regional diversification and firm performance this study examines how regional diversification affects firm performance the results indicate that regional diversification has linear and curvilinear effects on firm performance regional diversification enhances firm performance linearly up to a certain threshold and then its impact becomes negative the results also show that firms of developed countries maximize their performance when they operate across a moderate number of developed regions and a strictly limited number of developing regions this explains why internationalization by most international firms is regional rather than global

the bond old bond spread abstract i document the profits on a trade that is long the old 30 year treasury bond and short the new 30 year treasury bond and is rolled over every auction cycle from june 1995 to november 1999 despite the systematic convergence of the spread over the auction cycle the average profits are close to zero the difference in repo market financing rates between the two bonds is a significant cost of carry in this trade i show that variation in the bond old bond spread is driven by the treasury supply of 30 year bonds as well as aggregate factors affecting investors preference for liquid assets

the dynamic relationship between the federal funds rate and the treasury bill rate an empirical investigation this article examines the dynamic relationship between two key us money market interest rates the federal funds rate and the 3 month treasury bill rate using daily data over the period from 1974 99 we find a long run relationship between these two rates that is remarkably stable across monetary policy regimes of interest rate and monetary aggregate targeting employing a non linear asymmetric vector equilibrium correction model which is novel in this context we find that most of the adjustment toward the long run equilibrium occurs through the federal funds rate in turn there is strong evidence for the existence of significant asymmetries and non linearities in interest rate dynamics that have implications for the conventional view of interest rate behaviour

understanding heterogeneous preferences in random utility models a latent class approach a finite mixture approach toconditional logit models is developed in whichlatent classes are used to promoteunderstanding of systematic heterogeneity the model is applied to wilderness recreationin which a branded choice experiment involvingchoice of one park from a demand system wasadministered to a sample of recreationists the basis of membership in the classes orsegments in the sample involved attitudinalmeasures of motivations for taking a trip aswell as their stated preferences overwilderness park attributes the econometricanalysis suggested that four classes of peopleexist in the sample using the model toexamine welfare measures of some hypotheticalpolicy changes identified markedly differentwelfare effects than the standard singlesegment model and provided insight into thedifferential impact of alternative policies

are we risking too much perspectives on risk in farm modelling risk and uncertainty have been extensively studied by agricultural economists in this paper we question a the predominant use of static frameworks to formally analyse risk b the predominant focus on risk aversion as the motivation for considering risk and c the notion that explicitly probabilistic models are likely to be helpful to farmers in their decision making we pose the question for a risk averse farmer what is the extra value of a recommendation derived from a model that represents risk aversion compared to a model based on risk neutrality the conclusion reached is that for the types of the decision problems most commonly modelled by agricultural economists the extra value of representing risk aversion is commonly very little

a market performance comparison of u s firms active in domestic developed and developing countries direct foreign investment dfi may benefit investors through superior cash flows or lower risk relative to purely domestic firms this paper considers three groups of u s firms those without significant international operations those with international operations in developed countries and those with international operations in developing countries after performing risk return performance analysis on the three groups the findings show developing country dfi results in inferior performance but that there are no statistically significant differences in market performance among the three

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

idiosyncratic variation of treasury bill yields i document a dramatic increase in the importance of two types of variation in treasury bill yields beginning in the early 1980s the first is idiosyncratic variation in individual short maturity less than three months bill yields the second is a common component in treasury bill yields that is not shared by yields on other instruments such as short maturity privately issued instruments or longer maturity treasury notes and bonds some evidence suggests the first type reflects increased market segmentation these results have important implications for the calibration and testing of no arbitrage term structure models and interpreting tests of the expectations hypothesis united states treasury bill yields play a central role in economists efforts to understand the behavior of financial markets the focus on treasury bills is driven by the belief that bill yields can be viewed as benchmarks from which yields on other debt instruments are derived for example in no arbitrage models of the default free term structure the stochastic properties of the hypothetical instantaneous interest rate determine bond prices researchers often construct and evaluate these models using short maturity bill yields as proxies for instantaneous interest rates similarly bill yields are frequently used to test the expectations hypothesis of the term structure 2 economists standard pricing models for default risky securities also view treasury yields as building blocks in such models yields on default risky securities depend at least in part on the yields of default free securities and the underlying stochastic default process therefore yields on treasury bills have been used in studies of the effects of monetary policy on the business cycle not because bills are intrinsically critical to the economy but because

why gaussian macro finance term structure models are nearly unconstrained factor vars this paper explores the impact of simultaneously enforcing the no arbitrage structure of a gaussian macro nance term structure model mtsm and accommodating measurement errors on bond yield through ltering on the maximum likelihood estimates of the model implied conditional distributions of the macro risk factors and bond yields for the typical yield curves and macro variables studied in this literature the estimated joint distribution within a canonical mtsm is nearly identical to the estimate from an economic model free factor vector autoregression factor var even when measurement errors are large it follows that a canonical mtsm does not oer any new insights into economic questions regarding the historical distribution of the macro risk factors and yields over and above what is learned from a factor var in particular the discipline of a canonical mtsm is empirically inconsequential for analyses of impulse response functions of bond yields and macro factors or empirical studies of term premiums these results are rotation invariant and therefore apply to many of the specications of risk factors in the literature in deriving these results we develop a new canonical form for mtsms that is particularly revealing about the nature of the over identifying restrictions implied by mtsms relative to yield based factor models

