advertising competition in a mixed oligopoly we investigate a mixed oligopoly with misleading advertising competition we find that a welfare maximizing public enterprise always engages in misleading advertising and that an increase in the number of firms increases the profit and advertising level of each private firm

the pricing of foreign currency options this study examines the assumption that the exchange rate follows a log normal probability distribution and it tests whether different stochastic specifications translate into important differences in implied option prices we investigate a class of processes which includes the log normal probability distribution as a limiting case none of the models performs particularly well the main problem appears to be that the volatility estimates from actual exchange rate data are significantly smaller than those implied by observed option prices la formation du prix des options sur des devises etrangeres cette etude examine le pos tulat que le taux de change suit une courbe de probabilite log normale et verifie si des specifications stochastiques differentes se traduisent en des diff6rences importantes dans les prix des options qui en decoulent les auteurs examinent une famille de processus dont le processus log normal est un cas limite aucun des modeles ne donne des resultats particu lierement bons le probleme principal semble etre que la volatilite des evaluations a partir des donnees sur les taux de change reel est plus faible et de maniere significative que celle des evaluations derivees des prix d options observes

cooperative and noncooperative r d in duopoly with spillovers contrary to the usual assumption made in most oligopoly models relations among firms are seldom of a wholly cooperative or noncooperative type in many situations they compete in some fields while they cooperate in others an important example is the case of cooperative research efforts bringing fierce competitors together two types of agreement are observed first r d cooperation can take place at the so called precompetitive stage companies share basic information and efforts in the r d stage but remain rivals in the market place 1 a second type of agreement involves an extended collusion between partners creating common policies at the product level the usual justifications of this extension are the difficulties of protecting intellectual property the idea is then to allow partners who have achieved inventions together to also control together the processes and products which embody the results of their collaboration in order to recuperate jointly their r d investments 2 what could be expected from these types of agreement is a reduction in r d expenditures because of less wasteful duplication and a reduction of total production because of more reprinted from the american economic review 78 5 1133 1137 1988 center for operations research econometrics 1348 louvain la neuve belgium we are grateful to jean

modelling real interest rates abstract in this paper we model real interest rates as a generalised mean reverting ornstein uhlenbeck process empirical tests of the model using us and uk data for the period 1870 1975 shows that there exists significant mean reversion in both the us and uk for real interest rates inflation rates and nominal interest rates we present evidence for some stylised empirical facts which might be incorporated in models linking real interest rates inflation and nominal interest rates

the effects of unions on investment and innovation evidence from wirs the above is representative of much popular discussion of the effects of unions on investment and innovation in the professional literature the view that unions deter investment by expropriating quasi rents is also commonplace see e g simons i944 baldwin i983 grout i984 in addition it is argued that union foisted restrictive work practices might make investment a more costly process see e g denny and nickell i989 in recent years the above theoretical notions have appeared to receive some empirical support in that in the united states the level of the investment capital ratio does appear to be lower in union firms see hirsch i988 and references therein in this paper we use information contained in the i 984 workplace industrial relations survey in order to investigate the actual impact of unions on investment the rest of the paper is organised as follows in section i i we informally review the alternative channels through which unions might affect investment section i 2 contains a simple theoretical model of investment which embodies all the alternative channels our results are to be found in section ii and finally some conclusions are contained in section iii

a valuation formula for ldc debt a large gap may lie between the amount of debt relief that is nominally granted to a debtor and that which is actually given up by the creditors to help put that gap in perspective the author proposes a valuation formula that provides i the price at which a buy back of the debt on the secondary market is advantageous to the country ii the value to creditors of having the flows of payment guaranteed against factors that hinder a country in servicing its debt and iii the degree of tradeoff between growth of payments and levels of payments the author argues that it is not good business for a country to announce its intention to buy back debt because doing so immediately raises the price the value of guarantees the author argues cannot exceed 25 percent of the market price of the debt typically they re worth only about 10 percent as for the degree of tradeoff the author s formula finds that 1 percent additional growth rate is worth a 15 percent increase in the flows of payments an assessment of the mexican debt relief agreement reached in 1990 is also offered

