structural changes in volatility and stock market development evidence for spain abstract in this paper we review the factors that lead to changes in stock market volatility and use alternative methodologies of endogenous breakpoint detection in order to analyze whether the volatility of the spanish stock market has changed significantly over the period 1941 2001 this period corresponds to years of profound development of both the financial and the productive sides of the economy in this country the analysis of the spanish stock market suggests that volatility has behaved in a different manner over the period 1941 2001 after three decades of low volatility a structural break in volatility is detected in 1972 coinciding with the opening of the spanish economy from 1972 to 2001 the years of more intense financial development the stock market presents a higher level of volatility and lower persistence this effect is partly attributable to the increased growth of trading volume brought about by the economic development process

the behavior of risk and market prices of risk over the nasdaq bubble period we exploit the information in the options market to study the variations of return risk and market prices of different sources of risk during the rise and fall of the nasdaq market we specify a model that accommodates fluctuations in both risk levels and market prices of different sources of risk and we estimate the model using the time series returns and option prices on the nasdaq 100 tracking stock our analysis reveals three key variations during the period from march 1999 to march 2001 first return volatility increased together with the rising nasdaq index level even though the two tend to move in opposite directions second although the market price of diffusion return risk averages around 1 82 over the whole sample the estimates reached negative territory at the end of 1999 the estimates reverted back to highly positive values after the collapse of the nasdaq market third the market price of jump risk increased with the rising nasdaq valuation and this increase in market price coincided with an increased imbalance in open interest between put and call options

debt contracts banks and aggregate liquidity abstract the use of debt contracts in private trade credits leads to an overabundance of liquidity and a shortage of long term investments relative to the first best banks can avoid this problem by offering loan commitments or lines of credit thus helping to reduce aggregate liquidity

financial contracts when costs and returns are private abstract most bank loans are made under some form of commitment contract like a line of credit we show that a commitment dominates an ordinary debt contract when investment projects have random returns that are costly to observe and random costs that are completely unobservable the fees charged on commitments reduce default risk which in turn permits larger loans than under ordinary debt contracts our results contribute to the theoretical literature on financial intermediation and square with several stylized facts about commitment contracts

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

short run fiscal policy welfare redistribution and aggregate effects in the short and long run abstract this paper quantifies the effects of two short run fiscal policies a temporary tax cut and rebate transfer that are intended to stimulate economic activities a reduction in income taxation provides immediate incentives to work and save more raising aggregate output and consumption a temporary rebate is mostly saved and increases consumption marginally both policies improve the overall welfare of households and the rebate policy benefits especially low income households in the long run however the debt accumulated to finance the stimulus and a higher tax to service the debt can crowd out capital and lower output and consumption causing welfare to deteriorate

financial market volatility and primary placements abstract this paper studies empirically the link between financial market volatility and primary placements of stocks and bonds for the us economy we find that the impact of volatility on primary placements is not statistically significant

commercial paper bank reserve requirements and the informational role of loan commitments abstract an explanation is provided of the often observed purchase of back up bank loan commitments by corporations immediately preceding their sale of dealer placed commercial paper since loan commitments are typically viewed as hedging instruments our paper explains why a risk neutral corporation would purchase this type of instrument and how it is priced it is assumed that while firms know their own credit risks neither banks nor the paper market can distinguish between some credit applicants we show that the purchase of a commitment can identify these firms to the market the equilibrium is partially revealing of the firms with unobservable quality those with higher quality identify themselves by purchasing commitments while those with lower quality sell unbacked paper and are pooled together unbacked paper is sold also by firms whose quality is observable unidentified firms in the lowest quality range do not sell commercial paper

