contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

asset prices and institutional investors empirical evidence indicates that trades by institutional investors have sizable effects on asset prices generating phenomena such as index effects asset class effects and others it is difficult to explain such phenomena within standard representative agent asset pricing models in this paper we consider an economy populated by institutional investors alongside standard retail investors institutions care about their performance relative to a certain index our framework is tractable admitting exact closed form expressions and produces the following analytical results we find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index the resulting price pressure boosts index stocks while leaving nonindex stocks unaffected by demanding a higher fraction of risky stocks than retail investors institutions amplify the index stock volatilities and aggregate stock market volatility and give rise to countercyclical sharpe ratios trades by institutions induce excess correlations among stocks that belong to their benchmark index generating an asset class effect institutions finance their additional purchases of index stocks by taking on leverage a policy prescription that calls for a reduction in leverage while reducing the riskiness of institutional portfolios would also reduce the ability of institutions to tilt their portfolios towards index stocks depressing the index level

risk in dynamic arbitrage the price effects of convergence trading i develop an equilibrium model of convergence trading and its impact on asset prices arbitrageurs optimally decide how to allocate their limited capital over time their activity reduces price discrepancies but their activity also generates losses with positive probability even if the trading opportunity is fundamentally riskless moreover prices of identical assets can diverge even if the constraints faced by arbitrageurs are not binding occasionally total losses are large making arbitrageurs returns negatively skewed consistent with the empirical evidence the model also predicts comovement of arbitrageurs expected returns and market liquidity many hedge funds and other financial institutions attempt to exploit the relative mispricing of assets however from time to time the prices of the assets diverge forcing these institutions whom i will refer to as convergence traders or arbitrageurs to unwind some of their positions at spectacular losses the near collapse of the long term capital management ltcm hedge fund in 1998 is frequently cited as an example of this phenomenon 1 to what extent can these losses be attributed to the actions of arbitrageurs as opposed to unforeseen shocks why do other institutions with liquid capital not eliminate the abnormal returns around these events in this paper i develop a theoretical model to address these questions i show that such losses can occur in the absence of any shock i also show that even if the constraints faced by

funding liquidity and equity liquidity in the subprime crisis period evidence from the etf market using index and financial exchange traded funds etfs this study explores the relation between funding liquidity and equity liquidity during the subprime crisis period our empirical results show that a higher degree of funding illiquidity leads to an increase in bid ask spread and a reduction in both market depth and net buying imbalance such findings indicate that an increase in funding liquidity can improve equity liquidity with a stronger effect for the financial etfs than for the index etfs our study provides a better overall understanding of the effect of the liquidity supplier funding constraint during the subprime crisis period

financial contagion through capital connections a model of the origin and spread of bank panics financial contagion is modeled as an equilibrium phenomenon in a dynamic setting with incomplete information and multiple banks the equilibrium probability of bank failure is uniquely determined we explore how the cross holding of deposits motivated by imperfectly correlated regional liquidity shocks can lead to contagious eects conditional on the failure of a financial institution we show that contagion is possible in the unique equilibrium of the economy and characterize exactly when it may exist at the same time we identify a direction of flow for contagious eects which provides a rationale for localized financial panics simulations identify the optimal level of interbank deposit holdings in the presence of contagion risk our results suggest that when the probability of bank failure is low maximal levels of interbank holdings are optimal when cross holding of deposits is complete we demonstrate that the intensity of contagion is increasing in the size of regionally aggregate liquidity shocks

index investment and financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become incr

financial contagion in the laboratory the cross market rebalancing channel abstract we present the results of the first experimental study of financial markets contagion we develop a model of financial contagion amenable to be tested in the laboratory in the model contagion happens because of cross market rebalancing a channel for transmission of shocks across markets first studied by kodres and pritsker 2002 theory predicts that because of portfolio rebalancing a negative shock in one market transmits itself to the others as investors adjust their portfolio allocations the theory is supported by the experimental results the price observed in the laboratory is close to that predicted by theory and strong contagion effects are observed the results are robust across different market structures moreover as theory predicts lower asymmetric information in a developed financial market increases the contagion effects in emerging markets