nonlinear mean reversion in the short term interest rate using a new bayesian method for the analysis of diffusion processes this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative the assumption of stationarity which is common in the literature represents a nontrivial prior belief about the shape of the drift function this belief and the use of flat priors contribute strongly to the finding of nonlinear mean reversion implementation of an approximate jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed finally the article documents that nonlinear drift is primarily a feature of daily rather than monthly data and that these data contain a transitory element that is not reflected in the volatility of longermaturity yields the drift of the short term interest rate is an important determinant of a wide variety of asset prices both inside and outside the boundaries of what is often called fixed income while volatilities may be estimated relatively accurately using high frequency observations of the short rate the short rate s extreme persistence makes identifying the true shape of the drift function a particularly elusive goal if our goal is merely to fit prices then the difficulty in estimating a drift function can be avoided by backing out implied drifts using a no arbitrage approach such as hull and white 1990 or heath jarrow and morton 1992 these methods bypass the true distribution entirely focusing on solving for the risk neutral drift function that is consistent with the cross section of bond prices if our goal however is to learn from prices and to be able to assess theories such as the expectations hypothesis that link short and long rates then estimating the drift function under the true measure is unavoidable in several recent articles a variety of sophisticated econometric techniques have been brought to bear on the problem in particular

the mispricing of u s treasury bonds a case study this article documents an apparent pricing anomaly involving 94 percent 30 year treasury bonds during the months of may and june 1986 during this period the price of the 94s rose sharply relative to the prices of other long term treasury bonds and created a potential arbitrage opportunity in addition owners of the 94 bonds were able to borrow at a zero interest rate bypledging their bonds detailed examination reveals that this relative pricing anomaly cannot be attributed to changes in the level or term structure of interest rates or to differences between the bonds with respect to liquidity taxation or duration

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

pricing default swaps empirical evidence in this paper we compare market prices of credit default swaps with model prices we show that a simple reduced form model outperforms directly comparing bonds credit spreads to default swap premiums we find that the model yields unbiased premium estimates for default swaps on investment grade issuers but only if we use swap or repo rates as proxy for default free interest rates this indicates that the government curve is no longer seen as the reference default free curve we also show that the model is relatively insensitive to the value of the assumed recovery rate

an empirical examination of multinational corporate capital structure this paper examines whether there are systematic differences in the traditional capital structure determinants between mncs and dcs and if there are additional uniquely international factors that may help explain the capital structure choice of multinational corporations the results suggest that specific international factors such as political risk and exchange rate risk are relevant to the multinational capital structure decision that multinationals have higher agency costs than purely domestic firms and that international diversification does not lower earnings volatility for multinational corporations

the stochastic volatility of short term interest rates some international evidence this paper estimates a stochastic volatility model of short term riskless interest rate dynamics estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout in contrast to stock returns interest rate volatility exhibits faster meanreverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates the less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news the past decade has witnessed unprecedented growth in the market for fixedincome derivatives domestically as well as internationally in light of this growth recent research has attempted to empirically characterize the dynamics of short term riskless interest rates necessary for the valuation of many of these securities with few exceptions much of this evidence has been concerned with the behavior of u s interest rates the purpose of this paper is to investigate the dynamics of short term interest rates across a number of countries a particularly noteworthy feature at least of the u s evidence is that the volatility of short term interest rates is itself volatile the stochastic nature of volatility is an important property of interest rate dynamics which we wish to focus on in our comparison to do so practically this paper implements a computationally efficient and statistically reliable method for estimating stochastic volatility models in finance we apply this method to chan et al s 1992 specification of short term riskless interest rate dynamics augmented with stochastic volatility for a clean international comparison we use proxies for short term riskless interest rates drawn from the same market the london interbank market over the same sample period unlike nowman 1997 we find that the

mne subsidiaries versus domestic enterprises an analysis of their ownership and location specific advantages this paper compares the ownership advantages of multinational enterprises mnes subsidiaries and domestic enterprises dmes in greece previous studies have tested the hypothesis that ownership specific advantages oa are a major source of firm differences this study analyses the processed food sector sic 20 the leading industrial sector in greece with the highest inward and outward internationalization degree using a panel data set of 75 firms and 5 years the findings of a probabilistic regression analysis indicate that there are significant differences between the two groups of firms in the degree of possession of observed ownership advantages mne subsidiaries have higher market shares use multiplant operations and have higher advertising and r d to sales ratios compared to dmes dmes use their well established position knowledge of domestic and regional market conditions and size economies in order to compete effectively with mne subsidiaries it is inferred that pursuit of domestic ma

arbitrage and the expectations hypothesis this paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete a key implication is that the validity of the expectations hypothesis is purely an empirical issue the expectations hypothesis cannot be ruled out on a priori theoretical grounds one of the oldest and best known models in finance is the expectations hypothesis of the term structure introduced by fisher 1896 more than a century ago the expectations hypothesis has become a standard framework for explaining how yields of different maturities are related and it provides an important empirical benchmark from a theoretical perspective however the expectations hypothesis is not generally viewed as a viable model of the term structure in particular cox ingersoll and ross 1981 show that the traditional expectations hypothesis is actually a set of mutually exclusive propositions and offer a proof that most forms of the expectations hypothesis admit arbitrage recently mcculloch 1993 and fisher and gilles 1998 present counterexamples to the cox et al proof showing that the traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage they acknowledge however that their counterexamples are somewhat contrived and view them as economically implausible these results leave the impression that the expectations hypothesis is only consistent with the absence of arbitrage in pathological cases of little practical interest in this paper we argue that the expectations hypothesis is much more theoretically defensible than commonly believed an important point often overlooked is that the cox et al 1981 results are developed in an economic setting where bonds are redundant securities in the more realistic case where bond prices display security specific variation and there is mounting evidence of this traditional forms of the expectations hypothesis can hold quite generally without arbitrage only weak conditions guaranteeing the existence of an equivalent martingale measure need be satisfied for the various forms of the expectations hypothesis to hold without arbitrage a key

