guaranty funds and risk taking evidence from the insurance industry abstract this paper examines change in property liability insurers risk taking around enactments of state guaranty fund laws our evidence suggests that the risk of insurers asset portfolios increases following enactments but this increase in risk is significant only for stock insurers our evidence of increased risk taking following guaranty fund adoptions suggests that the way these funds are organized creates counterproductive investment incentives especially for stock companies because these laws were enacted by states over the period 1969 1981 our evidence on changes in risk taking helps resolve statistical problems that have been troublesome for studies of bank deposit insurance

a case study of organizational form and risk shifting in the savings and loan industry abstract i analyze the investment and funding strategies of two thrifts one stock owned and one mutually owned from 1983 to 1988 despite their similarities prior to 1983 the stock thrift implemented a riskier financial strategy and did so only after converting to stock ownership although this strategy ultimately led to its failure the stock thrift still made significant payouts to its controlling shareholders this case study illustrates in stark terms the relation between organizational form and risk shifting in the thrift industry

on the determinants of direct foreign investment evidence from east and southeast asia abstract a model of derived demand for foreign capital by a multiple product monopolist is estimated for seven asian countries direct foreign investment dfi inflows are estimated to be less elastic with respect to the costs of capital including taxes than to wages and to be more elastic with respect to aggregate demand in export markets than domestic demand the output deterrent effect of higher wages is estimated to outweigh any substitution toward greater capital intensity the estimates also suggest that dfi rises with greater costs within the investors home countries no similar effect occurs with respect to costs in rival host countries and concerns for political stability have overlain economic determinants

do firms engage in risk shifting empirical evidence i empirically test whether firms engage in risk shifting contrary to what risk shifting theory predicts i find that firms reduce investment risk when they approach financial distress to identify the effect of distress on risk taking i use a natural experiment with exogenous changes to leverage risk reduction is most prevalent among firms that have shorter maturity debt bank debt and tighter bank loan financial covenants these findings suggest that debt composition and financial covenants serve as important mechanisms to mitigate debt equity agency conflicts such as risk shifting that are not explicitly contracted on received january 8 2015 accepted may 27 2016 by editor david denis

on the optimal hedge of a nontraded cash position in this paper we focus on the optimal demand for futures contracts by an investor with a logarithmic utility function who attempts to hedge a nontraded cash position when the analysis is conducted in the cash commodity price space we show that the value function associated with the bernoulli investor program is not additively separable thus suggesting that this investor hedges against shifts in the opportunity set as represented by the commodity price by establishing the equivalence between the cash formulation of the problem and the wealth formulation we are able to analyze the problem in the wealth commodity price space in this space we show the additive separability of the value function when the futures settlement price process is perfectly locally correlated with the commodity price process the demand for futures in this instance is composed of a a mean variance term and b a minimum variance component that is a classic feature of models with nontraded assets since the first best nonmyopic optimum is attained however the deviation from a mean variance demand should not be interpreted as the expression of a nonmyopic behavior but rather as an attempt to restore a first best optimum on the other hand when the correlation between the futures price and the underlying commodity price is imperfect in general the value function does not separate additively the first best solution cannot be attained and the optimal futures trading strategy involves a hedging term against shifts in the opportunity set in the classic dynamic portfolio problem the investor selects a trading strategy in risky and riskless assets so as to maximize his or her expected lifetime utility in this environment where all assets can be freely traded the logarithmic investor behaves myopically to the extent that he or she ignores shifts in the opportunity set when making current choices samuelson 271 mossin 24 hakansson 16 merton 22 in particular in models with continuous trading it turns out that the value function corresponding to the investor s program is additively separable in wealth and state variables the implication is that his or her behavior will be myopic i e that his or her demand functions for assets will be of the pure meanvariance efficiency type and in particular will not include any dynamic hedging components that are characteristic of financial markets with shifting opportunities in this paper we investigate the structure of the bernoulli investor s demand functions in the situation where one asset cannot be freely traded in the market