a general equilibrium model of portfolio insurance this article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous time model portfolio insurers are modeled as expected utility maximizing agents martingale methods are employed in solving the individual agents dynamic consumption portfolio problems comparisons are made between the optimal consumption processes optimally invested wealth and portfolio strategies of the portfolio insurers and normal agents at a general equilibrium level comparisons across economies reveal that the market volatility and risk premium are decreased and the asset and market price levels increased by the presence of portfolio insurance article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

contagion of self fulfilling financial crises due to diversification of investment portfolios abstract we look at two countries that have independent fundamentals but share the same group of investors each country might face a self fulfilling crisis agents withdrawing their investments fearing that others will a crisis in one country reduces agents wealth this makes them more averse to the strategic risk associated with the unknown behavior of other agents in the second country increasing their incentive to withdraw their investments consequently the probability of a crisis there increases this generates a positive correlation between the returns in the two countries since diversification affects returns in our model its welfare implications are non trivial

financial contagion and attention allocation this paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors attention allocation we model the process of attention allocation that underlies portfolio investment in international markets using investors who face information processing constraints investors optimally allocate more attention to a region hit by a financial crisis to the detriment of other markets the resulting endogenous increase in uncertainty causes a reduction in the capacity to bear risks by international investors that induces them to liquidate their positions in all risky assets hence there is a collapse in stock prices around the world we show that the degree of non anticipation of a crisis is crucial for the existence of contagion using data from the east asian crisis and the number of news stories about thailand in the financial times relative to news stories about argentina brazil and chile as a proxy for the relative attention allocated to the asian stock market we find evidence consistent with two key predictions of our model first the higher the volatility of the originator market the more relative attention allocated to this market and second the more relative attention allocated to the originator market the higher the volatility of the other markets our findings support the attention reallocation channel as a transmission mechanism of financial crises between regions during the period from january 1997 to july 1998

convergence trading with wealth effects an amplification mechanism in financial markets abstract i study convergence traders with logarithmic utility in a continuous time equilibrium model in general convergence traders reduce asset price volatility and provide liquidity by taking risky positions against noise trading however when an unfavorable shock causes them to suffer capital losses thus eroding their risk bearing capacity they liquidate their positions thereby amplifying the original shock in extreme circumstances this wealth effect causes convergence traders to be destabilizing in that they trade in exactly the same direction as noise traders this situation is consistent with the near collapse of long term capital management in 1998

tail events a new approach to understanding extreme energy commodity prices abstract this paper shows that extreme energy price changes located in the 10 tails of the distribution cluster across energy futures markets during the boom bust cycle of 2006 to 2012 using multinominal logit regressions we find that the coincidence of such tail events cannot be explained solely by common supply and demand fundamentals instead we provide evidence that the transmission of extreme price changes occurs through a financial demand channel specifically changes in the net long position of hedge funds are associated with a significant increase in the probability of coincident large positive and negative returns across energy markets evidence that index investments drive tail events is limited further we identify adverse shocks to speculator funding liquidity as determinant of synchronized price drops across energy markets the likelihood of extreme negative returns in more than one market significantly increases when the ted spread rises

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the directional volatility connectedness between crude oil and equity markets new evidence from implied volatility indexes in this paper we use a set of newly introduced implied volatility indexes to investigate the directional connectedness between oil and equities in eleven major stock exchanges around the globe from 2008 to 2015 the inference on the oil equity implied volatility relationships depends on diebold and yilmaz 2012 2014 2015 who proposed a set of directional measures that enable the dynamic and directional characterization of the relationships among financial variables we find uniform results across the sample countries indicating that the connectedness between oil and equity is established by the bi directional information spillovers between the two markets however we find that the bulk of association is largely dominated by the transmissions from the oil market to equity markets and not the other way around the pattern of transmissions is varying over the sample period however most of the linkages between oil and equities are established from the mid of 2009 to the mid of 2012 which is a period that witnessed the start of global recovery

informational contagion of bank runs in a third generation crisis model abstract this paper highlights the international spread of bank runs in a third generation model of financial crises through an informational channel banks short term liabilities include loans granted by foreign creditors who have imperfect information about the liquidation costs of banks assets a bank panic in a country induces lenders to downgrade early liquidation yields in other countries and thus to require higher interest rates to enable their banks to roll over their maturing debt those banks become therefore more prone to self fulfilling depositors runs the paper then studies the effect on contagion of increased transparency and bailouts

a reconsideration of minsky s financial instability hypothesis the worst and longest depressions have tended to occur after periods of prolonged and reasonably stable prosperity this results in part from agents rationally updating their expectations during good times and hence becoming more optimistic about future economic prospects investors then increase their leverage and shift their portfolios towards projects that would previously have been considered too risky so when a downturn does eventually occur the financial crisis and the extent of default become more severe whereas a general appreciation of this syndrome dates back to minsky 1992 jerome levy economics institute wp 74 and even beyond to irving fisher 1933 econometrica 1 337 357 we model it formally in addition endogenous default introduces a pecuniary externality since investors do not factor in the impact of their decision to take risk and default on the borrowing cost we explore the relative advantages of alternative regulations in reducing financial fragility and suggest a novel criterion for improvement of aggregate welfare

financialisation oil and the great recession abstract this article addresses the role of world oil price hike of 2007 08 in serving to transform the financial and banking crisis into what is commonly referred to the great recession existing literature on the global crisis of 2007 09 tends to view it as a financial or banking phenomenon with analyses focusing mainly on state policies governance mechanisms and market dynamics in transforming the banking crisis of 2007 08 into the economic recession of 2008 12 13 although often attributing the global meltdown to wider phenomenon of financialisation rarely do existing perspectives delve into the role of the commodity sector in the global credit crunch in this paper we aim to fill this gap by inquiring into the role played by oil as a financial asset class in the political economy of the global crisis

limited investment capital and credit spreads using proprietary credit default swap cds data i investigate how capital shocks at protection sellers impact pricing in the cds market seller capital shocks measured as cds portfolio margin payments account for 12 of the time series variation in weekly spread changes a significant amount given that standard credit factors account for 18 during my sample in addition seller shocks possess information for spreads that is independent of institution wide measures of constraints these findings imply a high degree of market segmentation and suggest that frictions within specialized financial institutions prevent capital from flowing into the market at shorter horizons

portfolio choice attention allocation and price comovement abstract this paper models the attention allocation of portfolio investors investors choose the composition of their information subject to an information flow constraint given their expected investment strategy in the next period which is to hold a diversified portfolio in equilibrium investors choose to observe one linear combination of asset payoffs as a private signal when investors use this private signal to update information about two assets changes in one asset affect both asset prices and may lead to asset price comovement the model also has implications for the transmission of volatility shocks between two assets

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

relative risk aversion and the transmission of financial crises we study how investor behavior affects the transmission of financial crises if investors exhibit decreasing relative risk aversion then negative wealth shocks increase the risk premium required to hold risky assets we integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals investor behavior can be a transmission channel of financial crises as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker the feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely the possible stabilization effects of capital controls and a tobin tax on the international transmission of financial crises are also studied

a model of capital and crises we develop a model in which the capital of the intermediary sector plays a critical role in determining asset prices the model is cast within a dynamic general equilibrium economy and the role for intermediation is derived endogenously based on optimal contracting considerations low intermediary capital reduces the risk bearing capacity of the marginal investor we show how this force helps to explain patterns during financial crises the model replicates the observed rise during crises in sharpe ratios conditional volatility correlation in price movements of assets held by the intermediary sector and fall in riskless interest rates

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

a model of financial market liquidity based on intermediary capital we present a model ofnancial market liquidity provided bynanciallyconstrained inter mediaries we show that market liquidity increases with the level of intermediary capital we also characterize conditions under which intermediaries play a stabilizing or destabi lizing role in markets finally we sketch a number of areas including welfare and public policy on which the model can shed light jel g01 g11 g12 g15 g18

on the dynamic links between commodities and islamic equity abstract this paper investigates whether commodities offer potential diversification benefits for islamic equity index investors in light of possible financialization of commodity markets using mgarch dcc and wavelet coherence analyses our findings reveal that correlations between commodity markets and the dow jones islamic market world index are time varying and highly volatile throughout the january 1999 april 2015 period a substantial and persistent increase was observed in the return correlations between commodities and islamic equity at the onset of the 2008 financial crisis however trends in the recent two years suggest that this association is heading towards its pre crisis levels offering again diversification benefits for islamic equity holders these benefits vary across different commodities in various time scales overall gold natural gas soft commodities grains and livestock are better portfolio diversifiers than oil and other metals relative to medium to long term investors short term investors less than 32 days horizon gained better diversification benefits in most commodities during bullish bearish and market recovery periods these findings have implications for investors who are heterogeneous in risk tolerance and time preference as well as for policymakers who are concerned with market stability

on the volatility and comovement of u s financial markets around macroeconomic news announcements the objective of this paper is to provide a deeper insight into the links between financial markets and the real economy to that end we study the short term anticipation and response of u s stock treasury and corporate bond markets to the first release of surprise u s macroeconomic information specifically we focus on the impact of these announcements not only on the level but also on the volatility and comovement of those assets returns we do so by estimating several extensions of the parsimonious multivariate garch dcc model of engle 2002 for the excess holding period returns on seven portfolios of these asset classes we find that both the process of price formation in each of those financial markets and their interaction appear to be driven by fundamentals yet our analysis reveals a statistically and economically significant dichotomy between the reaction of the stock and bond markets to the arrival of unexpected fundamental information we also show that the conditional mean volatility and comovement among stock treasury and corporate bond returns react asymmetrically to the information content of these surprise announcements overall the above results shed new light on the mechanismsbywhichnewinformationisincorporatedintopriceswithinandacrossu s financial markets

intermediary asset pricing abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary intermediaries face an equity capital constraint risk premia r

equilibrium analysis of portfolio insurance a martingale approach is used to characterize general equilibrium in the presence of portfolio insurance insurers sell to noninsurers in bad states and general equilibrium requires that the risk premium rises to induce noninsurers to increase their holdings we show that portfolio insurance increases price volatility causes mean reversion in asset returns raises the sharpe ratio and volatility in bad states and causes volatility to be correlated with volume we also explain why out of the money sp that is the demand for an absolute level of price protection is equivalent to a demand for put options 1 we show that a similar argument can be used in a

the impact of systemic and illiquidity risk on financing with risky collateral abstract repurchase agreements repos are one of the most important sources of funding liquidity for many financial investors and intermediaries in a repo some assets are given by a borrower as collateral in exchange of funding the capital given to the borrower is the market value of the collateral reduced by an amount termed as haircut or margin the haircut protects the capital lender from loss of value of the collateral contingent on the borrower s default for this reason the haircut is typically calculated with a simple value at risk estimation of the collateral for the purpose of preventing the risk associated to volatility however other risk factors should be included in the haircut and a severe undervaluation of them could result in a significant loss of value of the collateral if the borrower defaults in this paper we present a stylized model of the financial system which allows us to compute the haircut incorporating the liquidity risk of the collateral and most important possible systemic effects these are mainly due to the similarity of bank portfolios excessive leverage of financial institutions and illiquidity of assets the model is analytically solvable under some simplifying assumptions and robust to the relaxation of these assumptions as shown through monte carlo simulations we also show which are the most critical model parameters for the determination of haircuts

legal institutions and fragile financial markets abstract this study investigates equity liquidity variation with a funding constraint across 38 countries and examines whether the effectiveness of a country s legal institutions is systematically related to cross country differences in fragile equity liquidity our results show that firms from countries with more extensive disclosure requirements tend to have lower liquidity shocks due to funding constraints leading to higher firm value this effect is stronger for ex ante disclosures especially for countries with a high level of openness and market volatility our empirical results are robust to the 2sls regression model the random effect regression model the alternative measure of fragile equity liquidity and the alternative measure of disclosure and enforcement variables our study provides a better understanding of the effect of information environments amidst periods of funding constraint

