dynamic asset allocation with event risk major events often trigger abrupt changes in stock prices and volatility we study the implications of jumps in prices and volatility on investment strategies using the event risk framework of duffie pan and singleton 2000 we provide analytical solutions to the optimal portfolio problem event risk dramatically affects the optimal strategy an investor facing event risk is less willing to take leveraged or short positions the investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy and hold strategies jumps in prices and volatility both have important effects

investigating diesel market integration in france evidence from micro data abstract we use station level daily price observations collected over a period of eight years to study the extent of diesel market integration in france the empirical analysis starts off by examining the time series properties of diesel price ratios and then assesses how geographical separation and petrol station characteristics affect the speed of adjustment of prices to exogenous shocks our findings reveal that the great majority of diesel price ratios maintain stable long run relationships we also find that while price ratios take longer to adjust for pairs of petrol stations that are farther apart adjustment is quicker when pairs of petrol stations provide the same range of services and when they belong to the same owner

bayesian portfolio selection with multi variate random variance models we consider multi period portfolio selection problems for a decision maker with a specified utility function when the variance of security returns is described by a discrete time stochastic model the solution of these problems involves a dynamic programming formulation and backward induction we present a simulation based method to solve these problems adopting an approach which replaces the preposterior analysis by a surface fitting based optimization approach we provide examples to illustrate the implementation of our approach

portfolio selection with uncertain exit time a robust cvar approach abstract in this paper we explore the portfolio selection problem involving an uncertain time of eventual exit to deal with this uncertainty the worst case cvar methodology is adopted in the case where no or only partial information on the exit time is available and the corresponding problems are integrated into linear programs which can be efficiently solved moreover we present a method for specifying the uncertain information on the distribution of the exit time associated with exogenous and endogenous incentives numerical experiments with real market data and monte carlo simulation show the usefulness of the proposed model

value at risk versus expected shortfall a practical perspective value at risk var has become a standard risk measure for financial risk management however many authors claim that there are several conceptual problems with var among these problems an important one is that var disregards any loss beyond the var level we call this problem the tail risk in this paper we illustrate how the tail risk of var can cause serious problems in certain cases cases in which expected shortfall can serve more aptly in its place we discuss two cases concentrated credit portfolio and foreign exchange rates under market stress we show that expected shortfall requires a larger sample size than var to provide the same level of accuracy 2004 elsevier b v all rights reserved

flex cars and the alcohol price abstract we build a model that incorporates the effect of the innovative flex car an automobile that is able to run with either gasoline or alcohol on the dynamics of fuel prices in brazil our model shows that differences regarding fuel prices will now depend on the proportions of alcohol gasoline and flex cars in the total stock conversely the demand for each type of car will also depend on the expected future prices of alcohol and gasoline in addition to the car prices the model reflects our findings that energy prices are tied in the long run and that causality runs stronger from gasoline to alcohol the estimated error correction parameter is stable implying that the speed of adjustment towards equilibrium remains unchanged the latter result is probably due to a still small fraction of flex cars in the total stock approx 5 despite the fact that its sales nearly reached 100 in 2006

macroeconomic features of the french revolution this paper describes aspects of the french revolution from the perspective of theories about money and government budget constraints we describe how unpleasant fiscal arithmetic gripped the old regime how the estates general responded to reorganize france s fiscal affairs and how fiscal exigencies impelled the revolution into a procession of monetary experiments ending in hyper inflation

interest rate restrictions in a natural experiment loan allocation and the change in the usury laws in 1714 this article studies the effects of interest rate restrictions on loan allocation the british government tightened the usury laws in 1714 reducing the maximum permissible interest rate from 6 to 5 a sample of individual loan transactions reveals that average loan size and minimum loan size increased strongly while access to credit worsened for those with little social capital collateralised credits which had accounted for a declining share of total lending returned to their former role of prominence our results suggest that the usury laws distorted credit markets significantly we find no evidence that they offered a form of pareto improving social insurance almost since the beginning of recorded history usury restrictions have been widely used the laws of hammurabi from the 2nd millennium bc regulated interest rates as did the old testament and the catholic church while early rules often outlawed the taking of interest altogether later restrictions stipulated maximum permissible interest rates to the present day many developing and islamic countries and us states impose limits on private loan contracts to stamp out predatory lending by credit sharks only recently italy re introduced a law against usurious credit contracts glaeser and scheinkman 1998 blitz and long 1965 homer and sylla 1996 the effects of usury regulation have remained controversial numerous scholars have argued that they had damaging consequences and that this conclusion applies to both

