financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

dynamic efficiency in overlapping generations models with stochastic production abstract we consider an overlapping generations economy as in diamond amer econ rev 55 1965 1126 1150 with stochastic production we define two types of efficiency for feasible production consumption allocations using first and second degree stochastic dominance we obtain a complete characterization of inefficiency of type i in this model for each given sequence of strictly concave utility functions for all generations the existence of a competitive equilibrium is proved it is shown that each competitive allocation is short run efficient of type ii

adverse selection in the overlapping generations model the case of pure exchange abstract we examine the general equilibrium consequences of credit rationing that results from an adverse selection problem relative to a full information benchmark economy static incentive problems result in reductions in the rate of return at inside money equilibria and hence can cause dynamic inefficiency these problems also create a role for outside money and may convert otherwise classical into samuelsonian economies however even the presence of money does not support steady state equilibria with constrained optimality properties policies that do support constrained optima are outlined as are the consequences of credit rationing for the financing of government deficits journal of economic literature classification numbers e13 e40 e44 e50 g14

characterizing efficiency in stochastic overlapping generations models abstract we introduce uncertainty about production in diamond s olg model we compare any two feasible consumption production allocations using stochastic ordering and define two types of efficient allocations given initial capital stock for stationary allocations it is shown that a necessary and sufficient condition for efficiency type i is that e log r is greater or equal to log 1 n where r generates the stationary interest factors corresponding to this allocation n is the population growth rate a complete characterization of type ii efficient allocations is derived using the property of cyclical monotonicity between each generation s consumption allocation and the relevant interest rates

money and credit in liquidity provision abstract this paper studies the liquidity provision in a model where the roles of money are challenged by other financial instruments alternative to money credit can be used as means of payment and rate dominating assets are available to serve as stores of value two features are found to be crucial in rendering money valuable in this environment information asymmetry in credit trading relationship and uncertainty in individuals liquidity demand in general the model economy can display a payment mechanism of money only credit only or mixed use of money and credit in transactions depending on the severity of the information asymmetry the optimal quantity of money in our paper is shown to contrast those in other monetary models

switching bubbles from outside to inside bubbles abstract the united states has recently experienced two asset price bubbles the dot com and the housing bubbles these bubbles had very different effects on investment and debt of manufacturing firms in this paper i develop a framework to understand the differential effect of two types of rational bubbles i distinguish between i outside bubbles which i define as savers purchasing and selling costless assets not attached to inputs of production and ii inside bubbles which i define as savers buying an input of production e g land or houses only as a store of value the model is an olg economy with savers and entrepreneurs savers save to consume when they are old entrepreneurs can borrow to invest but they face a collateral constraint in this environment rational bubbles can emerge i show that the size of an inside bubble is larger i also find that when the economy switches from an outside to an inside bubble manufacturing or non housing investment and debt is lower consistent with the u s experience finally i show that even though steady state consumption is higher with an outside bubble a social planner would prefer an inside bubble when the productivity of entrepreneurs is low

endogenous growth and the emergence of equity finance abstract this paper characterises the development of equity markets as a dynamic process that both influences and is influenced by the development of the real sector of the economy in overlapping generations economy borrowers seek funds to run risky investment projects by drawing up contracts which may take the form of either equity or debt issue in the presence of information asymmetry between borrowers and lenders the optimal contract is determined by trading off information dilution costs against bankruptcy costs significantly the equilibrium choice of contract depends on the state of the economy which in turn depends on the contracting regime based on this analysis the paper provides a theory of the joint determination of real and financial development with the ability to explain the emergence of a stock market along the path of real development

tax evasion the underground economy and financial development abstract we study the relationship between the underground economy and financial development in a model of tax evasion and bank intermediation agents with heterogeneous skills seek loans in order to undertake risky investment projects asymmetric information between borrowers and lenders implies a menu of loan contracts that induce self selection in a separating equilibrium faced with these contracts agents choose how much of their income to declare by trading off their incentives to offer collateral against their disincentives to comply with tax obligations the key implication of the analysis is that the marginal net benefit of income disclosure increases with the level of financial development thus in accordance with empirical observation we establish the result that the lower is the stage of such development the higher is the incidence of tax evasion and the greater is the size of the underground economy

