regulatory reform and productivity growth in the uk s public utilities the reforms in the regulation of the uk nationalised industries over the last decade are examined and the extent to which they have been successful in achieving one of their declared aims that of increasing the efficiency of the enterprises operations is considered to achieve this the productivity performance of nine of the largest enterprises over the last twenty years was analysed the results show that the rate of productivity growth has been significantly higher during the 1980s compared with the preceeding decade it is concluded that a large part of the observed upturn in productivity is a result of changes in efficiency

premia for correlated default risk abstract using data on corporate default experience in the u s and market rates of cdx index and tranche swaps of various maturities we estimate reduced form models of correlated default timing in the cdx high yield and investment grade portfolios under actual and risk neutral probabilities the striking contrast between the estimated processes followed by the actual and risk neutral arrival intensities of defaults and between the parameters governing the actual and risk neutral dynamics of the risk neutral intensities indicates the presence of substantial default risk premia in cdx swap market rates the effects of risk premia on swap rates covary strongly across maturities and depend on general stock market volatility and several measures of credit spreads large moves in the effects of these premia on swap rates have natural interpretations in terms of economic and financial market developments during the sample period april 2004 to october 2007 our results suggest that a large portion of the movements in cdx swap market rates observed during the sample period may be caused by changing attitudes toward correlated default risk rather than changes in the economic factors affecting the actual risk of clustered defaults which ultimately governs swap payoffs

the financial crisis and the geography of wealth transfers abstract this paper studies the geography of wealth transfers between 2007q4 and 2008q4 at the height of the global financial crisis we construct valuation changes on bilateral external positions in equity direct investment and portfolio debt to measure who benefited and who lost on their external exposure we find a very diverse set of fortunes governed by the structure of countries external portfolios in particular we are able to relate the gains and losses on debt portfolios to the country s exposure to abs abcp conduits and the extent of dollar shortage

privatisation in the u k de regulation and the advantage of incumbency privatisation in the u k has generated a lively debate amongst both economists and policy makers on issues relating to the efficiency of public sector enterprises the relationship between ownership and performance and the role of competition this paper is about the latter and considers the evidence now emerging from markets in the u k where de regulation policies have recently been implemented an extensive literature has analysed the dis incentives to efficient performance in markets where competition is regulated see for example bailey 1973 and a growing body of empirical evidence see for example bailey 1986 millward 1982 and yarrow 1986 has emphasised the importance of competition or contestability in inducing enterprises to act efficiently the first objective of this paper is thus to examine whether the findings from recently de regulated markets in the u k conform to this pattern and show evidence of increased efficiency increased efficiency would only be expected however to the extent that de regulation leads to effective competition or contestability a feature common to many of the recently de regulated markets in the u k is the continued pre dominance of incumbents the second objective of the paper is to consider the reasons for this it should be emphasised that a high market share for incumbents may still be consistent with the achievement of efficiency two conditions are required for this the first that cost conditions are such that provision by only a few firms is an efficient outcome the second that the market is contestable it will be concluded however that these conditions do not hold in most of the markets considered and that incumbents predominance is a consequence of barriers to entry both those which result from incumbency in the

evaluating interval forecasts a complete theory for evaluating interval forecasts has not been worked out to date most of the literature implicitly assumes homoskedastic errors even when this is clearly violated and proceed by merely testing for correct unconditional coverage consequently i set out to build a consistent framework for conditional interval forecast evaluation which is crucial when higher order moment dynamics are present the new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management

dynamic factor models with macro frailty and industry effects for u s default counts the credit crisis of 2008 we develop a high dimensional nonlinear and non gaussian dynamic factor model for the decomposition of systematic default risk conditions into latent components for 1 macroeconomic financial risk 2 autonomous default dynamics frailty and 3 industry specific effects we analyze discrete u s corporate default counts together with macroeconomic and financial variables in one unifying framework we find that approximately 35 of default rate variation is due to systematic and industry factors approximately one third of this systematic variation is captured by the macroeconomic and financial factors the remainder is captured by frailty 40 and industry 25 effects the default specific effects are particularly relevant before and during times of financial turbulence we detect a build up of systematic risk over the period preceding the 2008 credit crisis this article has online supplementary material

exploring the sources of default clustering abstract we study the sources of corporate default clustering in the united states we reject the hypothesis that firms default times are correlated only because their conditional default rates depend on observable and latent systematic factors by contrast we find strong evidence that contagion through which the default by one firm has a direct impact on the health of other firms is a significant clustering source the amount of clustering that cannot be explained by contagion and firms exposure to observable and latent systematic factors is insignificant our results have important implications for the pricing and management of correlated default risk

