balancing terrorism and natural disasters defensive strategy with endogenous attacker effort in this paper we apply game theory to identify equilibrium strategies for both attacker and defender in a fully endogenous model of resource allocation for countering terrorism and natural disasters the key features of our model include balancing protection from terrorism and natural disasters and describing the attacker choice by a continuous level of effort rather than a discrete choice i e attack or not interestingly in a sequential game increased defensive investment can lead an attacker to either increase his level of effort to help compensate for the reduced probability of damage from an attack or decrease his level of effort because attacking has become less profitable this can either reduce or increase the effectiveness of investments in protection from intentional attack and can therefore affect the relative desirability of investing in protection from natural disasters

order flow transaction clock and normality of asset returns the goal of this paper is to show that normality of asset returns can be recovered through a stochastic time change clark 1973 addressed this issue by representing the price process as a subordinated process with volume as the lognormally distributed subordinator we extend clark s results and find the following i stochastic time changes are mathematically much less constraining than subordinators ii the cumulative number of trades is a better stochastic clock than the volume for generating virtually perfect normality in returns iii this clock can be modeled nonparametrically allowing both the time change and price processes to take the form of jump diffusions the relations among trading volume stock prices and price volatility the subject of empirical and theoretical studies over many years have lately received renewed attention with the increased availability of high frequency data a vast amount of research has focused on issues such as news arrivals volume and price changes or volatility moves usually outside any framework of general or even partial equilibrium is the normality of returns a key issue for example in the mean variance paradigm for portfolio choice or the recent study of the problems of risk management e g in value at risk verified at any time horizon the evidence accumulated from a number of studies that document the presence of leptokurtosis and skewness in the distribution of returns of a wide variety of financial assets suggests that the answer is no studies as early as for example fama 1965 showed that daily returns are more long tailed than the normal density with the distribution of returns approaching normality as the holding period is extended to one month in the same manner volatility smiles and other observed

international institutional lending arrangements to sovereign borrowers abstract recent financial crises in east asia and elsewhere have illustrated the problems that plague emergency liquidity arrangements and the lender of last resort role of the international monetary fund and other international institutions in particular these act under conditions of extreme uncertainty where potential sovereign borrowers as well as private financial institutions are kept in the dark regarding the intentions of the emergency lenders and the amounts and terms of emergency liquidity that can be tapped from april 1999 longer term credit lines are being offered by the imf designed to be awarded to healthy countries before they experience contagion or distress the paper evaluates the advantages of this form of imf lending and this new trend in imf operations it is argued that provision of imf financing through such long term lending facilities is better in some senses than shorter term lending long term contracts reduce the uncertainty with respect to imf intentions moral hazard problems are reduced for the borrowing country and financial markets know the future level and terms of imf support another advantage is that long term loan contracts improve the allocation of resources within the borrowing country much as private sector facility lending is the dominant mode of finance in many markets so facility lending has efficiency advantages when it is provided by the imf this efficiency advantage is derived formally it is shown that sovereign borrowers are actually better off when utilizing these as backup lines of credit instead of emergency borrowing that is conducted after distress occurs facility lending by international institutions can lead to a welfare improvement and superior resource allocation for sovereign borrowers the intuition for this is that when financial distress drives these borrowers to increase their debt risk premia in borrowing rates would not rise at least up to the limits established by the size of the facility

structural changes in volatility and stock market development evidence for spain abstract in this paper we review the factors that lead to changes in stock market volatility and use alternative methodologies of endogenous breakpoint detection in order to analyze whether the volatility of the spanish stock market has changed significantly over the period 1941 2001 this period corresponds to years of profound development of both the financial and the productive sides of the economy in this country the analysis of the spanish stock market suggests that volatility has behaved in a different manner over the period 1941 2001 after three decades of low volatility a structural break in volatility is detected in 1972 coinciding with the opening of the spanish economy from 1972 to 2001 the years of more intense financial development the stock market presents a higher level of volatility and lower persistence this effect is partly attributable to the increased growth of trading volume brought about by the economic development process

credit lines and credit utilization while much is known about the characteristics of consumers or businesses that obtain credit lines relatively little is known empirically about credit line utilization after origination this study fills that gap by testing two interrelated hypotheses concerning borrower credit quality and credit line utilization the empirical analysis confirms that borrowers with higher expectations of future credit quality deterioration originate credit lines to preserve financial flexibility furthermore we estimate a competing risks model that confirms our predictions concerning changes in borrower credit line utilization in response to borrower credit quality shocks

securitization and the balance sheet channel of monetary transmission abstract this paper shows that the balance sheet channel of monetary transmission is stronger for us banks that securitize their assets this finding is different in spirit from the widely found negative relationship between financial development and the strength of the lending channel of monetary transmission focusing on the balance sheet channel and using bank level observations we find that securitizing banks are more sensitive to borrowers balance sheets and that monetary policy has a greater impact on this sensitivity for securitizing banks the optimality conditions from a simple partial equilibrium framework suggest that the positive effects of securitization on policy effectiveness could be due to the high sensitivity of security prices to policy rates