multinational corporations vs domestic corporations international environmental factors and determinants of capital structure this paper examines whether or not u s based multinational corporations mncs have different capital structures than u s domestic corporations dcs and if so what causes the differences in explaining the difference between the capital structures of mncs and dcs previous studies tended to directly discuss the relationships between international environmental factors e g political risk foreign exchange risk and the capital structure a framework of analysis is proposed in this paper that examines the influence of environmental factors on the firm related capital structure determinants e g agency costs bankruptcy costs that in turn affect the capital structure of the mnc among the determinants that are examined more emphasis is placed on the discussion of agency costs since no previous studies have applied this concept in the international arena empirical tests were conducted to investigate whether mncs are significantly different from dcs regarding agency costs of debt bankruptcy costs and capital structure contrary to conventional wisdom the empirical findings show that mncs do not have lower bankruptcy costs and that they tend to have lower debt ratios than dcs

why are excess returns on china s treasury bonds so predictable the role of the monetary system abstract it is well documented that the time varying bond excess returns can be explained by predetermined variables such as information in the term structure and macro economic variables recent studies suggest that demand and supply of bonds influence bond excess returns we extend the literature and find that monetary system attributes affect return dynamics in the bond market by introducing a theoretical model to forecast excess returns on treasury bonds in the context of china s unique monetary system this paper attributes the predicted components of bond excess returns mainly to the inflexible term structures of official interest rates set by china s central bank

heterogeneity of preferences for the benefits of environmental stewardship a latent class approach since 2005 environmental stewardship es has been the principal agri environment scheme for england and is the key instrument for the delivery of increased environmental benefits from agricultural landscapes the main objective of this study is to investigate whether or not individuals preferences for the environmental benefits associated with es vary depending on types of landscapes within which these benefits are delivered a latent class model is applied to data obtained from a choice experiment survey of over 1000 respondents sampled across england the results suggest that individuals have heterogenous preferences for the benefits of es though different segments of the population with more homogenous preferences can be identified in particular higher levels of benefit are often associated with the operation of es in landscapes close to where respondents live this leads to the suggestion that in order to maximise the benefits of es its implementation could take this result into account by encouraging greater uptake from farmers whose land is closer to large populations

the end of the month as a preferred habitat a test of operational efficiency in the money market this paper argues that an aggregate preferred habitat for investors exists on or about the last day of the calendar month due to standardizations in the nation s payments system resulting in a concentrated flow of funds on this date thus equilibrium yield discounts are predicted for securities maturing on such dates empirical tests on monthly and daily treasury bill data support the principal hypothesis as well as several ancillary hy potheses the results have implications for treasury debt management for the short term cash and debt management practices of businesses and banks and for the empirical esti mation of daily weekly or monthly return premiums on risky securities

the effect of transaction size on off the run treasury prices this paper examines intra day trading data from the inter dealer broker market for u s treasury securities and measures the degree of price pressure in the off the run treasury market as is well known securities that would appear to be very close substitutes i e on the run and off the run treasury bonds behave as if there is some degree of market segmentation this is the first systematic study of the off the run treasury note and bond market focused entirely on a price pressure effect using intra day data the paper analyzes price pressure through matched pairs of securities that differ only in liquidity

treasury auction bids and the salomon squeeze recent press accounts claim that collusion is common practice in treasury auctions and that as a result the auction profits are excessive but this paper finds that the auction prices are on average marginally higher than the secondary market bid prices the auction profits however are systematically related to the total fraction of winning bids tendered by banks and dealers the postauction prices of the two year notes in which salomon brothers had a 94 percent holding are also examined the secondary market prices of these notes were significantly higher than the estimated competitive prices in the four week postissue period

transaction costs and environmental policy design abstract this article synthesizes the growing empirical literature on transaction costs to identify pragmatic design recommendations for environmental and natural resource policies the new institutional economics literature recognizes that appropriate policy choice and design will be a function of the specific characteristics of the problem the physical and institutional determinants of both transaction costs and abatement costs should be considered in the policy design process due to potential interactions between them analysts also need to incorporate the extent to which the technologies institutional environment governance structures or policy designs can be changed some factors can only be adjusted to or designed around while others can be designed differently this framework highlights the importance of property rights since transaction costs will be incurred to obtain or retain property rights and since the rights assignment may affect both the magnitudes and distribution of costs another implication is that education and extension programs or use of behavioral economics concepts to affect choices can be cost effective in some circumstances policy design should take advantage of economies of scale and foster technical change appropriate sequencing of policy instruments may decrease transaction costs particularly if there is potential for technical change

the us treasury floating rate note puzzle is there a premium for mark to market stability abstract we find that treasury floating rate notes frns trade at a significant premium relative to the prices of treasury bills and notes this premium is directly related to the near constant nature of frn prices and is correlated with measures reflecting investor demand for safe assets money market funds are often the primary investors in frns and the frn premium is related to flows into funds with fixed net asset values but not to flows into funds with variable net asset values these results provide strong evidence that the frn premium represents a convenience yield for the mark to market stability feature of frns