efficiency effect of privatization in the developing countries privatization gained considerable momentum in the developing world in the 1980s the motives were many but the hope for higher economic efficiency underlined the expectations of the implementing governments and agencies in the developing countries while the merits of a market based economic system are well established under certain theoretical conditions far less is known of its empirical relevance in the developing world yet to the best of the author s knowledge no empirical study has examined the macro efficiency effect of privatization in the developing countries studies concerned with this issue often limit themselves to the impact of privatization at the firm level for a small number of companies and countries thus the current study is an attempt to provide a systematic quantitative measure of the magnitude of the macroeconomic effect of privatization in 45 developing countries using the concept of frontier production function efficiency differences between developing countries with differ

on the launching of a new currency this paper studies the appropriate way of launching a new fiat currency within a dual currency search theoretic framework we demonstrate that legal tender laws may not be sufficient to guarantee the acceptability of the new currency and that the old currency may continue to circulate if the enforcement power of legal tender laws is weak and the fraction of individuals endowed with the new currency is too low the possibility of converting the old currency into the new one can ease the transition to the new currency only if it is combined with strict legal tender laws finally a network externality may generate inefficiencies in the decision to switch to the new currency

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

currency substitution portfolio diversification and money demand we extend the thomas 1985 dynamic optimising model of money demand and currency substitution to the case in which the individual has no access to bonds denominated in foreign currency we show that in this case the demand for domestic money is influenced by portfolio decisions contrary to what defended by the portfolio balance approach to currency substitution the results obtained in this paper suggest that the significance of an expected exchange rate depreciation term in the demand for domestic money provides a valid test for the presence of currency substitution the results also suggest that in countries facing monetary instability and currency substitution restricting the availability of interest bearing assets denominated in foreign currency may have a destabilising impact on the money demand

a search theoretic approach to monetary economics the essential function of money is its role as a medium of exchange the authors formalize this idea using a search theoretic equilibrium model of the exchange process that captures the double coincidence of wants problem with pure barter one advantage of the framework described here is that it is very tractable the authors also show that the model can be used to addre ss some substantive issues in monetary economics including the potenti al welfare enhancing role of money the interaction between specializat ion and monetary exchange and the possibility of equilibria with multip le fiat currencies copyright 1993 by american economic association

neo liberalism sme development and the role of business support centres in the transition economies of central and eastern europe support for sme development was one of the most important policy interventions initiated by post communist governments in central and eastern europe from 1990 onwards substantial financial support for this was forthcoming from both the international assistance agencies and western governments one major result was the formation of networks of business support centres bscs the design of the bscs was very much informed by the neo liberal approach to business development which was still in the ascendancy in the late 1980s as a consequence the bsc networks were structured to be private sector led financially self sustaining to involve minimal local government participation and essentially pressed into focusing upon support initiatives which were consonant with short run market imperatives with several years of experience now behind them it is possible to begin to make an assessment of their operations and impact upon the sme development process unfortunately the bsc networks almost everywhere are failing to deliver upon the heady promises of both their domestic and international supporters and the sme development process is beginning to falter crucially they compare very badly with previous historical episodes of sme development facilitated and co ordinated by the local state a new sme discourse is called for which explicitly recognises that a local developmental state approach could have a much greater if not a pivotal role to play in sme development in the transition economies

dollarization and currency exchange abstract we use a dual currency money search model to study dollarization agents hold portfolios consisting of two currencies one of which is risky we use numerical methods to solve for the steady state distributions of currency portfolios transaction patterns and value functions as risk increases agents increasingly use the safe currency as a medium of exchange dollarization occurs furthermore the safe currency trades for multiple units of the risky currency this type of currency exchange and the corresponding nominal exchange rate are often observed in black market or unofficial currency exchange markets in developing countries due to decentralized trading a distribution of exchange rates arises whose mean and variance change in predictable ways when currency risk increases

government transaction policy and gresham s law abstract a search theoretic model is used to study how legal restrictions may account for the fact that gresham s law sometimes holds but other times fails legal restrictions is modeled here as policies that government adopts in the transactions with private agents such as at what prices it accepts a currency in exchange for goods and at what ratios it conducts currency exchange a government policy sufficiently favorable to light coins can induce the existence of an equilibrium where both coins circulate and light coins are even accepted at a premium a policy favorable to heavy coins may increase their value to such an extent that they are hoarded from circulation when this equilibrium did not exist without interventions

search bargaining money and prices the goal of this paper is to extend existing search theoretic models of fiat money which until now have assumed that the price level is exogenous by explicitly incorporating bilateral bargaining this allows us to determine the price level endogenously and leads to additional insights concerning the role of money for example we find that monetary equilibria are generally inefficient in the sense that output and prices differ from the solution to a social planner s problem although the difference can become small as the discount rate or search friction vanishes we also find that there exist nonstationary inflationary equilibria

