name your own price at priceline com strategic bidding and lockout periods a buyer suggests prices to n sellers in a time period and buys from the seller who accepts the bid first the number of bidding rounds is determined by how frequently the buyer can make an offer we show that with no limit on the frequency and without discounting the price path is either kept flat initially with large jumps at the end or increasing steadily over time which class of path occurs in equilibrium depends on the buyer s trade off between committing to a price ceiling versus finely screening the sellers costs with discounting limiting the number of rounds mitigates the delay caused by the reluctance to raise bids in the first class of equilibrium and therefore can benefit the buyer this result suggests why in reality bargaining parties often take measures to make their offers rigid and consequently force themselves to make fewer offers copyright oxford university press

dynamic jump intensities and risk premiums evidence from s p500 returns and options we build a new class of discrete time models that are relatively easy to estimate using returns and or options the distribution of returns is driven by two factors dynamic volatility and dynamic jump intensity each factor has its own risk premium the models significantly outperform standard models without jumps when estimated on s p500 returns we find very strong support for time varying jump intensities compared to the risk premium on dynamic volatility the risk premium on the dynamic jump intensity has a much larger impact on option prices we confirm these findings using joint estimation on returns and large option samples

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

volume and skewness in international equity markets abstract we examine the relation between trading volume and skewness in 11 international stock markets using daily and monthly data from january 1980 to august 2004 we construct single equation and var models of the relation between the first three moments of market returns and trading volumes our results show hitherto unrecognised channels of influence and support the investor heterogeneity approach to explaining return asymmetries

estimating systemic risk in the international financial system this paper develops three distinct methods to quantify the risk of a systemic failure in the global banking system we examine a sample of 334 banks representing 80 of global bank equity in 28 countries around five global financial crises our results suggest statistically significant but economically small increases in systemic risk although policy responses are endogenous the low estimated probabilities suggest that the distress of central bankers regulators and politicians about the events we study could be overstated and that current policy responses to financial crises could be adequate to handle major macroeconomic events

bargaining and waning commitments this paper presents a non cooperative two agent two period complete information bargaining model that introduces gradual concession as observed for example in labor negotiations the capacity of concession may affect the agents payoffs in a non monotonic way since its change may cause the timing of agreement to change d 2006 elsevier b v all rights reserved

risk return and the three moment capital asset pricing model another look abstract most studies on three moment capital asset pricing models have found a strong and consistent relationship between an asset s returns and its higher statistical moments other studies report results which are opposite to what the theory would suggest this paper re examines the empirical evidence of the three moment capital asset pricing model on 43 randomly selected mutual funds from 1970 1986 the results indicate that trade offs of risks for returns on the selected mutual funds are less than predicted and inconsistent

strategic delay in bargaining this paper analyses a bargaining model with incomplete information in which the time between offers is an endogenous strategic variable we find equilibria involving a delay to agreement that is due to the use of strategic time delay by bargainers to signal their relative strength under some specifications of the parameters delay is present in the unique sequential equilibrium whose beliefs satisfy one intuitive restriction this delay does not vanish as the minimal time between offers becomes small

bargaining and strikes strikes are generally regarded as an important economic phenomenon and yet good theoretical explanations of them are hard to come by the difficulty is to understand why rational parties should resort to a wasteful mechanism as a way of distributing the gains from trade why could not both parties be made better off by moving to the final distribution of surplus immediately or if it is uncertain to its certainty equivalent and sharing the benefits from increased production

improved estimates of higher order comoments and implications for portfolio selection in the presence of nonnormally distributed asset returns optimal portfolio selection techniques require estimates for variance covariance parameters along with estimates for higher order moments and comoments of the return distribution this is a formidable challenge that severely exacerbates the dimensionality problem already present with mean variance analysis this article extends the existing literature which has mostly focused on the covariance matrix by introducing improved estimators for the coskewness and cokurtosis parameters we find that the use of these enhanced estimates generates a significant improvement in investors welfare we also find that it is only when improved estimators are used that portfolio selection with higher order moments dominates mean variance analysis from an out of sample perspective the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

dynamics of credit spread moments of european corporate bond indexes abstract traditional quantitative credit risk models assume that changes in credit spreads are normally distributed but empirical evidence shows that they are likely to be skewed fat tailed and change behaviour over time not taking into account such characteristics can compromise calculation of loss probabilities pricing of credit derivatives and profitability of trading strategies therefore the aim of this study is to investigate the dynamics of higher moments of changes in credit spreads of european corporate bond indexes using extensions of garch type models that allow for time varying volatility skewness and kurtosis of changes in credit spreads as well as a regime switching garch model which allows for regime shifts in the volatility of changes in credit spreads performance evaluation methods are used to assess which model captures the dynamics of observed distribution of the changes in credit spreads produces superior volatility forecasts and value at risk estimates and yields profitable trading strategies the results presented can have significant implications for risk management trading activities and pricing of credit derivatives

