contingent capital tail risk and debt induced collapse we study the design and incentive effects of contingent convertible debt with contingent convertibles the endogenous bankruptcy boundary can be at either of two levels one with lower default risk or one at which default precedes conversion an increase in debt moves the firm from the first regime to the second a phenomenon we call debt induced collapse setting the conversion trigger sufficiently high avoids this hazard given this condition we investigate the effect of contingent capital and debt maturity on optimal capital structure debt overhang and asset substitution we calibrate the model to large banks during the financial crisis received april 10 2015 editorial decision march 20 2017 by editor leonid kogan

market triggered changes in capital structure equilibrium price dynamics we analyze the internal consistency of using the market price of a firm s equity to trigger a contractual change in the firm s capital structure given that the value of the equity itself depends on the firm s capital structure of particular interest is the case of contingent capital for banks in the form of debt that converts to equity when conversion is triggered by a decline in the bank s stock price we analyze the problem of existence and uniqueness of equilibrium values for a firm s liabilities in this context meaning values consistent with a market price trigger discrete time dynamics allow multiple equilibria in contrast we show that the possibility of multiple equilibria can largely be ruled out in continuous time where the price of the triggering security adjusts in anticipation of breaching the trigger our main condition for existence of an equilibrium requires that the consequences of triggering a conversion be consistent with the direction in which the trigger is crossed for the design of contingent capital with a stock price trigger this condition may be interpreted to mean that conversion should be disadvantageous to shareholders and it is satisfied by setting the trigger sufficiently high uniqueness follows provided the trigger is sufficiently accessible by all candidate equilibria we illustrate precise formulations of these conditions with a variety of applications

income inequality capitalism and ethno linguistic fractionalization we examine the relationship between capitalism and income inequality for a large sample of countries using an adjusted economic freedom index as proxy for capitalism our results suggest that there is no robust relationship between economic freedom and gini coefficients based on gross income subsequently we analyze the relationship between income redistribution and ethno linguistic fractionalization we find that the impact of ethno linguistic fractionalization on income redistribution is conditional on the level of economic freedom countries that have a high degree of fractionalization redistribute income less while capitalist countries that have a low degree of fractionalization redistribute income more

the political economy of linguistic cleavages article i nfo this paper uses a linguistic tree describing the genealogical relationship between all 6912 world languages to compute measures of diversity at different levels of linguistic aggregation by doing so we let the data inform us on which linguistic cleavages are most relevant for a range of political economy outcomes rather than making ad hoc choices we find that deep cleavages originating thousands of years ago lead to better predictors of civil conflict and redistribution the opposite pattern emerges when it comes to the impact of linguistic diversity on growth and public goods provision where finer distinctions between languages matter 2011 elsevier b v all rights reserved

contingent capital with a capital ratio trigger contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues specific proposals vary in their choice of conversion trigger and conversion mechanism we analyze the case of contingent capital with a capital ratio trigger and partial and ongoing conversion the capital ratio we use is based on accounting or book values to approximate the regulatory ratios that determine capital requirements for banks the conversion process is partial and ongoing in the sense that each time a bank s capital ratio reaches the minimum threshold just enough debt is converted to equity to meet the capital requirement so long as the contingent capital has not been depleted we derive closed form expressions for the market value of such securities when the firm s asset value is modeled as geometric brownian motion and from these we get formulas for the fair yield spread on the convertible debt a key step in the analysis is an explicit expression for the fraction of equity held by the original shareholders and the fraction held by converted investors in the contingent capital this paper was accepted by gerard p cachon stochastic models and simulation

what makes growth sustained abstract we identify structural breaks in economic growth in 140 countries and use these to define growth spells periods of high growth preceded by an upbreak and ending either with a downbreak or with the end of the sample growth spells tend to be shorter in african and latin american countries than elsewhere we find evidence that growth duration is positively related to the degree of equality of the income distribution democratic institutions export orientation with higher propensities to export manufactures greater openness to fdi and avoidance of exchange rate overvaluation favorable for duration and macroeconomic stability

valuation of insurers contingent capital with counterparty risk and price endogeneity this study develops a structural framework to value insurers contingent capital with counterparty risk cr and overcomes the problem of price endogeneity pe in the valuation model our results on the focal contingent capital instrument catastrophe equity put option cateput indicate that prices can be significantly overestimated without considering cr and be significantly underestimated without considering pe this study also examines how cateputs affect the buyer s probability of default pd our results show that buying a cateput lowers the pd for high risk insurers but not necessarily so for low risk insurers however without taking cr and pe into account one may significantly overestimate the credit enhancement provided by the cateputs

capital account liberalization and income inequality this article makes both a theoretical and an empirical contribution to the literature on financial liberalization and income inequality in the first part we develop a tractable model that features agents with varying investment abilities and a banking sector there are two possible interventions to liberalize the banking sector first a reduction in reserve requirements and second an increase in the amount of foreign funds that can be used to finance domestic loans financial liberalization leads to enhanced banking sector efficiency and adjustments in interest rates affecting income of investors and savers and therefore income inequality theoretically the impact of financial liberalization on income inequality is ambiguous yet the model suggests that financial liberalization will improve income distribution in countries where financial depth is high our empirical estimates confirm this conditional effect more precisely the estimates suggest that capital account liberalization only tends to lower income inequality if the level of financial depth as measured by private credit over gdp exceeds 25 percent

optimal bank capital with costly recapitalization we study optimal bank capital choice as a dynamic trade off between the opportunity cost of equity the loss of franchise value following a regulatory minimum capital violation and the cost of recapitalization we introduce a recapitalization delay that results in a strictly positive probability of capital adequacy violation we calibrate the model to bank accounting return data and evaluate the model s ability to explain observed bank capital ratios differences in return volatility explain a significant fraction of the cross sectional variation in bank capital ratios differences in the level of capital market imperfections across banks constitute a secondary explanation

does fdi actually affect income inequality insights from 25 years of research while there are 25 years of empirical research on how fdi may affect income inequality there is surprisingly no consensus on this issue in this paper we conduct a meta analysis on the effect of fdi on inequality using 543 empirical studies from 1995 to 2019 among various factors we find that the development level of the study country has the strongest influence on the direction in which fdi affects income inequality when the primary studies are sorted into three groups based on the gdp per capita of their sample areas the within group estimates on the effect of fdi on income inequality become strongly consistent with each other particularly we find that fdi is associated with higher inequality for the low income group has no statistically significant effect for the middle income group and is associated with lower inequality for the high income group this observation suggests that fdi may increase income inequality as a country initially develops but reduce inequality as development deepens

economic freedom government policy and the trade off between equity and economic growth this study investigates the role that economicfreedom plays in economic growth and in the distribution in marketincome the role of government policy in advancingeconomic progress and in promoting income equality and the effectthat the rate of economic progress has on thedistribution of market income structural and reduced formmodels are estimated that reveal that economic freedompromotes both economic growth and equity and that there is apositive but relatively small trade off between growth andincome inequality

macroprudential policy and income inequality abstract based on newly available data we examine the relationship between macroprudential policies maps and the gini coefficient of both market income inequality i e the gini coefficient of income inequality before redistributive policies and net income inequality i e inequality after redistribution we run panel regressions for 69 countries over the period 2000 2013 our results show a positive association of the use of some maps with both market and net income inequality in particular we find that concentration limits macroprudential reserve requirements and interbank exposure limits have a positive relationship with market income inequality while loan to value ltv limits have a positive association with net inequality the results for other measures are relatively sensitive to specification

on the design of contingent capital with a market trigger contingent capital cc which intends to internalize the costs of too big to fail in the capital structure of large banks has been under intense debate by policy makers and academics we show that cc with a market trigger in which direct stake holders are unable to choose optimal conversion policies does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante the no value transfer restriction precludes penalizing bank managers for taking excessive risk multiplicity or absence of an equilibrium introduces the potential for price uncertainty market manipulation inecient capital allocation and frequent conversion errors these results point to the need to explore alternative designs of a prudential capital structure for banks jel classication

central bank policies and income and wealth inequality a survey this paper reviews recent research on the relationship between central bank policies and inequality a new paradigm which integrates sticky prices incomplete markets and heterogeneity among households is emerging which allows for the joint study of how inequality shapes macroeconomic aggregates and how macroeconomic shocks and policies affect inequality the new paradigm features multiple distributional channels of monetary policy most empirical studies however analyze each potential channel of redistribution in isolation our review suggests that empirical research on the effects of conventional monetary policy on income and wealth inequality yields mixed findings although there seems to be a consensus that higher inflation at least above some threshold increases inequality in contrast to common wisdom conclusions concerning the impact of unconventional monetary policies on inequality are also not clear cut to better understand policy effects on inequality future research should focus on the estimation of general equilibrium models with heterogeneous agents

valuing the treasury s capital assistance program the capital assistance program cap was created by the u s government in february 2009 to provide backup capital to large financial institutions unable to raise sufficient capital from private investors under the terms of the cap a participating bank receives contingent capital by issuing preferred shares to the treasury combined with embedded options for both parties the bank gets the option to redeem the shares or convert them to common equity with conversion mandatory after seven years the treasury earns dividends on the preferred shares and gets warrants on the bank s common equity we develop a contingent claims framework in which to estimate market values of these cap securities the interaction between the competing options held by the buyer and issuer of these securities creates a game between the two parties and our approach captures this strategic element of the joint valuation problem and clarifies the incentives it creates we apply our method to the 18 publicly held bank holding companies that participated in the supervisory capital assessment program the stress test launched together with the cap on average we estimate that compared to a market transaction the cap securities carry a net value of approximately 30 of the capital invested for a bank participating to the maximum extent allowed under the terms of the program we also find that the net value varies widely across banks we compare our estimates with abnormal stock price returns for the stress test banks at the time the terms of the cap were announced we find correlations between 0 78 and 0 85 depending on the precise choice of period and set of banks included these results suggest that our valuation aligns with shareholder perception of the value of the program prompting questions about industry reactions and the overall impact of the program this paper was accepted by wei xiong finance

real options and contingent convertibles with regime switching abstract we consider a firm with no assets in place but an option to invest in a project the investment is irreversible but delayable in a regime switching economy the firm issues equity straight bonds sbs and contingent convertibles cocos we provide the closed form prices for the firm s securities and the pricing and timing of the option our numerical analyses discover that issuing cocos instead of sbs induces much less agency cost of debt the agency cost is higher in a boom economy than in recession but the difference is small there is a unique cocos conversion ratio such that the agency cost arrives at the minimum value zero the inefficiencies arising from asset substitution and debt overhang are much more significant in recession than in boom only if the conversion ratio is not too small the two inefficiencies disappear during boom periods while the effects of the conversion rate on optimal capital structure and firm value and those of supervision and jump intensity on optimal cocos coupon are ambiguous and weak the stricter the supervision or the longer the economy remains in recession the less the option value and the optimal sbs coupon

evaluating corporate bonds with complicated liability structures and bond provisions this paper presents a general and numerically accurate lattice methodology to price risky corporate bonds it can handle complex default boundaries discrete payments various asset sales assumptions and early redemption provisions for which closed form solutions are unavailable furthermore it can price a portfolio of bonds that accounts for their complex interaction whereas traditional approaches can only price each bond individually or a small portfolio of highly simplistic bonds because of the generality and accuracy of our method it is used to investigate how credit spreads are influenced by the bond provisions and the change in a firm s liability structure due to bond repayments

callable contingent capital valuation and default risk this paper proposes the use of contingent capital with a call provision in which the insurer has an option to redeem the contingent capital at any time i characterize in detail a unique dynamic equilibrium of common stock subordinated contingent capital and a senior standard bond under a simple yet sufficient and necessary condition that can be implemented easily i further show that the issuance of callable contingent capital does not affect the default risk of an outstanding senior standard bond as a result callable contingent capital provides an alternative design for contingent capital using a prudential capital structure for a bank that is too big to fail this paper was accepted by jerome detemple finance

globalization outsourcing and wage inequality there is considerable debate over whether international trade has contributed to the declining economic fortunes of less skilled workers one issue that has become lost in the current discussion is how firms respond to import competition and how these responses in turn are transmitted to the labor market in previous work we have argued that outsourcing by which we mean the import of intermediate inputs by domestic firms has contributed to an increase in the relative demand for skilled labor in the united states if firms respond to import competition from low wage countries by moving non skill intensive activities abroad then trade will shift employment towards skilled workers within industries in this paper we extend our previous work by combining new import data from the revised nber trade database with disaggregated data on input purchases from the census of manufactures we construct industry by industry estimates of outsourcing for the period 1972 1990 and reexamine whether outsourcing has contributed to an increase in relative demand for skilled labor our main finding is that outsourcing can account for 31 51 of the increase in the relative demand for skilled labor that occurred in u s manufacturing industries during the 1980s compared to our previous estimate of 15 33 this abstract was borrowed from another version of this item

contingent convertibles with stock price triggers the case of perpetuities initial proposals for contingent convertibles cocos envisioned that these bonds would convert to equity when the issuing bank s stock price declined to a prespecified trigger subsequent research has claimed that doing so causes the stock price to have multiple equilibria or no equilibrium we show that when cocos are perpetuities which characterizes most actual cocos a unique stock price equilibrium exists except under unrealistic conditions unique equilibria occur when conversion favors or disfavors coco investors when cocos convert to equity or are written down and when cocos are callable we also analyze a bank s risk choices before and after conversion received november 29 2016 editorial decision july 15 2018 by editor itay goldstein

analysis of a production inventory system subject to random disruptions in this paper we study an unreliable bottleneck production inventory system with a constant production and demand rate that is subject to random disruptions we assume that the restoration times are constant the time between breakdowns is exponential the production setup cost and or setup time is positive and excess demand is backordered we propose an s s production policy for such systems and develop expressions for the operating characteristics of the system the properties of the policy parameters that minimize the expected total cost rate are investigated and a procedure for finding their optimal values is developed in addition we devise and test a simple heuristic procedure for finding near optimal production policies the results of a numerical experiment suggest that i setup cost reduction is more effective in reducing total operating cost when the production system is more reliable ii setup cost reduction in unreliable production systems results in higher optimal safety stock level and iii proper determination of the safety stock levels is extremely important in just in time systems which are susceptible to disruptions

contingent convertible coco bonds a first empirical assessment of selected pricing models this study is the first to assess selected pricing models for contingent convertible coco bonds empirically substantial amounts of these instruments have recently been issued by a number of banks the authors analysis shows that although all tested approaches a structural model an equity derivatives model and a credit derivatives model largely fit market prices they exhibit biases in derived hedge ratios the equity derivatives model is the most practical for the pricing and risk management of coco bonds