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

corporate governance and innovation a survey abstract the traditional economics of innovation inspired by schumpeter and more recent advances on his work seem unable to explain why firms with similar external conditions may show greatly different performance in innovation contrastingly the literature on corporate governance provides some useful insights for understanding corporate innovation activity to the extent that such literature examines the economic effects of different modes of coordination between firm members the process through which individuals integrate their human and physical resources within the firm is central to the dynamics of corporate innovation this paper provides the first survey of the literature on this issue we start by discussing how various theoretical approaches to the analysis of the firm deal with technological innovation we then describe three main channels corporate ownership corporate finance and labour through which a system of corporate governance shapes a firm s innovation activity finally we examine the relationship between country level institutional settings national patterns of corporate governance and the aggregate innovation activity of corporations we conclude by suggesting that future research should focus more deeply on the interrelation between the various dimensions of corporate governance and on their joint effect on firm innovation

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

a dynamic programming approach for pricing options embedded in bonds abstract we propose a dynamic programming dp approach for pricing options embedded in bonds the focus being on call and put options with advance notice an efficient procedure is developed for the cases where the interest rate process follows the vasicek cox ingersoll ross cir or generalized vasicek models our dp methodology uses the exact joint distribution of the interest rate and integrated interest rate at a future date conditional on the current value of the interest rate we provide numerical illustrations for the vasicek and cir models comparing our dp method with finite difference methods our procedure compares quite favorably in terms of both efficiency and accuracy an important advantage of the our dp approach is that it can be applied to more general models calibrated to capture the term structure of interest rates e g the generalized vasicek model

country risk analysis the demand and supply of sovereign loans abstract tis paper develops a general model of the demand and supply of loans made to the public sector of a third world country its objective is to identify the critical variables of demand and supply and to discuss the current international financial situation within this framework on the supply side these loans are treated as part of an optimal portfolio decision while the demand for external loans by a lesser developed country is based on a life cycle hypothesis of development after conditions for market equilibrium are established credit rationing instability and default probabilities are discussed

unions innovation and investment australian evidence machin and wadhwani have produced evidence indicating that trade unions encourage investment in the uk this paper uses comparable data to ascertain whether their finding holds with respect to australia in general and contrary to the uk study the net effect of unions on investment in australia is found to be negative nevertheless investment levels at workplaces where unions were active were above the levels at non union workplaces offering support for the union voice hypothesis which machin and wadhwani use to explain their results

large external debt and slow domestic growth a theoretical analysis abstract this paper analyzes the optimal rescheduling strategy of lenders whose claims on a country show a discount on the secondary markets the paper shows that lenders should proceed as follows they should split the debt into two components a performing and a nonperforming part they should act as if the debt amounted to the performing part and scale down how much money the borrower should service on that part only as a result it is shown that the efficient servicing of the debt crowds in investment the paper relates this result to the debt overhang argument according to which too large a nominal claim may reduce investment and the market value of the debt

measuring world business cycles using kalman filtering and dynamic factor analysis the authors decompose aggregate output consumption and investment for the g7 countries into factors that are 1 common across all countries and aggregates 2 common across aggregates within a country and 3 specific to each individual aggregate in quarterly data for the period 1970 through 1993 fluctuations in all aggregates contain world and country specific common components that are both statistically significant and quantitatively important the authors find that the world and country specific common components play different roles in different business cycle episodes for each of the seven countries and that either may be dominant during a particular episode copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

international debt an explanation of the commercial banks lending behavior after 1982 this paper shows that whenever banks negotiate sequentially with debtor countries for debt rescheduling they have an incentive to establish a reputation as tough bargainers in early renegotiation rounds typically the banks face a tradeoff between acquiring reputation for toughness but losing debt repayments and rescheduling to maintain a positive probability of repayments this tradeoff explains the empirical fact that only the major debtors have received new loans since 1982

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

the 1990 mexico and venezuela recapture clauses an application of average price options abstract the paper prices contingent contracts and options written on average prices and uses the methodology to value the recapture clauses in the 1990 mexican and venezuelan debt restructuring agreements it is shown that the current values of the recapture clauses are less than one quarter of the maximum contractually possible and are a concave function of the standard deviation of the oil price the paper also points out that the benefits of recapture clauses are not only an increased degree of risksharing between countries and creditors but also a decrease in the likelihood of the debtor to default and an increased incentive to invest and adjust

r d subsidies spillovers and privatization in mixed markets we examine the use of subsidies to research and development rd however it does not lead to the equalization of per firm output and therefore to an efficient distribution of production costs we also find that privatization of the public firm reduces r d activity and welfare in the duopoly market this result stands even when optimal r d subsidies are provided

