models of stock returns a comparison in this paper a discrete mixture of normal distributions is proposed to explain the observed significant kurtosis fat tails and significant positive skewness in the distribution of daily rates of returns for a sample of common stocks and indexes stationarity tests on the parameter estimates of this discrete mixture of normal distributions model revealed significant differences in the mean estimates that can explain the observed skewness and significant differences in the variance estimates that can explain the observed kurtosis an alternative explanation for the observed fat tails is the symmetric student model the result of a comparison between the models is that the discrete mixture of normal distributions model has substantially more descriptive validity than the student model for many years both financial economists and statisticians have been concerned with the description of stock market returns the form of the distribution of stock returns is a crucial assumption for mean variance portfolio theory theoretical models of capital asset prices and the prices of contingent claims for example understanding the behavior of the variance is essential to option pricing models empirical tests of asset pricing models and the efficient markets hypothesis draw statistical inferences that are also conditional on distributional assumptions the most convenient assumption for financial theory and empirical methods is that the distribution of security rates of return be multivariate normal with parameters that are stationary over time since the normal distribution is stable under addition any arbitrary portfolio of stocks will also be normally distributed with the additional assumption of risk aversion mean variance theory follows furthermore the assumptions of normality and parameter stationarity are required for most of the econometric techniques typically used in empirical research tests of the normality hypothesis on the daily returns of the dow jones industrial stocks by fama 121 revealed more kurtosis fatter tails than that predicted from a sample of independent and identically distributed normal variates fama concluded from this evidence that the distribution of price changes conforms better to the stable paretian distribution with characteristic exponent

managerial leverage is limited by the extent of the market hierarchies specialization and the utilization of lawyers human capital abstract this paper examines the role of hierarchies in the organization of human capital intensive production we develop an equilibrium model of hierarchical organization and provide empirical evidence based on confidential data on thousands of law offices the equilibrium assignment of individuals to hierarchical positions varies with the degree of field specialization which increases as the extent of the market increases as individuals knowledge becomes narrower but deeper managerial leverage the number of workers per manager optimally increases to exploit this depth consistent with our model the share of lawyers who work in hierarchies and the ratio of associates to partners increase as market size increases and lawyers field specialize other results provide evidence against alternative interpretations that emphasize unobserved differences in the distribution of demand or firm size effects and lend additional support to the view that in legal services hierarchies help exploit increasing re

pricing and risk management of interest rate swaps this paper reformulates the valuation of interest rate swaps swap leg payments and swap risk measures all under stochastic interest rates as a problem of solving a system of linear equations with random perturbations a sequence of uniform approximations which solves this system is developed and allows for fast and accurate computation the proposed method provides a computationally efficient alternative to monte carlo based valuations and risk measurement of swaps this is demonstrated by conducting numerical experiments and so our method provides a potentially important real time application for analysis and calculation in markets

an economic approach to influence activities in organizations members of organizations spend considerable time effort and ingenuity attempting to influence decision makers such influence activities may bring benefits to the organization but they also involve real costs this essay offers an economic rationale for such influence activity as representing rational self interested behavior in the presence of informational asymmetries and an analysis of how the design of the organization s structure and policies should respond to the incentives for attempting influence it is posited that information valuable for the organization s decision making is directly available only to members of the organization who have some personal stake in the decisions these individuals may then have an incentive to try to manipulate the information they develop and provide in order to influence the resulting decisions to their benefits this can be costly both in degrading the quality of decision making and in diverting the attention and effort of the organization s members from more productive activities the organization has three different methods it can employ to discourage excessive influence activities and to encourage more directly productive uses of time and effort it can limit access to decision makers and participation in decision making it can alter its decision making criteria to favor those performing well in productive activities and it can provide direct financial incentives to encourage the desired allocation of effort it is shown that an efficiently designed organization will use such financial incentives only as a last resort instead it will always first alter its decision participation policies and decisionmaking criteria

an analysis of the use of accounting and market measures of performance in executive compensation contracts prior research has provided useful insights into the structure of compensation plans and their incentive effects however one important limitation of these studies is the virtual absence of any cross sectional analyses of the attributes of compensation contracts 2 this absence is related in part to the problems associated with controlling for other factors that affect compensation that is compensation contracts are