variable selection and corporate bankruptcy forecasts abstract we investigate the relative importance of various bankruptcy predictors commonly used in the existing literature by applying a variable selection technique the least absolute shrinkage and selection operator lasso to a comprehensive bankruptcy database over the 1980 2009 period lasso admits the majority of campbell et al 2008 predictive variables into the bankruptcy forecast model interestingly by contrast with recent studies some financial ratios constructed from only accounting data also contain significant incremental information about future default risk and their importance relative to that of market based variables in bankruptcy forecasts increases with prediction horizons moreover lasso selected variables have superior out of sample predictive power and outperform 1 those advocated by campbell et al 2008 and 2 the distance to default from merton s 1974 structural model

when did the dollar overtake sterling as the leading international currency evidence from the bond markets abstract we offer new evidence on the emergence of the dollar as the leading international currency focusing on its role as currency of denomination in global bond markets we show that the dollar overtook sterling much earlier than commonly supposed as early as in 1929 financial development appears to have been the main factor helping the dollar to overcome sterling s head start the finding that a shift from a unipolar to a multipolar international monetary and financial system has happened before suggests that it can happen again that the shift occurred earlier than commonly believed suggests that the advantages of incumbency are not insurmountable and that financial deepening was a key determinant of the dollar s emergence points to the challenges facing currencies aspiring to international status

endogenous multiple currencies in this paper i study a model in which households can decide which currency or currencies they will accept i provide a simple set of assumptions that are sufficient to prevent the indeterminacy of the exchange rate in the sense of kareken and wallace 1981 in a two country model stable equilibria have either a single currency or national currencies i also show currency substitution occurs as an endogenous response to high growth in the stock of a currency

a model of the federal reserve act under the international gold standard system abstract freeman am econom rev 86 1996a 1126 shows that an elastic money supply enhances the efficiency of monetary equilibrium by clearing default free debts at par value in the domestic credit market this research adds a foreign exchange market to freeman s model and extends his analysis into a two country model in which the arrival rates of agents are not equal between the two countries in this model an elastic money supply in the foreign exchange market to clear the exchange of fiat monies at gold standard parity accompanied by an elastic money supply in the domestic credit market could improve the efficiency of monetary equilibrium

the financial and operating performance of newly privatized firms an international empirical analysis this study compares the pre and postprivatization financial and operating performance of 61 companies from 18 countries and 32 industries that experience full or partial privatization through public share offerings during the period 1961 to 1990 our results document strong performance improvements achieved surprisingly without sacrificing employment security specifically after being privatized firms increase real sales become more profitable increase their capital investment spending improve their operating efficiency and increase their work forces furthermore these companies significantly lower their debt levels and increase dividend payout finally we document significant changes in the size and composition of corporate boards of directors after privatization the last fifteen years have witnessed a significant global shift away from state socialism towards entrepreneurial capitalism one of the most important and visible aspects of this trend has been the enthusiasm with which governments of all political persuasions have sold their state owned enterprises soes to private investors in hopes that the generally unsatisfactory economic performance of these firms can be improved by the discipline of private ownership this denationalization process given its current title of privatization by the conservative government of margaret thatcher in

an information based theory of international currency abstract this paper develops an information based theory of international currency based on search frictions private trading histories and imperfect recognizability of assets using an open economy search model with multiple competing currencies the value of each currency is determined without requiring agents to use a particular currency to purchase a country s goods strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements while some inflation can benefit the country issuing an international currency the threat of losing international status puts an inflation discipline on the issuing country when monetary authorities interact in a simple policy game the temptation to inflate can lead optimal policy to deviate from the friedman rule the calibrated model can produce a welfare cost of losing international status for the issuing country larger than previous findings though estimates depend critically on inflation rates and information costs

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

structural shifts in the manufacturing export performance of oecd economies summary this paper identifies structural shifts in manufacturing export performance of the major oecd economies the particular emphasis of this study is to see whether the longer run responses of a country s exports to the growth in world demand have undergone trend changes the econometric work focuses on the time variation in income elasticities from an export demand model over the period 1963 89 it thus covers a period in which there was a substantial slow down in world economic growth and in which the manufacturing sectors in advanced economies underwent substantial restructuring in the wake of the two oil price shocks and the competitive challenges of japan and the nics the exercise attempted to evaluate the relative successes and failures of the different oecd economies to maintain or improve their positions in the higher quality income elastic segments of world trade evidence was found for trend improvements in the income elasticity for uk exports from the early 1980s onwards and a trend decline for that of the us over the same period the effects of non tariff protection against japanese exports also showed up in our results and an attempt was made to separately identify its effects

