bond liquidity premia recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries in the us the repo market is the key funding market then the premium of on the run u s treasury bonds should share a common component with risk premia in other markets

the term structure of illiquidity premia abstract we investigate the term structure of bond market illiquidity premia and show that the term structure varies greatly over time short and long end are strictly separated suggesting that different economic factors drive different parts of the term structure we propose a stylized theoretical model which implies that current trading needs of investors determine the short end the long term risk of being forced to liquidate bond positions determines the long end empirical evidence supports these predictions while short term liquidation risk captured by asset market volatilities drives the short end the long end depends on the long term economic outlook

optimal inventory policy with supply uncertainty and demand cancellation we consider a periodic review model where the firm manages its inventory under supply uncertainty and demand cancellation we show that because of supply uncertainty the optimal inventory policy has the structure of re order point type that is we order if the initial inventory falls below this re order point otherwise we do not order this is in contrast to the work of yuan and cheung 2003 who prove the optimality of an order up to policy in the absence of supply uncertainty we also investigate the impact of supply uncertainty and demand cancellation on the performance of the supply chain using our model we are able to quantify the importance of reducing the variance of either the distribution of yield or the distribution of demand cancellation the single multiple periods and the infinite horizon models are studied

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

a periodic review lot sizing problem with random yields disruptions and inventory capacity this paper examines a periodic reviewed lot sizing problem with random yields disruptions and limited inventory capacity to characterise the continuous production an additive random yield model is considered rather than a multiplicative one disruptions cause breakdowns to production inventory capacity is included since the production has to be shut down when the inventory buffer is full both disruptions and shutdowns lead to a start up cost and a stochastic lead time to recover the production these compound factors of uncertainty are encountered in practical planning decisions in process industries we review the existing random yield models which are then compared with the additive model with a linear production cost the additive model has an order up to policy to be optimal disruptions deteriorate the expected actual production quantity and the fill rate dramatically even though the optimal order up to level increases compared with the cases of no disruption considering inventory capacity makes the problem to be a non convex dynamic programming problem numerical analysis shows that the performance is dramatically deteriorated when the inventory capacity is rather tight which indicates the importance of selecting a proper inventory capacity to reduce the negative impacts and avoid redundant investment on capacity moreover the start up cost plays an important role in determining the level of inventory capacity

an international study of tax effects on government bonds it is shown that coupon bonds alone are not sufficient to span time dated claims on ordinary income capital gains and non taxable wealth in an incomplete bond market where the pure dated claims are not spanned by existing bonds marginal rates of substitution between present consumption and pure dated claims on ordinary income capital gains income and non taxable wealth respectively can differ across bondholders however the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major non tax exempt holders of government debt

the tips treasury bond puzzle we show that the price of a treasury bond and an inflation swapped treasury inflation protected securities tips issue exactly replicating the cash flows of the treasury bond can differ by more than 20 per 100 notional treasury bonds are almost always overvalued relative to tips total tips treasury mispricing has exceeded 56 billion representing nearly 8 of the total amount of tips outstanding we find direct evidence that the mispricing narrows as additional capital flows into the markets this provides strong support for the slow moving capital explanation of arbitrage persistence

y2k options and the liquidity premium in treasury markets financial institutions around the world expected the millennium date change y2k to cause an aggregate liquidity shortage responding to the concern the federal reserve bank of new york auctioned y2k options to primary dealers the options gave the dealers the right to borrow from the fed at a predetermined interest rate using the implied volatilities of y2k options and the on off the run spread we demonstrate that the fed s action eased the fears of bond dealers contributing to a drop in the liquidity premium of treasury securities our analysis shows the link between the microstructure of government debt markets and the central bank s provision of liquidity we argue that y2k options and their effects on liquidity premium broadly conform to the economic theory on public provision of private liquidity

the term structure of interbank risk we infer a term structure of interbank risk from spreads between rates on interest rate swaps indexed to the london interbank offered rate libor and overnight indexed swaps we develop a tractable model of interbank risk to decompose the term structure into default and non default liquidity components from august 2007 to january 2011 the fraction of total interbank risk due to default risk on average increases with maturity at short maturities the non default component is important in the first half of the sample period and is correlated with measures of funding and market liquidity the model also provides a framework for pricing hedging and risk management of interest rate swaps in the presence of significant basis risk

strategic trading behavior and price distortion in a manipulated market anatomy of a squeeze abstract this paper investigates an attempted delivery squeeze in a bond futures contract traded in london using cash and futures trades of dealers and customers we analyze their strategic trading behavior price distortion and learning in a market manipulation setting we argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes we recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates and that exchanges mark to market their contract specifications more frequently or consider a cash settled contract on a basket of bonds

development of the market for u s treasury strips 1992 development of the market for u s treasury strips financial analysts journal vol 48 no 2 pp 68 74

central bank collateral frameworks abstract this paper seeks to inform about a feature of monetary policy that is largely overlooked yet occupies a central role in modern monetary and financial systems namely central bank collateral frameworks their importance can be understood by the observation that the money at the core of these systems central bank money is injected into the economy on terms not defined in a market but by the collateral frameworks and interest rate policies of central banks using the collateral framework of the eurosystem as a basis of illustration and case study the paper brings to light the functioning reach and impact of collateral frameworks a theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy they can for example bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and more generally impairs market forces and discipline the paper also emphasizes the important role of ratings and government guarantees in the eurosystem s collateral framework

half lives of currencies and aggregation bias we revisit the exchange rate half life issue and demonstrate that observed half lives can be reduced significantly by modelling relative currency rates rather than exchange rates we show that the average observed half life for relative currency rates around a measure of central tendency is about 1 55 years and this drops to 1 30 years when the us dollar is excluded we also show that a standard exchange rate model exhibits aggregation bias

spanish treasury bond market liquidity and volatility pre and post european monetary union abstract spain enacted a number of important debt management initiatives in 1997 to prepare its treasury bond market for european monetary union we interpret the impacts of these changes through shifts in a bond liquidity life cycle function furthermore we highlight the importance of expected average future liquidity in explaining spanish bond liquidity premiums we also uncover pricing biases that support the spanish treasury s tactical decision to target high coupon premium bonds in its pre emu debt exchanges finally we show that emu has been associated with both a decrease in bond yield volatility and an increase in pricing efficiency

