futures pricing in electricity markets based on stable carma spot models we present a new model for the electricity spot price dynamics which is able to capture seasonality low frequency dynamics and the extreme spikes in the market instead of the usual purely deterministic trend we introduce a non stationary independent increments process for the low frequency dynamics and model the large uctuations by a non gaussian stable carma process the model allows for analytic futures prices and we apply these to model and estimate the whole market consistently besides standard parameter estimation an estimation procedure is suggested where we t the non stationary trend using futures data with long time until delivery and a robust l 1 lter to nd the states of the carma process the procedure also involves the empirical and theoretical risk premiums which as a by product are also estimated we apply this procedure to data from the german electricity exchange eex where we split the empirical analysis into base load and peak load prices we nd an overall negative risk premium for the base load futures contracts except for contracts close to delivery where a small positive risk premium is detected the peak load contracts on the other hand show a clear positive risk premium when they are close to delivery while the contracts in the longer end also have a negative premium ams 2000 subject classications primary 60g52 62m10 91b84 secondary 60g10 60g51 91b70

self fulfilling fire sales fragility of collateralised short term debt markets this paper shows that collateralised short term debt although privately optimal for reducing borrowers moral hazard can cause fragility multiple equilibria when the collateral market is illiquid a new form of coordination failure between borrowers ex ante margin and risk taking decisions engenders a systemic run in the collateralised debt market large changes in credit rationing margins repo spreads etc the model also captures the large small crosssectional differences between safe and risky collateral in bad good times finally i show that asset price guarantees could improve welfare and promote stability but repealing repo contracts automatic stay exemption might do the opposite

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

a model of the evolution of duopoly does the asymmetry between firms tend to increase or decrease this paper is an attempt to identify some of the factors that affect the evolution of market structure in a model of dynamic competition between two firms the stochastic evolution of the state of competition depends on the respective effort rates of the firms the question is whether the current leader works harder than the laggard does the gap between firms tend to increase or decrease we show that several effects are at work the state tends to evolve in the direction where joint payoffs are greater since joint payoffs are related to joint product market profits less joint effort costs there are two classes of effect the joint profit effect and various joint cost effects the latter result in part from the pattern of profits and in part from endpoint effects that give relief from efforts asymptotic expansions illuminate these influences moreover we show by numerical simulation that there is another kind of joint cost effect the pattern of joint effort costs can influence the pattern of evolution of market structure and the evolution of the pattern of market structure can influence the pattern of efforts in a mutually self reinforcing manner in particular there may be equilibria in which this last effect means that the laggard works harder than the leader even though all the other effects work in favour of the leader

variations in market liquidity and the intraday interest rate most central banks offer banks participating in large value real time gross settlement rtgs systems a free intraday overdraft facility to discourage banks from actively managing their daylight liquidity in this paper we ask whether this facility has kept the intraday interest rate at zero using a unique transaction level data set on collateralized interbank loans for 2006 12 we find that during periods of financial distress rates for morning transactions are higher than those in the afternoon moreover this intraday rate correlates with market liquidity suggesting that rates contain a liquidity premium this intraday pattern is reduced but not eliminated by the eurosystem s accommodative liquidity provision

a perpetual race to stay ahead this paper presents a model of dynamic competition between two firms that repeatedly engage in an innovative activity the state of competition measured by the difference between the number of innovations introduced by the firms evolves stochastically according to their effort level the structure of markov perfect equilibria is identified it is generally not true that competition is fiercest when firms are closest rather firms invest under two distinct circumstances while sufficiently ahead to outstrip their rival and secure a durable leadership while behind to regain leadership and prevent the situation from worsening to the point where their rival outstrips them industry such a market structure cannot be adequately modelled by a repeated game since history obviously affects market opportunities more precisely previous outcomes determine the range of available actions and pay offs economists have thus resorted to the study of races to gain insights into the strategic issues raised by such competition with the notable exceptions of aoki 1991 harris 1991 and budd harris and vickers 1993 most of the literature has analysed formal races displaying exogenous finishing lines or deadlines as well as final prizes and rewards and the corresponding results rely on backward induction however such assumptions do not seem to capture accurately the essential features of many markets often the rivalry only ends if at all when one of the competitors withdraws so that the deadline should be endogenized moreover benefits and losses are continuously collected additionally the emerging empirical literature on races stresses the inadequacy of standard models and the need to model r d as a race with multiple prizes in the words of cockburn and henderson 1994 our finding that the modern game theoretic literature is of only limited usefulness as an empirical guide points to the need to model r d as a race with multiple prizes the model analysed in this paper is an attempt to offer an adequate framework for this type of dynamic competition the stochastic evolution of the state of competition between two firms depends on their respective effort levels the state of competition is measured by the

