+1. .

Capital Intensity- Capital intensity is the amount of capital per unit of labour input. . Capital Ratio- The capital ratio is a measure of a bank's capital strength used by U.S. regulatory agencies. ( ). Capital Structure- The capital structure of a firm is broadly made up of its amounts of equity and debt. . Capital- Augmenting- Capital-augmenting is one of the ways in which an effectiveness variable could be included in a production function in a Solow model. If effectiveness A is multiplied by capital K but not by labor L, then we say the effectiveness variable is capital-augmenting. For example, in the model of output Y where Y=(AK) aL1-a the effectiveness variable A is capital-augmenting but in the model Y=AKaL1-a it is not. Another example would be a capital utilization variable as measured say by electricity usage. (E.g., as in Eichenbaum). An example: in the context of a railroad, automatic railroad signaling, trackswitching, and car-coupling devices are capital-augmenting. From Moses Abramovitz and Paul A. David, 1996. "Convergence and Deferred Catch-up: productivity leadership and the waning of American exceptionalism." In Mosaic of Economic Growth, edited by Ralph Landau, Timothy Taylor, and Gavin Wright. Capitation- Capitation is the system of payment for each customer served, rather than by service performed. Both are used in various ways in U.S. medical care. . Cash-in-advance Constraint- The cash-in-advance constraint is a modeling idea. In a basic Arrow-Debreu general equilibrium there is no need for money because exchanges are automatic, through a Walrasian auctioneer. To study monetary phenomena, a class of models was made in which money was required to make purchases of other goods. In such a model the budget constraint is written so that the agent must have enough cash on hand to make any consumption purchase. Using this mechanism money can have a positive price in equilibrium and monetary effects can be seen in such models. Contrast money-in-the-utility function for an alternative modeling approach. . Cartels- Cartels are agreements between most or all of the major producers of a good to either limit their production and/or fix prices. Cartels are generally illegal in the United States. ( ). Cauchy Distribution- Has thicker tails than a normal distribution. density function (pdf): f(x) distribution function (cdf): F(x) = .5 + (tan-1x)/pi. = 1/[pi*(1+x 2)].

CDF (Cumulative Distribuion Function)- CDF is short for cumulative distribution function. This function describes a statistical distribution. It has the value, at each possible outcome, of the probability of receiving that outcome or a lower one. A cdf is usually denoted in capital letters. Consider for example some F(x), with x a real number is the probability of receiving a draw less than or equal to x. A particular form of F(x) will describe the normal distribution, or any other unidimensional distribution. Censored Dependent Variables- A dependent variable in a model is censored if observations of it cannot be seen when it takes on vales in some range. That is, the independent variables are observed for such observations but the dependent variable is not. A natural example is that if we have data on consumers and prices paid for cars, if a consumer's willingness-to-pay for a car is negative, we will see observations with consumer information but no car price, no matter how low car prices go in the data. Price observations are then censored at zero. Contrast truncated dependent variables. Censored Least Absolute Deviations- CLAD stands for the "Censored Least Absolute Deviations" estimator. If errors are symmetric (with median of zero), this estimator is unbiased and consistent though not efficient. The errors need not be homoskedastic or normally distributed to have those attributes. Center for Research in Security Prices - CRSP stands for Center for Research in Security Prices, a standard database of finance information at the University of Chicago. Has daily returns on NYSE, AMEX, and NASDAQ stocks. Started in early 1970s by Eugene Fama among others. The data there was so much more convenient than alternatives that it drove the study of security prices for decades afterward. It did not have volume data which meant that volume/volatility tests were rarely done. . Central Banks- A central bank is a government bank; a bank for banks. , . Certainty Equivalence Principle- Imagine that a stochastic objective function is a function only of output and output-squared. Then the solution to the optimization problem of choosing output will have the special characteristic that only the conditional means of the future forcing variables appear in the first order conditions. (By conditional means is meant the set of means for each state of the world.) Then the solution has the "certainty equivalence" property. "That is, the problem can be separated into two stages: first, get minimum mean squared error forecasts of the exogenous [variables], which are the conditional expectations...; second, at time t, solve the nonstochastic optimization problem," using the mean in place of the random variable. "This separation of forecasting from optimization.... is computationally very convenient and explains why quadratic objective functions are assumed in much applied work. For general [functions] the certainty equivalence principle does not

hold, so that the forecasting and opt problems do not 'separate.'" . Certainty Equivalent- The amount of payoff (e.g. money or utility) that an agent would have to receive to be indifferent between that payoff and a given gamble is called that gamble's 'certainty equivalent'. For a risk averse agent (as most are assumed to be) the certainty equivalent is less than the expected value of the gamble because the agent prefers to reduce uncertainty. . CES Production Function- CES stands for constant elasticity of substitution. This is a function describing production, usually at a macroeconomic level, with two inputs which are usually capital and labor. As defined by Arrow, Chenery, Minhas, and Solow, 1961 (p. 230), it is written this way: V = (beta*K-rho + alpha*L-rho) -(1-rho) where V = value-added, (though y for output is more common), K is a measure of capital input, L is a measure of labour input, and the Greek letters are constants. Normally alpha > 0 and beta > 0 and rho > -1. For more details see the source article. In this function the elasticity of substitution between capital and labor is constant for any value of K and L. (). CES Technology- An example of CES technology, adapted from Caselli and Ventura: For capital f(k,n) = (kb + nb)1/b k, labor input n, and constant b<

Here the elasticity of substitution between capital and labor is less than one, i.e. 1/(1b)<1. . CES Utility- CES utility stands for Constant Elasticity of Substitution utility, a kind of utility function. A synonym for CRRA or isoelastic utility function. Often written this way, presuming a constant g not equal to one: u(c)=c1-g/(1-g) This limits to u(c)=ln(c) as g goes to one. The elasticity of substitution between consumption at any two points in time is constant, equal to 1/g. "The elasticity of marginal utility is equal to" -g. g can also be said to be the coefficient of relative risk aversion, defined as -u"(c)c/u'(c), which is why this function is also called the CRRA (constant relative risk aversion) utility function. , . Ceteris Paribus- Ceteris Paribus means "assuming all else is held constant". The author using ceteris paribus is attempting to distinguish an effect of one kind of change from any others. .

 : - , Glossary of Economics Terms / Economics Dictionary Internet