mixed oligopoly subsidization and the order of firm s moves the relevance of privatization abstract a series of previous papers demonstrate that there are no consequences from privatization in a mixed oligopoly when the government uses a subsidy to ensure first best this conclusion depends upon the assumption that privatization results in a simultaneous move oligopoly if instead privatization results in a public leader becoming a private leader the optimal subsidy output and welfare are all reduced

privatization neutrality theorem revisited fjell and heywood 2004 show that privatization is not necessarily welfare neutral in mixed oligopolies under a production subsidy if firms move sequentially we find that the neutrality holds for any time structure if instead an output floor is introduced

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

quality of government institutions and spreads on sovereign credit default swaps abstract we examine how the quality of government institutions affects the likelihood of sovereign default we find both economically and statistically significant adverse effects of country governance indicators on sovereign credit default swap spreads the evidence suggests that better quality governance enhances a country s willingness to repay debt and hence reduces the probability of sovereign default the results still hold after we account for potential endogeneity and conduct a number of robustness tests

political manipulation of a public firm s objective function abstract in the context of a government owned public firm that competes with a private firm this paper demonstrates how the government can maximize its true objective by assigning the public firm a different objective function interestingly this assigned objective function need bear no resemblance to the actual objective being sought enabling the government to disguise a politically unpopular agenda and or outside influence

r d versus output subsidies in mixed markets we analyse the relative welfare effects of an r d and an output subsidy in a mixed duopoly we show that an r d subsidy is beneficial for society as a whole and socially superior to an output subsidy when spillovers are sufficiently high otherwise an output subsidy is socially superior

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

on the intertemporal behavior of the short term rate of interest this paper examines the intertemporal behavior of the short term rate of interest in a mean reverting model vasicek s elastic random walk model using the goldfeldquandt switching regressions technique we show that the mean reverting model switched regimes three times over the sample period march 1959 to december 1985 and that two of these switches coincide with the 1979 and 1982 changes in federal reserve monetary policy on interest rates parameter estimates prove to be unstable over the sample period there is evidence of slow mean reversion over the entire sample period yet significant mean reversion emerges only in the 1979 1982 regime

gaussian estimation of single factor continuous time models of the term structure of interest rates this article presents the first application in finance of recently developed methods for the gaussian estimation of continuous time dynamic models a range of one factor continuous time models of the short term interest rate are estimated using a discrete time model and compared to a recent discrete approximation used by chan karolyi longstaff and sanders 1992a hereafter ckls whereas the volatility of short term rates is highly sensitive to the level of rates in the united states it is not in the united kingdom the econometric estimation of continuous time models of the short term interest rate has been a relatively recent development in empirical finance see for example brown and dybvig 1986 melino and turnbull 1986 barone cuoco and zautzik 1991 babbs 1992 abken 1993 chen and scott 1993 das 1993 gibbons and ramaswamy 1993 pearson and sun 1994 lund 1994 pfann schotman and tschernig 1995 ait sahalia 1995 and broze scaillet and zakoian 1995 1 in an important study chan karolyi longstaff and sanders 1992a hereafter ckls develop a general framework to estimate and compare a range of different single factor term structure models for the short term interest rate their major conclusion is that term structure models with volatilities more highly sensitive to the level of interest rates than more generally used models have a closer empirical fit to the data in addition the functional form of the drift with or without mean reversion is of secondary importance to the correct specification of the conditional heteroskedasticity in ckls the continuous time models of the term structure are estimated using a discrete approximation we present in this article an alternative

how sensitive is short term japanese interest rate volatility to the level of the interest rate abstract the sensitivity of volatility to the level of the interest rate is well documented in the literature we investigate whether such results are robust over a range of maturities ranging from seven days to twelve months and whether these findings hold for offshore japanese yen rates the volatility is sensitive to level of the rate itself for every maturity examined

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

on the relation between reschedulings and bank value the effect of developing country loan reschedulings on large u s banks is investigated using an event study methodology the major finding concerns the evolving nature of the impact of loan reschedulings during 1978 80 reschedulings had a positive effect on bank returns in contrast to the negative impact found for the 1981 83 period an explanation for these results is provided by a model of the rescheduling process that recognizes the noncompetitive aspects of rescheduling negotiation copyright 1989 by american economic association

the stochastic properties of term structure movements abstract the aim of this paper is to identify a stationary statistical model for treasury bill discount changes we find that the sample variance of discount changes are non stationary over short differencing intervals but stabilize as the intervals increase to quarterly or semi annual periods this result has important implications for pricing options and for analyzing the predictive properties of forward rates we show that the stochastic process structure leads to a downward revision in estimates of forward rate predictive power

a model of strategic default of sovereign debt this paper presents a continuous time stochastic model to study the timing decision of strategic default of sovereign debt the debtor country precommits to an investment plan finances part of it with a foreign loan and maximizes the present value pv of utility from an infinite stream of consumption default risk arises from uncertainty surrounding the evolution of gdp over time as the debt ratio increases it introduces an increasing drag on the growth of gdp and also increases the risk premium on the loans at each moment the nation must decide whether to service the loan over the next period infinitesimally small or to default thereby gaining the pv of the loan but correspondingly suffering a default penalty and forgoing the option to default in the future this choice is cast as a first passage problem default occurs if and when the pv of consumption under default first exceeds the pv given continuance of debt service the actual values of the debt ratio for several debt ridden countries is found to be close to the theoretically derived critical level this framework also enables the study of austerity programs rescheduling and other policy alternatives

mixed oligopoly cost reducing research and development and privatisation abstract we develop a mixed oligopoly model to examine the role of r d subsidies and evaluate the welfare effects of privatisation in solving the oligopoly model we propose a novel use of aggregative games techniques our analysis reveals that privatisation reduces the optimal r d subsidy furthermore privatisation improves social welfare but only when the number of firms is sufficiently large implementing solely a subsidy to r d does not lead to a privatisation neutrality theorem or irrelevance result

privatization and efficiency in a differentiated industry we consider a market in which a public firm competes against private ones and ask what happens when the public firm is privatized in the short run privatization is harmful because prices rise the disciplinary role of the public firm is lost in the long run privatization leads to further entry the net effect is beneficial if consumer preference for variety is not too weak a sufficient statistic for the social surplus to be higher in the long run is that the public firm makes a loss this suggests that profitable firms should not necessarily be privatized

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

union rent seeking intangible capital and market value of the firm abstract this study considers the effect of unions on intangi ble capital investment and profitability within the context of a market value rather than a more traditional accounting based approach theory is provided suggesting unions are able to affect profitability by sharing in the economic returns to firm specific intangible capital in support of this hypothesis we find unionization reduces the returns to r d and produces a corresponding limiting influence on r d investment at the firm level i introduction a n extensive literature in economics has ex amined the determinants of profitability with much of the focus centering on the role of market structure only recently however have the effects of labor unions on profitability been analyzed ths is surprising since labor economists long have emphasized union influences on wages and productivity that in turn may affect profitabil ity in recent studies freeman 1983 and karier 1985 report a significant limiting influence of unions on price cost margins in high concentra tion manufacturing industries using firm level data and the market based tobin s

unions and investment in british industry this paper presents an empirical analysis of investment in british industry using data at the industry level and focusing on union effects the authors find that the rate of investment is around 28 percent lower in firms that recognize unions and have an average union density relative to those in which unions are not recognized this is the gross effect holding wages product prices and productivity constant if we take account of union effects on these as well the overall effect is an investment reduction of 16 percent in competitive firms and 3 percent in noncompetitive firms copyright 1992 by royal economic society

discounting the distant future how much do uncertain rates increase valuations abstract we demonstrate that when the future path of the discount rate is uncertain and highly correlated the distant future should be discounted at significantly lower rates than suggested by the current rate we then use two centuries of us interest rate data to quantify this effect using both random walk and mean reverting models we compute the certainty equivalent rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future under the random walk model we find that the certainty equivalent rate falls continuously from 4 to 2 after 100 years 1 after 200 years and 0 5 after 300 years at horizons of 400 years the discounted value increases by a factor of over 40 000 relative to conventional discounting applied to climate change mitigation we find that incorporating discount rate uncertainty almost doubles the expected present value of mitigation benefits

