investor preference for large firms new evidence on economies of size in the last several decades industrial organization literature has been replete with studies demonstrating a systematic relationship between accounting rates of return and firm size in the direction of greater and more stable accounting profits for larger firms these studies have been subject to criticism for an alarming number of statistical and conceptual problems the most important of which alleges a serious bias in accounting profit measures as proxies for economic profit 2 the criticisms have resulted in a stalemate in the interpretation of empirical evidence on firm size and performance nevertheless there is continued interest in the area ostensibly resulting from policy concerns with large firm advantages in both product and capital markets this paper provides new evidence concerning the industrial organization literature controversy of the connection between firm size and performance stock market data are used to examine the relationship between capital market returns risk and firm size the findings suggest that even if there were no advantages of large size in the product market equal rates of operating profit large firms would still have a substantial capital raising advantage over small firms this advantage is unrelated to the widely recognized floatation cost economies even after controlling for nondiversifiable risk using the capital asset pricing model capm investors still demonstrate a statistically significant and economically important preference for the securities of larger firms investors apparently place a premium on large firms which is not attributable to large firms observed lower risk as captured by the widely used measure of nondiversifiable risk beta risk this finding a fresh contribution to the

a model of liquidity hoarding and term premia in inter bank markets financial crises are associated with reduced volumes and extreme levels of rates for term inter bank loans reflected in one month and three month libor we explain such stress by modeling leveraged banks precautionary demand for liquidity asset shocks impair a bank s ability to roll over debt because of agency problems associated with high leverage in turn banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan high levels of short term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing in extremis inter bank markets can completely freeze

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

strength of co movement between sector cds indexes and relationship with major economic and financial variables over time and during investment horizons abstractthe main purpose of this article is to analyse the co movement in both time and frequency between financial sector cds indexes and between these indexes and their main economic and financial control variables for the period 2004 2014 empirically we implement the wavelet squared coherence methodology to analyse the co movement through time frequency and power our results unveil that the co movement between the three financial sectors cdss changes through time and investment horizons stressing the importance of hedging portfolios in real time also we uncover that the changes in co movement to relatively higher frequencies coincide with the inception of the recent global financial crisis this result is collaborated with the co movement between each cds index and other global risk factors including crude oil prices interest rates and equity market volatility finally we compare the wavelet coherence results with those of the dcc fiaparch model and find that the two different approaches pro

behavioral rationality in finance the case of dividends as the title suggests this paper attempts to get to the specifics of the behavioral rationality theme of this conference by focusing on an area in the main core of finance namely the demand and supply of dividends where by common consent the essentially rationalist paradigm of the field seems to be limping most noticeably important and pervasive behavior patterns on both the paying and the receiving ends have despairingly been written off as puzzles even by theorists as redoubtable as fischer black see esp his much cited 1976 article behaviorists have homed in on precisely these same dividendrelated soft spots in the current body of theory see esp shefrin and statman 1984 we seem to have in sum an ideal place to look for signs of an imminent paradigm shift in the behavioral direction of precisely the kind envisioned by some of the other contributors to this conference the dividend related difficulties and supposed anomalies at issue here are more than just the parochial concern of finance specialists the dividends seem a natural area in finance where the introduction of behavioral cognitive elements might help resolve long standing anomalies particularly the seeming failure of supply to adjust to taxinduced price penalties a closer look at the empirical record however particularly at evidence of responsiveness to major structural changes shows behavior of the aggregates to be less anomalous than conventional handwringing might suggest behavioral cognitive elements whatever they might contribute to the description of particular microdecisions do not appear to be essential adjuncts to the basic finance model in the major comparative static applications for which it was intended helpful comments on an earlier version of this paper have been received from nai fu chen jean marie gagnon gur huberman kose john james poterba and especially melvin reder

systemic risk and diversification across european banks and insurers the mutual and cross company exposures to fat tail distributed risks determine the potential impact of a financial crisis on banks and insurers we examine the systemic interdependencies within and across the european banking and insurance sectors during times of stress by means of extreme value analysis while insurers exhibit a slightly higher interdependency in comparison with banks the interdependency across the two sectors turns out to be considerably lower this suggests that downside risk can be lowered through financial conglomeration

