one sided performance measures under gram charlier distributions angel leon would like to acknowledge the financial support from the spanish ministry for science and innovation through the grant eco2014 58434 p and from the grant prometeoii 2013 015 manuel moreno gratefully acknowledges financial support by grants p12 sej 1733 and ppii 2014 030 p

inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

bank market power and the risk channel of monetary policy abstract do banks lend to riskier borrowers after a monetary expansion we modify the classic costly state verification problem by introducing a risk neutral monopolistic bank which maximizes profits subject to borrowers participation while the bank can diversify idiosyncratic default risk it bears the aggregate risk in partial equilibrium the bank prefers a higher leverage ratio of the borrower when the profitability of lending increases e g after a monetary expansion this risk channel persists in a new keynesian dsge model that replicates the conditional comovement in response to a monetary policy shock and the unconditional cross correlations of bank related variables in the data

the role of cognitive limitations and heterogeneous expectations for aggregate production and credit cycle abstract the behavioural model of de grauwe and macchiarelli 2015 is extended to include financial frictions on the aggregate supply side the result is a tight and sustained feedback loop between animal spirits on one hand and supply of credit capital purchase and production on the other during phases of optimism credit is abundant access to production capital is easy the cash in advance constraint is lax risks are undervalued and production is booming upon reversal in market sentiment the contraction is quick and deep moreover the model is capable of replicating the stylized fact of a long and sustained simultaneous growth in credit production and asset prices observed in the us since mid1990 s lastly the behavioural model does a decent job in matching us data including multiple supply side relations including capital firm credit and inflation interest rate

credit supply and the housing boom an increase in credit supply driven by looser lending constraints in the mortgage market is the key force behind four empirical features of the housing boom before the great recession the unpreced

financial crises unconventional monetary policy exit strategies and agents expectations a central bank may purchase assets during a financial crisis and then exit from those purchases agents have rational expectations about financial crises as rare events the probability the central bank purchases assets and the exit strategy selling off assets quickly produces a double dip recession while slowly unwinding generates a smooth recovery expectations about the exit strategy influence the initial effectiveness of purchases increasing the probability of purchases during crises distorts the pre crisis economy and depends upon the exit strategy the welfare benefits of unconventional policy may differ ex ante versus ex post as can the preferred exit strategy

bank risk taking securitization supervision and low interest rates evidence from the euro area and the u s lending standards using a unique dataset of the euro area and the u s bank lending standards we find that low monetary policy short term interest rates soften standards for household and corporate loans this softening especially for mortgages is amplified by securitization activity weak supervision for bank capital and low monetary policy rates for an extended period conversely low long term interest rates do not soften lending standards finally countries with softer lending standards before the crisis related to negative taylor rule residuals experienced a worse economic performance afterward these results help shed light on the origins of the crisis and have important policy implications the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

bank equity and macroprudential policy abstract this paper proposes an alternative macroprudential policy in the framework of gertler et al 2012 in their model the central bank subsidizes bank outside equity where the subsidy rate is determined by the shadow cost of the deposit we find that the alternative rule in which the subsidy rate responds to the aggregate bank outside equity ratio is welfare improving because it has a better stabilization effect on the bank asset deterioration after a financial shock we disentangle different channels through which macroprudential policies affect the economy and demonstrate that the better stabilization in the post crisis economy has a positive effect on the economy in normal times through security prices

banking bubbles and financial crises this paper develops a tractable macroeconomic model with a banking sector in which banks face endogenous borrowing constraints there is no uncertainty about economic fundamentals banking bubbles can emerge through a positive feedback loop mechanism changes in household confidence can cause the bubbles to burst resulting in a financial crisis credit policy can mitigate economic downturns the welfare gain is larger when the government interventions are more front loaded given that the government injects the same amount of liquidity in terms of present value bank capital requirements can prevent the formation of banking bubbles by limiting leverage but if too restrictive will lead to less lending and hence lower production

