quality adjusted cost functions and policy evaluation in the nursing home industry proper evaluation of cost quality trade offs inherent in regulatory policy requires identifying the structure of production from the behavioral response of quality to the policy change however estimating the structure of production with endogenous quality is difficult because of both measurement problems and data availability we develop a simple method for identifying and estimating cost functions in the presence of endogenous and unobserved quality using this method we estimate that a quality adjusted cost function for nursing homes treating quality as exogenous yields seriously misleading estimates of marginal cost and economies of scale we then used the parameter estimates to evaluate the cost quality trade off in nursing home regulatory policy

developing a stress testing framework based on market risk models the basel 2 accord requires regulatory capital to cover stress tests yet no coherent and objective framework for stress testing portfolios exists we propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods when applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital

modelling the causes and manifestation of bank stress an example from the financial crisis in this study i model the predictors and manifestation of bank stress during the financial crisis using a multiple indicator multiple cause model unlike most early warning models that predict failure probabilities this article describes a framework for predicting a broader notion of bank stress that need not rely on regulatory decisions as such this method can be easily applied to large institutions and avoids the complications associated with modelling a regulatory decision such as failure or a camels downgrade using bank reliance on term auction facility funds and the out of sample incidence of failures and acquisitions i demonstrate that the measure of bank stress generated here accords with other notions of bank level distress finally this method catalogues predictors of distress during the financial crisis thus this article can help assess the validity of several recent regulatory proposals i find that those banks entering the crisis with more tier 1 capital more liquid balance sheets

on the frequency of large stock returns putting booms and busts into perspective textabstractnumerous articles have investigated the distribution of share prices and find that the returns are fat tailed nevertheless there is still controversy about the amount of probability mass in the tails and hence about the most appropriate distribution to use in modeling returns this controversy has proven hard to resolve as the alternatives are non nested we employ extreme value theory focusing exclusively on the larger observations in order to assess the tail shape within a unified framework we find that at least the first two moments exist this enables one to generate robust probabilities on large returns which put the recent stock market swings into historical perspective

tail dependence analysis of stock markets using extreme value theory abstractfinancial risk modelling frequently uses the assumption of a normal distribution when considering the return series which is inefficient if the data is not normally distributed or if it exh

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

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

semiparametric estimation of multi asset portfolio tail risk abstract when correlations between assets turn positive multi asset portfolios can become riskier than single assets this article presents the estimation of tail risk at very high quantiles using a semiparametric estimator which is particularly suitable for portfolios with a large number of assets the estimator captures simultaneously the information contained in each individual asset return that composes the portfolio and the interrelation between assets noticeably the accuracy of the estimates does not deteriorate when the number of assets in the portfolio increases the implementation is as easy for a large number of assets as it is for a small number we estimate the probability distribution of large losses for the american stock market considering portfolios with ten fifty and one hundred assets of stocks with different market capitalization in either case the approximation for the portfolio tail risk is very accurate we compare our results with well known benchmark models

the import of hospital rate setting programs on hospital and health care expenditures 1975 85 to reduce hospital expenditures many jurisdictions now regulate hospital rates prior theoretical work has demonstrated however that the effect of rate regulation on total expenditures is a priori unclear empirical research has found that hospital rate setting programs have reduced expenditures per diem and per admission but not necessarily hospital expenditures or total health care expenditure per capita this study extends this empirical research it employs pooled cross section time series data on state level expenditure regulatory and demographic variables obrserved annually for 1975 85 the analysis provides little evidence that hospital rate setting programs have reduced hospital expenditures some rate setting programs actually are positively and significantly related to hospital expenditures overall this study does not suggest that regulatory programs will reduce hospital expenditures