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

liquidity maturity and the yields on u s treasury securities the efrect8 of aaaet liquidity on expected retuma for ts with infinite maturities toc ka are eumined for bonda treuury notes and bills with matched maturities of lellll than 6 months the yield to maturity ill higher on notes which have lower liquidity the yield di1ferential between notes and billa is a decreuing and convex function of the time to maturity the results provide a robult confirmation of the liquidity effect in auet pricing this paper studies empirically the effects of the liquidity of capital assets on their prices amihud and mendelson 1986 1989 proposed that liquidity affects asset prices because investors require a compensation for bearing transaction costs transaction costs paid whenever the asset is traded form a sequence of cash outflows the discounted value of this cost stream proxies for the value 1088 due to illiquidity which lowers the asset s value for any given cash flow that the asset generates 1 as a result the return on assets should be an increasing function of their illiquidity other things equal for stocks the illiquidity effect is expected to be strong because their transaction cost sequence is infinite amihud and mendelson 1986 1989 demonstrated that common stocks with lower liquidity yielded significantly higher average returns after controlling for risk and for other factors these results on the importance of liquidity in the pricing of stocks raise additional questions i does the liquidity effect depend on the specific controls used by amihud and mendelson 1986 1989 1 ii does illiquidity have a similarly strong effect on the pricing of bonds whose maturities are finite and iii if liquidity affects bond yields how is this effect related to the bond s time to maturity

a three stage theory of international expansion the link between multinationality and performance in the service sector it is generally assumed that the performance of a firm improves with greater multinationality yet recent empirical studies have shown both a u shaped relationship which suggests an initially negative effect of international expansion on performance before the positive returns of international expansion are realized and an inverted u shaped relationship which suggests that international expansion beyond an optimal level is again detrimental to performance and results in a negative slope this paper proposes a new unified three stage theory of international expansion that incorporates both concepts in a sigmoid hypothesis it then tests this on data from 11 service industries highlighting the difference between knowledge based and capital intensive service sectors

comparative analysis of the foreign investment evaluation practices by u s based manufacturing multinational companies a large sample of u s based manufacturing multinational companies were surveyed regarding their investment valuation practices it was found that a foreign direct manufacturing investment fdmi is motivated primarily by profit rather than the recently proposed behavioral considerations b the majority of companies practice project by project analysis of the simple accept reject type rather than the comparative project analysis advocated by financial analysts c most of the companies utilized criteria for single investments cash flows and cost of capital that were in general agreement with the analytical literature d companies were concerned more with business risk than currency and political risks moreover all three types of risk were evaluated subjectively and accounted through adjustments in the required rates of return rather than the cash flows of the fdmi as specified in financial research e analysis of demographic and behavioral variables for possible relationships to fdmi evaluation practices yielded interesting but variable specific results the questionnaires were mailed in may 1979 and the personal interviews were conducted during december 1979 and the first six months of 1980

risk premium information from treasury bill yields i find that short maturity treasury bill yields have unique information about risk premiums that is not spanned by long maturity treasury bond yields i estimate 2 components of risk premiums long term and short term the long term component steepens the slope of yield curves and has a forecastability horizon of longer than 1 year in contrast the short term component affects treasury bill yields but is almost invisible from treasury bonds has a forecastability horizon of less than 1 quarter and is related to bond liquidity premiums

from m p to ma p multinationality alignment and performance rather than searching for a universal optimal level of multinationality for all firms we argue that firm specific attributes should result in firm specific optimal levels of multinationality specifically we draw upon transaction cost and internalization theory to argue that there will be different optimal levels of multinationality for individual firms and if firms internalize foreign operations to an extent less than or greater than their individual optimal levels transaction costs will increase and performance will decrease to test this idea we use transaction cost models in the context of large us law firms during the time period from 1986 through 2008 to estimate firm specific optimal multinationality next we test relationships between alignment with or deviations from firm specific optimal levels of multinationality and performance ma p consistent with the ma p hypothesis insufficient and excessive levels of multinationality are both negatively related to financial performance in addition excessive multinationality is positively associated with downside performance risk one key implication is that an ma p approach may offer greater theoretical validity and clarity than traditional multinationality and performance m p approaches

the relative pricing of u s treasury strips empirical evidence abstract we investigate pricing relations and the potential for arbitrage in the u s treasury strips market stressing the importance of reconciling quoted treasury data with actual market pricing conventions we document that stripping and reconstitution profits in the strips market are fleeting and rarely economically significant that matched maturity principal and coupon strips generally have different prices due at least in part to richness or cheapness in the underlying note or bond and that apparent negative forward rates in the strips market are concentrated in certain long maturity strips that do not actually exist at the time

