when does the prime rate change abstract we study the frequency of prime rate changes we model the prime rate as a time series variable that can be changed only at some cost this yields a logit model in which the probability of a prime rate change is a function of market variables we test this model using data from a micro data set that gives the dating of prime rate changes the results indicate that adjustment costs are important to the prime rate adjustment process and that changes in exogenous variables have a significantly larger effect on the probability of a prime rate increase than decrease

stochastic comparisons in production yield management manufacturing firms routinely commit resources to increase yield rates through product and process improvement initiatives champions of such yield improvement projects may assume that stochastically larger yield rates are beneficial in this note we show that this need not hold even when the contingent production lot sizes are chosen optimally we employ stochastic comparison techniques to show that a yield rate that is smaller in the convex order ensures higher expected profit and we provide a distribution free bound on the size of increase in expected profit we also identify properties of yield rate distributions that do make stochastically larger yield rates beneficial

measuring the effects of regulation with stock price data this article examines the usefulness of stock returns in measuring the effects of regulation when the dates on which market expectations change are not known and standard sources e g the wall street journal are used to choose announcement dates twenty major changes in regulatory constraint since 1887 are considered tests using either monthly or daily data are found to have surprisingly little ability to detect the effects of regulation the evidence shows that formal regulatory announcements are generally anticipated in cases where it is unclear when expectations change

joint inventory replenishment and pricing control for systems with uncertain yield and demand we study the joint inventory replenishment and pricing problem for production systems with random demand and yield more specifically we analyze the following single item periodic review model demands in consecutive periods are independent random variables and their distributions are price sensitive the production yield is uncertain so that the quantity received from a replenishment is a random variable whose distribution depends on the production quantity stockouts are fully backlogged our problem is to characterize the optimal dynamic policy that simultaneously determines the production quantity and the price for each period to maximize the total discounted profit we show that the optimal replenishment policy is of a threshold type i e it is optimal to produce if and only if the starting inventory in a period is below a threshold value and that both the optimal production quantity and the optimal price in each period are decreasing in the starting inventory we further study the operational e

the structure of periodic review policies in the presence of random yield this work provides a comprehensive analysis of a general periodic review production inventory model with random variable yield existence of an order point whose value does not depend on yield being random is proved in the single period case without specifying the yield model and using a very general cost structure when yield is a random multiple of lot size the nonorder up to optimal policy is characterized for a finite horizon model the finite horizon value functions are shown to converge to the solution of an infinite horizon functional equation and the infinite horizon order point is shown to be no smaller than when yield is certain

inefficient households and the mix of government spending a model is presented in which individuals can vote over government subsidies to a private good and over redistributive taxation the subsidized good is purchased and shared by couples who act noncooperatively while possibly being altruistic towards each other the framework allows a separation of the subsidy policy from redistributive policy in a majority voting equilibrium the subsidy is used exclusively to correct the individuals spending pattern the results suggest that spending on private goods should be an important item in government expenditures when there is strong positive income bias in the political process and or when household decisions are relatively inefficient

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

an asymmetry generator for error coorection mechanisms with application to bank mortgage rate dynamics empirical evidence supports asymmetries in the adjustment of prices interest rates and other economic variables the asymmetry hypothesis however is often procedurally difficult to set up and test this article shows that a wide variety of such mechanisms can be nested within an asymmetry generator which represents the interactions between the disequilibrium term of an error correction mechanism and an ancillary driver process the asymmetry hypothesis can then be tested in a straightforward extension of linear statistical methods the methods are applied to 10 years of monthly new zealand mortgage rate data

the loss averse newsvendor model with backordering abstract in this paper we study the optimal order quantity in the loss averse newsvendor model with backordering we first obtain the optimal order quantity to maximize the expected utility to hedge against the risk arising from the uncertainty of market demand we introduce the conditional value at risk cvar measure and derive the optimal order quantity to maximize the cvar objective about utility it is found that the optimal order quantity with the cvar objective is decreasing in the confidence level and thus is smaller than the optimal order quantity to maximize the expected utility it is proved that under the optimal order quantity with the cvar objective the loss averse newsvendor s expected utility is decreasing in the confidence level it further confirms that high risk implies high return and low risk comes with low return

