model choice and value at risk performance broad agreement exists among both the investment banking and regulatory communities that the use of internal risk management models is an efficient means for calculating capital risk requirements the determination of model parameters laid down by the basle committee on banking supervision as necessary for estimating and evaluating the capital adequacies however has received little academic scrutiny we investigate a number of issues of statistical modeling in the context of determining market based capital risk requirements we highlight several potentially serious pitfalls in commonly applied methodologies and conclude that simple methods for calculating value at risk often provide superior performance to complex procedures our results thus have important implications for risk managers and market regulators

the asymptotic distribution of extreme stock market returns this article presents a study of extreme stock market price movements according to extreme value theory the form of the distribution of extreme returns is precisely known and independent of the process generating returns using data for an index of the most traded stocks on the new york stock exchange for the period 1885 1990 the author shows empirically that the extreme returns obey a frechet distribution copyright 1996 by university of chicago press

multifirm unions and the incentive to adopt pattern bargaining in oligopoly abstract this paper develops a model of wage bargaining between an industry wide trade union and firms in an oligopoly and considers the circumstances under which the union prefers pattern bargaining that is negotiating contracts in a sequential manner to simultaneous bargaining with the firms the paper goes on to consider the importance of the bargaining order in pattern bargaining when the firms are asymmetric the analysis shows that the union gains by first targeting a firm which is in a relatively weak bargaining position i e impatient to settle or a firm with relatively large profits

decision making with naive advice in many of the decisions we make we rely on the advice of others who have preceded us for example before we buy a car choose a dentist choose a spouse find a school for our children sign on to a retirement plan etc we usually ask the advice of others who have experience with such decisions the same is true when we make major financial decisions here people easily take advice from their fellow workers or relatives as to how to choose stock balance a portfolio or save for their child s education although some advice we get is from experts most of the time we make our decisions relying only on the rather uninformed word of mouth advice we get from our friends or neighbors we call this aive advice in this paper i will outline a set of experimental results that indicate that word of mouth advice is a very powerful force in shaping the decisions that people make and tends to push those decisions in the direction of the predictions of the rational theory

environmental taxation and unemployment some evidence on the double dividend hypothesis in europe abstract the employment double dividend hypothesis suggests that an appropriately designed fiscal reform in which emission charges are used to subsidize employers social security contributions may realize at least two relevant policy goals a better quality of the environment and at the same time an increase in employment levels this paper uses a newly developed econometric general equilibrium model for the european union as well as for each member country and presents simulation results up to the year 2010 of the effects of a european carbon tax the revenues from which are recycled to reduce employers social security contributions the results show that recycling carbon tax revenues may provide an employment double dividend only in the short run

derivatives regulation implications for central banks abstract we review aspects of derivatives markets that affect central bank operations we focus on how derivatives affect monetary policy and bank supervision and argue that derivatives have no material adverse impact on the conduct of monetary policy our analysis suggests that both derivatives users and dealers face relatively small default risks from derivatives systemic risk the risk of widespread default has been largely exaggerated policy debates have neglected incentives of employees the nature of this agency risk suggests that internal controls are more likely to reduce these problems than derivatives regulation

quasi fixed inputs in u s and japanese manufacturing a generalized leontief restricted cost function approach in this paper a generalized leontief variable cost function is develope d which permits analytical derivation of steady state levels of quasi fixed inputs and capacity output and does not require specification of a numeraire input this framework is then used to evaluate the fa ctor demand patterns of japanese and u s manufacturing based on bot h one quasi fixed capital input and two quasi fixed capital and la bor input specifications and both static and dynamic optimization t he findings provide evidence of considerable flexibility of demand re sponses in japan which may have contributed to japan s relatively st rong economic performance in the volatile 1970s copyright 1988 by mit press

a word of caution on calculating market based minimum capital risk requirements this paper demonstrates that the use of garch type models for the calculation of minimum capital risk requirements mcrrs may lead to the production of inaccurate and therefore inefficient capital requirements we show that this inaccuracy stems from the fact that garch models typically overstate the degree of persistence in return volatility a simple modification to the model is found to improve the accuracy of mcrr estimates in both back and out of sample tests given that internal risk management models are currently in widespread usage in some parts of the world most notably the usa and will soon be permitted for ec banks and investment firms we believe that our paper should serve as a valuable caution to risk management practitioners who are using or intend to use this popular class of models

volatility forecasting without data snooping abstract data snooping arises when the properties of a data series influence the researcher s choice of model specification when data has been snooped tests undertaken using the same series are likely to be misleading this study seeks to predict equity market volatility using daily data on u k stock market returns over the period 1955 1989 we find that even apparently innocuous forms of data snooping significantly enhance reported forecast quality and that relatively sophisticated forecasting methods operated without data snooping often perform worse than naive benchmarks for predicting stock market volatility we therefore recommend two alternative models both of which are extremely simple

do women shy away from competition do men compete too much we examine whether men and women of the same ability differ in their selection into a competitive environment participants in a laboratory experiment solve a real task first under a noncompetitive piece rate and then a competitive tournament incentive scheme although there are no gender differences in performance men select the tournament twice as much as women when choosing their compensation scheme for the next performance while 73 percent of the men select the tournament only 35 percent of the women make this choice this gender gap in tournament entry is not explained by performance and factors such as risk and feedback aversion only playa negligible role instead the tournament entry gap is driven by men being more overconfident and by gender differences in preferences for performing in a competition the result is that women shy away from competition and men embrace it

economic growth international competitiveness and environmental protection r d and innovation strategies with the warm model abstract it is often argued that policies designed to protect the environment may harm economic growth moreover if introduced unilaterally by a given country they may reduce the competitiveness of domestic firms these arguments are generally based on the assumption that environmental protection has to be achieved through the introduction of emission charges e g a carbon tax however three issues need to be raised first the tax is not the only policy instrument and is not the most efficient one that can be used to reduce polluting emissions secondly even when a tax policy is implemented it is important to assess the feedback effects induced by recycling the tax revenue thirdly and most importantly the role of technical progress cannot be neglected therefore there may exist a policy mix that provides firms with the correct incentives to adopt energy saving technologies and to invest in environment friendly r d the first two issues have partly been explored both in the theoretical and empirical literature the third issue i e the role of incentives to technical progress still lacks adequate quantitative assessment this is why a new model has been developed which endogenizes technical progress and its effects and feedbacks on economic energy and environmental variables using warm an econometric general equilibrium model for the european union and for each member country this paper presents simulation results up to 2015 of the effects of some industrial environmental policies which are aimed at protecting the environment without necessarily damaging competitiveness and economic growth the results show that policies that stimulate environmental r d technological innovation and diffusion may provide firms with the correct incentives to avoid damaging the environment while preserving their competitiveness in the market moreover such a policy based both on r d subsidies and on innovation incentives may not worsen the public sector budget balance as a result of the positive effects on economic growth

the stability of uk risk measures and the problem of thin trading this paper examines the problems of estimating risk measures and their stability in thin markets it shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading it then demonstrates using uk data that this is in fact a serious practical problem and that the resultant biases are of precisely the form predicted finally the paper presents reliable evidence on the stability of uk risk measures by using an estimation method designed to avoid thin trading bias using this approach risk measures are found to be as stable in the uk as they are in the usa this paper examines the stability of risk measures in the uk the focus is on providing reliable evidence in a market where many of the shares suffer from thin trading this is important because thin trading can seriously distort stability measures leading to incorrect conclusions indeed this is a problem which has almost certainly afflicted many previous studies of stability the paper makes four main contributions first it shows analytically that thin trading can lead to serious overstatements about stability second it uses uk data to illustrate that this is in fact a serious practical problem and that the biases are of precisely the form predicted this is important for anyone who wishes to interpret previous claims on beta stability in thin markets third the paper presents reliable evidence on the stability of uk betas by using an estimation method designed to avoid thin trading bias besides avoiding bias our

rewards experience and decision costs in first price auctions consistent with a model of asymmetric risk aversion subjects in first price auctions consistently bid above the risk neutral nash prediction it has been argued that this is due to low opportunity cost of deviating from the risk neutral bid we increase opportunity cost and payoff levels by factors of 0 1 5 10 and 20 from the normal levels generating payoffs up to 250 for risk neutral subjects and observe an insignificant increase in the slope of individual bid functions the rmse of bids declines significantly this is consistent with a reward decision cost model of bidding behavior

capital requirements for securities firms regulatory authorities set capital requirements to cover the position risk of securities firms and to protect against losses arising from fluctuations in the value of their holdings the requirements may be set using the comprehensive approach required by the u s securities and exchange commission the building block approach required by the european community or the portfolio approach required by the united kingdom we compare these three alternatives using a large sample of u k equity trading books the portfolio approach systematically specifies larger requirements for riskier books and vice versa it is more efficient than the building block approach and far more efficient than the comprehensive approach

pollution taxes and revenue recycling abstract discussions of environmental policy and the tax system have emphasized the value of pollution tax revenues which can be used to reduce other tax distortions in the economy however by raising private marginal production costs environmental taxes also tend to reduce gdp and exacerbate the welfare costs of conventional taxes for environmental taxes in consumption goods industries the net welfare change from these two effects is negative unless this good is a relatively weak substitute for leisure an estimate for the optimal pollution tax with full revenue recycling is 63 to 78 of marginal environmental damages

social interactions and asset pricing bubbles abstract we investigate the influence of social interactions on asset markets and provide an empirical test of the hypothesis that social interactions increase asset pricing bubbles we test the impact of social interactions on bubbles in a bubble prone experimental asset pricing market over a total of 21 markets we compare asset pricing bubbles in a design that allows for social interactions with a standard laboratory setting markets that allow for face to face communication between participants in a lab in the field setting show significantly larger asset pricing bubbles relative to standard laboratory markets face to face communication increases bubbles to a larger extend than a popular social media feature the like

innovation in pollution control comparisons of the various institutional arrangements for controlling pollutant emissions from individual sources effluent fees effluent control subsidies marketable permits and direct command and control regulation have usually focused on their static efficiency properties and institutional feasibility e g dales 1968 zerbe 1970 baumol and oates 1975 kneese and schultze 1975 marin 1978 mills and white 1978 spence and weitzman 1978 russell 1979 a relatively neglected area has been the study of how each arrangement influences innovation in pollution control a few studies e g kneese and schultze 1975 marin 1978 mills and white 1978 russell 1979 have casually claimed that the control methods that rely on economic incentives provide superior incentives for innovation but there have been few systematic studies of the question this paper provides a simple model of pollution control innovation by a profitmaximizing polluter who is subject to the various control methods the consequences of the methods will be explored in three major contexts first we assume that the polluter and the innovation is a small enough part of the overall pollution problem so that none of the important marginal conditions are changed by the innovation second we assume that the polluter and the innovation are important enough so that marginal conditions are changed by the innovations but that the governmental authority determining pollution control incentives or levels fails to make the appropriate adjustments third we again assume that the innovation causes marginal conditions to change but in this case the governmental authority makes the appropriate adjustments we use the term ratcheting to describe this last phenomenon in all cases we assume that the innovating polluter correctly predicts the reactions of the governmental authority and bases his innovation decisions on that prediction a profit maximizing entrepreneur would normally be expected to adopt any innovation that promised gains present discounted value to him in excess of initial

environmental policy reconsidered the role of technological innovation abstract this paper discusses recent environmental policy wisdom in the light of technological and organizational innovation starting from empirical evidence it argues that the main econometric models which are used in environmental policy analysis do not consider properly the determinants and effects of innovation and offer unreliable estimates of policy effects some solutions to the latter problem show that the integration between environmental policy and industrial policy can be more efficient than traditional environmental policies in the protection of the environment technological cooperation moreover can be an important instrument to stabilize international environmental agreements

a failure to communicate an experimental investigation of the effects of advice on strategic play abstract we investigate why two person teams beat the truth wins benchmark in signaling games cooper and kagel 2005 cooper and kagel 2009 by studying an advice treatment where advisees have the benefit of two individuals insight but not bilateral communication the tw benchmark states that the performance of a team for problems with a demonstrable correct solution should be no worse than the performance of its most able individual if one individual solves the problem the team solves it as well advisees whose advisors play strategically have significantly higher levels of strategic play but fall well short of the truth wins benchmark as i many advisors who play strategically do not provide advice to this effect and ii many advisees fail to follow sound advice effect i is largely attributable to female advisors who are far less likely to provide advice than men whether or not advice contains a clear explanation for its effectiveness has no effect on the likelihood of advisees strategic play a result at odds with the idea that economic agents regularly consider all the available alternatives

value at risk models for dutch bond portfolios this study investigates the consequences of dynamics in the term structure of dutch interest rates for the accurateness of value at risk models therefore value at risk measures are calculated using both historical simulation variance covariance and monte carlo simulation methods for a ten days holding period the best results were obtained for a combined variance covariance monte carlo method using a term structure model with a normal distribution and garch specification term structure models with a t distribution or with cointegration performed much worse 2000 elsevier science b v all rights reserved jel classification e43 g28