shadow wages and peasant family labour supply an econometric application to the peruvian sierra a striking feature of developing economies is the large proportion of the work force that is self employed lack of widespread labor market participation in the agricultural sector can pose a major obstacle to the empirical implementation of economic models of the peasant household whether because wage data are simply not available or because the assumptions required to make use of wage data stretch the bounds of credulity this paper develops a methodology for estimating a structural labor supply model for primarily self employed peasant households which holds under a general agricultural technology and set of labor market conditions the unique feature of the approach is that the opportunity cost of time or shadow wage of household workers is explicitly estimated from an agricultural production function and is subsequently used to identify a set of structural labor supply parameters recent household survey data from rural peru is employed to estimate and perform various diagnostic tests on the model the empirical findings lend support to the hypothesis that peasant households allocate their members time as if to maximize a family utility function and moreover demonstrate the tractability of the shadow wage methodology and its usefulness in estimating more elaborate time allocation models

hedge fund crowds and mispricing recent models and the popular press suggest that large groups of hedge funds follow similar strategies resulting in crowded equity positions that destabilize markets inconsistent with this assertion we find that hedge fund equity portfolios are remarkably independent moreover when hedge funds do buy and sell the same stocks their demand shocks are on average positively related to subsequent raw and risk adjusted returns even in periods of extreme market stress we find no evidence that hedge fund demand shocks are inversely related to subsequent returns our results have important implications for the ongoing debate regarding hedge fund regulation

is food financialized yes but only when liquidity is abundant abstract in this paper we investigate whether commodity index trader cit positions help to explain the increase in the correlations between agricultural commodities and equities starting around 2008 some argue institutional investors who invest both in stock and commodity markets demolish the borders between these two seemingly unrelated markets and increase correlations a recent phenomenon known as financialization yet some others argue recently correlations have decreased back to historical levels and the increase between 2008 and 2012 was merely due to a business cycle effect our results do not support one side at the expense of the other but rather shows that both factors are important in explaining the correlations between agricultural commodities and stocks furthermore we find that cits prefer to go back to their circle of competence under scarce liquidity and thus correlations decrease back to levels absent institutions hence low liquidity is a significant obstacle inhibiting financialization to occur

the emperor has no clothes limits to risk modelling abstract this paper considers the properties of risk measures primarily value at risk var from both internal and external regulatory points of view it is argued that since market data is endogenous to market behavior statistical analysis made in times of stability does not provide much guidance in times of crisis in an extensive survey across data classes and risk models the empirical properties of current risk forecasting models are found to be lacking in robustness while being excessively volatile for regulatory use the var measure may give misleading information about risk and in some cases may actually increase both idiosyncratic and systemic risk

commodity returns co movements fundamentals or style effect this paper investigates dynamic correlations both across commodities and between commodities and traditional assets such as equities and government bonds using the regime switching dynamic correlation rsdc model in particular this paper assesses the dynamics of 32 daily commodity futures returns spanning a period from may 28 2003 to june 04 2014 in the light of economic and financial events before and after the mid 2007 financial crisis there are three major findings first prior to the financial crisis we detect stronger correlation among the wide range of commodities used in the analysis indicating that the financialization process started impacting commodity price movements from mid 2005 between commodities taken as an asset class and traditional asset classes our results generally show very weak commodity equity and commodity bond correlations prior to the lehman brother collapse this can be explained by the style effect theory that correlations between different asset classes in a portfolio weaken second during the financial crisis correlations both across commodities and between commodities and equities increase dramatically with a regime change which coincides exactly with the demise of lehman brothers on september 15 2008 this suggests that a strong commodity equity integration was temporarily masked by the style effect however commodity bond correlations switch to a strongly negative regime showing that government bonds were considered as refuge securities third and most importantly the new and original finding here is the temporary nature of the financial crisis effect identified as correlations both across commodities and between commodities and traditional assets revert to pre crisis level from april 2013 this highlights the impact of the financial based factors on commodity price movements

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

economic development and the role of agricultural technology in earlier debates on economic development the agricultural sector s role was somewhat controversial while dualistic models highlighted the importance of agriculture the mainstream literature placed a greater emphasis on the creation of a modern industrial sector soon agriculture disappeared from the mainstream development literature to re emerge recently with a variety of multiple sector growth models emphasizing the key role of agriculture and specifically technology in agriculture this article is an empirical cross country analysis of agricultural technology s role in economic development specifically the hypothesis being tested is whether improvements in agricultural technology have a significant impact on long run economic growth the results indicate that agricultural modernization has a positive effect on both measures of economic growth and human development

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration