equilibrium in a stock market economy with shareholder voting this paper demonstrates the existence of a shareholders equilibrium for a two period stock market economy in which there may be fewer securities than states of the world there are two allocation mechanisms in the economy firms owners may vote direction restricted majority rule to change firms production plans across states while keeping shareholdings fixed and individuals may trade their shares and stocks of a current production consumption good while keeping firms plans fixed a shareholders equilibrium is a set of firms plans and an allocation of shares and the current good which are stable with respect to both mechanisms copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

complexity in structured finance we study complexity in the market for securitized products a market at the heart of the financial crisis of 2007 9 the complexity of these products rose substantially in the years preceding the financial crisis we find that securities in more complex deals default more and have lower realized returns the worse performance is economically meaningful a one standard deviation increase in complexity represents an 18 increase in default on aaa securities however yields of more complex securities are not higher indicating that investors did not perceive them as riskier our results are consistent with complexity obfuscating security quality

overreaction and underreaction in analysts forecasts abstract we examine hypotheses derived from behavioral decision theory regarding conditions that lead to overreaction and conditions that lead to underreaction in analysts earnings forecasts we argue that three heuristics jointly influence earnings forecasts leniency representativeness and anchoring and adjustment we present a model for the concurrent influence of these heuristics on forecast errors and examine three predictions of this model 1 that there is a tendency towards overreaction in forecast changes and underreaction in forecast revisions 2 that there is overreaction to positive forecast modifications and underreaction to negative forecast modifications and 3 that these biases increase with the forecast horizon

corporate production and shareholder cooperation under uncertainty a two period model of an economy with production and with uncertain future outputs and resources is investigated intertemporal trade is only possible via the stock market spanning equilibrium allocations lie always in the smallest core of each replica of the economy if a feasible allocation is not a price taking equilibrium allocation and satisfies an interiority and a liquidity condition then in some replica of the economy the replicated allocation does not belong to the largest core copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

rational beliefs and security design this article studies the security design problem of a cash constrained firm facing investors with diverse beliefs investor rational beliefs are modeled as varying and yet rational in the sense of kurz 1994 with two investors optimal designs are similar under rational beliefs and rational expectations with many investors however optimal securities under rational beliefs maximize investor differences of opinion while under rational expectations optimal designs minimize disagreements we demonstrate that the common practice of issuing multiple securities backed by a single asset is optimal under rational beliefs but not under rational expectations researching market beliefs can create substantial value for firms article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the scope of the stockholder unanimity theorems if a firm is owned by several stockholders each of whom has different risk preferences then whose risk preferences determine whether the firm accepts or rejects a risky proposed change in its production plan it might appear that this is a political problem whose resolution is necessarily through political means such as proxy fights this appearance however is only partially accurate arrow 1964 ekern 1973 ekern and wilson 1974 leland 1973 1978 baron 1977 and others have developed a theory showing that if a sufficient variety of securities are traded on the stock market then conflict among stockholders does not occur the reason is that if an economy has enough different securities then in equilibrium each stockholder s preferences towards risk is aligned with every other stockholder s preferences consequently stockholders are unanimous in their evaluations of risky investment projects the purpose of this paper is to inquire if any reason exists why one should

strategic liquidity supply and security design we study how securities and issuance mechanisms can be designed to mitigate the adverse impact of market imperfections on liquidity in our model asset owners seek to obtain liquidity by selling claims contingent on privately observed future cash flows liquidity suppliers can be competitive or strategic in the optimal trading mechanism associated to an arbitrary given security issuers with low cash flows sell their entire holdings of the security while issuers with high cash flows are typically excluded from trade by designing the security optimally issuers can avoid exclusion altogether we show that the optimal security is debt because of its low informational sensitivity debt mitigates the adverse selection problem furthermore by pooling all issuers with high cash flows debt also reduces the ability of a monopolistic liquidity supplier to exclude them from trade in order to better extract rents from issuers with lower cash flows

the impossibility of efficient decision rules for firms in competitive stock market economies considerable attention has been focused recently on models of firms under uncertainty in which there is an incomplete set of securities markets in these models each firm can issue only one security and consumers can generate consumption plans only through the purchase of firms securities consequently if the economy is competitive each stockholder of a firm will impute the same value to the firm in equilibrium where this value is given by the market price of the firm s security however stockholders will not in general have the same implicit prices for state contingent consumption since the financial market is said to be incomplete if the number of independent securities is less than the number of states of nature consumers cannot hedge perfectly whichimplies that unconstrained pareto optimal allocations are not generally attainable see 2 and 3 finally it is unclear what firms objectives should be in these models because profit maximization is not well defined firms profits in different states cannot be aggregated into a single index it is still generally accepted however that firms should operate in their own stockholders interests a necessary condition for allocative efficiency