are larger treasury issues more liquid evidence from bill reopenings this paper makes use of a natural experiment of the u s treasury department to examine the relationship between treasury security issue size and liquidity treasury bills that were first issued with 52 weeks to maturity and then reopened at 26 weeks are shown to be more liquid than comparable maturity bills that were first issued with 26 weeks to maturity the relationship is less pronounced when bills are on the run the most recently auctioned bills of a given maturity than when they are off the run and persists when controlling for other factors that affect liquidity the reopened bills are found to have higher yields lower prices than comparable maturity bills showing that the indirect liquidity benefits of reopenings are more than offset by the direct supply costs

money creation and the shadow banking system many explanations for the rapid growth of the shadow banking system in the mid2000s focus on money demand this paper asks whether the short term liabilities of the shadow banking system behave like money we rst present a simple model where households demand money services which are supplied by three types of claims deposits treasury bills and asset backed commercial paper abcp the model provides predictions for the price and quantity dynamics of these claims as well as the behavior of the banking system in terms of issuance and the monetary authority in terms of open market operations consistent with the model the empirical evidence suggests that the shadow banking system does respond to money demand

using proxies for the short rate when are three months like an instant the dynamics of the unobservable short rate are frequently estimated directly using a proxy we examine the biases resulting from this practice the proxy problem analytic results show that the proxy problem is not economically significant for single factor affine models in the two factor affine model of longstaff and schwartz 1992 the proxy problem is only economically significant for pricing discount bonds with maturities of more than five years we also describe two different numerical procedures for assessing the magnitude of the proxy problem in a general interest rate model when applied to a nonlinear single factor model they suggest that the proxy problem can be economically significant article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the measurement of the degree of foreign involvement this paper extends errunza and senber 1984 in assessing the relationship between alternative measures of the degree of foreign involvement dfi and the conditions under which the use of a specific measure will not affect the outcome of empirical studies on corporate international diversification the results suggest that among 21 pairs of seven most widely used series of dfi only three series foreign assets foreign earnings and foreign tax ratios in two pairs are equivalent evidence of constant returns to scale between the ratio of foreign to total assets and the ratio of foreign to total earnings is also discussed

gaussian estimation of single factor continuous time models of the term structure of interest rates this article presents the first application in finance of recently developed methods for the gaussian estimation of continuous time dynamic models a range of one factor continuous time models of the short term interest rate are estimated using a discrete time model and compared to a recent discrete approximation used by chan karolyi longstaff and sanders 1992a hereafter ckls whereas the volatility of short term rates is highly sensitive to the level of rates in the united states it is not in the united kingdom the econometric estimation of continuous time models of the short term interest rate has been a relatively recent development in empirical finance see for example brown and dybvig 1986 melino and turnbull 1986 barone cuoco and zautzik 1991 babbs 1992 abken 1993 chen and scott 1993 das 1993 gibbons and ramaswamy 1993 pearson and sun 1994 lund 1994 pfann schotman and tschernig 1995 ait sahalia 1995 and broze scaillet and zakoian 1995 1 in an important study chan karolyi longstaff and sanders 1992a hereafter ckls develop a general framework to estimate and compare a range of different single factor term structure models for the short term interest rate their major conclusion is that term structure models with volatilities more highly sensitive to the level of interest rates than more generally used models have a closer empirical fit to the data in addition the functional form of the drift with or without mean reversion is of secondary importance to the correct specification of the conditional heteroskedasticity in ckls the continuous time models of the term structure are estimated using a discrete approximation we present in this article an alternative

negative option values are possible the impact of treasury bond futures on the cash u s treasury market abstract this paper uses a unique financial instrument in the u s treasury market to study the price behavior of the put option embedded in the november 2009 14 callable u s treasury bond we find that beginning in august 1993 the estimated option value was persistently negative on nearly every day for the ensuing eight months we show that the anomalous pricing behavior arose because the underlying callable bond became the cheapest to deliver issue against u s treasury bond futures contracts hence this paper provides direct evidence that derivative assets can significantly distort pricing in the primary asset market

measuring the degree of internationalization of a firm in spite of both positivistic and instrumental research the reliability of measuring the degree of internationalization of a firm remains speculative we collected data on nine attributes of seventy four american manufacturing mncs alpha factor and frequency analyses revealed a linear combination of five variables with a reliability coefficient of 79 as a measure of the degree of internationalization of a firm we discuss the statistical and conceptual properties of the scale and their implications for content and construct validity

market making costs in treasury bills a benchmark for the cost of liquidity abstract we focus on market making costs by examining the daily bid ask spreads for off the run one month treasury bills around two liquidity changing events event one salomon brothers supply shock results in a roughly 2 5 basis point increase in the spread because of an increase in ask prices and event two the long term capital management demand shock results in a doubling of the spread because of a decrease in bid prices our results provide a benchmark for researchers examining bid ask spreads of securities that include a liquidity premium a risk premium and an asymmetric information premium

are multinational corporations safer the failure probabilities of a sample of multinational corporations mncs are derived and compared with those of a control group of domestic corporations dmcs the results suggest that the mean insolvency probability of dmcs is significantly higher than that of the mncs it is also observed that mncs are significantly more capitalized and the standard deviation of their equity as well as their average systematic risk are also significantly lower furthermore the average insolvency probability of the dmcs is more sensitive to changes in the values of the parameters than those of the mncs

strategic trading behavior and price distortion in a manipulated market anatomy of a squeeze abstract this paper investigates an attempted delivery squeeze in a bond futures contract traded in london using cash and futures trades of dealers and customers we analyze their strategic trading behavior price distortion and learning in a market manipulation setting we argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes we recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates and that exchanges mark to market their contract specifications more frequently or consider a cash settled contract on a basket of bonds