time varying term premia on u s treasury bills and bonds abstract we use instrumental variables estimation to document variation in ex ante term premia on u s treasury bills and bonds of maturities ranging from two months to twenty years for the april 1959 to december 1989 sample period ex ante term premia are found to be positively related to the ex ante variability in the nominal one month risk free rate of interest significant shifts in the stochastic process generating term premia are documented subsequent to the october 1979 and october 1982 shifts in monetary policy subperiod results document variation in ex ante tenn premia in each of the three monetary regimes

on alternative interest rate processes abstract in this paper alternative interest rate processes are estimated for denmark germany sweden and the uk using the generalized method of moments gmm in line with the study by chan karolyi longstaff and sanders 1992 on us data there seems to be a positive relation between interest rate level and volatility for some countries in contrast to their study it is found that mean reversion plays an important role for the specification of the interest rate dynamics the results seem to be robust to the use of different moment conditions and simulations of the estimated models reveal that they are fairly able to capture non fitted moments as well in addition there is evidence of a structural change in the danish interest rate process in august 1985 which may be due to a change in monetary policy the small sample properties of the gmm estimators are also studied through simulations

the regulation of international lending imf support the debt crisis and bank stockholder wealth abstract in a recent article cornell landsman and shapiro 1986 provide insight in to the impact of selected regulatory responses to the international debt crisis on bank stock prices the current study concentrates on the reaction of bank shareholders to the legislative events that ultimately led to the passage of the international lending supervision act ilsa and to greater u s support of the international monetary fund imf while cornell landsman and shapiro restricted their legislative analysis to when the relevant bills were passed this study also examines when such legislation was introduced in the house or the senate the empirical results indicate that the introduction of such legislation materially influenced bank stockholder expectations in contrast to cornell landsman and shapiro the effect of these events on the risk return complexion of banks is measured furthermore the sensitivity of bank stockholders reactions to the above legislative events is appraised in light of banks latin american loan portfolio risk analysis of the expected impact of greater imf support and the ilsa on bank stockholders supplements the work of cornell landsman and shapiro by providing additional insight into the expected impact of such legislation on bank industry risk unlike cornell landsman and shapiro this study provides evidence that the joint effect of a greater imf quota and the ilsa was a net benefit to stockholders analysis suggests that the perceived benefit of a greater imf quota was apparently diminished by the ilsa however stockholders evidently perceived a general decrease in the risk of the banking industry as a result of the legislative events

stochastic volatility movements in short term interest rates and bond option values abstract two classes of models for pricing interest rate contingent claims are compared the first contains standard single factor models while the second includes stochastic volatility variants of these it is demonstrated that incorporating stochastic volatility significantly improves the ability of the models to fit movements in short term interest rates the fundamental reason for this is that standard univariate models do not generate enough conditional heteroskedasticity the models are also compared on the basis of bond option prices when each is constrained to fit a particular yield curve the results suggest that stochastic volatility models will typically produce lower option values than corresponding single factor models particularly for near the money to deep out of the money options this is because estimated historical volatilities are significantly lower under stochastic volatility when single factor models are constrained to the same level of volatility as implied by stochastic volatility models in most cases the pricing differences become minor

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

a valuation model for developing country debt with endogenous rescheduling creditors have little recourse if a sovereign state repudiates debt obligations they can however threaten to impose penalties if such action occurs which results in deadweight losses to the system as a whole a preferred alternative for both borrower and lender is to reconstruct debt obligations reschedulings are a device that creditors can use to restructure the incentives faced by borrowers such that repudiation is never a rational action this article develops a numerical method of valuing the option to reschedule the model shows why fees are preferred to higher interest spreads during a rescheduling exerise why maturities get shorter prior to a debt crisis but are lengthened in a rescheduling and why little has been done to attempt to seize the assets of countries that have not repaid any interest or principal for extended periods of time the model shows that lenders are willing to commit greater amounts if reschedulings are possible than if they are not and that precommitment to provide additional funds at rescheduling can raise the market value of existing debt and should not be construed as concessions by commercial lenders alternately the model can be used to improve systems for ranking country creditworthiness to assess the degree of adjustment requried to spark resumption of spontaneous lending or to estimate how much interest rates would have to fall to restore a country s creditworthiness

partial privatization in mixed duopoly abstract we investigate a quantity setting duopoly involving a private firm and a privatized firm jointly owned by the public and private sectors the private firm maximizes profits while the privatized firm takes both profits and social welfare into consideration we consider how many shares the government should hold in the privatized firm we find that neither full privatization the government does not hold any shares nor full nationalization the government holds all of the shares is optimal under moderate conditions