opening the policy window for ecological economics katrina as a focusing event abstract ecological economics and its allied trans disciplinary fields are well established in academia but so far have failed to have significant influence on policy makers public policy research and theory suggest that three process streams must converge in order to shape the political agenda and change policy kingdon j 1984 agenda alternatives and public policies boston little brown first the problem stream emerges when an existing condition is defined as a problem a discrepancy between current reality and a desired goal and critical policy makers accept the definition of the problem the policy stream emerges as consensus grows around policy instruments to solve the problem the politics stream emerges as the national mood and leading politicians accept the gravity of the problem and are willing to implement the policies required to address it when these three streams converge a policy window is created that can move issues onto the political agenda and into formal policy a focusing event like katrina can bring these three process streams together however different strategic representations of the situation may allow entirely different problem definitions and policies to dominate the political agenda this paper analyzes the extent to which katrina has opened a policy window for ecological economics we find that katrina has strengthened the three streams necessary to create a policy window for ecological economics but that the dominant economic paradigm currently on the political agenda market fundamentalism is strategically presenting katrina as supporting its own problem stream and policy stream key elements of the ecological economic agenda such as investing in natural capital are making it on to the political agenda but overall market fundamentalist policies appear likely to dominate we argue that ecological economists have failed to galvanize public acceptance for the policy goals of sustainable scale and just distribution thus failing to effectively communicate their perspectives on problem definition and or policy solutions to policy makers and the voting public we conclude with suggestions for how ecological economists can still take advantage of the katrina window and better prepare for future windows opening

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

ecological economics of coastal disasters introduction to the special issue abstract coastal disasters are increasing in frequency and magnitude measured in terms of human lives lost destroyed infrastructure ecological damage and disrupted social networks hurricane katrina and the indian ocean tsunami illustrate the severe and widespread impacts of such disasters on human well being the proximate cause of most of these disasters is forces of nature however human decisions driven largely by economic forces do much to aggravate these natural disasters for example coastal mangroves and wetlands protect coastal communities from wave surges and winds but are rapidly being converted for the production of market goods and anthropogenic climate change driven by the energy use of our economy may exacerbate coastal disasters in several ways the goal of economics should be to improve the sustainable well being of humans our well being is generated in part by the production of market goods and services but also by the goods and services provided by nature by social networks and norms by knowledge and health in short built natural social and human capital respectively in seeking to increase human well being solely by maximizing the monetary value of market goods built capital our current economic system may be doing more to undermine our sustainable well being than to improve it a point made clear by the growing negative impacts of coastal disasters an economic system should allocate available resources in a way that equitably and efficiently provides for the sustainable well being of people by protecting and investing in all four types of capital this is what ecological economics seeks to do this article introduces ten papers that apply the four capital framework to the analysis of coastal disasters seeking to understand their impacts and how to mitigate them how to predict and plan for them and how to use this information to redesign coastal areas in a more sustainable and desirable way

evidence of bank market discipline in subordinated debenture yields 1983 1991 we examine debenture yields over the period 1983 1991 to evaluate the market s sensitivity to bank specific risks and conclude that investors have rationally reflected changes in the government s policy toward absorbing private losses in the event of a bank failure although this evidence does not establish that market discipline can effectively control banking firms it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major u s banking firms an increasingly important issue in the regulation of financial institutions concerns the extent to which market investors can will recognize and control the risks of banking firms although the banking act of 1933 replaced some private risk bearing with federal deposit insurance legislators were reluctant to displace market discipline very extensively flood 1992 by the early 1980s however u s regulators had come to protect virtually all bank liability holders from credit losses most visibly at large banks which were deemed too big to fail sprague 1986 o hara and shaw 1990 this extension of the government safety net largely reflects a skepticism on the part of regulators that normal market forces could adequately identify and control bank risks while u s regulators have recently shown an increased willingness to let some bank investors bear default losses an official suspicion of the efficacy of market discipline remains widespread by contrast some prominent academic economists argue that market investors in bank debentures could provide timely and effective control over banking firms risk exposures and that the social cost of supervising banks would be lower if regulators ceded greater

considering all microstructure effects the extension of a trade indicator model by considering various market microstructure effects this letter proposes a comprehensive trade indicator model incorporating trade duration order sizes bid ask spreads and market depth into a unified framework examining the intraday price behavior of the kospi200 futures market we find that i fast trading indicates informed trading ii stealth trading does not prevail iii order processing costs reach economies of scale and iv liquidity significantly affects investors order submission decisions in the highly liquid market