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

credit frictions and participation in over the counter markets abstract this paper formalizes a nash bargaining game between two players constrained by capacity decisions made prior to entering the negotiation in equilibrium strategic interactions drive capacity choices to zero and shut trade down despite the existence of gains from trade the game is embedded in a general equilibrium model of decentralized asset trade with credit frictions to investigate the interaction between availability of credit and investors participation modeled through their choices of inventory and payment capacity partial access to credit is sufficient to restore trade the strategic interactions between payment capacity and inventory generate endogenous heterogeneity in holdings trade sizes and prices and complementarity between money and credit

short term variations and long term dynamics in commodity prices in this article we develop a two factor model of commodity prices that allows meanreversion in short term prices and uncertainty in the equilibrium level to which prices revert although these two factors are not directly observable they may be estimated from spot and futures prices intuitively movements in prices for long maturity futures contracts provide information about the equilibrium price level and differences between the prices for the short and long term contracts provide information about short term variations in prices we show that although this model does not explicitly consider changes in convenience yields over time this short term long term model is equivalent to the stochastic convenience yield model developed in gibson and schwartz 1990 we estimate the parameters of the model using prices for oil futures contracts and apply the model to some hypothetical oil linked assets to demonstrate its use and some of its advantages over the gibson schwartz model

the information sensitivity of debt in good and bad times abstract we empirically show the dynamics of information production and information sensitivity of bank debt around the great recession as more precise information is produced at the onset of the crisis bank debt becomes informationally sensitive along two separate dimensions first precise information amplifies the effect of market expectations on default risk second for banks that are already expected to perform poorly more precise information further increases default risk both effects are muted in good times overall our findings are consistent with information based models of financial crises

go for broke or play it safe dynamic competition with choice of variance we consider a differential game in which the joint choices of the two players influence the variance but not the mean of the one dimensional state variable we show that a pure strategy perfect equilibrium in stationary markov strategies me exists and has the property that patient players choose to play it safe when sufficiently ahead and to take risks when sufficiently behind we also provide a simple condition that implies both players choose risky strategies when neither one is too far ahead a situation that ensures a dominant player emerges quickly

competition and growth with step by step innovation an example this paper develops a simple example to analyse the relationship between product market competition and growth in a model with step by step innovations where laggards can never leapfrog the current industry leaders but instead must first catch up with the leaders before battling for technological leadership in the future unlike in existing schumpeterian models of growth more intense product market competition and or imitations may be growth enhancing

dropout behavior in r d races with learning we examine a game theoretic model of a two firm r d race in which expenditures on r d and the concomitant increase in experience learning enable thefirms to increase their probability of discovering an invention the learning process is stochastic it generates a unique subgame perfect equilibrium for identicalfirms with the characteristic that the leader never drops out but the follower drops out if the leader gains a significant lead the leader can find it optimal to drop out if the firms value the invention differently or have different r d efficiencies thus our analysis generates results between vigorous competition and natural monopoly central to schumpeter s 1934 vision of entrepreneurship are the extraordinary profits associated with innovation the lure of these profits fuels the fires of creative destruction as innovators replace declining firms this article analyzes the competition for the profits obtained by bringing an innovation to fruition and receiving the associated patent we restrict attention to the subclass of innovations known as inventions innovations that are the product of a firm s research and development in particular we are concerned with the conditions that cause a firm after having invested in r d to drop out of the competitive race situations in which the leading firm drops out are of even greater interest competition in r d is often modelled as a race in which the winner receives a patent and reaps most or all of the benefits of the invention as exemplified by kamien and schwartz 1972 the early theoretical literature tended to be based on decision theoretic models the firm seeks an optimal rate of expenditure on r d determined in part by the expected value of the invention the extent of the first mover advantage the economies or diseconomies of scale in r d and the perceived intensity of rivalry it is not anticipated that the firm s decisions will affect the r d efforts of the perhaps unknown rivals kamien and schwartz 1982 p 124 show that the firm does no research if rivalry is sufficiently intense because their model is static however it is never the case that a firm enters the race and then drops out