informal credit markets in india informal financial markets those which are not regulated or monitored by the banking authorities account for much of business credit in developing countries these unregulated informal credit markets icm are important both in their own right as part of each country s financial system and because of their reciprocal relations with growing enterprises and the regulated financial sector in order to study the operations of some of these markets in detail in urban commercial settings we conducted an extended survey of some of the informal credit markets of india 2 based in some cases on centuries of operation these markets proved to be important in the functioning of the contemporary economy indigenous style bankers belonging to particular ethnic communities and castes formerly provided the full range of banking services to their clients 3 with the rise of modern western style banking the indigenous bankers either have transformed themselves to serve sectors such as wholesale trade not well served by the modern sector or provide services which the modern bankers cannot provide though any estimate is very approximate it seems that informal credit markets account for as much as 20 of commercial credit outstanding in the various markets surveyed we began by surveying the gujeratis some of whom still practice their traditional form of full service banking in their homeland of gujerat and adjoining bombay the shikarpuris or multanis originally full service bankers in sind who now provide commercial credit in various other centers the chettiars in south india the rastogis in uttar pradesh and the marwaris especially in eastern india 4 but our surveys revealed that a wide range of ethnic groups were now involved in informal credit markets and the more meaningful differentiations

market structure and discrimination the case of small businesses this paper examines bank market structure to draw inferences concerning the role of discrimination in credit markets for small businesses the authors analyze credit application and denial rates loans outstanding and interest rates across demographic groups this set of variables in combination with information on local bank market structure helps them distinguish among borrower preferences lender tastes and inadequate lender information as likely causes of differences in credit market experiences of small business operators from distinct demographic groups the authors find that white men and women can expect similar treatment in credit markets with some benefits to female owned firms located in concentrated banking markets minorities by contrast fare worse than whites moreover by appealing to becker s 1957 classic theories we find some clear evidence to support the view that prejudicial discrimination is at least partly to blame

on dynamic linkages of the state natural gas markets in the usa evidence from an empirical spatio temporal network quantile analysis we empirically investigate the dynamic linkages of the state level natural gas markets in the usa by introducing a novel spatio temporal network quantile econometric model we can estimate the dynamic cross state dependency or market integration of the state level natural gas markets and the dependence of the state natural gas markets on the national crude oil market at different quantile levels we find that significant local dynamic neighbouring market integrations exist in the natural gas markets not only in the eastern and central states as evidenced in the literature but also in some western and southwest states our results also show that there are significant linkages of the state level natural gas markets to the national crude oil market through the lagged price shocks and the long run price equilibrium with the national gas markets under varying price shock propagations the results can help local government and energy users to mitigate the negative impacts from the expected or unexpected fluctuations in the oil and the neighbouring natural gas markets which will enact appropriate state level price discovery and energy policy and investment decision makings

location choice product proliferation and entry deterrence within a slightly modified version of hotelling s model we reconsider the claim that the threat of entry induces existing firms to produce a larger number of products than they would otherwise we show that entry deterrence although optimal need not be achieved through product proliferation in some cases the incumbent monopolist resorts to an entry deterring strategy based on location choice rather than product proliferation we also show that in some cases the number of products chosen by the incumbent facing the threat of entry is strictly greater than the minimum number required to deter entry

risk and insurance in a rural credit market an empirical investigation in northern nigeria credit contracts play a direct role in pooling risk between households in northern nigeria repayments owed by borrowers depend on realizations of random shocks by both borrowers and lenders the paper develops two models of state contingent loans the first is a competitive equilibrium in perfectly enforceable contracts the second permits imperfect information and equilibrium default estimates of both models indicate that quantitatively important state contingent payments are embedded in these loan transactions but that a fully efficient risk pooling equilibrium is not achieved the research is based on a year long survey in zaria nigeria conducted by the author

dynamic mean variance portfolio selection with borrowing constraint abstract this paper derives explicit closed form solutions for the efficient frontier and optimal investment strategy for the dynamic mean variance portfolio selection problem under the constraint of a higher borrowing rate the method used is the hamilton jacobi bellman hjb equation in a stochastic piecewise linear quadratic plq control framework the results are illustrated on an example

on the sensitivity of mean variance efficient portfolios to changes in asset means some analytical and computational results tbis paper investigates the sensitivity of meanvariance mv efficientportfolios to changes in the means of individual assets when only a budget constraint is imposed on the investment problem the analytical results indicate that an mv efficient portfolio s weights mean and variance can be extremely sensitive to cbanges in asset means when nonnegativity constraints are also imposed on the problem the computational results confirm that a positively weigbted mv efficient portfolio s weigbts are extremely sensitive to cbanges in asset means but the portfolio s returns are not a surprisingly small increase in the mean of just one asset drives balf the securities from the portfolio yet the portfolio s expected return and standard deviation are virtually uncbanged this paper supersedes should investors hold well diversified portfolios financial support from the natural science and engineering research council of canada is gratefully acknowledged we also acknowledge the most capable assistance of ruth cornale simon ng jean marc potier and frederick shen the paper was presented at simon fraser university and the western finance association meetings in san diego we thank the participants especially stephen brown john herzog john heaney ray koopman and bruce lehmann and the editors jon ingersoll and chester spatt for

robust portfolio selection using linear matrix inequalities abstract in this paper we consider the problem of robust optimal portfolio selection for tracking error when the expected returns of the risky and risk free assets as well as the covariance matrix of the risky assets are not exactly known we assume that these parameters belong to a convex polytope defined by some known elements which form the vertices of this polytope we consider two problems the first one is to find a portfolio of minimum worst case volatility of the tracking error with guaranteed fixed minimum target expected performance the second one is to find a portfolio of maximum worst case target expected performance with guaranteed fixed maximum volatility of the tracking error we show that these two problems are equivalent to solving linear matrix inequalities lmi optimization problems so that the powerful numerical packages nowadays available for this class of problems can be used a numerical example in the sao paulo stock exchange bovespa is presented

mean reversion in g 10 nominal exchange rates according to conventional wisdom industrial country floating exchange rates contain unit roots sur tests on panels of monthly group of ten g 10 log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0 5 to 15 on average in out of sample forecasts mean reversion models beat random walks significantly in some forecast periods for monthly data the range of expected usd dem appreciation rates exceeds 15 per year in the mean reversion model mean reversion places strong restrictions on international models over the sample period the g 10 had to run monetary policies consistent with stable long run nominal rates

spatial differentiation and vertical mergers in retail markets for gasoline this paper studies an empirical model of spatial competition applied to gasoline markets the main feature is to specify commuting paths as the locations of consumers in a hotelling style model as a result spatial differentiation depends in an intuitive way on the structure of the road network and the direction of traffic flows the model is estimated using panel data on the quebec city gasoline market and used to evaluate the consequences of a recent vertical merger difference in difference and counterfactual simulation methods are compared and the results to a large extent validate the assumptions of the demand model jel g34 l13 l42 l81 q41 r41

fuel tourism in border regions the case of switzerland this paper explores the issue of fuel tourism in switzerland for the period 1985 1997 a panel data model for the border regions of switzerland italy france and germany is estimated the results show a significant impact of the gasoline price differential on demand suggesting that a decrease of 10 in the swiss gasoline price leads to an increase in demand in the border areas of nearly 17 5 it is shown that fuel tourism accounted for about 9 of overall gasoline sales in the three regions during the period 1985 1997 and that the recently proposed swiss co2 tax might given current conditions eliminate net fuel tourism

on the dynamics of gasoline market integration in the united states evidence from a pair wise approach abstract this paper employs a pair wise approach to examine regional integration in the us gasoline market using gasoline price data at the state level over a period of more than two decades we find strong support for the view that the law of one price holds in regional markets as more than 80 of bivariate price differentials turn out to be stationary furthermore we uncover evidence that the speed at which prices converge to the long run equilibrium depends upon the distance between states asymmetries are also present in this relationship our findings suggest that the more similar are states with respect to taxation gas stations and refining capacity the faster is the speed of adjustment towards the long run equilibrium

number of sellers average prices and price dispersion abstract a variety of models provide differing predictions regarding the effect of an increase in the number of competitors in a market seller density on prices and price dispersion we review different approaches to generating equilibrium price dispersion and then empirically estimate the relationship between seller density average product price and price dispersion in the retail gasoline industry using four unique gasoline price data sets controlling for station level characteristics we find that an increase in station density consistently decreases both price levels and price dispersion across four geographical areas

market integration in us gasoline markets this paper analyses the degree of market integration in the retail gasoline markets in the united states after it was completely deregulated in 1981 the monthly average prices of unleaded regular gasoline excluding taxes from january 1983 to december of 1998 for five us petroleum administration defense districts were considered in the analysis there is evidence of a high degree of market integration in the gasoline markets as evidenced by the engel and granger and johansen cointegration tests but perfect market integration is rejected in all but a few cases

price regulation and relative price convergence evidence from the retail gasoline market in canada this paper explores price regulation and relative price convergence in the canadian retail gasoline market we use monthly data 2000 2010 on retail gasoline prices in 60 canadian cities to investigate i whether the retail gasoline market in canada has experienced a relative price convergence to the mean which is expected given the increased economic integration across canadian provinces and ii whether the introduction of price regulation mechanisms in new brunswick and nova scotia in july 2006 had any impact on the price convergence in these provinces we use a nonlinear panel unit root test and find solid evidence that canadian retail gasoline markets are well integrated across locales however the share of converging cities reveals a significant decline since july of 2006 the impact of price regulation on price convergence is mixed our results indicate that since the enactment of the regulation in all new brunswick cities 9 included in the dataset gasoline prices converge to the national mean volatility of price is also significantly reduced in contrast in the wake of price regulation in nova scotia all 6 cities of the province are non convergent to the mean with increased volatility and overall price level

cvar models with selective hedging for international asset allocation abstract we develop an integrated simulation and optimization framework for multicurrency asset allocation problems the simulation applies principal component analysis to generate scenarios depicting the discrete joint distributions of uncertain asset returns and exchange rates we then develop and implement models that optimize the conditional value at risk cvar metric the scenario based optimization models encompass alternative hedging strategies including selective hedging that incorporates currency hedging decisions within the portfolio selection problem thus the selective hedging model determines jointly the portfolio composition and the level of currency hedging for each market via forward exchanges we examine empirically the benefits of international diversification and the impact of hedging policies on risk return profiles of portfolios we assess the effectiveness of the scenario generation procedure and the stability of the model s results by means of out of sample simulations we also compare the performance of the cvar model against that of a model that employs the mean absolute deviation mad risk measure we investigate empirically the ex post performance of the models on international portfolios of stock and bond indices using historical market data selective hedging proves to be the superior hedging strategy that improves the risk return profile of portfolios regardless of the risk measurement metric although in static tests the mad and cvar models often select portfolios that trace practically indistinguishable ex ante risk return efficient frontiers in successive applications over several consecutive time periods the cvar model attains superior ex post results in terms of both higher returns and lower volatility

discrimination in the small business credit market we use data from the 1993 and 1998 national surveys of small business finances to examine the existence of racial discrimination in the small business credit market we conduct an econometric analysis of loan outcomes by race and find that black owned small businesses are about twice as likely to be denied credit even after controlling for differences in creditworthiness and other factors a series of specification checks indicates that this gap is unlikely to be explained by omitted variable bias these results indicate that the racial disparity in credit availability is likely caused by discrimination

preference programming for robust portfolio modeling and project selection in decision analysis difficulties of obtaining complete information about model parameters make it advisable to seek robust solutions that perform reasonably well across the full range of feasible parameter values in this paper we develop the robust portfolio modeling rpm methodology which extends preference programming methods into portfolio problems where a subset of project proposals are funded in view of multiple evaluation criteria we also develop an algorithm for computing all non dominated portfolios subject to incomplete information about criterion weights and project specific performance levels based on these portfolios we propose a project level index to convey i which projects are robust choices in the sense that they would be recommended even if further information were to be obtained and ii how continued activities in preference elicitation should be focused the rpm methodology is illustrated with an application using real data on road pavement projects

combining mean reversion and momentum trading strategies in foreign exchange markets abstract the literature on equity markets documents the existence of mean reversion and momentum phenomena researchers in foreign exchange markets find that foreign exchange rates also display behaviors akin to momentum and mean reversion this paper implements a trading strategy combining mean reversion and momentum in foreign exchange markets the strategy was originally designed for equity markets but it also generates abnormal returns when applied to uncovered interest parity deviations for five countries i find that the pattern for the positions thus created in the foreign exchange markets is qualitatively similar to that found in the equity markets quantitatively this strategy performs better in foreign exchange markets than in equity markets also it outperforms traditional foreign exchange trading strategies such as carry trades and moving average rules

multiperiod portfolio optimization models in stochastic markets using the mean variance approach we consider several multiperiod portfolio optimization models where the market consists of a riskless asset and several risky assets the returns in any period are random with a mean vector and a covariance matrix that depend on the prevailing economic conditions in the market during that period an important feature of our model is that the stochastic evolution of the market is described by a markov chain with perfectly observable states various models involving the safety first approach coefficient of variation and quadratic utility functions are considered where the objective functions depend only on the mean and the variance of the final wealth an auxiliary problem that generates the same efficient frontier as our formulations is solved using dynamic programming to identify optimal portfolio management policies for each problem illustrative cases are presented to demonstrate the solution procedure with an interpretation of the optimal policies

portfolio selection under distributional uncertainty a relative robust cvar approach robust optimization one of the most popular topics in the field of optimization and control since the late 1990s deals with an optimization problem involving uncertain parameters in this paper we consider the relative robust conditional value at risk portfolio selection problem where the underlying probability distribution of portfolio return is only known to belong to a certain set our approach not only takes into account the worst case scenarios of the uncertain distribution but also pays attention to the best possible decision with respect to each realization of the distribution we also illustrate how to construct a robust portfolio with multiple experts priors by solving a sequence of linear programs or a second order cone program

price level convergence new evidence from u s cities abstract this paper tests the bilateral price level convergence among 52 u s cities at the good level by using a new econometric approach the estimated median half lives are far below the half lives found in the corresponding studies for the u s

the pricing behavior of italian gas stations some evidence from the cuneo retail fuel market abstract this paper studies how gas stations adjust their gasoline and diesel prices in response to their neighboring competitors the empirical analysis relies on data collected from january to august 2011 on the daily prices of 20 gas stations located in cuneo italy these data show significant price uniformity especially within the same geographical area of the town approximately one third of gas stations responded within a day to targeted competitors price changes indicating some evidence of price matching behavior in the industry additionally there is some but discontinuous geographical price propagation testifying to the presence of a weak domino effect finally spatial econometric analysis suggests that there is spatial dependence between gas stations up to about 1 1 km

numerical approximations of optimal portfolios in mispriced asymmetric levy markets abstract we present numerical approximations of optimal portfolios in mispriced levy markets under asymmetric information for informed and uninformed investors having logarithmic preference we apply our numerical scheme to kou 2002 jump diffusion markets by deriving analytic formulas for the first two derivatives of the underlying portfolio objective function which depend only on the levy measure of the jump generating process optimal portfolios are then simulated using the box muller algorithm newton s method and incomplete beta functions convergence dynamics and trajectories of sample paths of optimal portfolios for both investors are presented at different levels of information asymmetry mispricing horizon asymmetry in the kou density jump intensity volatility mean reversion speed and sharpe ratios we also apply the proposed newton s algorithm to compute optimal portfolios for investors in variance gamma markets via instantaneous centralized moments of returns

the extent of the market examines the classical theory of the market in this paper authors consider the role of price market determination price movement in competitive and monopolistic markets extension of commodity markets

political connection and cost of debt some malaysian evidence abstract this paper investigates the association between malaysian politically connected pcon firms and the cost of debt we extend previous research that finds malaysian pcon firms are perceived as being of higher risk by the market and by audit firms by providing evidence that lenders also perceive these firms as being of higher risk we also find that pcon firms have a significantly 1 higher extent of leverage 2 higher likelihood of reporting a loss 3 higher likelihood of having negative equity and 4 higher likelihood of being audited by a big audit firm we suggest that pcon firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks additionally we find that ceo duality present in pcon firms is perceived by lenders as being more risky and that a higher proportion of independent directors on the audit committee mitigate this perceived risk

from oil to consumer energy prices how much asymmetry along the way abstract a longstanding question in macroeconomics is whether fuel prices react more to increases than to decreases of the price of oil this paper analyzes the response of weekly gasoline and gasoil prices to oil prices in the u s the euro area and the four largest euro area countries germany france italy and spain using nonlinear impulse response functions and forecast accuracy tests while for the u s both approaches point to the presence of asymmetries in the adjustment of retail prices for the euro area the evidence is mixed

why fuel prices differ fuel taxes differ largely between countries this paper reviews a number of considerations from the theory of public finance that may explain these differences based on a multiple regression model we find for tax competition in europe that small countries tend to be more aggressive than large countries by charging lower fuel taxes to attract customers from neighbouring countries there is strong evidence that fuel is just considered as one of the many sources for government expenditure as the share of government expenditure in gdp is higher the fuel tax tends to be higher no support is found for the hypothesis that fuel taxes are higher in countries where externality problems are more severe proxied by car density of the country in this respect the normative literature on pricing externalities has found little support in the realities of transport policy

the determinants of moneylender interest rates evidence from rural india this study examines the determinants of moneylender interest rates in rural india in the context of two major developments of the 1960s a the incidence of agricultural technical change in the process popularly denoted by the term green revolution and b the spread of government sponsored subsidised credit through rural banks and co operative credit agencies it finds that farmers residing in areas characterised by the use of green revolution technology face lower moneylender interest rates it also finds evidence of the reduction of moneylender monopoly power as a result of increased competition from formal lending agencies it concludes that informal rural credit markets are sensitive mechanisms which respond to environmental as well as borrower characteristics

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

imperfect information screening and the costs of informal lending a study of a rural credit market in pakistan many governments have perceived the rural moneylender as usurious this article takes a first step toward directly testing the validity of this view in a study of services costs and charges of fourteen informal market moneylenders and their clients in chambar pakistan the article examines whether the high implicit interest rates charged reflect the actual costs of operating in that market estimates of the resource costs incurred by informal lenders for screening pursuing delinquent loans overhead and cost of capital including unrecoverable loans suggest that lenders charges are equal to their average cost of lending but exceed their marginal cost this finding is consistent with the view that the informal credit market is characterized by excess capacity and monopolistic competition in the presence of imperfect information

do lenders discriminate against minority and woman entrepreneurs abstract this paper draws on a conceptual analysis of discrimination to improve the methodology for estimating discrimination in small business credit markets and to provide some evidence about the possible causes of discrimination in these markets using a variety of statistical enhancements to existing studies we find statistically significant evidence of substantial discrimination in loan approval against black owned and hispanic owned businesses in 1998 we also find some hints that this discrimination takes the form of statistical discrimination driven by lenders stereotypes about the ability of black and hispanic owned businesses to succeed under some circumstances although we find no discrimination on average in interest rates on approved loans we also find that black owned businesses do face discrimination in interest rates when they borrow from finance companies and businesses such as mutual fund companies and leasing companies with a primary mission other than lending these findings suggest that federal financial regulatory agencies should re double their efforts to uncover and prosecute lenders who discriminate against black and hispanic owned businesses and that new tools may be needed to find discrimination by firms not well covered by the existing fair lending enforcement system

on the extent of the market wholesale gasoline in the northeastern united states this paper develops the classical view of the extent of markets by introducing explicitly in the analysis the concept of arbitrage costs arbitrage or transaction costs imply that market boundaries are essentially stochastic while a set of products or regions may have binding arbitrage conditions i e may be in the same market at a given point in time they may not at another thus in defining a market the probability that a set of agents or regions would h3ve binding arbitrage conditions has to be assessed this paper develops an econometric methodology to estimate the transaction costs required to arbitrage among a given set of products as well as the probability that that set of products would be bound by binding arbitrage condi tions finally the methodology is applied to wholesale gasoline in the northeastern part of the united states address for communications pablo t spiller herbert hoover memorl l bldg 9348 stanford ca 94305

incorporating asymmetric distributional information in robust value at risk optimization value at risk var is one of the most widely accepted risk measures in the financial and insurance industries yet efficient optimization of var remains a very difficult problem we propose a computationally tractable approximation method for minimizing the var of a portfolio based on robust optimization techniques the method results in the optimization of a modified var measure asymmetry robust var arvar that takes into consideration asymmetries in the distributions of returns and is coherent which makes it desirable from a financial theory perspective we show that arvar approximates the conditional var of the portfolio as well numerical experiments with simulated and real market data indicate that the proposed approach results in lower realized portfolio var better efficient frontier and lower maximum realized portfolio loss than alternative approaches for quantile based portfolio risk minimization

portfolio selection in stochastic markets with hara utility functions in this paper we consider the optimal portfolio selection problem where the investor maximizes the expected utility of the terminal wealth the utility function belongs to the hara family which includes exponential logarithmic and power utility functions the main feature of the model is that returns of the risky assets and the utility function all depend on an external process that represents the stochastic market the states of the market describe the prevailing economic financial social political and other conditions that affect the deterministic and probabilistic parameters of the model we suppose that the random changes in the market states are depicted by a markov chain dynamic programming is used to obtain an explicit characterization of the optimal policy in particular it is shown that optimal portfolios satisfy the separation property and the composition of the risky portfolio does not depend on the wealth of the investor we also provide an explicit construction of the optimal wealth process and use it to determine various quantities of interest the return risk frontiers of the terminal wealth are shown to have linear forms special cases are discussed together with numerical illustrations

retail gasoline price cycles across spatially dispersed gasoline stations abstract studies of volatility in retail gasoline prices have used either weekly averages of the prices at a small subset of stations in a city or daily observations on prices at a small number of stations this paper uses daily observations on station specific prices within a large canadian metropolitan area to address whether weekly average prices or prices for a small number of stations provide an accurate description of pricing in a market with volatility this paper considers whether researchers using restricted data can draw meaningful conclusions about the appropriate theoretical model and the policy response to allegations of anticompetitive behavior

why did the west extend the franchise democracy inequality and growth in historical perspective during the nineteenth century most western societies extended voting rights a decision that led to unprecedented redistributive programs we argue that these political reforms can be viewed as strategic decisions by the political elite to prevent widespread social unrest and revolution political transition rather than redistribution under existing political institutions occurs because current transfers do not ensure future transfers while the extension of the franchise changes future political equilibria and acts as a commitment to redistribution our theory also offers a novel explanation for the kuznets curve in many western economies during this period with the fall in inequality following redistribution due to democratization i introduction the nineteenth century was a period of fundamental political reform and unprecedented changes in taxation and redistribution britain for example was transformed from an oligarchy run by an elite to a democracy the franchise was extended in 1832 and then again in 1867 and 1884 transferring voting rights to portions of the society with no previous political representation the decades after the political reforms witnessed radical social reforms increased taxation and the extension of education to the masses moreover as noted by kuznets inequality which was previously increasing started to decline during this period the gini coefficient for income inequality in england and wales had risen from 0 400 in 1823 to 0 627 in 1871 but fell to 0 443 in 1901 two key factors in the reduction in inequality were the increase in the proportion of skilled workers williamson 1985 and the redistribution of income toward the poorer segments of the society for example taxes rose from 8 12 percent of national product in 1867 to 18 8 percent by 1927 and the progressivity of the tax system increased substantially see lindert 1989

mean reversion of standard poor s 500 index basis changes arbitrage induced or statistical illusion mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers we propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion arising because many stocks in the index portfolio trade infrequently even without formal arbitrage reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated the implications of this study go beyond index arbitrage however our analysis suggests that spurious elements may creep in whenever the price change or return series of two securities or portfolios of securities are differenced mean reversion in stock index basis changes has been amply documented mackinlay and ramaswamy 1988 find significant negative first order autocorrelation in normalized intraday basis changes of the s p 500 index futures traded on the chicago mercantile exchange cme yadav and pope 1990 find similar behavior using financial times stock exchange ftse 100 index futures data from the london international financial futures exchange liffe as does lim 1990 using nikkei 225 index futures from the singapore international monetary exchange simex the trading activity of stock index arbitragers has been presumed to be driving this elastic realignment of stock index and index futures prices when the basis widens beyond its theoretical level arbitragers simultaneously sell index futures and buy the index portfolio pulling the difference between the futures and index

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

mean reversion in real exchange rates a modified dickey fuller test which is approximately uniformly most power invariant is employed to examine mean reversion in real exchange rates results from this test provide a wider and more significant support for mean reversion than the standard dickey fuller test

a jump model for fads in asset prices under asymmetric information abstract this paper addresses how asymmetric information fads and levy jumps in the price of an asset affect the optimal portfolio strategies and maximum expected utilities of two distinct classes of rational investors in a financial market we obtain the investors optimal portfolios and maximum expected logarithmic utilities and show that the optimal portfolio of each investor is more or less than its merton optimal our approximation results suggest that jumps reduce the excess asymptotic utility of the informed investor relative to that of uninformed investor and hence jump risk could be helpful for market efficiency as an indirect reducer of information asymmetry our study also suggests that investors should pay more attention to the overall variance of the asset pricing process when jumps exist in fads models moreover if there are very little or too much fads then the informed investor has no utility advantage in the long run

an empirical investigation of the determinants of asymmetric pricing abstract this article empirically investigates the cause of asymmetric pricing retail prices responding faster to cost increases than decreases using daily price data for over 11 000 retail gasoline stations i find that prices fall more slowly than they rise as a consequence of firms extracting informational rents from consumers with positive search costs premium gasoline prices are shown to fall more slowly than regular fuel prices which supports theories based upon competition with consumer search further testing also rejects focal price collusion as an important determinant of asymmetric pricing

worst case value at risk and robust portfolio optimization a conic programming approach classical formulations of the portfolio optimization problem such as mean variance or value at risk var approaches can result in a portfolio extremely sensitive to errors in the data such as mean and covariance matrix of the returns in this paper we propose a way to alleviate this problem in a tractable manner we assume that the distribution of returns is partially known in the sense that onlybounds on the mean and covariance matrix are available we define the worst case value at risk as the largest var attainable given the partial information on the returns distribution we consider the problem of computing and optimizing the worst case var and we show that these problems can be cast as semidefinite programs we extend our approach to various other partial information on the distribution including uncertainty in factor models support constraints and relative entropy information

a discontinuous mispricing model under asymmetric information we study a discontinuous mispricing model of a risky asset under asymmetric information where jumps in the asset price and mispricing are modelled by levy processes by contracting the filtration of the informed investor we obtain optimal portfolios and maximum expected utilities for the informed and uninformed investors we also discuss their asymptotic properties which can be estimated using the instantaneous centralized moments of return we find that optimal and asymptotic utilities are increased due to jumps in mispricing for the uninformed investor but the informed investor still has excess utility provided there is not too little or too much mispricing

the financial power of the powerless socio economic status and interest rates under partial rule of law in advanced economies interest rates vary inversely with the borrower s socio economic status which itself depends inversely on default risk these relationships depend on the impartiality of the law where the law is markedly biased in favour of certain groups the latter will pay a surcharge for capital legal power as measured by privileges before the law thus undermines financial power the capacity to borrow cheaply developing this argument this paper also tests it through judicial records from ottoman istanbul 1602 1799 three privileged ottoman groups men muslims and titled elites all paid relatively high interest rates conditional on various loan characteristics this article is protected by copyright all rights reserved

the dynamic black litterman approach to asset allocation abstract we generalize the black litterman bl portfolio management framework to incorporate time variation in the conditional distribution of returns in the asset allocation process we evaluate the performance of the dynamic bl model using both standard performance ratios as well as other measures that are designed to capture tail risk in the presence of non normally distributed asset returns we find that the dynamic bl model outperforms a range of different benchmarks moreover we show that the choice of volatility model has a considerable impact on the performance of the dynamic bl model

the dynamics of gasoline prices evidence from daily french micro data using millions of individual gasoline prices collected at a daily frequency we examine the speed at which market prices of refined oil are transmitted to retail gasoline prices in france for that we estimate a reduced form model of state dependent pricing where thresholds triggering price changes are allowed to vary over time and depend on the duration since the last price change we find that the degree of pass through of wholesale prices to retail gasoline prices is on average 0 77 for diesel and 0 67 for petrol and depend on local market characteristics the duration for a shock to be fully transmitted into prices is about 10 days there is no significant asymmetry in the transmission of wholesale price to retail prices finally the duration since the last price change has a significant effect on thresholds triggering price changes but a large variance of idiosyncratic shocks on thresholds is also crucial to replicate the size distribution of price changes

risk analysis with contractual default does covenant breach matter abstract mergers and acquisitions m a private equity and leveraged buyouts securitization and project finance are characterized by the presence of contractual clauses covenants these covenants trigger the technical default of the borrower even in the absence of insolvency therefore borrowers may default on loans even when they have sufficient available cash to repay outstanding debt this condition is not captured by the net present value npv distribution obtained through a standard monte carlo simulation in this paper we present a methodology for including the consequences of covenant breach in a monte carlo simulation extending traditional risk analysis in investment planning we introduce a conceptual framework for modeling technical and material breaches from the standpoint of both lenders and shareholders we apply this framework to a real case study concerning the project financing of a 64 million euro biomass power plant the simulation is carried out on the actual model developed by the financial advisor of the project and made available to the authors results show that both technical and material breaches have a statistically significant impact on the net present value distribution and this impact is more relevant when leverage and cost of debt increase