optimal monetary policy rules financial amplification and uncertain business cycles abstract this paper studies optimal monetary policy in the presence of uncertainty time variation in cross sectional dispersion of firms productive performance using a model with financial market imperfections the results suggest that i optimal policy is to dampen the strength of financial amplification by responding to uncertainty at the expense of creating mild degree of fluctuations in inflation ii higher uncertainty makes the welfare maximizing planner more willing to relax financial constraints iii credit spreads are a good proxy for uncertainty hence a non negligible response to credit spreads together with a strong anti inflationary policy stance achieves the highest aggregate welfare possible

fire sales and the financial accelerator abstract during financial turmoil increases in risk lead to higher default foreclosure and fire sales this paper introduces a costly liquidation process for foreclosed collateral and pro cyclical recovery rates in a dynamic stochastic general equilibrium model of the financial accelerator links between endogenous recovery rates risk premia and default risk generate a liquidity spiral magnifying financial accelerator effects we illustrate how collateral liquidation and monetary policy alter the real impact of financial shocks operating through macro financial linkages and the way a government subsidy on collateral liquidity and required liquidity buffers can help dampen the liquidity spiral by shoring up recovery rates

optimal bank capital this article reports estimates of the long run costs and benefits of having banks fund more of their assets with loss absorbing capital or equity we model how shifts in funding affect required rates of return and how costs are influenced by the tax system we draw a clear distinction between costs to individual institutions private costs and overall economic or social costs we find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the basel iii framework this article reports estimates of the long run costs and benefits of having banks fund more of their assets with loss absorbing capital by which we mean equity rather than debt the benefits come because a larger buffer of truly loss absorbing capital reduces the chance of banking crises which as both past history and recent events show generate substantial economic costs the offset to any such benefits comes in the form of potentially higher costs of intermediation of saving through the banking system the cost of funding bank lending might rise as equity replaces debt and such costs can be expected to be reflected in a higher interest rate charged to those who borrow from banks that in turn would tend to reduce the level of investment with potentially long lasting effects on the level of economic activity calibrating the size of these costs and benefits is important but far from

optimal asset allocation aid system from one size vs tailor made performance ratio abstract optimal asset allocation well fitting investors goals is a pressing challenge in risk management making a step forward to the sharpe ratio the parameter dependent sortino satchell generalized rachev and farinelli tibiletti performance ratios are suggested for personalizing asset allocation tailor made optimal asset paths for five different investor risk profiles are traced over a rolling 12 month investing horizon our simulations show a satisfactorily good match between asset allocation and correspondent risk profile specifically generalized rachev ratios outperform in personalized allocation for extreme risk profiles i e conservative and aggressive investors whereas sortino satchell and farinelli tibiletti ratios for those that are more moderate sharpe ratio confirms its ability in constructing steady diversified portfolios although underperformed

bailouts time inconsistency and optimal regulation a macroeconomic view a common view is that bailouts of firms by governments are needed to cure inefficiencies in private markets we propose an alternative view even when private markets are efficient costly bankruptcies will occur and benevolent governments without commitment will bail out firms to avoid bankruptcy costs bailouts then introduce inefficiencies where none had existed although granting the government orderly resolution powers which allow it to rewrite private contracts improves on bailout outcomes regulating leverage and taxing size is needed to achieve the relevant constrained efficient outcome the sustainably efficient outcome this outcome respects governments incentives to intervene when they lack commitment

high public debt the italian experience introduction is there a public debt problem in italy luigi spaventa the end of large public debts alberto alesina monetary and fiscal policy coordination with a high public debt guido tabellini the management of public debt and financial markets marco pagano capital controls and public finance the experience in italy alberto giovannini public debt and households demand for monetary assets in italy andrea bollino and nicola rossi

credibility debt and unemployment ireland s failed stabilization ireland s disinflation rudiger dornbusch disinflation requires a switch to tough policies if these are fully and immediately reflected in expectations and actual prices there need be little output cost of disinflation this paper analyses the stabilization programme in ireland in the 1980s it may be that ems membership offers a credibility bonus by joining the ems playing by the rules of fixed exchange rates and tying the currency to german price stability a country can achieve a dramatic turnaround in expectations inflation and long interest rates but the evidence shows international disinflation in the 1980s was not limited to ems members the irish example demonstrates a second lesson disinflation and tight money have been accompanied by a serious public debt problem and soaring unemployment unless these problems can be tackled it may become necessary in future to resort once more to inflation and the printing press long interest rates suggest that the bond market does not yet take such fear seriously