international financial crises causes prevention and cures dale jorgenson has bestowed a great honor and no small challenge by inviting me to give this lecture a great honor because of the distinguished list of economists who have preceded me a challenge because of the standard they have set and because there is no greater challenge for any economist than providing a coherent account of significant events to his scientific peers i am sometimes asked by friends about the differences between academic life and life as a public official there are many two stand out first as an academic the gravest sin one can commit is to sign one s name to something one did not write as a public official it is a mark of effectiveness to do so as often as possible second as an academic if a problem is too hard and does not admit of a satisfactory solution there is an obvious response work on a different problem that is not a luxury that one has in government i have been reminded of this often in recent years as we have grappled with financial crises in a number of what had previously been considered emerging markets with unrestrained futures anyone who doubts the social importance of what economists do should consider the debates surrounding these crises hundreds of millions of people who expected rapidly rising standards of living have seen their living standards fall hundreds of thousands if not millions of children have been forced to drop out of school and go to work hundreds of billions of dollars of apparent wealth has been lost the stability of large nations as nations has been called into question and the united states has made its largest nonmilitary foreign policyrelated financial commitments since the marshall plan almost all the issues involved in understanding preventing and mitigating these crises are the stuff of economics courses and research fixed versus flexible exchange rates moral hazard and multiple equilibria speculation and liquidity fiscal and monetary policies regulation and competition what economists think say and do has profound implications for the lives of literally billions of their fellow citizens whether it is discussing the role of derivatives in signaling exchange rate commitments with chinese premier zhu rongji or discussing an nber working paper on inflation targeting with the brazilian central bank governor arminio fraga or discussing alternative approaches to bankruptcy law with indonesia s economic team or optimal debt durations with the mexican authorities i am consistently struck by the impact of the kind of research discussed at the aea meetings the future well being of the world s people in large part will depend on how the ongoing process of global integration works out this is a strong statement but one that is supported by the global economy s post world war i failure and its post world war ii success central to global integration is financial integration the flow of funds and of capital across international borders and as the events of the late 1920 s and early 1930 s remind us central to global disintegration can be international financial breakdowns today i want to reflect on the issue of global financial integration in light of the dramatic and largely unpredicted events of recent years it is perhaps a good time for reflection there has been enough repair that priority can shift from u s department of the treasury 1500 pennsylvania avenue washington dc 20005 this lecture reflects many things i have learned from experiences i have shared with colleagues in the united states government and governments around the world i thank brad delong marty feldstein stephanie flanders ken rogoff andrei shleifer and ted truman for useful comments and suggestions i am especially grateful to nouriel roubini and stephanie flanders for valuable discussions and assistance in the preparation of this lecture the usual disclaimer applies

money in a theory of banking we introduce money in a model of banking in order to examine how open market operations can affect aggregate bank lending and output we see two important ways changes in money supply affect the banking system first by changing prices and interest rates it affects the wealth of demanders of real liquidity and thus the equilibrium production of liquid assets aggregate output and the health of the banking system second it changes the value of money as a means of payment and thus the attractiveness of moving from deposits to currency the demand for financial liquidity again this impacts the health of the banking system and thus bank lending and aggregate output we use this understanding to see how changes in money supply can create alleviate or be ineffective in banking crises

on the design of hierarchies coordination versus specialization we consider an economy that has to decide how assets are to be used agents have ideas but these ideas conflict we suppose that decision making authority is determined by hierarchy each asset ha

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

fundamentals panics and bank distress during the depression we assemble bank level and other data for fed member banks to model determinants of bank failure fundamentals explain bank failure risk well the first two friedman schwartz crises are not associated with positive unexplained residual failure risk or increased importance of bank illiquidity for forecasting failure the third friedman schwartz crisis is more ambiguous but increased residual failure risk is small in the aggregate the final crisis early 1933 saw a large unexplained increase in bank failure risk local contagion and illiquidity may have played a role in pre 1933 bank failures even though those effects were not large in their aggregate impact

the power of incentives variable pay is usually defined as pay that is tied to some measure of worker output the most typical form of variable pay historically was the piece rate which was more prevalent during the early part of the 20th century than it is at the beginning of the 21st there is a resurgence in variable pay particularly as it relates to executives whose pay is tied to output through some mechanism like stock options or bonuses that depend on individual or firm performance why use variable pay the typical reaction is that variable pay provides incentives to put forth effort although true discrete pay schemes also generate incentives much of the confusion in the literature results from the use of the terms high powered and low powered incentives which connote difference in ability to elicit worker effort it is more informative to make distinctions between discrete and continuous pay and between inputbased and output based pay 2 pay structures can be summarized by the following equation

