.

:
Tr
H: :
r 3
2007
T
:
H ...................................................................................................................1
H ...............................................................................................2
......................................................................................................................3
B..............................................................................................................................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, AIIiliated, AIIine, AGI, AFQT,
Aggregate Demand, AIIine Pricing....................6
Aggregate Supply, Akaike`s InIormation Criterion, Alienation, Almost Surely,
Annihilator Operator, Analytic, Alternative Hypothesis............7
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 Test....11
Avar, Average Propensity To Consume, Average Propensity To Save, Average Total
Cost, B1, Bads, Balance OI Payments, Balanced Budget, Balanced Growth, Banach
Space...............................13
Bellman Equation, Bertrand Competition, Bertrand Duopoly, Bertrand Game,
Beveridge Curve, BHHH, Bias, Bidding Function, Bill OI Exchange.........14
Billon, Bimetallism, Black- Scholes Equation, Blue Chip, Bond, Bond Rating,
BonIerroni Criterion..........................15
Bootstrapping Criterion, Borel Set, Borel- Sigma Algebra, Bounded Rationality, Box-
Cox TransIormation..........................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, Buyer`s Market................18
Calculus OI 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 Ior Research in Security Prices.21
Certainty Equivalent, Ceteris Paribus, CES Technology, CES Utility, CES Production
Function.................................22
................................................................................................23
B:
H
r
.
r ,
, , , ,
r, , u, n, n
r . T
n , rr ,
, , , , x ,
, ,
n, r .
r .
3 x u r. 3,
, , u , ,
n rn . O
:
-u . B P
u , r
.
-rn n . H r
r
rn n,
. H, r
r , .
- n. O r n
, r , r
n , run
.
- . O r n, u,
n, u r .
-r rn . O
r n
.
Hx r r
,
. T u
un . T :
, r x un, -
, nn , .
A
A Fortiori Pricing- Latin Ior "even stronger". Can be used to compare two theorems
or prooIs. Could be interpreted to mean "in the same way." .
Ability To Pay Principle In Taxation- The widely held view that the amount oI
taxes someone pays should increase as their income increases. !"
#$" %& !'(
Abnor)al *et+rn,- Used in the context oI stock returns; abnormal returns means
the return to a portIolio in excess oI the return to a market portIolio. Contrast excess
returns which means something else. Note that abnormal returns can be negative.
Example: Suppose average market return to a stock was 10 Ior some calendar year,
meaning stocks overall were 10 higher at the end oI the year than at the beginning,
and suppose that stock S had risen 12 in that period. Then stock S's abnormal return
was 2. #-- &'.'/'( 0 1 -2 ! 3 '4'
5- 4' !! 6$& ! 7'83 !' %!'9(
Ab,ol+te *i,: A;er,ion- Absolute risk aversion is an attribute oI a utility Iunction.
'6'-2&'/" $-232&'/ ' 4$.
Ab,orpti;e <apacity- Absorptive capacity is a limit to the rate or quantity oI
scientiIic or technological inIormation that a Iirm can absorb. II such limits exist they
provide one explanation Ior Iirms to develop internal R&D capacities. R&D
departments can not only conduct development along lines they are already Iamiliar
with, but they have Iormal training and external proIessional connections that make it
possible Ior them to evaluate and incorporate externally generated technical
knowledge into the Iirm better than others in the Iirm can. In other words a partial
explanation Ior R&D investments by Iirms is to work around the absorptive capacity
constraint. =>'3$ $'' ' '23 !' ' !
8'.
Ab,tracting Fro)- Abstracting Irom is a phrase that generally means "leaving out".
A model abstracts Irom some elements oI the real world in its demonstration oI some
speciIic Iorce. ='/" 4'&'/.
Accelerator Principle- The accelerator principle is the growth oI output that induces
continuing net investment. That is, net investment is a Iunction oI the change in
output not its level. ' ' 7 ' ' 4&!&
4%-62&'' 5'$ !&' '6 4' &9(
Acceptance *egion- The acceptance region occurs in the context oI hypothesis
testing. Let T be a test statistic. Possible values oI T can be divided into two regions,
the acceptance region and the rejection region. II the value oI T comes out to be in the
acceptance region, the null hypothesis being tested is not rejected. II T Ialls in the
rejection region, the null hypothesis is rejected. #- 4' 5'.'/ 7! &!'
' !!' 6-&'9(
Acti;e ?ea,+re,- In the context oI combating unemployment: active measures are
policies designed to improve the access oI the unemployed to the labour market and
jobs, job-related skills, and the Iunctioning oI the labour market. Contrast passive
measures. =$& 6$ 71 &46'' 4' !' '6'-
&'>'9(
A@apte@- The stochastic process X
t
} and inIormation sets Y
t
} are adapted iI X
t
} is
a martingale diIIerence sequence with respect to Y
t
}.
A@;er,e Aelection- in a market where buyers cannot accurately gauge the quality oI
the product that they are buying, it is likely that the marketplace will contain generally
poor quality products. Adverse selection was Iirst noted by Nobel Laureate George
AkerloI in 1970. &- 4> 7' '4' $'! 1 '! 6B' !'
$&'- ' $''" $22&' $&'-' $'9(
ACCiliate@- Bidders' valuations oI a good being auctioned are aIIiliated iI, roughly:
&quot a high value oI one bidder's estimate makes high values oI the others' estimates
more likely.&quot. There may well be good reasons not to use the word correlated in
place oI aIIiliated. This editor is advised that there is some mathematical diIIerence.