time varying risk and long term reversals a re examination of the international evidence long term reversals ltrs have been extensively documented as existing in international markets the predictability of returns opens the question whether investors should continue to diversify across international markets such predictability also has implications for the corporate decision of where and when to raise capital this paper re examines the international evidence for long term contrarian profits using a longer time horizon than all previous studies 81 years of data from 1925 to 2005 and finds that the long term contrarian anomaly disappears when time varying conditional alphas are considered this is true even without transaction costs for the marginal trader conservative transaction costs subsume ltr profits whether returns are risk adjusted or not this suggests that benefits from actual trades on ltrs do not negate a strategy based on diversification although time varying beta has been extensively documented as ineffective in describing ltrs this paper demonstrates that it is important to control for time variation in alpha a full conditional capital asset pricing model captures the ltr premium this suggests that macroeconomic factors are important for understanding ltrs and their associated risk

public capital asymmetric information and economic growth we investigate the provision of public capital in an endogenous growth model with asymmetric information in a credit market with costly screening we show that the equilibrium contracts are characterized by the self selection of borrowers through identifying an additional adverse effect of taxation on growth we show that the optimal tax rate in our model is smaller than the output elasticity of public capital therefore our analysis justifies a more conservative tax policy in the presence of asymmetric information furthermore our model suggests a number of implications that appear to be well supported by preliminary evidence in cross country data jel classification d82 h21 041

further international evidence on asset pricing the case of the spanish capital market abstract a multivariate framework is used in order to study the price formation of risky assets in the spanish capital market issues regarding the efficiency of the spanish value weighted stock market index the validity of equilibrium considerations the size effect and the nature of the return generating process during january are analyzed

how good are standard debt contracts stochastic versus nonstochastic monitoring in a costly state verification environment the authors investigate ex ante efficient contracts in an environment in which implementation is costless in this environment standard debt contracts will typically not be optimal optimal contracts may involve defaults even in states in which the borrower is fully able to repay the authors then examine the welfare costs of arbitrarily restricting the set of feasible contracts to standard debt contracts when model parameters are calibrated to realistic values the welfare loss from exogenously imposing this restriction is extremely small thus if implementation costs are actually nontrivial as seems likely standard debt contracts will be very close to optimal copyright 1994 by university of chicago press

asymmetric information and demand for money in an overlapping generations economy this paper studies a pure exchange overlapping generations economy in which agents have asymmetric information pertaining to their income realizations such an information asymmetry introduces a role for fiat money that would otherwise be absent this information asymmetry can also drastically alter the equilibrium properties of the analogous model with perfect information in general the more severe the information asymmetry the greater the demand for fiat money

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

short term reaction of stock markets in stressful circumstances abstract in this paper we document the short term stock price behaviour following a period of stock market stress we focus on price behaviour using daily market indexes from 39 stock exchanges over the period 1989 1998 our results are not consistent with the overreaction hypothesis we find positive negative abnormal price performance in the short term window up to 10 days following positive negative price shocks our analysis also highlights differences between developed and emerging markets we show that the post shock abnormal performances are significantly larger for emerging markets but that this momentum behaviour is markedly less in the late 1990s we find the size of the after shock tremors to be related to market liquidity with larger post shock price changes in less liquid markets

what s causing overreaction an experimental investigation of recency and the hot hand effect a substantial body of empirical literature provides evidence of overreaction in markets past losers outperform past winners in stock markets as well as in sports markets two hypotheses are consistent with this observation the recency hypothesis states that traders overweight recent information they are too optimistic about winners and too pessimistic about losers according to the hot hand hypothesis traders try to discover trends in the past record of a firm or a team and thereby overestimate the autocorrelation in the series an experimental design allows us to distinguish between these hypotheses the evidence is consistent with the hot hand hypothesis

investments in modern production technology and the cash flow oriented epq model in this study we analyze investments in setup and production processes in the context of the traditional inventory problem the comparison of the results of a cash flow and a cost oriented model suggests the use of the net present value as a decision criterion the analysis shows that an additional investment which reduces setup cost decreases the optimal capital investment necessary to reduce production cost and vice versa an investment which increases the production rate however may increase or decrease the capital expenditure of an investment in the setup process