does product market competition lead firms to decentralize there is a widespread sense that over the last two decades firms have been decentralizing decisions to employees further down the managerial hierarchy economists have developed a range of theories to account for delegation but there is less empirical evidence especially across countries this has limited the ability to understand the phenomenon of decentralization to address the empirical lacuna we have developed a research program to measure the internal organization of firms including their decentralization decisions across a large range of industries and countries in this paper we investigate whether greater product market competition increases decentralization for example tougher competition may make local manager s information more valuable as delays to decisions become more costly since globalization and liberalization have increased the competitiveness of product markets one explanation for the trend towards decentralization could be increased competition of course there are a range of other factors that may also be at play including human capital information and communication technology culture and industrial composition to tackle these issues we collected detailed information on the internal organization of firms across nations the few datasets that exist are either from a single industry or at best across many firms in a single country we analyze data on almost 4 000 firms across twelve countries in europe north america and asia we find that competition does indeed seem to foster greater decentralization

an empirical analysis of sales force compensation plans among the array of direct and indirect methods of motivation and control available to the sales manager is sales force compensation in this article the authors summarize theoretical predictions from the economics marketing finance and accounting literatures on the structure of optimal sales force compensation plans guided by these insights they then construct empirical models to quantify the effect of various sales force factors firm and product factors and market factors on compensation using data from 286 firms in 39 industries the authors examine determinants of incentive components and total pay and the optimal horizon for incentive pay copyright 1992 by university of chicago press

integration of the sales force an empirical examination this article develops and tests a model of integration of a marketing function personal selling the model derived from transaction cost analysis as developed principally by williamson is formulated as a logistic function which is estimated with data from the electronic components industry as expected integration is associated with increasing levels of asset specificity difficulty of performance evaluation and the combination of these two factors contrary to the transaction cost model neither frequency of transactions nor interaction of specificity and environmental uncertainty is significantly related to integration the transaction cost model improves significantly upon the fit of a simple model relating integration to company size alone these results suggest that for studying transactions of this kind it is fruitful to view the firm as a governance structure

shadowy banks and financial contagion during the great depression a retrospective on friedman and schwartz this essay assesses whether network linkages within the banking system amplified the real effects of bank failures during the great contraction in 1929 nearly all interbank deposits held by federal reserve member banks belonged to shadowy nonmember banks which were outside the regulatory reach of federal regulators regional banking panics in the early 1930s drained these interbank deposits from central reserve city banks money center banks in chicago and new york responded to volatile and declining interbank deposits by changing their asset composition they reduced their lending to businesses and individuals and increased their holdings of cash and government bonds

local banking panics of the 1920s identification and determinants abstract using a newly discovered dataset of u s bank suspensions from 1921 to 1929 we discovered that banking panics were more common in the 1920s than had been believed besides identifying panics we investigate their determinants finding that local banking panics were more likely when fundamental economic conditions were generally weak and more likely in overbanked states they were less likely in states with deposit insurance or states where a relatively large share of banks belonged to chain banking organizations

endogenous matching and the empirical determinants of contract form empirical work on contracts typically regresses contract choice on observed principal and agent characteristics if i some of these characteristics are unobserved or partially observed and ii there are incentives whereby particular types of agents end up contracting with particular types of principals estimated coefficients on the observed characteristics may be misleading we address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early renaissance tuscany controlling for endogenous matching has an impact on parameters of interest and tenants risk aversion appears to have influenced contract choice

franchising and risk management franchising is an important and controversial form of vertical integration allegations of opportunistic behavior by franchisors have led to calls for public regulation and in some states fairness in franchising laws the advisability of such regulation depends on the long run incentives to franchise if franchising is a temporary step on the path to complete ownership integration regulation may be called for alternatively if complete or partial franchising is a permanen t market solution regulation is at least contestable this paper offer s new evidence on the incentives to franchise copyright 1988 by american economic association

portfolio optimization when asset returns have the gaussian mixture distribution abstract in this paper we consider a portfolio optimization problem where the underlying asset returns are distributed as a mixture of two multivariate gaussians these two gaussians may be associated with distressed and tranquil market regimes in this context the sharpe ratio needs to be replaced by other non linear objective functions which in the case of many underlying assets lead to optimization problems which cannot be easily solved with standard techniques we obtain a geometric characterization of efficient portfolios which reduces the complexity of the portfolio optimization problem

franchising agency problems and the cost of capital explanations for franchising are examined in the context of the us hotel industry the study is distinct from previous research on franchising because it explicitly recognizes the existence of three organizational forms whereas previous research has focused exclusively on two of these three forms the two organizational forms examined in previous work are franchising and company ownership the additional organizational form is company management investor ownership which involves management by the franchisor and ownership by outside investor groups a plausible explanation for the existence of the last organizational form is based on the availability of low cost capital from non chain sources

liquidity risk bank networks and the value of joining the federal reserve system reducing systemic liquidity risk related to seasonal swings in loan demand was one reason for the founding of the federal reserve system existing evidence on the post federal reserve increase in the seasonal volatility of aggregate lending and the decrease in seasonal interest rate swings suggests that it succeeded in that mission nevertheless less than 8 percent of state chartered banks joined the federal reserve in its first decade some have speculated that nonmembers could avoid higher costs of the federal reserve s reserve requirements while still obtaining access indirectly to the federal reserve discount window through contacts with federal reserve members we find that individual bank attributes related to the extent of banks ability to mitigate seasonal loan demand variation predict banks decisions to join the federal reserve consistent with the notion that banks could obtain indirect access to the discount window through interbank transfers we find that a bank s position within the interbank network as a user or provider of liquidity predicts the timing of its entry into the federal reserve system and the effect of federal reserve membership on its lending behavior we also find that indirect access to the federal reserve was not as good as direct access federal reserve member banks saw a greater increase in lending than nonmember banks

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

liquidity efficiency and bank bailouts governments can efficiently provide liquidity as when the banking system is bailed out we study a model in which not all assets can be used to purchase all other assets at every date agents sometimes want to sell projects the market price of the projects sold depends on the supply of liquidity which is determined in general equilibrium while private liquidity provision is socially beneficial since it allows valuable reallocations it is also socially costly since liquidity suppliers could have made more efficient investments ex ante there is a role for the government to supply liquidity by issuing government securities

a closed form garch option valuation model this paper develops a closed form option valuation formula for a spot asset whose variance follows a garch p q process that can be correlated with the returns of the spot asset it provides the first readily computed option formula for a random volatility model that can be estimated and implemented solely on the basis of observables the single lag version of this model contains heston s 1993 stochastic volatility model as a continuous time limit empirical analysis on s p500 index options shows that the out of sample valuation errors from the single lag version of the garch model are substantially lower than the ad hoc black scholes model of dumas fleming and whaley 1998 that uses a separate implied volatility for each option to fit to the smirk smile in implied volatilities the garch model remains superior even though the parameters of the garch model are held constant and volatility is filtered from the history of asset prices while the ad hoc black scholes model is updated every period the improvement is largely due to the ability of the garch model to simultaneously capture the correlation of volatility with spot returns and the path dependence in volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

dynamic link between oil prices and exchange rates a non linear approach abstract we explore the non linear relationship between crude oil prices and exchange rates of major currencies from quantitative and structural perspectives by utilizing bivariate normal mixture model the correlation coefficients between oil prices and exchange rates demonstrate that their dependences typically start from 2004 then dynamically change over time then we investigate whether business cycle and oil price shocks as two possible exogenous factors affect the dependence structure of oil fx linkage we find significant structural heterogeneity during economic expansion while little evidence of heterogeneity in recession this finding provides alternative interpretations for the enhanced dependence between oil prices and exchange rates and generates implications of financialization in commodity market in terms of oil price shocks kilian 2009 the normal mixture model captures significant heterogeneity implying that unstable oil fx dependence structure is frequently associated with oil aggregate demand shocks and oil specific demand shocks with an emphasis on the dynamic weights of two underlying states we interestingly find that structural heterogeneities coincide with a variety of geopolitical and economic events the application of normal mixture not only provide us knowledge of non linear relationship between oil prices and exchange rates but also guidance for investors in risk management and portfolio diversification complementary to the traditional portfolio theory based on normal distribution

executive compensation and principal agent theory the empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants in contrast this paper analy

monetary intervention mitigated banking panics during the great depression quasi experimental evidence from a federal reserve district border 1929 1933 the federal reserve act divided mississippi between the 6th atlanta and 8th st louis districts during the great depression these districts policies differed atlanta championed monetary activism and the extension of aid to ailing banks st louis eschewed expansionary initiatives during a banking crisis in 1930 atlanta expedited lending to banks in need st louis did not outcomes differed across districts in atlanta banks survived at higher rates lending continued at higher levels commerce contracted less and recovery began earlier these patterns indicate that central bank intervention influenced bank health credit availability and business activity