a latent structure approach to measuring reputation the present study provides estimates of reputation as a dynamic latent variable that is determined by price premiums and market data further it analyzes the effect of extrinsic factors on reputation specifically this study seeks to i quantify the reputation of washington apples over time ii study the dynamic nature of reputation and iii analyze the effect of the label washington apple the model adopted in this study is the dynamic multiple indicator multiple cause dymimic modeling approach which is a special case of the general latent variable modeling scheme called state space models both dymimic and hedonic approaches are applied to the data on washington apples and results from the two approaches are compared reputation plays an important role in assuring product quality in markets where consumers can only imperfectly judge the product quality until after consumption if reputation effects are absent in these types of markets there is an incentive for producers to reduce quality and take short run gains before buyers catch on in order to avoid such quality cutting products with good reputations will sell for premium prices shapiro 1983 showed theoretically that price premiums are necessary for producers to invest in quality and reputation there is an extensive theoretical literature on reputation but empirical studies are limited empirical studies on the impact of firm reputation on shareholder wealth or product demand include jarrell and peltzman 1985 borenstein and zimmerman 1988 and karpoff and lott 1993 caves and green 1996 showed that factors that may affect a firm s reputation influence the relationship between price and quality gorton 1996 analyzed how a bank s reputation for default affects the discount rate on its debt the measurement of the value of reputation to producers in terms of price premiums and how a reputation can be built up and destroyed are important issues that have not been empirically analyzed the current study provides estimates of reputation as a dynamic latent variable that is determined by price premiums and market data further it analyzes the effect of extrinsic factors on reputation steenkamp 1990 points out that consumers observe at the moment of purchase the intrinsic and extrinsic product quality cues but not the quality attributes intrinsic cues are characteristics of the product such as color freshness texture and flavor while extrinsic

the economics of voluntary export restraint agreements the three substantive sections of this survey deal with the economic consequences of voluntary export restraint agreements vers e g the multi fibre arrangement and vers on japanese auto exports section 2 focuses on the disposition of quota rents under the assumptions of perfectly competitive markets and the absence of substitute suppliers section 3 considers imperfect competition and the role of vers as cartelization instruments facilitating collusion section 4 analyzes the discriminatory effects of vers when there are third country suppliers a broad conclusion is that the economic consequences of vers are more complex than the standard trade policy analysis based on tariffs because of the issues discussed in sections 3 and 4 copyright 1989 by blackwell publishers ltd

a latent variable model of consumer taste determination and taste change for complex carbohydrates despite evidence that aggregate consumption of complex carbohydrates has risen over the last decade food consumption surveys suggest that fewer households are consuming less bread pasta rice potatoes and corn this paper estimates systems of complex carbohydrae demand using cross sectional data from 1977 78 and 1987 88 in order to explain this paradox changes in demand that are not explained by changes in prices or income are explained by variations in taste because tastes cannot be directly observed the paper uses a multiple indicator and multiple cause mimic model to construct a suitable proxy variable in the mimic approach the indicators are residuals from a household demand function that includes prices and incomes as explanatory variables while household and demograhic proxies are cause variables the objectives in applying the mimic model are to determine the effect of consumer tastes on complex carbohydrate demand and comparing cross sectional survey data from two different periods

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

a latent variable model of quality determination because of data difficulties there has been little empirical work analyzing the determination of the quality of a firm s output this article constructs a latent variable model for this problem that uses easily obtainable data the model is developed from the relationship between the firm s input demand functions and reduced form output functions and it has a novel multiple indicator multiple cause mimic interpretation the model also allows identification of an intercept implying that an index of quality that is comparable across samples can be constructed as an example a latent variable model of nursing home quality is estimated

the threshold effect in expected volatility a model based on asymmetric information this article develops theoretical insight into the threshold effect in expected volatility which means that large shocks are less persistent in volatility than small shocks the model uses the kyle admati pfleiderer setup with liquidity traders informed traders and a market maker information is modeled as a garch process it is shown that the garch process for information is transformed into a tarch process for threshold garch for the market price changes working with information flows allows one to derive implications for trading volume and market liquidity which provide the basis for a more complete test of the model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

from value at risk to stress testing the extreme value approach this article presents an application of extreme value theory to compute the value at risk of a market position in statistics extremes of a random process refer to the lowest observation the minimum and to the highest observation the maximum over a given time period extreme value theory gives some interesting results about the distribution of extreme returns in particular the limiting distribution of extreme returns observed over a long time period is largely independent of the distribution of returns itself in financial markets extreme price movements correspond to market corrections during ordinary periods and also to stock market crashes bond market collapses or foreign exchange crises during extraordinary periods an approach based on extreme values to compute the var thus covers market conditions ranging from the usual environment considered by the existing var methods to the financial crises which are the focus of stress testing univariate extreme value theory is used to compute the var of a fully aggregated position while multivariate extreme value theory is used to compute the var of a position decomposed on risk factors 2000 elsevier science b v all rights reserved

hiring procedures to implement stable allocations abstract we implement the stable correspondence of a job matching market in subgame perfect equilibrium we use a simple sequential mechanism in which firms propose a salary to each worker first stage and then each worker accepts at most one proposal second stage moreover if agents preferences are additive this mechanism implements in subgame perfect equilibrium the firms optimal corre spondence when firms use undominated strategies finally we construct another simple sequential mechanism where the order of decisions is permuted and which implements the workers optimal correspondence when agents preferences are additive journal of economic literature classification numbers c78 d78

extreme value theory and value at risk application to oil market recent increases in energy prices especially oil prices have become a principal concern for consumers corporations and governments most analysts believe that oil price fluctuations have considerable consequences on economic activity oil markets have become relatively free resulting in a high degree of oil price volatility and generating radical changes to world energy and oil industries as a result oil markets are naturally vulnerable to significant negative volatility an example of such a case is the oil embargo crisis of 1973 in this newly created climate protection against market risk has become a necessity value at risk var measures risk exposure at a given probability level and is very important for risk management appealing aspects of extreme value theory evt have made convincing arguments for its use in managing energy price risks in this paper we apply both unconditional and conditional evt models to forecast value at risk these models are compared to the performances of other well known modelling techniques such as garch historical simulation and filtered historical simulation both conditional evt and filtered historical simulation procedures offer a major improvement over the parametric methods furthermore garch 1 1 t model may provide equally good results as well as the combining of the two procedures

optimal portfolios with minimum capital requirements abstract we propose a novel approach to active risk management based on the recent basel ii regulations to obtain optimal portfolios with minimum capital requirements in order to avoid regulatory penalties due to an excessive number of value at risk var violations capital requirements are minimized subject to a given number of violations over the previous trading year capital requirements are based on the recent basel ii amendments to account for the stressed var that is the downside risk of the portfolio under extreme adverse market conditions an empirical application for two portfolios involving different types of assets and alternative stress scenarios demonstrates that the proposed approach delivers an improved balance between capital requirement levels and the number of var exceedances furthermore the risk adjusted performance of the proposed approach is superior to that of minimum var and minimum stressed var portfolios

estimating the basis risk of index linked hedging strategies using multivariate extreme value theory this paper studies the empirical quantification of basis risk in the context of index linked hedging strategies basis risk refers to the risk of non payment of the index linked instrument given that the hedger s loss exceeds some critical level the quantification of such risk measures from empirical data can be done in various ways and requires special consideration of the dependence structure between the index and the company s losses as well as the estimation of the tails of a distribution in this context previous literature shows that extreme value theory can be superior to traditional methods with respect to estimating quantile risk measures such as the value at risk thus the aim of this paper is to conduct an empirical analysis of basis risk using multivariate extreme value theory and extreme value copulas to estimate the underlying risk processes and their dependence structure in order to obtain a more adequate picture of basis risk associated with index linked hedging strategies our results emphasize that the application of extreme value theory leads to better fits of the tails of the marginal distributions in the considered stock price sample and that traditional methods in regard to estimating marginal distributions tend to overestimate basis risk while basis risk can in contrast be higher when taking into account extreme value copulas

varying the var for unconditional and conditional environments abstract accurate forecasting of risk is the key to successful risk management techniques using the largest stock index futures from 12 european bourses this paper presents var measures based on their unconditional and conditional distributions for single and multi period settings these measures underpinned by extreme value theory are statistically robust explicitly allowing for fat tailed densities conditional tail estimates accounting for volatility clustering are obtained by adjusting the unconditional extreme value procedure with garch filtered returns the conditional modelling results in iid returns allowing for the use of a simple and efficient multi period extreme value scaling law the paper examines the properties of these distinct conditional and unconditional trading models the paper finds that the biases inherent in unconditional single and multi period estimates assuming normality extend to the conditional setting

value at risk estimation of energy commodities a long memory garch evt approach abstract in this paper we evaluate value at risk var and expected shortfall es for crude oil and gasoline market we adopt three long memory models including figarch hygarch and fiaparch to forecast energy commodity volatility by capturing some volatility stylized fact such as long range memory heteroscedasticity asymmetry and fat tails then we consider extreme value theory which concentrates on the tail distribution rather than the entire distribution evt is considered as a potential framework for the separate treatment of tails of distributions which allows for asymmetry our results show that the fiaparch model with extreme value theory performs better in predicting the one day ahead var using the fitted long memory garch model and a simulation approach to estimate var for horizons over than one day backtesting results show that our approach still performs for lower estimation frequencies overall our findings confirm that taking into account long range memory asymmetry and fat tails in the behavior of energy commodity prices returns combined with filtering process such as evt are important in improving risk management assessments and hedging strategies in the high volatile energy market