foundations of dynamic monopoly and the coase conjecture subgame perfect equilibria are characterized for a market in which the seller quotes a price each period assume zero costs positive interest rate continuum of buyers and some technical conditions if buyers valuations are positive then equilibrium is unique buyers strategies are stationary and the price sequence is determinant along the equilibrium path but possibly randomized elsewhere otherwise a continuum of stationary equilibria can exist but at most one with analytic strategies coase s conjecture is verified for stationary strategies reducing the period length drives all prices to zero or the least valuation connections to bargaining models are described journal qf economic literature classification

escaping car dependence in the outer suburbs of paris the outer suburbs of paris are home to a large number of low income households driven from the centre by the workings of the property market this shift could give rise to a new form of socio spatial segregation insofar as the elevated costs of mobility in such highly car dependent areas restrict and change these households mobility patterns these effects were observed in data on three groups of working people from the 2001 global transport survey however the socio spatial impact of this outward movement is significantly reduced by the residential mobility of low income households which move from the most car dependent areas to denser areas with better public transport provision the presence of social housing in these areas only partially explains these migrations these results obtained from 1999 census micro data cast doubt upon the emergence of a new form of segregation in the outer suburbs described by dodson and sipe

conditional var estimation using pearson s type iv distribution abstract this paper presents a new value at risk var estimation model for equity returns time series and tests it extensively on stock indices of 14 countries two most important stylized facts of such series are volatility clustering and non normality as a result of fat tails of the return distribution while volatility clustering has been extensively studied using the garch model and its various extensions the phenomenon of non normality has not been comprehensively explored at least in the context of var estimation a combination of extreme value theory evt and garch has been explored to analyze financial data showing non normal behavior this paper proposes a combination of the pearson s type iv distribution and the garch 1 1 approach to furnish a new method with superior predictive abilities the approach is back tested for the entire sample as well as for a holdout sample using rolling windows

divergent expectations as a cause of disagreement in bargaining evidence from a comparison of arbitration schemes the fact that settlement rates are much higher where final offer arbitration rather than conventional arbitration is the dispute settlement procedure is used as the basis of a test of the role of divergent and relatively optimistic expectations in causing disagreement in negotiations calculations of identical expectations contract zones using existing estimates of models of arbitrator behavior yield larger identical expectations contract zones in conventional arbitration than in final offer arbitration this evidence clearly suggests that divergent expectations alone are not an adequate explanation of disagreement in labor management negotiations a number of alternative explanations for disagreement are suggested and evaluated

estimating multi period value at risk of oil futures prices abstractin this study we estimate the multi period value at risk var of oil future prices under a generalized autoregressive conditional heteroscedasticity with a skewed t residuals garch st model which is developed to account for the stylized facts of oil futures returns such as serial correlation volatility clustering asymmetry and heavy tails an efficient approximation algorithm based on the moment calibration method is developed to compute the multi period var and the numerical experiments show that the algorithm can yield good approximation quality in the empirical analysis we find that the garch st model can yield superior out of sample performance to a garch normal model or a garch t model especially when measuring the extreme tail risk meanwhile the square root of time rule srtr tends to underestimate the multi period tail risk and cannot produce a better performance than the garch family models

no compromise uncertain costs in reputational bargaining abstract i show how uncertainty about agents future costs of delay can lead to substantial bargaining delays when agents have reputational concerns reputational concerns arise because with positive probability agents are behavioral types committed to demanding a fixed share of the surplus in equilibrium rational agents may demand almost the entire surplus and then wait with the deadlock only broken by the arrival of news about future costs even as the probability of behavioral types vanishes although both agents would benefit from a compromise reached immediately they do not propose such agreements because doing so would increase an opponent s option value of waiting

reputational bargaining with minimal knowledge of rationality two players announce bargaining postures to which they may become committed and then bargain over the division of a surplus the share of the surplus that a player can guarantee herself under first order knowledge of rationality is determined as a function of her probability of becoming committed as is the bargaining posture that she must announce in order to guarantee herself this much this maxmin share of the surplus is large relative to the probability of becoming committed e g it equals 30 if the commitment probability is 1 in 10 and equals 13 if the commitment probability is 1 in 1000 and the corresponding bargaining posture simply demands this share plus compensation for any delay in reaching agreement

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments

modeling asymmetric comovements of asset returns existing time varying covariance models usually impose strong restrictions on how past shocks affect the forecasted covariance matrix in this article we compare the restrictions imposed by the four most popular multivariate garch models and introduce a set of robust conditional moment tests to detect misspecification we demonstrate that the choice of a multivariate volatility model can lead to substantially different conclusions in any application that involves forecasting dynamic covariance matrices like estimating the optimal hedge ratio or deriving the risk minimizing portfolio we therefore introduce a general model which nests these four models and their natural asymmetric extensions the new model is applied to study the dynamic relation between large and small firm returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effect of transport costs on housing related financial stress in australia housing related financial stress or housing stress is usually measured on the basis of income and direct housing costs such as mortgage repayments and rents one cost that is not included in calculations of housing stress but which may be important is the difference made by transport costs this paper shows how a measure of housing stress that incorporates transport costs can give a different picture of housing stress from a measure that ignores transport costs the result shows that in capital cities bringing transport costs into a housing stress measure particularly affects households with children it is also found that the impact of transport costs is even greater outside capital cities and that access to public transport may play a role in determining the spatial pattern of housing stress and hence the impact of transport cost on housing stress