firms choice of method of pay using data from the bls industry wage survey the author tests the theory that firms choose their methods of pay by balancing the gains from more precise links between performance and pay against m

the benefits of commitment to a currency peg aggregate lessons from the regional effects of the 1896 u s presidential election we develop a method to use the one time cross sectional impact of a cleanly identified shock to identify its aggregate impact through the use of a factor model we apply this methodology to evaluat

when does competition foster commitment consider a firm that would like to commit to a focused business strategy because focus improves efficiency and thus increases profit we identify two general conditions under which tougher competition strengthens the firm s ability to commit to a focused strategy under these conditions competition fosters commitment for two reasons i competition reduces the value of the option to diversify the contestability effect and ii competition increases the importance of being efficient the efficiency effect we use a number of different models of imperfect competition to illustrate the applicability of our results our examples suggest that the contestability effect is very general in contrast the efficiency effect often requires further conditions which are specific to the nature of competition in each model in both cases our analysis helps us predict when these effects are more likely to be observed this paper was accepted by bruno cassiman business strategy

incentives for lawyers moving away from eat what you kill the authors study an international law firm that changed its compensation plan for team leaders to address a multitasking problem team leaders were focusing their effort on billable hours and not spending sufficient time on leadership activities to build the firm compensation was changed to provide greater incentives for the leadership activities and weaker incentives for billable hours the effect of this change on the task allocation of the firm s team leaders was large and robust team leaders increased their non billable hours and shifted billable hours to team members the firm s new compensation plan combining an objective formula with subjective evaluations is the fastest growing compensation system among law firms today

an empirical look at franchising as an organizational form franchise contracts are identified as a hybrid form of economic organization motives for the dominance of franchise arrangements are identified by examining the theoretical literature on franchising and related literatures on the theory of the firm firm growth managerial and employee selection a nd brand name capital empirical tests are performed on the incidence of franchise contracts across states for three industries in which f ranchising is prominent and data are readily available the results s uggest that both principal agent incentives and informational incenti ves favor the use of franchise arrangements copyright 1988 by the university of chicago

option pricing under a normal mixture distribution derived from the markov tree model abstract we examine a markov tree mt model for option pricing in which the dynamics of the underlying asset are modeled by a non iid process we show that the discrete probability mass function of log returns generated by the tree is closely approximated by a continuous mixture of two normal distributions using this normal mixture distribution and risk neutral pricing we derive a closed form expression for european call option prices we also suggest a regression tree based method for estimating three volatility parameters and required to apply the mt model we apply the mt model to price call options on 89 non dividend paying stocks from the s p 500 index for each stock symbol on a given day we use the same parameters to price options across all strikes and expires comparing against the black scholes model we find that the mt model s prices are closer to market prices

the choice of organizational form the case of franchising abstract we examine companies that franchise some units and centrally operate own others the agency problems confronting these two organizational forms are analyzed testable hypotheses are developed the empirical results support the notion that owning versus franchising reflects a trade off among agency related problems the cost of monitoring store managers appears to be especially important in the own franchise decision the level of repeat business and initial investment requirements per unit also appear to be important

the choice of the distribution of asset returns how extreme value theory can help abstract one of the issues of risk management is the choice of the distribution of asset returns academics and practitioners have assumed for a long time for more than three decades that the distribution of asset returns is a gaussian distribution such an assumption has been used in many fields of finance building optimal portfolio pricing and hedging derivatives and managing risks however real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality this article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution an empirical analysis using equity data of the us market is provided to illustrate this point

arbitrage equilibrium with skewed asset returns the quadratic form of the covariance co skewness model by kraus and litzenberger and arbitrage pricing theory are used for an empirical investigation of market equilibrium with skewed seecurity returns empirical tests similar to the ones in black jensen scholes and gibbons are discussed the empirical estimates give some support to the kraus litzenberger hypothesis on skewness preference however there is some evidence that the tested arbitrage equilibrium is not a complete description of security pricing

an empirical analysis of a firm s decision to franchise abstract hypotheses from monitoring and search cost explanations for the existence of franchising are discussed and tested the evidence offers strong support for the search theory somewhat weaker support for the monitoring shirking theory and no support for the monitoring cheating hypothesis

