the dynamics of the leverage cycle abstract we present a simple agent based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a value at risk constraint based on historical observations of asset prices the value at risk constraint implies that when perceived risk is low leverage is high and vice versa a phenomenon that has been dubbed pro cyclical leverage we show that this leads to endogenous irregular oscillations in which gradual increases in stock prices and leverage are followed by drastic market collapses i e a leverage cycle this phenomenon is studied using simplified models that give a deeper understanding of the dynamics and the nature of the feedback loops and instabilities underlying the leverage cycle we introduce a flexible leverage regulation policy in which it is possible to continuously tune from pro cyclical to countercyclical leverage when the policy is sufficiently countercyclical and bank risk is sufficiently low the endogenous oscillation disappears and prices go to a fixed point while there is always a leverage ceiling above which the dynamics are unstable countercyclical leverage policies can be used to raise the ceiling we also study the impact on leverage cycles of direct temporal control of the bank s riskiness via the bank s required value at risk quantile under such a rule the regulator relaxes the value at risk quantile following a negative stock price shock and tightens it following a positive shock while such a policy rule can reduce the amplitude of leverage cycles its effectiveness is highly dependent on the choice of parameters finally we investigate fixed limits on leverage and show how they can control the leverage cycle

risk management with interdependent choice risks faced by traders from price movements are sometimes magnified by the actions of other traders risk management systems which neglect this feature may give a seriously misleading picture of the true risks the hazards arising from this potential blindspot are at their most dangerous when the prevailing conventional wisdom lulls traders into a false sense of security on the attractiveness of a trading position the efforts of one trader to reverse his trade makes more acute the need to follow suit on the part of others for markets dominated by traders with short time horizons such interdependence leads to exaggerated price movements estimates of value at risk which recognize such interdependence of actions can diverge substantially from those given by conventional techniques copyright 1999 by oxford university press

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

status in markets this project tests for the effect of social status in a laboratory experimental market we consider a special box design market in which a vertical overlap in supply and demand ensure that there are multiple equilibrium prices we manipulate the relative social status of our subjects by awarding high status to a subset of the group based on one of two procedures in the first a subject s score on a trivia quiz determines his or her status in another subjects are assigned randomly to a higher status or lower status group in both treatments we find that average prices are higher in markets where higher status sellers face lowerstatus buyers and lower when buyers have higher status than sellers across all sessions the higher status side of the market captures a greater share of the surplus earning significantly more than their lower status counterparts

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

optimality properties of alternative systems of taxation of foreign capital income foreign source capital income taxes are examined from the point of view of optimal taxation in the framework of a simple economy with international real capital flows a taxonomy of alternative systems of such taxation is first presented showing how crediting and other tax parameters induce what are called source based residence based and related systems next tax rates are determined that are optimal from a single country s point of view given those of the others the achievability of these rates under the various systems is analyzed finally tax rates that are optimal from an international point of view are considered again achievability of an international optimum under the various systems is considered leading to the main conclusions that i a pure residence based system in all countries can achieve an international fiscal optimum ii it cannot however be sustained as an equilibrium

portfolio insurance in complete markets a note this note presents an elementary derivation of the optimal investment strategy of an investor who wants to assure that his investment in risky assets does not lead his wealth to fall below a predetermined floor copyright 1989 by the university of chicago

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

optimal asset allocation and risk shifting in money management this article investigates a fund manager s risk taking incentives induced by an increasing and convex relationship of fund flows to relative performance in a dynamic portfolio choice framework we show that the ensuing convexities in the manager s objective give rise to a finite risk shifting range over which she gambles to finish ahead of her benchmark such gambling entails either an increase or a decrease in the volatility of the manager s portfolio depending on her risk tolerance in the latter case the manager reduces her holdings of the risky asset despite its positive risk premium our empirical analysis lends support to the novel predictions of the model

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

var constrained asset pricing with relative performance abstract this paper shows that when value at risk constrained institutional investors care about their relative standings among the peer group more risk averse investors would take more risk which improves the risk sharing and lowers the volatility

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

of contracts and subcontracts small firms in vertically dis integrated production distribution systems in ldcs abstract the increasing complexity in production and distribution which accompanies development provides opportunities for small firms to participate by undertaking a limited range of activities in vertically dis integrated systems through subcontracting arrangements in addition to reducing costs in particular activities this facilitates the growth of production and distribution systems which are more complex than one integrated firm could manage or finance on its own for this pattern to work though contracting difficulties arising from market imperfections must be overcome alternative ways used by third world firms to solve these coordination problems are identified and policy implications suggested

relative wealth concerns and financial bubbles we present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles we consider a finite horizon overlapping generations model in which agents care only about their consumption though the horizon is finite competition over future investment opportunities makes agents utilities dependent on the wealth of their cohort and induces relative wealth concerns agents herd into risky securities and drive down their expected return even though the bubble is likely to burst and lead to a substantial loss agents relative wealth concerns make them afraid to trade against the crowd

the impact of risk regulation on price dynamics most financial risk regulations assume that asset returns are exogenous where risk is estimated from historical data this assumption fails to take into account the feedback effect of trading decisions on prices we investigate the consequences of risk constrained trading by means of simulations of a general equilibrium model with a value at risk constraint and compare the results to the case when risk constraints are not present prices are lower on average in the presence of risk regulation while volatility is higher risk regulation may have the perverse effect of exacerbating price fluctuations

a flow based explanation for return predictability this paper proposes and tests an investment ow based explanation for three empirical ndings on return predictability the persistence of mutual fund performance the smart

index investment and the financialization of commodities the authors found that concurrent with the rapidly growing index investment in commodity markets since the early 2000s prices of non energy commodity futures in the united states have become increasingly correlated with oil prices this trend has been significantly more pronounced for commodities in two popular commodity indices this finding reflects the financialization of the commodity markets and helps explain the large increase in the price volatility of non energy commodities around 2008

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

capital income and profit taxation with foreign ownership of firms abstract this paper establishes optimal rules for capital income and profits taxation in the open economy with or without foreign ownership of domestic firms we show that if there are constraints on the feasibility of profits taxation both saving and investment taxes generally enter the optimal tax package if instead profits can be fully taxed then source based investment taxes vanish if domestic firms are in part owned by foreigners then source based investment taxes can be used to shift income away from these to domestic citizens and they may even be used to finance lump sum transfers to domestic residents

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

when micro prudence increases macro risk the destabilizing effects of financial innovation leverage and diversification by exploiting basic common practice accounting and risk management rules we propose a simple analytical dynamical model to investigate the effects of microprudential changes on macroprudential outcomes specifically we study the consequence of the introduction of a financial innovation that allows reducing the cost of portfolio diversification in a financial system populated by financial institutions having capital requirements in the form of value at risk var constraint and following standard mark to market and risk management rules we provide a full analytical quantification of the multivariate feedback effects between investment prices and bank behavior induced by portfolio rebalancing in presence of asset illiquidity and show how changes in the constraints of the bank portfolio optimization endogenously drive the dynamics of the balance sheet aggregate of financial institutions and thereby the availability of bank liquidity to the economic system and systemic risk the model shows that when fin

the role of foreign direct investment in the development of regional industrial systems current knowledge and suggestions for a future american research agenda o huallachain b 1985 the role of foreign direct investment in the development of regional industrial systems current knowledge and suggestions for a future american research agenda reg studies 20 151 162 the role of foreign direct investment in american regional industrial systems differs from the experiences found in other countries foreign investment in the us is increasing rapidly outside of the traditional industrial heartland it is highly integrated with the domestic economy and it does not seem to be developing the same truncated character found in other countries american research should concentrate on the impact increasing foreign investment is having on the technological makeup and total linkage structure of regional economies understanding these impacts will require a variety of research approaches ranging from sectoral studies to analysis of individual corporations this paper attempts to identify research priorities using the knowledge of foreign direct investment generated abroad

local input linkages a comparison of foreign owned and domestic manufacturers in georgia and south carolina barkley d l and mcnamara k t 1994 local input linkages a comparison of foreign owned and domestic manufacturers in georgia and south carolina reg studies 28 725 737 input purchasing patterns of foreign owned and domestic manufacturers were compared to determine if local economic impacts varied by country of ownership input purchasing data were obtained from a 1990 survey of south carolina and georgia manufacturers tobit estimation results indicate nonmetro foreign owned firms had significantly higher propensities to purchase inputs in county than domestic branch plants located in nonmetro counties no significant differences existed between the input purchase propensities of metro domestic and foreign owned manufacturers however foreign owned firms were disproportionately represented in industries with relatively weak indirect and induced effects on the local economies relatively strong overall impacts may not be associated with the relatively large initial input purchases of foreign owned

an analysis of the consistency of banks internal ratings abstract internal ratings based models are used for a variety of important bank and regulatory decisions thus model risk the potential for different models to provide different probability of default pd estimates is of crucial importance using a comprehensive german credit registry dataset from 40 banks and 17 000 corporate borrowers from 2008 2012 we assess the consistency of internal pd estimates across banks we find three main results first the variability of pd estimates for the same borrower across banks is large second bank fixed effects explain 5 of the variation in pd estimates across banks while 95 of the variation is idiosyncratic for the 10 largest banks in our sample reported regulatory capital ratios would change by a maximum of 10 equivalent to approximately 1 percentage point when using average risk weights from all banks instead of risk weights based on banks individual pd estimates third we explore various bank characteristics that explain the size of bank fixed effects

impact of value at risk models on market stability abstract financial institutions around the world use value at risk var models to manage their market risk and calculate their capital requirements under basel accords var models as any other risk management system are meant to keep financial institutions out of trouble by among other things guiding investment decisions within established risk limits so that the viability of a business is not put unduly at risk in a sharp market downturn however some researchers have warned that the widespread use of var models creates negative externalities in financial markets as it can feed market instability and result in what has been called endogenous risk that is risk caused and amplified by the system itself rather than being the result of an exogenous shock this paper aims at analyzing the potential of var systems to amplify market disturbances with an agent based model of fundamentalist and technical traders which manage their risk with a simple var model and must reduce their positions when the risk of their portfolio goes above a given threshold we analyse the impact of the widespread use of var systems on different financial instability indicators and confirm that var models may induce a particular price dynamics that rises market volatility these dynamics which we have called var cycles take place when a sufficient number of traders reach their var limit and are forced to simultaneously reduce their portfolio the reductions cause a sudden price movement raise volatility and force even more traders to liquidate part of their positions the model shows that market is more prone to suffer var cycles when investors use a short term horizon to calculate asset volatility or a not too extreme value for their risk threshold

window dressing by pension fund managers this paper takes a first look at investment strategies of managers of 769 pension funds with total assets of 129 billion at the end of 1989 the data show that managers of these funds tend to oversell stocks that have performed poorly relative sales of losers accelerate in the fourth quarter when funds portfolios are closely examined by the sponsors this result supports the view that fund managers window dress their portfolios to impress sponsors and suggests that managers are evaluated on their individual stock selections and not just aggregate portfolio performance this abstract was borrowed from another version of this item

the financial cycle and macroeconomics what have we learnt abstract it is high time we rediscovered the role of the financial cycle in macroeconomics in the environment that has prevailed for at least three decades now it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle this calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies this essay highlights the stylised empirical features of the financial cycle conjectures as to what it may take to model it satisfactorily and considers its policy implications in the discussion of policy the essay pays special attention to the bust phase which is less well explored and raises much more controversial issues

an evaluation of bank measures for market risk before during and after the financial crisis abstract we study the performance and behavior of value at risk measures used by a number of large u s banks before during and after the financial crisis alternative benchmark var measures including garch based measures are estimated directly from the banks trading revenues to explain the bank var performance results while overly conservative in both the pre crisis and post crisis periods bank var exceedances were excessive and clustered in the crisis period this contrasted with mostly unbiased benchmark hs and garch vars in the pre crisis and post crisis periods and vastly superior garch based var performance in the crisis period with lower exceedance rates and no exceedance clustering our results document the bank vars very slow adjustment to changing market conditions and their systematic bias in all studied periods our results indicate that bank vars could be improved by the use of models with time varying volatility and built on banks knowledge of their current positions

must losing taxes on saving be harmful abstract internationalization offers enhanced opportunities for individuals to place savings abroad and evade domestic saving taxation this paper asks whether the concomitant loss of saving taxation necessarily is harmful to this end we construct a model of many symmetric countries in which public goods are financed by taxes on saving and investment there is international cross ownership of firms and countries are assumed to be unable to tax away pure profits countries then face an incentive to impose a rather high investment tax also borne by foreigners in this setting the loss of the saving tax instrument on account of international tax evasion may prevent the overall saving investment tax wedge from becoming too high and hence may be beneficial for moderate preferences for public goods

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

institutional investors and stock market volatility statement of responsibility on t p reads xavier gabaix parameswaran gopikrishnan vasiliki plerou h eugene stanley

asymmetric tax competition abstract the paper analyzes nash equilibrium when two jurisdictions set tax rates on a tax base which is mobile between them population differences imply tax differences the smaller jurisdiction levies a lower tax rate in equilibrium and its residents are better off than those in the larger jurisdiction the nash equilibrium is inefficient if the two jurisdictions merged the resulting allocation would be efficient however if differences in population are great enough residents of the small jurisdiction would be made worse off by such a merger

bank size and risk taking under basel ii this paper discusses the relationship between bank size and risk taking under pillar i of the new basel capital accord using a model with imperfect competition and moral hazard we find that small banks and hence small borrowers may profit from the introduction of an internal ratings based irb approach if this approach is applied uniformly across banks however the banks right to choose between the standardized and the irb approaches unambiguously hurts small banks who are pushed towards higher risk taking due to fiercer competition this may even lead to higher aggregate risk in the economy

volatility and the institutional investor inconsistent with the relationship predicted by most academic theory a positive contemporaneous association is documented between the level of institutional ownership and security return volatility after accounting for capitalization this relationship is consistent with two stories either riskier securities attract institutional investors or an increase in institutional holdings results in an increase in volatility these empirical results are consistent with the latter interpretation

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

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

macroprudential policy and bank risk abstract this paper investigates the effects of macroprudential policies on bank risk through a large panel of banks operating in 61 advanced and emerging market economies there are three main findings first there is evidence suggesting that macroprudential tools have a significant impact on bank risk second the responses to changes in macroprudential tools differ among banks depending on their specific balance sheet characteristics in particular banks that are small weakly capitalised and with a higher share of wholesale funding react more strongly to changes in macroprudential tools third controlling for bank specific characteristics macroprudential policies are more effective in a tightening than in an easing episode

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

diversification as a public good community effects in portfolio choice within a rational general equilibrium model in which agents care only about personal consumption we consider a setting in which due to borrowing constraints individuals endowed with local resources underparticipate in financial markets as a result investors compete for local resources through their portfolio choices even with complete financial markets and no aggregate risk agents may herd into risky portfolios this yields a pareto dominated outcome as agents introduce community risk unrelated to fundamentals moreover if some agents are behaviorally biased or cannot completely diversify their holdings rational agents may choose more extreme portfolios and amplify the effect

revisiting marshall s agglomeration economies technological relatedness and the evolution of the sheffield metals cluster potter a and watts h d revisiting marshall s agglomeration economies technological relatedness and the evolution of the sheffield metals cluster regional studies according to alfred marshall firms receive increasing returns from a trinity of agglomeration economies a local pool of skilled labour local supplier linkages and local knowledge spillovers this article re examines the mechanisms underlying marshall s agglomeration economies in the sheffield metals cluster wherein marshall discovered them despite the cluster s decline empirical evidence is found that the mechanisms underlying marshallian agglomeration economies continue to occur within the surviving metals industry however upon closer examination marshallian agglomeration economies have evolved to become more prevalent amongst plants that use related metals technology the results highlight the importance of technological relatedness to cluster survival

price and volume effects associated with changes in the s p 500 list new evidence for the existence of price pressures attempts to identify price pressures caused by large transactions may be inconclusive if the transactions convey new information to the market this problem is addressed in an examination of prices and volume surrounding changes in the composition of the s p 500 since these changes cause some investors to adjust their holdings of the affected securities and since it is unlikely that the changes convey information about the future prospects of these securities they provide an excellent opportunity to study price pressures the results are consistent with the price pressure hypothesis immediately after an addition is announced prices increase by more than 3 percent this increase is nearly fully reversed after 2 weeks the efficient market hypothesis emh predicts that security prices reflect all publicly available information therefore one corollary of the emh is that you can sell or buy large blocks of stock at close to the market price as long as you can convince other investors that you have no private information 1 this statement assumes that securities are near perfect substitutes for each other if so the excess demand for a single security will be very elastic and the sale or purchase of a large number of shares will have no impact on price in contrast to the emh scholes 8 kraus and stoll 5 hess and frost 4 and others propose two hypotheses which predict that a large stock sale purchase will cause the price to decrease increase even if no new information is associated with the transaction the imperfect substitutes hypothesis ish also known as the distribution effect hypothesis assumes that securities are not close substitutes for each other and hence that long term demand is less than perfectly elastic under this hypothesis equilibrium prices change when demand curves shift to eliminate excess demand price reversals are not expected because the new price reflects a new equilibrium distribution of security holders the price pressure hypothesis pph assumes that investors who accommodate demand shifts must be compensated for the transaction costs and portfolio risks that they bear when they agree to immediately buy or sell securities which they otherwise would not trade these passive suppliers of liquidity are attracted by immediate price drops rises associated with large sales purchases they are compensated for their liquidity service when prices rise drop to their fullinformation levels the pph like the emh assumes that long run demand is

compensation incentives and the duality of risk aversion and riskiness the common folklore that giving options to agents will make them more willing to take risks is false in fact no incentive schedule will make all expected utility maximizers more or less risk averse this paper finds simple intuitive necessary and sufficient conditions under which incentive schedules make agents more or less risk averse the paper uses these to examine the incentive effects of some common structures such as puts and calls and it briefly explores the duality between a fee schedule that makes an agent more or less risk averse and gambles that increase or decrease risk with the growing interest in executive compensation and agency problems

the price response to s p 500 index additions and deletions evidence of asymmetry and a new explanation we study the price effects of changes to the s p 500 index and document an asymmetric price response there is a permanent increase in the price of added firms but no permanent decline for deleted firms these results are at odds with extant explanations of the effects of index changes that imply a symmetric price response to additions and deletions a possible explanation for asymmetric price effects arises from the changes in investor awareness results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of s p 500 index additions and deletions the long held assumption that stocks have perfect substitutes and the perfect elasticity of demand that follows from it is central to modern finance theory if securities have almost perfectly elastic demand then any supply or demand shocks that are devoid of information should have no effect on the prevailing price early empirical research on whether price changes occur in the absence of new information focused on block trades equity issues and stock splits but was unable to exclude information effects around these events since there is no obvious reason to believe ex ante that index changes contain new information they constitute a natural framework for testing whether stocks have almost perfectly elastic or horizontal demand curves a stock s excess return around such changes could be consistent with a downward sloping demand curve with the advent of indexed mutual funds in 1976 and the public announcement of s p index changes in the same year there is much evidence that such announcements are accompanied by an increase in price for firms added to the index if stocks have a short term downward sloping demand curve the price should be momentarily affected by a demand shock due to indexing but that effect

do demand curves for stocks slope down since september 1976 stocks newly included into the standard and poor s 500 index have earned a significant positive abnormal return at the announcement of the inclusion this return does not disappear for at least ten days after the inclusion the returns are positively related to measures of buying by index funds consistent with the hypothesis that demand curves for stocks slope down the returns are not related to s p s bond ratings which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock

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

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

local development conceptual bases and policy implications coffey w j and polese m 1985 local development conceptual bases and policy implications reg studies 19 85 93 although local development is frequently cited as an option within the broader context of regional policy the concept remains vague the bases of the local development approach lie in its complementarity with three traditional pillars of regional theory and policy capital and infrastructure policies migration as an adjustment mechanism and growth centre strategies in examining the potential utility of local development as an effective element of regional development policy we emphasize the emergence of local entrepreneurship and the role of the state in stimulating local initiatives local development policy may be generalized in terms of three options involving financial assistance access to information and social animation

international tax competition and gains from tax harmonization abstract in a world economy there are two types of distortions which can be caused by capital income taxation in addition to the standard closed economy wedge between the consumer saver marginal intertemporal rate of substitution and the producer investor marginal productivity of capital i international differences in intertemporal marginal rates of substitution implying an inefficient allocation of world savings across countries and ii international differences in the marginal productivity of capital implying an inefficient allocation of world investment across countries the paper focuses on the structure of taxation for countries which are engaged in tax competition and on potential gains from a tax harmonization we show that if the competing countries are sufficiently coordinated with the rest of the world then tax competition leads each country to apply the residence principle of taxation and there are no gains from tax harmonization if however there is not sufficient coordination then tax competition leads to low capital income taxes and the tax burden falls on the internationally immobile factors the outcome is nevertheless still efficient relative to the available constrained set of tax instruments

sourcing patterns of foreign owned multinational subsidiaries in europe tavares a t and young s 2006 sourcing patterns of foreign owned multinational subsidiaries in europe regional studies 40 583 599 this paper investigates the determinants of the international sourcing propensities of foreign owned multinational mne subsidiaries in four european union host countries major findings concern the impact of subsidiary roles and economic integration on international sourcing patterns regional and global integration are leading to a greater import orientation among mne subsidiaries including product mandate firms that are assumed to be strongly embedded within host economies the results cast doubts on existing criteria for inward foreign direct investment fdi attraction policy implications are developed relating to the attraction of inward fdi and to corporate development policies tavares a t et young s 2006 la distribution des sources d approvisionnement des filiales multinationales a capital etranger en europe regional studies 40 583 599 cet article che

when panic makes you blind a chaotic route to systemic risk abstract we present an analytical model to study the role of expectation feedbacks and overlapping portfolios on systemic stability of financial systems building on corsi et al 2016 we model a set of financial institutions having value at risk capital requirements and investing in a portfolio of risky assets whose prices evolve stochastically in time and are endogenously driven by the trading decisions of financial institutions assuming that they use adaptive expectations of risk we show that the evolution of the system is described by a slow fast random dynamical system which can be studied analytically in some regimes the model shows how the risk expectations play a central role in determining the systemic stability of the financial system and how wrong risk expectations may create panic induced reduction or over optimistic expansion of balance sheets specifically when investors are myopic in estimating the risk the fixed point equilibrium of the system breaks into leverage cycles and financial variables display a bifurcation cascade eventually leading to chaos we discuss the role of financial policy and the effects of some market frictions as the cost of diversification and financial transaction taxes in determining the stability of the system in the presence of adaptive expectations of risk

status the distribution of wealth private and social attitudes to risk this paper supposes an individual cares about his her own wealth not only directly but also via the relative standing that this wealth induces the implications for risk taking are investigated in particular such a model provides a natural explanation of the concave convex concave utility described by friedman and savage however there are a number of key differences between the present model and any model based on own wealth alone for example an equilibrium wealth distribution here may have a middle class further the status interaction involves an externality and an equilibrium wealth distribution may be pareto inefficient but also about the implied relative standing in the distribution of wealth has a long but checkered history an early exponent of such ideas was of course veblen 1899 it is indeed a notion which most economists reject albeit usually without explicit comment a notable and articulate exception however is frank 1985 for example see also the references frank cites on pp 33 34 it is however a notion with substantial intuitive appeal and it seems useful to ascertain its consequences before coming to a final judgement as to its merits the present paper is concerned with deriving the consequences of such valuation of status for risk taking what seems to be the sharpest possible model is adopted here this assumes that what is essentially ordinal rank in the wealth distribution enters von neumann morgenstern utility as an argument in addi tion to wealth itself thus higher wealth increases utility not only directly but also indirectly via higher status in the interests of both simplicity and drama it is typically assumed here that all individuals have identical utility functions which are concave in wealth but convex in status section 2 discusses how the model provides a natural explanation of the fundamental phenomenon addressed by friedman and savage 1948 that individuals may simultaneously purchase insurance and participate in lotteries although each individual here has a utility function which is concave in wealth itself utility can nevertheless be convex in wealth over some range when the indirect effect via status is included this effect is enhanced by the convexity of utility in status but will follow in any case if increasing wealth entails moving up in status much more rapidly than losing wealth entails moving down it is shown