unobserved systematic risk factor and default prediction abstract we conduct a thorough analysis on the role played by the unobserved systematic risk factor in default prediction we find that this latent factor outweighs the observed systematic risk factors and can substantially improve the in sample predictive accuracy at the firm rating group and aggregate levels thus it might be helpful to include the unobserved systematic risk factor when simulating portfolio credit losses however we also find that this factor only marginally improves out of sample model performance therefore although the models we investigated all show reasonably good ability to rank order firms by default risk accurate prediction of default rate remains challenging even when the unobserved systematic risk factor is considered

cyclicality in losses on bank loans based on unique data we show that macro variables the default rate and loss given default of bank loans share common cyclical components the innovation in our model is the distinction between loans with either severe or mild losses the variation in the proportion of these two types drives the cyclic behavior of the loss given default and constitutes the links with the default rate and macro variables these links vary according to loan and borrower characteristics during downturns the proportion of defaults with severe losses increases but the distribution of losses conditional on their being mild or severe does not change although loans are monitored more closely than bonds and are more senior the cyclical variation in their losses resembles those for bonds albeit around a lower average level this variation leads to an increase in the capital reserves required for loan portfolios

modeling the loss distribution in this paper we focus on modeling and predicting the loss distribution for credit risky assets such as bonds and loans we model the probability of default and the recovery rate given default based on shared covariates we develop a new class of default models that explicitly accounts for sector specific and regime dependent unobservable heterogeneity in firm characteristics based on the analysis of a large default and recovery data set over the horizon 1980 2008 we document that the specification of the default model has a major impact on the predicted loss distribution whereas the specification of the recovery model is less important in particular we find evidence that industry factors and regime dynamics affect the performance of default models implying that the appropriate choice of default models for loss prediction will depend on the credit cycle and on portfolio characteristics finally we show that default probabilities and recovery rates predicted out of sample are negatively correlated and that the magnitude of the correlation varies with seniority class industry and credit cycle this paper was accepted by wei xiong finance

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

currency areas and monetary coordination we integrate a monetary search model into open economy macro to analyze the gains from coordinating on inflation search frictions and local congestion lead to a determinate exchange rate between two currencies relative prices deviate from the law of one price because the deviations depend on the cross country differential in money growth each country is tempted to inflate to exploit the deviations policy coordination reduces inflation and improves welfare for all countries in contrast to traditional models the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country s currency

nonfundamental uncertainty and exchange rates this paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals this is demonstrated in the context of a two currency one good model with three agent types and cash in advance constraints a crucial feature is that the type i agents for i 1 2 must satisfy a cash in advance constraint by holding currency i while type 3 agents can satisfy it by holding either currency it is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist

spot pricing of electricity arguments and prospects abstract the paper in this issue extend the early literature on spot pricing but differences of opinion still remain between proponents and critics mathematical models designed to prove that spot pricing is socially optimal are unpersuasive regrettably there are no further empirical estimates of the consequences costs and benefits of spot pricing but previous studies suggest that it would be profitable and economic for a significant subset of large industrial users current moves to deregulate and privatize electricity industries are likely to stimulate rather than hinder the adoption of spot pricing

introducing a new currency government policy and prices abstract the aim of this article is to study the introduction of a new fiat currency within a dual currency divisible goods search model the government using price control or legal tender laws can affect the equilibrium price levels of two domestic currencies with the goal of driving the old currency out of circulation and replacing it with a new one it is shown that some equilibrium solutions that exist in a laissez faire environment disappear with government monitoring additionally when the old currency is made illegal its equilibrium value is affected differently by public measures such as conversion tax and redistribution policies finally if the enforcement power of legal tender laws is strong enough the old currency cannot be more valuable than the new one and the probability that it changes hands in trade when introducing lotteries cannot be smaller than one

on money as a medium of exchange we analyze economies in which individuals specialize in consumption and production and meet randomly over time in a way that implies that trade must be bilateral and quid pro quo nash equilibria in trading strategies are characterized certain goods emerge endogenously as media of exchange or commodity money depending both on their intrinsic properties and on extrinsic beliefs there are also equilibria with genuine fiat currency circulating as the general medium of exchange we find that equilibria are not generally pareto optimal and that introducing fiat currency into a commodity money economy may unambiguously improve welfare velocity acceptability and liquidity are discussed