tail risk in emerging markets of southeastern europe abstractthis article examines the left tail behaviour of returns on stocks in southeastern europe see we apply conditional extreme value theory evt approach on daily returns of six stock market indices from see between 2004 and 2013 predictive performance of value at risk var and expected shortfall es based on evt is compared against several alternatives such as historical simulation and analytical approach based on garch with a single conditional distribution model backtesting with daily returns shows that evt based models provide more reliable var and es forecasts than the alternative models in all six markets unlike the alternatives the evt based models cannot be rejected as var confidence level is increased this emphasizes the importance of extreme events in see markets and indicates that the ability of a model to capture volatility clustering accurately is not sufficient for a correct assessment of risk in these markets

a conditional extreme value volatility estimator based on high frequency returns abstract this paper introduces a conditional extreme value volatility estimator evt based on high frequency returns the relative performance of the evt is compared with the discrete time garch and implied volatility models for 1 day and 20 day ahead forecasts of realized volatility this is also a first attempt towards detecting any time series variation in extreme value distributions using high frequency intraday data the information content of evt is examined in the context of forecasting sp 2 vix generally yields a less accurate characterization of realized volatility than evt and garch models these results have implications for financial risk management and are thus relevant to both regulators and practitioners

reduced quality and an unlevel playing field could make consumers happier we study a model of imperfect competition and limited production capacity in which a key feature is the trade off between quality and quantity in particular lowering product quality enables firms to increase total production we illustrate that in the presence of limited capacity the choice of lower quality often results in increased social welfare we also explore the relation between the extent of competition and the choice of quality we find that in some cases reduced competition leads to increased production decreased average quality increased total welfare and makes consumers better off finally we consider the possibility of regulator mandated quality standards imposing high quality standards never improves welfare in our model on the other hand mandating an upper bound on quality could either increase or decrease welfare in either a monopoly or a duopoly market

on giffen like goods abstract this paper provides as a counter example to the alchian allen theorem a theory of giffen like goods a per unit charge to two similar goods raises the relative price of the lower quality good and yet increases the relative demand of the good

an evaluation of bank measures for market risk before during and after the financial crisis abstract we study the performance and behavior of value at risk measures used by a number of large u s banks before during and after the financial crisis alternative benchmark var measures including garch based measures are estimated directly from the banks trading revenues to explain the bank var performance results while overly conservative in both the pre crisis and post crisis periods bank var exceedances were excessive and clustered in the crisis period this contrasted with mostly unbiased benchmark hs and garch vars in the pre crisis and post crisis periods and vastly superior garch based var performance in the crisis period with lower exceedance rates and no exceedance clustering our results document the bank vars very slow adjustment to changing market conditions and their systematic bias in all studied periods our results indicate that bank vars could be improved by the use of models with time varying volatility and built on banks knowledge of their current positions

confidence intervals for conditional tail risk measures in arma garch models abstractarma garch models are widely used to model the conditional mean and conditional variance dynamics of returns on risky assets empirical results suggest heavy tailed innovations with positive extreme value index for these models hence one may use extreme value theory to estimate extreme quantiles of residuals using weak convergence of the weighted sequential tail empirical process of the residuals we derive the limiting distribution of extreme conditional value at risk cvar and conditional expected shortfall ces estimates for a wide range of extreme value index estimators to construct confidence intervals we propose to use self normalization this leads to improved coverage vis a vis the normal approximation while delivering slightly wider confidence intervals a data driven choice of the number of upper order statistics in the estimation is suggested and shown to work well in simulations an application to stock index returns documents the improvements of cvar and ces forecasts

extreme risk modeling an evt pair copulas approach for financial stress tests abstract this paper presents a semi parametric copula garch risk model for financial return series with a stress testing perspective the marginal distributions of the returns are specified using the extreme value theory evt putting a specific emphasis on extreme returns the joint distribution is then built up using the pair copulas theorem based on the marginal distributions and the pair dependence structures the model performance is assessed for three sets of assets namely equity indices exchange rates and commodity prices the empirical results support a better static and dynamic properties of the presented model compared to most common specifications used in practice the proposed model and the alternative specifications are then carried out to perform stress testing exercises on hypothetical portfolios where financial returns are considered as risk factors the results show that the use of a wide range of risk models produce significantly different results in terms of the corresponding stress scenario and in the corresponding impact on the portfolios hence considering flexible and consistent specifications as in the proposed model allows ensuring a better credibility of the stress scenario and enhances the usefulness of the stress testing results

simplified mechanisms with an application to sponsored search auctions abstract a mechanism can be simplified by restricting its message space if the restricted message spaces satisfy a certain outcome closure property then the simplification is tight for every e 0 any e nash equilibrium of the simplified mechanism is also an e nash equilibrium of the unrestricted mechanism prominent auction and matching mechanisms are tight simplifications of mechanisms studied in economic theory and often incorporate price adjustment features that facilitate simplification the generalized second price auction used for sponsored search advertising is a tight simplification of a series of second price auctions that eliminates the lowest revenue equilibrium outcomes and leaves intact only higher revenue equilibria

var seductive but dangerous value at risk var has gained rapid acceptance as a valuable approach to risk management not all vars are equal however a study of var techniques used by dealers and end users reveals that var calculations differ significantly for the same portfolio vars are extremely dependent on parameters data assumptions and methodology calculation of eight common vars for three hypothetical portfolios demonstrates the potentially seductive but dangerous nature of any single approach to risk management in sum although var and other quantitative techniques are necessary aspects of an effective risk management program they are not sufficient to control risk

measurement of industry conduct with a latent structure empirical industrial organization economists have long been concerned with measuring the degree of competition in markets and understanding its underlying determinants but they have faced serious difficulties including data requirements and misspecification issues this paper offers an alternative method of estimating market power and industry conduct market power is estimated for the fresh apple industry with a latent modelling structure specifically variations of the mimic model are adapted to this problem these variations are the multiple indicators mi and the filtered measure fm approaches the results suggest that although the washington apple industry has a large market share it does not exercise market power factors that mitigate the exertion of market power in the fresh apple market include competitor shipments and retailer power copyright 2004 john wiley sons ltd

good grapes and bad lobsters applying the alchian and allen theorem i the theorem the alchian and allen theorem states that adding a common charge to the price of two substitute goods increases the relative consumption of the higher quality good real income held constant the classic example of this theorem is from alchian and allen s 1964 75 textbook university economics suppose that grapes are grown in california and that it costs 5 cents a pound to ship grapes to new york whether the grapes are choice or standard suppose further that in california the choice grapes sell for 10 cents a pound and the standard for 5 cents a pound if grapes are shipped to new york the shipping costs will raise the costs of choice grapes to 15 cents and of standard grapes to 10 cents in new york the costs of choice grapes are lower relative to standard grapes 1 5 to 1 than in california 2 to 1 new yorkers faced with a lower price of choice grapes relative to standard will consume relatively more choice grapes than californians will alchian and allen s theorem is solely about relative price effects and does not rely upon income effects or selection effects it assumes that those most willing to pay the fixed charge do not have systematically different preferences and incomes as those not paying the charge furthermore the theorem does not hold for corner solutions where the high and low quality goods are consumed by different classes of consumers or equivalently each consumer purchases only one unit of the good in question we must then consider the different rates at which consumers of high and low quality goods decrease consumption when price changes purchasers of high quality items need not reap more consumer surplus than purchasers of low quality items 1 ii per unit costs versus fixed and sunk costs the alchian and allen theorem applies only when the costs are applied to each good on a per unit basis charging a single fee or fixed tax to allow consumption of the good to take place does not create a substitution effect the fixed fee once paid is treated as a sunk cost and consumers face the same relative prices they faced initially an increase in the cost of a grape shipping permit for instance will not have any direct effects on the quality of grapes many of the examples of the alchian allen theorem that have been given in the literature do not specify true per unit taxes umbeck 1980 for example argues that an increase in the installation charge for phones will increase phone usage but in this case the relevant charges are fixed the installation or monthly service charge will increase current phone usage only if individuals are planning to go without a phone in future periods in contrast individuals who will continue phone service into the foreseeable future cannot minimize their monthly charges or their installation charges by increasing their phone usage now any change in behavior would be due to an income effect which is unpredictable a trickier problem is raised by borcherding and silberberg 1978 133 who claim that it does not matter if the goods are shipped to the consumers or the consumers are shipped to the goods going to maine or the country involves a transport cost to people not from maine or the country what the alchian allen theorem predicts therefore is that tourists in maine will consume on average higher quality lobsters than the natives and similarly for city versus rural dweller s purchases of produce at roadside stands if people who make a special trip to maine in fact choose to eat truly delectable instead of inferior quality lobsters sold there this confirms alchian and allen s thesis emphasis added when the tourists are transported the alchian allen theorem applies only if 1 the tourists are planning both high quality and low quality trips in the future and 2 high quality lobster is strongly and positively related to a high quality vacation in maine

risk2 measuring the risk in value at risk the recent derivatives disasters have focused the attention of the finance industry on the need to control financial risks better this search has led to a uniform measure of risk called value at risk var which is the expected worst loss over a given horizon at a given confidence level var numbers however are themselves affected by sampling variation or estimation risk thus the risk in value at risk itself nevertheless given these limitations var is an indispensable tool to control financial risks this article lays out the statistical methodology for analyzing estimation error in var and shows how to improve the accuracy of var estimates

ambiguous changes in product quality economic goods are frequently sold according to a price per unit quantity where the quantity characteristic does not measure all the economically important characteristics of the good milk is sold by the quart automobiles rented by the mile physicians services bought by the visit and tennis lessons by the hour in all cases heterogeneous units are available in the market and the price per unit quantity depends upon the amount of the unpriced characteristic contained in each unit the per quart price of milk depends upon the butterfat content the mileage costs of automobile rentals on the cars make and the price per unit time for personal services on the providers skill and training the common distinction made between these variants of the same good is that they differ in quality where quality refers to the amounts of the unpriced attributes contained in each unit of the priced attribute thus milk is packaged according to the attribute milk liquid and the quality of milk refers to the ratio of butterfat per unit of liquid 2 this paper considers some of the unique aspects of the economics of supply and demand under this situation where products contain at least two desired attributes only one of which is quantified and measured prior to purchase product quality is here defined by the ratio of the second quality attribute per unit of the measured quantity attribute 3 this simple specification of quality allows a direct link between standard economic models of related products and the economics of variable product quality previous analyses which treat quality simply as a shift parameter in the demand function are shown to obscure the actual subtleties of supply and demand with variable endogenous quality 4 the paper proceeds by first examining the efficient quality and quantity and the competitive equilibrium the market equilibrium under monopoly is then contrasted in the second section the general theme of the

a generalized extreme value approach to financial risk measurement this paper develops an unconditional and conditional extreme value approach to calculating value at risk var and shows that the maximum likely loss of financial institutions can be more accurately estimated using the statistical theory of extremes the new approach is based on the distribution of extreme returns instead of the distribution of all returns and provides good predictions of catastrophic market risks both the in sample and out of sample performance results indicate that the box cox generalized extreme value distribution introduced in the paper performs surprisingly well in capturing both the rate of occurrence and the extent of extreme events in financial markets the new approach yields more precise var estimates than the normal and skewed t distributions

games of manipulation in marriage problems abstract we analyze the equilibrium outcomes of thepreference revelation gamesinduced bypareto efficientandindividually rationalsolutions in the context ofmarriage problems we employ a nash equilibrium refinement which allows deviations by a set of permissible coalitions and show that the set of equilibrium outcomes coincides with a variant of the core that allows blocking by only permissible coalitions journal of economic literatureclassification numbers c71 c78 d71 d78

overnight borrowing interest rates and extreme value theory we examine the dynamics of extreme values of overnight borrowing rates in an inter bank money market before a financial crisis during which overnight borrowing rates rocketed up to simple annual 4000 percent it is shown that the generalized pareto distribution fits well to the extreme values of the interest rate distribution we also provide predictions of extreme overnight borrowing rates before the crisis the examination of tails extreme values provides answers to such issues as what are the extreme movements expected in financial markets have we already seen the largest moves is there a possibility for even larger movements and are there theoretical processes that can model the type of fat tails in the observed data the answers to such questions are essential for proper management of financial exposures and laying ground for regulations

profit maximizing matchmaker abstract this paper considers a resource allocation mechanism that utilizes a profit maximizing auctioneer matchmaker in the kelso crawford 1982 many to one assignment problem we consider general and simple individualized price message spaces for firms reports following milgrom 2010 we show that in the simple message space i the matchmaker s profit is always zero and an acceptable assignment is achieved in every nash equilibrium and ii the sets of stable assignments and strong nash equilibria are equivalent by contrast in the general message space the matchmaker may make a positive profit in a nash equilibrium this shows that restricting message space not only reduces the information requirement but also improves resource allocation

a margin scheme that advises on when to change required margin abstract the purpose of a margin requirement is to protect a clearinghouse from members defaults resulting from big losses due to adverse movement of futures prices to decide on how much a margin is required a clearinghouse may refer to a benchmark margin defined as a constant multiple of the forecasted volatility however a benchmark margin only advises on a desirable margin level it gives no advice on whether a clearinghouse should alter existing required margin this paper proposes a margin scheme that can advise on when to change the required margin and if a change is recommended to what level it should be changed the proposed margin scheme can be devised so that the coverage probability and change frequency are controlled at target levels deemed appropriate by the clearinghouse the proposed margin scheme needs a volatility forecast as input this paper shows that among a large number of volatility forecasts implied volatility gives the best results this confirms a conjecture that implied volatility may have more information content than other volatility forecasts as far as margin setting is concerned

the choice of the distribution of asset returns how extreme value theory can help abstract one of the issues of risk management is the choice of the distribution of asset returns academics and practitioners have assumed for a long time for more than three decades that the distribution of asset returns is a gaussian distribution such an assumption has been used in many fields of finance building optimal portfolio pricing and hedging derivatives and managing risks however real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality this article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution an empirical analysis using equity data of the us market is provided to illustrate this point

on coalition proof nash equilibria in common agency games abstract in this paper we consider two notions of a coalitional deviation strict deviation where each of member of a deviating group is better off and weak deviation where at least one member of a deviating group is better off while all other members are at least as well off we then examine for the class of common agency games introduced in bernheim and whinston quart j econ 101 1986 1 31 the structure and properties of two notions of a coalition proof nash equilibrium generated by strict and weak deviation we also study a relationship between coalition proof equilibria strong equilibria and pareto undominated nash equilibria journal of economic literature classification numbers c72 d79

estimating value at risk under a heath jarrow morton framework with jump this article proposes a new methodology for measuring value at risk hereafter var using a model that incorporates both volatility and jumps heath jarrow morton hjm model has been used for the valuation of interest rate derivatives this study extends the use of hjm model to the estimation var this article specifically uses a two factor hjm jump diffusion model for the computation the study models the eurodollar futures prices using its derivatives in addition this article uses a new volatility specification of ze to 2002 to construct the hjm dynamics the result indicates that the var model using hjm jump diffusion framework performs well in capturing the nonnormality and in providing accurate var forecasts in the in sample and out sample tests

payment source and the cost of hospital care evidence from a multiproduct cost function with multiple payers abstract this study investigates the capacity of hospitals to vary the intensity of their services based on patients expected sources of payment while the concept of price discrimination by hospitals based on payer generosity cost shifting has been discussed extensively the notion that hospitals can adjust payer specific marginal costs to reflect differences in reimbursement policies has not been studied in depth to examine this issue this analysis employs a multiproduct cost function with hospital outputs defined as admissions by payment source controlling for the distribution and severity of illness casemix for each payer marginal costs of casemix adjusted discharges are obtained and compared for medicare medicaid private payers and a residual category that includes uncompensated care we find that indeed payer specific marginal costs generally reflect payer generosity

on the international harmonization of bank regulation this paper offers a three way typology of bank regulation and examines the question of international harmonization for each category for economic regulation the danger is that harmonization could support and preserve domestic protectionist regulatory regimes but it could instead be a beneficial guise for lowering protectionist barriers the latter efforts should be encouraged for prudential regulation national regulation should be adequate to handle the extra stresses of international banking harmonization efforts e g the basle accord may offer only modest help but the accord may offer indirect help by limiting national governments competitive efforts implicitly to subsidize their banks risk taking activities finally for information regulation national regulation appears to be adequate and international harmonization does not appear to be necessary copyright 1994 by oxford university press

extreme value theory in finance a survey extreme value theory is concerned with the study of the asymptotic distribution of extreme events that is to say events which are rare in frequency and huge in magnitude with respect to the majority of observations statistical methods derived from it have been employed increasingly in finance especially for risk measurement this paper surveys some of those main applications namely for testing different distributional assumptions for the data for value at risk and expected shortfall calculations for asset allocation under safety first type constraints and for the study of contagion and dependence across markets under conditions of stress

a mechanism implementing the stable rule in marriage problems abstract we consider a stable mechanism where each agent announces his her own preferences and a stable matching is selected for the announced preference profile we show that the mechanism implements the stable rule that selects all of the stable matchings in a strong equilibrium in other words when we select any stable matching to an announced preference profile in fact the matching is stable for the true preference profile in environments where agents behaviors are described by a strong nash equilibrium