increasing returns to scale in financial intermediation and the non neutrality of government policy a general equilibrium model of imperfectly competitive financial intermediaries is constructed and used to study the effects of some standard policy experiments one time increases in the growth rate and in the level of the stock of money have non neutral and sometimes surprising effects on interest rates the quantity of intermediated borrowing and lending the number of intermediary firms inflation and the price level optimal government macroeconomic policy is shown to reflect a tradeoff between public sector frictions and the capital market distortion created by increasing returns to scale and imperfect competition in private intermediation

the dynamics of credit markets in a model with learning abstract a dynamic credit market is modeled in which the production and processing of information leads to alternating and persistent periods of growth and contraction in the model the number of projects engaged in determines the precision of estimates of future returns obtained from current investment shocks to underlying returns to risky projects are magnified and prolonged by the learning process multiple equilibria may exist and the magnification effect may be even larger since shocks can move the credit market to a new equilibrium the allocation of credit is generally not a constrained pareto efficient allocation

from eoq towards zi zero inventory zi is a new and powerful concept to improve production efficiency underpinning zi is set up reduction and this paper examines what eventuates when set up costs are cut the folklore is that set up reduction lowers inventory and costs we obtain results contrary to that reducing set up costs need not reduce inventory for example likewise lowering set up costs need not necessarily lower total production and inventory costs furthermore most investments produce marginally decreasing returns set up cost reduction prompts the opposite it produces marginally increasing not decreasing returns a parametric algorithm that calculates the benefit of set up cost reduction is provided most presentations of zi have been descriptive with very few mathematical models of it yet untaken by modeling certain zi concepts mathematically we scrutinize their validity and sometimes invalidity

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

globalization and financial development a model of the dot com and the housing bubbles abstract in the last decade the united states experienced the burst of the dot com and the housing bubbles i develop a model to study the relationship between globalization and the emergence of rational bubbles i also analyze how the effect of globalization on house prices depends on the type of bubble i show that bubbles cannot arise in a financially developed country in autarky in contrast as globalization progresses bubbles are more likely to appear in the financially developed country i also show that house prices increase with globalization only when the bubble is attached to houses this prediction is consistent with empirical evidence for u s metropolitan areas

bubbles and inefficiencies abstract we study speculative behavior in a stochastic overlapping generations model and we show how the link between the existence of bubbles and dynamic inefficiency which has been established for the deterministic case is broken when risk related factors such as risk premia and capital gains are explicitly taken into account

day of the week and intraday effects in stock returns abstract this study examines day of the week effects using hourly values of the dow jones industrial average we find that over the 1963 1983 period the weekend effect has sifted from characterizing active trading on monday to characterizing the non trading weekend over the early part of our sample period negative returns characterize each hour of trading on monday while the return from friday close to monday open is positive in the most recent subperiod monday average hourly returns after noon are all positive and the weekend effect is due to negative average returns from friday close to monday open

economic growth with bubbles this paper presents a stylized model of economic growth with bubbles this model views asset price bubbles as a market generated device to moderate the effects of frictions in financial markets improving the allocation of investments and raising the capital stock and welfare the model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms and therefore the rate of economic growth the model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

overreaction in the spanish equity market abstract this paper examines the overreaction hypothesis within the spanish capital market the hypothesis is clearly accepted even after correcting for size when estimating excess returns twelve months after portfolio formation losers win 24 5 more than winners there is also a correspondence between excess returns and changes in the earnings pattern of losers and winners firms

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

existence uniqueness and stability of equilibrium in an overlapping generations model with productive capital abstract this paper analyzes the existence uniqueness and stability of a steady state equilibrium in an overlapping generations model with productive capital it is shown that for any feasible set of well behaved preferences there exists a production function that satisfies the inada conditions under which the economy experiences global contraction and the steady state equilibrium is characterized by the absence of production and consumption the study establishes a strengthened inada condition which is necessary to preclude global contraction and sufficient conditions for the existence of a unique and globally stable non trivial steady state equilibrium

stochastic inflation and government provision of indexed bonds abstract this paper examines the consequences of using indexed bonds as one of the government financing instruments along with money and taxes it is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money when provided by means other than open market operations indexed bonds can affect the allocation of resources but these reallocations cannot be pareto improving