integrating dynamic pricing and replenishment decisions under supply capacity uncertainty this paper examines an integrated decision making process regarding pricing for uncertain demand and sourcing from uncertain supply which are often studied separately in the literature our analysis of the integrated system suggests that the base stock list price policy fails to achieve optimality even under deterministic demand instead the optimal policy is characterized by two critical values a reorder point and a target safety stock under this policy a positive order is issued if and only if the inventory level is below the reorder point when this happens the optimal order and price are coordinated to achieve a constant target safety stock which aims at hedging the demand uncertainty we further investigate the profit improvement obtained from deploying dynamic pricing as opposed to static pricing our results indicate that either supply limit or supply uncertainty may induce a significant benefit from dynamic pricing and the compound effect of supply limit and uncertainty can be much more pronounced than the individual effects whether or not the supply capacity is limited has a major implication on the value of dynamic pricing under unlimited supply dynamic pricing is more valuable when procurement cost is high or when demand is more sensitive to price with limited supply however the capacity restriction tends to be relaxed reducing the value of dynamic pricing

the bond old bond spread abstract i document the profits on a trade that is long the old 30 year treasury bond and short the new 30 year treasury bond and is rolled over every auction cycle from june 1995 to november 1999 despite the systematic convergence of the spread over the auction cycle the average profits are close to zero the difference in repo market financing rates between the two bonds is a significant cost of carry in this trade i show that variation in the bond old bond spread is driven by the treasury supply of 30 year bonds as well as aggregate factors affecting investors preference for liquid assets

continuous review inventory models where random lead time depends on lot size and reserved capacity the processing time of large orders is in many industries longer than that of small orders this renders supply lead times in such settings to be increasing in the order size yet that pattern is not re ected in existing inventory control models especially those allowing for random lead times this work aims at rectifying the situation our setting is an order quantity reorder point model with backordering where the shortage penalty is incurred per unit per unit time the processing time of each unit is random the processing time of a lot is correlated with its size for the case where lead time is proportional to the lot size we obtain a closed form solution that is unlike the classical q r model where lead time is independent of lot size no iterations are required here we also analyze a case where the processing time exhibits economies of scale in the lot size finally we consider a situation where a customer can secure shorter processing times by reserving capacity at the supplier s manufacturing facility 2000 elsevier science b v all rights reserved

optimal inventory policies when ordering prices are random we consider a single item inventory model with deterministic demands at the beginning of each period a random ordering price is received according to a known distribution function a decision must be made as to how much if any of the item to order in each period so as to minimize total expected costs while satisfying all demands we show that in each period a sequence of critical price levels determines the optimal ordering strategy so that it is optimal to satisfy the demands of the next n periods if and only if the random price falls between the nth and the n 1st levels we derive recursive expressions that describe the critical price numbers and demonstrate the relationship of these expressions to minimal expected cost we study finite horizon as well as infinite horizon models and show that the critical number strategy is also average cost optimal

the optimality of myopic stocking policies for systems with decreasing purchasing prices abstract this paper studies the stocking replenishment decisions for inventory systems where the purchasing price of an item decreases overtime in a periodic review setting with stochastic demands we model the purchasing prices of successive periods as a stochastic and decreasing sequence to minimize the expected total discounted costs purchasing inventory holding and shortage penalty for systems with backlogging and lost sales we derive conditions regarding the cost parameters under which myopic stocking policies are optimal

treasury auction bids and the salomon squeeze recent press accounts claim that collusion is common practice in treasury auctions and that as a result the auction profits are excessive but this paper finds that the auction prices are on average marginally higher than the secondary market bid prices the auction profits however are systematically related to the total fraction of winning bids tendered by banks and dealers the postauction prices of the two year notes in which salomon brothers had a 94 percent holding are also examined the secondary market prices of these notes were significantly higher than the estimated competitive prices in the four week postissue period

the risk averse newsvendor problem with random capacity abstract we study the effect of capacity uncertainty on the inventory decisions of a risk averse newsvendor we consider two well known risk criteria namely value at risk var included as a constraint and conditional value at risk cvar for the risk neutral newsvendor we find that the optimal order quantity is not affected by the capacity uncertainty however this result does not hold for the risk averse newsvendor problem specifically we find that capacity uncertainty decreases the order quantity under the cvar criterion under the var constraint capacity uncertainty leads to an order decrease for low confidence levels but to an order increase for high confidence levels this implies that the risk criterion should be carefully selected as it has an important effect on inventory decisions this is shown for the newsvendor problem but is also likely to hold for other inventory control problems that future research can address

the relative pricing of u s treasury strips empirical evidence abstract we investigate pricing relations and the potential for arbitrage in the u s treasury strips market stressing the importance of reconciling quoted treasury data with actual market pricing conventions we document that stripping and reconstitution profits in the strips market are fleeting and rarely economically significant that matched maturity principal and coupon strips generally have different prices due at least in part to richness or cheapness in the underlying note or bond and that apparent negative forward rates in the strips market are concentrated in certain long maturity strips that do not actually exist at the time

are larger treasury issues more liquid evidence from bill reopenings this paper makes use of a natural experiment of the u s treasury department to examine the relationship between treasury security issue size and liquidity treasury bills that were first issued with 52 weeks to maturity and then reopened at 26 weeks are shown to be more liquid than comparable maturity bills that were first issued with 26 weeks to maturity the relationship is less pronounced when bills are on the run the most recently auctioned bills of a given maturity than when they are off the run and persists when controlling for other factors that affect liquidity the reopened bills are found to have higher yields lower prices than comparable maturity bills showing that the indirect liquidity benefits of reopenings are more than offset by the direct supply costs

optimal ordering strategies for announced price increases the familiar model for determining the optimal ordering strategy given an announced price increase assumes that the buyer has an opportunity to place an order at the end of the next economic order quantity cycle before the price increase takes effect this paper extends the price increase model by relaxing the requirement on the timing of the price increase specifically we develop optimal ordering strategies for situations where the price increase becomes effective at any future specified time we also calculate savings for alternate ordering strategies

negative option values are possible the impact of treasury bond futures on the cash u s treasury market abstract this paper uses a unique financial instrument in the u s treasury market to study the price behavior of the put option embedded in the november 2009 14 callable u s treasury bond we find that beginning in august 1993 the estimated option value was persistently negative on nearly every day for the ensuing eight months we show that the anomalous pricing behavior arose because the underlying callable bond became the cheapest to deliver issue against u s treasury bond futures contracts hence this paper provides direct evidence that derivative assets can significantly distort pricing in the primary asset market

does urgency affect price at market an analysis of u s treasury short term finance like all economic agents government must actively manage its cash position in order to meet obligations in the u s when the short term cash position is not adequate treasury offers bills that are not previously scheduled cash management bills using data from treasury s proprietary domestic finance database this paper finds unscheduled bills have consistently higher yields than normally scheduled bills suggesting the more inelastic demand represented by this type of finance has an impact on costs several factors are identified which contribute to the costs of cash management for treasury

the cost of short selling liquid securities standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive we show that short sellers can also pay a net liquidity premium if their cost to borrow the security is higher than the price premium they collect from selling it we provide a model free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short sellers empirically we find that short sellers were responsible for a substantial fraction of the liquidity premium for on the run treasuries from november 1995 through july 2009

price informativeness and predictability how liquidity can help information asymmetry and liquidity concentration has been widely discussed in literatures this study shows how liquidity influences not only forecasting performances of term structure estimation but also information transmission and price adjustment across markets our analysis helps understanding how extreme market movements affect one another this study examines and provides a rationale for incorporating liquidity in estimating term structure forecasting performance can be greatly enhanced when conditioning on trading liquidity it reduces information asymmetry in the sense of easley and o hara 2004 and burlacu et al 2007 we adopt a time series forecasting model following diebold and li 2006 to compare behaviour of forecasted price errors our findings indicate that forecasted price errors in markets with less depth would influence those with more information asymmetry induces volatile trading first and then price adjustment is transmitted to another market due to insufficient market dep

liquidity taxes and short term treasury yields this article investigates differences in yields on identical treasury notes and bills and shows that they reflect differences in liquidity immediacy risk and taxes it proposes an empirical measure for differences in the liquidity risk of notes and bills the volatility ofthe underlying rate times the ratio of bills turnover to notes turnover because differential taxes affect sellers but not buyers of bills and notes the results reject free of informational problems the hypothesis that the notes demand curve is horizontal note bill yield differences also decrease with inventories of notes the less liquid asset

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

the decline in idiosyncratic values of us treasury securities abstract unique features and market frictions can lead to idiosyncratic pricing for some us treasury securities this study uses a linear programming lp model to measure aggregate idiosyncratic pricing of t notes and t bonds from 1980 to 2016 we document an average idiosyncratic pricing of 0 11 per 100 par as compared to an average bid ask spread of 0 08 further idiosyncratic pricing declined dramatically from the early 1980s to the 2010s empirical evidence suggests that the 1986 tax reform act increasing issue sizes and improving market liquidity contribute to the decline at the individual security level we identify factors contributing to and mitigating idiosyncratic pricing

financial asset demand is elastic evidence from new issues of federal home loan bank debt abstract we estimate the slope of the demand curve for newly auctioned fhlb discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity our unique dataset of roughly 2900 observations of two price quantity pairs the first from a pre auction dealer survey the second from actual auction results provides the quantity shift necessary to identify demand in contrast to previous findings of downward sloping demand curves for equities we show that demand for newly issued fhlb notes is nearly perfectly elastic during normal market conditions we find however that frictions like arbitrage risk and to a lesser extent heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50 drop in elasticity observed during the recent financial crisis

idiosyncratic variation of the us dollar we address the role of the us dollar when constructing a set of systematic statistical factors from a group of us dollar exchange rates researchers usually regard the us dollar as wholly systematic in this paper however we are able to decompose the us dollar and other currencies into systematic and idiosyncratic factors using the global prices for currencies rather than us dollar exchange rates using monthly data over a period of more than 44 years we find that approximately 25 of the total variation for the us dollar can be attributed to idiosyncratic variation

reliability evaluation and adjustment of supply chain network design with demand fluctuations this study focuses on supply chain network design problems by considering economies of scale and demand fluctuations a reliability evaluation method is developed to evaluate the performance of plants under demand fluctuations in addition two mathematical programming models are developed to determine the optimal adjustment decisions regarding production reallocation among plants under different fluctuating demands the judgments to adjust or to do nothing are investigated by comparing the results if the adjustment is made or not made results show that making adjustments benefits the manufacturers by reducing total production cost and avoiding revenue loss which outweighs the extra costs especially for high value added products results also suggest that the manufacturer should ignore a short period abnormal state since the benefits to respond to it might not compensate the high allocation costs the results of this study provide a reference for the manufacturer in their decision making process of network planning with demand fluctuations when they have to cope with benefits and costs during abnormal states

myopic solutions to affine dynamic models new sufficient conditions are presented for a dynamic process to have a myopic optimum and for a sequential game to possess a myopic equilibrium point an optimum or an equilibrium point is said to be myopic if it can be specified by solving a static optimization problem or a static nash game the results are applied to an aquaculture harvesting model and a dynamic oligopoly model with advertising decisions

anticipated and repeated shocks in liquid markets we show that treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after this price pattern implies a large issuance cost for the treasury department which is estimated to be between 9 and 18 basis points of the auction size for example this cost amounts to over half a billion dollars for issuing treasury notes alone in 2007 our results appear to be consistent with the hypothesis of primary dealers limited risk bearing capacity and the imperfect capital mobility of end investors in the treasury market e g federal agencies sovereign wealth funds pension funds and etc highlighting the important role of capital mobility even in the most liquid financial markets

production control in the face of storable raw material random supply and an outside market we study a periodic review production inventory control problem where both the supply of raw material and demand for the finished product are exogenous and random the raw material can be stored for future use can be purchased from or sold to an outside market we study both the lost sales and backlogging cases under both strict convex and linear raw material purchasing selling costs convexity of the purchasing selling cost implies that the more the firm purchases from or sells to the outside market the more expensive or less valuable the raw material becomes for all cases we find the partial characterizations for the optimal policies which all turn out to be very intuitively appealing in particular for each of the linear cost cases the optimal policy degenerates into a combination of two base stock policies one for the raw material inventory and the other for the finished product inventory

salomon brothers and the may 1991 treasury auction analysis of a market corner abstract in may 1991 the treasury sold 12 29 billion in two year notes through improper bidding salomon brothers gained control of at least 86 percent of the issue this study investigates the impact of salomon s attempted corner by examining the postauction price behaviour of the two year note based on a no arbitrage relation the results show that the two year note was substantially overpriced for approximately six weeks following the auction the typical mispricing during this period is estimated at 0 16 to 0 25 percent of par in dollar terms the aggregate misvaluation averaged 20 30 million and by controlling the supply of the issue salomon stood to gain substantially from the squeeze

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

an evaluation of contingent immunization abstract this paper tests the effectiveness of contingent immunization a stop loss strategy that allows portfolio managers to take advantage of their ability to forecast interest rate movements as long as their forecasts are successful but switches to a pure immunization strategy should the stop loss limit be encountered this study uses actual daily transactions in the spanish treasury market covering the period 1993 2003 and uses performance measures that accounts for skewness and kurtosis as well as mean variance the main result of this paper is that contingent immunization provides excellent performance despite its simplicity

arbitrage and the expectations hypothesis this paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete a key implication is that the validity of the expectations hypothesis is purely an empirical issue the expectations hypothesis cannot be ruled out on a priori theoretical grounds one of the oldest and best known models in finance is the expectations hypothesis of the term structure introduced by fisher 1896 more than a century ago the expectations hypothesis has become a standard framework for explaining how yields of different maturities are related and it provides an important empirical benchmark from a theoretical perspective however the expectations hypothesis is not generally viewed as a viable model of the term structure in particular cox ingersoll and ross 1981 show that the traditional expectations hypothesis is actually a set of mutually exclusive propositions and offer a proof that most forms of the expectations hypothesis admit arbitrage recently mcculloch 1993 and fisher and gilles 1998 present counterexamples to the cox et al proof showing that the traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage they acknowledge however that their counterexamples are somewhat contrived and view them as economically implausible these results leave the impression that the expectations hypothesis is only consistent with the absence of arbitrage in pathological cases of little practical interest in this paper we argue that the expectations hypothesis is much more theoretically defensible than commonly believed an important point often overlooked is that the cox et al 1981 results are developed in an economic setting where bonds are redundant securities in the more realistic case where bond prices display security specific variation and there is mounting evidence of this traditional forms of the expectations hypothesis can hold quite generally without arbitrage only weak conditions guaranteeing the existence of an equivalent martingale measure need be satisfied for the various forms of the expectations hypothesis to hold without arbitrage a key

a periodic review production planning model with uncertain capacity and uncertain demand optimality of extended myopic policies increasing product complexity manufacturing environment complexity and an increased emphasis on product quality are all factors leading to uncertainties in production processes these uncertainties are in the form of unplanned machine maintenance varying production yields and rework among others in planning for production an adequate model must incorporate these uncertainties into the representation of the production process this paper treats the aggregate planning problem for a single product with random demand and random capacity in the single period problem random capacity does not affect the optimal policy but results in a unimodal nonconvex cost function in the multiple period and infinite horizon settings order up to policies that are dependent on the distribution of capacity are shown to be optimal in spite of a nonconvex cost in the infinite horizon setting an intuitive description of the situation leads to the notion of a class of extended myopic policies requiring the consideration o

optimal myopic policy for a stochastic inventory problem with fixed and proportional backorder costs in this paper we consider a single product periodic review stochastic demand inventory problem where backorders are allowed and penalized via fixed and proportional backorder costs simultaneously fixed backorder cost associates a one shot penalty with stockout situations whereas proportional backorder cost corresponds to a penalty for each demanded but yet waiting to be satisfied item we discuss the optimality of a myopic base stock policy for the infinite horizon case critical number of the infinite horizon myopic policy i e the base stock level is denoted by s if the initial inventory is below s then the optimal policy is myopic in general i e regardless of the values of model parameters and demand density otherwise the sufficient condition for a myopic optimum requires some restrictions on demand density or parameter values however this sufficient condition is not very restrictive in the sense that it holds immediately for erlang demand density family we also show that the value of s can be computed easily for the case of erlang demand this special case is important since most real life demand densities with coefficient of variation not exceeding unity can well be represented by an erlang density thus the myopic policy may be considered as an approximate solution if the exact policy is intractable finally we comment on a generalization of this study for the case of phase type demands and identify some related research problems which utilize the results presented here

negative nominal interest rates and the liquidity premium abstract this paper investigates the phenomenon whereby the most recently issued on the run us treasury bond is more heavily traded and thereby accrues a liquidity premium this premium is shown to be related to the time the asset will remain heavily traded and sufficient to cause negative forward nominal interest rates when compared with the prices of similar less liquid bonds

optimal inventory policies when purchase price and demand are stochastic in this paper we consider the problem of a firm that faces a stochastic poisson demand and must replenish from a market in which prices fluctuate such as a commodity market we describe the price evolution as a continuous stochastic process and we focus on commonly used processes suggested by the financial literature such as the geometric brownian motion and the ornstein uhlenbeck process it is well known that under variable purchase price a price dependent base stock policy is optimal using the single unit decomposition approach we explicitly characterize the optimal base stock level using a series of threshold prices we show that the base stock level is first increasing and then decreasing in the current purchase price we provide a procedure for calculating the thresholds which yields closed form solutions when price follows a geometric brownian motion and implicit solutions under the ornstein uhlenbeck price model in addition our numerical study shows that the optimal policy performs much better than inventory policies that ignore future price evolution because it tends to place larger orders when prices are expected to increase

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

analysis of an inventory system under supply uncertainty in this paper we analyze a periodic review single item inventory model under supply uncertainty the objective is to minimize expected holding and backorder costs over a finite planning horizon under the supply constraints the uncertainty in supply is modeled using a three point probability mass function the supply is either completely available partially available or the supply is unavailable machine breakdowns shortages in the capacity of the supplier strikes etc are possible causes of uncertainty in supply we demonstrate various properties of the expected cost function and show the optimality of order up to type policies using a stochastic dynamic programming formulation under the assumption of a bernoulli type supply process in which the supply is either completely available or unavailable and when the demand is deterministic and dynamic we provide a newsboy like formula which explicitly characterizes the optimal order up to levels an algorithm is given that computes the optimal inventory levels over the planning horizon extensions and computational analysis are presented for the case where the partial supply availability has positive probability of occurrence

beyond segmentation the case of china s repo markets this paper explores the reasons behind the discrepancy between interest rates in china s two repurchase agreement repo markets the interbank repo market and the exchange traded repo market the repo rates in the exchange market are at times significantly higher than those in the interbank market especially in the first three years of the 2000 2005 sample period while market segmentation clearly hinders arbitrage the causes of the repo rate discrepancy are related to the alternative investment opportunities available to market participants and to the volatility differences in the repo rates

quantitative easing auctions of treasury bonds abstract the federal reserve uses reverse auctions to implement its purchases of treasury bonds in quantitative easing qe to evaluate dealers offers across multiple bonds the fed relies on its internal yield curve model fitted to secondary market bond prices from november 2010 to september 2011 a one standard deviation increase in the cheapness of a treasury bond how much the market price of the bond is below a model implied value increases the fed s purchase quantity of that bond by 276 million and increases the auction costs on that bond by 2 6 cents per 100 par value controlling for standard covariates our results suggest that the fed harvests gains from trades by purchasing undervalued bonds but strategic dealers extract some profits because the fed s relative values can be partly inferred from price data

analysis of an inventory system under backorder correlated deterministic demand and geometric supply process abstract in this article we propose a single item periodic review model that investigates the effects of changes in the demand process that occur after stockout realizations we investigate a system where the demands in successive periods are deterministic but affected by the backorder realizations in order to capture the effects of changes in the demand process we use a geometric type supply availability we analytically derive the necessary components for obtaining profit related performance measures and provide computational analysis

coordinating inventory control and pricing strategies under batch ordering in this paper we investigate joint pricing and inventory control problems in a finite horizon single product periodic review setting with certain uncertain supply capacities the demands in different periods are random variables whose distributions depend on the posted price exhibiting the additive form the order quantity in each period is required to be of integral multiples of a given specific batch size denoted by q inventory replenishment incurs a linear ordering cost referred to as the cost rate function the sum of holding and backorder costs can either be convex or quasi convex the objective is to determine a joint ordering and pricing decision that can maximize the total expected profit over the planning horizon we first consider the case in which the cost rate function is convex and show that the modifiedr q list price policy is optimal for the system with certain and limited capacities a special case of which is the r q list price policy when capacities become unlimited as supply capacities become random the optimal policy follows a new structure wherein the optimal order up to level and posted price must be coordinated to make the optimal safety stock level follow the r q policy we further consider the case of a quasi convex cost rate function which may arise when a service level constraint is used as a surrogate for the shortage cost we demonstrate that the r q list price policy is optimal for the system without supply capacity constraints in addition extensions to several other models are discussed the enabling technique is based on the notion of q jump convexity and its variants

periodic review production models with variable capacity random yield and uncertain demand we investigate a production planning problem in a periodic review environment with variable production capacity random yields and uncertain demand the implications of random yields and variable capacity for lot sizing previously have been explored separately but not jointly many production environments are likely to be subject to both types of uncertainties to minimize the total discounted expected costs production holding and shortage costs we formulate the problem as a stochastic dynamic program for the finite horizon problem we prove that the objective function is quasi convex and that the structure of the optimal policy is characterized by a single critical point for the initial stock level at each period that is if the initial stock is greater than this critical point the optimal planned production is zero otherwise it is greater than zero expressions for solving the critical point and the optimal planned production are obtained we further show that the solution for the finite horizon problem converges to that of the infinite horizon problem

collateral values by asset class evidence from primary securities dealers using data on repurchase agreements by primary securities dealers we show that three classes of securities treasury securities securities issued by government sponsored agencies and mortgage backed securities can be formally ranked in terms of their collateral values in the general collateral gc market we then show that gc repurchase agreement repo spreads across asset classes display jumps and significant temporal variation especially at times of predictable liquidity needs consistent with the safe haven properties of treasury securities these jumps are driven almost entirely by the behavior of the gc repo rates of treasury securities estimating the collateral rents earned by owners of these securities we find such rents to be sizable for treasury securities and nearly zero for agency and mortgage backed securities finally we link collateral values to asset prices in a simple no arbitrage framework and show that variations in collateral values explain a significant fraction of changes in short term yield spreads but not those of longer term spreads our results point to securities role as collateral as a promising direction of research to improve understanding of the pricing of money market securities and their spreads jel g12 g23

random yield supply chain with a yield dependent secondary market abstract this paper considers a simple supply chain with one supplier and one retailer where the supplier s production is subject to random yield and the retailer faces uncertain demand there exists a secondary market for acquiring or disposing products by the supplier we study both the centralized and decentralized systems in the decentralized system a no risk sharing contract and a risk sharing minimum commitment contract are analyzed the supply chain with the risk sharing contract is further analyzed with a constant secondary market price and a yield dependent secondary market price we present both the supplier s and the retailer s optimal strategies and provide insights for managers when making decisions under random yield risk and demand uncertainty we find that the secondary market generally has a positive impact on supply chain performance and the actual effect of random yield risk on the supply chain performance depends on cost parameters and supply chain contract settings under certain conditions reducing yield randomness may weaken the double marginalization effect and improve the chain performance from the numerical study we also show that there exists an optimal commitment level for the supply chain

the capital cost of holding inventory with stochastically mean reverting purchase price most models of inventory control assume that the per unit purchase price is constant the capital cost of holding inventory can then be taken into account by adding a fixed interest rate r times the purchase price c to the out of pocket holding cost however it is not uncommon that the purchase price varies over time how the capital cost then should be calculated is the focus of the present paper the paper studies the common single item inventory model with a fixed set up cost and assumes that the stochastic purchase price follows the mean reverting ornstein uhlenbeck process methods for computing an adjusted interest rate r are suggested along with modifications of well known heuristics and formulas for lot sizing simulation tests where the optimal policy has been compared to policies obtained using modified versions of the silver meal method the part period algorithm and the eoq formula suggest that r should be estimated as the sum of the unadjusted interest rate and the average expected purchase price decrease measured over a period between 1 3 and 2 3 of the length of the order cycle

idiosyncratic variation of treasury bill yields i document a dramatic increase in the importance of two types of variation in treasury bill yields beginning in the early 1980s the first is idiosyncratic variation in individual short maturity less than three months bill yields the second is a common component in treasury bill yields that is not shared by yields on other instruments such as short maturity privately issued instruments or longer maturity treasury notes and bonds some evidence suggests the first type reflects increased market segmentation these results have important implications for the calibration and testing of no arbitrage term structure models and interpreting tests of the expectations hypothesis united states treasury bill yields play a central role in economists efforts to understand the behavior of financial markets the focus on treasury bills is driven by the belief that bill yields can be viewed as benchmarks from which yields on other debt instruments are derived for example in no arbitrage models of the default free term structure the stochastic properties of the hypothetical instantaneous interest rate determine bond prices researchers often construct and evaluate these models using short maturity bill yields as proxies for instantaneous interest rates similarly bill yields are frequently used to test the expectations hypothesis of the term structure 2 economists standard pricing models for default risky securities also view treasury yields as building blocks in such models yields on default risky securities depend at least in part on the yields of default free securities and the underlying stochastic default process therefore yields on treasury bills have been used in studies of the effects of monetary policy on the business cycle not because bills are intrinsically critical to the economy but because

the mispricing of u s treasury bonds a case study this article documents an apparent pricing anomaly involving 94 percent 30 year treasury bonds during the months of may and june 1986 during this period the price of the 94s rose sharply relative to the prices of other long term treasury bonds and created a potential arbitrage opportunity in addition owners of the 94 bonds were able to borrow at a zero interest rate bypledging their bonds detailed examination reveals that this relative pricing anomaly cannot be attributed to changes in the level or term structure of interest rates or to differences between the bonds with respect to liquidity taxation or duration

the structure of periodic review policies in the presence of random yield this work provides a comprehensive analysis of a general periodic review production inventory model with random variable yield existence of an order point whose value does not depend on yield being random is proved in the single period case without specifying the yield model and using a very general cost structure when yield is a random multiple of lot size the nonorder up to optimal policy is characterized for a finite horizon model the finite horizon value functions are shown to converge to the solution of an infinite horizon functional equation and the infinite horizon order point is shown to be no smaller than when yield is certain

reprint of central bank collateral frameworks abstract this paper seeks to inform about a feature of monetary policy that is largely overlooked yet occupies a central role in modern monetary and financial systems namely central bank collateral frameworks their importance can be understood by the observation that the money at the core of these systems central bank money is injected into the economy on terms not defined in a market but by the collateral frameworks and interest rate policies of central banks using the collateral framework of the eurosystem as a basis of illustration and case study the paper brings to light the functioning reach and impact of collateral frameworks a theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy they can for example bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and more generally impairs market forces and discipline the paper also emphasizes the important role of ratings and government guarantees in the eurosystem s collateral framework

replenishment and stocking policies for inventory systems with random deal offerings this paper considers the replenishment and stocking decision for inventory systems in which price discounts referred to as deals are offered by the supplier or the market place at random points in time assuming that the demand is constant over time the times between deal offerings are exponentially distributed and that the order leadtimes are negligible we derive expressions for evaluating the operating characteristics of the model moreover we derive expressions for determining the optimal policy parameters for such systems and present results on the behavior of the optimal policy parameters our results are easy to implement intuitive and provide managerial insights and a better understanding on the effect of random deal offerings on replenishment and stocking decisions in addition we suggest a back of envelope heuristic solution for deriving the policy parameters

ad revenue optimization in live broadcasting in live broadcasting the break lengths available for commercials are not always fixed and known in advance e g strategic and injury time outs are of variable duration in live sports transmissions broadcasters actively manage their advertising revenue by jointly optimizing sales and scheduling policies we characterize the optimal dynamic schedule in a simplified setting that incorporates stochastic break durations and advertisement lengths of 15 and 30 seconds the optimal policy is a greedy look ahead rule that accounts for the remaining number of breaks in this setting there is no value to perfect information at the scheduling stage and hence knowing the duration of all breaks would not change the schedule we present heuristics to help solve scheduling problems of even greater complexity the performance of these heuristics under various scenarios is tested by running simulations calibrated using industry data the simple greedy heuristic is shown to perform well except when revenues are con

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

liquidity maturity and the yields on u s treasury securities the efrect8 of aaaet liquidity on expected retuma for ts with infinite maturities toc ka are eumined for bonda treuury notes and bills with matched maturities of lellll than 6 months the yield to maturity ill higher on notes which have lower liquidity the yield di1ferential between notes and billa is a decreuing and convex function of the time to maturity the results provide a robult confirmation of the liquidity effect in auet pricing this paper studies empirically the effects of the liquidity of capital assets on their prices amihud and mendelson 1986 1989 proposed that liquidity affects asset prices because investors require a compensation for bearing transaction costs transaction costs paid whenever the asset is traded form a sequence of cash outflows the discounted value of this cost stream proxies for the value 1088 due to illiquidity which lowers the asset s value for any given cash flow that the asset generates 1 as a result the return on assets should be an increasing function of their illiquidity other things equal for stocks the illiquidity effect is expected to be strong because their transaction cost sequence is infinite amihud and mendelson 1986 1989 demonstrated that common stocks with lower liquidity yielded significantly higher average returns after controlling for risk and for other factors these results on the importance of liquidity in the pricing of stocks raise additional questions i does the liquidity effect depend on the specific controls used by amihud and mendelson 1986 1989 1 ii does illiquidity have a similarly strong effect on the pricing of bonds whose maturities are finite and iii if liquidity affects bond yields how is this effect related to the bond s time to maturity

stock interest rate risk and inflation shocks abstract in this paper we proceed to estimate a measure of the flow through capability of the firms listed on the spanish stock exchange the flow through capability is defined as the ability of firms to transmit inflation shocks to the prices of the products and services sold by the company according to a strand of the literature this flow through capability can to some extent explain the so called stock duration paradox which is the difference between the theoretical stock duration derived from the ddm model and its empirical estimates the line of reasoning suggests that if a company can pass on inflation shocks to the prices of its own outputs and then to profits and dividends nominal interest rate changes due to variations in the expected inflation will have a limited impact on stock prices so in this paper we first estimate the flow through capability for different industries and find great differences among them then we analyse the link between flow through capability and stock duration and find a significant negative relationship between them as claimed by part of the literature

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

optimality of myopic policies for dynamic lot sizing problems in serial production lines with random yields and autoregressive demand we study lot size policies in a serial multistage manufacturing inventory system with two key generalizations namely 1 random yields at each production stage and 2 an autoregressive demand process previous research shows that the optimal policies in models with random yields even in models with a single installation lack the familiar order up to structure and are not myopic thus dynamic programming algorithms are needed to compute optimal policies and one encounters the curse of dimensionality this is exacerbated here by the need to expand the size and dimension of the state space to accommodate the autoregressive demand feature nevertheless although our model is more complex we prove that there is an optimal policy with the order up to feature and more importantly that the optimal policy is myopic this avoids the computational burden of dynamic programming our results depend on two assumptions concerning the stochastic yield namely that the expected yield at a work station is proportional to the lot size and the distribution of the deviation of the yield from its mean does not depend on the lot size we introduce the concept of echelon like variables a generalization of clark and scarf s classical concept of echelon variables to derive the structure of optimal policies furthermore we show that the same kind of policy is optimal for several criteria infinite horizon discounted cost infinite horizon long run average cost and finite horizon discounted cost with the appropriate choice of the salvage value function

liquidity reconstitution and the value of u s treasury strips an apparent pricing anomaly exists in the market for u s treasury strips zerocoupon strips created from principal payments typically trade at significantly higher prices than otherwise identical zero coupon strips created from coupon payments in addition to documenting this phenomenon this study demonstrates that differences in liquidity and differences in reconstitution characteristics explain much of this price variation u s treasury strips are zero coupon bonds created from either the principal or individual coupons of u s treasury bonds if the maturity date and face value are identical the cash flows for a strip derived from a principal payment are identical to the cash flows for a strip derived from a coupon payment however the two instruments almost always trade at significantly different prices for a recent sample 5 31 91 the mean percentage difference in price is greater than 1 2 with some differences greater than 2 7 this is an apparent anomaly since securities with identical cash flows should trade at the same price although coupon strips and principal strips have identical cash flows at maturity closer inspection reveals two differences the two instruments have different degrees of liquidity and different reconstitution characteristics previous studies have documented the effect of liquidity on prices in other markets amihud and mendelson 1986 1989 find that common stocks with differences in liquidity have significantly different risk adjusted rates of return silber 1991 studies restricted stock offerings and documents substantial price discounts on these illiquid securities vis a vis identical stocks that trade in the open market 1 in a study of u s treasury bills and treasury bonds with remaining maturities of less than six months amihud and mendelson 1991 find that differences in liquidity contribute to differences in prices between matched pairs of bills and bonds of the same

optimal inventory decisions in a multiperiod newsvendor problem with partially observed markovian supply capacities abstract this paper considers a multi period news vendor problem with partially observed supply capacity information which evolves as a markovian process the supply capacity is fully observed by the buyer when the capacity is smaller than the buyer s ordering quantity otherwise the buyer knows that the current period supply capacity is greater than its ordering quantity based on these two observations the buyer updates the future supply capacity forecasting accordingly with a dynamic programming formulation we prove the existence of an optimal ordering policy we also prove that the optimal order quantity is greater than the myopic order quantity

environmental safety stock the impacts of regulatory and voluntary control policies on production planning inventory control and environmental performance abstract this paper analyzes the impacts of different pollution control policies on a firm s decisions of production planning and inventory control based on a stochastic model with both demand and environmental uncertainties we derive the optimal policies of production planning and inventory control under both regulatory and voluntary pollution control approaches and investigate their operational and environmental effects we establish that the conventional wisdom which suggests that reduction of environmental waste at the end of a production process also decreases the stock and throughput levels of a production system is not necessarily true rather a regulatory environmental standard that limits the total amount of waste may induce the firm to raise its planned stock level which would lead to a higher expected amount of environmental wastes before the standard is enforced as well as environmental risks at other stages of the production process the additional planned stock level which is termed environmental safety stock can be reversed by using the voluntary control approach that provides the firm with the flexibility to occasionally exceed the environmental standard we also conduct numerical experiments to analyze the effects of different values of model parameters under different control approaches the analytical results provide new insights to the impacts of a firm s production and inventory decisions on the natural environment as well as to the choices of pollution control approaches by decision makers in both the private and public sectors

a seasoning process in the u s treasury bond market the curious case of newly issued ten year notes the pricing behavior of new treasury notes and bonds issued during the treasury s regular refunding operations suggest the existence of a seasoning process prices of new issues are generally higher than prices of equivalent seasoned issues although overpricing for issues with original maturities of 3 5 and 30 years persists for approximately two to three months after issuance the seasoning process for treasury notes with original maturity of 10 years is more pronounced and lengthier on average the prices of these notes take approximately 20 months to adjust and become comparable to the prices of seasoned issues to a lesser extent this overpricing is present in the prices of the principal strips derived from the newly issued ten year notes

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

supply and demand uncertainty reduction efforts and cost comparison abstract in industries like health care consumer goods and agriculture shortages are widely observed and the consequences can be costly one of the main drivers of such shortages is the uncertain nature of supply and demand to reduce uncertainties sufficient information about supply and demand can be obtained by gathering relevant data e g auditing suppliers and conducting market research in this paper we conduct an analysis to examine the impacts of supply uncertainty demand uncertainty and uncertainty reduction efforts on production quantity and total cost we show that in the absence of uncertainty reduction efforts when the financial consequences of shortages are large or when the unit benefit is large supply uncertainty is more costly than demand uncertainty in addition exerting supply uncertainty reduction effort always causes the firm to produce fewer units than exerting demand uncertainty reduction effort although supply uncertainty reduction effort delivers a larger degree of improvement to total cost and hence is more efficient reduced supply uncertainty still leads to a higher system cost than does reduced demand uncertainty

the three types of factor models a comparison of their explanatory power multifactor models of security market returns can be divided into three types macroeconomic fundamental and statistical factor models macroeconomic factor models use observable economic time series such as inflation and interest rates as measures of the pervasive shocks to security returns fundamental factor models use the returns to portfolios associated with observed security attributes such as dividend yield the book to market ratio and industry identifiers statistical factor models derive their pervasive factors from factor analysis of the panel data set of security returns this paper compares the explanatory power of these three approaches for u s equity returns

repo market effects of the term securities lending facility the term securities lending facility tslf was recently introduced by the federal reserve to promote liquidity in the financing markets for treasury and other collateral we evaluate one aspect of the program the extent to which it has narrowed repo spreads between treasury collateral and lower quality collateral we find that tslf operations have precipitated a significant narrowing of repo spreads more refined tests indicate the market conditions and types of operations associated with the program s effectiveness various additional tests including a split sample test suggest that our findings are robust

systemic risk in clearing houses evidence from the european repo market abstract we study how crises affect central clearing counterparties ccps we focus on a large and safe segment of the ccp cleared repo market during the eurozone sovereign debt crisis we develop a simple model to infer ccp stress which is measured as repo rates sensitivity to sovereign credit default swaps cds spreads and jointly captures 1 the effectiveness of haircut policies 2 ccp member default risk conditional on sovereign default and 3 ccp default risk conditional on both sovereign and ccp member default during 2011 repo rates strongly respond to sovereign risk particularly for greece italy ireland portugal and spain giips repo investors behaved as if the conditional probability of ccp default was substantial

an international examination of affine term structure models and the expectations hypothesis we examine the yield curve behavior and the relative performance of affine term structure models atsms using government bond yield data from canada germany japan the u k and the u s we find strong predictability of forward rates for excess bond returns and reject the expectations hypothesis in all five countries a three factor model is sufficient to capture movements in the yield curve of canada japan the u k and the u s but may not be enough for germany an exhaustive comparison among atsms with no more than three factors reveals that the three factor essential affine model a 1 3 e with only one factor affecting the volatility of the short rate but with all three factors affecting the price of risk performs best in all five countries simulations provide inconclusive evidence on whether this best affine model can successfully generate the rich yield curve behavior observed in the data

the impact of unconventional monetary policy on the market for collateral the case of the french bond market we consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants in particular we analyze liquidity and volatility premia on the french government debt securities market since these assets are used as collateral both in the open market operations of the ecb and on the interbank market in our time varying transition probability markov switching tvtp ms model we highlight the existence of two regimes in one of them which we refer to as the conventional regime monetary policy neutrality is verified in the other which we dub the unconventional regime monetary policy operations lead to volatility and liquidity premia on the collateral market the existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy

dynamic replenishment production and pricing decisions in the face of supply disruption and random price sensitive demand abstract we study a joint decision problem for replenishment production pricing strategies in the face of both supply and demand uncertainties the supply of the raw material suffers from a potential supply disruption while the demand for the finished goods is price sensitive and random we assume that the raw material is storable and unfilled demands are fully backordered we characterize the optimal policies for raw material replenishment finished goods production and pricing we find that the optimal replenishment policy is an order up to type for a given finished goods stock level while it is a threshold type for a given raw material stock level for either a given finished goods stock level or a given raw material stock level the optimal production policy is a threshold type and the optimal pricing policy is a modified list price type respectively

financial innovation and the role of derivative securities an empirical analysis of the treasury strips program the role that financial innovation plays in financial markets is very controversial to provide insight into this role we examine how market participants use the highly successful treasury strips program we find that investors use the option to create treasury derivative strips primarily to make markets more complete and take advantage of tax and accounting asymmetries although liquidity related factors help explain differences in the prices of treasury bonds and strips we find little evidence that the option to strip and reconstitute securities is used for speculative or arbitrage related purposes the role of financial innovation is a central issue for both policymakers and researchers in finance 1 critics argue that financial innovations often have no economic role beyond allowing some investors to take highly leveraged speculative or arbitrage related positions in contrast advocates argue that the introduction of new products makes financial markets more complete reduces frictions and transaction costs and leads to a more optimal allocation of risk in the economy to better understand the role played by financial innovation this paper examines how investors use the successful separate trading of registered interest and principal of securities strips program of the u s treasury this program allows investors to strip treasury notes and bonds to create separate discount bonds and to reconstitute previously stripped notes and

inventory management with random supply and imperfect information a hidden markov model in most of the papers on inventory models operating in a random environment the state of the environment in each period is assumed to be fully observed with perfect information however this assumption is not realistic in most real life situations and we provide a remedy in this paper by assuming that the environment is only partially observed with imperfect information we accomplish this by analyzing two formulations of single item models with periodic review and random supply in a random environment in the first one supply is random due to random capacity of production and random availability of transportation we show that state dependent base stock policy is optimal if the capacity and all costs are observed while demand and availability are unobserved in the second model we consider a model with random availability only with fixed ordering cost we show that state dependent s s policy is optimal if the availability process is observable