price or quantity the strategic choice of subsidized firms in a mixed duopoly this paper investigates the endogenous choice of the strategic variable price or quantity taken in a mixed duopoly by a public and a private firm prior to market competition while matsumura and ogawa 2012 in a standard mixed duopoly find that price is the unique equilibrium we show that by introducing firm subsidization in the same setting quantity can constitute a dominant strategy equilibrium

australian evidence on the exit voice model of the labor market two predictions of the exit voice model of union activity that have been confirmed by empirical research in the united states are that union workers will have longer tenures and lower quit rates th

structural reforms and technological behaviour abstract the opening up to foreign competition the deregulation of a vast array of markets and the privatization of public sector firms have been inducing major changes in the structure and behaviour of the latin american economies the aim of this paper is to describe some of these changes and to identify the new patterns of firm behavior the new institutional environment and the new policy agenda gradually emerging in the region in the field of science and technology as a result of recent trade liberalization and market deregulation efforts

game theoretic models of mixed oligopoly abstract in this paper we review various models that have been proposed for the study of mixed oligopoly that is markets in which private and public firm compete on equal basis using only market instruments

single factor heath jarrow morton term structure models based on markov spot interest rate dynamics this paper considers the class of heath jarrow morton term structure models where the spot interest rate is markov and the term structure at time t is a function of time maturity and the spot interest rate at time t a representation for this class of models is derived and i show that the functional forms of the forward rate volatility structure and the initial forward rate curve cannot be arbitrarily chosen i provide necessary and sufficient conditions indicating which combinations of these functional forms are allowable i also derive a partial differential equation representation of the term structure dynamics that does not require explicit modeling of both the market price of risk and the drift term for the spot interest rate process using the analysis presented in this paper a class of intertemporal term structure models is derived

sovereign credit spreads abstract the paper develops a structural credit risk model to study sovereign credit risk and the dynamics of sovereign credit spreads the model features endogenous default and recovery rates that both depend on the interaction between domestic output fluctuations and global macroeconomic conditions we show that sovereigns choose to default at higher levels of economic output once global macroeconomic conditions are bad this yields to default rates and credit spreads that are substantially higher compared to normal times we derive closed form expressions for sovereign debt values and default times and focus on the dynamics of sovereign credit spreads as opposed to standard theories of sovereign debt this paper s structural model generates much richer default patterns and non linearities through regime shifts in the global macroeconomic environment moreover changes in the global environment reveal the interconnectedness of the financial system

modeling sovereign yield spreads a case study of russian debt we construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring and allows for compensation for illiquidity using a new and relatively efficient method we estimate the model using russian dollar denominated bonds we consider the determinants of the russian yield spread the yield differential across different russian bonds and the implications for market integration relative liquidity relative expected recovery rates and implied expectations of different default scenarios this paper develops a model of the termstructure of credit spreads on sovereign bonds that accommodates i default or repudiation the sovereign announces that it will stop making payments on its debt ii restructuring or renegotiation the sovereign and the lenders agree to reduce or postpone the remaining payments and iii a regime switch such as a change of government or the default of another sovereign bond that changes the perceived risk of future defaults we build on the framework of duffie and singleton 1999 showing that cash flows promised by a sovereign bond can be discounted using a default adjusted short termdiscount rate that reflects the m ean arrival rate and associated losses in market value upon arrival of each of the aforementioned types of credit events since a sovereign credit event is often not a liquidation event the model allows for continued trading and pricing of a sovereign instrument through credit events possibly after writedowns in face value or cash distributions to creditors on credit event dates additionally we accommodate the possibility that bonds issued by the same sovereign of exactly the same type but possibly of different maturities may be priced in the market using different discount factors reasons for this may include i bond covenants may not include cross default clauses that would force upon the default of one bond the simultaneous default of other bonds of the same type but of a different maturity for various strategic reasons related to internal

debt valuation renegotiation and optimal dividend policy the valuation of debt and equity reorganization boundaries and firm s optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game theoretic setting which can accommodate varying bargaining powers to the two claimants two formulations of reorganization are presented debt equity swaps and strategic debt service resulting from negotiated debt service reductions we study the effects of bond covenants on payout policies and distinguish liquidity induced defaults from strategic defaults we derive optimal equity issuance and payout policies the debt capacity of the firm and the optimal capital structure are characterized

on the determinants of the value of call options on default free bonds the fundamental determinants of the value of an option on a bond are the level and slope of the term structure and the level of interest rate uncertainty competing models that have been developed to price bond options produce similar estimates as long as those models are conditioned on similar values for the fundamental determinants this result is established for simple options with known closed form solutions and for more complex options that require numerical methods for evaluation the finding is confirmed for a wide range of economic conditions and it is shown to be robust with respect to the number and nature of factors that generate interest rate movements copyright 1990 by the university of chicago

mixed oligopoly privatization and strategic trade policy this paper investigates the effects of privatization in the presence of strategic trade policies within an international mixed oligopoly serving a single market if the government uses a domestic production subsidy then welfare is always increased with privatization while the optimal subsidy falls if the government uses an import tariff privatization increases welfare over much of the parameter space the optimal tariff however may rise or fall in recent years many countries around the world are privatizing their state owned industries at the same time many of these countries are also showing remarkable changes in their economic policies toward international trade on many occasions tariffs are significantly altered and domestic production subsidies are substantially reduced for example russia has privatized its aircraft industry and doubled its tariff on imported aircraft colombia has privatized its stateowned automobile maker colombia automotriz and reduced the import tariffs on foreign made cars in argentina the government is pursuing a policy of selective privatization and subsequent reduction of subsidies in western europe countries such as germany and spain have privatized their major airlines lufthansa and iberia respectively and significantly reduced subsidies what is the connection between privatization and strategic trade policies does privatization require a welfare maximizing government to alter trade barriers the objective of this paper is to answer these questions by investigating the interaction between privatization and strategic trade policies the effects of privatization are typically analyzed in the context of mixed oligopoly models where state owned welfare maximizing public firms interact with profit maximizing private firms 1 we investigate the interaction between privatization and strategic trade policies by incorporating strategic trade instruments in an international mixed oligopoly model specifically we consider two strategic trade instruments an import tariff and a domestic production subsidy the government chooses the optimal level of tariff or subsidy to maximize domestic welfare for each trade instrument we primarily focus on two questions first does privatization increase

predictability of secondary market developing country debt prices this paper examines the predictability of secondary market prices for sovereign debt instruments issued by colombia ecuador and venezuela monthly time series observations for each economy are utilized in a seemingly unrelated regression framework econometric analysis includes both in sample and out of sample modelling and forecasting results only data available to financial markets are included in the extrapolation analysis theil inequality coefficients are reported for the simulation tests

a parametric nonlinear model of term structure dynamics recent nonparametric estimation studies pioneered by ait sahalia document that the diffusion of the short rate is similar to the parametric function r superscript 1 5 estimated by chan et al whereas the drift is substantially nonlinear in the short rate these empirical properties call into question the efficacy of the existing affine term structure models and beg for alternative models which admit the observed behavior this article presents such a model our model delivers closed form solutions for bond prices and a concave relationship between the interest rate and the yields we show that in empirical analyses our model outperforms the one factor affine models in both time series as well as cross sectional tests article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mixed oligopoly privatization and subsidization abstract this paper demonstrates three effects of domestic production subsidies in a mixed oligopoly industry regarding privatization and efficiency first if subsidies are used before and after privatization welfare is unchanged by privatization second if subsidies are used only before privatization then privatization always lowers welfare regardless of the number of private firms in the industry third the subsidy contributes to overall efficiency in a mixed oligopoly due to cost distribution effects

r d competition between public and private sectors abstract we investigate a mixed market where a welfare maximizing public research institute competes against profit maximizing private firms we investigate r d competition by using a standard model of patent races where each firm chooses both its innovation size and r d expenditure we find that the innovation size r d expenditure chosen by the public institute is too small too large from the viewpoint of social welfare respectively and so the government should control the public institute appropriately we also discuss the welfare implications of privatization of public research institutes

another look at models of the short term interest rate the short term rate of interest is fundamental to much of theoretical and empirical finance yet no consensus has emerged on the dynamics of its volatility we show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of volatility to levels and fail to model adequately the serial correlation in condi tional variances on the other hand serial correlation based models like garch models fail to capture adequately the relationship between interest rate levels and volatility we introduce and test a new class of models for the dynamics of short term interest rate volatility which allows volatility to depend on both interest rate levels and information shocks two important conclusions emerge first the sensitivity of interest rate volatility to interest rate levels has been overstated in the literature while this relationship is important adequately modeling volatility as a function of unexpected information shocks is also important sec ond we conclude that the volatility processes in many existing theoretical models of interest rates are misspecified and suggest new paths toward improving the theory

discrete time valuation of american options with stochastic interest rates we develop an arbitrage free discrete time model to price american style claims for which domestic term structure risk foreign term structure risk and currency risk are important this model combines a discrete version of the heath jarrow and morton 1992 term structure model with the binomial model of cox ross and rubinstein 1979 it converges weakly to the continuous time models in amin and jarrow 1991 1992 the general model is path dependent and can be implemented with arbitrary volatility functions to value claims with maturity up to five years the model is illustrated with applications to long dated american currency warrants and a cross rate swap from the quanto class article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

regulating innovative activity abstract without spillovers and under the winner take all hypothesis there is overinvestment in r d in a non cooperative equilibrium due to duplication of effort we show that a public firm can represent an effective instrument in the hands of a policymaker to mitigate such a problem in particular it is proved that in a mixed duopoly i each firm invests less than in a private duopoly and ii although the expected time of innovation is postponed social welfare is higher than in a private duopoly

stochastic processes for interest rates and equilibrium bond prices default free bonds represent in essence money sold forward the investor gives dollars say to the government now in exchange for a contract which promises to pay with probability one a given number of dollars at maturity and possibly a stream of intermediate coupon payments prior to maturity only recently have financial economists begun to examine the pricing of those bonds in a portfolio context in that framework nominal liquidity premiums or risk premiums on long term default free bonds are attributable to uncertainty about taste technological and price level changes which may occur prior to maturity of the bonds and prior to each coupon payment if any to the extent that the investor is unable to diversify away that uncertainty there is a systematic risk attached to the marginal utility which he or she can derive from the use in consumption or investment of the dollar payoffs on the bonds in some term structure models the instantaneous or short term rate of interest denoted here as a function of time t by r t in nominal terms and r t in real terms can be taken as a sufficient statistic1 for the source of systematic uncertainty about the marginal utility of the proceeds to be derived from defaultfree bonds maturing beyond the next instant e g merton 1974 vasicek 1977 cox ingersoll and ross 1977 specific assumptions about tastes technology and utility functions lead to specific equilibrium stochastic processes for the instantaneous short term riskless rate and longer term bond prices which are modelled as functionally dependent upon maturity and that short term riskless rate if a closed form solution exists for the long term bond price as a function of maturity and the short term interest rate it will be conditional inter alia on the parameters of the stochastic process for that short term rate marsh 1981 proposed that the closed form solutions could be tested in terms of the restrictions implied cross sectionally on the parameters of the time series process for the returns or prices of longer term bonds each with a given term to maturity for an analogy outside the term structure literature think of the closed form solution given by black and scholes 1972 for the price of an option on a nondividend paying stock with lognormal price dynamics given the model the cross section of time series for the changes in prices for each of the several options written on the same stock are not unrestricted their dispersion is functionally linked to the same volatility parameter for the stock price thus the option model including

the volatility of short term interest rates an empirical comparison of alternative models of the term structure of interest rates we estimate and compare a variety of continuous time models of the short term riskless rate using the generalised method of moments we find that the most successful models in capturing the dynamics of the short term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate a number of well known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility we show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk

valuing swiss default free callable bonds abstract a model to price the call features embedded in swiss riskless callable bonds is developed the model accounts for the time dependent variance of bond returns the specific exercise conditions of this long term non traded call option and the incompleteness of the swiss bond market empirical results show that the call feature s price is particularly sensitive to the riskless rate and variance specifications illiquidity explains some cross sectional call pricing biases found in this study but the underpricing of ordinary versus callable bonds cannot be excluded

statistical tests of contingent claims asset pricing models abstract a new methodology for statistically testing contingent claims asset pricing models based on asymptotic statistical theory is proposed it is introduced in the context of the black scholes option pricing model for which some illustrative estimation inference and simulation results are also presented the proposed methodology is then extended to arbitrary contingent claims by first considering the estimation problem for general ito processes and then deriving the asymptotic distribution of a general contingent claim which depends upon such ito processes