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

stress testing the equity home bias a turnover analysis of eurozone markets abstract shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted their pattern reveals a persistent equity home bias even in the eurozone a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area the bias is greater for small caps because investors are reluctant to hold this class of foreign asset our study corroborates calendar anomalies in trading volumes but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints our results reveal vanishing cost asymmetries in taking long rather than short positions

has the financial system become safer after the crisis the changing nature of financial institution risk abstract six years after the collapse of lehman brothers the question of whether the u s financial system has become less risky remains unanswered on the one side new regulations including dodd frank and basel iii have made improvements by requiring higher bank capital and financial institutions themselves have reduced risk taking activities on the other side it has been argued that the fundamental risks remained and the efforts of regulators and politicians were simply rearranging the deckchairs on the titanic baily and elliott 2013 this paper highlights the changing nature of financial institution risk from 2005 to 2011 it finds that while these institutions have become less risky individually after the crisis the financial market has become more vulnerable to systemic contagion the causal inference that the crisis and the post crisis legislation have gradually changed the nature of financial institution risk is drawn from a quasi experimental design this finding suggests that the ever more integrated financial system might experience more synchronized contractions in future crises providing empirical support for the proposals of the inter bank collective regulation of banks by acharya 2009 in addition to the intra bank collective regulations as in froot and stein 1998 and bis 1996 1999

using market information in prudential bank supervision a review of the u s empirical evidence in principle market and government supervision provide alternative devices for controlling governing any type of corporation most national governments have instituted nonmarket regulatory mechanisms for banking firms on the grounds that market based mechanisms do not adequately discipline banks but what evidence supports this assessment why must governments assure bank solvency but not the solvency of other firms government oversight naturally displaces private efforts to evaluate and control financial firms moreover if the banking business changes over time as it assuredly has in the past decade or two the best combination of government and private supervision may change concurrently this paper reviews and evaluates the growing empirical literature on private investors abilities to assess the financial condition of banking firms the evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of corporate governance services for large traded u s financial firms

taxes subsidies and insurance as drivers of united states coastal development abstract ever increasing coastal populations in the united states and worldwide are putting growing quantities of people and property at risk due to coastal disasters at the same time poorly planned development policies and practices erode the natural capital of coastal regions eliminating existing landscape protection from intense wind and waves government tax subsidy and insurance policies can encourage or discourage particular forms of development in the u s there is no consistent set of incentives or disincentives for coastal development and many programs have ambiguous or contradictory goals federal programs are highly fragmented being administered by a variety of government agencies state and local governments can also implement policies to improve coastal disaster protection but often fail to do so in other cases state and local policies designed for local economic growth work against the goals of federal policy increasing flood damage risk while relying on federal aid once disaster does strike these programs frequently lead to perverse subsidies where economically inefficient policies degrade natural capital and foster economic inequality in this study we evaluate the existing tax subsidy and insurance structures that led to coastal development patterns on the u s gulf coast over the last sixty years and propose alternative policies that could create a more sustainable just economically efficient and storm adaptive region

optimal stock trading with personal taxes implications for prices and the abnormal january returns abstract the tax law confers upon the investor a timing option to realize capital losses and defer capital gains with the tax rate on long term gains and losses being about half the short term rate the law provides a second timing option to realize losses short term and gains long term if at all our theory and simulation over the 1962 1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term tax trading does not explain the small firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices the january anomaly only if investors are irrational or ignorant of the price seasonality

the effect of public information and competition on trading volume and price volatility in a one period model of market making with many exogenously informed traders we first show that the variance of prices and expected trading volume depend on the public information released at the start of trading this is accomplished by representing beliefs with elliptically countoured distributions for which the form of optimal decision rules does not depend on the specific distribution used second if the model is altered so that the decision to become informed is made endogenous then the decision rules of the market maker and infomed traders depend on the public information third in a multiperiod model with many informed traders and long lived private information recursion formulas similar to those of kyle 1985 hold for all elliptically contoured distributions trading volume is autocorrelated and unless per period liquidity trading is bounded away from zero as new trading periods are added informed traders profits vanish article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

coastal disasters from the perspective of ecological economics natural hazards are recurrent events that frequently result in high death tolls and large economic losses because of their large impact they have concerned the international community for a long time in spite of the efforts the impact of natural hazards has increased oftentimes the role of natural ecosystems and the ecosystem services they provide to human societies are not considered in risk reduction programs how relevant are ecosystems what are the consequences of the depletion of natural ecosystems and the loss of ecosystem services provided by them would the alternative vision of ecological economics in which development and economy are seen as the whole the ecosystem daly h e and farley j 2004 ecological economics principles and applications island press washington dc 454 pp be helpful in reducing disaster risk in this paper we are set to test whether a holistic approach from the perspective of ecological economics is helpful to clarify and reduce the impact of natural hazards we focused on hurricanes because they are the most frequently reported events of all natural disasters hewitt k 1997 regions of risk longman edinburgh gate 389 pp we analyze the relationship between the components of human built social and natural capitals with the damage caused by hurricanes in terms of mortality rate we then generate a conceptual model to help envision the complexity of the system a stepwise back and forth steps linear regression analysis revealed that mortality rate was significantly and positively affected by hurricane frequency p 0 01 while area covered by semi altered ecosystems a mosaic of natural and human altered ecosystems p 0 01 and gdp p 0 05 negatively affected mortality rate r2 0 81 the proportion of natural altered ecosystems yielding the best protection results needs to be determined yet natural capital alone does not decrease number of deaths rather its complex interactions with the other capitals and the many feedback loops that are involved need to be considered to achieve effective disaster risk reduction no single capital is enough to reduce the impact and intensity of natural hazard a balance between human built social and natural capitals and an increasing awareness of the consequences of different development decisions will help human societies to live with rather than cope with coastal hazards

the ecb and the interbank market this paper analyses the impact on the macroeconomy of the ecb s non standard monetary policy implemented in the aftermath of the collapse of lehman brothers in the fall of 2008 we study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up which we regard as a key channel of transmission for non standard monetary policy measures our approach is similar to lenza et al 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank to bank transactions across the eurosystem balance sheet we do this by exploiting data drawn from the aggregate monetary and financial institutions mfi balance sheet which allows us to construct a new measure of the policy shock represented by the ecb s increasing role as a financial intermediary we find that bank loans to households and in particular to non financial corporations are higher than would have been the case without the ecb s intervention in turn the ecb s support has a significant impact on economic activity two and a half years after the failure of lehman brothers the level of industrial production is estimated to be 2 higher and the unemployment rate 0 6 percentage points lower than would have been the case in the absence of the ecb s non standard monetary policy measures

price convexity and skewness this paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal the model implies that the equilibrium price is a convex function of the public signal the model predicts that 1 the stock price reacts more to good news than to bad news 2 the skewness of stock returns is positively correlated with contemporaneous returns but negatively correlated with lagged returns 3 short sale constraints increase rather than decrease skewness and 4 disagreement about information precision increases skewness empirical tests conducted find supportive evidence for all these predictions

differential information and security market equilibrium we propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parame ters of alternative securities in contrast with earlier work we show that parameter uncer tainty or estimation risk can have an effect upon market equilibrium under reasonable conditions securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured ceteris paribus the initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions we provide theoretical support for the empirical examination of at least three proxies for relative information period of listing number of security returns observations available and divergence of analyst opinion

making money out of publicly available information we study a version of the standard kyle 85 model with endogenous information acquisition and we find that equilibria exist with free entry in which speculators make positive profits moreover these equilibria are robust

interbank lending and systemic risk systemic risk refers to the propagation of a bank s economic distress to other economic agents linked to that bank through financial transactions banking authorities often prevent systemic risk through an implicit insurance of interbank claims or by reducing interbank transactions and centralizing banks liquidity management this paper investigates whether the flexability afforded by decentralized bank interactions can be preserved while protecting the central banks from the necessity of conducting undesired rescue operations it develops a model in which decentralized interbank leading is motivated by peer monitoring in this context the paper derives the optimal prudential rules and in particular looks at the impact of interbank monitoring on the solvency and liquidity ratios of borrowing and lending banks last it provides conditions which a too big to fail policy is or is not justified and studies the possibility of propagation of a bank s liquidity shock throughout the financial system copyright 1996 by ohio state university press

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed