dynamic adverse selection a theory of illiquidity fire sales and flight to quality we develop a dynamic equilibrium model of asset markets with adverse selection there exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price dividend ratio in less liquid markets sellers of high quality assets signal quality by accepting a lower trading probability we show how the distribution of sellers private information affects an asset s price and liquidity how a change in that distribution can cause a re sale and a ight to quality and how asset purchase and subsidy programs may raise prices and liquidity and reverse the ight to quality jel d82 g12 this paper develops a dynamic equilibrium model of asset markets with adverse selection the owners of heterogeneous assets are privately informed about the quality of their assets sellers set prices for their assets recognizing that sales may be rationed at high prices buyers set prices recognizing that the quality of available assets may depend on the price selected in equilibrium sellers of high quality assets are willing to set a high price despite the low sale probability because the continuation value from failing to sell a high quality asset is high conversely sellers of low quality assets opt for a low price buyers are indifferent between paying a low price for a low quality asset and a high price for a high quality asset we prove these results in a deliberately stylized dynamic general equilibrium framework assets are perfectly durable and pay a constant dividend each period some amount of a perfectly perishable consumption good better quality assets pay a higher dividend but only the asset s current owner observes the dividend this is the source of private information and the root of the adverse selection problem as in akerlof 1970 the only permissible trades are between the consumption good and the asset individuals are risk neutral and have a discount factor that changes over time independently across individuals creating gains from trade finally discount factors are observable which ensures that patient individuals never sell assets since there are no gains from trade we believe this framework is useful for capturing

sovereign default risk and the u s equity market i develop a two country general equilibrium model with firms governments and endogenous default decisions this paper shows that the risk of sovereign default abroad is important in the explanation of the level and the volatility of u s equity returns the intuition is that negative economic shocks deteriorate the fiscal situation of foreign governments thereby increasing the risk of a sovereign default that would trigger a local contraction in economic growth the rise in the risk of an economic slowdown abroad amplifies the direct eect of these shocks on the level and the volatility of equity returns in the u s through i a decrease in the present value of future firm earnings due to the unfavorable adjustment of the real exchange rate for u s exporters and ii a fall in u s equity prices that originates from the investors incentive to rebalance their portfolio towards risk free securities the amplification eect is strongest during periods of financial distress when the risk of corporate default is high in the u s a structural estimation of the model provides strong support for this prediction using monthly data for brazil and the u s over the period 1994 2008

stochastic equilibria existence spanning number and the no expected financial gain from trade hypothesis stochastic equilibria under uncertainty with continuous time security trading and consumption are demonstrated in a general setting a common question is whether the current price of a security is an unbiased predictor of the future price of the security plus intermediate dividends this is the hypothesis of no expected financial gains from trade the relevance of this hypothesis in multi good economies is called into question by the following demonstrated fact for each set of probability assessments there exists a corresponding equilibrium one with the original agents original equilibrium allocations and no expected financial gains from trade under the given probability assessments the spanning number of the economy is defined as the fewest number of security markets required to sustain a complete markets equilibrium in a dynamic sense made precise in the paper the spanning number is linked directly to agent primitives in particular the manner in which new information resolves uncertainty over time the spanning number is shown to be invariant under bounded changes in expectations several examples are given in which the spanning number is finite even though the number of potential states of the world is infinite

asset pricing in multiperiod securities markets the intertemporal models developed in this paper have been stimulated by the capital asset pricing model capm of sharpe and lintner and the role of factor structure in ross arbitrage pricing theory apt suppose that some one dimensional stochastic process s provides a sufficient statistic for aggregate consumption then a heuristic dynamic programming argument shows that s market wealth and the wealth derivative of the value function for any agent are all locally perfectly correlated it follows from merton s work that there is a linear relationship between the local mean return on a security and the local covariance of that return with the return on the market portfolio the formal development uses martingale representation and martingale projection to obtain an intertemporal capm the history of a scalar brownian motion plays the role of a sufficient statistic we motivate the assumption of a sufficient statistic for aggregate consumption by considering a countable set of securities whose payoffs have an approximate factor structure where the factor components are in the information set generated by an n dimensional brownian motion and the idiosyncratic components are weakly correlated the approximate factor structure on the security payoffs implies that the rates of return have locally an approximate factor structure the role of the market portfolio can now be played by a set of n well diversified portfolios

heterogeneity and volatility puzzles in international finance we develop an equilibrium model in a 2 country 2 good pure exchange economy in which investors with logarithmic utility functions have heterogeneous beliefs about exogenously given output or endowment processes we obtain closed form representations of real ex change rates and of stock prices we show that heterogeneous beliefs together with hetero geneous preferences make the volatility of real exchange rates and of stocks exhibit some properties that have been well documented in the empirical literature these properties include the high volatility of both real exchange rates and stocks compared with that of economic fundamentals the high correlation of stocks during periods of volatile markets the model can also generate the clustering of the volatility of foreign exchange rates and stocks if the differences of beliefs are clustering

job creation by company size class the magnitude concentration and persistence of job gains and losses in canada the statistical observation that small firms have created the majority of new jobs during the 1980s has had a tremendous influence on public policy governments have looked to the small firm sector for employment growth and have promoted policies to augment this expansion however recent research in the u s suggests that net job creation in the manufacturing small firm sector may have been overestimated relative to that in large firms

how good are small firms are predicting employment this paper utilises some data from an interview survey of very small firms in the north of england to examine the relationship between actual and forecast employment in small firms over a twelve month period the paper first provides some summary statistics on actual and forecast employment for the survey firms over the reference period it then looks at how successful the firms are in their short term forecasts and finds that there is systematic over estimation the causes of the systematic forecast error are investigated it is suggested tentatively that the firms may in some way be incorrectly interpreting the information embodied in their own employment figures when making their forecasts the paper concludes with a brief review of the results and possible policy implications avenues for future work are also proposed

imperfect competition information heterogeneity and financial contagion this study examines how heterogeneity of private information may induce financial contagion using a model of multi asset trading in which the three main channels of contagion through financial linkages in the literature correlated information correlated liquidity and portfolio rebalancing are ruled out by construction i show that financial contagion can still be an equilibrium outcome when speculators receive heterogeneous fundamental information risk neutral speculators trade strategically across many assets to mask their information advantage about one asset asymmetric sharing of information among them prevents rational market makers from learning about their individual signals and trades with sufficient accuracy incorrect cross inference about terminal payoffs and contagion ensue when used to analyze the transmission of shocks across countries my model suggests that the process of generation and disclosure of information in emerging markets may explain their vulnerability to financial contagion jel d82 g14 g15

consensus consumer and intertemporal asset pricing with heterogeneous beliefs le fichier attache est egalement edite dans les cahier de la chaire les particuliers face aux risques de l institut de finance de dauphine cahier n 7 mars 2007

asset prices and risk sharing in open economies this paper proposes a two good two country general equilibrium model with external habits and home biased preferences that addresses a number of international nance puzzles speci cally the model reconciles the high degree of international risk sharing implied by relatively smooth exchange rates with the modest cross country consumption growth correlations seen in the data resolving the brandt cochrane and santa clara 2006 puzzle furthermore the model matches the empirically observed low correlation between exchange

why do big firms pay higher wages evidence from an international database abstract bigger firms pay higher wages this note reports tests of the hypothesis that this big firm premium bfp occurs because workers in big firms are more skilled we use the international adult literacy survey which gives richer skill measures than those typically available in labor market surveys to measure the bfp in nine countries with and without controls for worker skill the results show that the bfp is not as universal as is often suggested but in countries where it exists controlling for skills does little to reduce the size of the bfp

a general equilibrium model of portfolio insurance this article examines the effects of portfolio insurance on market and asset price dynamics in a general equilibrium continuous time model portfolio insurers are modeled as expected utility maximizing agents martingale methods are employed in solving the individual agents dynamic consumption portfolio problems comparisons are made between the optimal consumption processes optimally invested wealth and portfolio strategies of the portfolio insurers and normal agents at a general equilibrium level comparisons across economies reveal that the market volatility and risk premium are decreased and the asset and market price levels increased by the presence of portfolio insurance article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

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

discounting values and decisions how do discount rates affect agents decisions and valuations this paper provides a general method to analyze this question allowing stochastic and managed cash flows stochastic discount rates and time inconsistency and including arbitrary learning and payoff or utility processes we show that some of these features can lead to counterintuitive answers e g a more patient agent stops earlier but we also establish under simple conditions theorems yielding robust predictions concerning the impact of discount rates on control and stopping decisions and on valuations we apply our theory to models of search experimentation bankruptcy optimal growth investment and social learning

typology for flight to quality episodes and downside risk measurement abstractwe propose a total return based framework to measure downside risk associated with phenomenon of capital outflows from riskier to safer financial markets the proposed method consists of three elements i the general definition of the flight to quality ftq phenomenon ii the typological classification of the flight to quality occurrences for associating them with the phases of the business cycle and iii the automated technique to diagnose the time frames and to measure the impact of flight to quality on financial instruments the proposed framework is applied to analyse the global scale capital inflows outflows from emerging markets public debt to the us treasuries and vice versa the results show that different phases of business cycles and gdp growth rates including turning points could be associated with flights to quality of different types and causality origins addressing downside risk crystallizations in flight to quality occurrences new perspectives of integrated interest rate r

financial crises and the multilateral response what the historical record shows abstract we provide a synoptic description of financial crises and the multilateral response over the course of the last four decades we present both indicators of economic performance around crisis dates and a comprehensive description of multilateral rescue efforts while emergency lending has grown reliance on debt restructuring broadly speaking has declined this leads us to ask what can be done to rebalance the management of debt problems toward a better mix of emergency lending and private sector burden sharing in particular we explore the idea of sovereign cocos contingent debt securities that automatically reduce payment obligations in the event of debt sustainability problems

an intertemporal model of industrial exit a finite horizon model of industrial exit is developed after an initial lag most exits are by young firms the duration of the lag is positively related to sunk entry costs but not due to the fallacy of sunk costs the conception of entry differs from previous research as a result not all entrants are identical and firm size affects the rate of learning on average larger new firms last longer entrepreneurs in declining firms act more lazily as the firm declines a number of empirical observations about declining firms are organized by the model

pension coverage and retirement savings of young and prime aged workers in canada 1986 1997 in this paper we assemble data from several household surveys to document how pension coverage of young and prime aged workers has evolved in canada between the mid 1980s and the mid 1990s we show that between 1986 and 1997 pension coverage has fallen significantly for men has dropped slightly for young women and has increased for prime aged women the decline in union density and employment shifts towards low coverage industries explain most of the decline in pension coverage of men and young women in contrast most of the increase in coverage of prime aged women remains unexplained while pension coverage has fallen for men and young women their real average contributions to registered retirement savings plan rrsps have increased substantially as a result the sum of the amounts they contributed to registered pension plans rpps and rrsps has increased markedly jel classification j26 j32 couverture des regimes de rentes et epargnes pour la retraite des travailleurs jeunes et de ceux dans la force de l ge au canada 1986 1997 dans ce memoire les auteurs assemblent des donnees de plusieurs enquetes sur les menages pour documenter l evolution de la couverture des regimes de rentes des travailleurs jeunes et dans la force de l ge entre le milieu des annees 80 et le milieu des annees 90 on montre que cette couverture a chute de maniere significative pour les hommes a decline legerement pour les femmes et s est accrue pour les femmes dans la force de l ge la chute du taux de syndicalisation et les deplacements de l emploi vers des secteurs ou la couverture est plus faible expliquent le gros du declin de couverture pour les hommes et les jeunes femmes quant a l accroissement de la couverture pour les femmes dans la force de l ge il demeure inexplique alors que la couverture des deux premiers groupes a decline leurs contributions aux regimes enregistres d epargne retraite reer ont augmente substantiellement en consequence le total des sommes qu ils ont contribuees aux regimes de rentes enregistres et aux reer ont augmente de maniere importante

classical and restricted impulse control for the exchange rate under a stochastic trend model abstract building on cadenillas and zapatero 2000 and bertola et al 2016 we consider the problem faced by a central bank to optimally control the exchange rate whereby the control is composed of a direct impulse control intervention and an indirect continuously acting intervention given by the control of the domestic interest rate similarly to cadenillas and zapatero 2000 and bertola et al 2016 we formulate the problem as a mixed classical impulse control problem and the approach is based on a quasi variational inequality by considering a specific class of the optimal value functions and controls as in bertola et al 2016 but differently from cadenillas and zapatero 2000 we consider a finite horizon that makes the problem time inhomogeneous and we do not have to impose a smooth fit condition so that a fully analytical solution is possible with respect to bertola et al 2016 we generalize the problem by letting more realistically the drift in the dynamics of the exchange rate to be time varying or even unobservable so that it has to be filter estimated from observable data numerical illustrations are presented as well

commodity currencies and equity flows abstract this paper analyzes the relationship among the prices of natural resources returns on equity and nominal exchange rates of the developed countries where primary commodities are an important share of exports australia canada and new zealand it is found that the portfolio rebalancing motive of hau and rey hau h rey h 2006 exchange rates equity prices and capital flows review of financial studies 19 1 273 317 is weaker for these countries one possible explanation of this finding is that commodity prices due to their flexibility play a special role in the transmission of shocks by linking equity markets across countries and reducing the need for portfolio rebalancing

dynamic relations between international equity and currency markets the role of currency order flow previous research on the dynamic linkages between international financial markets focused on bivariate interequity or intercurrency relationships and do not allow a specific role for the currency or equity market respectively in this paper we hypothesize that there are important yet not well understood dynamic relationships between international equity and currency markets and these are driven by information spillover via the mechanism of currency order flow using a trivariate asymmetric garch framework we find that the relationships between equity and currency markets are significant bidirectional and pervasive these relationships which coexist with the relationships between u s and foreign equity markets are much stronger in the volatilities than in the means importantly we find strong support for our information spillover hypothesis where currency order flow is the economic mechanism by which information is transmitted

the role of portfolio constraints in the international propagation of shocks we study the comovement among stock prices and exchange rates in a three good three country centre periphery dynamic equilibrium model in which the centre s agents face portfolio constraints we characterize equilibrium in closed form for a broad class of portfolio constraints solving for stock prices terms of trade and portfolio holdings we show that portfolio constraints generate wealth transfers between the periphery countries and the centre which increase the comovement of the stock prices across the periphery we associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion the model generates predictions consistent with other important empirical results such as amplification and flight to quality effects copyright 2008 wiley blackwell