tirole s industrial regulation and organization legacy in economics jean tirole was awarded the 2014 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of market power and regulation this paper provides an overview of some of that work and of his related contributions to game theory

a dynamic model of competitive entry response i develop a dynamic investment game with a memoryless research and development process in which an incumbent and an entrant can invest in a new technology and the entrant can also invest in the old technology i show that an increase in the probability of successfully implementing a technology can cause the incumbent to reduce its investment under certain conditions if the success probability is high the incumbent allows the entrant to win the new technology so that firms reach an equilibrium in which they use different technologies and threats of retaliation prevent attacks but if the success probability is low such an equilibrium cannot be sustained and both firms eventually implement both technologies

repo runs evidence from the tri party repo market the repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis based in part on findings that margins increased sharply in a segment of this market this paper provides evidence suggesting that there was no system wide run on repo using confidential data on tri party repo a major segment of this market we show that the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis however we also document a sharp decline in the tri party repo funding of lehman in september 2008

competition imitation and growth with step by step innovation is more intense product market competition and imitation good or bad for growth this question is addressed in the context of an endogenous growth model with step by step innovations in which technological laggards must first catch up with the leading edge technology before battling for technological leadership in the future in contrast to earlier schumpeterian models in which innovations are always made by outsider firms who earn no rents if they fail to innovate and become monopolies if they do innovate here we find first that the usual schumpeterian effect of more intense product market competition pmc is almost always outweighed by the increased incentive for firms to innovate in order to escape competition so that pmc has a positive effect on growth second that a little imitation is almost always growth enhancing as it promotes more frequent neck and neck competition but too much imitation is unambiguously growth reducing the model thus points to complementary roles for competition anti trust policy and patent policy

re use of collateral in the repo market this paper introduces a methodology to estimate the re use of collateral based on actual transaction data with a comprehensive data set from the swiss franc repo market we are able to provide the first systematic study on the re use of collateral we find that re using collateral was most popular prior to the financial crisis when roughly 10 of the outstanding interbank volume was secured with re used collateral furthermore we show that the re use of collateral increases with the scarcity of collateral by giving an estimate of the collateral re use and explaining its drivers the paper contributes to the on going debate on collateral availability

persistence of technological leadership emerging technologies and incremental innovation in a model of competitive innovation i derive theoretical conditions for an entrant to displace the incumbent firm by innovating in an undeveloped substitute emerging technology the main result presents conditions on profitability and innovation speed that yield a markov perfect equilibrium in which the entrant pursues the emerging technology while the incumbent chooses to persist with the established technology and collect short run profits notably this result does not require the entrant s superiority to the incumbent for innovation finally when the model is calibrated to hard drive industry data its predictions are consistent with the observed outcomes

dynamic competition in technological investments an empirical examination of the lcd panel industry abstract when are technological laggards more likely to try to catch up with leaders we offer empirical evidence on firm level data of plant investments in the tft lcd panel industry where technological competition has been intense and dynamic we find that the followers level of technology has a non monotonic effect on technology improving investments with intermediate followers the most apt to invest in catch ups this result is a puzzle given the existing theory on technology race we also find that followers catch up investments increase with the capacity of the leader that employs the state of the art technology these results are robust to variations in specification and alternative accounts of effects we discuss our findings and contributions in light of the technology race literature

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

the macroeconomics of shadow banking we propose a dynamic macroeconomic model of nancial intermediation in an environment where households demand liquid assets in contrast to the literature intermediaries can issue equity without any friction in normal times intermediaries maximize liquidity creation by levering up the collateral value of their assets a process we call shadow banking a rise in uncertainty causes investors to demand liquidity in bad states intermediaries respond by simultaneously deleveraging and substituting toward safe liabilities shadow banking eectively shuts down prices fall and investment plummets the model generates amplication via endogenous collateral runs as well as ight to quality eects the model s macroeconomic eects are consistent with a slow economic recovery even when and especially when intermediary capital is high we analyze the impact of several policy interventions in the areas of unconventional monetary policy and regulatory reform

systemic risk in clearing houses evidence from the european repo market abstract we study how crises affect central clearing counterparties ccps we focus on a large and safe segment of the ccp cleared repo market during the eurozone sovereign debt crisis we develop a simple model to infer ccp stress which is measured as repo rates sensitivity to sovereign credit default swaps cds spreads and jointly captures 1 the effectiveness of haircut policies 2 ccp member default risk conditional on sovereign default and 3 ccp default risk conditional on both sovereign and ccp member default during 2011 repo rates strongly respond to sovereign risk particularly for greece italy ireland portugal and spain giips repo investors behaved as if the conditional probability of ccp default was substantial

dynamic r d competition the authors study a simple two stage stochastic patent race involving two firms they examine the behavior of the participants as they gain the lead or fall behind in the race the authors find that the leader engages in rd 2 a policy of issuing patents for intermediate research results and 3 the effects of research joint ventures whereby the firms coordinate their initial research efforts and share their results copyright 1987 by royal economic society

the great industry gamble market structure dynamics as a survival contest industry dynamics are studied as an endogenous tournament with infinite horizon and stochastic entry in each period firms investments determine their probability of surviving into the next period this generates a survival contest which fuels market structure dynamics while the evolution of market structure constantly redefines the contest more concentrated markets endogenously generate less profit rivals that are more difficult to outlive and more entry the unique steady state distribution exhibits ongoing turbulence correlated exit and entry rates and shakeouts the model s predictions fit empirical findings in markets where firms trade off profits for smaller risk of failure e g banking

resaleable debt and systemic risk many debt claims such as bonds are resaleable whereas others such as repos are not there was a fivefold increase in repo borrowing before the 2008 crisis why did banks dependence on non resaleable debt precipitate the crisis in this paper we develop a model of bank lending with credit frictions the key feature of the model is that debt claims are heterogeneous in their resaleability we find that decreasing credit market frictions leads to an increase in borrowing via non resaleable debt borrowing via non resaleable debt has a dark side it causes credit chains to form since if a bank makes a loan via non resaleable debt and needs liquidity it cannot sell the loan but must borrow via a new contract these credit chains are a source of systemic risk since one bank s default harms not only its creditors but also its creditors creditors overall our model suggests that reducing credit market frictions may have an adverse effect on the financial system and may even lead to the failures of financial institutions

rollover risk as market discipline a two sided inefficiency abstract why does the market discipline that financial intermediaries face seem too weak during booms and too strong during crises this paper shows in a general equilibrium setting that rollover risk as a disciplining device is effective only if all intermediaries face purely idiosyncratic risk however if assets are correlated a two sided inefficiency arises good aggregate states have intermediaries taking excessive risks while bad aggregate states suffer from costly fire sales the driving force behind this inefficiency is an amplifying feedback loop between asset values and market discipline in equilibrium financial intermediaries inefficiently amplify both positive and negative aggregate shocks

interbank loans collateral and modern monetary policy this study develops a novel agent based model of the interbank market with endogenous credit risk formation mechanisms we allow banks to exchange funds through unsecured and secured transactions which facilitates the flow of funds to the most profitable investment projects risk premiums result from banks forecasting rules and depend on past performance of the benchmark risk factors and interest rates our model confirms basic stylized facts of the interbank interest rates and volumes we also find that network structures within the secured market segment are characterized by the presence of dealer banks while we do not observe similar patterns in the unsecured market we perturb the model with exogenous shocks and policy scenarios which correspond to unconventional monetary policies