to bargain or not to bargain that is the question we use economic analysis in a simple game theory framework to ascertain under what circumstances a government would want to precommit itself to a no negotiation strategy from the government viewpoint we examine both the choice of deterrence expenditure i e expense meant to reduce terrorist logistical success during incidents and whether to negotiate or not this abstract was borrowed from another version of this item

detecting multiple breaks in financial market volatility dynamics the paper evaluates the performance of several recently proposed tests for structural breaks in the conditional variance dynamics of asset returns the tests apply to the class of arch and sv type processes as well as data driven volatility estimators using high frequency data in addition to testing for the presence of breaks the statistics identify the number and location of multiple breaks we study the size and power of the new tests for detecting breaks in the conditional variance under various realistic univariate heteroscedastic models change point hypotheses and sampling schemes the paper concludes with an empirical analysis using data from the stock and fx markets for which we find multiple breaks associated with the asian and russian financial crises these events resulted in changes in the dynamics of volatility of asset returns in the samples prior and post the breaks copyright 2002 john wiley sons ltd

bank forward lending in alternative funding environments this paper examines the effects of loan commitments on bank lending behavior in both deposit funding and liability management environments assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain the bank must choose its supply of commitments given this choice the bank becomes a passive lender to commitment holders our focus on forward credit markets sheds new light on the private bankers assertion that they do not directly determine their level of lending but merely accommodate the credit needs of their customers similarly the central banker s claimed inability to control monetary aggregates in the short run becomes understandable in a new context it is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system it is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments expected bank and banking system size

bank credit rationing and the customer relation abstract this paper investigates the theory that preference in situations of bank rationing is given to those customers with the strongest customer relation it has shown that within a certainty model where competitive pressure among banks requires full compensation for other bank relationships neither deposit levels nor intertemporal demand would produce the preferential treatment claimed it has also been shown that the prime borrowers would be unable to bargain effectively for credit line protection from such occasions of credit restriction

terrorism in a bargaining framework a lthough hostage seizures are a small percentage of terrorist incidents they represent some of the most spectacular and influential events 2 the takeover of the american embassy in tehran on november 14 1979 the seizure of eleven dpec oil ministers on december 21 1975 and the capture and killing of nine israeli athletes on september 5 1972 are incidents not easily forgotten from 1968 through 1982 of the approximately 8 000 reported terrorist events 540 7 percent were transna

an economic rationale for the pricing structure of bank loan commitments abstract an economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing it is shown that under perfect information assessing both fees rather than just one permits optimal risk sharing when the borrower is privately informed about its probability of future commitment utilization commitment and usage fees can be used to induce borrowers to identify themselves by self selection through contract choice the equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper

credit rationing and non price loan terms a re examination abstract this paper develops the implications of heterogeneous bank loans for borrower and lender behaviour in a competitive bank loan market by considering the own funds loan ratio as the non price loan term it is shown that in equilibrium each bank will ration its loan to borrowers by providing them with the smaller loan and requiring the higher own funds loan ration than they would desire at the equilibrium loan rate moreover restrictive monetary policy that raises the opportunity cost of granting loans decreases the loan size and increases the own funds loan ratio but its effect on the loan rate and credit rationing remains ambiguous thus credit rationing may decrease as a result of restrictive monetary policy

us business credit sources demand deposits and the missing money abstract this study accounts for much of the missing money in the us through compensating balances business lending by banks affects demand deposit growth standard money demand models include variables that likely pick up income and interest rate effects on the transactions demand for demand deposits and on compensating balance requirements provided that bank lending to firms is stable however during the missing money period business shifted toward nonbank sources of short term credit causing a decline in compensating balances empirical finding support this hypothesis as a partial explanation for the missing money using the federal reserve board s demand deposit model

commercial paper bank reserve requirements and the informational role of loan commitments abstract an explanation is provided of the often observed purchase of back up bank loan commitments by corporations immediately preceding their sale of dealer placed commercial paper since loan commitments are typically viewed as hedging instruments our paper explains why a risk neutral corporation would purchase this type of instrument and how it is priced it is assumed that while firms know their own credit risks neither banks nor the paper market can distinguish between some credit applicants we show that the purchase of a commitment can identify these firms to the market the equilibrium is partially revealing of the firms with unobservable quality those with higher quality identify themselves by purchasing commitments while those with lower quality sell unbacked paper and are pooled together unbacked paper is sold also by firms whose quality is observable unidentified firms in the lowest quality range do not sell commercial paper

the investment problem in terrorism evidence from early terrorist groups reveals a structural equivalence between extortion and terrorism this allows us to draw conclusions from the theory of extortion that can be applied to a theory of terrorism concerning the role of repeated play in the viability of extortion it also enables us to analyse the role of commitment in destroying the extortionary organization