ACCine- AIIine is an adjective, describing a Iunction with a constant slope.
Distinguished Irom linear which sometimes is meant to imply that the Iunction has no
constant term; that it is zero when the independent variables are zero. An aIIine
Iunction may have a nonzero value when the independent variables are zero.
Examples: y 2x is linear in x, whereas y 2x 7 is an aIIine Iunction oI x.
And y 2x z
2
is aIIine in x but not in z. !'&$' 4' 52$8' 8''
'D'3$' &!(
ACCine Pricing- AIIine pricing is a pricing schedule where there is a Iixed cost or
beneIit to the consumer Ior buying more than zero, and a constant per-unit cost per
unit beyond that. Formally, the mapping Irom quantity purchased to total price is an
aIIine Iunction oI 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 Iixed cost, an example oI an aIIine price schedule is T(q)kpq.
=5 7 4' !!2&'/ ' 4&! & 4'& !
$-3'' & $8' $22&''9(
AFET- AFQT is short Ior the Armed Forces QualiIications Test -- a test given to new
recruits in the U.S. armed Iorces. Results Irom this test are used in regressions oI
labour market outcomes on possible causes oI those outcomes, to control Ior other
causes. F&'-5$' ' &2B -.
Aggregate Ge)an@- Aggregate demand is the sum oI 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). H$2'
>'2&'3$' 7' & ' '&9(
AII- AGI is an abbreviation Ior Adjusted Gross Income, a line item which appears
on the U.S. taxpayer's tax return and is sometimes used as a measure oI income which
is consistent across taxpayers. AGI does not include any accounting Ior deductions
Irom income that reduce the tax due, e.g. Ior Iamily size. -'%! >2
J!.
Aggregate A+pply- Aggregate supply is the total value oI the goods and services
produced in a country, plus the value oI imported goods less the value oI exports.
H$2' 2!'.
A:ai:eK, InCor)ation <riterion- Akaike's InIormation Criterion is a criterion Ior
selecting among nested econometric models. The AIC is a number associated with
each model:
AICln (s
m
2
) 2m/T
where m is the number oI parameters in the model, and s
m
2
is (in an AR(m) example)
the estimated residual variance: s
m
2
(sum oI squared residuals Ior model m)/T. That
is, the average squared residual Ior model m.
The criterion may be minimized over choices oI m to Iorm a trade oII between the Iit
oI the model (which lowers the sum oI squared residuals) and the model's complexity,
which is measured by m. Thus an AR(m) model versus an AR(m1) can be compared
by this criterion Ior a given batch oI data.
An equivalent Iormulation is this one: AICT ln(RSS) 2K where K is the number oI
regressors, T the number oI obserations, and RSS the residual sum oI squares;
minimize over K to pick K. L56'& $26 ' =$'$.
Alienation- Alienation is a Marxist term. Alienation is the subjugation oI people by
the artiIicial creations oI people "which have assumed the guise oI independent
things." Because products are thought oI as commodities with money prices, the
social process oI trade and exchange becomes driven by Iorces operating
independently oI human will like natural laws. M2D2&'/" '682&'/"
'-'8'(
Al)o,t A+rely- Almost surely is with probability one. In particular, the statement that
a series W
n
} limits to W as n goes to inIinity, means that PrW
n
-~W}1
>-B' &! ' N(
Alternati;e OypotPe,i,- Alternative hypothesis is the "hypothesis that the restriction
or set oI restrictions to be tested does NOT hold." OIten denoted H
1
. Synonym Ior
'maintained hypothesis.
Analytic- Analytic oIten means 'algebraic', as opposed to 'numeric'. E.g., in the
context oI taking a derivative, which could sometimes be calculated numerically on a
computer, but is usually done analytically by Iinding an algebraic expression Ior the
derivative. ='-3$ 73 $ '6 Q'-%>'$R" 1 4'3
& ! 263$9(
AnniPilator Sperator- The annihilator operator is denoted

with a lag operator

polynomial in the brackets. Has the eIIect oI removing the terms with an L to a
negative power; that is, Iuture values in the expression. Their expected value is
assumed to be zero by whoever applies the operator.
A)ericani,t- An Americanist is a member oI a certain subIield oI political science.
=6$'(
Ann+ity- An annuity is an asset that pays a constant amount each year to the holder
until the annuity expires and/or the holder oI the annuity passes away. T!1'
-''" '2
Ann+ity For)+la- II annuity payments over time are (0,P,P,...P) Ior n periods, and
the constant interest rate r~0, then the net present value to the recipient oI the annuity
can be calculated by the annuity Iormula:
NPV(A) (1-(1r)
-n
)P/r 62-' 4' 62&'/ %!1' -''" '2.
AntiU Tr+,t Vegi,lation- Anti-trust legislation is legislation designed to break up
existing monopolies and prevent the Iormation oI new monopolies to increase
competition and societal welIare. W'$$' %2-'&' 4' 4>&'/ 6-.
AXSYA- ANOVA stands Ior 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 oI an F test to see iI the diIIerent categories oI x have any
detectable eIIect on the dependent variable on average. ANOVA is used oIten in
sociology, but rarely in economics as Iar as this editor can tell. The terms ANCOVA
and ANOCOVA mean analysis-oI-covariance. ='-4' ' '4&!"
&'8'(
A*7N9- AR(1) is a Iirst-order autoregressive process. =&%& .