the dynamic interrelation between external finance and bank credit abstractthis article studies the interrelation among the volumes of bonds and stocks issued by non financial firms and levels of industrial loans outstanding in the united states these aggregates are co integrated and characterized by asymmetric volatility their co movements are driven by financial indicators such as the yield spread size of loan market and market volatility bond and stock issuance are positively correlated and even more so during the expansionary phase of the cycle loans outstanding and bond issuance are negatively correlated and their substitutability increases in periods of economic downturn highlighting the importance of bond markets to mitigate credit crunches

margin regulation and stock market volatility using daily and monthly stock returns we find no convincing evidence that federal reserve margin requirements have served to dampen stock market volatility the contrary conclusion expressed in recent papers by hardouvelis 1988a b is traced to flaws in his test design we do detect the expected negative relation between margin requirements and the amount of margin credit outstanding we also confirm the recent finding by schwert 1988 that changes in margin requirements by the fed have tended to follow rather than lead changes in market volatility after 55 years stock market margin requirements are again a source of controversy the securities and exchange act of 1934 transferred to the federal reserve system the authority exercised previously by the new york stock exchange and other private sector exchanges to set the minimum margins i e down payments that securities brokers and dealers subsequently expanded to all lenders must require of customers purchasing common stocks on credit the transfer of authority reflected the view widely held at the time that the low initial margins set by the exchanges had fueled the stock market boom of the 1920 s and that the frenzied liquidation of shares in response to margin calls had accelerated the crash in october 1929 supposedly dragging the economy down with it congress hoped that timely raising of margin requirements by the monetary authorities might dampen speculative excesses before they raged out of control or in today s terms that margin controls might reduce market volatility what the federal reserve has done since then with its margin setting authority can be seen from figure 1 which shows the time paths both of margins and one measure of market volatility from october 1934 to december 1987 margin requirements were set initially at 45 percent raised to 55 percent during the boomlet of 1936 and then cut back to a low of 40 percent after the sharp stockmarket break in the autumn of 1937 the requirement stayed at that level for the remainder of the 30 s and most of the war years but was stepped up sharply as the war drew to a close reaching 100 percent i e all cash no borrowing for most of 1946 changes were frequent over the next two and a half decades

costly monitoring financial intermediation and equilibrium credit rationing abstract this paper establishes a link between equilibrium credit rationing and financial intermediation in a model with asymmetrically informed lenders and borrowers costly monitoring and investment project indivisibilities intermediation is shown to dominate borrowing and lending between individuals and these financial intermediaries exhibit several of the important features of intermediaries as we know them equilibrium interest rates and the aggregate quantity of loans respond quite differently to changes in taste and technology parameters depending on whether or not there is rationing in equilibrium

stock volatility in the new millennium how wacky is nasdaq abstract the recent volatility of stock prices has caused many people to conclude that investors have become irrational in valuing at least some stocks this paper investigates the behavior of the volatility of stocks on the nasdaq which tend to be smaller companies with more growth options in relation to the more seasoned issues reflected in the standard poor s 500 portfolio it also analyzes the relation of the unusual nasdaq volatility to the hot ipo market in 1998 and 1999 the factor that seems to explain unusual volatility best is technology not firm size or the immaturity of the firm

a simple model of market liquidity abstract the literature on illiquid markets is relatively large although little theoretical work has been done in terms of endogenizing the liquidity problem this paper presents a simple model in which liquidity costs are entirely endogenous i e the traders can technically trade at zero costs but in equilibrium these are incurred the liquidity problem causes i the return on the asset to be greater ii the volume of trade to be less and iii the return on the asset to be more risky than it otherwise would have been all are characteristics associated with illiquid markets

securities transaction taxes an overview of costs benefits and unresolved questions many major developed countries including germany japan and the united kingdom have some form of tax on securities transactions the clinton administration recently considered imposing fees of from 14 on transactions in futures contracts past budgets have considered fees of from 6 to 15 proponents of a securities transaction tax in the u s argue that it would tap into a significant source of revenues and would in addition act to reduce excess volatility in securities markets by discouraging speculative and noise trading some have argued that it would also increase investors expected holding periods hence encourage corporate managers to build for the long term opponents argue that any benefits from such a tax would be overwhelmed by its costs they point out that a tax on transactions would increase the cost of capital reduce market liquidity and bring down security values furthermore as the tax would change the relative costs of holding and issuing different classes of securities it might be expected to change capital structures and investment portfolios too at its worst a securities transaction tax could drive trading in some securities to overseas markets not burdened by taxation the economic and societal distortions resulting from taxation and avoidance would likely be large