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

the puzzling price behavior of treasury bills that mature at the turn of calendar months abstract this paper documents the unusual price behavior of treasury bills that mature at the turn of calendar months there is a kink in the yield curve as it crosses calendar months and this kink is most pronounced as the yield curve crosses between calendar years potential seasonality in the spot rate of interest could not explain these results nor could they be explained by the mispricing of either the last bill or first bill in a month the exceptionally large premium on the first bill in a month tended to be earned throughout the lifetime of the bill

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

a daily view of yield spreads and short term interest rate movements daily data on short term interest rates are used to show how changes in federal reserve operating procedures have affected the term structure yield spreads were helpful in predicting short term interest rate movements during the nonborrowed reserves targeting period 1979 82 but not during the earlier federal funds targeting period since the adoption of contemporaneous reserves accounting in 1984 yield spreads have been informative about short term interest rate movements principally because of the interplay between the market determination of the overnight funds rate on reserve settlement wednesdays and the fed s apparent commitment to stabilizing the funds rate on other days copyright 1996 by ohio state university press

improving environmental decisions a transaction costs story abstract a multidisciplinary team of researchers made efforts to influence the design and implementation of environmental policy in australia a focus of these efforts was the development of the investment framework for environmental resources inffer in addition the team undertook a range of communication activities training user support and participation in committees and enquiries transaction costs were relevant to these efforts in a variety of ways environmental managers perceived inffer to involve relatively high transaction costs a balance was struck between the system having simplicity and low transaction costs and delivering environmental benefits transaction costs were factored into the planning and prioritisation processes developed for example public and private transaction costs are accounted for in the calculation of benefit cost ratios and in the choice of policy mechanisms there are diverse roles that transaction costs play in the processes of developing implementing and influencing environmental policy programmes a key observation is that appropriate strategic investment in transaction costs can improve decisions and increase net benefits from an environmental programme a well designed decision process can involve incurring transaction costs at one stage in order to save transaction costs at a later stage

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

public transaction costs of agri environmental schemes and their determinants analysing stakeholders involvement and perceptions despite an overall budget increase for rural development in the new programming period 2007 2013 most older member states in the now expanded european union are facing a substantial reduction in their budget for rural development and thus for agri environmental schemes aess it can be assumed that in most countries none or at best only part of this loss can be offset by national funds therefore the design of more efficient national governance structures for aess which decrease public transaction costs tcs would be an appropriate solution to this problem the objective of this paper is to define the factors that influence these public tcs so that appropriate action can then be taken to reduce them a statistical analysis with a proxy for public tcs is combined with an analysis of stakeholder perceptions excluding farmers concerning public tc influencing factors the research showed that it is mainly scheme related factors that are perceived to be important although the governance structure institutional environment and level of trust also play a role finally the analysis of perceptions concerning tcs also showed that aes related actors have a limited knowledge of tcs

foreign ownership market structure and industrial performance brazil s electrical industry abstract using an industrial organization approach this article tests the hypothesis that the ownership of firms exerts an independent influence on industrial performance we compare the behavior of foreign and domestic firms in brazil s electrical industry in four areas the association of firms with particular types of domestic market structures their technology their trade conduct and their profitability regression analysis shows that tncs tend to produce in tightly organized differentiated oligopolies they generally employ a more capital intensive technology they import more per unit of sales but do not necessarily export more finally reported earnings of tncs are found not to be any higher than domestic firms but reported profits of all firms are positively related to the level of industrial concentration and product differentiation markets which tend to be the domain of tncs rather than domestic enterprises it is concluded that ownership is a strong variable of market structure in brazil s electrical industry and that the systematic effect of foreign ownership on industrial performance is not always helpful in attaining development objectives

the decline in idiosyncratic values of us treasury securities abstract unique features and market frictions can lead to idiosyncratic pricing for some us treasury securities this study uses a linear programming lp model to measure aggregate idiosyncratic pricing of t notes and t bonds from 1980 to 2016 we document an average idiosyncratic pricing of 0 11 per 100 par as compared to an average bid ask spread of 0 08 further idiosyncratic pricing declined dramatically from the early 1980s to the 2010s empirical evidence suggests that the 1986 tax reform act increasing issue sizes and improving market liquidity contribute to the decline at the individual security level we identify factors contributing to and mitigating idiosyncratic pricing

information in the term structure of yield curve volatility using a novel no arbitrage model and extensive second moment data we decompose conditional volatility of u s treasury yields into volatilities of short rate expectations and term premia short rate expectations become more volatile than premia before recessions and during asset market distress correlation between shocks to premia and shocks to short rate expectations is close to zero on average and varies with the monetary policy stance while treasuries are nearly unexposed to variance shocks investors pay a premium for hedging variance risk with derivatives we illustrate the dynamics of the yield volatility components during and after the financial crisis

the on the run liquidity phenomenon abstract we test the implications of a model of multi asset speculative trading in which liquidity differentials between on the run and off the run u s treasury bonds ensue from endowment shocks in the presence of two realistic market frictions information heterogeneity and imperfect competition among informed traders and a public signal our evidence suggests that i off on the run liquidity differentials are economically and statistically significant even after controlling for several of the bonds intrinsic characteristics such as duration convexity repo rates or term premiums and ii off on the run liquidity differentials are smaller immediately following bond auction dates and larger when the uncertainty surrounding the ensuing auction allocations is high when the dispersion of beliefs across informed traders is high and when macroeconomic announcements are noisy consistent with our model

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

incomplete markets liquidation risk and the term structure of interest rates we analyse the term structure of interest rates in a general equilibrium model with incomplete markets borrowing constraint and positive net supply of government bonds uninsured idiosyncratic shocks generate bond trades while aggregate shocks cause uctuations in the trading price of bonds long bonds command a liquidation risk premium over short bonds because they may have to be liquidated before maturity following a bad idiosyncratic shock precisely when their resale value is low due to the simultaneous occurrence of a bad aggregate shock our framework endogenously generates limited cross sectional wealth heterogeneity among the agents despite the presence of uninsured idiosyncratic shocks which allows us to characterise analytically the shape of the entire yield curve including the yields on bonds of arbitrarily long maturities agents desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms imply that a greater bond supply raises the level of the yield curve while an increase in the relative supply of long bonds raises its slope

political risk and dividend policy evidence from international political crises we examine the impact of political risk on firms payout policy using a large international sample across 35 countries over the period from 1990 to 2008 we find that global political crises raise the market perceived uncertainty and cost of external financing using crisis events as a proxy for political risk we document that past dividend payers are more likely to terminate dividends and that non payers are less likely to initiate dividends during periods of high political risk these findings suggest a precautionary incentive of managers in response to political shocks further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations but can be attenuated by country specific institutional settings such as more stable political systems and stronger investor legal protection

a spatially explicit choice model to assess the impact of conservation policy on high nature value farming systems this study was funded by project poci 01 0145 feder 016664 ptdc aag rec 5007 2014 supported by norte portugal regional operational programme norte 2020 under the portugal 2020 partnership agreement through the european regional development fund erdf the study was also sponsored by the portuguese foundation for science and technology fct through projects ptdc agr aam 102300 2008 fcomp 01 0124 feder 008701 and ptdc bia bic 2203 2012 fcomp 01 0124 feder 028289 under feder funds through the operational programme for competitiveness factors compete and by national funds through fct foundation for science and technology and grants to pfr sfrh bd 87530 2012 and js sfrh bd 63566 2009 lr received support from the portuguese ministry of education and science and the european social fund through fct under poph qren typology 4 1 post doc grants sfrh bpd 62865 2009 and sfrh bpd 93079 2013 pb was supported by edp biodiversity chair fm was supported by the ren biodiversity chair and fct if 01053 2015

further evidence on segmentation in the treasury bill market abstract this paper shows that differences in supplies of 13 and 12 week treasury bills have statistically significant and economically meaningful effects on their yield differentials from january 1985 through october 1991 controlling for the general slope of the treasury bill yield curve the tendency of bills maturing at month ends to have lower yields and the tendency of bills whose supply is augmented by cash management bills to have higher yields the finding that market participants do not arbitrage away yield differentials that owe to differences in supplies indicates that demand curves for individual bills are downward sloping and that segmentation in the treasury bill market is more pervasive than previously documented

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

prediction performance of earnings forecasts the case of u s multinationals prior accounting research has provided evidence of the information content of a company s actual or predicted accounting earnings prior studies have also found that factors such as firm size industry or systematic risk influence the accuracy of the earnings predictions this study investigates the accuracy and the consensus among forecasters of earnings estimates for u s domestic and u s multinational corporations companies were classified into a domestic or multinational type for this research following the criteria established by statement of financial accounting standards no 14 for required disclosure of foreign operations the empirical results indicate that the accuracy of earnings forecasts is significantly lower for purely domestic firms than for u s based multinationals likewise the level of consensus in earnings estimates submitted by financial analysts is significantly lower for u s domestic than for u s multinational firms

inflation expectations and risk premiums in an arbitrage free model of nominal and real bond yields differences between yields on comparable maturity u s treasury nominal and real debt the so called breakeven inflation bei rates are widely used indicators of inflation expectations however better measures of inflation expectations could be obtained by subtracting inflation risk premiums from the bei rates we provide such decompositions using an estimated affine arbitrage free model of the term structure that captures the pricing of both nominal and real treasury securities our empirical results suggest that long term inflation expectations have been well anchored over the past few years and inflation risk premiums although volatile have been close to zero on average

markov switching and stochastic volatility diffusion models of short term interest rates this article empirically compares the markov switching and stochastic volatility diffusion models of the short rate the evidence supports the markov switching diffusion model estimates of the elasticity of volatility parameter for single regime models unanimously indicate an explosive volatility process whereas the markov switching models estimates are reasonable itis found that either markov switching or stochastic volatility but not both is needed to adequately fit the data a robust conclusion is that volatility depends on the level of the short rate finally the markov switching model is the best for forecasting a technical contribution of this article is a presentation of quasi maximum likelihood estimation techniques for the markov switching stochastic volatility model

anticipated and repeated shocks in liquid markets we show that treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after this price pattern implies a large issuance cost for the treasury department which is estimated to be between 9 and 18 basis points of the auction size for example this cost amounts to over half a billion dollars for issuing treasury notes alone in 2007 our results appear to be consistent with the hypothesis of primary dealers limited risk bearing capacity and the imperfect capital mobility of end investors in the treasury market e g federal agencies sovereign wealth funds pension funds and etc highlighting the important role of capital mobility even in the most liquid financial markets