Arbitrage Spport+nity- An arbitrage opportunity is the opportunity to buy an asset
at a low price then immediately selling it on a diIIerent market Ior a higher price.
=>'B' 6B 7$22&'/ $' 4' !' !'! &$'
'9(
Arbitrage Pricing TPeory- APT is short Ior Arbitrage Pricing Theory; Irom Stephen
Ross, 1976-78. Quoting Sargent, "Ross posited a particular statistical process Ior asset
returns, then derived the restrictions on the process that are implied by the hypothesis
that there exist no arbitrage possibilities." =>'B' 8' 4' !!2&'/
.
A*<O- ARCH stands Ior Autoregressive Conditional Heteroskedasticity. It is a
technique used in Iinance 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 Ior this (introduced by
Engle (1982)) is that the variance oI the series itselI is an AR (autoregressive) time
series, oIten a linear one.
Formally, per Bollerslev et al 1992 and Engle (1982):
An ARCH model is a discrete time stochastic process e
t
} oI the Iorm:
e
t
z
t
s
t

where the z
t
's are iid over time, E(z
t
)0, var(z
t
)1, and s
t
is positive and time-varying.
Usually s
t
is Iurther 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 oI asset returns even iI 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.
=&%&' Z-&' [$!'3(
A*I?A- ARIMA describes a stochastic process or a model oI one. Stands Ior
"autoregressive integrated moving-average". An ARIMA process is made up oI sums
oI autoregressive and moving-average components, and may not be stationary.
A*?A- Describes a stochastic process or a model oI one. Stands Ior "autoregressive
moving-average". An ARMA process is a stationary one made up oI sums oI
autoregressive and moving-average components.
Arro;ian \ncertainty- Arrovian uncertainty is measurable risk, that is, measurable
variation in possible outcomes, on the basis oI knowledge or believed assumptions in
advance. Contrast Knightian uncertainty. =&$']$ 2%2]4$.

Arro^U Gebre+ _`+ilibri+)- Arrow-Debreu equilibrium means, in practice,
competitive equilibrium oI the kind shown in Debreu's Theory of Value. Occasionally
reIerred to as Arrow-Debreu-McKenzie equilibrium. =2U #> '6B'(
Arro^U Pratt ?ea,+re- The Arrow-Pratt measure is an attribute oI a utility Iunction.
Denote a utility Iunction by u(c). The Arrow-Pratt measure oI absolute risk aversion is
deIined by:
R
A
-u''(c)/u'(c)
This is a measure oI the curvature oI the utility Iunction. This measure is invariant to
aIIine transIormation oI the utility Iunction, which is a useIul attributed because such
transIormation do not aIIect the preIerences expressed by u().
II R
A
() is decreasing in c, then u() displays decreasing absolute risk aversion. II R
A
()
is increasing in c, then u() displays increasing absolute risk aversion. II R
A
() is
constant with respect to changes in c, then u() displays constant absolute risk
aversion. =2U ' a-.
A,,et Pricing F+nction,- An asset-pricing Iunction maps the state oI the economy at
time t into the price oI a capital asset at time t. 0! ' & ' '4&8 '
! '& & !! &6 &!' ' $''-
75-'8''9(
A,,et Pricing ?o@el,- Asset pricing models are a way oI mapping Irom abstract
states oI the world into the prices oI Iinancial assets like stocks and bonds. The prices
are always conceived oI as endogenous; that is, the states oI the world cause them, not
the other way around, in an asset pricing model.
Several general types are discussed in the research literature. The CAPM is one,
distinguished Irom three that Fama (1991) identiIies: (a) the Sharpe-Lintner-Black
class oI models, (b) the multiIactor models like the APT oI Ross (1976), and (c) the
consumption based models such as Lucas (1978).
An asset pricing model might or might not include the possibility oI Iads or bubbles.
a!- 4' !!2&'/ ' &!'.
A,y)ptotic- Asymptotic is an adjective meaning 'oI a probability distribution as
some variable or parameter oI it (usually, the size oI the sample Irom another
distribution) goes to inIinity.
A,y)ptotic Xor)ality- Asymptotic normality is a property oI the limiting
distributions oI some estimators. This is usually proven with a mean value expansion
oI the score at the estimated parameter value.
A,y)ptotic Yariance- DeIinition oI the asymptotic variance oI an estimator may
vary Irom author to author or situation to situation. One standard deIinition is given in
Greene, p 109, equation (4-39) and is described there as "suIIicient Ior nearly all
applications." It's:
asy var(that) (1/n) lim
n-~inIinity
E that - lim
n-~inIinity
Ethat }
2
=6$
'4-$(
A,y)ptotically _`+i;alent- Estimators are asymptotically equivalent iI they have
the same asymptotic distribution. =63$' !'$&.
A,y)ptotically \nbia,e@- "There are at least three possible deIinitions oI asymptotic
unbiasedness:
1. The mean oI the limiting distribution oI n
.5
(that - t) is zero.
2. lim
n-~inIinity
Ethat t.
3. plim that t."
Usually an estimator will have all three oI these or none oI them. Cases exist however
in which leIt hand sides oI those three are diIIerent. "There is no general agreement
among authors as to the precise meaning oI asymptotic unbiasedness, perhaps because
the term is misleading at the outset; asymptotic reIers to an approximation, while
unbiasedness is an exact result. Nonetheless the majority view seems to be that (2) is
the proper deIinition oI asymptotic unbiasedness. Note, though, that this deIinition
relies upon quantities that are generally unknown and that may not exist." -- Greene, p
107( =63$' '.
Attractor- An attractor is a kind oI steady state in a dynamical system. There are
three types oI attractor: stable steady states, cyclical attractors, and chaotic attractors.
&-$2&'3(
A+g)ente@ Gic:eyU F+ller Te,t- An augmented Dickey-Fuller test is a test Ior a unit
root in a time series sample. An augmented Dickey-Fuller test is a version oI the
Dickey-Fuller test Ior a larger and more complicated set oI time series models.
The augmented Dickey-Fuller (ADF) statistic, used in the test, is a negative number.
The more negative it is, the stronger the rejection oI the hypothesis that there is a unit
root at some level oI conIidence. In one example, with three lags, a value oI -3.17
constituted rejection at the p-value oI .10. W%-6 #$U 2- .
A+,trian _cono)ic,- Austrian Economics is a school oI thought that is associated
with little government interIerence in the marketplace, the primacy oI property rights
and is generally associated with libertarian ideology. =&$'' 1$-' 4'
$68'(
A+tar:y- Autarky is the state oI an individual who does not trade with anyone.
=&'$8'(
A+tocorrelation- The jth autocorrelation oI a covariance-stationary process is
deIined as its jth autocovariance divided by its variance. In a sample, the kth
autocorrelation is the OLS estimate that results Irom the regression oI the data on the
kth lags oI the data. =&$-'8'(
A+toco;ariance- The jth autocovariance oI a stochastic process y
t
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:
gamma
jt
E(y
t
- Ey)(y
t-j
-Ey)
In that equation the process is assumed to be covariance stationary. II there is a trend,
then the second Ey should be the expected value oI at the time t-j.
=&$&'8'(
A+toco;ariance ?atrix- he autocovariance matrix is deIined Ior a vector random
process, denoted y
t
here. The ij'th element oI the autocovariance matrix is cov(y
it
, y
j,t-k
)
a'' ' '&$&'8'.
A+toregre,,i;e- AR stands Ior "autoregressive." Describes a stochastic process
(denote here, e
t
) that can be described by a weighted sum oI its previous values and a
white noise error. An AR(1) process is a Iirst-order one process, meaning that only the
immediately previous value has a direct eIIect on the current value:
e
t
re
t-1
u
t
where r is a constant that has absolute value less than one, and u
t
is drawn Irom a
distribution with mean zero and Iinite variance, oIten a normal distribution.
An AR(2) would have the Iorm:
e
t
r
1
e
t-1
r
2
e
t-2
u
t
and so on. =&%&(
A;ar- Avar is an abbreviation or symbol Ior the operation oI taking the asymptotic
variance oI an expression, thus: avar().
A;erage Propen,ity To <on,+)e- The average propensity to consume is the
proportion oI income the average Iamily spends on goods and services.
12&'3$' $1'.
A;erage Propen,ity To Aa;e- The average propensity to save is the proportion oI
income the average Iamily saves (does not spend on consumption). a3
1!/(
A;erage Total <o,t- Average total cost is the sum oI all the production costs divided
by the number oI units produced. 3 1 6'8'-
4&!..
B
bN- B
1
denotes the Borel sigma-algebra oI the real line. It will contain every open
interval by deIinition, which implies that it contains every closed interval and every
countable union oI open, halI-open, and closed intervals.
What won't it contain In practice, only obscure sets. Here's an example: DeIine the
equivalence class on the real line such that xy (read: x is in the same equivalence
class as y) iI x-y is a rational number. Now consider the set oI all numbers in 0,1
such that none oI them are in the same equivalence class. How many members oI that
set are there Well, it's not a countable number. This set is not in B
1
ba@,- Bads are the opposite oI "goods". Bads are most oIten physical items that
people will usually pay money to dispose oI like toxic waste. M'! 6'8'-(
balance SC Pay)ent,- A country's balance oI payments is the quantity oI its own
currency Ilowing out oI oI the country (Ior purchases, Ior example, but also Ior giIts
and intraIirm transIers) minus the amount Ilowing in. c%&$ >-'.
balance@ b+@get- A balanced budget occurs when the total sum oI money a
government collects in a year is equal to the amount it spends on goods, services, and
debt interest. Z'6B >2d.
balance@ Iro^tP- A macroeconomics model exhibits balanced growth iI
consumption, investment, and capital grow at a constant rate while hours oI work per
time period stays constant. Z'6B '4&8.
banacP Apace- Any complete normed vector space is a Banach space.
ban@^i@tP- In kernel estimation, a scalar argument to the kernel Iunction that
determines what range oI the nearby data points will be heavily weighted in making
an estimate. The choice oI bandwidth represents a tradeoII between bias (which is
intrinsic to a kernel estimator, and which increases with bandwidth), and variance oI
the estimates Irom the data (which decreases with bandwidth).
Cross-validation is one way to choose the bandwidth as a Iunction oI the data.
Has a variety oI similar deIinitions in spectral analysis. Generally, a bandwidth is
some way oI deIining the range oI Irequencies that will be included by the estimation
process. In some estimations it is an argument to the estimation process.
ban: Xote- In periods oI Iree banking, such as most states in the U.S. Irom 1839-
1863, 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. e'$'(
ban: *+n- A bank run takes place when the customers oI a bank Iear that the bank
will become insolvent. Customers rush to the bank to take out their money as quickly
as possible to avoid losing it. Federal Deposit Insurance has ended the phenomenon oI
bank runs. '21'/ >'$' 7'! %-6 4$ !$' . '
-&'9(
barter _cono)y- 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. e' $68' 7f$68' >4 '3'
!'9(
ba,e Point Pricing- Base pointing pricing is the practice oI Iirms setting prices as iI
their transportation costs to all locations were the same, even iI all the vendors are
distant Irom one another and have substantially diIIerent costs oI transportation to
each location. One might interpret this as a Iorm oI monitored collusion between the
vendor Iirms. f!'$&' ' 4' 4&!" >4 '4-$' ' '
1(
ba,in SC Attraction- The basin oI attraction is the region oI states, in a dynamical
system, around a particular stable steady state, that lead to trajectories going to the
stable steady state. (E.g. the region inside the event horizon around a black hole.)
ba,i, Point- A basis point is one-hundredth oI a percentage point. Used in the context
oI interest rates.
ba,:et- A basket is a known set oI Iixed quantites oI known goods, needed Ior
deIining a price index. F1'.
bear ?ar:et- A bear market occurs when almost all stock prices are Ialling. The
term bear market comes Irom the image oI a bear pawing something to the ground.
'4' ' '$ 3 1 'D''(
bell)an _`+ation- A Bellman equaion is any value or Ilow value equation. For a
discrete problem it can generally be oI the Iorm:
v(k) max over k' oI u(k,k') bv(k') }
where:
u() is the one-period return Iunction (e.g., a utility Iunction) and
v() is the value Iunction 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.
bertran@ <o)petition- A Bertrand competition is a bidding war in which the
bidders end up at a zero-proIit price. e'!& '&'.
bertran@ G+opoly- A bertrand duopoly is a bidding war in which the bidders end up
at a zero-proIit price. .
bertran@ Ia)e- A Bertrand game is a model oI a bidding war between Iirms each oI
which can oIIer to sell a certain good (say, widgets), but no other Iirms can. Each Iirm
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 halI Irom each iI the
prices are the same.
Best Ior the Iirms (both collectively and individually) is to cooperate, charge
monopoly price, and split the proIits. Each Iirm could seize the whole market by
lowering price slightly, however, and the noncooperative Nash equilibrium outcome
oI a Bertrand game is that both charge a zero-proIit price. e'!&' %'.
be;eri@ge <+r;e- A Beveridge curve is the graph oI the inverse relation oI
unemployment to job vacancies. W%-6' &'>.
bOOO- BHHH is a numerical optimization method Irom Berndt, Hall, Hall, and
Hausman (1974). Used in Gauss, Ior example. e!" ['-" ['- ['26'.
bia,- Bias is the diIIerence between the parameter and the expected value oI the
estimator oI the parameter. g'4-$'' 6D2 3$2&''' !>''
&! ' ''6'(
bi@@ing F+nction- In an auction analysis, a bidding Iunction (oIten denoted b()) is a
Iunction whose value is the bid that a particular player should make. OIten it is a
Iunction oI the player's value, v, oI the good being auctioned. Thus the common
notation b(v). 2!' ' !.
bill SC _xcPange- A bill oI exchange is Irom the late Middle Ages. A bill oI
exchange is a contract entitling an exporter to receive immediate payment in the local
currency Ior 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. #%& 4' 4&42&'/ $'" $'! 1 56''U
$22&'3 -'.' & !6'1' &'-2'(
billon- Billon is a mixture oI silver and copper, Irom which small coins were made in
medieval Europe. Larger coins were made oI silver or gold. e- 7h%2' !
> >'$' $8' $-' 4' $&'/ '3$9(
bi)etalli,)- Bimetallism is a commodity money regime in which there is concurrent
circulation oI coins made Irom each oI two metals and a Iixed exchange rate between
them. Historically the metals have almost always been gold and silver. Bimetallism
was tried many times with varying success but since about 1873 the practice has been
generally abandoned. e6'-4'6(
blac:U AcPole, _`+ation- The Black-Scholes equation is an equation Ior option
securities prices on the basis oI an assumed stochastic process Ior stock prices.
The Black-Scholes algorithm can produce an estimate the value oI a call on a stock,
using as input:
an estimate oI the risk-Iree interest rate now and in the near Iuture
current price oI the stock
exercise price oI the option (strike price)
expiration date oI the option
an estimate oI the volatility oI the stock's price
From the Black-Scholes equation one can derive the price oI an option.
bl+e <Pip- The term blue chip usually reIers to a stock, but could in theory apply to
any Iinancial asset with potential risk. A blue chip stock is one that entails unusually
small risk (risk being a subjective judgment). Stocks that are considered "blue chip"
are issued by large stable corporations like IBM. a64'/ ' 4$"
6'$64'/ ' !>&$''(
bon@- A bond is a Iixed interest Iinancial asset issued by governments, companies,
banks, public utilities and other large entities. Bonds pay the bearer a Iixed amount a
speciIied end date. A discount bond pays the bearer only at the ending date, while a
coupon bond pays the bearer a Iixed amount over a speciIied interval (month, year,
etc.) as well as paying a Iixed amount at the end date. M>&4'.
bon@ *ating- Organizations like Standard and Poor's and Moody's rate the riskiness
oI 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 Iile Ior bankruptcy beIore the Iinal bond payment
is due and what percentage oI the bondholder's clams creditors will receive iI a
bankruptcy takes place.