confidence and the real value of money in an overlapping generations economy we demonstrate that stochastic bubbles which have a constant exogenous probability of collapsing may exist in general equilibrium on an intrinsically useless and unbacked asset money this may happen provided that the probability q that the bubble will persist next period is large enough and exceeds a threshold level q which we call the minimum rate of confidence this condition is always violated when the economy without bubble is dynamically efficient it is more likely to be satisfied in dynamically inefficient economies the larger the size of the inefficiency as measured by the excess of the growth rate over the no bubble interest rate we study both exchange and production economies

on the interaction between risk sharing and capital accumulation in a stochastic olg model with production abstract we analyze the interaction between risk sharing and capital accumulation in a stochastic olg model with production we give a complete characterization of interim pareto optimal competitive equilibrium allocations furthermore we provide tests of pareto optimality suboptimality based on risky rates of return only

could prometheus be bound again a contribution to the convergence controversy abstract this paper presents a neoclassical model of stochastic growth in which the probability of adverse shocks to production is inversely related to the aggregate stock of capital per capita postulating this endogenous relationship justified by empirical evidence the model yields predictions that are largely consistent with the recent findings of cross country club convergence differently from the standard explanation based on multiplicity of steady states this model is also able to yield predictions consistent with observable intra distribution dynamics thus accounting for phenomena such as economic miracles growth disasters and reversals of fortune

rational bubbles and public debt policy a quantitative analysis abstract do empirically plausible dynastic general equilibrium models admit bubbles and ponzi schemes under rational expectations contrary to conventional wisdom the answer is affirmative the central assumption is that current securities do not represent claims to all future profits calibrating the model to u s data we find that it is consistent with the presence of rational bubbles the observed level of public debt is entirely a ponzi scheme there are large welfare gains from eliminating bubbles on private assets and lodging all the non fundamental asset value in public debt paying off public debt benefits only a small group of wealthy individuals

equilibrium cycles in an overlapping generations economy with production abstract perfect foresight equilibrium trajectories of an overlapping generations model with production may include stable or unstable invariant closed curves these orbits are detected using the hopf bifurcation theorem where the parameter of bifurcation is purely technological the paper also proves that there is a stabilization policy that completely eliminates the cycle finally using a c e s production function it is shown that the range of values of the elasticity of substitution between capital and labor for which cycles may exist is bounded above

deficits and cycles abstract this paper shows that periodic equilibria may arise in a simple overlapping generations model with capital if the government follows a policy of fixing the value of the deficit rather than fixing the value of government debt then the difference equation that describes competitive equilibria may posses complex roots in the neighborhood of the golden rule stationary state one may show that if there exist parametric families of economies for which these roots change stability then locally there exists an invariant closed curve the paper provides two simple examples that generate such equilibria and it solves these examples numerically

the role of social security in an economy with asymmetric information and financial intermediaries abstract we study an overlapping generations model with production asymmetric information and competitive financial intermediaries social security may be beneficial even when it should not be used under full information unless credit rationing emerges with pooling contracts in this case social security could be welfare reducing even when the safe rate of return falls short of population growth we provide a full characterization of constrained pareto efficient allocations and prove that when the expected marginal product exceeds population growth and high risk firms have a low probability of default no tax transfer policy can support these allocations as competitive equilibria when equilibria are constrained inefficient optimal contracts are pooling and the optimal stock market value is zero

educational policy in a credit constrained economy with skill heterogeneity an overlapping generations model where agents choose whether to become educated when young is presented education enhances productivity but needs to be financed by borrowing because of the possibility of default lenders may ration credit we characterize the steady state equilibrium with and without credit constraints and show that credit constraints are associated with lower education and a lower real interest rate we then study the role of public policy in remedying the inefficiency which occurs with credit market imperfections and examine whether public education can improve on the constrained equilibrium

on the positive role of financial intermediation in allocation of venture capital in a market with imperfect information this paper develops a theory of financial intermediation that highlights the contribution of intermediaries as informed agents in a market with imperfect information we consider a venture capital market where the entrepreneurs select the qualities of projects and their perquisite consumptions about which the investors are imperfectly informed it is shown that when all investors have positive search costs the entrepreneurs are induced to offer the unacceptable inferior projects lemons only and the investors will not enter the venture capital market but put their funds in other low return investments an undesirable allocation of resources beginning with an initial undesirable situation the financial intermediaries may evolve as informed agents that induce a pareto preferred allocation leading the investors to a higher welfare state we focus our analysis on the existence of intermediation equilibra when the market for intermediation services is competitive the distribution of returns on projects the fees charged by intermediaries and the fraction of institutional holdings are all endogenous in equilibrium it is shown that i there cannot be a competitive intermediation equilibrium with very high institutional holdings and ii in other cases multiple equilibra may exist but the one with the highest institutional holdings dominates the others in a pareto sense

habit persistence in overlapping generations economies under pure exchange abstract this paper analyzes the implications of habit persistence preferences for savings and equilibrium dynamics in the context of an overlapping generations model under pure exchange we show that habit persistence can convert an economy which otherwise has no role for government currency into an economy where there does exist a role for such currency further the increased saving induced by habit persistence implies that governments are able to float higher levels of deficits in such economies relative to economies without habit persistence the paper also shows that relative to standard preferences habit persistence preferences cause the savings function to become decreasing in the rate of interest at lower values for relative risk aversion this is of particular interest since the paper demonstrates that this result is closely related to the relative success of models with habit persistence in explaining the equity premium puzzle journal of economic literatureclassification numbers e21 e32

note can a reduction in set up costs indeed increase total costs zangwill zangwill w i 1987 from eoq towards zi management sci 33 1209 1223 has constructed an example which purports to show that reducing set up costs can increase total cost we show that this happened as a result of restricting the policies to be of a greedy nature the expected cost of truly optimal policies is shown not to increase

intermediation and the equilibrium allocation of investment capital implications for economic development abstract we investigate several common assertions about intermediation and how it affects the allocation of investment capital we use a model with adverse selection and costly state verification in which both debt contracts and credit rationing are observed intermediaries arise due to a comparative advantage in information acquisition relative to the situation absent intermediation intermediaries reduce credit rationing and inefficient interest rate differentials the model also shows how large interest rate differentials can be observed when financial markets are not integrated and how the volume of intermediation is affected by changes in the environment

stationary equilibria in an overlapping generations economy with stochastic production abstract this paper generalizes the analyses of the existence uniqueness and stability of a non trivial steady state equilibrium in galor and ryder j econ theory49 1989 360 375 to an overlapping generations economy with stochastic production the study establishes sufficient conditions for the existence of a non trivial stationary equilibrium as well as for the existence of a globally unique and stable non trivial stationary equilibrium it is shown that the existence of a non trivial stationary equilibrium is not assured by conventional regularity conditions on the production function and preferences furthermore multiplicity and indeterminacy of long run equilibria appear to be commonplace journal of economic literature classification numbers c62 e13 o41

on the computation of returns in tests of the stock market overreaction hypothesis abstract a number of recent studies have attempted to find out whether investors overreact we argue that in many of these studies the method used to compute cumulative returns the arithmetic method is flawed and we show that estimates of portfolio performance can be affected our findings are relevant not only to tests of the overreaction hypothesis but to other areas in finance where the arithmetic method and event study approach are used

safe debt risky capital the author extends the diamond 1965 model of national debt in two directions she first introduces technological uncertainty and then she allows the stock of debt to vary the author studies the dynamical equilibria of the resulting stochastic system and she establishes conditions for the existence of stationary states that are expressed in terms of invariant distributions since conditions that ensure the existence of a stochastic stationary state with positive debt are very restrictive in this model financial instability is a pervasive phenomenon and allocations are in general dynamically inefficient copyright 1994 by the london school of economics and political science

refinancing mfis with market power theory and evidence this paper presents a model of the complete microcredit financing chain investor miv mfi micro borrower in which social minded mivs provide funds only to those mfis which do not exploit their bargaining power towards micro borrowers the mfis with the highest bargaining power do not use miv capital since eschewing their market power is most costly for them consistent with this prediction of the theoretical model we find empirically that the net interest margin as a measure of mfi market power negatively affects the likelihood of using miv finance this lends support to the view that social criteria play an effective role in mivs investment policies thereby also impacting mfis lending behavior