stochastic capacity investment and flexible vs dedicated technology choice in imperfect capital markets this paper analyzes the impact of endogenous credit terms under capital market imperfections in a capacity investment setting we model a monopolist firm that decides on its technology choice flexible versus dedicated and capacity level under demand uncertainty differing from the majority of the stochastic capacity investment literature we assume that the firm is budget constrained and can relax its budget constraint by borrowing from a creditor the creditor offers technology specific loan contracts to the firm after which the firm makes its technology choice and subsequent decisions capital market imperfections impose financing frictions on the firm our analysis contributes to the capacity investment literature by extending the theory of stochastic capacity investment and flexible versus dedicated technology choice to understand the impact of capital market imperfections and by analyzing the impact of demand uncertainty variability and correlation on the operational decisions and the performance of the firm under different capital market conditions we demonstrate that the endogenous nature of credit terms in imperfect capital markets may modify or reverse conclusions concerning capacity investment and technology choice obtained under the perfect market assumption and we explain why the theory developed in this paper suggests some rules of thumb for the strategic management of the capacity and technology choice in imperfect capital markets this paper was accepted by john birge focused issue editor

interest rate volatility and monetary policy in october 1979 the federal reserve shifted from an interest rate oriented operating procedure to a reserves oriented procedure it is argued in this paper that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation shifts due to the adoption of a reserve aggregates operating procedure this result is derived by comparing rational expectations equilibria in a simple theoretical model under alternative policy rules this allows the variance of interest rates to be explicitly expressed as a function of the policy rule this abstract was borrowed from another version of this item

structural changes and the us money demand function previous literature on the stability of the us money demand function suggests mixed results in this article we study the stability of the money demand function from the standpoint of structural changes in the function we first investigate if a stable money demand function can be found for the us for the period from the first quarter of 1959 to the fourth quarter of 2000 the results show that a stable long run money demand function does not exist for the sample period under consideration we then estimate unknown structural break points in the variables of the money demand function using bai and perron s 1998 method and test if there is a stable relationship in each sub sample period of the break points the results show that a stable relationship exists for each sub sample period the estimated income elasticity and interest rate semi elasticity are relatively smaller than ball s 2001 estimates but consistent with his argument

stock volatility in the new millennium how wacky is nasdaq abstract the recent volatility of stock prices has caused many people to conclude that investors have become irrational in valuing at least some stocks this paper investigates the behavior of the volatility of stocks on the nasdaq which tend to be smaller companies with more growth options in relation to the more seasoned issues reflected in the standard poor s 500 portfolio it also analyzes the relation of the unusual nasdaq volatility to the hot ipo market in 1998 and 1999 the factor that seems to explain unusual volatility best is technology not firm size or the immaturity of the firm

immigration policy and counterterrorism abstract in a developing country terrorists recruit and allocate their capital skilled labor and unskilled labor between domestic and foreign targets domestic targets require less skilled labor than foreign targets under various strategic scenarios we show how countermeasures against the different terrorist inputs alter the amount and mix of targets as well as how skilled and unskilled immigration quotas by a targeted foreign country affect this mix of attacks we find that increases in skilled labor quotas generally reduce terrorist attacks in the foreign country especially when the terrorists reside in a skill scarce country a number of different strategic scenarios including leader follower are investigated

intimidation linking negotiation and conflict challenger demands a resource from defender in each period challenger chooses whether to attack if attacked defender chooses whether to concede the resource forever each player might be committed to ghting until victory before con ict begins defender can make nitely many offers con ict begins if challenger rejects all offers in equilibrium all offers except the last are unacceptable negotiation cannot eliminate con ict because a larger offer makes con ict increasingly attractive for challenger if negotiation fails prolonged con ict can happen in equilibrium even when uncertainty is vanishingly small we provide comparative statics regarding the probability and length of con ict

the demand for money a rational expectations approach the authors derive a model of money demand for an optimizing consumer with rational expectations in a discrete time infinte hortizon framework under uncertainty mone y demand responds to unanticipated changes in income one period expe ctations of future bond and money interest rates unanticipated curre nt interest rates and past anticipations of current rates the deriv ed consumption function mirrors money demand behavior joint estimati on of the consumption and money demand equations by weighted nonlinea r least squares corroborates the predicted effects particularly inco me neutrality this money demand model substantially outperforms a co nventional specification in post sample simulation over 1975 85 copyright 1988 by mit press

investment pass through and exchange rates a cross country comparison using detailed data from the united states canada the united kingdom and japan we examine the implications of exchange rates for time series of sectoral investment both theoretically and empirically we show that investment responsiveness to exchange rates varies over time positively in relation to sectoral reliance on export share and negatively with respect to the share of imported inputs in production important differences exist in investment endogeneity across high and low price over cost markup sectors with investment in low markup sectors often significantly more responsive to exchange rates cross country differences in investment response are only partially explained by industrial organization arguments

toward a theory of bank loan commitments abstract the characteristics of fixed and variable rate bank loan commitments are analyzed in a contingent claims framework and valuation expressions are derived for these commitments the valuation expressions are used to present estimates of the impact of interest rate uncertainty on the liability assumed by a bank issuing loan commitments finally a simple two period asymmetric information model is employed to explain the recent trend among bankers to substitute variable rate commitments for their fixed rate counterparts

how capital regulation and other factors drive the role of shadow banking in funding short term business credit abstract this paper empirically analyzes how capital regulation risk and other factors altered the relative use of shadow banking funded short term business debt since the early 1960s results indicate that the share was affected over the long run not only by changing information and reserve requirement costs but also by shifts in relative regulation of bank versus nonbank credit sources such as basel i in 1990 and reregulation in 2010 in the short run the shadow bank share rose when deposit interest rate ceilings were binding on traditional banks the economic outlook improved or risk premia declined and fell when event risks arose