the effects of shifts in monetary policy and reserve accounting regimes on bank reserve management behavior in the federal funds market abstract this paper looks at the effects on fed fund rates and fed fund purchasing behavior of large banks resulting from i the 1982 regime switch from non borrowed to borrowed reserve targeting by the fed and ii the 1984 switch from lagged to almost contemporaneous reserve accounting cra whether we analyse changes in the interest rate or quantity dimensions the shift in monetary policy targets appeared to have had a more profound effect on the market for bank reserves than the shift in reserve accounting regime these results therefore tend to support the contention that a shift to cra by itself will have little effect on bank reserve management behavior unless combined with its logical counterpart a total reserves target

a model of the commercial loan rate this paper explores the theoretical and empirical determinants of the commercial loan rate charged by commercial banks based on a model of financial intermediary behavior which assumes monopolistic competition in asset and liability markets the model incorporates the constraint that banks must maintain at least a minimum quantity of bonds in asset portfolios equations are estimated on a time series basis to explain the behavior of commercial loan rates over the period 1953 to 1980 the evidence appears consistent with the hypothesis that commercial banks operate in a market characterized by imperfect competition and that they explicitly set loan rates the development of large scale econometric models has focused attention on the operation of the commercial loan market because of the importance of commercial loan activity in the transmission of monetary policy moreover it is commonly accepted that the quantity of commercial loans or changes in these loans has an important influence on the holding of free reserves by commercial banks and this implies that the commercial loan market has an effect on the supply of money 2 nevertheless the determinants of commercial loan rates have drawn relatively little analytical attention previous work on the commercial loan market has generally focused on the question of whether this market is characterized by credit rationing 3 most studies assume that the commercial loan market is generally competitive but at times the commercial loan rate does not clear the market the quantity of loans transacted is constrained by the supply function and commercial banks engage in nonprice rationing of customers a corollary of this rationing hypothesis is that events in the deposit market have an important influence on the quantity of commercial loans 4 the purpose of this paper is to explore the determinants of the commercial

the relative rigidity of monopoly pricing this paper seeks to explain why monopolies keep their nominal prices constant for longer periods than do tight oligopolies the authors show that cost changes create a larger incentive for duopolists to change their prices while demand changes tend to have a greater effect on a monopolist when both costs and demand are affected by small changes in the overall price level the cost effect dominates in the presence of a small fixed cost of changing prices therefore duopolists change their prices in response to smaller perturbations in underlying conditions copyright 1987 by american economic association

optimal replenishment and rework with multiple unreliable supply sources we study a production inventory system with multiple unreliable supply sources through inspection and rework the system can improve the quality of the units received from the supply sources there are two interleaved decisions the replenishment quantities from the sources and the inspection rework quantities among the units received we show the optimal solution to the replenishment decision can be efficiently derived from a greedy algorithm and inspection rework is optimally applied to a single source identified by the algorithm furthermore in the case of linear cost functions it is optimal to place orders from two supply sources i e dual sourcing the results extend to the infinite horizon case where an order up to policy is optimal the model also readily adapts to situations in which the supply imperfection takes the form of a reduced delivery quantity yield loss

the pricing of the prime rate abstract the prime business loan rate has become widely viewed as one of the chief barometers of credit market conditions yet we know little about how this rate is determined the objective of this paper is to attempt to further our understanding of the prime rate through an analysis of recent prime rate movements in order to determine if the prime reacts immediately to changes in money market conditions as would be the case of a competitively determined price or whether the prime demonstrates properties of an oligopolistic price the empirical findings contained herein appear to support the hypothesis that the prime rate is an average of a bank s cost of its currently and previously issued but still outstanding managed liabilities this type of pricing minimizes the interest rate risk in the bank s balance sheet and facilities coordination and discipline in an oligopolistic market furthermore it also appears that banks may be using the prime rate in conjunction with below prime lending to price discriminate between customers on the basis of whether these customers have alternative channels of short term financing