bonCerroni <riterion- Suppose a certain treatment oI a patient has no eIIect. II one
runs a test oI statistical signiIicance on enough randomly selected subsets oI the
patient base, one would Iind some subsets in which statistically signiIicant diIIerences
were apparently distinguished by the treatment. The BonIerroni criterion is a
redeIinition oI the statistical signIicance criterion Ior the testing oI many subgroups:
e.g. iI there are Iive subgroups and one oI them shows an eIIect oI the treatment at the
.01 signiIicance level, the overall Iinding is signiIicant at the .05 level. F26
e5(
boot,trapping <riterion- Bootstrapping is the activity oI applying estimators to each
oI many subsamples oI a data sample, in the hope that the distribution oI the estimator
applied to these subsamples is similar to the distribution oI the estimator when applied
to the distribution that generated the sample.
It is a method that gives a sense oI the sampling variability oI an estimator. "AIter the
set oI coeIIicients b0 is computed, M randomly drawn samples oI T observations are
drawn Irom 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 oI this distribution oI estimates oI b0 can then be characterized, e.g. its
variance. II the estimates are highly variable, the investigator knows not to think oI
the estimate oI b0 as precise.
Bootstrapping could also be used to estimate by simulation, or empirically, the
variance oI an estimation procedure Ior which no algebraic expression Ior the
variance exists.
borel Aet- A Borel set is any element oI a Borel sigma-algebra. e- (
borelU Aig)a Algebra- The Borel sigma-algebra oI a set S is the smallest sigma-
algebra oI S that contains all oI the open balls in S. Any element oI a Borel sigma-
algebra is a Borel Set.
Example: The set B
1
is the Borel sigma-algebra oI the real line, and thus contains
every open interval.
Example: Consider a Iilled circle in the unit square. It can be constructed by a
countable number oI non-overlapping open rectangles (since a series oI such
rectangles can be deIined that would cover every point in the circle but no point
outside oI it. ThereIore it is in the smallest sigma-algebra oI open subsets oI the unit
square. e-U 0%6' '-%>'.
bo+n@e@ *ationality- Models oI bounded rationality are deIined in a recent book by
Ariel Rubinstein as those in which some aspect oI the process oI choice is explicitly
modelled.
boxU <ox Tran,Cor)ation- The Box-Cox transIormation, below, can be applied to a
regressor, a combination oI regressors, and/or to the dependent variable in a
regression. The objective oI doing so is usually to make the residuals oI the regression
more homoskedastic and closer to a normal distribution:
y(l) ((yL) - 1) / l Ior l not equal to zero y(l)log(y)L0 Box and Cox (1964)
developed the transIormation.
Estimation oI any Box-Cox parameters is by maximum likelihood.
Box and Cox (1964) oIIered an example in which the data had the Iorm oI survival
times but the underlying biological structure was oI hazard rates, and the
transIormation identiIied this. e$U F$ '56'8'.
boxU ien:in,- Box-Jenkins is a "methodology Ior identiIying, estimating, and
Iorecasting" ARMA models. (Enders, 1996, p 23). The reIerence in the name is to
Box and Jenkins, 1976.
ox- !ierce "tatistic- The Box-Pierce statistic is deIined on a time series sample Ior
each natural number k by the sum oI the squares oI the Iirst k sample autocorrelations.
The k
th
sample autocorrelation is denoted r:
BP(k)S
s1
k
r
s
2

Used to tell iI a time series is nonstationary. e$U j$
brent ?etPo@- The Brent method is an algorithm Ior choosing the step lengths when
numerically calculating maximum likelihood estimates. a! e.
brettonU koo@, Ay,te)- The Bretton Woods system was a international monetary
Iramework oI Iixed exchange rates aIter World War II. Drawn up by the U.S. and
Britain in 1944. Keynes was one oI the architects.
The Bretton Woods system ended on August 15, 1971, when President Richard Nixon
ended trading oI gold at the Iixed price oI 35/ounce. At that point Ior the Iirst time in
history, Iormal links between the major world currencies and real commodities were
severed. 06 eU H2!.
bre+,cPU Pagan Atati,tic- A diagnostic test oI a regression. It is a statistic Ior testing
whether dependent variable y is heteroskedastic as a Iunction oI regressors X. II it is,
that suggests use oI GLS or SUR estimation in place oI OLS. The test statistic is
always nonnegative. Large values oI test statistic reject the hypothesis that y is
homoskedastic in X. The meaning oI 'large' varies with the number oI variables in X.
Quoting almost directly Irom the Stata manual: The Breusch and Pagan (1980) chi-
squared statistic -- a Lagrange multiplier statistic -- is given by
l T S
m1
mM
S
n1
nm-1
r
mn
2

where r
mn
2
is the estimated correlation between the residuals oI the M equations and T
is the number oI observations.
b+bble,- The existence oI bubbles is the conjecture that market prices Ior securities
take selI-IulIilling swings away Irom any model oI their Iundamental values.
Bubbles are oIten described as speculative and it is conjectured that bubbles could be
risky ventures Ior speculators who earn a Iair rate oI return on them.
b+@get- A budget is a description oI a Iinancial plan. It is a list oI estimates oI
revenues to and expenditures by an agent Ior a stated period oI time. Normally a
budget describes a period in the Iuture not the past. e2d.
b+@get Vine- A consumer's budget line characterizes on a graph the maximum
amounts oI goods that the consumer can aIIord. In a two good case, we can think oI
quantities oI good X on the horizontal axis and quantities oI good Y on the vertical
axis. The term is oIten used when there are many goods, and without reIerence to any
actual graph. e2d$' %' %''.
b+@get Aet- The budget set is the set oI bundles oI goods an agent can aIIord. This set
is a Iunction oI the prices oI goods and the agents endownment.