the search for a stable money demand function a survey of the post 1973 literature phe question of whether the demnand function for money is stable is one of the most important recurring issues in the theory and application of macroeconomic policy what is being sought in a stable demand function is a set of necessary conditions for money to exert a predictable influence on the economy so that the central bank s control of the money supply can be a useful instrument of economic policy as such the notion of a stable demand function appears to involve three key elements e g john t boorman 1976 p 317 and david e w laidler 1977 pp 34 35 first the demand for money relation should be highly predictable in a statistical sense as measured by the usual goodness of fit statistics precision of estimated coefficients and presumably its ability to forecast accurately out of sample second a stable demand function for money has relatively few arguments a relationship that requires knowledge about a large number of variables in order to pin it down is in effect not predictable finally the variables that appear as arguments in the function should represent significant links to spending and economic activity in the real sector in sum a stable demand function for money means that the quantity of money is predictably related to a small set of key variables linking money to the real sector of the economy the importance of a stable money demand function for monetary policy can be illustrated with the standard is lm model in which interest rates and gnp are the endogenous variables in this context a stable demand function for money translates into a well defined relationship between money interest rates and gnp

the impact of mortgage activity on recent demand deposit growth abstract this study quantifies the substantial effects of mortgage activity on recent demand deposit growth and finds that estimates and forecasts of recent demand deposit growth are considerably more accurate using data adjusted for mortgage activity

a theory and test of credit rationing some further results the arbitrage argument extends to the case of many risk assets the equilibrium leverage ratio will vary with the riskiness of the asset backing up the loan and variations in leverage will then substitute for variations in the interest rate however it can readily be shown along the lines of vernon l smith that competition in leverage terms would be insufficient to correct the inefficient allocation of claims produced by the market when the interest rate is fixed 4

asymmetric information and a theory of compensating balances this paper derives an economic justification for the existence of compensating balance requirements using an equilibrium model of asymmetric information because bank profitability depends upon the probability distribution of a borrower s future cash requirements and assuming this distribution is known by the borrower but not by the bank compensating balance requirements can be used by the bank as a screen to distinguish among borrowers compensating balances are shown to exist without invoking assumptions of monopoly banks or non maximizing behavior and these balances need not be explained as a method of indirect payment for bank services

should bond funds be added to m2 abstract in the early 1990s m2 growth has been weaker than estimated while bond mutual funds have grown rapidly this study assesses whether adding bond funds to m2 would yield a monetary aggregate that is more explainable using a standard error correction model of money with and without modifications for bond interest rate and thrift resolution effects results indicate that it is important to net out institutional and ira keogh assets from bond funds as is done for m2 and that adding such a bond fund series to m2 results in an aggregate that is somewhat more explainable than m2

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

competitive equilibrium with type convergence in an asymmetrically informed market this article studies an asymmetric information game with type convergence in which under some realizations of a common uncertainity inducing informed agents to reveal their types through self selection by contract choice is either costly or impossible under other realizations self selection permits costless distinctions between informed agents i obtain sufficient conditions under which contracting with options prior to the realization of the common uncertainity leads to the existence of a perfectly separating costless nash equilibrium applications to variable rate loan commitments and life insurance contracting are discussed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

loan commitment contracts terms of lending and credit allocation this paper analyzes the structure of loan commitment contracts and the interrelationships among their component parameters lenders offer borrowers a set of loan packages from which the latter may choose that package found to be most appealing borrowers may trade off changes in any loan parameter in exchange for other adjustments the borrower at this time may purchase a larger credit ration for a price supporting empirical evidence is presented recently researchers have begun to study the determinants of loan commitment or line of credit contracts such contracts play an extremely important role in bank credit allocation according to the federal reserve bulletin over 70 of u s commercial and industrial loans are made under loan commitment contracts given the central importance of the institution it is not surprising that it is the subject of a growing literature loan commitment contracts have importance both at the micro level in terms of the bank customer relationship and at the marco level in terms of the channels of operation of monetary policy in this paper we seek to present and test empirically an analytic model of loan commitment contracts our paper differs from most previous work in that we include empirical analysis of credit allocation moreover most previous theoretical work on the subject has concentrated on the specific issue of pricing of the contracts often using an approach based on option theory and not on the quantity allocation of credit and its determinants we are particularly interested in the determinants of the quantitative allocation of credit to bank customers and in the composition of and trade offs among the various parameters comprising such a loan commitment package our model helps explain how contract terms are established in the market and will illuminate the institutional framework of commercial lending a view of the credit contract as a package of loan terms has been implied recently in connection with the credit rationing problem studies by azzi and cox 21 arzac schwartz and whitcomb 11 and koskela 81 show that the

a strategic analysis of the war against transnational terrorism abstract we study a two stage game in which a transnational terrorist organization interacts with an arbitrary number of countries that may differ in their political or economic power their military effectiveness the benefit from cooperating against terrorism and the value they assign to damage only a subset of countries that emerges endogenously takes proactive measures to fight the terrorist while all countries incur defensive expenditures to protect their soil we characterize analytically the pure strategy subgame perfect equilibrium of the game and show how the equilibrium strategies depend on the key model parameters we provide an algorithm to find the endogenous set of cooperating countries based on their benefit from cooperation and their political economic power