optimal vs traditional securities under moral hazard this paper provides an explanation for the widespread use of traditional securities by wellestablished firms standard moral hazard models predict that equity debt and warrants are almost never optimal financing instruments i show that issuing these securities is nevertheless nearly optimal the issuer would gain very little by using non traditional securities instead combined with equity one debt issue without multiple layers of seniority and one warrant issue without multiple exercise prices suffice to achieve near optimality the near optimality of traditional financing depends crucially on the issuer s ability to use war rants in addition to debt and equity

portfolio separation for stockholder owned depository financial intermediaries abstract the conditions leading to separation of asset composition and financing decisions for depository financial intermediaries have received considerable attention in the literature although research to date provides useful insights into the issue of separation none analyze separation from the point of view of shareholder approval in this paper a single period model of investor behavior is developed and analyzed based on market equilibrium the impetus for the existence of intermediaries is random cash payments of investors and liquidation costs the conditions for shareholder unanimity and optimal rules for intermediary decisions are derived the optimality conditions are then analyzed for separation

intelligent agents for negotiations in market games 2 application for part i see ibid vol 13 no 5 p 1103 8 1998 in competitive markets human decision makers need assistance to determine potential coalitions that they can be part of note that such coalitions are legal provided market power is not monopolized we present an approach for designing specialized intelligent software agents that perform negotiations on behalf of their human counterparts and then suggest market strategies that the human can adopt our negotiation protocol is derived from cooperative game theory however it differs from the game theory literature in requiring virtually no trustworthy information exchange between the potential coalition partners in the part i we presented the negotiation model in this paper we apply it to power markets

changes in the financial market welfare and price effects and the basic theorems of value conservation this paper analyzes the impact on both welfare and equilibrium prices of changes in the financial market in a general equilibrium two period context previous papers have focussed on the securities effect tending to essentially ignore the equally important endowment effect that arises when market structure changes are implemented two forms of endowment neutrality and market structure changes which either preserve expand or shift allocational feasibility differentiate the main theorems which are based on arbitrary preferences and beliefs and substantially extend and modify extant results in particular earlier statements identified with value conservation are sharply moderated very roughly the paper yields the following implications for some of the more common changes in the market nonsynergistic corporate spinoffs and the opening of option markets have on balance strongly positive welfare effects nonsynergistic mergers tend to have strong negative welfare effects while the welfare effects of alternative risky debt structures tend to be ambiguous all of the preceding however may under plausible conditions be redistributive changes in the structure of the financial market have long been of interest to financial economists while such changes may take many forms it is perhaps surprising that only a few of the more common ones have been systematically studied foremost among these are changes which involve the firm s capital structure the relative amounts of debt and equity mergers and other special recapitalizations this paper analyzes the impact on both welfare and equilibrium prices of changes in the financial market in a two period context it differs from previous studies primarily in that it is based on a fully integrated general equilibrium approach similar to that employed in international trade analysis thus while the resulting mosaic contains previous studies as clearly recognizable fragments such as the classic paper of modigliani and miller 33 it also provides the necessary framework and tools for an evaluation of market structure changes of any type such as changes involving subordinated debt convertibles warrants mergers spinoffs and the opening of option markets

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

the design of securities abstract this paper investigates the determinants of security design we consider the assignment of both cash flows and voting rights focusing on corporate control we postulate that a conflict of interest exists between contestants for control and outside investors the conflict arises because private benefits of control give contestants an incentive to acquire control even when this reduces firm value security design is a tool for resolving these conflicts and maximizing firm value our main result is that a single voting security is optimal

market resolution and valuation in incomplete markets the arrow debreu approach to general equilibrium in an economy has been recognized as one of the most general and conceptually elegant frameworks for the study of financial problems under uncertainty 2 9 equally well known is its elusiveness when it comes to ready application to practical problems like capital budgeting or empirical testing see 6 15 18 however some recent research see 1 3 6 12 16 18 and 19 has made a serious attempt to put the state preference theoretic model in an operational setting breeden and litzenberger 6 have developed an interesting approach to derive constructively the prices of elementary arrow debreu securities from the prices of call options on aggregate consumption banz and miller 3 use a similar technique to value capital budgeting projects based on values for state contingent claims computed from prices of call options written on the market portfolio the supershare securities proposed by hakansson 14 16 and related work by garman 13 ross 24 etc have also served to give the so called state contingent approach a practical flavor

analyst forecasting errors and their implications for security analysis a comparison of 66 100 consensus estimates of wall street analysts with reported earnings for a large sample of nyse amex and otc companies demonstrates that their forecasts differ significantly from actual reported earnings a minority of estimates fall within a range around reported earnings considered acceptable to many professional investors the error rates are not meaningfully affected by the business cycle or industry groupings the average error also appears to be increasing over time these findings question the use of finely calibrated earnings forecasts that are integral to the most common valuation models and indirectly question the valuation methods themselves

forecasting efficiency concepts and applications this article introduces the concept of forecast efficiency in which the forecast contains all information available at the time of the forecast empirical tests investigate weak efficiency where the information set is all past forecasts and where all forecast revisions and errors should be uncorrelated with past forecast revisions tests of macroeconomic energy consumption and oil price forecasts find a significant autocorrelation of forecast revisions with fifty of fifty one tests showing positive correlation of forecast revisions as opposed to zero correlation consistent with forecast efficiency copyright 1987 by mit press

a theory of mandatory convertibles abstract the objective of this paper is to develop a theoretical analysis of mandatory convertibles which are securities that automatically mandatorily convert to common stock on a pre specified date we consider a firm facing a financial market characterized by asymmetric information and significant costs in the event of financial distress the firm can raise capital either by issuing mandatory convertibles or by issuing more conventional securities like straight debt ordinary convertibles or equity we show that in equilibrium the firm issues straight debt or ordinary convertibles if the extent of asymmetric information facing it is large but the probability of being in financial distress is relatively small it issues mandatory convertibles if it faces a smaller extent of asymmetric information but a greater probability of financial distress our model provides a rationale for the three commonly observed features of mandatory convertibles mandatory conversion capped or limited capital appreciation and a higher dividend yield compared to common stock we also characterize the equilibrium design of mandatory convertibles

cash flow tranching and the macroeconomy the volume of cash flow transformation activities has grown markedly over the past few decades we develop a dynamic model that characterizes the effects of changes in the costs and benefits of security creation lower tranching costs and increases in foreign appetite for safe assets can both increase costly security creation with positive effects on gdp and have diverse macroeconomic implications whereas the former counterfactually increases yields the latter lowers them and also raises rents associated with cash flow transformation these two features as well as other subsidiary implications of increased foreign demand are consistent with recent u s data

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

financial innovations and arbitrage pricing in economies with frictions revisited abstract existing literature points to the role of market frictions in providing motivations for financial innovations in this paper we study the effectiveness of the arbitrage pricing approach and the design and pricing of innovated securities in economies with restrictions on short sales in the process we also define the no arbitrage conditions that is appropriate for such economies the differences between our results and chen s 3 are pointed out when appropriate journal of economic literature classification numbers c61 g10 g12 g20

using game theory to analyze electric transmission pricing policies in the united states abstract us public policy towards the private electric power industry is moving away from restrictive regulation and towards promotion of competition alternative policies concerning access to and pricing of transmission are now being discussed similar issues may arise in europe as trade barriers fall our purpose is to show how game theory can help illuminate that debate and identify desirable policies game theory models are used to estimate the possible effects of various policies upon productive efficiency and the distribution of gains among sellers transmitters and buyers of power static cooperative models are used to calculate the possible outcomes of short run transmission games long run games in which the amount of transmission capacity is a decisition variable are modeled as dynamic noncooperative stackelberg games one conclusion is that under some conditions price regulation and mandatory access could hurt power buyers by removing incentives for building transmission capacity another conclusion is that under a system of voluntary access and price regulation it may be better to allow wheeling prices to exceed the marginal cost of transport rather than to risk losing the benefits of cooperation

a general equilibrium theory of banks capital structure abstract we develop a general equilibrium theory of the capital structures of banks and firms the liquidity services of bank deposits make deposits a cheaper source of funding than equity in equilibrium banks pass on part of this funding advantage in the form of lower interest rates to firms that borrow from them firms and banks choose their capital structures to balance the benefits of debt financing against the risk of costly default an increase in the equity of a firm makes its debt less risky and that in turn reduces the risk of the banks who lend to the firm hence there is some substitutability between firm and bank equity we find that firms have a comparative advantage in providing a buffer against systemic shocks whereas banks have a comparative advantage in providing a buffer against idiosyncratic shocks

game theory approach to use of noncommercial power plants under time of use pricing the authors use the game theory approach for evaluating the impact of the introduction of customer owned noncommercial power plants ncp when time of use pricing is used various results from this analysis are derived some of which are that the conflict between ncp customer and the supplier forces the supplier to reduce the price of ncp customers perception of the situation in which they are involved in plays an important role in this conflict the game model analysis presented provides a detailed quantitative information on electricity prices and on the ways of using ncp

pre harvest price expectations for corn the information content of usda reports and new crop futures this article examines the puzzle of why futures prices continue to react to usda crop reports despite the fact that reports appear to be no longer newsworthy that is provide no better production estimates than private forecasts the information value of reports is measured in terms of their influence on rational agents harvest time corn price expectations which are uncovered using a hamilton type modeling approach results show that reports are still newsworthy as they would contribute to agents price expectations if released a day early thus futures price reactions which closely reflect price expectations are rational and consistent with efficient markets hypothesis copyright 2008 oxford university press

securitization bubbles structured finance with disagreement about default risk abstract an additional reason for the structured finance boom of the 2000s may have been disagreement about default risk of collateral assets when risk neutral investors disagree about average default probabilities structuring collateral cash flow raises prices by concentrating optimists demand on risky tranches with disagreement about default correlation low correlation investors believe in diversification and pay high prices for senior tranches they deem riskless high correlation investors value junior tranches they expect to pay whenever aggregate conditions are good risk aversion and short selling through credit default swaps reduce the prices of both pass through and structured securitizations but may increase the return to tranching

trading in derivatives when the underlying is scarce abstract regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security when these constraints bind we refer to the security as scarce and its price becomes distorted relative to its value in a frictionless market we show that an otherwise redundant derivative can reduce the price distortion of the underlying security by relaxing its scarcity we also show that it is especially important to analyze the underlying and derivative markets jointly when evaluating the impact of regulation such as short sales bans and position limits in derivatives that restricts trade

the democratization of credit and the rise in consumer bankruptcies financial innovations are a common explanation for the rise in credit card debt and bankruptcies to evaluate this story we develop a simple model that incorporates two key frictions asymmetric information about borrowers risk of default and a fixed cost of developing each contract lenders offer innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers this results in more defaults and borrowing and increased dispersion of interest rates using the survey of consumer finances and federal reserve board interest rate data we find evidence supporting these predictions specifically the dispersion of credit card interest rates nearly tripled while the new cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders our calculation suggest these new cardholders accounted for over 25 of the rise in bank credit card debt and delinquencies between 1989 and 1998

arbitrage and martingales with taxation this paper extends the martingale analysis of no arbitrage pricing to worlds with taxation the absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments for example no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed andfor item s such as depreciation expenses that influence only after tax cash flows the analysis is applied to several topics in finance including the debt equity decision tax options and the taxation of dividends and pensions copyright 1987 by university of chicago press

banking scope and financial innovation we explore the implications of financial system design for financial innovation we begin with assumptions about the investment opportunities of firms their observable attributes and the roles of commercial banks investment banks and the financial market we examine the borrower s choice between bank and financial market funding the commercial bank s choice of monitoring capacity and the investment bank s choice of whether to invest in financial innovation our main result is that financial innovation in a universal banking system is stochastically lower than innovation in a financial system in which commercial and investment banks are functionally separated article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

valuation capital structure and shareholder unanimity for depository financial intermediaries the theory of corporate finance is not directly applicable to financial intermediary decision making the lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm first when intermediaries accept deposit financing they must produce services such as liquidity and convenience at considerable expense for real resources second the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid in this paper a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived

bankruptcy limited liability and the modigliani miller theorem this paper examines the validity of the modigliani miller theorem in the presence of bankruptcy the theorem asserts that the value of a firm and the set of return patterns that the capital markets offer to private investors are independent of firm debt equity ratios the usual proof of the theorem is based on the presumption that in perfect capital markets borrowing by firms and borrowing by individuals can be perfect substitutes it is unclear whether this presumption is valid when there is a positive probability that either the firm or the individual who borrows to invest in the firm goes bankrupt on the one hand joseph stiglitz 1969 and robert merton have argued that the modigliani miller theorem remains valid even with bankruptcy if agents who borrow to invest in a firm can limit their liability to the amount of collateral they put up on the other hand vernon smith 1972 has argued that a margin loan which is secured by a pure equity collateral has a different return pattern from a direct loan to the firm and cannot serve as a substitute for the latter see also david baron smith s argument raises a number of issues first it brings out the important fact that return patterns for limited liability borrowing and lending depend on the composition of the portfolio that serves as collateral if a firm goes bankrupt a pure equity collateral is worthless whereas a collateral that contains some bonds may still earn a positive return because the bonds have a privileged claim to the firm s remaining assets in general margin contracts with different collateral compositions will generate different return patterns both for the borrower and the lender given this multiplicity of return patterns on margin loans one would not expect that all margin loans can be used as substitutes for direct loans to the firm this intuition is confirmed by smith s demonstration that a particular margin loan namely the loan on pure equity collateral cannot serve this purpose the question remains open whether this is actually needed for the modiglianimiller theorem it might be enough if some appropriate margin loan could be used as a substitute for lending to the firm in pursuing this problem one finds a gap in the standard proof of the modiglianimiller theorem usually one applies an arbitrage argument to show that as a firm changes its debt equity ratio investors in shares and bonds adjust their portfolios so as to leave their overall return patterns unchanged no such arguments are given for other securities related to the firm in particular for margin investments and for margin loans that serve to finance those margin investments without an analysis of professor of economics university of bonn research on this paper was supported by nsf grant soc 75 13437 at princeton university and by the deutsche forschungsgemeinschaft i have benefited from the advice of dwight jaffee and an anonymous referee in a similar vein stiglitz 1972 asserts the value of the firm decregses because there is a divergence in the estimation of the chances of bankruptcy between the lender and the borrower p 467 this analysis rests upon a form of market segmentation that is without economic merit in his model there are two groups of agents optimists and pessimists the optimists invest all their wealth in the firm s equity valued to make the rate of return equal to that on the riskless asset the pessimists are indifferent between the risky firm s bonds and the riskless asset it follows that the optimists being more optimistic than the pessimists must prefer the risky bond to the riskless asset and hence to the equity yet stiglitz assumes that the optimists invest in the equity and not in the risky bond of course if one group invests all its wealth into one asset that asset need not satisfy a marginal equality condition at all a correct analysis of his model leads to the results of this paper

voting power in the proxy process abstract the likelihood that a firm will enact a management sponsored antitakeover charter amendment depends on ownership structure this implies that the adoption of antitakeover amendments may be anticipated then announcement returns provide a biased estimate of wealth effects an estimator that corrects for the bias induced by anticipation indicates that the enactment of an antitakeover amendment is associated with a statistically significant decrease in shareholder wealth the voting power of employee stock ownership plans and the chief executive officer plays a prominent role in determining whether a firm will adopt this type of takeover defense

strategic financial innovation in segmented markets rohit rahi obtained his ph d in economics from stanford university in 1993 he is a reader in finance and economics and a member of the financial markets group at the london school of economics his research interests are in the theory of financial markets in particular arbitrage in segmented markets security design and asset pricing with asymmetric information and in general equilibrium theory with incomplete markets he has published articles in the review of economic studies journal of economic theory and journal of business he served a nine year term on the editorial board of the review of economic studies jean pierre zigrand is a lecturer at the london school of economics his research interests are asset pricing financial intermediation theory and general equilibrium theory any opinions expressed here are those of the authors and not necessarily those of the fmg the research findings reported in this paper are the result of the independent research of the authors and do not necessarily reflect the views of the lse

efficient competitive equilibria with adverse selection do walrasian markets function orderly in the presence of adverse selection in particular is their outcome efficient when exclusive contracts are enforceable this paper addresses these questions in the context of a rothschild stiglitz insurance economy we identify an externality associated with the presence of adverse selection as a special form of consumption externality consequently we show that competitive equilibria always exist but are not typically incentive efficient however as markets for pollution rights can internalize environmental externalities markets for consumption rights can be designed to internalize the consumption externality due to adverse selection with such markets competitive equilibria exist and incentive constrained versions of the first and second welfare theorems hold

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

transaction analysis in deregulated power systems using game theory the electric power industry is in transition to a deregulated marketplace for power transactions in this environment all power transactions are made based on price rather than cost a regional power pool is noted as the most straightforward path to a deregulated electricity marketplace however many questions remain unanswered regarding the economics of power pool participation in a deregulated energy marketplace participants are interested in maximizing their own profits regardless of the system wide profits it is perceived that competition will reduce the price of electricity for retail customers however the key issue for participants is related with the price definition to remain competitive in this paper the authors use game theory to simulate the decision making process for defining offered prices in a deregulated environment the outcome of this study may be used by power pool coordinators to discourage unfair coalitions a modified ieee 30 bus power system is used as a deregulated power pool to illustrate the main features of the proposed method

announcement effects and the theory of storage an empirical study of lumber futures we investigate how lumber futures returns are affected by monthly housing starts announcements and analyze the dependence of the response on lumber inventories and time to delivery to do so we develop a generalized least squares gls method to jointly analyze simultaneously traded contracts we find that increases in the unanticipated component of housing starts announcements increase returns on lumber futures contracts further and as predicted by the theory of storage but previously unrecorded the effects of housing starts shocks decline with lumber inventories there is also a time to delivery effect near delivery contracts respond more sharply to housing starts news than do farther out contracts

collective decision mechanisms and efficient stock market allocations existence of a participation equilibrium the recent literature on economies with an incomplete set of markets has been devoted to the study of the efficiency properties of collective stockholder decision mechanisms for guiding the behavior of firms when the restrictive ekern wilson spanning condition is not satisfied the results have been essentially negative a majority voting rule and controlling interest rules will not yield efficient equilibrium allocations in general however in a recent paper helpman and razin 1978 suggested a decision rule that assures constrained pareto optimality of equilibrium allocations their rule is patterned on the recent contributions to the theory of incentive compatibility in this paper we show that an equilibrium relative to the helpman razin mechanism rarely exists making their optimality result essentially vacuous we then demonstrate that an equilibrium does exist in general relative to the shared cost mechanism developed by hurwicz 1976 and that all equilibrium allocations in the helpman razin model are constrained pareto optima finally we suggest that the optimality of equilibrium allocations is as much a consequence of how technology is modeled as of the incentives induced by the decision mechanism existence on the other hand is very sensitive in general to the decision mechanism adopted

are harvest forecasts news usda announcements and futures market reactions futures market price data for maize and soyabeans are used to examine reactions to us department of agriculture harvest forecasts these forecasts are widely known and reasonably accurate so failure to find significant reaction would indicate that the usda did not contribute additional news relative to information already possessed by traders various t tests f tests and nonparametric chi square tests indicate rejection of the null hypothesis of no significant difference between means of absolute values or variances of changes in closing prices on days following a usda announcement and other days thus the data indicate that significant information is contained in the forecasts

tax arbitrage and the existence of equilibrium prices for financial assets in models where both investors and securities are subject to differential taxation there may be no set of prices that rule out infinite gains to trade or tax arbitrage this paper characterizes the joint restrictions on financial asset returns and investors tax schedules that preclude tax arbitrage in the absence of short sale constraints the authors show that if there exists any configuration of marginal tax rates on investors tax schedules that rule out infinite gains to trade then no tax arbitrage prices will exist they also show that the existence of no tax arbitrage prices ensures the existence of equilibrium prices the effects of differential taxation on the equilibrium prices of financial assets have attracted much attention from financial economists in recent years otherwise identical securities that contribute to taxable income to different degrees will in general be valued differently by taxable investors as a result tax considerations have been useful in helping explain the effect of dividend yield on stock returns the effect of coupon levels and term to maturity on bond prices 2 the timing of investors portfolio transactions 3 and the observed capital structures of firms 4 while a rich set of observed behaviors can be better understood by reference to differential taxation there are well known difflculties in dealing with taxes in a general equilibrium setting to clear markets relative prices must reflect the marginal rates of substitution of all agents simultaneously when tax rates differ across investors however this condition can be impossible to achieve to illustrate consider a world of perfect certainty with two assets a tax exempt municipal bond and a taxable government bond to equate marginal rates of substitution the rate of return on the government bond rg must equal that on the municipal rm grossed up by one minus the investor s marginal tax rate ti that is rg rm 1 ti if there are investors in more than one tax bracket this condition will obviously be impossible to satisfy for all of them simultaneously both authors from graduate school of industrial administration carnegie mellon university we wish to thank scott richard steven spear and an anonymous referee for helping us sort through the issues considered here seminar participants at columbia wharton the johnson symposium on asset pricing at the university of wisconsin madison and the 1986 western finance association meeting also provided valuable comments we are also grateful for the financial support provided by the center for public policy research carnegie mellon university all errors are our own responsibility

capital structure equilibrium under market imperfections and incompleteness this paper generalizes miller s supply side equilibrium argument to other forms of capital market imperfections and incompleteness if corporations possess a comparative advantage in dealing with these imperfections they have an incentive to act as financial intermediaries corporations attempts to profit from these intermediation activities dictate an optimal capital structure for the corporate sector as a whole but in equilibrium the capital structure of any single firm is a matter of indifference in addition the positive role that corporate finance plays in completing the market restores standard perfect market results on asset pricing and the associated portfolio separation properties

how market efficiency and the theory of storage link corn and ethanol markets this article uses the theories of market efficiency and supply of storage to develop a conceptual link between the corn and ethanol markets and explores statistical evidence for the link we propose that a long run no profit condition is established in distant futures markets for ethanol corn and natural gas and then use the theory of storage to define an inter temporal equilibrium among these prices the relationship shows that under certain conditions future price expectations will influence nearby futures prices and that a short term relationship between input and output prices will exist we demonstrate validity of the theory using a structural price model and then by means of time series techniques

when do the usda forecasters make mistakes this study analysed forecasts for all us corn soya bean and wheat categories published within the world agricultural supply and demand estimates wasde reports over the 1987 88 through 2009 10 marketing years in an attempt to identify patterns and better understand when the usda forecasters make mistakes two general sources of errors were investigated behavioural and macroeconomic factors the first objective was to examine how these factors affect the size of the forecast error and the second concentrated on the direction of the error due to these effects our findings suggest that the largest increase in the size of usda forecast errors was associated with structural changes in commodity markets that took place in the mid 2000s corn soya bean and wheat forecast errors also grew during the periods of economic growth and with changes in exchange rates while inflation and changes in oil price had a much smaller impact with respect to behavioural sources we identified patterns consistent with leni

the study of the impacts of potential coalitions on bidding strategies of gencos the paper studies the impacts of potential coalitions on bidding strategies of gencos in a pool based power market the generator under consideration can form any potential coalition with other generators subgroups are then formed and each of these subgroups consists of some members which coordinate their bidding strategies to achieve a common goal noncooperative gaming applies among all the subgroups while cooperative gaming applies among the members in each subgroup by implementation of bids sensitivities the paper presents an algorithm for the members in each coalition subgroup to obtain optimal bids which essentially is based on interior point optimal power flow ipopf model a priority list produced after optimal bids are found for all the potential combinations of coalition is used by the generator under consideration to bargain with members on the list the algorithm and model are tested by the ieee 30 bus system and numerical results are presented

modelling soybean prices in a changing policy environment accurate forecasts of commodity prices are an important ingredient in the policy formation process a commodity price forecasting procedure used routinely by the us department of agriculture in their policy and market analysis activities is a simple linear reduced form regression model that predicts season average farm prices safp using policy variables and the ratio of total ending stocks to use this approach is extended to the soybean safp to estimate a benchmark model using annual data also several specification issues related to this estimation framework are addressed evaluation suggests that the standard forecasting procedure may be affected by the fact that the ratio of stocks to use is endogenous to prices in addition important structural changes are revealed in these relationships over time a model is then considered that allows parameters to shift gradually improvements in the accuracy of model forecasts allowed by this parameter switching technique are identified and discussed in add

forecast performance of wasde price projections for u s corn we conduct a comprehensive evaluation of the season average price projections for u s corn as published by the u s department of agriculture s world agricultural supply and demand estimates wasde an important issue given reduced resources and increased program scrutiny within the federal government this study is the first in the literature to evaluate the wasde corn projections relative to futures adjusted forecasts throughout the forecasting cycle using a lengthy evaluation period 1980 81 2012 13 we find that wasde projections provide lower rmses relative to futures adjusted forecasts for 9 of the 16 forecast periods 4 of which are statistically different encompassing tests show that wasde projections often provide incremental information not present in the futures adjusted forecasts composite forecasts based on futures adjusted forecasts and wasde projections reduced the rmses over all forecast periods by an average 12 16 favorable average trading profits may be generated for some forecast months using wasde projections overall our results suggest that wasde projections of the u s corn season average price provide useful information to the market and could enhance the efficiency of the agricultural sector

competition among exchanges does competition among e nancial intermediaries lead to excessively low standards to examine this question we construct a model where intermediaries design contracts to attract trading volume taking into consideration that traders differ in credit quality and may default when credit quality is observable intermediaries demand the right amount of guarantees a monopolist would demand fewer guarantees private information about credit quality has an ambiguous effect in a competitive environment when the cost of default is large small private information leads to higher lower standards we exhibit examples where private information is present and competition produces higher standards than monopoly does i introduction in spite of the general acceptance of the competitive mechanism as an allocation scheme many observers consider e nancial intermediation an exception competition is thought to lead to a race to the bottom in which e nancial intermediaries settle for excessively low levels of contractual guarantees in an attempt to increase volume evaluating futures exchanges a joint report from the treasury and the federal reserve board written in the wake of the 1987 crash states that t here is sufe cient possibility that at some point sros self regulatory organizations might establish margins that were inconsistent enough to present market problems or set them at levels that might present potential costs to other parties that regulatory approval should be established in all markets 1

evaluating the joint efficiency of german trade forecasts a nonparametric multivariate approach i analyse the joint efficiency of export and import forecasts by leading economic research institutes for the years 1970 to 2017 for germany in a multivariate setting to this end i compute in a

a mechanism for the allocation of corporate investment corporate investment in an economy without a complete set of contingent claims markets has the characteristic of a public good in the sense that the stockholders consumption planscannot be separated from but depend on the specific investment plans of the firms dreze 4 has shown that a constrained pareto optimal cpo allocation of investment in a stock market economy must satisfy a generalization of the samuelson 24 condition for efficient production of public goods the investment plan should maximize a weighted sum of the stockholders personal valuations of future output minus current input cost however except for those special cases in which cpo investment plans are unanimously supported by stockholders see 17 20 and 2 the theory of the firm in incomplete markets lacks a suitable maximization criterion although the dreze samuelson condition is a most appealing candidate it is not unanimously preferred by stockholders each of whom prefers that his or her own valuation of future output receives all the weight in the investment decision furthermore the application of the dreze samuelson condition depends on the correct revelation of stockholders preferences which in the absence of special inducements cannot be expected from economic agents

transmission analysis by nash game method this paper describes an open access transmission method for maximizing profits in a power system the proposed method is based on the nash bargaining game for power flow analysis in which each transaction and its optimal price are determined to optimize the interests of individual parties transmission losses are considered by the proposed method and test cases and results are discussed to present the merits of the proposed method

evaluation of usda interval forecasts of corn and soybean prices usda world agricultural supply and demand estimates wasde price forecasts are published as an interval but are typically analyzed as point estimates thus all information about uncertainty imbedded in the forecast is ignored the purpose of this article is to evaluate the accuracy of wasde corn and soybean price forecasts using methodology suitable for testing judgmental interval forecasts accuracy tests suggest that wasde forecasts are not calibrated at the 95 confidence level for both commodities and generally not calibrated for corn but calibrated for soybeans at the implied confidence level elicited from the survey of forecast providers

class shares and economies of scope abstract this paper examines the allocative role of class shares that pay dividends based upon the performance of the individual activities of multi activity firms the firms considered operate under economies of scope and technological uncertainty in an incomplete asset market investor unanimity about the choice of production plans and a constrained pareto optimum are attained when all firms in the economy issue a class of shares for each of their activities partial issuance of class shares leads to a pareto superior allocation if the ensuing changes in production plans are individually rational

are revisions to usda crop production forecasts smoothed this article uses nordhaus framework to determine the efficiency of the revision process for usda corn and soybean production forecasts over the 1970 1971 through 2004 2005 marketing years positive autocorrelation and consistency of directional changes in forecast revisions suggest these forecasts are smoothed evidence is provided that the loss in forecast accuracy due to smoothing is statistically and economically significant in several cases a conservative bias in farm operators assessments of yield potential and in the procedure for translating enumerator s information about plant fruit counts into objective yield estimates are identified as plausible sources of smoothing

the rationality of usda forecasts under multivariate asymmetric loss a large number of previous studies suggest that many usda forecasts are biased and or inefficient these findings however may be the result of the assumed loss function of usda forecasters we test the rationality of the usda net cash income forecasts and the wasde production and price forecasts between 1988 and 2018 using a flexible multivariate loss function that allows for asymmetric loss and non separable forecast errors our results provide robust evidence that usda forecasters are rational expected loss minimizers yet demonstrate a tendency to place a greater weight on under or overprediction as a result this study provides an alternate interpretation of previous findings of forecast irrationality

testing the rationality of japanese gdp forecasts the sign of forecast revision matters abstract this paper analyzes the rationality of japanese gdp forecasts of individual economists it finds that japanese forecasters are pessimistic optimistic when their forecast revisions frs are positive negative and that they always over react to new information across forecasters the magnitude of average fr is not correlated with the magnitude of average forecast errors fe these results together are consistent with neither the rational expectations hypothesis nor reputation models with rational and strategic forecasters

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

application of actor critic learning algorithm for optimal bidding problem of a genco the optimal bidding for generation companies genco in the deregulated power market is an involved task the problem is formulated in the framework of the markov decision process mdp a discrete stochastic optimization method when the time span considered is 24 hours the temporal difference method becomes attractive for application the cumulative profit over the span is the objective function to be optimized the temporal difference technique and actor critic learning algorithm is employed an optimal strategy is devised to maximize the profit a market clearing system is included in the formulation simulation cases of three seven and ten participants are considered and the results obtained are discussed

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio

intelligent agents for negotiations in market games i model in competitive markets human decision makers need assistance to determine potential coalitions that they can be part of note that such coalitions are legal provided market power is not monopolized we present an approach for designing specialized intelligent software agents that perform negotiations on behalf of their human counterparts and then suggest market strategies that the human can adopt our negotiation protocol is derived from cooperative game theory however it differs from the game theory literature in requiring virtually no trustworthy information exchange between the potential coalition partners in this paper we present the negotiation model

tax clienteles and optimal capital structure under uncertainty this article demonstrates that investors heterogeneous tax status implies that they value bonds differently at the margin due to asymmetric personal taxes high risk bonds generate a higher amount of taxable income than low risk bonds and are therefore held by investors in low tax brackets in such a setting firms can increase their value by choosing a capital structure that attracts a particular bondholder clientele the author analyzes how bondholder clienteles change as the uncertainty about a bond s final payoff is resolved over time and shows how tax clientele effects influence firms capital structure decisions copyright 1990 by the university of chicago