liquidity shocks size and the relative performance of hedge fund strategies abstract we examine whether the increase in the flow of capital to hedge funds over the period 1994 2005 had a negative impact on performance more specifically we study the relative performance of small versus large funds for each of the hedge fund strategies our results indicate that on an absolute return basis small funds outperform large funds on a risk adjusted return basis however we find that large funds outperform small funds and that large funds are also shown to hold less liquid assets and take on less systematic and idiosyncratic risk than small funds further funds that experience positive liquidity shocks generally outperform those that experience negative liquidity shocks we also find evidence that hedge fund managers that are aggressive in dealing with liquidity shocks perform better than hedge fund managers that are conservative in dealing with liquidity shocks

bank capital and the macroeconomy policy considerations we develop a macroeconomic model in which the balance sheet liquidity condition of financial institutions plays an important role in the determination of asset prices and economic activity the financial intermediaries in our model are required to make investment commitments before a complete resolution of idiosyncratic funding risk that can be addressed only by costly refinancing forcing them to behave in a risk averse manner the model shows that the balance sheet condition of intermediaries can drive asset values away from their fundamentals causing aggregate investment and output to respond to shocks to intermediaries we use this model to evaluate several public policies designed to address balance sheet problems at financial institutions with regard to short run policies we find that capital injections conditioned upon voluntary recapitalization can be a more effective tool than direct lending asset purchases with regard to long run policies we demonstrate that higher capital requirements can have sizable short run effects on economic activity and that a long transition period helps avoid undesirable side effects finally we show that the mariginal effects of policies can be larger during crises because of the nonlinear interactions between some financial frictions and policy actions

in search for yield survey based evidence on bank risk taking abstract monetary policy can have an impact on economic and financial stability through the risk taking of banks falling interest rates might induce investment into risky activities this paper provides evidence on the link between monetary policy and bank risk taking we use a factor augmented vector autoregressive model favar for the us for the period 1997 2008 besides standard macroeconomic indicators we include factors summarizing information provided in the federal reserve s survey of terms of business lending stbl these data provide information on banks new loans as well as interest rates for different loan risk categories and different banking groups we identify a risk taking channel of monetary policy by distinguishing responses to monetary policy shocks across different types of banks and different loan risk categories following an expansionary monetary policy shock small domestic banks increase their exposure to risk large domestic banks do not change their risk exposure foreign banks take on more risk only in the mid 2000s when interest rates were too low for too long

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

asset bubbles and bailouts as long as bubble size is relatively small bubbles increase production level but once the size becomes too large then bubbles reduce it given this non monotonic relationship this paper investigates the relationship between bubbles and government bailouts it shows that bailouts for bursting bubbles may positively influence ex ante production efficiency and relax the existence condition of stochastic bubbles the level of bailouts has a non monotonic relationship with production efficiency and a partial bailout policy achieves production efficiency moreover it examines the welfare effects of bailout policies rigorously and shows that even non risky bubbles may be undesirable for taxpayers

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

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

unconventional government debt purchases as a supplement to conventional monetary policy abstract in response to the great financial crisis the federal reserve the bank of england and many other central banks have adopted unconventional monetary policy instruments we investigate if one of these purchases of long term government debt could be a valuable addition to conventional short term interest rate policy even if the main policy rate is not constrained by the zero lower bound to do so we add a stylised financial sector and central bank asset purchases to an otherwise standard new keynesian dsge model asset quantities matter for interest rates through a preferred habitat channel if conventional and unconventional monetary policy instruments are coordinated appropriately then the central bank is better able to stabilise both output and inflation

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

credit traps and macroprudential leverage we construct a macroeconomic model with overlapping generations to study credit traps prolonged periods of stagnant real activity accompanied by low productivity financial sector undercapitalization and credit misallocation shocks to bank capital tighten banks borrowing constraints causing them to allocate credit to easily collateralizable but low productivity projects low productivity weakens bank capital generation reinforcing tight borrowing constraints sustaining the credit trap steady state macroprudential policy to limit bank leverage can be welfare enhancing in the presence of a credit trap optimal leverage policy is countercyclical

international portfolios a comparison of solution methods we compare the performance of the perturbation based local portfolio solution method of devereux sutherland 2010a 2011 with a global solution method as a test suite we use model specifications that broadly capture features of international financial trade between advanced economies and between advanced and emerging economies we consider both symmetric country setups and asymmetric setups that capture important empirical facts such as differences in macroeconomic volatility differences in portfolio composition and high equity premia we find that the local method performs well at business cycle frequencies both in the symmetric and asymmetric settings while significant differences arise at long horizons in asymmetric settings

financial crises bank risk exposure and government financial policy a macroeconomic model with nancial intermediation is developed in which the intermediaries banks can issue outside equity as well as short term debt this makes bank risk exposure an endogenous choice the goal is to have a model that can not only capture a crisis when banks are highly vulnerable to risk but can also account for why banks adopt such a risky balance sheet in the rst place we use the model to assess quantitatively how perceptions of fundamental risk and of government credit

sharpe thinking in asset ranking with one sided measures abstract if we exclude the assumption of normality in return distributions the classical risk reward sharpe ratio becomes a questionable tool for ranking risky projects in line with sharpe thinking a general risk reward ratio suitable to compare skewed returns with respect to a benchmark is introduced the index includes asymmetrical information on 1 good volatility above the benchmark and bad volatility below the benchmark and 2 asymmetrical preference to bet on potential high stakes and the aversion against possible huge losses the former goal is achieved by using one sided volatility measures and the latter by choosing the appropriate order for the one sided moments involved the omega index see cascon a keating c shadwick w 2002 introduction to omega the finance development centre and the upside potential ratio see sortino f van der meer r plantinga a 1999 the dutch triangle journal of portfolio management 26 i fall 50 58 follow as special cases

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

optimal dynamic capital requirements we characterize welfare maximizing capital requirement policies in a macroeconomic model with household firm and bank defaults calibrated to euro area data we optimize on the level of the capital requirements applied to each loan class and their sensitivity to changes in default risk we find that getting the level right so that bank failure risk remains small is of foremost importance while the optimal sensitivity to default risk is positive but typically smaller than under basel irb formulas when starting from low levels initially both savers and borrowers benefit from higher capital requirements at higher levels only savers are in favour of tighter and more time varying capital charges

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

credit growth monetary policy and economic activity in a three regime tvar model we employ a threshold vector autoregression tvar methodology in order to examine the nonlinear nature of the interactions among credit market conditions monetary policy and economic activity we depart from the existing literature on the subject along two dimensions first we focus on a model in which the relevant threshold variable describes the state of economic activity rather than credit market conditions second in contrast to the existing tvar literature which concentrates exclusively on single threshold models we allow for the presence of a second threshold which is overwhelmingly supported by all relevant statistical tests our results indicate that the dynamics of the interactions among credit market conditions monetary policy and economic activity change considerably as the economy moves from one phase of the business cycle to another and that single threshold tvar models are too restrictive to fully capture the nonlinear nature of those interactions the impact of most shocks tends to be largest during periods of sub par economic growth and smallest during times of moderate economic activity by contrast credit risk shocks have the largest impact when output growth is considerably above it long term trend

italy the real effects of inflation and disinflation over the past 15 years the italian economy has experienced rather uncommon developments by comparison with the rest of europe these developments have been described alternatively in terms of near collapses miracles or impending bankruptcy such dramatic characterizations are of little help in understanding what happened yet they somehow reflect a history of large and often unexpected changes and a sequence of policy turn arounds from a distance the italian experience still raises some issues of general interest regarding the means and the timing of an adjustment process in italy return to profitability was pursued before macroeconomic stabilization instead of resulting from it as happened elsewhere it is indeed our contention that this evolution is sometimes commendable adjustment in italy was quicker and less costly in terms of output investment and employment

combining mean reversion and momentum trading strategies in foreign exchange markets abstract the literature on equity markets documents the existence of mean reversion and momentum phenomena researchers in foreign exchange markets find that foreign exchange rates also display behaviors akin to momentum and mean reversion this paper implements a trading strategy combining mean reversion and momentum in foreign exchange markets the strategy was originally designed for equity markets but it also generates abnormal returns when applied to uncovered interest parity deviations for five countries i find that the pattern for the positions thus created in the foreign exchange markets is qualitatively similar to that found in the equity markets quantitatively this strategy performs better in foreign exchange markets than in equity markets also it outperforms traditional foreign exchange trading strategies such as carry trades and moving average rules