arresting banking panics federal reserve liquidity provision and the forgotten panic of 1929 scholars differ on whether central bank intervention mitigates banking panics in april 1929 a fruit fly infestation in florida forced the u s government to quarantine fruit shipments from the state and destroy infested groves in july depositors panicked in tampa and surrounding cities the federal reserve bank of atlanta rushed currency to member banks beset by runs we show that this intervention arrested the panic and estimate that bank failures would have been twice as high without the federal reserve s intervention our results suggest that similar interventions may have reduced bank failures during the great depression

transactions costs and the efficient organization of production a study of timber harvesting contracts a transaction costs framework is developed to explain the choice between lump sum and per unit payment provisions in private timber harvesting contracts predictions about which contract type minimizes the transaction costs of presale measurement and contract enforcement and monitoring are derived and tested using private timber sales contracts from north carolina the empirical results provide strong support for the transaction costs approach and also reject several predictions from a risk based model the transaction costs framework also provides insights into the choice between negotiated and competitive sales procedures

liquidity shortages and banking crises we show in this article that bank failures can be contagious unlike earlier work where contagion stems from depositor panics or contractual links between banks we argue that bank failures can shrink the common pool of liquidity creating or exacerbating aggregate liquidity shortages this could lead to a contagion of failures and a total meltdown of the system given the costs of a meltdown there is a possible role for government intervention unfortunately liquidity and solvency problems interact and can cause each other making it hard to determine the cause of a crisis we propose a robust sequence of intervention banks are often found at the center of systemic financial crises the causes of these crises have long been debated do they stem from depositor panics or do they arise because bank balance sheets are exposed to common factors if it is the latter then is there any sense in which bank failures can be contagious can anything be done to prevent these crises or stop them from propagating once they begin our purpose in this paper is to reexamine whether bank failures can start and propagate systemic crises even if we assume that depositors do not panic that is even if depositors actions are coordinated and they do not run simply because they fear others will run our focus is not because we think that panics are empirically unimportant the jury is still out on that instead we show that contagion can stem from an underlying real general equilibrium problem rather than just from lack of coordination among depositors from a policy perspective attempts to reassure investors through confidence building measures will not work if panic and lack of coordination are not the reasons for a crisis we begin in this paper with a model of a bank that we developed in diamond and rajan 2001 assets in this model are illiquid they cannot be borrowed against or sold for the full value of resources they will generate in their best use because the human capital necessary to generate that full value cannot

contagion and bank failures during the great depression the june 1932 chicago banking panic the authors examine the social costs of asymmetric information induced bank panics in an environment without government deposit insurance their case study is the chicago bank panic of june 1932 the authors compare the ex ante characteristics of panic failures and panic survivors despite temporary confusion about bank asset quality on the part of depositors during the panic which was associated with widespread depositor runs and bank stock price declines the panic did not produce significant social costs in terms of failures among solvent banks copyright 1997 by american economic association

alternatives for distressed banks during the great depression using data on individual banks during the great depression i find that institutions that failed during periods in which failures were especially numerous such as the banking panics appear to have been at least as financially sound as banks that were able to pursue alternative resolution strategies such as merging with another institution or suspending and recapitalizing during less extreme periods this result suggests that problems associated with having numerous banks in distress simultaneously during the depression may have exacerbated the number of banks closed and the economic downturn

a general framework for discretely sampled realized variance derivatives in stochastic volatility models with jumps abstract after the recent financial crisis the market for volatility derivatives has expanded rapidly to meet the demand from investors risk managers and speculators seeking diversification of the volatility risk in this paper we develop a novel and efficient transform based method to price swaps and options related to discretely sampled realized variance under a general class of stochastic volatility models with jumps we utilize frame duality and density projection method combined with a novel continuous time markov chain ctmc weak approximation scheme of the underlying variance process contracts considered include discrete variance swaps discrete variance options and discrete volatility options models considered include several popular stochastic volatility models with a general jump size distribution heston scott hull white stein stein hypergeometric 3 2 and 4 2 models our framework encompasses and extends the current literature on discretely sampled volatility derivatives and provides highly efficient and accurate valuation methods numerical experiments confirm our findings

uncertainty entrepreneurship and sharecropping in india this study attempts to explain the coexistence of different farm lease arrangements in terms of the varying significance of entrepreneurial functions in india crop sharing arrangements are common in areas of relative economic certainty with very little scope for decision making for example for product and factor substitution and where the entrepreneurial profit is low fixed cash rents are common in situations of high uncertainty where the scope for decision making is significant or where the crops are highly profitable efficiency considerations predominate in areas of sharecropping favoring a smaller farm size whereas under high uncertainty large size is favored for reducing risk

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem