bank runs liquidity costs and investment distortions abstract in this paper we extend the diamond and dybvig 1983 model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank run equilibria we provide weaker necessary conditions for runs we then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions banks might choose to offer contracts that prevent runs but under some conditions the second best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments

currency unions in africa is the trade effect substantial enough to justify their formation using estimates that currency unions double trade we quantify the welfare effects of forming currency unions for the african regional economic communities and for the african union as a whole the potential increase in trade is shown to be small and much less than that resulting from the adoption of the euro allowing for increased african trade does not overturn the negative assessment of african currency unions due to asymmetries in countries terms of trade shocks and their degree of fiscal discipline

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

implementing efficient allocations in a model of financial intermediation abstract in a finite trader version of the diamond and dybvig j polit econ 91 1983 401 model the ex ante efficient allocation is implementable by a direct mechanism i e each trader announces the type of his own ex post preference in which truthful revelation is the strictly dominant strategy for each trader when the model is modified by formalizing the sequential service constraint cf wallace fed reserve bank minneapolis quart rev 12 1988 3 the truth telling equilibrium implements the symmetric ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies

monetary union in west africa and business cycles synchronicity new evidence in the light of the initiative of the west african monetary zone wamz to introduce a common currency by 2020 this paper investigates the intricacies of the business cycles synchronicity among the six countries given i the rising importance of trade and cooperation with china ii the consideration of the euro as a potential anchor currency and a vehicle for trade with the eurozone and iii the importance of nigeria as the largest country of the group and the main supplier of oil we investigate the relative importance of these three major players in having their business cycles linked with the group in addition we investigate the underlying determinants of the business cycles synchronicity among the wamz countries on a pairwise basis results show a clear dominance of china s business cycle synchronicity with the wamz over europe s and nigeria s trade integration emerges as the key underlying factor of the common cycle observed

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

private information deposit interest rates and the stability of the banking system abstract the regulation of deposit interest rates has received little support from economists the same is true for the original rationale for such regulation that bank competition for deposits generates inherent instability in the banking system this paper develops an adverse selection model of banking in which this rationale is correct moreover in this model instability in the banking system can arise despite the presence of a lender of last resort and despite the absence of any need for deposit insurance however in the world described the regulation of deposit interest rates is shown to be an appropriate response to instability in the banking system finally it is argued that adverse selection models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts

on avoiding bank runs abstract can bank runs be avoided and should they be avoided i analyze a banking environment where bank runs can occur as a result of negative signals about the bank s investments in this environment banks can make sure that runs do not occur by designing the deposit contract appropriately i show that there are conditions under which it is profit maximizing for the bank to avoid runs and others under which occasional runs are part of optimal bank behavior i also compare the banking arrangement to an arrangement based on trading in equity

bank runs and institutions the perils of intervention we study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create we show that the efficient response to a run is typically not to freeze all remaining deposits since doing so imposes heavy costs on some individuals instead once a run is underway benevolent government institutions would allow additional deposit withdrawals placing further strain on the banking system when depositors anticipate these extra withdrawals their incentive to participate in the run increases in fact ex post efficient interventions can generate the conditions necessary for a self fulfilling run to occur jel g21 g8

monetary union in west africa who might gain who might lose and why we develop a model in which governments financing needs exceed the socially optimal level because public resources are diverted to serve the narrow interests of the group in power from a social welfare perspective this results in undue pressure on the central bank to extract seigniorage monetary policy also suffers from an expansive bias owing to the authorities inability to precommit to price stability such a conjecture about the fiscal monetary policy mix appears quite relevant in africa with deep implications for the incentives of fiscally heterogeneous countries to form a currency union we calibrate the model to data for west africa and use it to assess proposed ecowas monetary unions fiscal heterogeneity indeed appears crit ical in shaping regional currency blocs that would be mutually beneficial for all their members in particular nigeria s membership in the configurations currently envisaged would not be in the interests of other ecowas countries unless it were accompanied by effective containment on nigeria s financing needs jel classification e58 e61 e62 f33 union monetaire en afrique de l ouest qui pourrait gagner qui pourrait perdre et pourquoi les auteurs developpent un modele dans lequel les besoins financiers des gouvernements depassent le niveau socialement optimal parce que des ressources pub liques sont detournees de maniere aservir les interets etroits du groupe au pouvoir dans une perspective de bien etre social cela entraine des pressions indues sur la banque centrale pour qu elle extraie du seigneuriage la politique monetaire souffre