mne subsidiaries versus domestic enterprises an analysis of their ownership and location specific advantages this paper compares the ownership advantages of multinational enterprises mnes subsidiaries and domestic enterprises dmes in greece previous studies have tested the hypothesis that ownership specific advantages oa are a major source of firm differences this study analyses the processed food sector sic 20 the leading industrial sector in greece with the highest inward and outward internationalization degree using a panel data set of 75 firms and 5 years the findings of a probabilistic regression analysis indicate that there are significant differences between the two groups of firms in the degree of possession of observed ownership advantages mne subsidiaries have higher market shares use multiplant operations and have higher advertising and r d to sales ratios compared to dmes dmes use their well established position knowledge of domestic and regional market conditions and size economies in order to compete effectively with mne subsidiaries it is inferred that pursuit of domestic ma

should investors include commodities in their portfolios after all new evidence abstract this paper investigates whether an investor is made better off by including commodities in a portfolio that consists of traditional asset classes first we revisit the posed question within an in sample setting by employing mean variance and non mean variance spanning tests then we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out of sample performance under the in sample setting we find that commodities are beneficial only to non mean variance investors however these benefits are not preserved out of sample our findings challenge the alleged diversification benefits of commodities and are robust across a number of performance evaluation measures utility functions and datasets the results hold even when transaction costs are considered and across various sub periods not surprisingly the only exception appears over the 2005 2008 unprecedented commodity boom period

optimal hedging and equilibrium in a dynamic futures market abstract this paper considers an agent maximizing the expected utility of the sum of the terminal value of a fixed portfolio of spot market assets and the terminal value of a margin account on a futures trading position closed form solutions for the optimal hedging strategy are provided in several special cases

organizational form and risk taking in the savings and loan industry abstract i hypothesize that risk taking is greater in stock thrifts than in mutual thrifts because the residual and fixed claims are separable i find that stock thrifts exhibit greater profit variability during the 1982 1988 period and that conversions from mutual to stock ownership are associated with increased investment in risky assets and increased profit variability these findings illustrate the relation between the structure of residual claims incentives and firm performance as well as the unintended consequences resulting from changes in thrift regulations

on optimal portfolio choice under stochastic interest rates abstract in an economy where interest rates and stock price changes follow fairly general stochastic processes we analyze the portfolio problem of an investor endowed with a non traded cash bond position he can trade on stocks the riskless asset and a futures contract written on the bond so as to maximize the expected utility of his terminal wealth when the investment opportunity set is driven by an arbitrary number of state variables the optimal portfolio strategy is known to contain a pure preference free hedge component a speculative element and merton breeden hedging terms against the fluctuations of each and every state variable while the first two components are well identified and easy to work out the implementation of the last ones is problematic as the investor must identify all the relevant state variables and estimate their distribution characteristics using the martingale approach we show that the optimal strategy can be simplified to include in addition to the pure hedge and speculative components only two merton breeden type hedging elements however large is the number of state variables the first one is associated with interest rate risk and the second one with the risk brought about by the co movements of the spot interest rate and the market prices of risk the implementation of the optimal strategy is thus much easier as it involves estimating the characteristics of the yield curve and the market prices of risk only rather than those of numerous a priori unknown state variables moreover the investor s horizon is shown explicitly to play a crucial role in the optimal strategy design in sharp contrast with the traditional decomposition finally the role of interest rate risk in actual portfolio risk management is emphasized

the impact of contingent liability on commercial bank risk taking abstract from 1863 1935 regulators imposed contingent liability on bank shareholders to discourage risk taking using data from 1900 to 1915 i find that banks subject to stricter liability rules have lower equity and asset volatility hold a lower proportion of risky assets and are less likely to increase their investment in risky assets when their net worth declines consistent with the hypothesis that stricter liability discourages commercial bank risk taking these findings provide lessons for current bank regulatory policy and show that the shape of the residual claimant s payoff function has a significant impact on managerial incentives and firm performance

stakeholder rights and economic performance the profitability of nonprofits abstract this paper explores whether ownership matters in a fundamental sense by comparing the performance of stockholder owned firms with the much less analyzed nonprofit firms no stakeholder has residual cash flow rights in nonprofit firms and the control rights are held by customers employees and community citizens accounting for differences in size and risk and comparing only firms in the same industry we find that stockholder owned firms do not outperform nonprofit firms this result is consistent with the notin that the monitoring function of stockholders may be successfully replaced by other mechanisms we find evidence that product market competition may play this role as a substitute monitoring mechanism

wti crude oil futures in portfolio diversification the time to maturity effect the aim of the paper is to analyze the diversification effect brought by crude oil futures contracts the most liquid commodity futures into a portfolio of stocks the studies that have documented the very low and essentially negative correlations between commodities and equities typically rely on normally distributed returns which is not the case for crude oil futures and stocks indexes moreover the particular time to maturity chosen for the future contract used as an investment vehicle is an important matter that needs to be addressed in presence of forward curves switching between backwardation and contango shapes our goal in this paper is twofold a we introduce copula functions to have a better representation of the dependence structure of oil futures with equity indexes b using this copula representation we are able to analyze in a precise manner the maturity effect in the choice of crude oil future contract with respect to its diversification benefits our finding is that in the case of distant maturities futures e g 18 months the negative correlation effect is more pronounced whether stock prices increase or decrease this property has the merit to avoid the hurdles of a frequent roll over while being quite desirable in the current trendless equity markets empirical evidence is exhibited on a database comprising the nymex wti crude oil futures and s p 500 index over a 15 year time period

the ownership advantage in latin american fdi a sectoral study of us direct investment in mexico this article develops a model which tests the hypothesis that sectoral fdi flows from the united states to mexico over a four year period can be explained by the ownership advantages of us multinationals theoretical developments in the concept of ownership advantage are used to guide the formulation of the research the findings suggest that direct investment into us mnes affiliates in mexico is driven by benefits derived from embedded human knowledge technology embodied advantages and possibly from scale advantages local r d is negatively associated with fdi

the s l debacle public policy lessons for bank and thrift regulation this book describes the period of failures of savings and loan associations and sets out a program of policies to prevent future debacles it explains the regulatory actions and inactions that created the incentives for large numbers of thrifts to make excessively risky and ill conceived and in some cases fraudulent and criminal investments it describes the failure of the accounting system to provide adequate information to regulators and in many cases even to the managers of the thrifts themselves concerning the health and riskiness of individual thrifts it also discusses how the regulatory system that had been conceived in an earlier and highly regulated era was overwhelmed in the deregulated environment of the early 1980s it shows how the reforms that were made in response to the growing crisis were too little and too late and finally it offers a set of policy reforms that could prevent future crises in the savings and loan industry this work should be of interest to political and financial economists

the determinants of interindustry variation of foreign ownership in canadian manufacturing using two stage least squares to allow for the presence of simultaneous relationships this study obtains results which support the view that the pattern of foreign ownership in canada s manufacturing sector is determined in part by the ability of foreign firms to exploit intangible assets by producing in canada in addition the empirical findings suggest that managerial resources and relative labour costs are significant influences on the foreign firm s decision concerning direct investment in canada however the strongest influence on the extent of foreign ownership in canadian manufacturing industries appears to be simply the extent of multi plant development in the corresponding u s industries les facteurs determinants de la variation inter industrielle de la propriete etrangere dans le secteur manufacturier au canada a partir d une analyse utilisant la methode des moindres carres en deux etapes pour tenir compte de la presence de rapports simultanes entre variables on obtient des resultats qui soutiennent le point de vue de ceux qui disent que le pattern de propriete etrangere dans le secteur manufacturier canadien est determine en partie par l aptitude des entreprises a tirer profit d actifs intangibles en produisant au canada les resultats empiriques suggerent que les ressources manageriales et les couts relatifs de travail ont aussi une influence determinante sur la decision de la firme etrangere de faire un investissement direct au canada cependant l influence la plus forte sur le degre de propriete etrangere dans un secteur manufacturier canadien semble etre le developpement de l entreprise a plusieurs etablissements comme pattern de production dans le secteur industriel americain correspondant

futures markets and commodity options hedging and optimality in incomplete markets abstract this paper examines the allocational roles of futures markets and commodity options in multi good and multi period economies in a continuous time model with time additive utilities and homogeneous beliefs trading in unconditional futures contracts the market portfolio and a riskless asset gives any pareto optimal allocation individuals optimal holdings of futures contracts in the continuous time model are related to their consumption bundles and to their risk tolerances it is shown that both hedging and reverse hedging behavior are possible in the general model with discrete trading options on portfolios of commodity options are shown to permit any unconstrained pareto optimal allocation

portfolio optimization when asset returns have the gaussian mixture distribution abstract in this paper we consider a portfolio optimization problem where the underlying asset returns are distributed as a mixture of two multivariate gaussians these two gaussians may be associated with distressed and tranquil market regimes in this context the sharpe ratio needs to be replaced by other non linear objective functions which in the case of many underlying assets lead to optimization problems which cannot be easily solved with standard techniques we obtain a geometric characterization of efficient portfolios which reduces the complexity of the portfolio optimization problem

dynamic asset allocation for varied financial markets under regime switching framework asset allocation among diverse financial markets is essential for investors especially under situations such as the financial crisis of 2008 portfolio optimization is the most developed method to examine the optimal decision for asset allocation we employ the hidden markov model to identify regimes in varied financial markets a regime switching model gives multiple distributions and this information can convert the static mean variance model into an optimization problem under uncertainty which is the case for unobservable market regimes we construct a stochastic program to optimize portfolios under the regime switching framework and use scenario generation to mathematically formulate the optimization problem in addition we build a simple example for a pension fund and examine the behavior of the optimal solution over time by using a rolling horizon simulation we conclude that the regime information helps portfolios avoid risk during left tail events

portfolio optimization in a regime switching market with derivatives abstract we consider the optimal asset allocation problem in a continuous time regime switching market the problem is to maximize the expected utility of the terminal wealth of a portfolio that contains an option an underlying stock and a risk free bond the difficulty that arises in our setting is finding a way to represent the return of the option by the returns of the stock and the risk free bond in an incomplete regime switching market to overcome this difficulty we introduce a functional operator to generate a sequence of value functions and then show that the optimal value function is the limit of this sequence the explicit form of each function in the sequence can be obtained by solving an auxiliary portfolio optimization problem in a single regime market and then the original optimal value function can be approximated by taking the limit additionally we can also show that the optimal value function is a solution to a dynamic programming equation which leads to the explicit forms for the optimal value function and the optimal portfolio process furthermore we demonstrate that as long as the current state of the markov chain is given it is still optimal for an investor in a multiple regime market to simply allocate his her wealth in the same way as in a single regime market

valuation of commodity futures and options under stochastic convenience yields interest rates and jump diffusions in the spot this paper investigates the effects of stochastic convenience yields stochastic interest rates and jumps in the spot price on the pricing of commodity futures forwards and futures options numerical examples show that one factor prices differ materially from the stochastic convenience yield two factor prices when convenience yield is considerably above its long term average the extension to a three factor model with stochastic interest rates leads to a different futures price but the forward price is unchanged the extension ofthe three factor model to include jumps in the spot price process does not affect forward or futures prices but it can have an impact on options prices the model is applied to price the present value of future cash flows from a real asset

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

performance replication of the spot energy index with optimal equity portfolio selection evidence from the uk us and brazilian markets abstract this paper reproduces the performance of a geometric average spot energy index by investing only in a subset of stocks from the dow jones composite average the ftse 100 and bovespa composite indexes and in two pools that include only energy sector stocks from the us and the uk respectively daily data are used and the index tracking problem for passive investment is addressed with two evolutionary algorithms the differential evolution algorithm and the genetic algorithm the performance of the suggested investment strategy is tested under three different scenarios buy and hold quarterly and monthly rebalancing accounting for transaction costs where necessary

deposit insurance and financial development the authors examine the effect of different design features of deposit insurance on long run financial development defined to include the level of financial activity the stability of the banking sector and the quality of resource allocation their empirical analysis is guided by recent theories of banking regulation that employ an agency framework the authors examine the effect of deposit insurance on the size and volatility of the financial sector in a sample of fifty eight countries they find that generous deposit insurance leads to financial instability in lax regulatory environments but in sound regulatory environments deposit insurance does have the desired impact on financial development and growth thus countries introducing a deposit insurance scheme need to ensure that it is accompanied by a sound regulatory framework otherwise the scheme will likely lead to instability and deter financial development in weak regulatory environments policymakers should at least limit deposit insurance coverage

dynamic speculation and hedging in commodity futures markets with a stochastic convenience yield the main objective of this paper is to address in an a continuous time framework the issue of using storable commodity futures as vehicles for hedging purposes when in particular the convenience yield as well as the market prices of risk evolve randomly over time following the martingale route and by operating a suitable constant relative risk aversion utility function crra specific change of numeraire we solve the investor s dynamic optimization program to obtain quasi analytical solutions for optimal demands which can be expressed in terms of two discount bonds traded and synthetic contrary to the existing literature we explicitly derive the individual optimal proportions invested in the spot commodity in a discount bond and in the futures contracts which can be computed in a simple recursive way we suggest various decompositions allowing an investor to assess the sensitivity of the optimal demands to the state variables and to specify the role played by each risky asset empirical evidence shows that the convenience yield has a strong impact on the speculation and hedging positions and the interaction among time varying risk premia determines the magnitude and the sign of these positions

monopolistic advantages and the international operations of firms disaggregated evidence from u s based multinationals the paper presents statistical evidence supporting the proposition that the kind of monopolistic advantage possessed by the firm is decisive as to which form of involvement it will choose to penetrate into foreign markets exporting versus producing abroad a decomposition of export flows into exports to affiliates intra company trade and exports to unaffiliated buyers proves to be a crucial element in the empirical test of this proposition

dynamic asset allocation portfolio decomposition formula and applications a new decomposition of the optimal portfolio in dynamic models with von neumann morgenstern preferences and ito prices is established the formula rests on a change of numeraire that uses pure discount bonds as units of account the dynamic hedging demand has two components the first hedge insures against fluctuations in an optimally designed bond with a maturity date matching the investor s horizon the second hedge immunizes against fluctuations in the market price of risk in the bond numeraire various applications are examined new results concerning the behavior of extremely risk averse individuals the demand for bonds and its long horizon limit and the optimal portfolio in incomplete markets are derived the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

optimal leverage and aggregate investment we analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures optimal financial contracts can be implemented by a combination of debt and equity when the risk shifting problem is the most severe while stock options are also needed when the effort problem is the most severe worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level moreover aggregate leverage decreases with the risk shifting problem and increases with the effort problem

mean reversion in equilibrium asset prices evidence from the futures term structure we use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices the empirical results indicate mean reversion in each market we examine for agricultural commodities and crude oil the magnitude of the estimated mean reversion is large for example point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months for metals the degree of mean reversion is substantially less but still statistically significant we detect only weak evidence of mean reversion in financial asset prices in this study we provide evidence of mean reversion in the prices of several real and financial assets rather than examining evidence of ex post reversion using time series of asset prices we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert this approach offers two advantages first since futures prices are readily available for many markets our procedure can be implemented for many assets including those for which reliable spot price data is elusive second there is little ambiguity as to the source of any mean reversion detected using our method subject only to the maintained assumption that the no arbitrage cost of carry condition holds our test detects mean reversion that is expected to occur in equilibrium but has no power to detect mean reversion resulting from noise or inefficiencies our methodology focuses on relations between price levels and the slope of the futures term structure defined as the change across delivery dates in the futures prices observed on a given trading date an inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices to illustrate initially assume there are no

factors affecting inter industry variation of foreign ownership of manufacturing industry a set of hypotheses incorporating various explanations to foreign direct investment are developed and tested on a simultaneous equation model on australian data the analysis shows that foreign ownership of industry tends to be higher in the humanskill intensive and technology intensive industries high protection seems to be an important inducement for multinational enterprises participation in australian industry the results demonstrate how a major bias can be introduced when the simultaneity involved in the determination of foreign ownership is ignored

determinants of foreign direct investment a tale of nine theoretical models abstract this paper presents a review of nine theoretical models of foreign direct investment fdi discussed are early studies of determinants of fdi 1 as well as determinants of fdi based on the neoclassical trade theory 2 ownership advantages 3 aggregate variables 4 the ownership location and internalization advantage framework 5 horizontal and vertical fdi models 6 the knowledge capital model 7 diversified fdi and risk diversification models 8 and policy variables 9 from each of the nine theories the relevant determinants of fdi are derived empirical studies indicate the importance of these determinants in the real world the paper shows that there is not one single theory of fdi but a variety of theoretical models attempting to explain fdi and the location decision of multinational firms therefore any analysis of determinants of fdi should not be based on a single theoretical model instead fdi should be explained more broadly by a combination of factors from a variety of theoretical models such as ownership advantages or agglomeration economics market size and characteristics cost factors transport costs protection risk factors and policy variables

commodity prices money surprises and fed credibilit strict monetarist theory in an extreme form holds that excessive money growth or the expectation of future money growth shows up immediately in the rapid inflation of goods prices however it is widely argued that for most goods prices are in fact sticky in the short run and reflect money growth only in the long run if one seeks a sensitive market measure of the perceived looseiless or tightness of monetary policy one must look elsewhere than at the general price level interest rates being determined in quickly adjusting financial markets are free to respond immediately to expectations regarding monetary policy in 1981 and 1982 every friday at 4 10 p m eastern standard time the federal reserve board would announce the money stock for the week ending nine days previously if the announced money stock was different from what the market had been expecting interest rates generally jumped in the same direction clearly they were responding to revisions of the expected future path of the money stock but nominal interest rates are an ambiguous indicator of expectations on the one hand an announced increase in the money stock may be received by the market as indicating a higher

the causality between fdi and sector specific production in turkey evidence from threshold cointegration with regime shifts abstractthis article considers bidirectional nonlinear cointegration relation between fdi and industrial output in turkey the data cover the monthly period 2005 1 2013 10 for the time series of total industrial production 36 sub industrial sectors production and fdi following nonlinear threshold cointegration and vecms the article yields that i total industrial production and nine sub industrial productions have positive long run impact on fdi with significant error corrections ii six sub industrial productions have short term influence on fdi iii fdi has long run positive impulse on total industrial production and nine sub industrial productions with some significant error corrections and iv fdi affects four sub industrial productions in the short run as well as in the long run the results of vecms from i also reveal that the all short term adjustment parameters are found significant and powerful in 10 typical regimes regime 1s and in 5 extreme regimes regime 2s finally the outcom

regulatory incentives and the thrift crisis dividends mutual to stock conversions and financial distress during the 1980s insolvency of individual thrifts and the thrift deposit insurer created severe incentive problems lacking cash to close insolvent thrifts regulators induced nearly 10 billion of private capital to flow into the industry through mutual to stock conversions we test a theory of how regulators encouraged capitalimpaired mutual thrifts to convert by permitting them to pay dividends rather than rebuild capital we estimate the costs of this policy and interpret the 1991 federal deposit insurance corporation improvement act as requiring regulators to impose restraints on depository institutions parallel to debt covenants that prevent capital distributions by nonfinancial firms experiencing distress