forecasting and decomposition of portfolio credit risk using macroeconomic and frailty factors this paper presents a dynamic portfolio credit model following the regulatory framework using macroeconomic and latent risk factors to predict the aggregate loan portfolio loss in a banking system the latent risk factors have three levels global across the entire banking system parent sectoral for the intermediate loan sectors and sector specific for the individual loan sectors the aggregate credit loss distribution of the banking system over a risk horizon is generated by monte carlo simulation and a quantile estimator is used to produce the aggregate risk measure and economic capital the risk contributions of the individual sectors and risk factors are measured by combining the hoeffding decomposition with the euler capital allocation rule for the u s banking system we find that the real gdp growth rate the global and sector wide frailty risk factors and their spillovers significantly affect loan defaults and the impacts of the frailty factors are not only economy wide but also sector specific we also find that the frailty risk factors make more significant risk contributions to the aggregate portfolio risk than the macroeconomic factors while the macroeconomic factors help to improve the accuracy and efficiency of the credit risk forecasts

optimal credit swap portfolios this paper formulates and solves the selection problem for a portfolio of credit swaps the problem is cast as a goal program that entails a constrained optimization of preference weighted moments of the portfolio value at the investment horizon the portfolio value takes account of the exact timing of protection premium and default loss payments as well as any mark to market profits and losses realized at the horizon the constraints address collateral and solvency requirements initial capital position limits and other trading constraints that credit swap investors often face in practice the multimoment formulation accommodates the complex distribution of the portfolio value which is a nested expectation under risk neutral and actual probabilities it also generates computational tractability numerical results illustrate the features of optimal portfolios in particular we find that credit swap investment constraints can have a significant impact on optimal portfolios even for simple investment objectives our problem formulation and solution approach extend to corporate bond portfolios and mixed portfolios of corporate bonds and credit derivatives this paper was accepted by wei xiong finance

existence of steady states with positive consumption in the kiyotaki wright model we prove the general existence of steady states with positive consumption in an n goods and fiat money version of the kiyotaki wright model by admitting mixed strategies we also show that there always exists a steady state in which everyone accepts a least costly to store object in particular if fiat money is one such object then there always exists a monetary steady state we also establish some other properties of steady states and comment on the relationship between steady states and incentive feasible allocations

time changed birth processes and multiname credit derivatives a credit investor such as a bank granting loans to firms or an asset manager buying corporate bonds is exposed to correlated corporate default risk a multiname credit derivative is a financial security that allows the investor to transfer this risk to the credit market in this paper we study the valuation and risk analysis of multiname derivatives to capture the complex economic phenomena that drive the pricing of these securities we introduce a time changed birth process as a probabilistic model of correlated event timing the self exciting property of a time changed birth process captures the feedback from events that is often observed in credit markets the stochastic variation of arrival rates between events captures the exposure of firms to common economic risk factors we derive a closed form expression for the distribution of a time changed birth process and develop analytically tractable pricing relations for a range of multiname derivatives valuation problems we illustrate our results by calibrating a tranche forward and option pricer to market rates of index and tranche swaps

privatization benefits in eastern europe abstract we document changes in the performance of over 6000 privatized and state owned manufacturing enterprises in seven eastern european countries over the initial transition period we find that privatization is associated with significant increases in sales revenues and labor productivity and to a lesser extent with fewer job losses the positive effect of privatization is stronger in economic magnitude and statistical significance as the time elapsed since privatization increases enterprises privatized for less than 2 years have labor productivity growth similar to that of state owned enterprises in contrast enterprises privatized for 3 or more years significantly outperform state owned enterprises the results are robust to the use of alternative econometric specifications fixed effects cluster effects and random effects and survive in six of the seven individual country samples the exceptions being hungary for sales growth and romania for labor productivity growth

credit contagion from counterparty risk standard credit risk models cannot explain the observed clustering of default some times described as credit contagion this paper provides the first empirical analysis of credit contagion via direct counterparty effects we find that bankruptcy announce ments cause negative abnormal equity returns and increases in cds spreads for credi tors in addition creditors with large exposures are more likely to suffer from financial distress later this suggests that counterparty risk is a potential additional channel of credit contagion indeed the fear of counterparty defaults among financial institu tions explains the sudden worsening of the credit crisis after the lehman bankruptcy in september 2008

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

industrial structure in us telecommunications some empirical evidence the telecommunications industry in the us is re assessed using a methodology which incorporates new developments in time series analysis the issue of natural monopoly is re considered with a view to the validation of the use of applied econometry in the fields of divestiture and industrial policy recent developments in us telecommunications are considered and incorporated into the model

strategic competition among the few some recent developments in the economics of industry the title of this article is intended as a signal of two things first we are concerned with industries where several but not many firms are actually or potentially in competition with each other thus our topic is competition among the few 1 or oligopoly rather than the polar extremes of textbook perfect competition and pure monopoly secondly we are interested in the strategic nature of competition between firms where the meaning of strategic can be explained as follows if the essence of a game of strategy is the dependence of each person s proper choice of action on what he expects the other to do it may be useful to define a strategic move as follows a strategic move is one that influences the other person s choice in a manner favourable to one s self by affecting the other person s expectations of how one s self will behave schelling 1960 p 150

on correlation and default clustering in credit markets we establish markovian models in the heath jarrow and morton 1992 paradigm that permit an exponential affine representation of riskless and risky bond prices while offering significant flexibility in the choice of volatility structures estimating models in our family is typically no more difficult than in the workhorse affine family besides diffusive and jump induced default correlations defaults can impact the credit spreads of surviving firms allowing for a greater clustering of defaults numerical implementations highlight the importance of incorporating interest rate credit spread correlations credit spread impact factors and the full credit spread curve when building a unified framework for pricing credit derivatives the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

a model of a currency shortage abstract until the mid 19th century shortages of currency were common moreover a frequent policy response was a prohibition on the export of coins we use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins the model although extreme in many regards represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible it can also rationalize a prohibition on the export of money

credit default swaps and the credit crisis many observers have argued that credit default swaps contributed significantly to the credit crisis of particular concern to these observers are that credit default swaps trade in the largely unregulated over the counter market as bilateral contracts involving counterparty risk and that they facilitate speculation involving negative views of a firm s financial strength some observers have suggested that credit default swaps would not have made the crisis worse had they traded on exchanges i conclude that credit default swaps did not cause the dramatic events of the credit crisis that the over the counter credit default swaps market worked well during much of the crisis and that exchange trading has both advantages and costs compared to over the counter trading though i argue that eliminating over the counter trading of credit default swaps could reduce social welfare i also recognize that much research is needed to understand better and to quantify the social gains and costs of derivatives in general and credit default swaps in particular

a unified framework for monetary theory and policy analysis search theoretic models of monetary exchange are based on explicit descriptions of the frictions that make money essential however tractable versions of these models typically make strong assumptions that render them ill suited for monetary policy analysis we propose a new framework based on explicit micro foundations within which macro policy can be studied the framework is analytically tractable and easily quantifiable we calibrate the model to standard observations and use it to measure the cost of inflation we find that going from 10 percent to 0 percent inflation is worth between 3 and 5 percent of consumption much higher than previous estimates

contestability a revisionist view many claims have been made about the significance of the contribution of contestability theory to industrial organizat ion this paper concludes that contestability theory leaves unanswere d questions about the identity of entrants and the source of their re sources a modification to the theory is proposed rather than as a h indrance to potential entry sunk costs are viewed as being of key si gnificance for the disciplining of oligopolists through potential ent ry with the proposed modification the analysis of the costs of mult iproduct firms may be more easily integrated with recent developments in industrial organization copyright 1988 by the london school of economics and political science

decentralized international exchange traditional models of international trade take place within trading environments in which trade is coordinated by a walrasian auctioneer who instantly matches buyers and sellers in world markets this assertion seems inconsistent with evidence suggesting that trading arrangements seem to economize on transactions costs associated with international trade recognizing these insights we depart from standard models of international trade by incorporating the difficulties in the coordination of exchange within a two country random matching model of international trade we capture a motivation for trade through comparative advantage and interpret trade across economies to be associated with an agent s endogenous choice to participate in foreign markets although an individual may decide to search abroad to obtain additional gains from trade resulting from comparative advantage she is less likely to meet trading partners abroad as search frictions are higher in the foreign country than in the domestic market using this framework we show that international trade is associated with convergence in relative prices across countries we also show that the extent of market frictions in the foreign country affects relative prices the volume of international trade and welfare levels due to market participation externalities associated with international trade we show that a movement from autarky to free trade may actually lower welfare levels we conclude by examining the possible inefficiencies associated with international trade due to the decentralized nature of exchange and the policy implications of our model

an ex post welfare analysis of natural gas regulation in the industrial sector the current structure of the us natural gas industry is a result of the evolution of regulatory policy over the past three decades which began with the deregulation of natural gas prices at the wellhead ngpa of 1978 and culminated with the deregulation of interstate transportation of natural gas ferc order 636 focusing on the industrial sector this paper estimates the welfare and price effects associated with the changes in regulatory policy overtime actual prices converge towards estimated equilibrium prices consequently deadweight losses diminished an estimated 15 47 billion 2003 dollars of welfare loss had been incurred from 1977 to 2000

a contribution to the pure theory of money abstract this article analyzes a general equilibrium model with search frictions and differentiated commodities because of the many differentiated commodities barter is difficult in that it requires a double coincidence of wants and this provides a medium of exchange role for fiat currency we prove the existence of equilibrium with valued fiat money and show it is robust to certain changes in the environment rate of return dominance liquidity and the welfare implications of fiat money are discussed