margin exceedences for european stock index futures using extreme value theory abstract futures exchanges require a margin requirement that ensures their competitiveness and protects against default risk this paper applies extreme value theory in computing unconditional optimal margin levels for a selection of stock index futures traded on european exchanges the theoretical framework focuses explicitly on tail returns thereby properly accounting for large levels of risk in measuring prudent margin levels the paper finds that common margin requirements are sufficient for each contract with the exception of the norwegian obx index in providing equitable costs for traders in addition the paper shows the underestimation bias in margin levels that are calculated assuming normality differing margin requirements reflect the unconditional and conditional trading environments

the generalized alchian allen theorem a slutsky equation for relative demand we generalize the alchian allen theorem so as to account for income and endowment effects and provide two versions of a generalized alchian allen theorem one for a unit cost component and one for a proportional cost component both versions provide a decomposition of an uncompensated change in the demand ratio of two goods into a substitution effect and an income endowment effect and may thus be regarded as extensions of the familiar slutsky equation for relative demand finally we apply our results to the choice of real estates and to parental time allocation decisions the latter providing implications for child care policies uel dll h21 j22 r21 i introduction the alchian allen theorem see alchian and allen 1964 74 75 suggests that an increase in the prices of two goods by the same amount leads to a decrease in the relative price of the more expensive good and hence to a relative increase in the compensated demand for that good as this pure substitution effect applies to any pair of goods with a common but abstract unit cost component the alchian allen theorem has a broad range of applications for example the common unit cost component may be interpreted as a specific tax as a fixed transportation cost as a flat transaction cost or as the wage forgone in favor of different leisure time activities accordingly the alchian allen theorem has been discussed in various fields of both theoretical and empirical economics 1 above all borcherding and silberberg 1978 formulated the alchian allen theorem for compensated demand in the standard consumer model with three goods then hummels and skiba 2004 extended the analysis of borcherding and silberberg by introducing an ad valorem tariff on the two goods under consideration and showed that the effect of a change in the ad valorem tariff is basically opposite to the effect of a change in the unit cost in this paper we generalize the two formulas for substitution effects one for demand changes resulting from the unit cost components and one resulting from the proportional cost components 2 within the alchian allen framework so as to incorporate income and endowment effects we believe that this generalization constitutes an important result as these effects are arguably significant for a broad variety of goods in this way we arrive at two versions of the generalized alchian allen theorem gaat which essentially provides a decomposition of an uncompensated change in the demand ratio of two goods into a substitution effect compensated effect and an income endowment effect because of the apparent similarity of our decomposition of the change in the demand ratio with the renowned slutsky equation the two versions of the gaat we provide here may be regarded as the proper versions of the slutsky equation for relative demand the alchian allen result i e an increase in the demand for the more expensive good relative to the demand for the less expensive good resulting from an increase of a common unit cost component of both goods has been examined empirically for example bertonazzi maloney and mccormick 1993 interpreted the alchian allen theorem within a household production framework 3 and found that football fans traveling farther tend to purchase higher quality tickets hummels and skiba 2004 presented the hypothesis that an increase in unit transport costs increases the share of the higher quality goods and therefore the share weighted average of prices and confirmed this using international trade data moreover some researchers have indirectly provided findings that are consistent with the alchian allen result sobel and garrett 1997 found that an increase in specific taxes is estimated to increase the market share of premium brand cigarettes and nesbit 2007 found that an increase in specific taxes is estimated to increase the market share of premium grade gasoline

conflict and cooperation the structure of equilibrium payoffs in common agency abstract this paper is a contribution to the theory of common agency initiated by b d bernheim and m d whinston 1986 quart j econ 101 1 31 by common agency we mean the following an agent decides upon an action which affects its well being as well as the well being of n other individuals the principals each of whom offers a menu of payments contingent on the action chosen under complete information bernheim and whinston prove the existence of an interesting subset of nash equilibria they call truthful provide arguments in defense of this refinement and characterize the set of equilibrium payoffs this paper provides a set of theoretical results to identify the structure of equilibrium payoffs with special attention to the payoff of the agent by focusing on complete information we are in a position to evaluate the effects of competition per se on the magnitude of the rent obtained by the agent we illustrate this user guide on a wide and diverse family of applications including auctions competition for an input economic influence and private production of public goods journal of economic literature classification numbers c72 d72