bargaining with endogenous deadlines we develop a two person negotiation model with complete information that makes endogenous both the deadline and the level of surplus destruction after the deadline we show that the undominated nash equilibrium outcome is always unique but might be inefficient moreover as the bargaining period becomes short or as the players become very patient the unique undominated nash equilibrium outcome is always inefficient

asset pricing higher moments and the market risk premium a note following the work of rubinstein 4 kraus and litzenberger kl 2 derived and tested a linear three moment pricing model finding the additional variable co skewness to explain the empirical anomalies of the two moment capital asset pricing model capm the three moment model was reexamined by friend and westerfield fw 1 with mixed results the purpose of this note is to examine why the market risk premium rm rf may influence tests of asset pricing models with higher moments when skewness is added to a pricing model developed within the usual two fund separation assumptions the market risk premium enters the pricing equation in a nonlinear fashion and is implicit in the estimation of each moment s coefficient unless this nonlinearity is recognized incorrect conclusions regarding the tests of such models may result section i examines the implications of the risk premium nonlinearity while section ii contains a brief summary

bargaining with imperfect commitment abstract we study the effect of imperfect commitment in noncooperative two person bargaining games by establishing the reputation for being stubborn a player sometimes commits to her initial demand becoming unable to change her demands or to accept an inferior offer from her opponent when the probability of being stubborn is small the set of equilibria is shown to be small and agreement may be reached immediately despite the possibility of stubbornness a player has greater bargaining power when she is more patient and or is more likely to be stubborn journal of economic literature classification number c78

unfolded garch models abstract a new garch type model for autoregressive conditional volatility skewness and kurtosis is proposed the approach decomposes returns into their signs and absolute values and specifies the joint distribution by combining a multiplicative error model for the absolute values a dynamic binary choice model for the signs and a copula function for their interaction the conditional volatility and kurtosis are determined by innovations following a folded or absolute student t distribution with time varying degrees of freedom and separate time variation in conditional return skewness is achieved by allowing the copula parameter to be dynamic model estimation is performed with bayesian methods using an adaptive markov chain monte carlo algorithm an empirical application to the returns on four major international stock market indices illustrates the statistical and economic significance of the new model for conditional higher moments

reputation in bargaining and durable goods monopoly this paper analyzes durable goods monopoly in an infinite horizon discrete time game we prove that as the time interval between successive offers approaches zero all seller payoffs between zero and static monopoly profits are supported by subgame perfect equilibria this reverses a well known conjecture of coase alternatively one can interpret the model as a sequential bargaining game with one sided incomplete information in which an uninformed seller makes all the offers our folk theorem for seller payoffs equally applies to the set of sequential equilibria of this bargaining game

housing investment and the private rental sector in australia over the past two decades the private rental sector has changed its role within the australian housing system as it has moved from being a tenure of transition comprised principally of young households saving to enter home ownership to a tenure of long term occupancy rising real house prices soaring interest rates changes in the nature of paid work and an increase in the number of household deaths through divorce or separation has seen an increasing proportion of households either unable to enter home purchase or unable to maintain their position within this tenure in addition access to publicly provided housing has declined this paper considers the changing environment for private rental housing in australia and examines the nature of investors and the size of their investment in the housing stock as well as the impact of their investment strategies on the operation of the housing market

optimal value commitment in bilateral bargaining we study the role of commitment as a source of strategic power in a non cooperative bargaining game two impatient players bargain about the division of a shrinking surplus under a standard bargaining protocol in discrete time with constant recognition probabilities before bargaining a player can commit to some part of the surplus this commitment remains binding until the surplus has shrunk below the amount that the player is committed to intuitively one cannot remain committed to something which has become impossible the model offers insight on the relative importance of proposal power and commitment for the bargaining outcome in a version of the game where both players may simultaneously choose their commitments the equal split emerges from within a range of equilibrium divisions as a focal point which is robust to changes in the model parameters 2012

tough negotiations bilateral bargaining with durable commitments abstract we offer a tractable model of tough negotiations and delayed agreement the setting is an infinite horizon bilateral bargaining game in which negotiators can make strategic commitments to durable offers commitments decay stochastically but uncommitted negotiators can make new commitments the game s unique markov perfect equilibrium outcome takes the form of a war of attrition negotiators initially commit to incompatible offers but agreement occurs once a negotiator s commitment decays if commitments decay more quickly the terms of the agreement become more equal in expectation more patient committed and less risk averse negotiators obtain a larger fraction of the surplus

the copula garch model of conditional dependencies an international stock market application abstract modeling the dependency between stock market returns is a difficult task when returns follow a complicated dynamics when returns are non normal it is often simply impossible to specify the multivariate distribution relating two or more return series in this context we propose a new methodology based on copula functions which consists in estimating first the univariate distributions and then the joining distribution in such a context the dependency parameter can easily be rendered conditional and time varying we apply this methodology to the daily returns of four major stock markets our results suggest that conditional dependency depends on past realizations for european market pairs only for these markets dependency is found to be more widely affected when returns move in the same direction than when they move in opposite directions modeling the dynamics of the dependency parameter also suggests that dependency is higher and more persistent between european stock markets

a letter to the editor on wage bargaining abstract the rubinstein perfect information alternating offers bargaining model is problematic when applied to wage negotiations a strike or any other industrial action is not an automatic consequence of a delay in reaching an agreement because production can continue normally also when negotiations take place this paper extends the rubinstein model to incorporate the choice of calling a strike and it is shown that in this model there is no longer a unique subgame perfect equilibrium and that strikes with a length in real time can occur in equilibrium

quadratic arch models we introduce a new model for time varying conditional variances as the most general quadratic version possible within the arch class hence it encompasses all the existing restricted quadratic variance functions its properties are very similar to those of garch models but avoids some of their criticisms in univariate applications to daily u s and monthly u k stock market returns qarch adequately represents volatility and risk premia qarch is easy to incorporate in multivariate models to capture dynamic asymmetries that garch rules out such asymmetries are found in an empirical application of a conditional factor model to 26 u k sectorial stock returns

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

risk and global economic architecture why full financial integration may be undesirable integration of global financial markets was supposed to lead to greater financial stability as risks were spread around the world the finan cial crisis has thrown doubt on this conclusion a failure in one part of the global economic system caused a global meltdown the recent crisis has shown that in the absence of appro priate government intervention privately profit able transactions may lead to systemic risk this paper provides a general analytic framework within which we can analyze the optimal degree and form of financial integration within this general framework full integration is not in general optimal indeed faced with a choice between two polar regimes full integration or autarky in the simplified model autarky may be superior

portfolio optimization in the presence of dependent financial returns with long memory a copula based approach abstract in this paper we seek to examine the effect of the presence of long memory on the dependence structure between financial returns and on portfolio optimization first we focus on the dependence structure using copulas to select the best copula in addition to the goodness of fit tests we employ a graphical method based on visual comparison of the fitted copula density and the smoothed copula density estimated by wavelets moreover we check the stability of the copula parameter the empirical results show that the long memory affects the dependence structure second we analyze the impact of this dependence structure on the optimal portfolio we propose a new approach based on minimizing the conditional value at risk and assuming that the dependence structure is modeled by the copula parameter the empirical results show that our approach outperforms the traditional minimizing variance approach where the dependence structure is represented by the linear correlation coefficient

voting and vetoing the consequences of veto power in committees is analyzed using the appro ach of noncooperative bargaining theory it is first shown that in equilibrium nonveto players do not share in the benefits gained by the decision making of the committee that is in every equilibrium outcome of the bargaining game nonveto players earn zero some measures for reducing the excessive power of veto members in committees are analyzed specifically i study the effects of imposing a deadline on negotiations and of expanding the committee by increasing the number of nonveto players quantitative results are given for the case of the un security council

conditionally heteroskedastic factor models with skewness and leverage effects conditional heteroskedasticity skewness and leverage effects are well known features of financial returns the literature on factor models has often made assumptions that preclude the three effects to occur simultaneously in this paper i propose a conditionally heteroskedastic factor model that takes into account the presence of both the conditional skewness and leverage effects this model is specified in terms of conditional moment restrictions and unconditional moment conditions are proposed allowing inference by the generalized method of moments gmm the model is also shown to be closed under temporal aggregation an application to daily excess returns on sectorial indices from the u k stock market provides a strong evidence for dynamic conditional skewness and leverage with a sharp efficiency gain resulting from accounting for both effects the estimated volatility persistence from the proposed model is lower than that estimated from models that rule out such effects i also find that the longer the returns horizon the fewer conditionally heteroskedastic factors may be required for suitable modeling and the less strong is the evidence for dynamic leverage some of these results are in line with the main findings of harvey and siddique 1999 and jondeau and rockinger 2003 namely that accounting for conditional skewness impacts the persistence in the conditional variance of the return process

selective acceptance and inefficiency in a two issue complete information bargaining game abstract this paper explores the effects of a selective acceptance rule on the outcome of two issue negotiations the alternating offer game introduced here allows for the possibility that settlement may be reached on one issue while negotiation continues about the other this model captures features of laws that are generally believed to increase efficiency the analysis shows that if one issue is indivisible there are inefficient subgame perfect equilibria with no pareto improving alternative equilibria with opposing valuations rapid communication guarantees inefficiency these are unique examples of this strong form of inefficiency in an alternating offer bargaining game with complete and perfect information journal of economic literature classification numbers c72 j30

delay in multilateral bargaining under complete information abstract this paper analyzes a complete information infinite horizon multilateral bargaining model in which one player bargains with each of the other players one at a time and binding cash offer contracts are used to govern transactions under a weak stationarity condition on equilibrium strategies we characterize the set of equilibria for the game we show that when players are sufficiently patient significant delay in reaching agreements may emerge and this delay can become longer quickly as the number of involved parties rises indeed when the number of bargainers is large perpetual disagreement can occur in equilibrium journal of economic literature classification numbers c78 d23 d62

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

liaisons dangereuses increasing connectivity risk sharing and systemic risk the recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises this paper shows that a financial network can be most resilient for intermediate levels of risk diversification and not when this is maximal as generally thought so far this finding holds in the presence of the financial accelerator i e when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent s subsequent performance through the reaction of the agent s counterparties 2012 elsevier b v all rights reserved

car dependence and housing affordability an emerging social deprivation issue in london this paper investigates the combined problem of high car dependence and housing affordability in view of likely continued volatility in oil prices and hence higher petrol and diesel prices and rising house prices household budgets are likely to be stretched where there are high levels of car dependency and housing unaffordability with little flexibility for rising costs in either or both of these a composite car dependence and housing affordability cdha index is developed using indices of oil vulnerability related to car travel and housing affordability greater london is used as the case study with 2001 and 2011 data analysed at the level of lower super output areas and presented using geographic information system and r statistical software the findings reveal that there are high levels of composite car dependence and housing price vulnerability in many suburban areas across greater london adding to the previous areas of social deprivation found mainly in east london the composite cdha i

hourly volatility spillovers between international equity markets abstract this paper examines the timing of mean and volatility spillovers between new york and london equity markets using an arch model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so the most significant effects surround the movement of share prices around the new york opening but these results are not strong several new arch models are estimated including an asymmetric or leverage model and a non linear model which allows big shocks to have a different impact from small shocks

a stochastic volatility model with conditional skewness we develop a discrete time affine stochastic volatility model with time varying conditional skewness svs importantly we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way our approach allows current asset returns to be asymmetric conditional on current factors and past information which we term contemporaneous asymmetry conditional skewness is an explicit combination of the conditional leverage effect and contemporaneous asymmetry we derive analytical formulas for various return moments that are used for generalized method of moments gmm estimation applying our approach to s p500 index daily returns and option data we show that one and two factor svs models provide a better fit for both the historical and the risk neutral distribution of returns compared to existing affine generalized autoregressive conditional heteroscedasticity garch and stochastic volatility with jumps svj models our results are not due to an overparameterization of the mod

multilateral bargaining with concession costs this paper presents a new non cooperative approach to multilateral bargaining we consider a demand game with the following additional ingredients i there is an exogenous deadline by which bargaining has to end ii prior to the deadline players may sequentially change their demands as often as they like iii changing one s demand is costly and this cost increases as the deadline gets closer the game has a unique subgame perfect equilibrium prediction in which agreement is reached immediately and switching costs are avoided moreover this equilibrium is invariant to the particular order and timing in which players make demands this is important as multilateral bargaining models are sometimes too sensitive to these particular details in our context players with higher concession costs obtain higher shares of the pie their increased bargaining power stems from their ability to credibly commit to a demand earlier we discuss how the setup and assumptions are a reasonable description for certain real bargaining situations

costly bargaining and renegotiation we identify the inefficiencies that arise when negotiation between two parties takes place in the presence of transaction costs first for some values of these costs it is efficient to reach an agreement but the unique equilibrium outcome is one in which agreement is never reached secondly even when there are equilibria in which an agreement is reached we find that the model always has an equilibrium in which agreement is never reached as well as equilibria in which agreement is delayed for an arbitrary length of time finally the only way in which the parties can reach an agreement in equilibrium is by using inefficient punishments for some of the opponent s deviations we argue that this implies that when the parties are given the opportunity to renegotiate out of these inefficiencies the only equilibrium outcome which survives is the one in which agreement is never reached regardless of the value of the transaction costs

asset commonality debt maturity and systemic risk we develop a model in which asset commonality and short term debt of banks interact to generate excessive systemic risk banks swap assets to diversify their individual risk two asset structures arise in a clustered structure groups of banks hold common asset portfolios and default together in an unclustered structure defaults are more dispersed portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency when bank debt is short term creditors do not roll over in response to adverse signals and all banks are ine ciently liquidated this information contagion is more likely under clustered asset structures in contrast when bank debt is long term welfare is the same under both asset structures

striking for a bargain between two completely informed agents this paper models the wage contract negotiation procedure between a union and a firm as a sequential bargaining process in which the union must decide in each period whether or not to strike for the duration of that period we show that there exist subgame perfect equilibria in which the union engages in several periods of strikes prior to reaching a final agreement although both parties are completely rational and fully informed this has implications for other inefficient phenomena such as tariff wars debt negotiations and wars in general we characterize the set of equilibria show that strikes can occur in real time and discuss extensions of the model such as lockouts and the possibility of multiple recontracting opportunities copyright 1991 by american economic association

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

bargaining with common values this paper examines a bargaining model with asymmetric information in which the private valuations of the two bargaining agents are correlated it shows that equilibria in such models typically exhibit a significant probability of a significant delay to agreement the paper characterizes the unique perfect bayesian equilibrium to the game in which an uninformed buyer makes offers to a privately informed seller it also shows by example that in this framework bargainers may rationally break off negotiations even in the presence of commonly known gains from trade

tail granger causalities and where to find them extreme risk spillovers vs spurious linkages abstract identifying risk spillovers in financial markets is of great importance for assessing systemic risk and portfolio management granger causality in tail or in risk tests whether past extreme events of a time series help predicting future extreme events of another time series the topology and connectedness of networks built with granger causality in tail can be used to measure systemic risk and to identify risk transmitters here we introduce a novel test of granger causality in tail which adopts the likelihood ratio statistic and is based on the multivariate generalization of a discrete autoregressive process for binary time series describing the sequence of extreme events of the underlying price dynamics the proposed test has very good size and power in finite samples especially for large sample size allows inferring the correct time scale at which the causal interaction takes place and it is flexible enough for multivariate extension when more than two time series are considered in order to decrease false detections as spurious effect of neglected variables an extensive simulation study shows the performances of the proposed method with a large variety of data generating processes and it introduces also the comparison with the test of granger causality in tail by hong et al 2009 we report both advantages and drawbacks of the different approaches pointing out some crucial aspects related to the false detections of granger causality for tail events an empirical application to high frequency data of a portfolio of us stocks highlights the merits of our novel approach

risk dependence of covar and structural change between oil prices and exchange rates a time varying copula model abstract this paper analyses the dynamic dependence between wti crude oil and the exchange rates of the united states and china taking structural changes of dependence into account by using six time varying copula models upside and downside conditional values at risk covars are introduced specifically to measure the upward and downward risk dependences between oil prices and exchange rates the findings indicate a structural break point of dependence exists between daily or weekly crude oil and the us dollar index the dependence between crude oil and the rmb exchange rate is faintly positive with lower tail dependence while the dependence between crude oil and the us dollar index is significantly negative with lower upper and upper lower tail dependence finally the covars results show that there is significant risk spillover from crude oil to chinese and the us exchange rate markets furthermore the spillover effect is significantly asymmetry in chinese exchange rate market in response to rising and falling oil returns while the asymmetry of spillover effect for the us dollar index is not significant

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

credit chains and bankruptcy propagation in production networks abstract we present a simple model of a production network in which firms are linked by supplier customer relationships involving extension of trade credit our aim is to identify the minimal set of mechanisms which reproduce qualitatively the main stylized facts of industrial demography such as firms size distribution and at the same time the correlation over time and across firms of output growth and bankruptcies the behavior of aggregate variables can be traced back to the direct firm firm interdependence in this paper we assume that the number of firms is constant and the network has a periodic static structure but the framework allows further extensions to investigate which network structures are more robust against domino effects and if the network is let to evolve in time which structures emerge spontaneously depending on the individual strategies for orders and delivery

conditional volatility skewness and kurtosis existence persistence and comovements abstract recent portfolio choice asset pricing value at risk and option valuation models highlight the importance of modeling the asymmetry and tail fatness of returns these characteristics are captured by the skewness and the kurtosis we characterize the maximal range of skewness and kurtosis for which a density exists and show that the generalized student t distribution spans a large domain in the maximal set we use this distribution to model innovations of a garch type model where parameters are conditional after demonstrating that an autoregressive specification of the parameters may yield spurious results we estimate and test restrictions of the model for a set of daily stock index and foreign exchange returns the estimation is implemented as a constrained optimization via a sequential quadratic programming algorithm adequacy tests demonstrate the importance of a time varying distribution for the innovations in almost all series we find time dependency of the asymmetry parameter whereas the degree of freedom parameter is generally found to be constant over time we also provide evidence that skewness is strongly persistent but kurtosis is much less so a simulation validates our estimations and we conjecture that normality holds for the estimates in a cross section setting we also document covariability of moments beyond volatility suggesting that extreme realizations tend to occur simultaneously on different markets

negative externalities may cause delay in negotiation we study the strategic equilibria of a negotiation game where potential buyers are affected by identity dependent negative externalities the unique equilibrium of long finitely repeated generic games can either display delay where a transaction can take place only in several stages before the deadline or in spite of the random element in the game a well defined buyer exists that obtains the object with probability close to one

common trends in global volatility abstract this paper investigates the long term patterns in global foreign exchange equity and bond markets in three different trading zones namely japan europe and the united states recent advances in the measurement of volatility from high frequency data are used together with the concepts of fractional integration and cointegration the specific objective is to consider whether there are common trends that drive volatility in the global marketplace this so called commonality in volatility hypothesis is formulated using a cofractional model the results confirm that volatility in all three financial asset markets across all three trading zones share a single common trend which lends itself to interpretation as a global news stream

a critique of the stochastic discount factor methodology in this paper we point out that the widely used stochastic discount factor sdf methodology ignores a fully specified model for asset returns as a result it suffers from two potential problems when asset returns follow a linear factor model the first problem is that the risk premium estimate from the sdf methodology is unreliable the second problem is that the specification test under the sdf methodology has very low power in detecting misspecified models traditional methodologies typically incorporate a fully specified model for asset returns and they can perform substantially better than the sdf methodology asset pricing theories such as those of sharpe 1964 lintner 1965 black 1972 merton 1973 ross 1976 and breeden 1979 show that the expected return on a financial asset is a linear function of its covariances or betas with some systematic risk factors this implication has been tested extensively in the finance literature by the so called traditional methodologies in the traditional methodologies a data generating process is first proposed for the returns and then the restrictions imposed by an asset pricing model are tested as parametric constraints on the return generating process the approach taken by the traditional methodologies has a potential problem which is that when the proposed return generating process is misspecified the test results could be misleading therefore in applying the traditional methodologies researchers typically have to justify that the proposed data generating process provides a good description of the returns for example when the proposed return generating process is a factor model one would like the model to have high r 2 in explaining the returns on the test assets especially when the test assets are well diversified portfolios as many of the earlier theories are special cases of the stochastic discount factor sdf model recent empirical asset pricing studies have been focused on testing the pricing restrictions in terms of the sdf model rather

systemic risk in financial systems we consider default by firms that are part of a single clearing mechanism the obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity we first show via a fixed point argument that there always exists a clearing payment vector that clears the obligations of the members of the clearing system under mild regularity conditions this clearing vector is unique next we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms finally we produce qualitative comparative statics for financial systems these comparative statics imply that in contrast to single firm results even unsystematic nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms

bargaining with history dependent preferences abstract two impatient players bargain over a pie of size one according to the infinite alternating offers procedure players payoffs depend not only on the outcome but also on the process of the bargaining specifically they prefer impasse to any agreement that gives them lower discounted utility than would have been derived from accepting earlier offers we characterize the essentially unique subgame perfect equilibrium path which consists of gradual concessions the more patient players are the longer it takes them to reach an agreement when players become infinitely patient the efficiency loss is substantial yet the equilibrium division converges to the nash solution

deadline effects and inefficient delay in bargaining with endogenous commitment abstract bilateral sequential negotiators delay agreements until a deadline if a player that rejects an offer is subsequently committed not to accept any poorer proposal and if the common discount factor is close enough to one journal of economic literature classification numbers c7 c78 j52

balance sheet contagion japan has been in a slump for the past decade after gdp had been growing by on average 4 percent during the 1980 s the growth rate dropped to 1 percent in the 1990 s asset prices also fluctuated significantly capital gains on stocks and real estate in the 1980 s followed by capital losses in the 1990 s were both on the order of a few years worth of gdp even after taking inflation into account together with production and asset prices the fraction of nonperforming loans fluctuated substantially these are by no means all bank loans for the nonfinancial corporate sector in japan the ratio of financial assets to total assets is about 40 percent much higher than in the united states such financial assets include loans to and securities of other private agents that is nonfinancial institutions simultaneously borrow from and lend to each other on a significant scale many nonperforming loans are interlocked paralyzing the financial system it is important to recognize that these swings have been experienced by almost all sectors of the japanese economy yet in other countries comparable movements in asset prices have had less widespread consequences for example the recent fluctuations in the nasdaq index in the united states have been no smaller than those of asset prices in japan but the damage appears to be contained to closely related sectors although u s equity holders particularly pension funds have lost value the level of nonperforming loans is relatively limited up to now the question is why does there appear to be more contagion in some countries than in others has contagion anything to do with the nature of financing or the extent to which there are inter locking loans in this theoretical paper we examine two different mechanisms by which contagion may occur in both cases propagation is through balancesheet effects first through the indirect effects that fluctuations in asset prices have on collateral values second through the direct effects that default on or postponement of debt repayments have when there are chains of credit

modeling the conditional distribution of daily stock index returns an alternative bayesian semiparametric model this article introduces a new family of bayesian semiparametric models for the conditional distribution of daily stock index returns the proposed models capture key stylized facts of such returns namely heavy tails asymmetry volatility clustering and the leverage effect a bayesian nonparametric prior is used to generate random density functions that are unimodal and asymmetric volatility is modeled parametrically the new model is applied to the daily returns of the s p 500 ftse 100 and eurostoxx 50 indices and is compared with garch stochastic volatility and other bayesian semiparametric models

superstitious seasonality in precious metals markets evidence from garch models with time varying skewness and kurtosis in this article we analyse whether the friday the 13th effect documented by kolb and rodriguez 1987 can be observed in precious metals markets specifically we use dummy augmented garch models to investigate the impact of this specific calendar day on the conditional means of gold silver palladium and platinum returns the specification of the garch model follows a flexible class recently proposed by leon et al 2005 that incorporates time varying skewness and kurtosis by applying a gram charlier series expansion of the normal density function our results for the period from july 1996 to august 2013 provide three important insights first there is no evidence that human superstition regarding bad luck fridays affects precious metals markets in a negative way i e returns on fridays the 13th are not significantly lower than on regular fridays second besides showing robustness in a variety of settings we can confirm this main result in a sensitivity check where we replace the dummy variables

on delay in bargaining with one sided uncertainty recently attention has been given to a model of two person bargaining in which the parties alternate making offers and there is uncertainty about the valuation of one party the purpose of the analysis has been to identify delay to agreement with a screening process where agents with relatively lower valuations distinguish themselves by waiting longer to settle we point out a fundamental difficulty with this program by demonstrating that the assumptions used in the literature allow for delay only in so far as the time between offers is significant

alternating offer bargaining with endogenous commitment abstract we revisit the classical alternating offer bargaining model further assuming that players cannot reduce their proposals during the game in equilibrium players have history dependent strategies and do not necessarily reach an agreement immediately in the first stage

optimism delay and in efficiency in a stochastic model of bargaining abstract i study a bilateral bargaining game in which the size of the surplus follows a stochastic process and in which players might be optimistic about their bargaining power following yildiz 2003 i model optimism by assuming that players have different beliefs about the recognition process i show that the unique subgame perfect equilibrium of this game might involve inefficient delays i also show that these inefficiencies disappear when players can make offers arbitrarily frequently

reputational bargaining and deadlines i highlight how reputational concerns provide a natural explanation for deadline effects the high frequency of deals prior to a deadline in bargaining rational agents imitate the demands of obstinate behavioral types and engage in brinkmanship in the face of uncertainty about the deadline s arrival i also identify how surplus is divided when the prior probability of behavioral types is vanishingly small if behavioral types are committed to fixed demands outcomes converge to the nash bargaining solution regardless of agents respective impatience if behavioral types can adopt more complex demand strategies outcomes converge to the solution of an alternating offers game without behavioral types for the deadline environment

model free evaluation of directional predictability in foreign exchange markets we examine directional predictability in foreign exchange markets using a model free statistical evaluation procedure based on a sample of foreign exchange spot rates and futures prices in six major currencies we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns but also the past history of interest rate differentials suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates this evidence becomes stronger when the direction of larger changes is considered we further document that despite the weak conditional mean dynamics of foreign exchange returns directional predictability can be explained by strong dependence derived from higher order conditional moments such as the volatility skewness and kurtosis of past foreign exchange returns moreover the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability we also examine the co movements between two foreign exchange rates particularly the co movements of joint large changes there exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials furthermore both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes several sources can explain this directional predictability of joint changes including the level and volatility of underlying currency returns copyright 2007 john wiley sons ltd

portfolio selection in multidimensional general and partial moment space abstract this paper develops a general approach for the single period portfolio optimization problem in a multidimensional general and partial moment space a shortage function is defined that looks for possible increases in odd moments and decreases in even moments a main result is that this shortage function ensures sufficient conditions for global optimality it also forms a natural basis for developing tests on the influence of additional moments furthermore a link is made with an approximation of an arbitrary order of a general indirect utility function this non parametric efficiency measurement framework permits to differentiate mainly between portfolio efficiency and allocative efficiency finally information can in principle be inferred about the revealed risk aversion prudence temperance and other higher order risk characteristics of investors

generating volatility forecasts from value at risk estimates statistical volatility models rely on the assumption that the shape of the conditional distribution is fixed over time and that it is only the volatility that varies the recently proposed conditional autoregressive value at risk caviar models require no such assumption and allow quantiles to be modeled directly in an autoregressive framework although useful for risk management caviar models do not provide volatility forecasts such forecasts are needed for several other important applications such as option pricing and portfolio management it has been found that for a variety of probability distributions there is a surprising constancy of the ratio of the standard deviation to the interval between symmetric quantiles in the tails of the distribution such as the 0 025 and 0 975 quantiles this result has been used in decision and risk analysis to provide an approximation of the standard deviation in terms of quantile estimates provided by experts drawing on the same result we construct financial volatility forecasts as simple functions of the interval between caviar forecasts of symmetric quantiles forecast comparison using five stock indices and 20 individual stocks shows that the method is able to outperform generalized autoregressive conditional heteroskedasticity garch models and moving average methods

simultaneous offers and the inefficiency of bargaining a two period example abstract it is shown that the pareto optimal outcomes in a two period simultaneous move bargaining model violate forwards induction rationality when the players are sufficiently patient this bargaining model describes a situation where a principal is represented by an agent whose flexibility is restricted hence a bargaining process with such agents can create costly delays the result also provides another example of the power of forwards induction and stability

market timing with option implied distributions a forward looking approach we address the empirical implementation of the static asset allocation problem by developing a forward looking approach that uses information from market option prices to this end we extract constant maturity s p 500 implied distributions and transform them to the corresponding risk adjusted ones then we form optimal portfolios consisting of a risky and a risk free asset and evaluate their out of sample performance we find that the use of risk adjusted implied distributions times the market and makes the investor better off than if she uses historical returns distributions to calculate her optimal strategy the results hold under a number of evaluation metrics and utility functions and carry through even when transaction costs are taken into account not surprisingly the reported market timing ability deteriorated during the recent subprime crisis an extension of the approach to a dynamic asset allocation setting is also presented this paper was accepted by wei xiong finance