on equilibrium prices in continuous time abstract state prices are the fundamental building block for dynamic asset pricing models we provide here a general continuous time setup that allows to derive non trivial structural properties for state prices from economic fundamentals to this end we combine general equilibrium theory and theorie generale of stochastic processes to characterize state prices that lead to continuous price systems on the consumption set we also show that equilibria with such state prices exist

staying in business abstract the paper analyses factors which help a small entrepreneurial firm to stay in business the time scale for the analysis is three years 1985 1988 the main issue that the paper is concerned with is the role of market and financial variables primary source data are used an estimated probit model indicates that for this sample product range and gearing are the key maket and financial variables respectively the greater the product range and the lower the gearing ceteris paribus the better the chances of staying in business

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

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

an asset pricing view of external adjustment abstract recent literature has argued that conventional measures of external sustainability the trade balance and current account are misleading because they omit capital gains on net foreign asset positions we adjust the definition of the current account to include the capital gains and discuss how this may affect our thinking about external adjustment and sustainability we do so in the context of a two country macro finance model of pavlova and rigobon 2008a that allows exploration of the interconnections between equilibrium portfolios and external accounts dynamics we calibrate the model and find that it generates several testable implications some of which have already been validated empirically first we establish dynamic properties of the capital gains adjusted current account and show that they are fundamentally different from those of the conventional current account second we find that capital gains have a stabilizing effect on the trade balance and the current account finally we demonstrate that in response to a shock the conventional and the capital gains adjusted current accounts may move in opposite directions

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

employer size wage effects evidence from matched employer employee survey data in the uk this paper employs a random sample of matched employer employee data from the uk to test seven possible explanations for the positive relationship between employer size and pay individual wage equations show a large employer size wage premium we then control for a range of establishment level variables based on seven hypotheses typically advanced to explain this premium each establishment level factor reduces the wage premium but a sizeable premium nonetheless remains in adjudicating on these hypotheses we find a strong association between the internal labour market and the employer size wage premium this finding supports the theory that the employer size wage effect may be due to the higher costs of turnover or monitoring in larger firms however we find contrasting effects for public versus private sector establishments

asset prices and exchange rates in this paper we study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model trade in goods gives rise to an additional channel of international propagation through the terms of trade absent in traditional single good asset pricing models the inclusion of demand shocks helps overturn many unrealistic implications of existing international flnance models in which productivity shocks are the sole source of uncertainty our model generates a rich set of implications on how stock bond and foreign exchange markets co move we solve the model in closed form which yields a system of equations that can be readily estimated empirically our estimation validates the main predictions of the theory

human capital and information this paper examines the issue of the establishment size wage effect it analyzes a cross section for the year 1979 with information on 607 individuals and the 60 private sector establishments where they work it discusses four theories of the establishment size wage effect and uses empirical proxies to test them it shows that when a dummy variable on computer access in the establishment is introduced as a regressor the establishment size variable is an insignificant regressor this result and other evidence supports the contention that the establishment size coefficient captures the effect of unobserved human capital accumulation

competitive equilibria in production economies with an infinite dimensional commodity space the existence of competitive equilibrium is established for economies with a produc tion sector and an infinite dimensional space of commodities the cru cial assumptions which are required beyond those required in the fin ite dimensional setting are bounds on marginal rates of substitution and marginal rates of transformation copyright 1987 by the econometric society

an economic capital model integrating credit and interest rate risk in the banking book banks often measure credit and interest rate risk in the banking book separately and then add the risk measures to determine economic capital this approach misses complex interactions between the two risk types we develop a framework where these risks are analysed jointly since banking book positions are generally not marked to market our model is based on book value accounting our simulations show that interactions matter and that ignoring them leads to risk overstatement the magnitude of the errors depends on the structure of the balance sheet and on the repricing characteristics of assets and liabilities

optimal central bank intervention in the foreign exchange market abstract we consider a currency with exchange rate dynamics modeled as a geometric brownian motion the objective of the central bank is to keep this exchange rate as close as possible to a given target so there is a running cost associated to the difference between the exchange rate and the target additionally there are also fixed and proportional costs associated with each intervention the objective of this paper is to find the optimal level of intervention and the optimal sizes of the interventions so as to minimize the total cost we solve this problem by applying the theory of stochastic impulse controls journal of economic literature classification numbers c61 d81 f31 g15

complex actions and simple outcomes how new entrepreneurs stay in business in this paper the entrepreneur within the new small firm is regarded as taking complex rather than simple actions which determine whether he or she will remain in business thus instead of simply choosing output as in the standard analysis of the competitive firm the entrepreneur may take actions which involve choices about markets finance organisation innovation and much else besides to explore this approach very detailed information on actions within small firms is required it is shown how this was obtained by a fieldwork study of new business starts using data from this fieldwork a rich statistical picture was created of actions within the new small firm in turn this permitted econometric analysis of actions that help a new small firm to stay in business over a three year period this indicates that the crucial actions which enable a small firm to stay in business are the rapid repayment of debt and the willingness to sacrifice short run profit for growth there is also evidence that staying in business is fostered by tight control of the wage bill especially by substituting other labour inputs for full time employees

on the fluctuations in consumption and market returns in the presence of labor and human capital an equilibrium analysis abstract we examine the effects of human capital on consumption stock market and other fluctuations in a general equilibrium continuous time model a representative consumer worker investor derives utility from consumption and leisure a representative firm demands labor as the sole input to a stochastic production technology driven by general possibly nonmultiplicative shocks for cobb douglas utility and multiplicative shocks labor is nonstochastic and consumption and stock market volatility are equated as under no human capital deviations from this are analyzed for logarithmic utility and constant elasticity of substitution production technology cases are identified where the presence of labor causes consumption to be smoother than the stock market

towards an interdisciplinary theory of entrepreneurship entrepreneurship is one of the least understood topics in economics the rising significance of small companies and especially of start ups for the creation of new jobs has been an intensively discussed subject for nearly one decade but there is still no theory of entrepreneurship

government debt control optimal currency portfolio and payments motivated by empirical facts we develop a theoretical model for optimal currency government debt portfolio and debt payments which allows both government debt aversion and jumps in the exchange rates we obtain first a realistic stochastic differential equation for public debt and then solve explicitly the optimal currency debt problem we show that higher debt aversion and jumps in the exchange rates lead to a lower proportion of optimal debt in foreign currencies furthermore we show that for a government with extreme debt aversion it is optimal not to issue debt in foreign currencies to the best of our knowledge this is the first theoretical model that provides a rigorous explanation of why developing countries have reduced consistently their proportion of foreign debt in their debt portfolios

the consumption based capital asset pricing model the paper provides conditions on the primitives of a continuous time economy under which there exist equilibria obeying the consumption based capital asset pricing model ccapm the paper also extends the equilibrium characterization of interest rates of cox ingersoll and ross 1985 to multi agent economies we do not use a markovian state assumption this work provides sufficient conditions on agents primitives for the validity of the consumption based capital asset pricing model ccapm of breeden 1979 as a necessary condition breeden showed that in a continuous time equilibrium satisfying certain regularity conditions one can characterize returns on securities as follows the expected instantaneous rate of return on any security in excess of the riskless interest rate the security s expected excess rate of return is a multiple common to all securities of the instantaneous covariance of this excess return with aggregate consumption increments this common multiple is the arrow pratt measure of risk aversion of a representative agent rubinstein 1976 published a discrete time precursor of this result the exis tence of equilibria satisfying breeden s regularity conditions had been an open issue we also show that the validity of the ccapm does not depend on breeden s assumption of markov state information and present a general asset pricing model extending the results of cox ingersoll and ross 1985 as well as the discrete time results of rubinstein 1976 and lucas 1978 to a multi agent environment since the ccapm was first proposed much effort has been directed at finding sufficient conditions on the model primitives the given assets the agents preferences the agents consumption endowments and in a production econ omy the feasible production sets conditions sufficient for the existence of continuous time equilibria were shown in duffie 1986 but the equilibria demonstrated were not shown to satisfy the additional regularity required for the ccapm in particular breeden assumed that all agents choose pointwise interior consumption rates in order to characterize asset prices via the first order conditions of the bellman equation interiority was also assumed by huang 1987 in demonstrating a representative agent characterization of equilibrium an approach exploited here the use of dynamic programming and the bellman equation aside from the difficulty it imposes in verifying the existence of interior 1 financial support from the national science foundation is gratefully acknowledged we thank

a selectivity model of employer size wage differentials this article investigates wage differentials for employees of different size firms utilizing an econometric methodology that allows the size of employer to be treated as endogenous in the context of discrete ordered employer size data as a result we are able to estimate i employer size wage gaps which are corrected for selectivity bias and ii the magnitude and direction of the selection bias decompositions of the resulting wage differentials are computed with comparisons of the conditional on sorting across employer size and unconditional wage gaps

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

a comparative study of portfolio insurance abstract this paper undertakes a comparative study of portfolio insurance under a variety of modeling strategies specifically we focus on portfolio insurers who derive utility from horizon wealth with marginal utility tending smoothly to infinity at some pre specified floor we solve for the optimal consumption portfolio wealth of these portfolio insurers and compare with constrained portfolio insurers and normal agents general equilibrium conditions are contrasted under pure exchange and production type models while the market price level is unambiguously increased under pure exchange under production the effect on market level is state dependent in both models the market volatility and risk premium are decreased by portfolio insurance the paper also investigates the possible relationship between portfolio insurance type trading strategies and market volatility

work contracts and earnings inequality the case of chile great social inequality has been one of the worrisome features of economic development in latin america this study focuses on chile one of latin america s fastest growing economies with one of the highest levels of income inequality during the 1990s using micro level data from the 1994 and 2000 encuestas de caracterizacion socio economica this article examines the role of work contracts in explaining male and female earnings and earnings inequality among wage and salary workers over the second half of the 1990s the analysis distinguishes between wage and salary work without a work contract referred to as informal work and wage and salary work with a work contract within the latter group the study further differentiates by the type of work contract held such as permanent and a variety of contingent work contracts the findings reveal that the majority of employees in informal and contingent wage and salary work arrangements earned significantly less than their permanent counterparts additiona

canadian jobs and firm size do smaller firms pay less even after controlling for observable workers characteristics and for occupation and industry specific effects a substantial wage differential remains between large and small firms what underlies the remaining wage differential is unclear direct evidence on pension plan coverage and on lay off rates by firm size is inconsistent with the bad working conditions hypothesis the union avoidance hypothesis does not seem to explain an important portion o f the wage differential as suggested by efficiency wage models part of the remaining wage differential may be due to firms heterogeneity similarly perhaps large firms pay higher wages simply partly beca use they employ workers with more unobserved abilities because differen t explanations of the wage differential may lead to different policy implications determining the source of the wage firm size effect is an important question for future research

international capital markets and redundant securities abstract in this paper we propose a general equilibrium model of a two country two good complete dynamic financial market we fully characterize the equilibrium and show that under time additively separable preferences there exist redundant securities in international capital markets for example using the foreign bond and domestic securities investors are able to replicate foreign equity however unlike zapatero 1995 equilibrium asset prices and exchange rates journal of economic dynamics and control 19 787 811 and pavlova and rigobon 2003 asset prices and exchange rate nber working paper 9834 the perfect correlation between equity markets obtained under the restrictive assumption of logarithmic preferences does not hold under more general specifications of utility even though the pricing kernels in the two countries are perfectly linked through the exchange rate

choice among wage hours packages an empirical investigation of male labor supply this article specifies and estimates an empirical model of male labor supply based on an implicit market model of wage hours determination we discuss how moving from a standard labor supply model to an implicit market model affects model specification and choice of estimation technique we find that average hourly earnings are not independent of hours worked and that ols estimates of the wage hours relationship are biased we also show that a labor supply model that assumes wages to be independent of hours worked produces a positively biased estimate of the effect of the wage on labor supply

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

equilibrium asset prices and exchange rates abstract in a two country two good world we construct an intertemporal international general equilibrium for two logarithmic representative agents financial markets are fully integrated and independently incomplete the equilibrium expected rate of change of the exchange rate increases with the differential of interest rates and the volatility of the domestic equity markets and decreases with the covariance between domestic and foreign equity markets the equilibrium volatility of the exchange rate is the sum of the volatilities due to idiosyncratic factors in the financial markets and a term that represents the difference of weights in the common international factor

the intersection of market and credit risk abstract economic theory tells us that market and credit risks are intrinsically related to each other and not separable we describe the two main approaches to pricing credit risky instruments the structural approach and the reduced form approach it is argued that the standard approaches to credit risk management creditmetrics creditrisk and kmv are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with treasury bond index returns than do low yield bonds also macro economic variables appear to influence the aggregate rate of business failures the creditmetrics creditrisk and kmv methodologies cannot reproduce these empirical observations given their constant interest rate assumption however we can incorporate these empirical observations into the reduced form of jarrow and turnbull 1995b drawing the analogy risk 5 63 70 model here default probabilities are correlated due to their dependence on common economic factors default risk and recovery rate uncertainty may not be the sole determinants of the credit spread we show how to incorporate a convenience yield as one of the determinants of the credit spread for credit risk management the time horizon is typically one year or longer this has two important implications since the standard approximations do not apply over a one year horizon first we must use pricing models for risk management some practitioners have taken a different approach than academics in the pricing of credit risky bonds in the event of default a bond holder is legally entitled to accrued interest plus principal we discuss the implications of this fact for pricing second it is necessary to keep track of two probability measures the martingale probability for pricing and the natural probability for value at risk we discuss the benefits of keeping track of these two measures

new firm growth and bank financing this paper examines the extent to which lucas ideas on human capital and jovanovic theorising on learning can provide further insights into the development of small firms it focuses exclusively upon newly established independent firms our evidence from two surveys is that bank lending to new firms is unrelated to many of the personal characteristics of founders which have been argued by other researchers to relate to small firm performance instead lending appears to be more related to whether or not the founder can or chooses to use personal savings and the legal status of the business

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

differences of opinion endogenous liquidity and asset prices this paper studies how investors differences of opinion affect liquidity and asset prices in our economy excessively optimistic investors are subject to an endogenous funding constraint that prevents default due to ex ante limited commitment when the funding constraint binds optimists use their savings to increase their consumption share deterring default this allows them to place speculative trades increasing market liquidity their losses on these trades make them prone to default leading to a renewed binding of the funding constraint this feedback between funding illiquidity disagreement and market liquidity is consistent with several empirical features of liquidity and financial asset prices

asset prices and real exchange rates with deep habits i introduce an external habit for each consumption good known as deep habits into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries i show that deep habits coupled with consumption home bias account for a wide range of asset pricing and exchange rate moments calibrated to a set of ten countries the model reproduces the cross sectional evidence on currency risk premiums when sorting on interest rates interest rate volatility innovations to global exchange rate volatility and value hence the model provides an equilibrium interpretation of these empirical regularities

longitudinal analyses of the effects of trade unions but union members are different from nonmembers in unobserved ways biasing your estimates y ou should make a selectivity bias correction simultaneously determine union status and economic outcomes develop an unobservables model use longitudinal data archetypical comment on virtually any study of the economic effects of umomsm or suitably modified on any other empirical subject

mature micro firms and their experience of funding shortages funding shortages are analysed in the context of a simple neoclassical model of the micro firm that uses financial capital for its operations it predicts that a response to funding shortages is to substitute part time workers for full time workers under the assumption that the latter are the more financial capital intensive employees the experience of funding gaps in finance capital by long lived micro firms is investigated using data which were obtained by telephone interviews the micro firms examined had an average size of six full time and two part time workers and an average age of fifteen years using probit estimators of the probability of experiencing funding shortages it is found that a strong and significant negative association exists between the number of part time workers and the probability of experiencing funding shortages refuting the simple neoclassical hypothesis and suggesting an alternative hypothesis emphasising the flexibility advantages of part time embloyees in averting funding shortages a ten per cent increase in part time employees is shown to reduce the probability of experiencing funding shortages by two and a half per cent a regional effect was also discovered and bivariate probits gave results which were consistent with univariate probits

should workers care about firm size the authors analyze how firms of different sizes reward measured skills and unmeasured ability the empirical methodology based on nonlinear instrumental variable estimation permits direct estimation of the returns to unmeasured ability by firm size an analysis of panel data from the canadian survey of labour and income dynamics for two periods 1993 1998 and 1996 2001 reveals statistically significant differences between firms of different sizes in particular returns to unmeasured ability are higher in medium sized firms than in either small firms or large firms the authors find that the firm size wage gap and the differential in returns to unmeasured ability between small and medium sized firms is mainly explained by ability sorting the fact that larger firms reward ability less than medium sized firms is consistent with an explanation based on monitoring costs when firms become too large monitoring costs may prevent them from rewarding ability directly through wages

approximating the asset pricing kernel this article tests a simple consumption based asset pricing model by approximating the true asset pricing kernel using low order orthonormal polynomials based on the model s state variables approximated kernels based solely on next period s consumption growth are not rejected by overall measures of model fit but they produce statistically and economically large pricing errors approximated kernels based on two quarters of future consumption growth and technology shocks have substantially improved overall fit in particular the best of these kernels are capable of eliminating the small firm effect a conventional approach to examining the implications of dynamic asset pricing models is to assume that markets are complete the economy is in equilibrium and that the unique state price deflator can be interpreted as the intertemporal marginal rate of substitution of a representative consumer given assumptions about the form of this unobservable utility function and on the observability of aggregate consumption the model can be tested by examining the conditional or unconditional covariation of estimated intertemporal marginal rates of substitution with measured asset returns the fact that this method of testing dynamic models requires strong assumptions is in and of itself not particularly troubling however the fact that these attempts have been almost uniformly inconsistent with the data on asset returns and consumption is problematic for example when the utility function is assumed to be time and state separable the absolute and relative levels of the real returns on risk free and risky securities see for example mehra and prescott 1985 and weil 1989 are inconsistent with the model s predictions the primary finding from a large literature testing consumption based models is that measured consumption is too smooth to rationalize the observed level and variability of asset returns for reasonable parameterizations of time separable utility functions an alternate approach pursued in this paper is to approximate the stateprice deflator or asset pricing kernel using orthonormal polynomials in a

pricing continuously resettled contingent claims abstract this paper is a study of continuously resettled contingent claims prices in a stochastic economy as special cases the relationship between futures and forward prices is analyzed and a preference free expression is derived for these prices as well as the price of a continuously resettled futures option whose formula differs from black s futures option pricing formula due to the effects of marking to market the changes in the futures option premium

student work placements in small firms do they pay off or shift tastes we present a model of training investments and employment outcomes in this model training may enhance trainees tastes for particular types of career taste shift and or shift their wage offer distributions pay off an empirical analysis is conducted with a unique data set of uk graduates these data contain information on students career tastes before small firm placements as well as their employment outcomes after graduation analysis of these data indicates that the placements provide a pay off among highly employable graduates who face certain disadvantages in the labour market conversely individuals who expressed a taste for small firm careers before placements are more likely to take up small firm employment after placements suggesting these individuals experience enhanced opportunities for their preferred career however individuals with pre placement large firm preferences have no greater likelihood of entering small firms employment after placements indicating there is no fundamental effect on career tastes

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

the trade off between supervision and wages evidence of efficiency wages from the nlsy standard efficiency wage models suggest that workers employed in places with lower probabilities of identifying shirking will earn more as will workers who have better alternative opportunities this paper provides new empirical evidence in support of efficiency wage theory using the national longitudinal surveys of youth data the empirical results support the prediction of the model that workers employed in larger work groups are paid more a finding consistent with a supervision wage trade off additional evidence supports the prediction that workers with better alternative opportunities earn more the classical competitive theories of wage determination predict that workers will be paid the value of their marginal product these theories suggest that after accounting for differences in working conditions there should be no variation in wages among homogeneous workers recent findings that industry affiliation and firm size affect wages suggest that part of the explanation of wage structure is missing these results call into question the view that industry wage differentials can plausibly be rationalized with textbook competitive models krueger and summers 1988 p 280 this paper follows the efficiency wage literature by assuming that one important determinant of wage differences is variation in employers ability to monitor workers efforts 2 this paper provides new empirical evidence in support of efficiency wage theory using data from the national longitudinal surveys of youth nlsy a data set that is noticeably absent from the efficiency wage literature efficiency wage models attempt to complete the explanation of wage structure by focusing

working hours and hedonic wages in the market equilibrium in the conventional model of labor supply working hours are implicitly assumed to be divisible goods which is an obviously unrealistic assumption the purpose of this paper is to analyze working hours as indivisible goods when working hours are indivisible labors are differentiated in the market by their length and wages will be a function of working hours the main conclusions are that 1 in the market equilibrium the elasticity of the hedo nic wage curve with respect to hourly wage rates must be positive or less than a1 and 2 generally data will reveal neither demand nor su pply structures copyright 1987 by university of chicago press

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

consumption and portfolio policies with incomplete markets and short sale constraints the infinite dimensional case abstract we employ a martingale approach to study a dynamic consumption portfolio problem in continuous time with incomplete markets and short sale constraints we introduce a notion of minimax local martingale and transform the dynamic problem into a static problem of maximizing expected utility over the consumption bundles that satisfy a single budget constraint formed using that measure we establish the existence of and characterize the minimax local measure provide sufficient conditions for the dynamic consumption portfolio problem to have a solution and relate the optimal policies to the solution of quasi linear partial differential equation

stock and bond market liquidity a long run empirical analysis this paper establishes liquidity linkage between stock and treasury bond markets there is a lead lag relationship between illiquidity of the two markets and bidirectional granger causality the effect of stock illiquidity on bond illiquidity is consistent with flight toquality or flight to liquidity episodes monetary policy impacts illiquidity the evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market these effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short term maturities the paper provides evidence of illiquidity integration between stock and bond markets

stochastic multi agent equilibria in economies with jump diffusion uncertainty abstract we study a multi agent dynamic production economy that is subject to diffusive as well as shock sources of uncertainty using the theory of martingales and point processes we establish existence of an equilibrium in the economy the equilibrium commodity price asset prices and optimal policies of the individual agents are explicitly characterized we also establish the general existence of a risk neutral measure for equilibrium asset prices in the presence of jump risk

heterogeneous firms and the organization of production firms in the same industry exhibit systematic differences in the organization of production and the structure of employment entrepreneurial ability is the specific scarce input that limits the size of a firm this input must be allocated to two activities coordinating production and monitoring workers able entrepreneurs can convert calendar time into larger supplies of coordinating effort that enable them to assemble large firms greater ability implies a higher shadow price of time which increases the implicit costs of monitoring a dispersion of entrepreneurial abilities generates an equilibrium size distribution of firms differences in monitoring costs affect the choice of worker productivities the design of products and the organization of production the monitoring cost hypothesis advanced in this paper goes a long way in explaining the equilibrium of an industry containing heterogeneous firms that differ in size and behavior

on trees and logs abstract in this paper we contrast the main workhorse model in asset pricing theory the lucas 1978 tree model lt model to a benchmark model in financial equilibrium theory the real assets model ra model it is commonly believed that the two models entail similar conclusions since the lt model is a special case of the ra model but this is simply wrong implications of these models can be strikingly at odds indeed under the widely used log linear specification of households preferences we show that for a large set of initial endowments the lt model even with potentially complete financial markets admits only peculiar financial equilibria in which the stock market is completely degenerate in that all stocks offer the same investment opportunity and yet allocation is pareto optimal we investigate why the lt model is so much at variance with the ra model and uncover new results on uniqueness of financial equilibria and introduction of portfolio constraints obtaining in the lt model but not in the ra model