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

common failings how corporate defaults are correlated we test the doubly stochastic assumption under which firms default times are correlated only as implied by the correlation of factors determining their default intensities using data on u s corporations from 1979 to 2004 this assumption is violated in the presence of contagion or frailty unobservable explanatory variables that are correlated across firms our tests do not depend on the time series properties of default intensities the data do not support the joint hypothesis of well specified default intensities and the doubly stochastic assumption we find some evidence of default clustering exceeding that implied by the doubly stochastic model with the given intensities why do corporate defaults cluster in time several explanations have been explored first firms may be exposed to common or correlated risk factors whose co movements cause correlated changes in conditional default probabilities second the event of default by one firm may be contagious in that one such event may directly induce other corporate failures as with the collapse of penn central railway in 1970 third learning from default may generate default correlation for example to the extent that the defaults of enron and worldcom revealed accounting irregularities that could be present in other firms they may have had a direct impact on the conditional default probabilities of other firms our primary objective is to examine whether cross firm default correlation that is associated with observable factors determining conditional default probabilities the first channel on its own is sufficient to account for the degree of time clustering in defaults that we find in the data

currency competition in a fundamental model of money abstract we study how two fiat monies one safe and one risky compete in a decentralized trading environment the currencies equilibrium values their transaction velocities and agents spending patterns are endogenously determined we derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases we also examine when the reverse spending pattern is optimal traders generally favor dealing in the safe currency unless trade frictions and the currency risk is low as risk increases or trading becomes more difficult the transaction velocity and value of the safe money increases

price and productivity change following deregulation the u s experience no real world market is likely to be perfectly contestable anymore than it is to be perfectly competitive yet like its predecessor the contestability benchmark proves highly useful as a framework for evaluating policies and outcomes under the contestability framework entry and price regulation is deemed inappropriate in industries which do not have system wide natural monopoly characteristics on this criterion brokerage airline trucking long distance telephone and terminal equipment should not be regulated true these industries may be characterised by some elements of scale economy such as economies of vehicle size so that at some level city pair routes only a few firms may serve but industry performance need not suffer in such an unregulated environment impediments to entry and exit not concentration or scale of operations may be the primary source of prices that are not welfare optimal even in the presence of natural monopoly characteristics it is important to isolate those markets which are not yet structurally competitive as in the case of coal shipments over which the railroads are judged to possess market dominance or in local telephone service it can be argued that the latter should continue to be overseen by regulators while markets which are controlled by competitive forces deriving from actual or potential competition or taking other indirect but effective forms should be free from traditional regulation thus unlike privatisation policy in the united kingdom described in the companion article by kay and thompson i985 us deregulatory policy can be construed as having a coherent rationale the nature and extent of deregulation match remarkably well with the policy prescription of the theory this paper analyses the consequences that have emerged under deregulation in terms of the following behavioural properties predicted by multi product competition and contestability theory a variety of products will emerge each of which will yield zero economic profit the revenues from any subset of the products must exceed the incremental costs of those products so that no cross subsidy can exist prices for each product will equal or exceed marginal costs and an equilibrium market structure will minimise costs for the industry see baumol

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

affine modeling of credit risk pricing of credit events and contagion we propose a discrete time affine pricing model that simultaneously allows for i the presence of systemic entities by departing from the no jump condition on the factors conditional distribution

the empirics of international currencies network externalities history and persistence using a new database for the late nineteenth century when the pound sterling was the world s leading international currency this article provides evidence on the empirical determinants of international currency status we report evidence in favour of the search theoretic models to international currencies using a microeconomic model of currency choice we provide empirical support to strategic externalities we find strong confirmation of the existence of persistence but reject the view that the international monetary system was subject to pure path dependency and lock in effects suggesting that even in the absence of wwi the usd was bound to overtake sterling

government transaction policy media of exchange and prices abstract we study government transaction policies in search theoretic models of money we model government as a subset of agents who are subject to the same random matching technology and other constraints as private agents but who behave in an exogenous way regarding which objects they accept in trade and at what price the objective is to see how these policies affect private agents strategies and hence the set of equilibria we analyze how the effects depend on factors like the size of government the intrinsic properties of money and the availability and efficacy of substitutes like barter or foreign currency journal of economic literature classification numbers c78 e31 e42