Assuming the agent cannot have a negative quantity oI any good, the budget set can
be characterized this way. Let e be a vector representing the quantities oI the agent's
endowment oI each possible good, and p be a vector oI prices Ior those goods. Let
B(p,e) be the budget set. Let x be an element oI R

L
; that is, the space oI nonnegative
reals oI dimension L, the number oI possible goods. Then:
B(p,e) x: px pe} e2d$ (
b+ll ?ar:et- A bull market occurs when almost all stock prices are on the rise. The
term bull market comes Irom the image oI a bull Ilinging things into the air with his
horns. '4' ' '$ 38' 1 ' '.
b+rea+cracy- A bureaucracy is a Iorm oI organization in which oIIiceholders have
deIined positions and (usually) titles. Formal rules speciIy the duties oI the
oIIiceholders. Personalistic distinctions are usually discouraged by the rules.
e$'8'(
b+rr Gi,trib+tion- A Burr distibution has density Iunction (pdI):
I(x) ckx
c-1
(1x
c
)
k1
Ior constants c~0, k~0, and Ior x~0.
Has distribution Iunction (cdI): F(x) 1 - (1x
c
)
-k
b+,ine,, <ycle Fre`+ency- The business cycle Irequency is considered to be three to
Iive years. Called the business cycle Irequency by Burns and Mitchell (1946), and this
became standard language. $58' ' >4 $-2.
b+yerK, ?ar:et- A buyer's market is a market Ior a good (stocks, housing, etc.)
where prices are Ialling and there are more parties interested in selling than in buying.
'4' %-6' 2!'" ' 6'-' >'2&'3$'(
C
<alc+l+, SC Yoting- The calculus oI voting is a model oI political voting behavior in
which a citizen chooses to vote iI the costs oI doing so are outweighed by the strength
oI the citizen's preIerence Ior one candidate weighted by the anticipated probability
that the citizen's vote will be decisive in the election. T-''3$ $'-$2-2.
<alibration- 1. Calibration is the estimation oI some parameters oI a model, under
the assumption that the model is correct, as a middle step in the study oI other
parameters. Use oI this word suggests that the investigator wishes to give those other
parameters oI the model a 'Iair 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 Ior a similar model into
one's own model, solving one's own model numerically, and simulating. Attributed to
Edward Prescott. F'->'8'(
<all Sption,- A call option is a contract that gives the bearer the right to buy a share
at a given price. Usually these options expire aIter a certain date. #%& 4'
$22&'/ '$ !'!' '(
<apital- Capital is something owned which provides ongoing services. In the national
accounts, or to Iirms, capital is made up oI durable investment goods, normally
summed in units oI money. Broadly: land plus physical structures plus equipment.
The idea is used in models and in the national accounts. F''-(
<apital <on,+)ption- In national accounts, capital consumption is the amount by
which gross investment exceeds net investment. It is the same as replacement
investment. 0-23'8 $%' >2 &8'' 8' '!62&'
&8''.
<apital Geepening- 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 oI capital
available Ior a worker to use, but this use is rare.
Capital deepening is a macroeconomic concept, oI a Iaster-growing magnitude oI
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 oI a certain input (e.g. a certain kind oI capital input, a recent key
example being computer equipment) can be measured in the Iollowing way. Estimate
the growth oI the services provided by this input, per unit oI labour input, in year T
and in year T1. W%-62&'/ ' $''- 4.
<apital Inten,ity- Capital intensity is the amount oI capital per unit oI labour input.
F''- 4.
<apital *atio- The capital ratio is a measure oI a bank's capital strength used by U.S.
regulatory agencies. a- 4' -& ' >'$ 7& 0=#9(
<apital Atr+ct+re- The capital structure oI a Iirm is broadly made up oI its amounts
oI equity and debt. 02$2' ' $''-.
<apitalU A+g)enting- Capital-augmenting is one oI the ways in which an
eIIectiveness variable could be included in a production Iunction in a Solow model. II
eIIectiveness A is multiplied by capital K but not by labor L, then we say the
eIIectiveness variable is capital-augmenting.
For example, in the model oI output Y where Y(AK)
a
L
1-a
the eIIectiveness variable
A is capital-augmenting but in the model YAK
a
L
1-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 oI a railroad, automatic railroad signaling, track-
switching, and car-coupling devices are capital-augmenting. From Moses Abramovitz
and Paul A. David, 1996. "Convergence and DeIerred Catch-up: productivity
leadership and the waning oI American exceptionalism." In #osaic of $conomic
%rowth, edited by Ralph Landau, Timothy Taylor, and Gavin Wright.
<apitation- Capitation is the system oI payment Ior each customer served, rather than
by service perIormed. Both are used in various ways in U.S. medical care.
F''8'(
<a,PUinUa@;ance <on,traint- The cash-in-advance constraint is a modeling idea. In
a basic Arrow-Debreu general equilibrium there is no need Ior money because
exchanges are automatic, through a Walrasian auctioneer. To study monetary
phenomena, a class oI models was made in which money was required to make
purchases oI other goods. In such a model the budget constraint is written so that the
agent must have enough cash on hand to make any consumption purchase. Using this
mechanism money can have a positive price in equilibrium and monetary eIIects can
be seen in such models. Contrast money-in-the-utility Iunction Ior an alternative
modeling approach. -'.'/ !'!.
<artel,- Cartels are agreements between most or all oI the major producers oI a good
to either limit their production and/or Iix prices. Cartels are generally illegal in the
United States. F'- 7#%& 6D2 !6' 4&!- ' !!
4&! 4' !!2&'/ 6-$' '9(
<a+cPy Gi,trib+tion- Has thicker tails than a normal distribution.
density Iunction (pdI): I(x) 1/pi(1x
2
).
distribution Iunction (cdI): F(x) .5 (tan
-1
x)/pi.
<GF &Cumulative 'istribuion (unction)- CDF is short Ior cumulative distribution
Iunction. This Iunction describes a statistical distribution. It has the value, at each
possible outcome, oI the probability oI receiving that outcome or a lower one. A cdI is
usually denoted in capital letters.
Consider Ior example some F(x), with x a real number is the probability oI receiving a
draw less than or equal to x. A particular Iorm oI F(x) will describe the normal
distribution, or any other unidimensional distribution.
<en,ore@ Gepen@ent Yariable,- A dependent variable in a model is censored iI
observations oI it cannot be seen when it takes on vales in some range. That is, the
independent variables are observed Ior such observations but the dependent variable
is not.
A natural example is that iI we have data on consumers and prices paid Ior cars, iI a
consumer's willingness-to-pay Ior a car is negative, we will see observations with
consumer inIormation 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.
<en,ore@ Vea,t Ab,ol+te Ge;iation,- CLAD stands Ior the "Censored Least
Absolute Deviations" estimator. II errors are symmetric (with median oI zero), this
estimator is unbiased and consistent though not eIIicient. The errors need not be
homoskedastic or normally distributed to have those attributes.
<enter Cor *e,earcP in Aec+rity Price,- CRSP stands Ior Center Ior Research in
Security Prices, a standard database oI Iinance inIormation at the University oI
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 oI security prices Ior decades
aIterward. It did not have volume data which meant that volume/volatility tests were
rarely done. l' 4' 'B2&'/ ' '>-' ' .
<entral ban:,- A central bank is a government bank; a bank Ior banks. l'-'
>'$'" '!' >'$'(
<ertainty _`+i;alence Principle- Imagine that a stochastic objective Iunction is a
Iunction only oI output and output-squared. Then the solution to the optimization
problem oI choosing output will have the special characteristic that only the
conditional means oI the Iuture Iorcing variables appear in the Iirst order conditions.
(By conditional means is meant the set oI means Ior each state oI the world.) Then the
solution has the "certainty equivalence" property. "That is, the problem can be
separated into two stages: Iirst, get minimum mean squared error Iorecasts oI the
exogenous variables, which are the conditional expectations...; second, at time t,
solve the nonstochastic optimization problem," using the mean in place oI the random
variable. "This separation oI Iorecasting Irom optimization.... is computationally very
convenient and explains why quadratic objective Iunctions are assumed in much
applied work. For general Iunctions the certainty equivalence principle does not
hold, so that the Iorecasting and opt problems do not 'separate.'" 4'
4!>&'/ >4>!(
<ertainty _`+i;alent- The amount oI payoII (e.g. money or utility) that an agent
would have to receive to be indiIIerent between that payoII 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 oI the gamble
because the agent preIers to reduce uncertainty. W!>&'/ >4>!.
<_A Pro@+ction F+nction- CES stands Ior constant elasticity oI substitution. This is
a Iunction describing production, usually at a macroeconomic level, with two inputs
which are usually capital and labor. As deIined by Arrow, Chenery, Minhas, and
Solow, 1961 (p. 230), it is written this way:
V (betaK
-rho
alphaL
-rho
) -
(1-rho)
where V value-added, (though y Ior output is
more common),
K is a measure oI capital input,
L is a measure oI 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 Iunction the elasticity oI substitution between capital and labor is constant Ior
any value oI K and L. 8' -'3 4'6' 7fW9(
<_A TecPnology- An example oI CES technology, adapted Irom Caselli and
Ventura:
For capital k, labor input n, and constant b
I(k,n) (k
b
n
b
)
1/b
Here the elasticity oI substitution between capital and labor is less than one, i.e. 1/(1-
b)1. fW cJ-%8'.
<_A \tility- CES utility stands Ior Constant Elasticity oI Substitution utility, a kind
oI utility Iunction. A synonym Ior CRRA or isoelastic utility Iunction. OIten written
this way, presuming a constant g not equal to one:
u(c)c
1-g
/(1-g)
This limits to u(c)ln(c) as g goes to one.
The elasticity oI substitution between consumption at any two points in time is
constant, equal to 1/g. "The elasticity oI marginal utility is equal to" -g. g can also be
said to be the coeIIicient oI relative risk aversion, deIined as -u"(c)c/u'(c), which is
why this Iunction is also called the CRRA (constant relative risk aversion) utility
Iunction. !>&$" >-'%! ! fW(
<eteri, Parib+,- Ceteris Paribus means "assuming all else is held constant". The
author using ceteris paribus is attempting to distinguish an eIIect oI one kind oI
change Irom any others. l '>2.
:
- r r, H
Glossary oI Economics Terms / Economics Dictionary Internet