competition in portfolio management theory and experiment we explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor manager relationship is nonexclusive our theory predicts that competition forces managers to promise portfolios that mimic arrow debreu ad securities which investors then combine to fit their preferences a weak version of the capital asset pricing model capm obtains where state prices relative to state probabilities implicit in prices of traded securities will be inversely ranked to aggregate wealth across states our experiment broadly corroborates the price and choice predictions of the theory however price quality deteriorates when only a few managers attract most of the available wealth wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating ad securities as in the theory but also because funds flow to managers who had better performance in the immediate past an observation unrelated to the theory this paper was accepted by jerome detemple finance

portfolio performance and agency the evaluation and compensation of portfolio managers is an important problem for practitioners optimal compensation will induce managers to expend eort to generate information and to use it appropriately in an informed portfolio choice our general model points the way towards analysis of optimal performance evaluation and contracting in a rich model optimal contracting in the model includes an important role for portfolio restrictions that are more complex than the sharing rule the agent s compensation gives the agent approximately to a benchmark return plus an incentive fee equal to a portfolio measure that is approximately the excess of return above the benchmark this measure is often used by practitioners but is simpler than the jensen measure and other measures commonly recommended in the academic literature in addition to the excess return above the xed benchmark the manager is given some additional incentive to take a position that deviates from the benchmark to remove an incentive to tend towards being a closet indexer ecient contracting involves restrictions on what portfolio strategies can be pursued and prior communication of the information gathered

the delegated lucas tree we analyze the effects of the observed increased share of delegated capital for trading strategies and equilibrium prices by introducing delegation into a standard lucas exchange economy in equilibrium some investors trade on their own account but others decide to delegate trading to professional fund managers flow performance incentive functions describe how much capital clients provide to funds at each date as a function of past performance convex flow performance relations imply that the average fund outperforms the market in recessions and underperforms in expansions when the share of capital that is delegated is low all funds follow the same strategy however when the equilibrium share of delegated capital is high funds with identical incentives employ heterogeneous trading strategies a group of managers borrows to take on a levered position on the stock thus fund returns are dispersed in the cross section and the outstanding amounts of borrowing and lending increase the relation between the share of delegated capital and the sharpe ratio typically follows an inverse u shaped pattern jel g11 g12 g23 d02 d81 over the past thirty years there has been a gradual but profound change in the way money is invested in financial markets while almost 50 of u s equities were held directly in 1980 by 2007 this proportion decreased to approximately 20 see french 2008 what are the equilibrium implications of this shift in particular how does the increased presence of delegation affect trading strategies and prices to analyze the link between the incentives of financial institutions and asset prices we introduce financial intermediaries into a lucas exchange economy rather than study an optimal contracting problem we rely on empirical regularities inflows and assume a convex relation betweenflows and performance relative to the market as documented for example in chevalier and ellison 1997

taxation of investment and savings in a world economy the equilibrium of capital and equilibrium market prices are derived for a world economy with a unified securities market mobile capital no uncertainty and varying tax rates on different sources of income in each country the paper then characterizes optimal tax rates for a small country in this setting focusing on the peculiar incentives created when the before tax rate of return differs among securities due to differences in their typical tax treatment copyright 1986 by american economic association

market liquidity hedging and crashes in the absence of significant news hedging strategies were blamed for the stock market crash of october 1987 but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop the authors develop a rational expectations model in which prices play an important role in shaping expectations markets are much less liquid in their model than in traditional models discontinuities or crashes can occur even with relatively little hedging the model is consistent with theories as disparate as keynes beauty contest insights and thom s catastrophe analysis and suggests means to reduce volatility copyright 1990 by american economic association

withholding taxes or information exchange the taxation of international interest flows abstract this paper considers withholding taxes and information exchange as alternative means to tax international interest income for each regime we consider the maximum level of taxation of foreign source income that can be sustained as the equilibrium of a repeated game the best regime is the one that brings the level of taxation in the repeated game closest to the cooperative level of interest taxation sustainable levels of taxation in either regime depend on the importance of bank profits and on the marginal cost of public funds among other things simulations with the model illustrate the choice between withholding taxes and information exchange an explicit possibility is the emergence of a mixed regime with one country imposing a withholding tax and the other country providing information the basic model is extended to allow for size differences between the two countries and to incorporate a third outside country

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal