threshold effects in price transmission the case of brazilian wheat maize and soya prices recent studies into price transmission have recognized the important role played by transport and transaction costs threshold models are one approach to accommodate such costs we develop a generalized threshold error correction model to test for the presence and form of threshold behavior in price transmission that is symmetric around equilibrium we use monthly wheat maize and soya prices from the united states argentina and brazil to demonstrate this model classical estimation of these generalized models can present challenges but bayesian techniques avoid many of these problems evidence for thresholds is found in three of the five commodity price pairs investigated

bayesian estimation and selection of nonlinear vector error correction models the case of the sugar ethanol oil nexus in brazil nonlinear adjustment toward long run price equilibrium relationships in the sugar ethanol oil nexus in brazil is examined we develop generalized bivariate error correction models that allow for cointegration between sugar ethanol and oil prices where dynamic adjustments are potentially nonlinear functions of the disequilibrium errors a range of models are estimated using bayesian monte carlo markov chain algorithms and compared using bayesian model selection methods the results suggest that the long run drivers of brazilian sugar prices are oil prices and that there are nonlinearities in the adjustment processes of sugar and ethanol prices to oil price but linear adjustment between ethanol and sugar prices

the high cost of incompletely funding the fslic shortage of explicit capital a useful parallel can be drawn between the alaskan oil spill of 1989 and the flood of red ink spilled in recent years by u s thrift institutions savings and loan associations and savings banks in each case initial damage from the spill was severely compounded by delaying and mishandling the clean up required for more than a decade federal officials refused to acknowledge that the thrift ink spill had compromised the integrity of the supporting deposit insurance fund instead of promptly shoring up the finances of this fund officials used accounting smoke and mirrors to cover up the fund s secularly increasing capital shortage this prolonged refusal to face up to the magnitude of the underfunding imposed enormous costs on society as a whole

prompt corrective action and bank efforts to recover from undercapitalization abstract this study empirically examines the likelihood and timing of bank recoveries from positions of undercapitalization our findings indicate that 1 there appears to be only a limited capacity for banks to correct positions of undercapitalization by growth limitations or dividend restrictions 2 the impact of profitability on recovery is greater the longer a bank remains undercapitalized and 3 equity infusions are the primary mechanism by which banks can recapitalize quickly this evidence is relevant to regulators in their implementation of the fdic improvement act of 1991 which requires that undercapitalized banks take prompt corrective actions to recapitalize quickly under threat of early closure

fdicia after five years at year end 1991 congress enacted fundamental deposit insurance reform for banks and thrifts the fdic improvement act this reform followed the failure of more than 2 000 depository institutions in the 1980s many failed because the incentive incompatibility of the structure of federal government provided deposit insurance encouraged moral hazard behavior by banks and poor agent behavior by regulators insurance was put on a more incentive compatible basis providing for a graduated series of sanctions mimicking market discipline that first may and then must be applied by the regulators on floundering banks this article reviews these changes and evaluates early results

benchmarking portfolio insurance and technical analysis a monte carlo comparison of dynamic strategies of asset allocation abstract this paper makes an extensive simulation comparison of popular dynamic strategies of asset allocation for each strategy alternative measures have been calculated for risk return and risk adjusted performance sharpe ratio sortino ratio return at risk moreover the strategies are compared in different market situations bull bear no trend markets and with different market volatility taking into account transaction costs and discrete rebalancing of portfolios the simulations show a dominant role of constant proportion strategies in bear and no trend markets and a preference for benchmarking strategies in bull markets these results are independent of the volatility level and the risk adjusted measure adopted

real interest rates and the savings and loan crisis the moral hazard premium real interest rates shifted upwards by four or five percentage points in approximately 1980 the question is why in this paper we review some of the more popular explanations and point out that they are somewhat inconsistent with the facts we then present a new explanation which may partially account for the dramatic increase we suggest that the upward shift in rates may be directly connected with the decade long crisis in the savings and loan industry and the federal government s handling of that crisis owners and managers of troubled thrifts responded to the incentives provided by underpriced deposit insurance by offering higher and higher rates in an attempt to attract new funds depositors anticipating that the government would protect their investments actively sought out higher yields in local and national markets the end result was that the rates offered by treasury securities rose to compete with these quasi risk free substitutes sold by savings and loans this added and indeed continues to add significantly to the federal government s borrowing costs we calculate this increased cost under various assumptions about the effect of the s l crisis on real interest rates

price dynamics in a vertical sector the case of butter we develop a reduced form model of price transmission in a vertical sector allowing for refined asymmetric contemporaneous and lagged own and cross price effects under time varying volatility the model is used to investigate the wholesale retail price dynamics in the u s butter market the analysis documents the nature of nonlinear price dynamics in a vertical sector it finds strong evidence of asymmetric retail price responses both in the short term and the longer term but only weak evidence of asymmetric wholesale price responses asymmetric retail responses play a major role in generating a skewed distribution of butter prices the empirical results indicate the presence of imperfect competition at the retail level

market integration among electricity markets and their major fuel source markets dynamic price information flows among u s electricity wholesale spot prices and the prices of the major electricity generation fuel sources natural gas uranium coal and crude oil are studied multivariate time series methods applied to weekly price data show that in contemporaneous time peak electricity prices move natural gas prices which in turn influence crude oil in the long run price is discovered in the fuel sources market except uranium as these prices are weakly exogenous in a reduced rank regression representation of these energy prices

the limits of diversification when losses may be large abstract recent results in value at risk analysis show that for extremely heavy tailed risks with unbounded distribution support diversification may increase value at risk and that generally it is difficult to construct an appropriate risk measure for such distributions we further analyze the limitations of diversification for heavy tailed risks we provide additional insight in two ways first we show that similar non diversification results are valid for a large class of risks with bounded support as long as the risks are concentrated on a sufficiently large interval the required length of the support depends on the number of risks available and on the degree of heavy tailedness second we relate the value at risk approach to more general risk frameworks we argue that in markets for risky assets where the number of assets is limited compared with the bounded distribution support of the risks unbounded heavy tailed risks may provide a reasonable approximation we suggest that this type of analysis may have a role in explaining various types of market failures in markets for assets with possibly large negative outcomes

deposit insurance regulation and moral hazard in the thrift industry evidence from the 1930 s this paper compares risk taking of insured and uninsured thrifts operating under strict and less strict regulatory regimes during the 1930 s analysis of balance sheet data indicates that while newly insured thrifts undertook less risk than their uninsured counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts possibly because of screening by deposit insurance authorities moral hazard emerged gradually insured institutions operating under relatively premissive regulatory regimes were more prone to undertake risky lending activities than their more tightly regulated counterparts given the current system of deposit insurance the results suggest that effective regulation and supervision will play a key role in maintaining thrift stability in the 1990s copyright 1992 by american economic association

the asymmetric effects of monetary policy a nonlinear vector autoregression approach this paper tests for nonlinearity in a standard vector autoregression including output prices and money supply using an estimation strategy that is consistent with a wide range of structural macroeconomic models shocks to the money supply are found to have stronger output effects and weaker price effects when output growth is initially low positive and negative monetary shocks are found to have nearly symmetric effects in addition there is some evidence that shocks of different magnitudes have asymmetric effects these results are consistent with the view that the aggregate supply curve is convex

third degree stochastic dominance here f x and g x are less than cumulative probability distributionis where x is a continuous or discrete random variable representing the outcome of a prospect the closed interval a b is the sample space of both prospects the integral shown in rule 2 and those shown throughout the paper are stieltjes integrals recall that the stieltjes integral fb f x dg x exists if one of the functions f and g is continuous and the other has finite variation in a b let d1 d2 and d3 be three sets of utility functions x d1 is the set containing all utility functions with 4 x and 1 x continuous and 41 x 0 for all xe a b d2 is the set with x 1 x 2 x continuous and q j x 0 02 x o for all xc a b d3 is the set with x 1 x 2 x 3 x continuous and 1 x 04 2 x o o for all xc a b here 1 x denotes the ith derivative of x hadar and russell proved that rule 1 is valid for all cd1 and rutle 2 is valid for all ed2 the authors point out that the set of probability distributions that can be ordered by means of second degree stochastic dominance is in general larger than that which can be ordered by means of first degree stochastic dominance note that in rule 2 they assume that x is not only an increasing function of x but also exhibits weak global risk aversion a condition guaranteed by requiring the second derivative of x to be nonpositive in this paper a condition which will be called third degree stochastic dominance is considered it is based on the following assumption about the form of the utility function x from a normative point of view one expects the risk premium associated with an uncertain prospect to become smaller the greater is the individual s wealth the plausibility and implications of this assumption h ave been explored by john pratt as well as others the risk premium of an uncertain prospect is that amount by which the certainty equivalent of the prospect differs from its expected value in mathematical terms given the prospect f x with expected value a the corresponding risk premium t is obtained by solving the following equation rb

active intermediation in a monetary overlapping generations economy abstract this paper establishes that the profit seeking activities of private intermediaries can ensure pareto efficiency in the standard pure exchange monetary overlapping generations economy without the need for government monetary or fiscal policy intervention moreover these profit seeking activities are shown to rule out all aperiodic and k periodic cycles for k greater than 2 contrary to much recent work on intermediation the profit opportunities that arise for intermediaries in this context are not due to assumed frictions or asymmetric information rather they are due to the dynamic open ended structure of the economy which permits debt roll over

deleveraging and monetary policy japan since the 1990s and the united states since 2007 japan s deleveraging became serious because the negative feedback loop was japan s deleveraging became serious because the negative feedback loop was not contained in its early stage of development the japanese government did not not contained in its early stage of development the japanese government did not act promptly to recapitalize banks that were suffering from the erosion of their act promptly to recapitalize banks that were suffering from the erosion of their capital buffer due to their large holdings of stocks as a result japan s banks only capital buffer due to their large holdings of stocks as a result japan s banks only slowly recognized bad loans while stopping lending to promising new projects slow slowly recognized bad loans while stopping lending to promising new projects slow but protracted asset sales resulted in a long period of asset price declines nonfi nanbut protracted asset sales resulted in a long period of asset price declines nonfi nancial companies perceived the deterioration of their balance sheets as permanent cial companies perceived the deterioration of their balance sheets as permanent and cut spending drastically as japan s economy stagnated the total amount of bad and cut spending drastically as japan s economy stagnated the total amount of bad loans turned out to be much larger than initially estimated loans turned out to be much larger than initially estimated

regulation competition and abnormal returns in the market for failed thrifts abstract this study investigates the returns to acquiring firm stockholders in federally assisted mergers in the savings and loan industry it is unique in that a these mergers are arranged and subsidized by government regulators and b they occur in a single industry one plagued by well publicized financial difficulties the contribution of resources by the federal government creates the possibility of wealth transfers from the government to owners of the acquiring firms we find consistent with the oversubsidization hypothesis that shareholders of acquiring firms earn significant positive returns

can the u s ethanol industry compete in the alternative fuels market the u s ethanol fuel industry has experienced preferential treatment from federal and state governments ever since the energy tax act of 1978 exempted 10 ethanol gasoline blend gasohol from the federal excise tax combined with a 54c gal ethanol import tariff this exemption was designed to provide incentives for the establishment and development of a u s ethanol industry despite these tax exemptions until recently the u s ethanol fuel industry was unable to expand from a limited regional market ethanol was dominated in the market by mtbe methyl tertiary butyl ether only after mtbe was found to contaminate groundwater and consequently banned in many states did the demand for ethanol expand nationally limit pricing on the part of mtbe refiners is one hypothesis that may explain this lack of ethanol entry into the fuel additives market as a test of this hypothesis a structural vector autoregression svar model of the ethanol fuel market is developed the results support the hypothesis of limit pricing behavior on the part of mtbe refiners and suggest the u s corn based ethanol industry is vulnerable to limit price competition which could recur the dependence of the corn based ethanol price on supply determinants limits u s ethanol refiners ability to price compete with sugar cane based ethanol refiners without federal support u s ethanol refiners may find it difficult to compete with cheaper sugar cane refined ethanol chiefly from brazil

deposit insurance pricing and social welfare abstract recent literature has established that financial disruption has real costs which justify government intervention in the financial sector one form of government intervention is deposit insurance in this paper we determine the optimal pricing and subsidy of deposit insurance in a social welfare context the main conclusion is that optimal deposit insurance need not be actuarially fair in an economy with a real and a financial sector we consider the effects of taxation and social political weights of the sectors we analyze two policy tools government supervision and deposit insurance pricing

price transmission and asymmetric adjustment in the spanish dairy sector asymmetric threshold vector error correction models are applied to monthly price data to analyse price relationships and patterns of transmission among farm and retail markets for a variety of dairy products in spain the results suggest that asymmetries affect a conspicuous part of the raw milk processed in spain implications for the organizational structure of spanish dairy markets are offered

why basel ii may need a leverage ratio restriction abstract we analyze regulatory capital requirements where the amount of required capital depends on the level of risk reported by the banks it is shown that if the supervisors have a limited ability to identify or to sanction dishonest banks an additional risk independent leverage ratio restriction may be necessary to induce truthful risk reporting the leverage ratio helps to offset the banks potential capital savings of understating their risks by i reducing banks put option value of limited liability ex ante and by ii increasing the banks net worth which in turn enhances the supervisors ability to sanction banks ex post

performance evaluation of portfolio insurance strategies using stochastic dominance criteria abstract this paper evaluates the performance of the stop loss synthetic put and constant proportion portfolio insurance techniques based on a block bootstrap simulation we consider not only traditional performance measures but also some recently developed measures that capture the non normality of the return distribution value at risk expected shortfall and the omega measure we compare them to the more comprehensive stochastic dominance criteria the impact of changing the rebalancing frequency and level of capital protection is examined we find that even though a buy and hold strategy generates higher average excess returns it does not stochastically dominate the portfolio insurance strategies nor vice versa our results indicate that a 100 floor value should be preferred to lower floor values and that daily rebalanced synthetic put and cppi strategies dominate their counterparts with less frequent rebalancing

spatial market integration in the presence of threshold effects a large body of research has evaluated price linkages in spatially separate markets much recent research has applied models appropriate for nonstationary data such analyses have been criticized for their ignorance of transactions costs which may inhibit price adjustments and thus affect tests of integration this analysis utilizes threshold autoregression and cointegration models to account for a neutral band representing transactions costs we evaluate daily price linkages among four corn and four soybean markets in north carolina nonlinear impulse response functions are used to investigate dynamic patterns of adjustments to shocks our results confirm the presence of thresholds and indicate strong support for market integration though adjustments following shocks may take many days to be complete in every case the threshold models suggest much faster adjustments in response to deviations from equilibrium than is the case when threshold behavior is ignored a large amount of empirical research has evaluated the extent to which spatially separate markets are integrated though the term is used loosely in the literature tests of market integration usually consider the extent to which shocks are transmitted among spatially separate markets the integration of markets can have important implications for price discovery and the operation of the market since persistent deviations from integration may imply riskless profit opportunities for spatial traders