myopic heuristics for the random yield problem we consider a single item periodic review inventory problem with random yield and stochastic demand the yield is proportional to the quantity ordered with the multiplicative factor being a random variable the demands are stochastic and are independent across the periods but they need not be stationary the holding penalty and ordering costs are linear any unsatisfied demands are backlogged two cases for the ordering cost are considered the ordering cost can be proportional to either the quantity ordered e g in house production or the quantity received e g delivery by an external supplier random yield problems have been addressed previously in the literature but no constructive solutions or algorithms are presented except for simple heuristics that are far from optimal in this paper we present a novel analysis of the problem in terms of the inventory position at the end of a period this analysis provides interesting insights into the problem and leads to easily implementable and highly accurate myopic heuristics a detailed computational study is done to evaluate the heuristics the study is done for the infinite horizon case with stationary yields and demands and for the finite horizon case with a 26 period seasonal demand pattern the best of our heuristics has worst case errors of 3 0 and 5 0 and average errors of 0 6 and 1 2 for the infinite and finite horizon cases respectively

prime rate changes is there an advantage in being first this article analyzes the impact of prime rate changes on stock prices of prime rate change initiating banks relative to noninitiating banks the prime rate as a sticky price is analyzed and the potential directions and sizes of information effects are discussed and empirically examined it is found that prime rate increases generally convey bad news about the initiating banks prime rate decreases in contrast have weakly positive effects on the initiating banks prime rate change announcements are also found to have some effect on banks other than the initiating bank implying that contagion effects exist copyright 1993 by university of chicago press

combined pricing and inventory control under uncertainty this paper addresses the simultaneous determination of pricing and inventory replenishment strategies in the face of demand uncertainty more specifically we analyze the following single item periodic review model demands in consecutive periods are independent but their distributions depend on the item s price in accordance with general stochastic demand functions the price charged in any given period can be specified dynamically as a function of the state of the system a replenishment order may be placed at the beginning of some or all of the periods stockouts are fully backlogged we address both finite and infinite horizon models with the objective of maximizing total expected discounted profit or its time average value assuming that prices can either be adjusted arbitrarily upward or downward or that they can only be decreased we characterize the structure of an optimal combined pricing and inventory strategy for all of the above types of models we also develop an efficient value iteration method to compute these optimal strategies finally we report on an extensive numerical study that characterizes various qualitative properties of the optimal strategies and corresponding optimal profit values

the pricing of interest rate risk evidence from the stock market this paper addresses the issue of whether firms are required to pay an ex ante premium to investors for bearing the risk of interest rate changes a two factor apt model with the market and changes in the yield on long term government bonds as factors is employed the paper shows that empirically most of the interest sensitive stocks are in the utility industries and that there is reasonable evidence that the interest factor is priced in the sense of the apt several sources for the interest sensitivity are considered and regulatory lags are focused on as a likely candidate some firms exhibit ex post sensitivity in their stock returns to unanticipated changes in interest rates are these firms required to pay investors ex ante for bearing this risk of interest rate changes the framework for examining pricing of unanticipated interest rate changes is a two factor apt model with the market and changes in the yield on long term government bonds as factors the issue is whether the interest rate change premium is significant to study this the paper uses full information maximum likelihood fiml estimation on groups of twenty five individual firms with both cross equation constraints and withinequation nonlinear constraints on the parameters as mandated by the apt model whether the risk of unanticipated changes in interest rates is priced in the market is of particular interest with regard to regulated firms regulated firms especially electric utilities turn out to comprise the big majority of firms that are sensitive to unanticipated interest rate changes after some preliminary investigation the analysis focuses on electric utilities much empirical work on the apt relies on factor analysis e g roll and ross 30 bower bower and logue 5 use factor analysis in comparing the apt and the capm to explain utilities returns the present paper however uses observable variables at the macro level chan chen and hsieh cch 7 and chen roll and ross crr 8 also examine apt models with specific macroeconomic factors cch and crr use a traditional fama macbeth type of cross sectional estimation approach in the premia calculations rather than a fiml approach gibbons and stambaugh have applied fiml techniques to models using only the market as an explanatory variable gibbons 20 used a noniterative algorithm on portfolios of firms equivalent to a two step cross sectional approach stam

tactical inventory and backorder decisions for systems with predictable production yield abstract we consider a manufacturing system with stochastic demand and predictable production yield the manufacturer has predetermined prices and limited production capacity in each period the manufacturer also has the option to save some inventory for future periods even if there is demand in the current period the demand that is not met is lost or may be backordered for only one period our objective is to maximize the expected profit by choosing optimal produce up to level y t save s t and backorder quantities b t in each period t we formulate this problem as a markov decision process where the state of the system is represented by the net inventory and the yield rate we show that a modified order up to policy y t s t b t is optimal in each period t we also perform computational analysis to examine the effects of production yield on the optimal decisions

yield and allocation management in a continuous make to stock system with demand upgrade substitution abstract yield management is crucial for high tech industries to reduce over production however it is very challenging for a manufacturer to make a yield decision under the circumstance of uncertain demand and stochastic product quality for example in semiconductor manufacturing industry products are produced in batches within certain production cycle time even if the same raw material is put into the production system the product qualities measured by performance usually are not identical due to random yield in the manufacturing process since products have overlapped performance specifications products of the same batch are classified into different classes according to their qualities at the allocation stage products with higher performance can substitute for demand for products with lower performance this type of production and allocation system can be specified as a make to stock system with single material multi products multi periods upward demand substitution under random yield and uncertain demands in order to maximize profit the manufacturer needs to decide on the optimal input material quantity and the optimal allocation policy the problem is formulated as a stochastic dynamic programming model because manufacturer s profit is affected by the allocation policies atp r allocation policy is proposed to help manufacturer make real time allocation decisions a numerical experiment shows that atp r allocation policy performs better than the traditional myopic allocation policy to reduce the computation burden involved in atp r allocation policy we further propose a simplified algorithm and our experimental studies provide proof of the effectiveness of the proposed simple algorithm

the failure of competition in the credit card market the bank credit card market containing 4 000 firms and lacking regulatory barriers casually appears to be a hospitable environment for the model of perfect competition nevertheless this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds moreover major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the periods 1983 88 the failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances copyright 1991 by american economic association

periodic review production models with variable capacity random yield and uncertain demand we investigate a production planning problem in a periodic review environment with variable production capacity random yields and uncertain demand the implications of random yields and variable capacity for lot sizing previously have been explored separately but not jointly many production environments are likely to be subject to both types of uncertainties to minimize the total discounted expected costs production holding and shortage costs we formulate the problem as a stochastic dynamic program for the finite horizon problem we prove that the objective function is quasi convex and that the structure of the optimal policy is characterized by a single critical point for the initial stock level at each period that is if the initial stock is greater than this critical point the optimal planned production is zero otherwise it is greater than zero expressions for solving the critical point and the optimal planned production are obtained we further show that the solution for the finite horizon problem converges to that of the infinite horizon problem

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

the effects of a shift in monetary policy regime on the profitability and risk of commercial banks abstract this paper examines the effects of the fed s october 6th 1979 change in monetary policy regime on the profitability and risk of commercial banks using capital market data and an event study methodology it was found that bank stocks exhibited significant abnormal returns during the announcement week of the policy change when these abnormal returns were decomposed into a part related to unexpected interest rate changes and a part assumed to reflect increased rate variability the results were consistent with a negative relationship between bank returns and interest rate surprises as well as between bank returns and rate variability