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

tariffs and load management a post privatisation study of the uk electricity supply industry an electric utility can influence its customers load by providing financial incentives through the prices charged for electricity at different times of use by designing discriminatory time of use tariffs in which the price of electricity corresponds to the marginal cost of supply a utility provides appropriate signals to the customer to increase consumption of electricity at off peak periods the utilization of off peak electricity results in the improvement of power system load factor which is an indicator for the utilities to decide to defer investment in new generating and transmission capacity the need to utilize off peak electricity provides ample justification for the investigation of the determinants of the off peak demand functions customers response to discriminatory prices and their implication to system load management using the econometric approach this paper reports a study of the british experience in the field of tariffs and load management in the case of the privatised electricity supply industry the results of this study may be applicable to the regional electricity companies in the uk the utilities in several developing countries may find this study relevant if they decide to restructure their industry for increasing efficiency and tariff for implementing load management instead of arbitrary load shedding

risk analysis of collateralized debt obligations collateralized debt obligations which are securities with payoffs that are tied to the cash flows in a portfolio of defaultable assets such as corporate bonds play a significant role in the financial crisis that has spread throughout the world insufficient capital provisioning due to flawed and overly optimistic risk assessments is at the center of the problem this paper develops stochastic methods to measure the risk of positions in collateralized debt obligations and related instruments tied to an underlying portfolio of defaultable assets it proposes an adaptive point process model of portfolio default timing a maximum likelihood method for estimating point process models that is based on an acceptance rejection resampling scheme and statistical tests for model validation to illustrate these tools they are used to estimate the distribution of the profit or loss generated by positions in multiple tranches of a collateralized debt obligation that references the cdx high yield portfolio and the risk capital required to support these positions

mars or mercury the geopolitics of international currency choice we assess the role of economic and security considerations in the currency composition of international reserves we contrast the mercury hypothesis that currency choice is governed by pecuniary factors familiar to the literature such as economic size and credibility of major reserve currency issuers against the mars hypothesis that this depends on geopolitical factors using data on foreign reserves of 19 countries before world war i for which the currency composition of reserves is known and security alliances proliferated our results lend support to both hypotheses we find that military alliances boost the share of a currency in the partner s foreign reserve holdings by 30 percentage points these findings speak to current discussions about the implications of possible u s disengagement from global geopolitical affairs in a hypothetical scenario where the u s withdraws from the world our estimates suggest that long term u s interest rates could rise by as much as 80 basis points assuming that the composition of global reserves changes but their level does not

counterparty risk and the pricing of defaultable securities motivated by recent financial crises in east asia and the united states where the downfall of a small number of firms had an economy wide impact this paper generalizes existing reduced form models to include default intensities dependent on the default of a counterparty in this model firms have correlated defaults due not only to an exposure to common risk factors but also to firm specific risks that are termed counterparty risks numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps it has been well documented in moody s reports on historical default rates of corporate bond issuers that the number of defaults the number of credit rating downgrades and credit spreads are all strongly correlated with the business cycle this has motivated reduced form models such as duffie and singleton 1999 and lando 1994 1998 which assume that the intensity of default is a stochastic process that derives its randomness from a set of state variables such as the short term interest rate this approach has the convenient features that conditioning on the state variables defaults become independent events and default correlation arises due to the common inf luence of these state variables on the other hand a default intensity that depends linearly on a set of smoothly varying macroeconomic variables is unlikely to account for the clustering of defaults around an economic recession this is evident from a casual inspection of the exhibits in the latest moody s report see keenan 2000 within the usual affine framework one can model the state variables as jump diffusions see duffie pan and single

liquidity a new monetarist perspective this essay surveys the new monetarist approach to liquidity work in this literature strives for empirical and policy relevance plus rigorous foundations questions include what is liquidity is money essential in achieving desirable outcomes which objects can or should serve in this capacity when can asset prices differ from fundamentals what are the functions of commitment and collateral in credit markets how does money interact with credit and intermediation what can and should monetary policy do the research summarized emphasizes the micro structure of frictional transactions and studies how institutions like monetary exchange credit arrangements or intermediation facilitate the exchange process

macroeconomic effects of corporate default crisis a long term perspective abstract using an extensive data set on corporate bond defaults in the us from 1866 to 2010 we study the macroeconomic effects of bond market crises and contrast them with those resulting from banking crises during the past 150 years the us has experienced many severe corporate default crises in which 20 50 of all corporate bonds defaulted although the total par amount of corporate bonds has at times rivaled the amount of bank loans outstanding we find that corporate default crises have far fewer real effects than do banking crises these results provide empirical support for current theories that emphasize the unique role that banks and the credit and collateral channels play in amplifying macroeconomic shocks

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