the behavior of money demand in the 1980s existing money demand functions did not predict the strength in m1 in the 1980s this strength derived from the combination of a change in the character of m 1 due to elnancial deregulation and the sharp fall in market rates that began in 1982 the public s m2 demand function however remains unaffected by the forces that altered the m1 demand function the character of the public s m 1 demand function changed with the legalization nationwide in january 1981 of the checkable deposits known as nows because nows pay explicit interest they are used by the public as an instrument for saving as well as for effecting transactions mehra 1986 the addition of nows to m1 therefore caused m1 to become more highly substitutible with the savings instruments included in the non ml component of m2 that is savings deposits small time deposits money market deposit accounts mmdas and money market mutual funds of noninstitutional investors mmmfs furthermore financial institutions move the rate paid on nows only sluggishly in response to changes in market rates in contrast the rates paid on small time deposits mmdas and mmmfs move promptly in response to changes in market rates consequently when market rates fell beginning in late summer 1982 the differential between the rates paid on the non ml components of m2 and on nows fell sharply the public then substituted out of the non ml components of m2 and into the nows in m1 these substitutions increased m1 de

can speculative trading explain the volume volatility relation we derive a speculative trading model with endogenous informed trading that yields a conditionally heteroscedastic time series for trading volume and the squared price changes we use half hourly price change and volume data for ibm during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure although the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared price change processes it fares less well in fitting the relation between current trading volume and lags of trading volume and squared volume s and its lag s relation to squared price changes

compensating balance rationality and optimality the rationality of requiring compensating balances in commercial lending is a long standing controversy this paper demonstrates that compensating balance requirements can be either rational or irrational and derives the conditions under which each may occur the model presented is capable of explaining illustrating and resolving analytically and graphically the apparent inconsistency among conclusions of previous studies in addition the model entertains questions of optimality in borrowing arrangements

stock prices and volume the authors undertake a comprehensive investigation of price and volume co movement using daily new york stock exchange data from 1928 to 1987 they adjust the data to take into account well known calendar effects and long run trends to describe the process they use a seminonparametric estimate of the joint density of current price change and volume conditional on past price changes and volume four empirical regularities are found 1 positive correlation between conditional volatility and volume 2 large price movements are followed by high volume 3 conditioning on lagged volume substantially attenuates the leverage effect and 4 after conditioning on lagged volume there is a positive risk return relation article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

searching for a break in gnp it has been suggested that existing estimates of the long run impact of a surprise move in income may have a substantial upward bias due to the presence of a trend break in postwar u s gross national product data this article shows that the statistical evidence does not warrant abandoning the no trend break null hypothesis a key part of the argument is that conventionally computed p values overstate the likelihood of the trend break alternative hypothesis this is because they do not take into account that in practice the date is chosen based on pretest examination of the data

stock market wealth and consumer spending martha starr mccluer this article investigates the effects of stock market wealth on consumer spending traditional macroeconometric models estimate that a dollar s increase in stock wealth boosts consumption by three to seven cents with the substantial 1990s rise in stock prices the nature and magnitude of this wealth effect have been much debated after describing the issues and previous research i present new evidence from a well known consumer survey the results are broadly consistent with life cycle saving and a modest wealth effect most stockholders reported no appreciable effect of stock prices on their saving or spending but many mentioned retirement saving in explaining their behavior jel e21 e30 d12 i introduction the relationship between stock market wealth and consumer spending has been a subject of long standing interest traditional macroeconometric models estimate that a dollar s increase in household wealth boosts consumer spending by three to seven cents per year such an effect is consistent with predictions from a simple life cycle model in which consumers spend more over their lifetimes in response to higher wealth however the stock market is known to play a role as a passive predictor of information thus it is also possible that stock prices simply lead aggregate economic activity without any short run change in spending induced by changes in wealth understanding the response of spending to changes in wealth is important for determining how stock market fluctuations affect the macroeconomy the question also bears directly on theories of saving behavior and on the issue of retirement preparedness by today s workers the experience of the past few years provides an interesting opportunity to revisit this issue stock prices increased substantially in the 1990s with the standard poor s 500 more than doubling from 1994 to 1997 and rising another 44 through 1999 at the same time stock ownership broadened considerably mostly through mutual funds and retirement accounts so that a large number of households likely experienced wealth gains the increase in wealth might be expected to boost consumer spending and lower the saving rate and indeed these trends occurred however it is hard to separate the influence of the wealth effect from other factors that also would have promoted spending such as strong income growth and favorable labor market conditions this article presents some new evidence on the response of spending to changes in wealth the data come from the michigan survey research center src survey of consumers an ongoing nationally representative survey of u s households in interviews conducted between july and september 1997 households owning stock were asked special questions about their spending and saving the questions covered a number of factors that may influence the effect of wealth on spending including the value and form of stockholdings stock price expectations concerns about retirement and perceptions of income uncertainty in brief the results are broadly consistent with life cycle saving and a modest wealth effect the vast majority of stockholders reported no appreciable effect of stock prices on their spending or saving but many mentioned retirement saving in explaining their behavior the next section reviews previous research on the relationship between stock market wealth and consumer spending the third section describes the data from the michigan survey and the fourth presents the results a final section summarizes and concludes ii background and previous research to frame the discussion it is useful to review how an unexpected increase in wealth would affect consumption in a simple lifecycle model this model though restrictive in its assumptions provides valuable intuition about the propensity to consume unexpected stock gains consequences of refinements to the model are discussed below

interest rate indexation and the pricing of loan commitment contracts abstract the central question addressed in this paper is why most loan pricing agreements between banks and their commercial customers involve additive rather than multiplicative markups over the base lending rate it is argued that banks generally prefer additive pricing because the real value of the premiums moves inversely with inflation therefore this pricing formula provides an automatic partial inflation hedge for banks most borrowers who hold long positions in nominal assets also prefer this formula for the same reason however some borrowers who hold net short positions in nominal assets prefer multiplicative pricing banks provide them with such a form of pricing in exchange for appropriate compensation supporting empirical evidence is provided

terrorism key assets and critical infrastructures to protect or to rebuild that is the question both the choice between stick and carrot and the tension between control and preservation of civil liberties characterize the policy debate over counterterrorism arguing for the carrot and preservation of civil liberties viewpoint frey and rohner def peace econ 18 3 245 252 2007 propose strategic reconstruction as an alternative to protection our paper provides a comparative analysis of these two policies first we study the rationality of the public s expectations and we show that credible strategic reconstruction may deter terrorist attacks next we derive conditions under which strategic reconstruction is more efficient than protection finally we show that strategic reconstruction may reinforce the efficiency of protection

identifying the balance sheet and the lending channels of monetary transmission a loan level analysis abstract we make a novel attempt at comparing the strength of the lending and balance sheet channels of monetary transmission to make this comparison we use loan level data to determine how borrower balance sheets and bank liquidity are related to bank lending decisions and how monetary policy can affect these relationships the key innovation in this paper is the use of loan level data this enables us to measure the independent effects of the two channels and directly account for borrower balance sheets and lender liquidity instead of using proxies our results show that the balance sheet channel is the main mechanism through which monetary policy shocks are transmitted to the economy and that the lending channel does not play a significant role

day of the week effects in federal funds rates further empirical findings abstract we extend the spindt and hoffmeister 1988 model of the daily operation of an institution s federal reserve account to show strong inter and intra period incentives to borrow and lend in the federal funds market at predictable points in the 10 trading day settlement period using intraday high and low prices we demonstrate changes in the federal funds rate consistent with our model s predictions we provide evidence of predictable changes in the variance of fed funds returns on a daily and intraday basis our analysis confirms that federal reserve requirements result in daily and intraday variances which are not constant

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

modeling the banking firm a survey this paper reports on the status of the literature on micro bank modeling and assesses our understanding of the banking firm s optimal behavior this is no mean task for much has been written on banking broadly defined over the past couple of decades the review is developed in pieces each major subproblem is outlined and the analysis used to deal with the issue explicated this is not the best way to summarize the development of a field it should be immediately recognized one would prefer to have a smooth continuum of development moving the frontier of knowledge evenly through time and across subareas yet this is rarely the way a field develops more likely individual questions attract attention and are the subjects of a substantial number of contributions after a time the field moves on to the new area of interest the banking field is no exception before embarking upon the review however a couple of lines should be devoted to previous attempts there have been essentially three first pyle 1972 analyzes the uncertainty portfolio models at a time when little existed in the literature and hence one finds the review a bit vague and sketchy baltensperger s contributions 1978 1980 are the next serious and rather extensive reviews the quality of these

the dependence between hourly prices and trading volume this study provides evidence on joint characteristics of hourly common stock trading vol ume and returns on the new york stock exchange average volume traded shows signifi cant differences across trading hours of the day and across days of the week average returns differ across hours ofthe day and to some extent across days ofthe week there is a strong contemporaneous relation between trading volume and returns and also a rela tion between trading volume and returns lagged up to four hours furthermore the trading volume returns relation is steeper for positive returns than for nonpositive returns

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

exchange rates and investment in united states industry the path of the dollar has significantly influenced investment activity in u s industry the effects of both exchange rate levels and exchange rate volatility have been more pronounced in the 1980s than in the 1970s although aggregate investment data mask some of these relationships the effects of exchange rates on investment are most pronounced in the disaggregate data for manufacturing durable goods sectors and nonmanufacturing sectors these relationships also have changed over time in contrast to the conventional wisdom in the 1980s real dollar depreciations appreciations were likely to be associated with investment contractions expansions copyright 1993 by mit press

bank loan commitments and interest rate volatility bank loan commitments are examined in the context of option pricing models and a valuation formula is obtained the partial takedown phenomenon which is both distinctive and vexatious is considered in detail finally estimates of the value of u s bank loan commitments and their sensitivity to interest rate changes are provided

transactions volume and volatility we show that the positive volatility volume relation documented by numerous researchers actually reflects the positive relation between volatility and the number of transactions thus it is the occurrence of transactions per se and not their size that generates volatility trade size has no information beyond that contained in the frequency of transactions our results suggest that theoretical research needs to entertain scenarios in which 1 both the frequency and size of trades are endogenously determined yet 2 the size of trades has no information content beyond that contained in the number of transactions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

terror networks and trade does the neighbor hurt abstract this paper studies how network related terrorism redistributes trade flows across countries including those countries that are not a direct source of terror we first develop a game theoretical framework with imperfect information on the spatial location of transnational terrorism to show how the resulting security measures produce a non monotonic effect on the distribution of trade across countries neighbors adjacent to terror even when they do not source it have trade reduced through enhanced security measures while countries farther away benefit from those security measures second to empirically assess the distortional effects of terrorism on trade we first estimate the structural gravity equation derived from our theory then armed with the estimates of the partial effect of neighbor terror on bilateral trade we perform a counterfactual experiment and confirm the non monotonic general equilibrium effect of neighbor terror on trade

intraday management of bank reserves the effects of caps and fees on daylight overdrafts the federal reserve system imposes caps and charges fees on the negative intraday balances in banks reserve accounts i e on daylight overdrafts our empirical results suggest that caps alone did little to reduce daylight overdrafts in the aggregate by contrast the 1994 imposition of fees reduced the average daily maximum overdraft on the fedwire system by about 93 billion and the average aggregate overdraft at any time during the day by about 43 billion we also found statistical evidence that higher beginning of day reserve balances lower aggregate dollar values of securities related transfers over fedwire and lower shares of banks assets funded with federal funds and repurchase agreements reduced daylight overdrafts copyright 1996 by ohio state university press

the relation between price changes and trading volume a survey this paper reviews previous and current research on the relation between price changes and trading volume in financial markets and makes four contributions first two empiri cal relations are established volume is positively related to the magnitude of the price change and in equity markets to the price change per se second previous theoretical research on the price volume relation is summarized and critiqued and major insights are emphasized third a simple model ofthe price volume relation is proposed that is consis tent with several seemingly unrelated or contradictory observations and fourth several directions for future research are identified

noncooperative equilibrium and market signalling among many recent developments in the economics of information none has generated more controversy than the concept of market signalling introduced by a michael spence if buyers are less well informed about product quality than sellers and no additional information is available market clearing prices must reflect some weighted average of product quality then if potential sellers of the highest quality products have the greatest opportunity costs and these costs exceed price they will not enter the market this adverse selection phenomenon is however offset if sellers of higher quality products can adopt activities that operate as a signal to potential buyers intuitively an activity is a potential signal if entering into it has a lower marginal cost for sellers of higher quality products for example the fly bynight operator faces a higher advertising cost per unit of sales than the new entrant who plans to build and then maintain his reputation or in the labor market productivity on the job is positively correlated with performance in school therefore the higher productivity worker has on average a lower personal cost of obtaining a given set of educational credentials similarly in purchasing insurance the marginal cost of accepting a higher coinsurance rate for a specific loss is lower for those with a lower probability of loss but on closer inspection it turns out that informational equilibria that is equilibria in which signalling is needed to distinguish product quality do not have the stability properties of classical walrasian equilibria in papers by michael rothschild and joseph stiglitz and the author 1975 1977 it has been shown that unless the difference between quality levels is sufficiently large there is for every set of signal price pairs s some alternative s 4 s which if offered by a single seller would improve his lot that is there is no cournot nash signalling equilibrium one possible inference that might be drawn from this result is that signalling could not be an important phenomenon in a competitive economy after all if any attempt at signalling were to result in interference in the form of competitive responses there would be no opportunity for individuals to identify the correlation between the level of the signal and the underlying quality of the product however this is too simplistic since the interference cannot take place until after signalling has been established it is therefore more appropriate to suppose that an economy is initially in a state of informational equilibrium with signals reflecting product quality and to ask whether the potential instability is likely to lead to a general collapse of the equilibrium following the approach adopted by charles wilson there have been several related attempts to introduce quasi dynamic considerations in which every agent takes into account the reaction by other agents when contemplating a defection from the initial set of signal price pairs s it is then argued that the set s forms a stable equilibrium if for every alternative s that would make a single defector better off this same signalprice pair would make the defector worse off after the reaction by other agents where these attempts differ is in the university of california los angeles this research was supported by national science foundation grant soc 76 13443 to the rand corporation

dynamics of biofuel stock prices a bayesian approach we use bayesian markov chain monte carlo methods to investigate the linkage between the volatility of ethanol security prices and the uncertainty surrounding the profitability of ethanol production and the price variations of non ethanol energy securities the joint evolution of return and volatility is modeled as a stochastic process that incorporates jumps in both return and volatility while a strong and significant correlation is found between the volatility of ethanol securities and profit uncertainty from june 2005 to july 2008 the dynamic pattern of ethanol stock volatility is strikingly similar to that of the s p 500 energy sector index in the more recent period our evidence lends support to the findings in the literature on rational learning from uncertainty in determining the equity price and volatility during the adoption and development of a technological innovation