bank leverage cycles and the external finance premium by combining the approaches of gertler and karadi 2011 and bernanke et al 1999 i develop a dsge model with leverage constraints both in the banking and in the non financial firm sector i calibrate this full model to us data in a world with only a monetary policy and a productivity shock the full model matches the relative volatility of the external finance premium while a bgg model generates too low volatility the full model also matches the procyclicality of bank leverage unlike the gk model for a reasonably calibrated combination shocks to the net worth of banks and non financial firms the model reproduces a substantial share of the contraction increase of investment the external finance premium observed during the great recession

daily seasonality in crude oil returns and volatilities abstract in this article we test for the existence of daily seasonality in returns and volatilities of crude oil using a dummy augmented garch specification for the period from may 1987 to october 2013 our key findings are as follows i volatilities on mondays are significantly higher than on all other weekdays providing the important insight that seasonal effects should be considered when forecasting crude oil volatility ii returns on the other hand tend to be lower on mondays than on other weekdays suggesting profitable investment strategies based on this seasonal pattern in fact the analysis of a simple long short trading rule based on the monday effect provides some evidence that it can outperform a passive buy and hold approach however it cannot do so to an extent that is statistically significant iii our seasonality results are fairly robust to the choice of other frequently used garch model variants like garch m tgarch and cgarch

reputation risk taking and macroprudential policy abstract this paper examines the role of macroprudential capital requirements in preventing inefficient credit booms in a model with reputational externalities in our model unprofitable banks have strong incentives to invest in risky assets when macroeconomic fundamentals are good in order to avoid the stigma of being assessed as low ability by the market we show that across the system countercyclical capital requirements that deter such gambling are constrained optimal when fundamentals are neither extremely weak nor extremely strong

the role of policymakers reputation in the ems disinflations abstract it is frequently argued that the ems itself in connection with the high anti inflation reputation of the german bundesbank is responsible for the inflation reduction and convergence which member countries have experienced based on the game theoretical model of backus and driffill 1985 american economic review 75 530 538 an empirical measure of the government s reputation for fighting inflation is derived by using a bayesian learning approach time varying estimates of these counterinflation reputation measures are computed for the original ems member countries and for a control group of major non ems countries the paper finds that only the smaller ems participants have gained anti inflation reputation during the ems period

aggregate uncertainty and the supply of credit abstract this paper presents a model in which a bank can exhibit self insurance with loan supply contracting when uncertainty increases this prediction is tested with u s commercial banks where identification is achieved by looking at differential effects according to banks capital to assets ratio car increases in uncertainty reduce the supply of credit more so for banks with lower levels of car these results are weaker for large banks and are robust to controlling for monetary policy to different measures of uncertainty and to breaking the dataset in subsamples quantitatively the effect of uncertainty shocks on credit supply is about as important as that of monetary policy shocks

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

financial crises and recapitalizations we develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods producing firms since financial intermediaries are highly leveraged we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations we also find that these gains are increasing in the size of the net worth loss are larger when recapitalization funds are raised from the household rather than the real sector and can be larger when lower idiosyncratic risk leads to higher leverage

stochastic dominance and expected utility survey and analysis while stochastic dominance has been employed in various forms as early as 1932 it has only been since 1969 1970 that the notion has been developed and extensively employed in the area of economics finance agriculture statistics marketing and operations research in this survey the first second and third order stochastic dominance rules are discussed with an emphasis on the development in the area since the 1980s

sufficient conditions for expected utility to imply drawdown based performance rankings the least restrictive sufficient condition for expected utility to imply sharpe ratio rankings is the location and scale ls condition see meyer 1987 the ls condition includes the normal and many other asymmetric and leptokurtic distributions commonly used in finance in this paper we argue that this condition is also sufficient for expected utility to imply drawdown based performance measure rankings because for investment funds satisfying the ls condition it does not matter whether funds are ranked with the sharpe ratio or with a drawdown based performance measure as the rankings are identical hence the same conditions that provide an expected utility foundation for the sharpe ratio also provide an expected utility foundation for drawdown based performance measures theoretically drawdown based performance measures are as good as the sharpe ratio

reputation and credibility in the european monetary system ems credibility axel weber this article provides a quantitative assessment of the credibility of the european monetary system during the disinflation period of the 1980s the results contradict the widely held view that the ems has operated as a dm zone it is shown that after a brief early phase the ems has functioned as a bipolar system with a hard currency option supplied by the german bundesbank and a soft currency option offered by the banque de france whilst from the onset the netherlands have chosen the hard currency option at least in a first stage the remaining smaller economies belgium denmark and ireland adopted the soft currency alternative at a later stage of the ems however the soft currency block has disintegrated and some countries most noticeably ireland and to a lesser extent france have shifted towards the hard currency standard it is argued that this increased tightening of the ems provides a favourable starting condition for the transition to economic and monetary union

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

fiscal deficits financial fragility and the effectiveness of government policies recent developments in the euro area highlighted the interactions between fiscal policy sovereign debt and financial fragility we introduce asset choice and sovereign debt holdings in banks portfolios in an otherwise standard macroeconomic model with financial frictions to emphasize a new crowding out mechanism through reduced private access to credit when leverage constrained banks accumulate sovereign debt when banks are substantially invested in sovereign debt the effectiveness of fiscal stimuli is impaired because deficit financed fiscal expansions through this channel crowd out private demand this channel also significantly reduces the gains from fiscal policy when interest rates are at the zero lower bound

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

aggregate supply and demand factors in oecd unemployment an update unemployment in the oecd countries has continued to rise to unprecedented levels the eec countries which on average ended the turbulent 1970s with an unemployment rate of close to 7 per cent are now in the mid 1980s approaching an 11 per cent level the united states is virtually the only country for which the changes in unemployment during the 1970s have not been systematically upward and for which the 1984 rate was more or less back to where it had been both ten years and five years earlier see figure 1 the reasons for the sustained increase in unemployment during the 1970s as well as the possible reasons for differences in patterns across industrial countries have been studied but question marks undoubtedly remain our own emphasis in an earlier study has been on the combination of the great supply shocks of the previous decade and the contractionary macro policy response of most oecd countries to these shocks as well as on the more recent policy coordination problem between the united states and europe with a few more years that have elapsed and quite a few percentage points of additional unemployment there is obviously room for both an update and a reappraisal starting from a fairly conventional aggregate supply as and aggregate demand ad macro framework an increase in unemployment may come

a prudential stable funding requirement and monetary policy in a small open economy abstract the basel iii net stable funding requirement introduced in january 2018 requires banks to use a minimum share of long term wholesale funding and deposits to fund their assets a similar regulation has been in place in new zealand since 2010 we introduce the stable funding requirement sfr into an open economy dsge model featuring a banking sector with richly specified liabilities and estimate the model for new zealand we then evaluate the impact of the new prudential instrument on monetary policy trade offs a higher steady state sfr level amplifies the effects of shocks to the spread on long term bond financing in the banking sector adding to macroeconomic volatility conditional on these shocks however the sfr plays a passive role in the transmission of all other shocks to the real economy hence in the overall picture the monetary policy trade off between inflation stabilisation and output stabilisation is only slightly worsened by the sfr we note that the trade off can be improved when monetary policy responds systematically to credit growth

global implications of national unconventional policies abstract financial integration in the markets for banks assets and liabilities makes balance sheet constraints highly correlated across countries resulting in a high degree of financial and macroeconomic interdependence likewise under financial integration unconventional policies aimed at stabilizing domestic financial and credit conditions could entail large international spillovers therefore stabilization by one country will also benefit other countries reducing incentives to implement credit policies in a classic free riding problem especially when these policies entail domestic costs we show that this outcome can emerge in an open economy model featuring financial intermediaries that face endogenously determined balance sheet constraints