the nonequivalence between deficits and distortionary taxation abstract this paper examines how relaxing the assumption of lump sum taxation affects the ricardian equivalence theorem in a model with income taxation instead of lump sum taxation structural deficit finance causes keynesian like effects even though government bonds are not perceived as net wealth a temporary substitution of debt for taxation significantly increases consumption work and output initially the same effects as in the keynesian case where the implied future tax liability is not perceived but in contrast to the keynesian case investment also increases initially in the long run however deficit finance significantly reduces investment work output and consumption

assessing ricardian equivalence this paper reviews the literature on ricardian equivalence this hypothesis may be interpreted as a generalisation to the short and the long run of the theories which put no weight on the real effects of public policies on aggregate demand we argue that ricardian equivalence relies on both permanent income hypothesis and the fulfilment of the intertemporal government budget constraint the theoretical literature emphasises several reasons for departures from this hypothesis however the empirical literature is inconclusive when ricardian equivalence is tested in a life cycle framework the hypothesis is usually rejected while when the empirical analysis is based on optimising models it is usually accepted

bank credit commitments credit rationing and monetary policy when loan needs are uncertain and bankruptcy is costly contracts resembling bank credit commitments dominate ordinary debt contracts the fees charged on commitments reduce bankruptcy risk by smoothing out borrowers loan payments reduced bankruptcy risk entitles borrowers to larger loans thereby reducing the risk of quantity rationing even if commitments reduce rationing risk monetary policy is not necessarily weaker under commitment finance a rise in lenders cost of funds perhaps reflecting a monetary contraction can reduce the expected value of a project more under a commitment than under an ordinary debt contract copyright 1994 by ohio state university press

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

toward a theory of bank loan commitments abstract the characteristics of fixed and variable rate bank loan commitments are analyzed in a contingent claims framework and valuation expressions are derived for these commitments the valuation expressions are used to present estimates of the impact of interest rate uncertainty on the liability assumed by a bank issuing loan commitments finally a simple two period asymmetric information model is employed to explain the recent trend among bankers to substitute variable rate commitments for their fixed rate counterparts

the effect of taxation on human capital this study finds a significant negative effect of proportional income taxation on human capital of the few earlier studies to address this issue most suggested a negligible effect of taxation on investment in human capital this earlier conclusion is shown to be incorrect by using a model that is more general in several respects than the models used previously

balanced government budgets versus deficit finance in a growth economy this paper analyses the effects of balanced budgets and deficit finance policies on the resulting steady state capital stock in a simple neoclassical growth model it is shown that the steady state capital stock may be higher or lower if the government is required to balance its budget in each period than if it uses deficit finance depending on the level of the initial capital stock and the curvature of the utility function of the representative agent

empirical evidence of risk shifting in financially distressed firms this paper provides evidence of risk shifting behavior in the investment decisions of financially distressed firms using a real options framework i show that shareholders risk shifting incentives can reverse the expected negative relation between volatility and investment i test two hypotheses that are consistent with risk shifting behavior i volatility has a positive effect on distressed firms investment ii investments of distressed firms generate less value during times of high uncertainty empirical evidence using 40 years of data supports both hypotheses i further evaluate the effect of various firm characteristics on risk shifting and estimate the costs of the investment distortion

does futures trading increase stock market volatility 1988 does futures trading increase stock market volatility financial analysts journal vol 44 no 1 pp 63 69

loan commitments and monetary policy abstract in this paper we examine the impact of loan commitment agreements on the way in which monetary policy affects the economy we estimate a vector autoregressive var model and find evidence of a smaller impact of monetary policy on loans made under commitment agreements than on loans not made under commitment our conclusion is that loan commitments effectively protect borrowers from quantity credit rationing and thus force monetary policy to work mainly through interest rate channels

y2k options and the liquidity premium in treasury markets financial institutions around the world expected the millennium date change y2k to cause an aggregate liquidity shortage responding to the concern the federal reserve bank of new york auctioned y2k options to primary dealers the options gave the dealers the right to borrow from the fed at a predetermined interest rate using the implied volatilities of y2k options and the on off the run spread we demonstrate that the fed s action eased the fears of bond dealers contributing to a drop in the liquidity premium of treasury securities our analysis shows the link between the microstructure of government debt markets and the central bank s provision of liquidity we argue that y2k options and their effects on liquidity premium broadly conform to the economic theory on public provision of private liquidity

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

competition risk neutrality and loan commitments abstract we rationalize fixed rate loan commitments forward credit contracting with options in a competitive credit market with universal risk neutrality future interest rates are random but there are no transactions costs borrowers finance projects with bank loans and choose ex post unobservable actions that affect project payoffs credit contract design by the bank is the outcome of a non cooperative nash game between the bank and the borrower the initial formal analysis is basically in two steps first we show that the only spot credit market nash equilibria that exist are inefficient in the sense that they result in welfare losses for borrowers due to the bank s informational handicap second we show that loan commitments because of their ability to weaken the link between the offering bank s expected profit and the loan interest rate enable the complete elimination of informationally induced welfare losses and thus produce an outcome that strictly pareto dominates any spot market equilibrium perhaps our most surprising result is that if the borrower has some initial liquidity it is better for the borrower to use it now to pay a commitment fee and buy a loan commitment that entitles it to borrow in the future rather than save it for use as inside equity in conjunction with spot borrowing

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

distortionary taxation and labor supply this paper examines empirically the effects of distortionary taxation on labor supply using a general equilibrium framework the long term relations predicted by the model are derived and tested using data from canada united states germany and japan in all these countries labor tax changes are found to be persistent and to have played an important role in the observed downward trend in hours worked

tax changes and phase diagrams for an overlapping generations model the literature evaluating tax changes within an intertemporal general equilibrium framework subdivides into representative agent and overlapping generations formulations papers in the former class have developed techniques analogous to those routine for static analyses i show that the same general approach works for the overlapping generations model the context is the system from auerbach and kotlikoff s dynamic fiscal policy the proposed methodology allows one to examine stability and determinancy issues for the model it deals precisely with small policy changes and it can easily handle bundles of changes i present comparative static results for comparison with existing work

financial repression the new structuralists and stabilization policy in semi industrialized economies abstract this paper examines the short and long run effects of a variety of macroeconomic policies in a simple model where the curb market plays a pivotal role as the marginal supplier of loanable funds it is found that financial liberalization may fail in the short run and contrary to the claims of the new structuralists that the financial market repercussions of devaluation may be favorable in evaluating any policy the time horizon is critical short and long run multipliers may differ in sign in all cases save that of a contraction in the stock of bank credit

volatility in an era of reduced uncertainty lessons from pax britannica abstract although it has been well established that financial volatility is related to news and macroeconomic shocks less emphasis has been placed on the importance of underlying economic and political stability in this paper we study the behavior of consol returns since 1729 and identify a greater than 50 decline in volatility from the end of the napoleonic wars in 1815 until the first world war news events and macroeconomic variables cannot account for this extended period of reduced volatility underlying political stability under pax britannica seems to be a more likely explanation

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

margin requirements volatility and the transitory component of stock prices official margin requirements in the u s stock market were established in october 1934 to limit the amount of credit available for the purpose of buying stocks since then higher or rising margin requirements are associated with lower stock price volatility lower excess volatility and smaller deviations of stock prices from their fundamental values the results hold throughout the post 1934 period and are not very sensitive to the exclusion of the turbulent depression years from the sample thus margin requirements seem to be an effective policy tool in curbing destabilizing speculation jel 313 520 federal regulation of securities margins was mandated by congress in the securities exchange act of 1934 the stock market experience of the late 1920s led congress to the conclusion that credit financed speculation in the stock market might create excessive market volatility through a pyramidingdepyramiding process congress reasoned that the imposition of margin requirements could constrain the amount of borrowing and prevent excessive market volatility and subsequently gave the federal reserve jurisdiction over the level of margin requirements since 1934 the federal reserve

on financial innovations and credit market evolution abstract this paper examines the role of financial innovations in the economic development process it discusses the place of policy intervention in the financial development of developing countries and through a case study of an innovative bank illustrates the nature and characteristics of the financial innovations necessary for financing small enterprises and mobilizing resources from low and middle income groups such financial innovations are shown to reduce transaction costs and risk and as a result to bring about widening deeping and intergration of capital markets this process accelerates economic development through a favorable impact on savings investment and output

the relation between price changes and trading volume a survey this paper reviews previous and current research on the relation between price changes and trading volume in financial markets and makes four contributions first two empiri cal relations are established volume is positively related to the magnitude of the price change and in equity markets to the price change per se second previous theoretical research on the price volume relation is summarized and critiqued and major insights are emphasized third a simple model ofthe price volume relation is proposed that is consis tent with several seemingly unrelated or contradictory observations and fourth several directions for future research are identified

entrepreneurial activity risk and the business cycle abstract this paper analyzes a model in which the risk associated with entrepreneurial activity implies that the amount of such activity is procyclical and results in amplification and intertemporal propagation of productivity shocks in the model risk averse agents choose between a riskless project and a risky project with higher expected output the entrepreneurial activity agents who become entrepreneurs need to bear part of the project specific risk for incentive reasons more agents become entrepreneurs when productivity is high because agents are more willing to bear risk and need to bear less risk for incentive reasons furthermore cross sectional heterogeneity can be countercyclical

do loan commitments cause overlending i begin with a model that generates quantity credit rationing by banks in the spot credit market when the real interest rate is high and there is an economic downturn then i rationalize a bank loan commitment as partial insurance against such future rationing incorporating uncertainty about both the creditworthiness of borrowers and the abilities of banks to screen borrowers i extend the bank contracting literature wherein i examine banks decisions of whether to lend under the commitments sold earlier i show that this discretion of whether to honor borrowing requests under commitments generates reputational concerns on the part of banks and can lead to an equilibrium in which loan commitments serve their role in increasing credit supply relative to the spot credit market but produce the inefficiency of excessive credit supply when the real interest rate is low and the economy is doing well despite this welfare is higher with loan commitments than with spot credit numerous empirical predictions and policy implications are drawn out

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

investment opportunities and corporate demand for lines of credit abstract the behavior of a risk neutral corporation in selection of a line of credit is modeled in a new framework where demand for credit lines by a firm arises from the stochastic arrival in continuous time of short lived opportunities to capture investment projects the firm needs speed and secrecy to capture projects before competitors the firm chooses a credit line that balances its up front commitment cost against the expected extra cost of borrowing in the spot market upon exhaustion of its credit line the firm s demanded credit line depends upon both relative pricing within the contract and the nature of the firm s growth opportunities interestingly while credit line demand is positively related to business growth prospects it is potentially negatively related to uncertainty in those prospects

heterogeneous beliefs asset prices and volatility in a pure exchange economy abstract this paper extends the lucas 1978 asset prices in an exchange economy econometrica 46 1429 1445 model to a setting in which investors have heterogeneous beliefs about the structure of a dividend process by assuming that all investors have logarithmic preferences and different subjective discount rates we can obtain a closed form representation of the stock price this closed form solution enables us to analyze the dynamics of the stock price and its volatility the model can simultaneously generate several well known empirical facts excessive volatility leverage effects and positive relationships between price and trading volume and between volatility and volume all of these effects are driven by the different beliefs of investors

debt and distortionary taxation in a simple perfect foresight model abstract we examine the real effects of a temporary substitution of debt for distortionary income taxation we find that such a policy may reduce consumption increase investment and reduce interest rates these results arise even though we examine the same model used by barro where temporary substitution of debt for lump sum taxes was shown to have no real effects we show that these anti keynesian effects on consumption are as significant as various pro keynesian effects such as finite lives hence the impact of debt is an empirical issue and ricardian neutrality appears to be a reasonable benchmark

banking and insurance abstract this paper studies the economic role of financial institutions in economies where agents incomes are subject to privately observable idiosyncratic random events the information structure precludes conventional insurance arrangements however a financial institution perhaps best viewed as a savings bank can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes resulting in a level of expected utility higher than that achievable in simple security markets insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

uncertainty shocks and balance sheet recessions this paper investigates the origin and propagation of balance sheet recessions i first show that in standard models driven by tfp shocks the balance sheet channel disappears when agents can write contracts on the aggregate state of the economy optimal contracts sever the link between leverage and aggregate risk sharing eliminating the concentration of aggregate risk that drives balance sheet recessions i then show that uncertainty shocks can help explain this concentration of aggregate risk and drive balance sheet recessions even with contracts on aggregate shocks the mechanism is quantitatively important and i explore implications for financial regulation

loan commitments and optimal monetary policy this paper analyzes how increased reliance on floating rate loan commitments by firms affects the optimal interest rate conditioned monetary policy the analysis uses a stylized poole type is lm structure that explicitly integrates the interaction between credit and goods markets by endogenizing the choice between traditional loans and floating rate commitments the model can analyze interaction between central bank monetary policy decisions and the choice of loan contract types a key implication is that when this joint decision problem is taken into account the separation between the monetary and goods sectors assumed in the standard is lm paradigm breaks down copyright 1990 by ohio state university press

lapm a liquidity based asset pricing model the intertemporal capm predicts that an asset s price is equal to the expectation of the product of the asset s payoff and a representative consumer s intertemporal marginal rate of substitution this paper develops an alternative approach to asset pricing based on corporations desire to hoard liquidity our corporate finance approach suggests new determinants of asset prices such as the distribution of wealth within the corporate sector and between the corporate sector and the consumers also leverage ratios capital adequacy requirements and the composition of savings affect the corporate demand for liquid assets and thereby interest rates starting with the capital asset pricing model capm derived by sharpe 1964 lintner 1965 and mossin 1966 market finance has emphasized the role of consumers time preference and risk aversion in determining asset prices the intertemporal consumption based asset pricing model e g rubinstein 1976 lucas 1978 breeden 1979 harrison and kreps 1979 cox ingersoll and ross 1985 hansen and jagannathan 1991 predicts that an asset s current price is equal to the expectation conditioned on current information of the product of the asset s payoff and a representative consumer s intertemporal marginal rate of substitution imrs while fundamental this dominant paradigm for pricing assets has some wellrecognized shortcomings see below and there is clearly scope for alternative and complementary approaches this paper begins developing one such approach based on aggregate liquidity considerations 1 our starting point is that the productive and financial spheres of the economy have autonomous demands for financial assets and that their valuations for these assets are often disconnected from the representative consumer s corporate demand for financial assets is driven by the desire to hoard liquidity in order to fulfill future cash needs in contrast with the

animal spirits margin requirements and stock price volatility a simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices investors are assumed to exhibit heterogeneous preferences for risk bearing the distribution of which evolves stochastically across generations this framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility depending upon the microeconomic structure behind fluctuations in economy wide average risk bearing propensity the ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs beyond their prudential functions the effects of initial margin requirements on securities markets are not well understood many have argued based upon empirical findings that the level of margin requirements has no discernable impact on stock price behavior nevertheless the view that high margin requirements dampen speculative excesses and reduce excess price volatility remains popular the simultaneous existence of such views highlights the uncertainty surrounding this issue in fact there exists no rigorously articulated theory of the interaction between initial margin requirements and stock prices and their returns characteristics in this paper we construct a simple dynamic model useful for characterizing the effects of initial margin requirements on security prices and returns to analyze the impact of margins we introduce investor heterogeneity into an otherwise simplified overlapping generations olg economy 2 the olg models are constructed so that each generation displays heterogeneous preferences or beliefs the distribution of which evolves stochastically across generations in each of two heterogeneous taste models we consider there are two types of agents one of which is more risk tolerant than the other in one model the

information transmission between the nasdaq and asian second board markets abstract in the 1980s and early 1990s the nasdaq s success helped to prompt singapore sesdaq japan jasdaq taiwan taisdaq and south korea kosdaq to set up or formalize their own second board markets in 1999 malaysia mesdaq and hong kong gem followed suit given the growing importance of these second board markets we examine whether there is any evidence of spillovers from nasdaq returns and volatilities to asian second board market returns and volatilities after controlling for spillovers from the nyse and whether these cross country spillovers are strong relative to domestic spillovers from the corresponding main board markets we employ egarch models dynamic causality tests and var based forecast error decompositions using daily data of a recent sample period that includes the asian financial crisis of 1997 and continues until april 20 2001 there is strong evidence of lagged returns and volatility spillovers from the nasdaq market to the asian second board markets when we exclude contemporaneous main board market returns there is also strong evidence of contemporaneous and lagged returns and volatility spillovers from the local main board markets to the corresponding second board markets however even in the presence of contemporaneous main board market returns there are substantial spillovers from the lagged nasdaq returns and volatilities to asian second board market returns and volatilities these findings are not sensitive to whether we use us dollar based data or local currency based data given the difference in the trading hours between the nasdaq and asian stock markets we use available intra day return data and canadian return data the findings seem quite robust there is substantial information spillover from the nasdaq to the asian and canadian second board markets these findings indicate the existence of a substantial cross country industry effect or meteor shower effect as well as a domestic market effect or heat wave effect and imply that both country diversification and industry diversification are important

smoothing with liquid and illiquid assets abstract a quantitative examination of the demand for liquid assets arising from consumption smoothing motives reveals that such demand is very low consumers faced with income streams calibrated to match income and unemployment data and returns and transactions costs calibrated to match us treasury bill data almost exclusively buy and hold illiquid long term assets even though the return premium on long term assets is quite small this is because with standard preferences savings are highly persistent even when risky income is not in the calibrated model the first order autocorrelation of savings is an order of magnitude larger than that of income

economies of scale for various types of manufacturing production technologies in an underdeveloped economy manufacturing sector 2 all these studies suffer from at least three weaknesses first almost all of them have used either the cobbdouglas or the constant elasticity of substitution ces production functions which are highly restrictive second many have used time series analysis without proper attention to time lags and the problems of multicollinearity also they have neglected to separate fully the effects of technological changes on cost from those of the economies of scale third they have invariably assumed labor and capital to be the main factors of production raw materials inputs which are a considerable element of the total cost of production and could therefore cause significant changes in the estimated elasticities of substitution and consequently in the estimates of returns to scale have been ignored altogether 3 the purpose of this paper is to overcome all these weaknesses by using a flexible functional form and simultaneously to estimate returns to scale and elasticities of substitution specifically we use the transcendental logarithmic cost function introduced by christensen jorgenson and lau4 to estimate the measured characteristics of technology for india s manufacturing industries for purposes of comparison we also focus on various specifications of the production technology we describe all functions in terms of a translog specification and distinguish other technologies with appropriate parametric restrictions