simple optimal policy for cash management the average balance requirement case this paper treats a problem of stochastic cash management under an average compensating balance requirement it develops a dynamic programming formulation of the problem in which the relevant state is a unidimensional quantity equivalent to the forecasted average balance at the end of the averaging period under usably broad conditions it establishes the optimality of a transient policy of simple type similar to the two sided inventory type policy familiar from certain earlier studies of stationary cash balance problems having absolute balance requirements the results apply to cases in which the transactions costs contain both fixed and proportional components the paper discusses also a numerical example drawn from the literature of the cash balance problem and shows by simulation of the optimal and simply modified forms of the optimal policy that good protection is afforded against negative balances even though the model does not explicitly constrain the negative balance probabilities

myopic and stationary solutions for stochastic cash balance problems this paper presents constructive solutions to stochastic cash balance problems the model studied is in a periodic review framework with convex holding and shortage costs levied both in the beginning and at the end of each period transaction costs are linear with the possibility of unequal fixed and proportional parts for orders and disposals optimal myopic solutions are presented for convex and linear costs the application of an integral of the cumulative demand distribution yields simple formulae for solving the exact values of the policy parameters the logistic distribution is used to obtain results readily applicable in day to day decision making approximations of the wilson formula type are developed and compared with earlier contributions conditions for the optimality of myopic policies are also presented stationary solutions are developed and compared with myopic results in order to evaluate the amount of suboptimality the stationary distribution and the optimal policy are given for the bilateral exponential demand distribution case all results have been programmed and tested against the local finance market data

hiding in plain sight using signals to detect terrorists this paper studies the interaction between a governmental security agency as the transportation security agency or the immigration and naturalization service and a terrorist organization like al qaeda the governmental agency wants to stop the terrorists but first must infer whether a visa applicant or an airline passenger is a terrorist on the basis of some observable signal the terrorist organization s objective is to get past security to commit murder and mayhem we derive the equilibrium strategy for this signaling model and evaluate specific anti terrorist policies as the creation of the new homeland security agency and increased airport security screening

commitment lending under asymmetric information theory and tests on u k startup data u k business startup data is used to examine the role of contract parameters in solving the bank s problem of lending under asymmetric information margins are found to be a direct function of the probability of failure and an inverse function of security for given loan size consistently with collateral being invoked to solve the moral hazard problem business survival is also found to be enhanced by owner equity inputs for given debt again consistent with a requirement for owner financial inputs to enhance unobservable effort security rises along with loan size and survival chances a finding consistent with a a firm loan size effect larger borrowers have lower marginal admin cost to the bank and with b positive borrower self selection better borrowers offer collateral because they are less likely to experience forfeiture observable business characteristics are found to play an important intermediary role in the solution to the moral hazard problem more mature proprietors have more experience business commitment assets for borrowing and the willingness to use them for loan collateral their contract parameters reflect these facts

smooth adjustment econometrics and inventory theoretic money management abstract a growing number of empirical papers use miller orr s s money management as economic motivation for application of non linear smooth adjustment models this paper shows such models are not implied by the miller orr economy instead the miller orr economy implies non standard smooth adjustment as derived in the neglected and misinterpreted work of milbourne et al 1983 remarkably this function includes a varying weight on the lagged dependent variable capturing static not dynamic effects interpretations of these apparent dynamics are presented some of which may be useful in non monetary s s contexts results imply a new agenda for applied smooth adjustment modeling of money

the determinants of contract terms in bank revolving credit agreements the paper examines the determinants of contract terms on bank revolving credit agree ments revolvers of medium large publicly traded companies we model the duration maturity secured status and pricing decisions within a simultaneous decision frame work thereby overcoming the biased and inconsistent estimates in prior single equation studies of debt contract terms we find strong interrelationships between contract terms with significant bi directional relationships between duration and secured status and be tween the all in spread and commitment fees and a unidirectional relationship from both duration and secured status to all in spread we also illustrate how several single equa tion studies of contract terms draw incorrect conclusions because of their inappropriate assumption that other contract terms and leverage were exogenous finally our results sup port the hypothesis that the setting of contract terms plays an important role in alleviating contracting problems

compensating balance requirements and the firm s demand for transactions balances previous analyses of the conditions for the rationality of the use of compensating balance requirements have been stated in terms of the relationship between the firm s normal transactions balance and the required compensating balance however these papers fail to recognize the interdependence between the required compensating balance and the firm s optimum transactions balance our paper incorporates a required compensating balance into the control limits model of miller and orr 1966 our results demonstrate that the average level of transactions balances and the expected opportunity cost of maintaining these balances are non decreasing functions of the required compensating balance thus strengthening the case against their rationality

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

stock market wealth and consumption this paper explores the link between changes in the aggregate value of corporate stock and changes in consumer spending it presents data on the distribution of corporate stock ownership based on the 1998 survey of consumer finances it also uses time series evidence on the comovement of stock market wealth and various categories of consumer spending to calibrate the wealth effect it concludes that in the year after a change in stock market values consumer spending is likely to rise by between one and two cents for each dollar increase in the value of corporate stock

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

compensating balances deficiency fees and lines of credit abstract models of compensating balance decisions to date have implied that agreed upon balances are not violated by borrowers when compensating balance requirements can be deficient the customer and bank must agree in advance what deficiency fee will be charged this paper develops boundary conditions for such fees both with and without lines of credit and with balance requirements on unused lines this process uncovers a number of important attributes of such fees including dependence upon customer borrowing alternatives situations of fee impossibility and elements of practical application