rational mean variance decisions for subsistence farmers this paper explores the issue of approximating expected utility in applying portfolio theory it has been demonstrated that expected utility is very closely approximated by an appropriate quadratic function recent studies have again questioned the empirical validity of mean variance analysis these efforts disregard the importance of the differences among various approximations and historically have focused on domestic financial securities we re examine the problem in the context of determining risk efficient portfolios of production activities for subsistence farmers the risks faced by these farmers are large and probably actuarially nonneutral thus recommendations based on an inappropriate quadratic approximation could result in substantial losses in welfare

contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

a general mean variance approximation to expected utility for short holding periods the mean variance model is precisely consistent with the expected utility hypothesis only in the special cases of normally distributed security returns or quadratic utility functions there is little evidence however that security returns follow normal distributions see 13 for references and quadratic preferences can be shown to generate implausible results exhibiting increasing absolute risk aversion in the pratt ll arrow 1 2 sense and displaying negative marginal utility after some finite wealth level in addition hakansson 4 has shown that single period mean variance efficient portfolios can have disastrous consequences over time even when return distributions are stationary such criticisms of the mean variance approach within the von neumann morgenstern framework have prompted several writers to suggest that investors maximize the expected value of utility functions with more realistic properties while others have criticized the single period focus of the model one popular alternative utility function is the logarithmic function which exhibits decreasing absolute risk aversion and conveniently leads to myopic decision processes through time i e investors treat each period as if it were the last basing investment decisions on that period s wealth and return distributions only 8 4 other utility functions with constant relative risk aversion such as the power function also imply myopic decision rules within a multiperiod setting

econometric developments in agricultural and resource economics the first 100 years this article reviews the major contributions of agricultural and resource economists in the area of econometrics over the past 100 years early on a number of agricultural economists were in on the ground floor in terms of developing new econometric methods over time as the economics profession became more empirically oriented agricultural and resource economists increasingly assumed the role of early adopters of new econometric methods even so agricultural and resource economists continue to make useful modifications to econometric techniques in order to adapt the methods to the unique nature of the problems and applications that we study

interbank networks in prewar japan structure and implications forthcoming as interbank networks in prewar japan structure and implications with michiru sawada industrial and corporate change 2011

the implications of financial cooperation in israel s semi cooperative villages abstract financial cooperation through credit sharing and co signing of debts was a source of strength for israel s semi cooperative moshavim in the early decades of their development but such cooperation entails a potential free rider problem when farmers borrowings are uncoordinated and recent events in israel have demonstrated the severe implications it can have this paper presents a theoretical analysis of the externalities generated by financial cooperation and tests its conclusions empirically using israeli data simulation results indicate that the potential instability of financial cooperation is aggrevated when the moshav population is heterogeneous

unobservable shocks as carriers of contagion we propose an identified structural garch model to disentangle the dynamics of financial market crises we distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non crisis markets and the contagion imported to a tranquil domestic market from foreign crises the model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses to illustrate we apply the method to data from the 1997 1998 asian financial crisis which consists of a complicated set of interacting crises we find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken impulse response functions for an equally weighted equity portfolio show the increasing dominance of korean and hong kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects

the theoretical effects of farm policies on optimal leverage and the probability of equity losses the degree to which the use of debt is increased in response to risk reducing and income augmenting farm policies is studied theoretically a mean variance model is used to determine the optimal leverage adjustment then the effects of policies on the cumulative probability of earning very low rates of return on equity are examined the evidence suggests that farm policies induce a large enough increase in financial leverage to increase the probability of farmers having negative returns to equity

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

a critical review of contagion risk in banking the recent financial crisis has focused the attention of scholars and policymakers on how to improve financial stability through better macro prudential regulation and supervision in this paper we compare the existing theoretical and empirical literature on contagion through the banking system it is argued that the structure of the interbank market the size of banks the linkages among them the level of correlation of their investments and the transparency of the regulator are key factors in determining the possibility of contagion we discuss the different findings and present avenues for future research

land allocation under uncertainty for alternative specifications of return distributions reply the relevance and usefulness of mean variance portfolio analysis is not a point we wish to question for roughly thirty years this analysis has been a cornerstone of financial and production analysis under risk our goal is to delimit circumstances in which it can be straightforwardly applied and those where some modification may be necessary before addressing tew and reid tr regarding the empirical illustration in collender and zilberman cz we review the cz contribution cz is concerned with resource allocation under uncertainty in the context of nonnormal returns much empirical evidence is available to suggest that agricultural decision makers frequently make decisions under such circumstances literature supporting this view is cited in cz since cz was published buccola has concluded that the chance of encountering approximately gaussian returns in reasonable agricultural situations is small having established the relevance of the problem our contributions a e twofold first we develop a decision making technique that does not impose counterfactual assumptions second we develop a test for the statistical significance of losses in expected utility resulting from the counterfactual imposition of the mean variance framework the first contribution is accomplished through the development of the eumgf approach the approach facilitates decision making consistent with expected utility maximization without imposing normality of returns the relaxation of this assumption is consistent with empirical evidence the second contribution is accomplished by developing a test statistic for differences in expected utility cz and the subsequent article by collender and chalfant illustrate that one can use the eumgf approach to determine if departures from normality are relevant in the decision making process given the risk preferences of the decision maker cz do not contend that departures from normality are always important just that they may be this is more likely true as partial risk aversion increases and or distributions depart further from normality

financial contagion and depositor monitoring this paper analyzes market discipline in a many bank economy where contagion and bank runs interact we present a model with differently informed depositors where those depositors that are more informed have incentives to monitor banks investments it is shown that when banks are undercapitalized and the probability of success of the risky asset is low depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment the results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline

solving consumption and portfolio choice problems the state variable decomposition method we develop a new solution method for a broad class of discrete time dynamic portfolio choice problems the method efficiently approximates conditional expectations of the value function by using i a decomposition of the state variables into a component observable by the investor and a stochastic deviation and ii a taylor expansion of the value function we illustrate the accuracy of the method in handling several realistic features of portfolio choice problems such as intermediate consumption multiple assets multiple state variables portfolio constraints non time separable preferences and nonredundantendogenous state variables we finally use the method to solve a realistic large scale life cycle portfolio choice and consumption problem with predictable expected returns and recursive preferences jel g11 g12

the rationale of the mean standard deviation analysis skewness preference and the demand for money publisher summary this chapter discusses the rationale of the mean standard deviation analysis skewness preference and the demand for money in january 1969 issue of the review of economic studies karl borch and martin feldstein separately criticized the widely used mean variance analysis of portfolio selection borch contended that any system of upward sloping mean standard deviation e s indifference curves can be shown to be inconsistent with the basic axiom of choice under uncertainty he pointed out that one can always pick any two points on an upward sloping indifference curve to represent two bernoulli distributions with probability 1 p of gaining the same amount x in both the cases and probability p of gaining y1 in the case of one distribution and y2 in the case of the second distribution with y2 y1 if the second distribution represents the point to the northeast of the other point then by the dominance axiom the second distribution must be preferred to the first which contradicts the basic meaning of indifference curves feldstein by using a log utility function and a lognormal distribution for investment outcome showed that e s indifference curves for a risk averter need not be convex downwards though upward sloping they would change from convex to concave once the standard deviation of the outcome exceeds the mean multiplied by on the face of it this seems to suggest that risk aversion might decrease as risk is increased beyond a certain extent

normality solvency and portfolio choice this paper examines whether investors with power utility functions choose mean vari ance mv efficient portfolios when returns are approximately normally distributed and there is borrowing or lending at a riskless interest rate the results show that the unlevered portfolios of power utility investors plot very closely to the mv efficient frontier how ever there are marked differences in the mix of risky assets regardless of whether the portfolios are highly concentrated or widely diversified such differences allow power investors to remain solvent even when they lever their optimal portfolios to a greater ex tent than less risk averse mv investors who risk bankruptcy it is concluded that the investment policies of power utility and mv investors with similar risk aversion measures are not as similar as is commonly believed this is particularly true for high power inves tors unless explicit solvency constraints are imposed on the mv problem and for low power investors when quadratic utility approximations are made to the power utility func tions these differences in the investment policies of power utility and mv investors lead us to question the widely accepted assertion that the assumptions of homogeneous beliefs normality a riskless asset and risk averse investors imply the simple mv capm where all investors including power utility investors hold combinations ofthe market portfolio and the riskless asset

information acquisition and financial contagion abstract this paper incorporates costly voluntary acquisition of information a la nikitin and smith 2007 nikitin m smith r t 2007 information acquisition coordination and fundamentals in a financial crisis journal of banking and finance in press doi 10 1016 j jbankfin 2007 04 031 in a framework similar to allen and gale 2000 allen f gale d 2000 financial contagion journal of political economy 108 1 33 without relying on any unexpected shock to model contagion in this framework contagion and financial crises are the result of information gathering by depositors weak fundamentals and an incomplete market structure of banks it also shows how financial systems entering a recession can affect others with apparently stronger economic conditions contagion finally this is the first paper to investigate the effectiveness of the contingent credit line procedures introduced by the imf at the end of the nineties as a mechanism to prevent the propagation of crises

contagion and risk sharing on the inter bank market abstract increasing inter bank lending has an ambiguous impact on financial stability using a computational model with endogenous bank behavior and interest rates we identify the conditions under which inter bank lending promotes stability through risk sharing or provides a channel through which failures may spread in response to large economy wide shocks more inter bank lending relationships worsen systemic events for smaller shocks the opposite effect is observed as such no inter bank market structure maximizes stability under all conditions in contrast deposit insurance costs are always reduced under greater numbers of inter bank lending relationships a range of regulations are considered to increase system stability

introducing new futures contracts reinforcement versus cannibalism abstract in order to assure survival futures exchanges around the world are in constant search of new futures contracts that will generate a profitable level of trading volume introducing new futures contracts may increase or decrease the volume for those contracts already listed using a multi product hedging model in which the perspective has been shifted from portfolio to exchange management we study these effects using data from two exchanges that differ regarding assets traded and market liquidity amsterdam exchanges versus chicago board of trade we show the usefulness of the proposed method the method may also be used to evaluate the benefits for exchanges that plan to internationalize their activities by merging with another exchange or by cross listing other exchanges futures contracts

the pecking order of segmentation and liquidity injection policies in a model of contagious crises we study a two country setting in which leveraged investors generate fire sale externalities leading to financial crises and contagion governments can affect the incidence of financial crisis and the degree of contagion by injecting public liquidity and additionally by segmenting the countries liquidity markets we show that segmentation allows a country to avoid contagion and fend off mild financial crises caused by a small shock to its liquidity demand at the cost of exposing it to more severe financial crises caused by a large shock we derive a pecking order result whereby segmentation is a second best measure that coordinated governments should use only when tax capacity constrains them from injecting liquidity even when segmentation is welfare enhancing it should be applied to public liquidity alone never restricting the free flow of private liquidity across countries uncoordinated governments tend to use segmentation excessively

on the contagion effect in the us banking sector by using the spatial econometrics methodology this paper investigates the contagion of the risk taking by banks in the us banking sector during 2001 to 2012 in addition the contagion signals up to the subprime crisis in 2008 are analyzed and different channels of contagion are studied in order to identify fragile groups of banks our analysis reveals that there is no significant contagion transmitted to the whole banking system however we observe that the bank contagion is significantly spread locally and for the group of banks that share similar characteristics related to size and bank regulations

heterogeneity and distributional form of farm level yields representing farm level crop yield heterogeneity and distributional form is critical for risk and crop insuranceresearch moststudieshaveusedcountydata understatingbothsystematicandrandomvariation comparison of systematic versus random intra county variation is lacking few studies compare the various distributional forms that have been proposed this study utilizes the extensive potential of government farm level crop insurance data results show that systematic intra county variation is surprisingly strong a newly applied reverse lognormal distribution is preferred when county wide variation is removed but the normal distribution fits surprisingly well in the crop insurance relevant percentiles when county wide variation is not removed representing and accounting for both spatial and temporal heterogeneity is a major problem in agricultural economics and policy analysis due to the fact that most data are aggregated to at least the county level e g gardner and kramer 1986 just and pope 1999 both systematic and random components of crop yields are major factors in intra county farm level heterogeneity that are critical for modeling risk producer behavior and crop insurance participation most studies have either used aggregate at least county level data or relied on relatively few farm level observations the former makes results primarily illustrative while the latter limits statistical significance this article characterizes intra county crop yield heterogeneity both spatially and temporally with the most extensive dataset utilized to date and evaluates a broader set of parametric distributional possibilities than previously

on the sensitivity of mean variance efficient portfolios to changes in asset means some analytical and computational results tbis paper investigates the sensitivity of meanvariance mv efficientportfolios to changes in the means of individual assets when only a budget constraint is imposed on the investment problem the analytical results indicate that an mv efficient portfolio s weights mean and variance can be extremely sensitive to cbanges in asset means when nonnegativity constraints are also imposed on the problem the computational results confirm that a positively weigbted mv efficient portfolio s weigbts are extremely sensitive to cbanges in asset means but the portfolio s returns are not a surprisingly small increase in the mean of just one asset drives balf the securities from the portfolio yet the portfolio s expected return and standard deviation are virtually uncbanged this paper supersedes should investors hold well diversified portfolios financial support from the natural science and engineering research council of canada is gratefully acknowledged we also acknowledge the most capable assistance of ruth cornale simon ng jean marc potier and frederick shen the paper was presented at simon fraser university and the western finance association meetings in san diego we thank the participants especially stephen brown john herzog john heaney ray koopman and bruce lehmann and the editors jon ingersoll and chester spatt for

are crop yields normally distributed the evidence for nonnormality of crop yields is reassessed three methodological problems are identified in typical yield distribution analyses i misspecification of the nonrandom components of yield distributions ii missreporting of statistical significance and iii use of aggregate timeseries ats data to represent farm level yield distributions one or more of these problems infect virtually all evidence against normality to date the positive contribution of the article is a set of principles that must be followed in any valid investigation of yield normality

sufficient conditions for expected utility to imply mean standard deviation rankings empirical evidence concerning the location and scale condition this paper presents and implements a procedure which examines for empirical support for the location and scale condition the kolmogorov smirnov multisample test is used to determine if the distribution functions describing the nonsystematic risk component of rate of return for portfolios of common stock are equal to one another except for location and scale implications concerning the relationship between mean variance and expected utility efficient sets are noted copyright 1992 by royal economic society

the effect of changing expectations upon stock returns the relationship between heterogeneous expectations on the part of investors with respect to a security s future return and asset prices is an area of increasing interest in finance theoretical examples include miller 14 williams 23 and jarrow 8 empirical examples include bart and masse 1 and peterson and peterson 18 miller bart and masse and peterson and peterson address issues related to whether an increase in divergence of opinion will lead to an increase in an asset s price unfortunately little is known of how different types of changes in investors probability distributions of returns influence asset returns an even more basic problem is that it is not clear what is meant in terms of investor probability distributions when it is said that divergence of opinion increases or decreases the answer to this problem has important implications for understanding equilibrium price

single period mean variance analysis in a changing world corrected ideally financial analysts would like to be able to optimize a consumption investment game with many securities many time periods transaction costs and changing probability distributions we cannot for a small optimizable version of such a game we consider in this article how much would be lost by following one or another heuristic that could be easily scaled to handle large games for the games considered a particular mean variance heuristic does almost as well as the optimum strategy

stochastic dominance vs mean variance portfolio analysis an empirical evaluation most of the work in portfolio theory in the past decade has been based on the principle of utility maximization where either the investor s utility function is assumed to be a second degree polynomial with a positive first derivative and a negative second derivative or the probability functions are assumed to be normal if at least one of these conditions holds it can be shown that choosing among risky assets on the basis of their mean and variance only is consistent with the von neumann morgenstern utility maximization model thus given the above assumptions the incorporation of higher moments of a distribution and the adoption of alternative approaches to portfolio selection have largely been ignored in favor of the more familiar mean variance approaches

wright meets markowitz how standard portfolio theory changes when assets are technologies following experience curves abstract we consider how to optimally allocate investments in a portfolio of competing technologies using the standard mean variance framework of portfolio theory we assume that technologies follow the empirically observed relationship known as wright s law also called a learning curve or experience curve which postulates that costs drop as cumulative production increases this introduces a positive feedback between cost and investment that complicates the portfolio problem leading to multiple local optima and causing a trade off between concentrating investments in one project to spur rapid progress vs diversifying over many projects to hedge against failure we study the two technology case and characterize the optimal diversification in terms of progress rates variability initial costs initial experience risk aversion discount rate and total demand the efficient frontier framework is used to visualize technology portfolios and show how feedback results in nonlinear distortions of the feasible set for the two period case in which learning and uncertainty interact with discounting we compare different scenarios and find that the discount rate plays a critical role

crop insurance valuation under alternative yield distributions considerable disagreement exists about the most appropriate characterization of farm level yield distributions yet the economic importance of alternative yield distribution specifications on crop insurance valuation has not been well documented the results of this study demonstrate that large differences in expected payouts from popular crop insurance products can arise solely from the parameterization chosen to represent yield distributions the results suggest that the frequently unexamined yield distribution specification may lead to economically significant errors in crop insurance policy rating and assessment of expected payouts from policies

conservation payments under risk a stochastic dominance approach conservation payments can be used to preserve forest and agroforest systems to explain landowners land use decisions and determine appropriate conservation payments it is necessary to focus on revenue risk marginal conditional stochastic dominance rules are used to derive conditions for determining the conservation payments required to guarantee that the environmentally preferred land use dominates an empirical application to shaded coffee protection in the biologically important choco region of west ecuador shows that conservation payments required for preserving shaded coffee areas are much higher than those calculated under risk neutral assumptions further the extant distribution of land has strong impacts on the required payments

testing for nonnormality in farm net returns cash returns from farming are expected to be nonnormally distributed under a wide range of joint price yield distributions adequate testing for such nonnormality requires use of proper whitening procedures as well as appropriate statistics with tests and sample sizes commonly employed a false imputation of normality often will be made however positive correlation between skewness and kurtosis reduces the likelihood of associated decision errors these results are illustrated with data for

a policy analysis of china s wheat economy this paper examines the impacts of china s historical and anticipated future reforms on its domestic wheat economy and how it affects the import demand for wheat using a stochastic coefficient regression method the results strongly support the hypothesis that producers and consumers in the post reform era were responsive to a less controlled economy furthermore the higher import forecasts indicate that china will interact more with the world wheat market

estimation risk in farm planning under uncertainty this paper examines the impact of estimation risk on a decision maker s ability to distinguish between the mean variance characteristics of different farm plans the importance of making such distinctions should be clear risk averse decision makers will want to bear risk only if they can be reasonably confident of commensurate increases in expected return when parameters are unknown statistically testing for differences in their estimated values is appropriate an illustration of such tests using data from hazell suggests considerable resources must be devoted toward data generation if normative statements under uncertainty are to be reliable

risk forecasting models and optimal portfolio selection this study analyses from an investor s perspective the performance of several risk forecasting models in obtaining optimal portfolios the plausibility of the homoscedastic hypothesis implied in the classical markowitz model is dicussed and more general models which take into account assymetry and time varying risk are analysed specifically it studies whether arch type based models obtain portfolios whose risk adjusted returns exceed those of the classical markowitz model the same analysis is performed with models based on the lower partial moment lpm which take into account the assymetry in the distribution of returns the results suggest that none of the models achieve a clearly superior average performance it is also found that models based on semivariance perform as well as those based on the variance but not better than even if the evaluation criterion is based on the reward to semivariance ratio when attention turns to the analysis of worst case performance the results are clearly differ

the impact of china s economic reforms on agricultural productivity growth this paper presents a method for assessing the relative importance of price increases and strengthened individual incentives due to the introduction of the responsibility system for the post 1978 increase in china s agricultural productivity data on post 1978 chinese agricultural performance suggest that a little over three quarters of the measured productivity increase is due to payment system changes and the remainder to price increases we also use our method to calculate incentive indices giving an estimate of the fraction of their marginal product that peasants received under the pre 1978 regime

local banking panics of the 1920s identification and determinants abstract using a newly discovered dataset of u s bank suspensions from 1921 to 1929 we discovered that banking panics were more common in the 1920s than had been believed besides identifying panics we investigate their determinants finding that local banking panics were more likely when fundamental economic conditions were generally weak and more likely in overbanked states they were less likely in states with deposit insurance or states where a relatively large share of banks belonged to chain banking organizations

reforms the weather and productivity growth in china s grain sector we use disaggregate county level production data to study the effects of economic reform on china s grain production between 1980 and 1990 china s grain production area is divided into five regions based on geographic agronomic and meteorological criteria regional grain production functions are estimated and weather is explicitly modeled the institutional impact of economic reform was found to explain about 38 of the production growth from 1980 to 1985 this is lower than the estimates reported in many previous studies regional differences in efficiency gains from economic reform and in the effects of weather on grain production are found to be significant

a flow network analysis of direct balance sheet contagion in financial networks this paper puts forward a novel approach to the analysis of direct contagion in financial networks financial systems are here represented as flow networks i e directed and weighted graphs endowed with source nodes and sink nodes and the propagation of losses and defaults originated by an exogenous shock is here represented as a flow that crosses such a network in establishing existence and uniqueness of such a flow function we address a know problem of indeterminacy that arise in financial networks from the intercyclicity of payments sufficient and necessary conditions for uniqueness are pinned down we embed this result in an algorithm that while computing the propagation caused by a shock controls for the emergence of possible indeterminacies we then apply some properties of network flows to investigate the relation between the structures of a financial network i e the size and the pattern of obligations and its exposure to default contagion

sovereign debt and reserves with liquidity and productivity crises during the recent financial crisis emerging economies have kept accumulating both sovereign reserves and debt to account for this empirical fact we model the optimal portfolio choice of a sovereign that is subject to liquidity and productivity shocks we determine the equilibrium level of debt and its cost by solving a contracting game between sovereign and international lenders although raising debt increases the sovereign exposure to liquidity and productivity crises the simultaneous accumulation of reserves can mitigate the negative effects of such crises this mechanism rationalizes the complementarity between debt and reserves

financial integration and liquidity crises this paper analyzes the effects of financial integration on the stability of the banking system financial integration allows banks in different regions to smooth local liquidity shocks by borrowing and lending on a world interbank market we show under which conditions financial integration induces banks to reduce their liquidity holdings and to shift their portfolios toward more profitable but less liquid investments integration helps reallocate liquidity when different banks are hit by uncorrelated shocks however when a correlated systemic shock hits the total liquid resources in the banking system are lower than in autarky therefore financial integration leads to more stable interbank interest rates in normal times but to larger interest rate spikes in crises these results hold in a setup in which financial integration is welfare improving from an ex ante point of view we also look at the model s implications for financial regulation and show that in a second best world financial integrati

banking panics the role of the first come first served rule and information externalities this paper proposes that both the first come first served rule and information externalities are important in causing contagious bank runs the first come first served rule creates a negative payoff externality among depositors this payoff externality forces depositors to respond to early noisy information such as failures of other banks therefore failures of a few banks may trigger runs on other banks contagious runs may occur even if i depositors choose the pareto dominant equilibrium when there are multiple equilibria and ii the deposit contract is chosen to maximize depositor welfare the feasibility of reforming the fdic to impose market discipline is also investigated

contagious bank failures in a free banking system this paper develops a model of an unregulated banking system based around a private clearing house arrangement whilst such a system may dominate one with a public safety net in reducing moral hazard in lending and therefore the scope for individual bank insolvency it also increases the likelihood of contagious bank failures following a systemic shock or an aggregate liquidity shortage

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

land allocation under uncertainty for alternative specifications of return distributions using the expected utility moment generating function approach a land allocation rule is derived which is both independent of the nature of the underlying distribution of each element in the choice set and accounts for all moments of that distribution this decision rule is applied to the choice between cotton and corn in the mississippi delta to demonstrate that consideration of just the first two moments of the distribution can often be unjustified and damaging empirically theoretically and in terms of the utility of the decision maker

rural reforms and agricultural growth in china this paper employs province level panel data to assess the contributions of decollectivization price adjustments and other reforms to china s agricultural growth in the reform period decollectivization is found to improve total factor productivity and to account for about half of the output growth during 1978 84 the adjustment in state procurement prices also contributed positively to output growth its impact came mainly from the responses in input use the effect of other market related reforms on productivity and output growth was very small reasons for slowdown in agricultural growth after 1984 are also analyzed copyright 1992 by american economic association

sensitivity analysis for mean variance portfolio problems this paper shows how to perform sensitivity analysis for mean variance mv portfolio problems using a general form of parametric quadratic programming the analysis allows an investor to examine how parametric changes in either the means or the right hand side of the constraints affect the composition mean and variance of the optimal portfolio the optimal portfolio and associated multipliers are piecewise linear functions of the changes in either the means or the right hand side of the constraints the parametric parts of the solution show the rates of substitution of securities in the optimal portfolio while the parametric parts of the multipliers show the rates at which constraints are either tightening or loosening furthermore the parametric parts of the solution and multipliers change in different intervals when constraints become active or inactive the optimal mv paths for sensitivity analyses are piecewise parabolic as in traditional mv analysis however the optimal paths may contain negatively sloping segments and are characterized by types of kinks i e points of nondifferentiability not found in mv analysis

spatial dispersion of retail margins evidence from turkish agricultural prices the farmer share of retail prices is shown to be about 16 percent corresponding to about 84 percent of a distribution share on average across agricultural products and regions within turkey the share of transportation costs in retail prices is only about 7 percent while the share of retail margins is about 77 percent of retail prices the dispersion of retail prices across regions is shown to be mostly due to local wages and variable markups while the contribution of traded input prices is relatively small accordingly the high dispersion of farmer prices across locations is not reflected in the dispersion of retail prices due to the high contribution of retail margins these retail margins are also shown to account for about one third of the consumer welfare dispersion across regions and more than half of the consumer welfare dispersion across products

participation in farm commodity programs a stochastic dominance analysis grube correctly argues that mini max and maximax criteria can help analysts determine the interval in which for a given set of preferences there will be changes in the preferred distribution the criteria is of less value when simulations are used to generate distributions without exact a priori knowledge of the random draw of order statistics we will argue that in most cases one can go even further and solve for the specific break even level of risk aversion this should simplify the procedures commonly used to rank risky prospects the author calculates that for the data presented the mini max critical value is 0 000003 for risk preferrers and 0 000002 for risk avoiders he concludes that these are low values when compared to the range originally considered 0 04 to 0 03 since his numbers fall within our range this suggests that our range could have been narrower than it was but clearly our range did contain the values he calculated it is noteworthy that when the smaller coefficients were used the relative rankings of choices remained unchanged grube concludes that kp s results are correct in the sense that they give a correct ranking of the order in which alternatives would be chosen by decision makers with varying absolute risk aversion coefficients since ultimately risk analysts are interested in the relative ranking of risky prospects this would suggest that our results are more robust than the author implies in his remarks while grube has suggested a means of identifying the interval of interest we would argue that in many cases one could go further and solve for the break even level of risk preference the break even level would be that value at which there is a switching in the dominance of one distribution over another using results developed by hammond it should be possible to simplify both the calculation and presentation of stochastic dominance results by solving for the break even level two conditions must be satisfied in order to apply hammond s results first constant risk aversion must be assumed while the use of utility functions exhibiting decreasing risk aversion has been advocated in the theoretical literature and supported somewhat by empirical studies which have assessed utility functions in most applications constant risk aversion is assumed this is largely because wealth data is frequently unavailable or of questionable accuracy thus risk analysts typically assume that a decision maker s utility function can be approximated over the relevant range by a constant risk aversion function such as the negative exponential function u x 1 e ax

the sampling error in estimates of mean variance efficient portfolio weights this paper presents an exact finite sample statistical procedure for testing hypotheses about the weights of mean variance efficient portfolios the estimation and inference procedures on efficient portfolio weights are performed in the same way as for the coefficients in an ols regression ols t and f statistics can be used for tests on efficient weights and when returns are multivariate normal these statistics have exact t and f distributions in a finite sample using 20 years of data on 11 country stock indexes we find that the sampling error in estimates of the weights of a global efficient portfolio is large

positively weighted portfolios on the minimum variance frontier duality theory is employed to provide necessary and sufficient conditions for portfolios on the minimum variance frontier to have positive investment proportions in all assets these conditions involve the feasibility of portfolios that have non negative correlation with all assets and positive correlation with at least one using these results several qualitative results concerning the signs of investment proportions in efficient portfolios are proved it is argued that the conditions that ensure all positive weights in efficient portfolios are intuitively compelling and are not unique to the capm with large numbers of assets however the signs of weights in minimum variance portfolios can be very sensitive to slight departures from these conditions due to for example sampling error the behavior of the minimum variance frontier is of general concern to portfolio theory and plays a central role in the study of asset pricing an unresolved question in the theory of the minimum variance frontier involves when it will contain portfolios with positive weights on all assets this paper addresses that question we show that the conditions that ensure positive investment proportions in efficient portfolios have by farkas lemma a simple dual this dual or alternative system of inequalities puts conditions directly on the variances covariances and means of the returns and these conditions can be interpreted intuitively this contrasts with simply considering the first order conditions for variance minimization since these involve the inverted covariance matrix with a large number of assets it can be difficult to translate one s intuitive sense about how assets covary into statements about the inverse of the covariance matrix the duality conditions we derive involve the existence of portfolios that are positively or negatively correlated with all assets indeed we show that a necessary and sufficient condition for no portfolio on the frontier to have all positive weights is the feasibility of an arbitrage or hedge portfolio with weights that sum to zero that has an expected payoff of zero and has non negative correlation with all assets the duality conditions also make it easy to construct examples of the types of covariability that permit or preclude positive investment proportions on all assets in frontier portfolios there are at least three apparent reasons for interest in the signs of weights

networks and systemic risk in the financial system the complex web of exposures and interlinkages across the financial system highlights the relevance of network analysis in understanding systemic risk and guiding the design of financial regulation this paper discusses how network models and those based on epidemiological approaches in particular offer a compelling description of the structure of real world financial systems and shed light on different contagion mechanisms seen during the global financial crisis we also review how these insights may inform macroprudential risk assessment and policy in the areas of stress testing the financial system and the regulation of systemically important institutions the role of non bank financial intermediation and social networks in shaping financial system risk is also briefly considered

risk aversion and land allocation between annual and perennial crops in semisubsistence farming a stochastic optimization approach this article analyzes the effect of production uncertainty on farmland allocation decisions between perennial and annual crops focusing on a representative farmer s attitude toward risk a dynamic stochastic optimization model that considers net planting the difference between new plantings and removals of perennial crops that achieve full production cycle is used the effect of uncertainty on the representative farmer s decisions to increase or decrease perennial crops acreage on the optimal path is examined our results reveal that the response of optimal path of net planting to uncertainty related to perennial crop production is highly affected by the farmer s attitude toward risk a risk averse or a low risk loving farmer tends to reduce land allocation to perennial crops under uncertainty while a high risk loving farmer will do exactly the opposite also due to disutility of farming the farmer tends to reduce land allocation to perennial crops when prices are high enough for him to attain a desired income level expectation one implication of this research is the need for mechanization in sub saharan countries in particular that increases per acreage yield and output in semisubsistence agriculture

liquidity coinsurance moral hazard and financial contagion we study the propagation of financial crises between regions characterized by moral hazard problems the source of the problem is that banks are protected by limited liability and may engage in excessive risk taking the regions are affected by negatively correlated liquidity shocks so that liquidity coinsurance is pareto improving the moral hazard problem can be solved if banks are sufficiently capitalized under autarky a limited investment is needed to achieve optimality so that a limited amount of capital is sufficient to prevent risk taking with interbank deposits the optimal investment increases and capital becomes insufficient to prevent excessive risk taking thus bankruptcy occurs with positive probability and the crises spread to other regions via the financial linkages opening the financial markets is nevertheless pareto improving consumers benefit from liquidity coinsurance although they pay the cost of excessive risk taking finally we show that in this framework a completely connected deposit structure is more conducive to financial crises than an incompletely connected structure

measuring network systemic risk contributions a leave one out approach abstract the aim of this paper is to propose a new network measure of systemic risk contributions that combines the pair wise granger causality approach with the leave one out concept this measure is based on a conditional granger causality test and consists of measuring how far the proportion of statistically significant connections in the system breaks down when a given financial institution is excluded we analyse the performance of our measure of systemic risk by considering a sample of the largest banks worldwide over the 2003 2018 period we obtain three important results first we show that our measure is able to identify a large number of banks classified as global systemically important banks g sibs by the financial stability board fsb second we find that our measure is a robust and statistically significant early warning indicator of downside returns during the last financial crisis finally we investigate the potential determinants of our measure of systemic risk and find similar results to the existing literature in particular our empirical results suggest that the size and the business model of banks are significant drivers of systemic risk

uncertainty aversion and systemic risk we propose a new theory of systemic risk based on knightian uncertainty or ambiguity we show that due to uncertainty aversion beliefs on future asset returns are endogenous and bad news on one asset class induces investors to be more pessimistic about other asset classes as well this means that idiosyncratic risk can create contagion and snowball into systemic risk furthermore in a diamond and dybvig 1983 setting we show that surprisingly uncertainty aversion causes investors to be less prone to run individual banks but runs will be systemic in addition we show that bank runs are associated with stock market crashes and ight to quality finally we argue that increasing uncertainty makes the nancial system more fragile and more prone to crises we conclude with implications for the current public policy debate on the management of nancial crisis

in efficient interbank networks we study the efficiency properties of the formation of an interbank network banks face a trade off by establishing connections in the interbank market on the one hand banks improve the diversification of their liquidity risk and therefore can obtain a higher expected payoff on the other hand banks not sufficiently capitalized have risk shifting incentives that expose them to the risk of bankruptcy connecting to such risky banks negatively affects expected payoff we show that both the optimal and the decentralized networks are characterized by a core periphery structure the core is made of the safe banks whereas the periphery is populated by the risky banks nevertheless the two network structures coincide only if counterparty risk is sufficiently low otherwise the decentralized network is underconnected as compared to the optimal one finally we analyze mechanisms that can avoid the formation of inefficient interbank networks

the empirical minimum variance hedge decision making under unknown true parameters estimation risk is discussed along with bayes and parameter certainty equivalent pce criteria bayes criterion incorporates estimation risk in a manner consistent with expected utility maximization the pce method which is the most commonly used is not consistent with expected utility maximization bayes criterion is employed to solve for the minimum variance hedge ratio empirical application of bayes minimum variance hedge ratio is addressed and illustrated simulations shoe that discrepancies between prior and sample parameters may lead to substantial differences between bayesian and pce minimum variance hedges

the mean and variance of the mean variance decision rule the widely used mean variance approach to decisions under uncertainty requires estimates of the parameters of the joint distribution of returns when optimal behavior is determined using estimates rather than the true values the decision is a random variable we consider the reliability of mean variance analysis by examining the bias and variance covariance matrix for the decision vector the latter shows that decisions based on estimated parameters can have a large variance around the true optimum the results show that optimal decisions can differ substantially from those based on meanvariance analysis

the pricing of revenue assurance a theoretical model to value gross revenue assurance under one of the popular proposals facing u s policy makers is developed the approach makes use of a fundamental paradigm of asset valuation and stochastic calculus because farm level gross revenue is not a traded asset equilibrium arguments must be made to specify the partial differential equation characterizing the value of the assurance an example solution is presented under the assumption of lognormally distributed gross revenue county level data for a variety of crops are used to examine empirically the pricing ability of the model

capital asset pricing compatible with observed market value weights we show that the set of expected return vectors for which an observed portfolio is mean variance mv efficient is a two parameter family we identify ten ways to specify the time series behavior of the two parameters the result highlights a number of inconsistencies involved in mv modelling for each of the cases it permits the inference of the time series of expected return vectors as well as all the other capital asset pticing model capm variables compatible with a known covariance matrix and the observed time series of market value weights the empirical work shows that there are substantial case to case differences in the time series of mean vectors and many of them are quite different from the constant mean vector envisioned in tests of

the impact of grain self sufficiency regime on regional welfare and agricultural productivity in china the nineties agricultural reforms in china that were aimed at deregulating the agricultural market eventually resulted in a huge drop in agricultural production and a high rate of inflation in agricultural input prices this apparently motivated the government to introduce the grain self sufficiency regime in 1998 we examine how and to what extent this reform affected the productivity and welfare of grain farmers in china at the regional level we find that the price regulations that destroyed the incentive to exert more effort adversely affected the growth in agricultural productivity but contributed to the growth in farmers welfare although the price regulations resulted in short term improvement in welfare across all the regions in the long run such regulations can potentially result in larger drop in agricultural production because of its negative impact on the incentives to produce more

beta in linear risk tolerance economies this paper employs numerical means to examine i the expected return beta plot in power utility linear risk tolerance lrt economies and ii whether in the power utility economies a valuation equation containing covariance and coskewness terms might better explain expected returns than one containing covariance terms alone the results show that the expected return beta plots constructed from real world return distributions are very similar to the plots found in empirical tests of the mean variance capital asset pricing model mv capm hence a power utility lrt capm may provide a better theory of asset pricing than the mv capm does while beta is not the correct measure of risk in power utility lrt economies the results show that on average a valuation equation containing covariance terms only explains expected returns better than a valuation equation containing both covariance and coskewness terms

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

financial contagion and economic development an epidemiological approach abstract we develop an epidemiological approach to analyze how financial contagion may affect and be affected by economic activity we show that according to specific parameter values the economy may converge either to a non speculative or to a speculative equilibrium in the former situation the level of per capita income is maximal while in the latter it is reduced by financial contagion the presence of economic and financial feedback effects may also give rise to macroeconomic fluctuations during the transitional path clearly showing that such economic and financial links are an important driver of the short run macroeconomic performance by extending the analysis to a spatial dimension we also show that financial contagion in some specific region may propagate quickly also in regions far away from those in which the contagion initially occurs highlighting the role of regional policy coordination to avoid interregional contagion

what is the opportunity cost of mean variance investment strategies an analytical framework is set up to evaluate the foregone opportunity cost of mean variance investment strategies a parametric structure of the joint distribution of security returns for which mean variance investment strategy is suboptimal is specified for all constant absolute risk aversion investors the optimal strategy its corresponding mean variance alternative and the foregone opportunity cost of mean variance investment strategy are analytically derived and operationalized empirically when the investor s opportunity set includes the riskless asset the premium to replace the mean variance investment strategy by its optimal one does not exceed 0 05 cents on an invested dollar regardless of the investor s risk aversion when the riskless asset is denied the opportunity costs of mean variance investment strategies increase with the degree of risk aversion

integration of var and expected utility under departures from normality this article identifies the level of the expected utility eu risk aversion and value at risk var confidence level that yield the same choice from a given distribution of outcomes and thus allow for consistent application of the two criteria the result for a given distribution is an explicit mapping between risk aversion under eu and var for both normal and nonnormal distributions the cornish fisher expansion is used to establish adjusted mean deviates for nonnormal outcome distributions and the investor s preference function is expanded to include elements for variance skewness and excess kurtosis a farm level application with nonnormal revenue distribution illustrates these approaches

interbank contagion at work evidence from a natural experiment this article tests financial contagion due to interbank linkages for identification we exploit an idiosyncratic sudden shock caused by a large bank failure in conjunction with detailed data on interbank exposures first we find robust evidence that higher interbank exposure to the failed bank leads to large deposit withdrawals second the magnitude of contagion is higher for banks with weaker fundamentals third interbank linkages among surviving banks further propagate the shock finally we find results suggesting that there are real economic effects these results suggest that interbank linkages act as an important channel of contagion and hold important policy implications jel g01 g21 g28 e58 since the onset of the financial turmoil increased uncertainty reflected particularly in counterparty risk has led banks to hoard liquidity this has resulted in a significant decline of trading in the interbank money markets jean claude trichet president of the european central bank december 2008

market price uncertainty risk aversion and procurement combining contracts and open market sourcing alternatives abstract we evaluate the implications of concurrent utilization of contracts and open market arrangements by a risk averse buyer in continuous procuring of a standardized product of known demand over a specified time period the buyer being risk averse is concerned about the magnitude and uncertainty of expenses the contract price is deterministic and the market price is stochastic cases when the two price processes are exogenous and when the contract price is endogenously linked to volume of procurement and market price are examined models are developed to determine the optimal pattern of procurement from the two arrangements for specified price risk aversion and contract duration parameters the study finds that optimal procurement from market increases with contract price premium but decreases with degree of risk aversion and market price uncertainty usefulness of alternate forms of contracts when contract and market alternatives are used concurrently is discussed application of the models to hypothetical datasets compares the relative usefulness of alternate forms of integrating contract and market alternatives and of complete reliance on contract or market alternatives