bulls bears and market sheep abstract a deterministic excess demand model of stock market behavior is presented that generates stochastically fluctuating prices and randomly switching bear and bull markets

the effectiveness of keynes tobin transaction taxes when heterogeneous agents can trade in different markets a behavioral finance approach abstract we develop a model in which boundedly rational agents apply technical and fundamental analysis to identify trading signals in two different speculative markets whether an agent trades and if so in which market with which strategy depends on profit considerations as it turns out an ongoing evolutionary competition between the trading strategies causes complex price dynamics which closely resembles the behavior of actual speculative prices moreover we find that if the agents have to pay a transaction tax in one market price variability decreases in this market but increases in the other market however the imposition of a uniform tax on all transactions stabilizes both markets our results suggest that if regulators of a market introduce a transaction tax other markets are likely to follow

profitability of time series momentum abstract we propose a continuous time heterogeneous agent model consisting of fundamental momentum and contrarian traders to explain the significant time series momentum we show that the performance of momentum strategy is determined by both time horizon and the market dominance of momentum traders specifically when momentum traders are more active in the market momentum strategies with short long time horizons stabilize destabilize the market and meanwhile the market under reacts over reacts in short run long run this provides profit opportunity for time series momentum strategies with short horizons and reversal with long horizons when momentum traders are less active in the market they always lose the results provide an insight into the profitability of time series momentum documented in recent empirical studies

wealth driven selection in a financial market with heterogeneous agents we study the co evolution of asset prices and individual wealth in a financial market with an arbitrary number of heterogeneous boundedly rational investors using wealth dynamics as a selection device we are able to characterize the long run market outcomes i e asset returns and wealth distributions for a general class of competing investment behaviors our investigation illustrates that market interaction and wealth dynamics pose certain limits on the outcome of agents interactions even within the wilderness of bounded rationality as an application we consider the case of heterogeneous mean variance optimizers and provide insights into the results of the simulation model introduced by levy levy and solomon 1994

separation of powers and development abstract we model separation of powers as an instrument against corruption more specifically as a way to decrease the costs of collusion proofness then we show that the value of this institutional design is higher in developing countries unfortunately the same reasons which are behind this higher value also increase the implementation cost of this institution

klein s price variability terms in the u s demand for money a note one recent innovation in the empirical work on the demand for money has been the inclusion of a measure of the past or future variability of the inflation rate or the interest rate 1 one particularly unique empirical and theoretical treatment is developed by klein 12 who reports a positive and significant effect on the u s demand for money by a price uncertainty variable s p which allegedly measures the quality of cash balances these results substantiate his theoretical development that an increase in the uncertainty of the inflation rate lowers the quality of the services from a stock of money which thereby increases the demand for money the s p term represents a measure of the past variability of the rate of change of prices and is analogous to an adaptive expectations term for the rate of inflation 2

toward a political theory of the emergence of environmental incentive regulation this article makes some steps toward a formal political economy of environmental policy economists quasi unanimous preference for sophisticated incentive regulation is reconsidered we recast the question of instrument choice in the general mechanism design literature within an incomplete contract approach to political economy we show why constitutional constraints on the instruments of environmental policy may be desirable even though they appear inefficient from a standard economic viewpoint their justification lies in the limitations they impose on the politicians ability to distribute rents insights are provided on the emergence of incentive mechanisms in environmental regulation

heterogeneous beliefs and adaptive behaviour in a continuous time asset price model abstract this paper extends the analysis of the seminal work of brock and hommes 1997 brock and hommes 1998 on heterogeneous beliefs and rational routes to randomness in discrete time models to a continuous time model of asset pricing the resulting model characterised mathematically by a system of stochastic delay differential equations provides a unified approach to deal with adaptive behaviour of heterogeneous agents and market stability impact of lagged price used by chartists to form their expectations for the underlying deterministic model we show not only that the result of brock and hommes on rational routes to market instability in discrete time holds in continuous time but also a double edged effect of an increase in lagged price used by the chartists on market stability for the stochastic model we demonstrate that the interaction and boundedly rational behaviour of heterogeneous agents can generate various market phenomena such as bubbles and crashes and replicate stylised facts including volatility clustering and long range dependence in volatility

a dynamic analysis of moving average rules abstract the use of various moving average ma rules remains popular with financial market practitioners these rules have recently become the focus of a number empirical studies but there have been very few studies of financial market models where some agents employ technical trading rules of the type used in practice in this paper we propose a dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component the chartist demand is governed by the difference between current price and a long run ma both types of traders are boundedly rational in the sense that based on a fitness measure such as realized capital gains traders switch from a strategy with low fitness to the one with high fitness we characterize the stability and bifurcation properties of the underlying deterministic model via the reaction coefficient of the fundamentalists the extrapolation rate of the chartists and the lag length used for the ma by increasing the intensity of choice to switching strategies we then examine various rational routes to randomness for different ma rules the price dynamics of the ma rule are also examined and one of our main findings is that an increase of the window length of the ma rule can destabilize an otherwise stable system leading to more complicated even chaotic behaviour the analysis of the corresponding stochastic model is able to explain various market price phenomena including temporary bubbles sudden market crashes price resistance and price switching between different levels

decentralisation and accountability in infrastructure delivery in developing countries many developing countries are experimenting with decentralisation of public service delivery to elected local governments instead of bureaucrats appointed by a central government we study the resulting implications in a theoretical model in which the central government is uninformed about local need and unable to monitor service allocations bureaucrats charge bribes for services as monopoly providers resulting in underprovision of services especially for the poor local governments are directly responsive to their citizens needs but may be subject to capture by elites effects of decentralisation on service volumes efficiency and equity are analysed under different financing arrangements for local governments the theme of the 2004 world development report is summarised by its opening paragraph too often services fail poor people in access in quantity in quality but the fact that there are strong examples where services do work means governments and citizens can do better how by putting poor people at the center of service provision by enabling them to monitor and discipline service providers by amplifying their voice in policymaking and by strengthening the incentives for providers to serve the poor problems of accountability associated with traditional modes of delivery involving centralised bureaucracies include cost padding service diversion limited responsiveness to local needs limited access and high prices charged especially to the poor 1 many developing countries have thus begun to experiment with initiatives to increase accountability of service providers by providing greater control rights to citizen groups these include decentralisation of service delivery to local governments community participation direct transfers to households and contracting out delivery to private providers and ngos the programmes include a wide range of infrastructure services water sanitation electricity telecommunications roads and social services education health and welfare programmes countries where such trends have gathered

industrial policy and politics abstract recognizing the uncontrollable nature of the political system in a fine tuning way we derive simple constitutional rules for industrial policies which take into account simultaneously the inefficiencies of the political system and informational asymmetries of regulators we apply this methodology to the regulation of natural monopolies we consider a two type political system with the majority rule we study how the chosen cost reimbursement rules and pricing rules which characterize regulation are affected by constitutional choices such as public ownership or privatization creation of incentives for regulators or not price discrimination or not

toward a theory of regulation for developing countries following jean jacques laffont s lead the efficient operation and expansion of infrastructures in developing countries is crucial for growth and poverty reduction however recent reforms aimed at improving the performance of these sectors have had limited success evidence suggests that in many instances this was because the traditional regulatory theory relied on by policymakers was not suitable for the institutional context in developing countries this article surveys more recent theoretical work focusing on problems with regulation in these countries at the heart of the survey is the work of jean jacques laffont who in the last decade of his life set about developing a theoretical framework for regulation in developing countries we consider the implications of his work which focused on the key institutional limitations faced in developing countries we then discuss where experience suggests that there are important omissions from this modeling bringing in extensions and alternative approaches pursued by other authors we conclude by summarizing the key ways in which regulatory policy will be different when institutions are weak overall we find that an understanding of the institutional context and its implications are crucial when designing a regulatory framework for developing countries

the financial instability hypothesis a stochastic microfoundation framework this paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy the analysis is performed by representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures the model is solved both numerically and analytically by means of a stochastic approximation that is able to replicate quite well the numerical solution these methodologies by overcoming the restrictions imposed by the traditional microfounded approach enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system

variability of the inflation rate and the forward premium in a money demand function the case of the german hyperinflation since cagan s 1956 classic study the specification of the demand for money in the german hyperinflation has attracted much attention

volatility clustering a nonlinear theoretical approach abstract this paper verifies the endogenous mechanism and economic intuition on volatility clustering using the coexistence of two locally stable attractors proposed by gaunersdorfer et al 2008 by considering a simple asset pricing model with two types of boundedly rational traders fundamentalists and trend followers and noise traders we provide theoretical conditions on the coexistence of a locally stable steady state and a locally stable invariant circle of the underlying nonlinear deterministic financial market model and show numerically that the interaction of the coexistence of the deterministic dynamics and noise processes can endogenously generate volatility clustering and long range dependence in volatility observed in financial markets economically volatility clustering occurs when neither the fundamental nor trend following traders dominate the market and when traders switch more often between the two strategies

on the design of hierarchies coordination versus specialization we consider an economy that has to decide how assets are to be used agents have ideas but these ideas conflict we suppose that decision making authority is determined by hierarchy each asset ha

separation of regulators against collusive behavior we show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture splitting regulatory tasks and monitoring technologies among several nonbenevolent regulators may reduce their discretion in engaging in socially wasteful activities when regulators make collusive offers that are accepted by the agent whatever his characteristics competition between regulators relaxes collusion proofness constraints and improves social welfare this result is robust to different specifications of the agent s preferences and to the timing of the game as long as one insists on safe side contracting offers we also discuss how separation affects both allocative efficiency and the distribution of rents in the economy

the architecture of economic systems hierarchies and polyarchies the authors present new ways of looking at economic organizations andsystems individuals judgments entail errors they sometimes reject good projects and accept bad projects the architecture of an economicsystem specifying how the decision making units are organized togetherwithin a system who gathers what information and who communicates what with whom affects its performance both because it influences thenature of errors that individuals make within the system and becauseit has a critical effect on the aggregation of individuals errors theperformance of two polar architectures decentralized polyarchical versus centralized hierarchical decision making authorities are analyzed and compared copyright 1986 by american economic association

strategic tax competition implications of national ownership abstract two jurisdictions compete to capture the rents of a large multinational enterprise mne which invests locally and which is partly owned by local investors the mne contributes to local welfare by tax payments and dividends and it has private information about the efficiency of the operations in the two localisations it is shown that the distortions in the mne s real investment portfolio are determined by a trade off between fiscal externalities and equity externalities and that investments in the case of strategic tax competition may be lower than in the co operative case ownership matters and we show how the firm may reduce its overall tax payments by influencing the distribution of owner shares between investors in the two countries

structural stochastic volatility in asset pricing dynamics estimation and model contest abstract in the framework of small scale agent based financial market models the paper starts out from the concept of structural stochastic volatility which derives from different noise levels in the demand of fundamentalists and chartists and the time varying market shares of the two groups it advances several different specifications of the endogenous switching between the trading strategies and then estimates these models by the method of simulated moments msms where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index in addition to the standard version of msm with a quadratic loss function we also take into account how often a great number of monte carlo simulation runs happen to yield moments that are all contained within their empirical confidence intervals the model contest along these lines reveals a strong role for a tamed herding component the quantitative performance of the winner model is so good that it may provide a standard for future research

mixed duopoly privatization and subsidization with excess burden of taxation we investigate optimal tax subsidy policies in mixed and private oligopolies with excess burden of taxation we compare the optimal subsidies and the resulting welfare levels among four regimes mixed and private cournot duopolies and stackelberg competition with public and private leaderships we show that in contrast to the existing works on the privatization neutrality theorem privatization affects resulting welfare duopole mixte privatisation et subsidisation en presence de fardeau fiscal excedentaire on examine les politiques optimales de taxes et de subventions dans le cas d oligopoles mixtes et prives en presence de fardeau fiscal excedentaire on compare les subsides optimaux et les effets sur le niveau de bien etre dans quatre regimes les duopoles de cournot mixte et prive et la concurrence a la stackelberg avec leadership public et prive on montre que contrairement a ce que suggeraient les travaux anterieurs sur le theoreme de la neutralite de la privatisation la privatisation affecte les niveaux de bien etre

designing a private industry government auctions with endogenous market structure abstract this paper considers government mechanisms for auctioning production rights in which both the winners and the market structure doupoly dual sourcing monopoly sole sourcing or government owned production are a function of the bids in designing the optimal mechanism the government considers the tradeoffs among consumer surplus producer surplus and revenue under incomplete information doupoly is implemented less frequently and government production more frequently than under complete information when bidders are symmetric the optimal mechanism can be implemented as a modified second price auction applications to privatization deregulation and defense procurement are discussed

charts noise and fundamentals in the london foreign exchange market this paper presents some empirical evidence on the prevalence perceived importance and nature of chartist or technical analysis in the london foreign exchange market if noise traders see e g de long et al i987 are defined as those speculators who do not base their trading strategies on a consideration of market fundamentals then it clearly encompasses those traders who employ chart analysis i e those who base their strategies on the analysis and extrapolation of past price movements alone

dynamic analysis of policy lag in a keynes goodwin model stability instability cycles and chaos abstract in this paper we investigate the impact of government s stabilization policy on the dynamic behavior of the economic system in an analytical framework of a keynes goodwin model of the growth cycle in particular we study the effects of the policy lag on macroeconomic stability analytically and numerically it is shown that the increase of the policy lag contributes to destabilize the system and cyclical behavior and chaotic motion emerge in some ranges of the parameter values

inflation risk and the speed of adjustment in short run money demand functions abstract after 1973 money demand functions show a slow speed of adjustment including inflation risk does not help this the ser shows multiple minima as a function of the estimated rho in the error with higher speeds and rhos associated

herding trend chasing and market volatility abstract we introduce a heterogeneous agent asset pricing model in continuous time to show that although trend chasing switching and herding all contribute to market volatility in price and return and to volatility clustering their impacts are different the fluctuations of the market price and return and the level of the significant autocorrelations acs of the absolute and squared returns increase with the intensities of herding and trend chasing based on long time horizon however an increase in switching intensity reduces the return volatility and in particular a low switching intensity reduces the price volatility and increases the level of the significant acs but the effect becomes opposite when the switching intensity is high we also show that market noise plays a more important role than fundamental noise on the power law behavior of returns

commodity price fluctuations price dependent delays and nonlinearities as explanatory factors this paper develops a price adjustment model for a single commodity market with state dependent production and storage delays conditions for the equilibrium price to be stable are derived in terms of a variety of economic parameters when stability of the equilibrium price is lost a hopf bifurcation occurs giving rise to an oscillatory commodity price with a period between two and four times the equilibrium production storage delay

a robust rational route to randomness in a simple asset pricing model abstract we investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists trend followers and a market maker agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free price adjustment is proportional to the excess demand in the asset market agents asynchronously update their strategy according to realized net profits in the recent past as agents become more sensitive to differences in strategy performance the fundamental steady state becomes unstable and multiple steady states may arise as the traders sensitivity to differences in fitness increases a bifurcation route to chaos sets in due to homoclinic bifurcations of stable and unstable manifolds of the fundamental steady state

portfolio selection with inflation linked bonds and indexation lags abstract we derive the price of inflation indexed bonds of which the payments are linked to a lagged price index and solve for the optimal bond portfolio under both inflation and indexation lags in closed form we show that indexation lags increase the number of state variables characterizing both the bond prices and the optimal portfolio the lag induced state variables affect the future investment opportunity and hence further arm investors with the tools for hedging inflation risk that is however unhedgeable if there is no indexation lag we find that the optimal portfolio accounts for the indexation lags by also exploring the historical information and increases investors welfare therefore we document a positive effect of the indexation lags that are typically considered as a type of market friction

private behaviour and government policy in interdependent economies this is a comprehensive survey of the macroeconomic co ordination of international economies subjects covered include monetary policies and exchange rates abolishing exchange controls policy co ordination and the international monetary system assessing monetary shocks and exchange rate variability ems stability economic interactions and fiscal policies the contributors are anthony s courakis ronald macdonald mark p taylor peter n smith michael r wickens jeffrey a frankel kenneth a froot michael j artis giorgio radaelli shaziye gazioglu michael j moore neil rankin s mansoob murshed somnath sen paul r masson malcolm knight patrick minford emanuel pikoulakis david currie ullrich hoffmeyer and frederick van der ploeg this book is intended for international monetary economists and macroeconomists graduate and third year undergraduate students

reviving kalecki s business cycle model in a growth context abstract in 1935 kalecki formulated the first fully specified model of a macroeconomic dynamics in which he studied an endogenous and most elementary business cycle mechanism to revive his insights the present paper adapts his stationary economy to a growth context introducing a reasonable nonlinearity into the investment function it then takes care that the model exhibits persistent cyclical behaviour that is characterized by a unique globally attracting limit cycle this feature is a robust property a calibration of the numerical parameters achieves desired values for the cycle period as well as the amplitudes of the output capital ratio and the capital growth rate it is moreover demonstrated that a one time shock to the dynamics can easily have long lasting effects on the amplitudes despite common misgivings about delay differential equations which here result from kalecki s implementation lag the analysis can be conducted with a limited mathematical effort

delay differential neoclassical growth model abstract this paper develops a continuous time neoclassical growth model with time delay despite of its simple structure the resulting dynamic system shows emergence of erratic fluctuations in the capital accumulation process when the production function is unimodal and the delay in production is explicitly considered it complements the seminal paper of day 1982 in which a discrete time neoclassical growth model displayed chaotic behavior for some configurations of the propensity to save the growth rate of labor and the capital depreciation rate our analysis has at least two implications first nonlinearities and delay matter for a birth of aperiodic fluctuations of national product in the continuous time model second comparing the effects caused by two different time delays fixed and continuously distributed time delays reveals that the continuous time model with the former can generate complex fluctuations while the one with the latter generates simple fluctuations when the shape parameter of the density function is small and complex fluctuations when large

conditional jump dynamics in stock market returns this article develops a new conditional jump model to study jump dynamics in stock market returns we propose a simple filter to infer ex post the distribution of jumps this permits construction of the shock affecting the time t conditional jump intensity and is the main input into an autoregressive conditional jump intensity model the model allows the conditional jump intensity to be time varying and follows an approximate autoregressive moving average arma form the time series characteristics of 72 years of daily stock returns are analyzed using the jump model coupled with a generalized autoregressive conditional heteroscedasticity garch specification of volatility we find significant time variation in the conditional jump intensity and evidence of time variation in the jump size distribution the conditional jump dynamics contribute to good in sample and out of sample fits to stock market volatility and capture the rally often observed in equity markets following a significant downturn

multinationals tax competition and outside options abstract we analyze tax competition when a multinational firm has invested in two countries but also has an outside option e g towards a third country an interesting finding is that more attractive outside options for firms may constitute a win win situation the firm as well as its present host countries may gain when this occurs the reason that it benefits the host countries is that an enhanced outside option reduces the inefficiencies of tax competition an implication of the result is that better outside options for multinational firms may reduce the gains from host countries policy coordination and thus reduce those countries incentives to coordinate their policies also with a development where outside options become more accessible the perceived costs of tax competition e g in terms of underprovision of public goods may be overestimated our findings may also have implications for international negotiations since it provides an argument for mutual reduction of entry barriers as this may improve outside options

non exclusive competition in the market for lemons in order to check the impact of the exclusivity regime on equilibrium allocations we set up a simple akerlof like model in which buyers may use arbitrary taris under exclusivity we obtain the zero profit separating riley rothschilds stiglitz allocation under non exclusivity there is also a unique equilibrium allocation that involves a unique price as in akerlof 1970 these results can be applied to insurance in the dual model in yaari 1987 and have consequences for empirical tests of the existence of asymmetric information

using cost observation to regulate firms the paper emphasizes the use of accounting data in regulatory or procurement contracts when the supplier 1 has superior information about the cost of the project and 2 invests in cost reduction the main result states that under risk neutrality the supplier announces an expected cost and is given an incentive contract linear in cost overruns this optimal contract moves toward a fixed price contract as the announced cost decreases an investment choice is then introduced and the use of a rate of return regulation is studied

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

uncertainty in the demand for money during hyperinflation much recent empirical work on hyperinflation has centered on the direct and indirect effects of uncertainty on the demand for money we test the hypothesis originally put forward by klein that uncertainty positively affects the demand for real balances a variant of cagan s demand for money function is utilized and operational measures of uncertainty are derived by fitting autoregressive integrated moving average models to the inflation series for each of three hyperinflation nations we find that the most reasonable measures of variation do not significantly enter the money demand function for any of the three hyperinflations studied

on the profitability of technical trading rules based on artificial neural networks evidence from the madrid stock market in this paper we investigate the profitability of a simple technical trading rule based on artificial neural networks anns our results based on applying this investment strategy to the general index of the madrid stock market suggest that in absence of trading costs the technical trading rule is always superior to a buy and hold strategy for both bear market and stable market episodes on the other hand we find that the buy and hold strategy generates higher returns than the trading rule based on ann only for a bull market subperiod 2000 elsevier science s a all rights reserved

inconsistent regulators evidence from banking we find that regulators can implement identical rules inconsistently due to differences in their institutional design and incentives and this behavior may adversely impact the effectiveness with which regulation is implemented we study supervisory decisions of u s banking regulators and exploit a legally determined rotation policy that assigns federal and state supervisors to the same bank at exogenously set time intervals comparing federal and state regulator supervisory ratings within the same bank we find that federal regulators are systematically tougher downgrading supervisory ratings almost twice as frequently as do state supervisors state regulators counteract these downgrades to some degree by upgrading more frequently under federal regulators banks report worse asset quality higher regulatory capital ratios and lower return on assets leniency of state regulators relative to their federal counterparts is related to costly outcomes such as higher failure rates and lower repayment rates of government assistance funds the discrepancy in regulator behavior is related to different weights given by regulators to local economic conditions and to some extent differences in regulatory resources we find no support for regulator self interest which includes revolving doors

the subsidiarity bias in regulation abstract we study the choice of the regulatory structure when a firm engages in different activities for different countries under decentralization regulatory contracts suffer from two opposite distortions the competition between regulatory authorities leads to too high powered contracts however with a dispersed ownership structure contracts tend to be too low powered for sufficiently substitutable activities decentralization always leads to an inefficient drift towards fixed price contracts nonetheless when regulators have private agendas and possess the discretion to distort their policy to gain the support of some interest groups decentralization may be preferred to centralization as competition between regulatory authorities mitigates their discretionary power

mixed duopoly location choice and shadow cost of public funds we examine the relationship between equilibrium and efficient levels of product differentiation in a mixed duopoly where a welfare maximizing public enterprise competes with a profit maximizing private firm we introduce shadow costs of public funding i e the excess burden of taxation the profits of public firms obtained by the government reduce these costs we find that in a mixed duopoly the level of product differentiation is too low for social welfare this result is in sharp contrast to the private oligopoly where the level of product differentiation is too high finally we show that when the shadow cost is high privatizing the public enterprise improves welfare

an analysis of the cobweb model with boundedly rational heterogeneous producers abstract this paper considers the traditional cobweb model with heterogenous risk averse producers whose supply functions involve their estimates of the conditional mean and variance of the future price the producers seek to learn these quantities by applying geometric decay processes gdp to past prices the heterogeneity manifests itself in the lag lengths and memory parameters applied to past prices as well as in risk aversion coefficients we find that each dimension of heterogeneity changes enriches the cobweb dynamics with respect to the case of homogeneous producers

time variation of higher moments in a financial market with heterogeneous agents an analytical approach a growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets more and more this literature has been concerned with the explanation of some of the stylized facts of financial markets it now seems that some previously mysterious time series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the interaction among different groups of speculative traders however most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions in this paper this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by kirman 1993 embedding the herding framework into a simple equilibrium asset pricing model we are able to derive closed form solutions for the time variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series

commitment in utility regulation a model of reputation and policy applications abstract this paper builds a dynamic model of utility regulation where a government cannot commit to a time inconsistent policy of not expropriating investment by allowing the government s type to change over time i explore how reputation concerns may generate partial commitment restricting attention to equilibria that are strongly renegotiation proof i show that there is a unique perfect bayesian equilibrium this contains episodes of investment and good behaviour followed by periods of expropriation and non investment i then apply the model to consider how the power of the incentive scheme and decentralization may influence the properties of this equilibrium in the case of the power of incentives the model suggests that price caps may worsen commitment in developing countries but not in developed ones similarly the model suggests that decentralisation is likely to have a significant effect on commitment but that this effect will depend on the general ability of the government to commit overall we conclude that the effect of such policies on commitment will be different across countries depending on the institutional environment

accountability and decentralisation in government an incomplete contracts model this paper approaches the question of the appropriate level of decentralisation of power in government as a problem in the allocation of control rights under incomplete contracts the model of the paper compares allocations of power to local central and regional government as alternative means of motivating governments to act in the interests of citizens centralisation allows benefits from policy coordination but has costs in terms of diminished accountability which can be precisely defined as the reduced probability that the welfare of a given region can determine the re election of the government the model is extended to allow for conflicts of interest within regions and externalities between central and local governments in a federation it is also applied to determining levels of fiscal transfer between localities and to circumstances where governments may act as leviathans appropriating resources for their own use

electoral competition and special interest politics have fixed positions on some issues but vary their positions on others in order to attract votes and campaign contributions in this context we examine whether special interest groups are governed by an electoral motive or an influence in their campaign giving and how their contributions affect the equilibrium platforms we show that each party is induced to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest groups the party that is expected to win a majority of seats caters more to the special interests

dynamics of moving average rules in a continuous time financial market model within a continuous time framework this paper proposes a stochastic heterogeneous agent model ham of flnancial markets with time delays to unify various moving average rules used in discrete time hams the time delay represents a memory length of a moving average rule in discrete time hams intuitive conditions for the stability of the fundamental price of the deterministic model in terms of agents behavior parameters and memory length are obtained it is found that an increase in memory length not only can destabilize the market price resulting in oscillatory market price characterized by a hopf bifurcation but also can stabilize an otherwise unstable market price leading to stability switching as the memory length increases numerical simulations show that the stochastic model is able to characterize long deviations of the market price from its fundamental price and excess volatility and generate most of the stylized facts observed in flnancial markets

incentives and optimal size of local jurisdictions abstract a model of optimal territorial decentralization is presented in which smaller local governments have an informational advantage concerning public goods production costs and the central government has imperfect information on spillover effects induced by local projects the attention is focused on the optimal size of local entities and on the shape of transfer schedules from the central government to local jurisdictions the optimal territorial organization is a compromise between small jurisdictions so as to benefit from the geographical proximity effect on information and large entities in which spillover effects are more easily internalized by means of linear or non linear taxation schemes implemented by the centre

the price dynamics of common trading strategies a deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices this paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies showing how they amplify noise induce structure in prices and cause phenomena such as excess and clustered volatility

national vs european incentive policies bargaining information and coordination abstract we build a hierarchical model of contractual relationships under moral hazard to address issues about subsidiarity i e optimal de centralization of incentive industrial policies at the national level or at the european community level incentive policy is viewed as an incentive contract for producers who take unobservable decisions that have spillover effects across member states a community agency designs contracts for producers and contractual compensatory transfers between states on the basis of its observations then national regulators and their home producers negotiate according to a generalized nash bargaining a national contract that complements the community contracts given that national regulators will have access to more observations on the producers activities in this setting we show that full centralization is never optimal we give sufficient conditions for complete decentralization to be optimal and when both policies are present we characterize how they interact to provide incentives to producers

is technical analysis in the foreign exchange market profitable a genetic programming approach using genetic programming techniques to find technical trading rules we find strong evidence of economically significant out of sample excess returns to those rules for each of six exchange rates over the period 1981 1995 further when the dollar deutsche mark rules are allowed to determine trades in the other markets there is significant improvement in performance in all cases except for the deutsche mark yen betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk bootstrapping results on the dollar deutsche mark indicate that the trading rules detect patterns in the data that are not captured by standard statistical models

renegotiation design with multiple regulators abstract one striking feature of the internal organization of governments is the existence of multiple regulators this paper explains this organizational choice as coming from the government s limited ability to commit the separation of powers between two regulators is modeled as a stackelberg common agency game with respect to the case of a single regulator the allocative efficiency and the regulated firm s informational rent are both reduced in the unique equilibrium of this game however when regulators have a limited ability to commit this static cost of regulators separation becomes a dynamic benefit separation makes renegotiation harder and improves commitment journal of economic literature classification numbers d82 l51