a hybrid spline based parametric model for the yield curve empirical evidence indicates that both nominal and real yield curves in important markets have segmentation between their short end and their longer maturity segments this segmentation might affect term structure estimation introducing distortions in longer maturity yields especially in parametric models in order to deal with such segmentation we propose a new model that combines the flexibility of spline functions with the parsimoniousness of a parametric four factor exponential model the short end of the yield curve is fitted using a b spline function while longer segments are captured by the parametric model we illustrate the benefits of the proposed model for pricing and risk management purposes using two examples the real yield curve in the brazilian government index linked bond market and the us treasury nominal yield curve we show that in both markets our model is simultaneously able to fit the yield curve well and to provide unbiased value at risk estimates for all tested portfolios of bonds outperforming an important parametric benchmark model frequently adopted by central banks

cultural diversity and the performance of multinational firms we test the hypothesis that culturally related international diversification will have a positive impact on firm performance and that the opposite will be true for culturally unrelated globalization cultural diversity for fortune 500 firms was used to predict performance over a ten year period 1985 1994 controlling for several organizational and industry characteristics regression tests using nine indicators of cultural diversity revealed no significant cultural effects alternate interpretations are offered

repo market effects of the term securities lending facility the term securities lending facility tslf was recently introduced by the federal reserve to promote liquidity in the financing markets for treasury and other collateral we evaluate one aspect of the program the extent to which it has narrowed repo spreads between treasury collateral and lower quality collateral we find that tslf operations have precipitated a significant narrowing of repo spreads more refined tests indicate the market conditions and types of operations associated with the program s effectiveness various additional tests including a split sample test suggest that our findings are robust

yield factor volatility models the term structure of interest rates is often summarized using a handful of yield factors that capture shifts in the shape of the yield curve in this paper we develop a comprehensive model for volatility dynamics in the level slope and curvature of the yield curve that simultaneously includes level and garch effects along with regime shifts we show that the level of the short rate is useful in modeling the volatility of the three yield factors and that there are significant garch effects present even after including a level effect further we find that allowing for regime shifts in the factor volatilities dramatically improves the model s fit and strengthens the level effect we also show that a regime switching model with level and garch effects provides the best out of sample forecasting performance of yield volatility we argue that the auxiliary models often used to estimate term structure models with simulation based estimation techniques should be consistent with the main features of the yield curve that are identified by our model

identification of maximal affine term structure models building on duffie and kan 1996 we propose a new representation of affine models in which the state vector comprises infinitesimal maturity yields and their quadratic covariations because these variables possess unambiguous economic interpretations they generate a representation that is globally identifiable further this representation has more identifiable parameters than the maximal model of dai and singleton 2000 we implement this new representation for select three factor models and find that model independent estimates for the state vector can be estimated directly from yield curve data which present advantages for the estimation and interpretation of multifactor models

explorations into factors explaining money market returns in this article we measure and interpret the common factors that describe money market returns results are presented for both three and four factor models we find that the three factor model explains on average 86 percent of the total variation in most money market returns while the four factor model explains on average 90 percent of this variation using mimicking portfolios we provide an interpretation of the systematic risks represented by these factors in this article we attempt to measure and interpret the common factors that describe money market returns the factor approach we employ assumes that the covariance matrix of a set of random variables in this case excess returns can be decomposed into common or systematic components and idiosyncratic or nonsystematic components this decomposition into systematic and nonsystematic components is based on an assumption of a linear relationship between the returns of each security and a set of common factors this is the assumption of linear return generating models which form an integral part of the structure of many asset pricing theories for example arbitrage pricing theory apt as developed by ross 1976 the interpretation is that the common factors represent sources of systematic or nondiversifiable risk and the idiosyncratic component of returns represents diversifiable risks our focus here is not on testing a particular asset pricing model per se but on developing empirical evidence for the existence of stylized facts regarding money market returns the stylized facts take the form of the existence measurement and interpretation of the common factors that are found in money markets our attempt to measure and interpret these sources of systematic risk may eventually lead to the construction of observable eco

multinationality and performance among british manufacturing companies over the period 1972 84 profitability among 304 large british manufacturing companies was positively related to their degree of multinationality moreover increases in overseas production were strongly associated with increases in sales and profitability the profitability of multinational growth over the whole period was independent of its destination supporting the view that the primary source of the superior performance of multinationals was competitive advantage rather than the higher rate of profit in the industries of other countries

the statistical and economic role of jumps in continuous time interest rate models this paper analyzes the role of jumps in continuous time short rate models i first develop a test to detect jump induced misspecification and using treasury bill rates find evidence for the presence of jumps second i specify and estimate a nonparametric jump diffusion model results indicate that jumps play an important statistical role estimates of jump times and sizes indicate that unexpected news about the macroeconomy generates the jumps finally i investigate the pricing implications of jumps jumps generally have a minor impact on yields but they are important for pricing interest rate options

the term structure of commercial paper rates this paper tests the expectations hypothesis in the market for commercial paper our main dataset which is new to the literature consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by u s corporations between january 1998 and august 2003 we show that the term premia built into commercial paper yields rise dramatically at year end causing the expectations hypothesis to be rejected however once we control for these predictable year end eects we nd the reverse that commercial paper yields largely conform with the expectations hypothesis