reaching for yield and the diabolic loop in a monetary union abstract we use the theoretical framework of acharya and naqvi 2019 to introduce a macro financial model where the reaching for yield incentivized by a loosening monetary policy in the united states mitigates the diabolic loop in a monetary union we provide empirical evidence that the introduction of an accommodative monetary policy by the fed lowers the yields in us assets and increases liquidity and by extension the threshold above which a liquidity shock can damage a bank this in turn incentivizes bank managers to optimize their portfolios by investing in risky assets we use a monetary var to provide novel empirical evidence that there is an increase in the flow of funds to european assets a result which can be attributed to the reaching for yield incentive this portfolio balance channel attenuates the effects of financial fragility and improves government funding costs as well as credit conditions by providing liquidity to domestic banks and assets as a result the reaching for yield incentive mitigates the diabolic loop effect

demand and supply shocks in italy an application to industrial output abstract we investigate the impact of three different kinds of disturbances on industrial output in italy they originate respectively in aggregate demand technology and the labour supply we first illustrate the theoretical restrictions which permit identification of the three shocks then econometric identification is achieved by extending the blanchard and quah 1989 the american economic review 79 pp 655 673 procedure to a multivariate case our main conclusion is that output variability is significantly affected by technological shocks at all frequencies labour supply disturbances are also relevant while demand shocks have a minor impact on the series although they act in the expected direction therefore the short run behaviour of industrial production is largely explained by supply side shocks

do contractionary monetary policy shocks expand shadow banking summary using var models for the usa we find that a contractionary monetary policy shock has a persistent negative impact on the level of commercial bank assets but increases the assets of shadow banks and securitization activity to explain this waterbed effect we propose a standard new keynesian model featuring both commercial and shadow banks and we show that the model comes close to explaining the empirical results our findings cast doubt on the idea that monetary policy can usefully get in all the cracks of the financial sector in a uniform way

two moment decision models and expected utility maximization comment the two most common approaches to analyzing behavior under uncertainty are the expected utility model eu and the meanstandard deviation model ms jack meyer 1987 has recently established in this review that when the choice set consists of random variables which are represented by distribution functions that differ from one another only by location and scale parameters eu and ms are consistent in the sense that any eu ranking of elements of a choice set can also be represented by an ms ranking no claim has been made by meyer regarding the euand ms efficient sets however it can be easily shown that with no additional restrictions risk averters euefficient set is a subset in the weak sense of the ms efficient set in this note we extend meyer s work and prove that under a certain restriction on the support of the distribution random variables which are ms efficient are also eu efficient namely ms and eu yield identical efficient sets we analyze separately the relationship of msand eu efficient sets for all unrestricted u with u 0 and alternatively for all risk averse u with u 0 and u 0 only pairwise comparisons of risky options are considered

the economic consequences of president mitterrand france under mitterrand jeffrey sachs and charles wyplosz while french economic performance has not conformed to the enthusiastic promises of early 1981 this paper argues that the widely held view that it has been an unmitigated failure is unwarranted first the general deterioration can largely be dated back to the early seventies second the early and unfortunate attempt at a demand led expansion was both moderate in size and quickly reversed finally the post 1983 anti inflationary policies have been successful so that overall the disappointing french performance has been on a par with and in some ways better than the rest of europe but the main theme of the paper is the emphasis on the supply side the analysis is organized around the nairu the threshold rate of unemployment below which inflation rises in an attempt to explain the factors which have led to a continuous rise of the nairu since 1973 the paper focuses on labour costs particularly on the wedge between the costs borne by employers and net take home pay to achieve and sustain a significantly lower level of unemployment labour taxes must be cut thus reducing the wedge and the nairu and there must be a corresponding demand stimulus so that actual unemployment can fall to this level

shadow banks and macroeconomic instability we develop a macroeconomic model in which in which commercial banks can o oad risky loans to a highly levered shadow banking sector and financial intermediaries trade in securitized assets we highlight the liquidity creation role played by securitization we show how an endogenous tightening of credit constraints can exacerbate the e ect of shocks by limiting the ability of shadow banks to supply collateral and of banks to securitize the model is able to reproduce the cyclical behavior of bank and non bank credit and leverage macroeconomic shocks that directly impact the worth of financial sector are particularly harmful to economic activity but purely redistributive intra financial shocks can also generate recessions we discuss how government policy can stabilize the securitization market when the shadow banking system becomes impaired

a decision theoretic foundation for reward to risk performance measures abstract in this paper we prove that partial moments based performance measures e g omega kappa upside potential ratio sortino satchell ratio farinelli tibiletti ratio value at risk based performance measures e g var ratio cvar ratio rachev ratio generalized rachev ratio and other admissible performance measures are a strictly increasing function in the sharpe ratio the theoretical basis of this result is the location and scale property and two other plausible and mild conditions our result provides a decision theoretic foundation for all these frequently used performance measures moreover it might explain the empirical finding that all these measures typically lead to very similar rankings

monetary policy and long run systemic risk taking as an extension to the literature on the risk taking channel of monetary policy this paper studies the existence of a systemic risk taking channel srtc in the eurozone through an original macroeconomic perspective based on causality measures because the srtc is effective after an incubation period we make a distinction between short and long term causality following the methodology proposed by dufour and taamouti 2010 we find that causality from monetary policy to systemic risk while not significant in the very short term robustly represents 75 to 100 of the total dependence between the two variables in the long run reverse causality is rejected systemic risk did not influence the policy of the european central bank before the global financial crisis however central banks must be aware that a too loose monetary policy stance may be conducive to a build up of systemic risk

news and financial intermediation in aggregate fluctuations an important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks findings from estimated dsge models that in theory allow news shocks to matter quantitatively suggest that they do not this disconnect can be resolved once we augment a dsge model with a financial channel that provides amplification to news shocks our results suggest that news shocks to the future growth prospects of the economy are significant drivers of u s fluctuations explaining as much as 50 and 37 of the variance in hours worked and output respectively in cyclical frequencies

liquidity business cycles and monetary policy this paper presents a model of monetary economy with dier ences in liquidity across assets our purpose is to study how aggre gate production and asset prices uctuate with shocks to productivity and liquidity in so doing we examine what role government policy might have through open market operations that change the mix of assets held by the private sector we also show that certain apparent anomalies of asset markets are in fact normal features of a monetary economy in which the circulation of money is essential for a better allocation of resources

does the choice of performance measure influence the evaluation of hedge funds abstract the sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund hedge fund returns differ significantly from a normal distribution for this reason other performance measures for hedge fund returns have been proposed in both the academic and practice oriented literature in conducting an empirical study based on return data of 2763 hedge funds we compare the sharpe ratio with 12 other performance measures despite significant deviations of hedge fund returns from a normal distribution our comparison of the sharpe ratio to the other performance measures results in virtually identical rank ordering across hedge funds

country portfolios in open economy macro models this paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models the method is widely applicable simple to implement and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset it can be used in models with any number of assets whether markets are complete or incomplete and can be applied to stochastic dynamic general equilibrium models of any dimension so long as the model is amenable to a solution using standard approximation methods we first illustrate the approach using a simple two asset endowment economy model and then show how the results extend to the case of any number of assets and general economic structure

beyond sharpe ratio optimal asset allocation using different performance ratios abstract as the assumption of normality in return distributions is relaxed classic sharpe ratio and its descendants become questionable tools for constructing optimal portfolios in order to overcome the problem asymmetrical parameter dependent performance ratios have been recently proposed in the literature the aim of this note is to develop an integrated decision aid system for asset allocation based on a toolkit of eleven performance ratios a multi period portfolio optimization up covering a fixed horizon is set up at first bootstrapping of asset return distributions is assessed to recover all ratios calculations at second optimal rebalanced weights are achieved at third optimal final wealth is simulated for each ratios eventually we make a robustness test on the best performance ratios empirical simulations confirm the weakness in forecasting of sharpe ratio whereas asymmetrical parameter dependent ratios such as the generalized rachev sortino satchell and farinelli tibiletti ratios show satisfactorily robustness

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

sufficient information in structural vars abstract necessary and sufficient conditions under which a var contains sufficient information to estimate the structural shocks are derived on the basis of this theoretical result we propose two simple tests to detect informational deficiency and a procedure to amend a deficient var a simulation based on a dsge model with fiscal foresight suggests that our method correctly identifies and fixes the informational problem in an empirical application we show that a bivariate var including unemployment and labor productivity is informationally deficient once the relevant information is included into the model technology shocks appear to be contractionary