asset prices and institutional investors empirical evidence indicates that trades by institutional investors have sizable effects on asset prices generating phenomena such as index effects asset class effects and others it is difficult to explain such phenomena within standard representative agent asset pricing models in this paper we consider an economy populated by institutional investors alongside standard retail investors institutions care about their performance relative to a certain index our framework is tractable admitting exact closed form expressions and produces the following analytical results we find that institutions optimally tilt their portfolios towards stocks that comprise their benchmark index the resulting price pressure boosts index stocks while leaving nonindex stocks unaffected by demanding a higher fraction of risky stocks than retail investors institutions amplify the index stock volatilities and aggregate stock market volatility and give rise to countercyclical sharpe ratios trades by institutions induce excess correlations among stocks that belong to their benchmark index generating an asset class effect institutions finance their additional purchases of index stocks by taking on leverage a policy prescription that calls for a reduction in leverage while reducing the riskiness of institutional portfolios would also reduce the ability of institutions to tilt their portfolios towards index stocks depressing the index level

models of banking instability a partial review of the literature abstract this paper critically examines the theoretical literature on banking instability that has followed diamond and dybvig 1983 it explores the extent to which it a explains banking instability within a theoretical context in which financial intermediaries improve on unintermediated markets and b justifies government involvement in the financial intermediation industry it suggests that the literature has yet to provide a satisfactory theoretical basis for banking instability as such since the intermediaries which arise from it are peculiar mutual funds that bear little resemblance to real world banks in addition the paper challenges the widespread belief that this literature provides a sound foundation for government involvement in the industry it suggests that arguments for government intervention are open to objection on various grounds the most important one being that they are inconsistent with the existence of properly motivated financial intermediation in these models

in which context is the option clause desirable the option clause is a contractual device from free banking experiences meant to prevent banknote redemption duels it has been used within the diamond and dybvig j pol econ 91 401 419 1983 framework to suggest that very simple contractual solutions can act as an alternative to deposit insurance this literature has however been ambiguous on whether the option clause can replace deposit insurance outside of those two contexts it will be argued that the theoretical clause does not generally affect the likelihood that a solvent bank goes bankrupt because of a bank run as empirical evidence suggests it is already near null and that the exercise of the clause will have the effect of diminishing the size of creditor claims on bank assets because it exacerbates the agency problem of bank debt it will therefore be argued that the clause is only desirable in a free banking systems that are historically devoid of bank runs in the first place and have other means of managing debt related agency problems and b under the unrealistic assumption that bank runs are self fulfilling prophecies it will be argued that the agency problem of bank debt makes the option clause undesirable outside of free banking systems

financial contagion and depositor monitoring this paper analyzes market discipline in a many bank economy where contagion and bank runs interact we present a model with differently informed depositors where those depositors that are more informed have incentives to monitor banks investments it is shown that when banks are undercapitalized and the probability of success of the risky asset is low depositors might prefer a contract that is subject to bank runs in the interim period to a contract that allows banks to gamble with their funds and maintain their investment the results of the paper emphasize the benefits of private monitoring of banks in order to promote market discipline

a model of the interactions between banking crises and currency crises abstract a second generation model of currency crises is combined with a standard banking model in a pegged exchange rate regime after funds have been committed to the banks news arrives about the quality of the banks assets and about the exchange rate fundamentals a run on the banks may cause a currency crisis or vice versa there are multiple equilibria with either twin crises or no crisis depending on depositors expectations of other depositors actions suspension of deposit convertibility can prevent a speculative attack on the currency but last resort lending to solvent banks can induce one

the expectations management approach to stabilization in argentina during 1976 1982 abstract the main goals of the economic authorities in argentina during 1976 1982 were to open the economy to foreign trade and to reduce inflation the stabilization plan relied first on the control of money and wages later on a preannounced schedule of a declining future exchange rate actions that were supposed to be accompanied by a fiscal policy to reduce the public sector deficit the stabilization plan was abandoned in the first quarter of 1981 for two reasons an important financial crisis during the second quarter of 1980 and a deterioration of fiscal discipline that could no longer assure coherence between the deficit and the preannouncement schedule the paper also argues that the political situation in argentina undermined the credibility of the reforms and particularly the stabilization attempts with the abandonment of the stabilization schedule new commercial and exchange rate measures were gradually introduced reversing the policy of opening the economy to foreign trade the financial reform was reversed in 1982 with the virtual nationalization of deposits the experience of argentina suggests that capital inflows responding to interest rate arbitrage play a fundamental role in the short run dynamics of real exchange rates they can promote the adjustment or they can precipitate a run on the foreign exchange market the lesson is that a stabilization plan based on the preannouncement of future exchange rates is highly risky for an economy like argentina s

the impact of the euro on risk exposure of the world s major banking industries abstract in this paper we examine if the introduction of the euro impacted the risk exposures risk premiums and hence the cost of equity of the banking industry of 11 eurozone countries five non eurozone european countries and three non european countries using a multi factor asset pricing model that allows time variation in the risk exposures we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro though we find an increase in the market and currency exposures after the euro consistent with increased competition among banks the fall in the cost of equity arises from an economically large decline in the currency premium as expected the eurozone banking industry experienced the largest decrease our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

should bank runs be prevented abstract this paper extends diamond and dybvig s model j political economy 91 1983 401 to a framework in which bank assets are risky there is aggregate uncertainty about the demand for liquidity in the population and some individuals receive a signal about bank asset quality others must then try to deduce from observed withdrawals whether an unfavorable signal was received by this group or whether liquidity needs happen to be high in this environment both information induced and pure panic runs will occur however banks can prevent them by designing the deposit contract appropriately it is shown that in some cases it is optimal for the bank to prevent runs but there are situations where the bank run allocation may be welfare superior

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

uncertain liquidity and interbank contracting we study a version of the diamond and dybvig journal of political economy 1983 91 401 419 model where banks would like to obtain insurance against shocks on returns on liquid assets through an interbank borrowing and lending program we show that if investments in liquid assets and their realized returns are private information to individual banks the first best allocation is not incentive compatible we then characterize the second best interbank contract

sources of panics evidence from the weekly data abstract we use weekly data 1867 1933 to investigate the sources of banking and financial panics we find that while a panic s exact starting date is unpredictable one can identify environments conducive to panics a lack of liquidity in financial markets seems to be a key source results also reveal the effectiveness of the aldrich vreeland act inelastizing the money supply and shortening the panic of 1914 and suggest that the panic of 1933 may have been caused by a speculative attack on the gold backed us dollar via the banks as opposed to a run on the banks directly

economic obstacles to expanding intra african trade abstract the paper extends the gravity model to examine the impact of infrastructure availability economic policy and internal political tensions on intra african trade to highlight specific obstacles hampering such a trade bilateral trade between africa and developed countries is also analyzed the results show that besides traditional gravity variables poor infrastructure economic policy mismanagement and internal political tensions have a negative impact on trade among african countries except for political tensions the identified obstacles are specific to intra african trade since they have no impact on african trade with developed countries

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

hard or soft pegs choice of exchange rate regime and trade in africa summary this paper revisits the link between fixed exchange rate regimes and trade in the context of africa s exchange rate arrangements differentiating the effects of hard pegs currency unions from conventional soft pegs using a novel dataset of exchange rate regime classification the paper augments the gravity model of bilateral trade flows with measures of currency unions and conventional pegged arrangements and benchmarks africa s experience against the rest of the world we find that in both samples currency unions and pegs increase trade vis a vis more flexible exchange rate arrangements through channels in addition to reduced exchange rate volatility however the effect is almost twice as large for africa in addition the trade generating effect of pegs is at least as large for africa as that of currency unions suggesting that pegs could present a viable option perhaps an alternative to currency unions to promote trade in the region

the efficiency of self regulated payments systems learning from the suffolk system this paper analyzes the operation of the suffolk system an interbank note clearing network operating throughout new england from the 1820s through the 1850s banks made markets in each other s notes at par which allowed new england to avoid discounting of bank notes in trade privately enforced regu lations prevented free riding in the form of excessive risk taking observers of the suffolk system have been divided some emphasized the stability and effi these arrangements others argued that the arrangements were motivated by rent seeking on the part of boston banks and were primarily coervice and exploitative in the neighboring mid atlantic states regulations limited the potential for developing a regional clearing system centered in new york city on the model of the suffolk system this difference makes it possible to compare the performance of banks across regulatory regimes to judge the relative merits of the sanguine and jaundiced views of the suffolk system evidence supports the sanguine view new england s banks were able to issue more notes and these notes traded at uniform and low discount rates compared to those of other banks an examination of the balance sheets and stock returns of boston and new york city banks indicates that the stock market perceived that bank lending produced less risk for bank debt holders in boston than in new york the benefits of the system extended outside of boston peripheral new england banks displayed high propensities to issue notes and wer able to maintain low specie reserves boston banks did not show high profit rates or high ratios of market to book values of equity thus there is no evidence that boston banks extracted rents from their control of the payments system this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

financing banking crises abstract a model of strategic asset pricing is used to investigate the increase in interest rates and the formation of cash syndicates that can occur during privately financed banking crises results produced help to explain the federal reserve system s creation following the panic of 1907 and to clarify the fed s role in financing contemporary banking crises

runs versus lemons information disclosure and fiscal capacity we study the optimal use of disclosure and fiscal backstops during financial crises providing information can reduce adverse selection in credit markets but negative disclosures can also trigger inefficient bank runs in our model governments are thus forced to choose between runs and lemons a fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy our model explains why governments with strong fiscal positions are more likely to run informative stress tests and paradoxically how they can end up spending less than governments that are more fiscally constrained

asset pricing with heterogeneous beliefs and relative performance we propose an equilibrium asset pricing model in which agents with heterogeneous beliefs care about relative performance we find that the concern with relative performance leads agents to trade more similarly a development that has two effects first similar trading directly decreases volatility second similar trading decreases the impact of dominant agents the second effect dominates the first when agents expect large differences between their final performances and vice versa when agents expect small differences between their final performances compared with the case in which agents are unconcerned about relative performance the stock return volatility is higher when the second effect dominates and lower when the first effect dominates this paper also demonstrates that the concern about relative performance influences investors holdings stock prices and risk premia

asset prices and exchange rates in this paper we study the implications of introducing demand shocks and trade in goods into an otherwise standard international asset pricing model trade in goods gives rise to an additional channel of international propagation through the terms of trade absent in traditional single good asset pricing models the inclusion of demand shocks helps overturn many unrealistic implications of existing international flnance models in which productivity shocks are the sole source of uncertainty our model generates a rich set of implications on how stock bond and foreign exchange markets co move we solve the model in closed form which yields a system of equations that can be readily estimated empirically our estimation validates the main predictions of the theory

local banking panics of the 1920s identification and determinants abstract using a newly discovered dataset of u s bank suspensions from 1921 to 1929 we discovered that banking panics were more common in the 1920s than had been believed besides identifying panics we investigate their determinants finding that local banking panics were more likely when fundamental economic conditions were generally weak and more likely in overbanked states they were less likely in states with deposit insurance or states where a relatively large share of banks belonged to chain banking organizations

banks and loan sales marketing nonmarketable assets theories of financial intermediation predict that bank loans should not be marketable because of moral hazard problems banks will not conduct credit risk analysis or monitor borrowers if they are not at risk for failing to perform these services throughout most of history bank loans have not in fact been marketable yet by the end of the 1980 s the amount of commercial and industrial loan sales outstanding had grown to over 250 billion from trivial amounts at the beginning of the decade to explain the opening of this loan sales market we present a model of incentive compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers we then test for the presence of these features using a sample of over 800 recent loan sales

optimal financial crises empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of sunspots panics occur when depositors perceive that the returns on bank assets are going to be unusually low we develop a simple model of this in this setting bank runs can be first best efficient they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios however if costly runs or markets for risky assets are introduced central bank intervention of the right kind can lead to a pareto improvement in welfare from the earliest times banks have been plagued by the problem of bank runs in which many or all of the bank s depositors attempt to withdraw their funds simultaneously because banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets in the form of loans they are vulnerable to runs that can lead to closure and liquidation a financial crisis or banking panic occurs when depositors at many or all of the banks in a region or a country attempt to withdraw their funds simultaneously prior to the twentieth century banking panics occurred frequently in europe and the united states panics were generally regarded as a bad thing and the development of central banks to eliminate panics and ensure financial stability has been an important feature of the history of financial systems it has been a long and involved process the first cerntral bank the bank of sweden was established more than 300 years ago the bank of england played an especially important role in the development of effective stabilization policies in the eighteenth and nineteenth centuries by the end of the nineteenth century banking panics had been eliminated in europe the last true panic in england was the overend gurney company crisis of 1866

bank suspension of convertibility abstract a banking panic occurs when depositors at all banks seek a large reduction in their deposit holdings suspension of convertibility of demand deposits into currency was the banking system s response to a banking panic when depositors are incompletely informed about the state of bank investments a panic can occur when depositors expect capital losses conditional on having observed noisy indicators of the state of bank investments banks with superior information about the investments can signal to depositors by suspending convertibility that continuation of the long term investments is mutually beneficial

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

the importance of the exchange rate regime in limiting current account imbalances in sub saharan african countries abstract one of the major current concerns of economic policy in developing countries is the choice of the appropriate exchange rate regime to consolidate and accelerate the pace of economic growth this paper aims to investigate whether the choice of a country s exchange rate regime may affect current account imbalances for sub saharan african economies to this end we first use bayesian model averaging bma supplemented by the general to specific gets method to address concerns about model uncertainty and identify the key determinants fundamentals of external balances then estimating current account imbalances over the period 1980 2012 we show that flexible exchange rate regimes are more effective in preventing such disequilibria consequently candidates for membership of monetary unions should discuss widely the possible adjustment mechanisms before forming such unions one potential measure is the sharing of external risks at the regional level

imperfect competition risk taking and regulation in banking abstract we asses the welfare implications of banking competition under various deposit insurance regimes in a model of imperfect competition with social failure costs and where banks are subject to limited liability we study the links between competition for deposits and risk taking incentives and conclude that the welfare performance of the market and the appropriateness of alternative regulatory measures depend on the degree of rivalry and the deposit insurance regime specifically when competition is intense and the social failure costs high deposit rates are excessive both in a free market and with risk based insurance if insurance premiums are insensitive to risk then the same is true even if there is no social cost of failure we find also that in an uninsured market with nonobservable portfolio risk or with flat premium deposit insurance deposit regulation rate regulation or deposit limits and direct asset restrictions are complementary tools to improve welfare in an uninsured market with observable portfolio risk or with risk based insurance deposit regulation may be a sufficient instrument to improve welfare

difference in interim performance and risk taking with short sale constraints abstract absent much theory empirical works often rely on the following informal reasoning when looking for evidence of a mutual fund tournament if there is a tournament interim winners have incentives to decrease their portfolio volatility as they attempt to protect their lead while interim losers are expected to increase their volatility so as to catch up with winners we consider a rational model of a mutual fund tournament in the presence of short sale constraints and find the opposite interim winners choose more volatile portfolios in equilibrium than interim losers several empirical works present evidence consistent with our model however based on the above informal argument they appear to conclude against the tournament behavior we argue that this conclusion is unwarranted we also demonstrate that tournament incentives lead to differences in interim performance for otherwise identical managers and that mid year trading volume is inversely related to mid year stock return

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

dollars for sale exchange rate policy and inflation in africa abstract in africa the government is often the main provider of foreign exchange acquired through aid or via a nationalized mining sector although a parallel market is also usually active a policy of indexing the official exchange rate on the parallel one is destabilizing while a nominal anchor policy has the opposite effect using the case of nigeria these stylized facts are interpreted in the light of an analytical model with rational expectations the case of guinea is also presented as an example of where the nominal anchor policy has succeeded

a model of capital and crises we develop a model in which the capital of the intermediary sector plays a critical role in determining asset prices the model is cast within a dynamic general equilibrium economy and the role for intermediation is derived endogenously based on optimal contracting considerations low intermediary capital reduces the risk bearing capacity of the marginal investor we show how this force helps to explain patterns during financial crises the model replicates the observed rise during crises in sharpe ratios conditional volatility correlation in price movements of assets held by the intermediary sector and fall in riskless interest rates

bank runs and currency run in a system without a safety net argentina and the tequila shock abstract this paper tests the random withdrawals vs informed based theories of bank runs in the context of the bank panic that took place in argentina as a consequence of the mexican devaluation of december 20 1994 this evidence is unique in several ways it is the case of a contemporary banking system with virtually no explicit safety net a currency board with no deposit insurance scheme and a case in which the bank runs were triggered by a currency run the findings of the paper provide support to the informed based theories and show that depositors are concerned with the impact of a currency run on bank solvency

financial fragility liquidity and asset prices we define a financial system to be fragile if small shocks have disproportionately large effects in a model of financial intermediation we show that small shocks to the demand for liquidity cause either high asset price volatility or bank defaults or both furthermore as the liquidity shocks become vanishingly small the asset price volatility is bounded away from zero in the limit economy with no shocks there are many equilibria however the only equilibria that are robust to the introduction of small liquidity shocks are those with non trivial sunspot activity

aspects of monetary and banking theory and moral hazard we consider two problems in monetary and banking theory in this paper the first of these deals with differences between monetary and tax transfer resolutions of risk sharing problems in overlapping generations 12 15 models of fiat money under uncertainty our second contribution the scenario for which is also motivated in part by interventions needed for risk sharing reasons is an attempt to provide a rationale for interest rate controls on the liabilities of intermediaries that invest in risky assets both models consider environments in which uncertainty exists private markets are incomplete and most importantly some material payoff relevant actions are not perfectly observable the goal of this research is to provide further momentum to theoretical developments that serve to integrate information based models of investment and intermediation with theories of unbacked fiat money and the control of monetary institutions in recent years there has been a great deal of research interest in explicating the micro economic foundations of fiat money i e valued government created assets which are unbacked by payoffs from productive investments or taxes and the uniqueness and criteria for regulation of depository intermediary firms important contributions have been among others the works of bryant 3 the papers in kareken and wallace 7 fama 6 merton 10 and diamond and dybvig 5 asymmetric information based foundations of intermediary functioning have been provided by the papers of leland and pyle 9 followed by diamond 4 in most of this work there has usually been a dichotomy between models that focus on providing and analyzing a role for fiat money and those which analyze the rationale regulation and pricing of capital market intermediaries and their contracts regrettably we persist in having this dichotomy in our work some recent work like fama 6 does merge these two aspects however by emphasizing perfect information complete market environments in which the financial structure irrelevance theorems of modigliani and miller 10 apply models of unbacked fiat money many different types of which are to be found in kareken and wallace 7 can be usefully dichotomized as being of two types in the first fiat money serves the function of opening up or expanding trading opportunities among contemporaneously living agents who have endowment

bank runs in the free banking period free banks in the united states issued private banknotes without discretionary restriction of entry previous research suggests explanations for noteholders relatively large losses and the substantial number of banks that closed the authors examine these hypotheses and the hypothesis that contagious runs were important the evidence provides no support for the importance of wildcat banking due to par versus market valuation of bond reserves episodic but not general support for the importance of declining bond prices and support for contagion effects and contemporaries knowledge of them with little or no impact on the number of banks that closed copyright 1994 by ohio state university press

good booms bad booms credit booms usually precede financial crises however some credit booms end in a crisis bad booms and others do not good booms we document that while all booms start with an increase of total factor productivity tfp and labor productivity lp such growth falls much faster subsequently for bad booms we then develop a simple framework to explain this firms finance investment opportunities with short term collateralized debt if agents do not produce information about the collateral quality a credit boom develops accommodatingfirms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral eventually triggering a crisis when the average quality of investment opportunities also grows the credit boom may not end in a crisis because the gradual adoption of low quality projects is not strong enough to induce information about collateral finally we also test the main predictions of the model

truthful revelation in the diamond and dybvig banking environment abstract the welfare analysis in the diamond and dybvig banking literature has been conducted by appealing to the revelation principle the best banking arrangement that induces truthtelling by depositors is characterized and it is asserted presumably by appeal to the revelation principle that no other arrangement could give higher welfare this appeal to the revelation principle is however not straightforward because the diamond and dybvig environment includes a sequential service constraint which is not present in standard formulations of the revelation principle this paper justifies the use of the revelation principle in sequential service environments

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

the benefits and costs of monetary union in southern africa a critical survey of the literature with the 14 members of the southern african development community sadc having set the objective of adopting a common currency for the year 2018 an expanding empirical literature has emerged evaluating the benefits and costs of a common currency area in southern africa this paper reviews that literature focusing on two categories of studies 1 those that assume that a country s characteristics are invariant to the adoption of a common currency and 2 those that assume that a monetary union alters an economy s structure resulting in trade creation and credibility gains the literature reviewed suggests that a relatively small group of countries typically including south africa satisfies the criteria necessary for monetary unification the literature also suggests that in a monetary union comprising all sadc countries and a regional central bank that sets monetary policy to reflect the average economic conditions e g fiscal balances in the region the potential losses i e higher inflation from giving up an existing credible national central bank a relevant consideration for south africa could outweigh any potential benefits of trade creation resulting from a common currency

liquidity banking and bank failures a multiperiod model with risk neutral agents is constructed in which a liquidity problem arises in an equilibrium with decentralized tradin g in capital which banking institutions are able to alleviate depos it contracts provide for early withdrawal banks hold debt and agent s who borrow from banks hold compensating balances institutional col lapse or a state of the world when bank failures are experienced is associated with a high demand for liquidity low output and a lower than average level of welfare bank failure is symptomatic of a part icular state of endowments preferences and technology and governme nt intervention is undesirable copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

intermediary asset pricing abstract we model the dynamics of risk premia during crises in asset markets where the marginal investor is a financial intermediary intermediaries face an equity capital constraint risk premia r

the 1985 ohio thrift crisis the fslic s solvency and rate contagion for retail cds this paper uses both an arima transfer function intervention model and a panel data analysis to examine the effect of the ohio deposit insurance crisis in 1985 on the pricing of six month retail certificates of deposit cds for federally insured ohio banks and savings and loans adjusting for pricing reactions due to changes in market rates we find a significant unanticipated rise in cd rate premiums on the initial event week of the crisis that continued for approximately seven weeks consistent with a contingent insurance guarantee hypothesis rate premiums are found to be risk based from both a regulator s and a bank manager s perspective it is important to understand the nature of depositors reactions to a depository institution crisis recent events including large real estate loan losses for major banks the rhode island deposit insurance crisis and the general accounting office s gao announcement that a large bank failure or a severe recession could jeopardize the solvency of the federal deposit insurance corporation fdic have renewed debate over the potential for a widespread loss of confidence in the banking system in particular concern has been expressed over the potential for instability in retail deposit markets in a deregulated environment see smith 1984 1

spatial competition in the banking system localization cross subsidies and the regulation of deposit rates abstract the paper analyses a spatial competition model of the banking sector banks offer two kind of services deposits and credit and can either borrow or lend on the money market we investigate the consequences of the regulation of rates paid on deposits the main conclusions are as follows regulation first increases network size beyond social optimum in the long run it results in lower equilibrium credit rates because of increased competition secondly regulation generates tied sales contracts by which banks propose bundles of credit and deposit services tied sales in turn motivate the introduction of cross subsidies between the two activities the rent levied upon regulated deposits financing lower rates in the credit market finally it is shown that in a regulated environment the effectiveness of monetary policy is reduced in the sense that fluctuations of money market rates are less than fully transmitted in credit rates

bank panics suspensions and geography some notes on the contagion of fear in banking bank panics suspensions and geography some notes on the contagion of fear in banking recent attempts to understand bank panics tend to emphasize informational asymmetries or the possibilities of multiple equilibria such approaches stand in contrast to historical research that emphasizes legal factors influencing the organization of the banking system this paper constructs a model of a banking system operating under regulations similar to those in effect under the national banking system and in which information is complete in all other respects the model resembles that of diamond and dybvig 1983 the results indicate that given the regulatory environment it would have been surprising if suspensions of convertibility had not recurred periodically i introduction traditional explanations of panics under the national banking system 1863 1913 offered both by scholars and contemporaries stressed three factors 1 limitations on branching created incentives for the development and heavy use of correspondent banking relations 2 regulations favored holding interbank deposits with a relatively small group of new york banks this concentrated the reserves of the banking system in one location guaranteeing that heavy withdrawals of interbank balances from any source would affect new york banks and through them the entire banking system 3 legal restrictions prevented banks especially those holding large interbank deposits from adjusting interest rates in order to protect those deposits during periods of heavy withdrawal demand 1 this traditional explanation of the periodic recurrence of panics which emphasizes the organization of the banking system stands in marked contrast to more recent theories of panics which tend to focus on various informational asymmetries between banks and depositors 2 most of the recent literature on panics follows diamond and dybvig 1983 in modelling banks as a mechanism for pooling liquidity risks faced by depositors more specifically potential depositors can invest in the same primary assets available to banks however primary assets are costly to liquidate and depositors face random future liquidity needs at the time they make their investment decisions in such a framework the role of banks is to create and issue liabilities more liquid than their assets this activity provides insurance to depositors against random liquidity needs in diamond and dybvig s paper exogenous shocks to agents liquidity preference motivate withdrawal demand contracts between banks and depositors allow agents with liquidity needs to liquidate deposits at a lower cost than would be incurred in liquidating the primary asset however for each withdrawal due to inopportune liquidity needs a bank must liquidate primary assets and bear these costs hence the provision of liquidity by banks is feasible only if withdrawal demand is restricted to those actually requiring liquidity in the model of diamond and dybvig 3 panics can occur because the liquidity needs of individuals are private information in particular banks are assumed to be unable to observe whether any individual needs liquidity and hence cannot limit payments to individuals who actually need to withdraw funds banks are thus subject to runs as the result of self fulfilling prophecies if all depositors fear a run and they all seek to withdraw it will not be feasible for the banking system to provide liquidity to all of them thus the banking system must either suspend payments or be rendered insolvent of course a crucial component of this reasoning is that banks cannot distinguish legitimate from panic motivated withdrawals and hence cannot ration funds on this basis this model of panics provides no role for the organization of the banking system it therefore suggests that different countries or different regulatory regimes within the same country should have similar histories with respect to panics so long as they had similar deposit insurance schemes and similarly behaving lenders of last resort

financial intermediation in an overlapping generations model with transaction costs abstract we analyze an overlapping generations economy where agents interact to share liquidity risk we show that a pure exchange economy has excessive trade in equilibrium because agents interact to rebalance their portfolios intergenerational financial intermediaries reduce the number of interactions because agents only transact when they face liquidity needs in the absence of asset risk intermediaries match redemptions with deposits and dividends and never sell assets if the economy is subject to transaction costs the intermediated economy can sustain higher stationary investment and welfare we also find that dead weight transaction costs can increase welfare because it protects banks from interbank arbitrage and dampens the inherent cyclicality of market economies

solvency runs sunspot runs and international bailouts abstract this paper introduces a model of intervention by an international financial institution ifi under asymmetric information the ifi is unable to distinguish between runs due to fundamentals and those which are the result of pure sunspots however it maximizes global welfare by offering a relending package consistent with generating a separating equilibrium where voluntary creditor participation implies that underlying fundamentals are good the need for direct ifi lending in the package is shown to depend on the commitment capacity of creditors this adverse selection problem provides an alternative rationale for bagehot s principle of last resort lending at high rates of interest to the moral hazard motivation commonly found in the literature

bank competition and financial stability in asia pacific the impact of bank competition on financial stability has been a focus of academic and policy debate over the last two decades and particularly since the 2007 08 global financial crises beck 2008 oecd 2011 under the traditional competition fragility view banks cannot earn monopoly rents in competitive markets and this results in lower profits capital ratios and charter values this makes banks less able to withstand demand or supply side shocks and encourages excessive risk taking marcus 1984 alternatively the competition stability view suggests that competition leads to greater stability a less competitive banking market may lead to more risk taking if the big banks are deemed too important to fail and as such obtain implicit or explicit subsidies via government safety nets mishkin 1999 in addition banks with more market power tend to charge higher loan rates which may induce borrowers to assume greater risk leading to greater default in competitive banking markets loan rates are lower too big to fail issues and safety net subsidies are smaller and this results in a positive link between bank competition and stability boyd and de nicolo 2005 it could also be the case as noted by martinez miera and repullo 2010 that bank competition and stability are linked in a non linear manner and in a similar vein berger et al 2009 argue that competition and concentration may coexist and can simultaneously induce stability or fragility

liquidity uncertainty and intermediation the paper performs a welfare comparison between demand deposit and equity contracts in the presence of intrinsic aggregate uncertainty in this framework the welfare dominance of deposit contracts emerges under corner preferences it is shown that aggregate uncertainty creates high price volatility of ex dividend equity claims traded in a secondary market and the resulting consumption allocations offer less risk sharing opportunities to risk averse consumers than tailor made deposit contracts the contingency of early payoffs on depositors withdrawal order reinforces the welfare performance of deposit contracts whereas costly liquidation of productive long term investments deteriorates their welfare performance relative to equity contracts

bank failure contagion in historical perspective abstract bank failures are contagious due to the lack of bank specific information depositors who lack financial information on individual banks make withdrawal decisions based on the condition of the banking system as a whole a high ratio of bank failures then signals an adverse condition within the banking sector and triggers systemwide bank runs this paper looks at bank panics in u s history and shows the importance of solvency information specific to individual banks the major empirical finding is that the government or banks stopped bank panics mainly by providing financial information on banks

exogenous shocks contagion and bank soundness a macroeconomic framework abstract in a model where all banks are initially solvent an exogenous shock affects confidence causing a flight from deposits into domestic and foreign currency real interest rates increase unexpectedly affecting firms and raising the share of the banks nonperforming assets this contagion causes a bank run simulations show that compensatory monetary policy mitigates the bank run but causes macroeconomic imbalances combining compensatory monetary policy with tight fiscal policies slows the bank run and mitigates insolvency a devaluation combined with compensatory monetary policy reduces insolvencies and increases the growth of real income but at the cost of increased inflation

the delegated lucas tree we analyze the effects of the observed increased share of delegated capital for trading strategies and equilibrium prices by introducing delegation into a standard lucas exchange economy in equilibrium some investors trade on their own account but others decide to delegate trading to professional fund managers flow performance incentive functions describe how much capital clients provide to funds at each date as a function of past performance convex flow performance relations imply that the average fund outperforms the market in recessions and underperforms in expansions when the share of capital that is delegated is low all funds follow the same strategy however when the equilibrium share of delegated capital is high funds with identical incentives employ heterogeneous trading strategies a group of managers borrows to take on a levered position on the stock thus fund returns are dispersed in the cross section and the outstanding amounts of borrowing and lending increase the relation between the share of delegated capital and the sharpe ratio typically follows an inverse u shaped pattern jel g11 g12 g23 d02 d81 over the past thirty years there has been a gradual but profound change in the way money is invested in financial markets while almost 50 of u s equities were held directly in 1980 by 2007 this proportion decreased to approximately 20 see french 2008 what are the equilibrium implications of this shift in particular how does the increased presence of delegation affect trading strategies and prices to analyze the link between the incentives of financial institutions and asset prices we introduce financial intermediaries into a lucas exchange economy rather than study an optimal contracting problem we rely on empirical regularities inflows and assume a convex relation betweenflows and performance relative to the market as documented for example in chevalier and ellison 1997

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

the spirit of capitalism and stock market prices in existing theory wealth is no more valuable than its implied consumption rewards in reality investors acquire wealth not just for its implied consumption but for the resulting social status max m weber 1958 refers to this desire for wealth as the spirit of capitalism the authors examine both analytically and empirically implications of weber s hypothesis for consumption savings and stock prices when investors care about relative social status propensity to consume and risk taking behavior will depend on social standards and stock prices will be volatile the spirit of capitalism seems to be a driving force behind stock market volatility and economic growth copyright 1996 by american economic association

bank runs deposit insurance and capital requirements diamond and dybvig provide a model of intermediation in which deposit insurance can avoid socially undesirable bank runs we extend the diamond dybvig model to evaluate the costs and benefits of deposit insurance in the presence of moral hazard by banks and monitoring by depositors we find that complete deposit insurance alone will not support the first best outcome depositors will not have adequate incentives for monitoring and banks will invest in excessively risky projects however an additional capital requirement for banks can restore the first best allocation

a literature survey on proposed african monetary unions this study provides a survey of recent advances in the literature on proposed african monetary unions the survey comprises about 60 empirical papers published during the past fifteen years four main strands are discussed individually and collectively notably the proposed west african monetary zone wamz east african monetary union eamu southern african monetary union samu and african monetary union amu we observe a number of issues with establishing the feasibility and or desirability of potential monetary unions inter alia variations in choice of variables empirical strategies sampled countries and considered periodicities we address this ambiguity by reviewing studies with scenarios that are consistent with hegelian dialectics and establish selective expansion as the predominant mode of monetary integration some proponents make cases for strong pegs and institutions as viable alternatives to currency unions using cluster analysis disaggregating panels into sub samples and distinguishing shocks from responses in the examination of business cycle synchronisation provide more subtle policy implications we caution that for inquiries using the same theoretical underpinnings variables and methods just by modifying the scope context and periodicity may only contribute to increasing the number of conflicting findings authors should place more emphasis on new perspectives and approaches based on caveats of and lessons from the european monetary union emu and cfa zones

the causes of free bank failures a detailed examination abstract in this paper we propose and test a new explanation of bank behavior during the free banking era 1837 1863 arguing against the conventional view that free bank failures were due to wildcat banking we claim they were caused by falling asset prices confronting both explanations with our new and detailed data set developed from state auditor reports we find that the falling asset price explanation of free bank failures explains far more failures than does the wildcatting hypothesis

avoiding bank runs in transition economies the role of risk neutral capital abstract in a general equilibrium model with risk neutral and risk averse agents we show that if banks issue both demand deposits and equity then free banking is run proof and efficient in particular we obtain the first best insurance solution if there is adequate risk neutral capital if sufficient risk neutral capital is unavailable then a partial suspension of convertibility is optimal in general therefore policies like capital adequacy norms and deposit insurance are neither necessary nor desirable