housing market responses to transaction taxes evidence from notches and stimulus in the uk we investigate housing market responses to transaction taxes using administrative data on all property transactions in the u k from 2004 to 2012 combined with quasi experimental variation from tax notches and tax stimulus we present two main findings first transaction taxes are highly distortionary across a range of margins causing large distortions to the price volume and timing of property transactions secondly temporary transaction tax cuts are an enormously effective form of fiscal stimulus a temporary elimination of a 1 transaction tax increased housing market activity by 20 in the short run due to both timing and extensive responses and less than half of the stimulus effect was reversed after the tax was reintroduced due to re timing because of the complementarities between moving house and consumer spending these stimulus effects translate into extra spending per dollar of tax cut equal to about 1 we interpret our empirical findings in the context of a housing model with downpayment constraints in which leverage amplifies the effects of transaction taxes

individual taxpayer response to tax cuts 1982 1984 with implications for the revenue maximizing tax rate abstract this paper measures the response of taxpayers to the u s personal rate reductions from 1982 to 1984 a baseline income distribution is created to describe what level and distribution could be expected in the absence of tax changes comparison of this baseline with actual tax return data shows that at least one sixth and probably one quarter of the revenue ascribable to the rate reductions was recouped by changes in taxpayer behavior the data also show that federal income tax revenue would have been maximized at a tax rate of about 35 percent and total income tax revenue maximized at a total tax rate of about 40 percent

some aspects of the taxation of capital gains abstract the analysis of the effects of capital gains taxation requires a careful modelling both of the details of the tax code and the imperfections in the capital market under the standard assumptions concerning perfect capital markets and under the standard idealizations of the tax code there are several strategies by which rational investors can avoid note only all taxes on their capital income but also all taxes on their wage income these strategies leave individuals consumption and bequests in each state of nature and at each date unchanged from what they would have been in the absence of taxes although certain detailed provisions of the tax code may limit the extent to which rational investors can avail themselves of these tax avoidance activities there are ways in a perfect capital market by which the effects of these restrictions can be ameliorated accordingly any analysis of the effects of capital taxation must focus on imperfect capital markets if individuals face limitations on the amounts which they can borrow and or if there are limitations on short sales then under some circumstances there is a locked in effect individuals do not sell securities which they would have sold in the absence of taxation but under other circumstances individuals are induced to sell securities that they otherwise would have held in order to take advantage of the asymmetric treatment of short term losses and long term gains a policy of realizing gains as soon as they become eligible for long term treatment dominates the policy of postponing the realization of capital gains provided the gains are not too large a simple general equilibrium model is constructed within which it is shown that the taxation of capital gains may increase the volatility of asset prices and lead individuals not to trade when they otherwise would while the analysis casts doubt on the significance of the welfare losses resulting from these exchange inefficiencies there are circumstances in which the tax leads to production inefficiencies e g terminating projects at other than the socially optimal date finally we argue that the focus of some recent policy debates on the short run revenue impact of a decrease in the tax rate on capital gains is misplaced even when the short run revenue impact is positive consumption may increase thus exacerbating inflationary pressures and private savings may decrease thus leading to a lower level of investment in the private sector moreover there is some presumption that the long run revenue impact is negative our analysis has some important implications for empirical research in particular it suggests that the impact of the tax is not adequately summarized by a single number such as the effective tax rate representing the average ratio of tax payments to capital gains moreover the impact of the tax cannot be assessed by looking only at reported capital gains and losses

cooperative and noncooperative r d in duopoly with spillovers contrary to the usual assumption made in most oligopoly models relations among firms are seldom of a wholly cooperative or noncooperative type in many situations they compete in some fields while they cooperate in others an important example is the case of cooperative research efforts bringing fierce competitors together two types of agreement are observed first r d cooperation can take place at the so called precompetitive stage companies share basic information and efforts in the r d stage but remain rivals in the market place 1 a second type of agreement involves an extended collusion between partners creating common policies at the product level the usual justifications of this extension are the difficulties of protecting intellectual property the idea is then to allow partners who have achieved inventions together to also control together the processes and products which embody the results of their collaboration in order to recuperate jointly their r d investments 2 what could be expected from these types of agreement is a reduction in r d expenditures because of less wasteful duplication and a reduction of total production because of more reprinted from the american economic review 78 5 1133 1137 1988 center for operations research econometrics 1348 louvain la neuve belgium we are grateful to jean

debt leases taxes and the endogeneity of corporate tax status we provide evidence that corporate tax status is endogenous to financing decisions which induces a spurious relation between measures of financial policy and many commonly used tax proxies using a forward looking estimate of before financing corporate marginal tax rates we document a negative relation between operating leases and tax rates and a positive relation between debt levels and tax rates this is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more and have lower debt levels than high tax rate firms many theories of capital structure imply that all else equal the incentive to use debt financing increases with a firm s marginal tax rate due to the tax deductibility of interest expense e g modigliani and miller 1963 deangelo and masulis 1980 conversely leasing models generally predict that firms with low marginal tax rates employ relatively more leases than do firms with high marginal tax rates the logic behind the leasinlg prediction is that leases allow for the transfer of tax shields from firms that cannot fully utilize the associated tax deduction lessees to firms that can lessors e g myers dill and bautista 1976 smith and wakeman 1985 ross westerfield and jaffe 1996 despite these straightforward predictions empirically testing for tax effects is difficult because a spurious relation exists between the financing decision and many commonly used tax proxies specifically both interest expense and lease payments are tax deductible thus a firm that finances its operations with debt or leases reduces its taxable income potentially lowering its expected marginal tax rate if not properly addressed this endogeneity of the tax rate can bias an experiment in favor of finding a negative

do high taxes lock in capital gains evidence from a dual income tax system the purpose of this paper is to study whether investors willingness to realize capital gains falls when the marginal tax rate on capital gains is raised we use a rich register based panel data set covering almost 8 of the swedish population the results indicate that a 10 increase in capital gains tax rate reduces the number of realizations of capital gains with 8 7 and the realized amount given the decision to realize with 1 9 in addition we find that wealthy individuals seem to respond more to changes in capital gains tax rates than less wealthy

credit risk drivers evaluating the contribution of firm level information and of macroeconomic dynamics abstract understanding if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors is an important issue for the assessment of financial stability by exploring the links between credit risk and macroeconomic developments we observe that in periods of economic growth there may be some tendency towards excessive risk taking using an extensive dataset with detailed information for more than 30 000 firms we show that default probabilities are influenced by several firm specific characteristics when time effect controls or macroeconomic variables are also taken into account the results improve substantially hence though the firms financial situation has a central role in explaining default probabilities macroeconomic conditions are also very important when assessing default probabilities over time

the impact of market structure and learning on the tradeoff between r d competition and cooperation this paper compares r d competition and cooperation when firms can devote resources to a safe investment or a risky r d investment when the discovery of a new product creates positive externalities on non discovering firms equilibrium investment flow ex ante investment and welfare under r d competition are less than or equal to what they are under research cooperation with negative externalities r d cooperation results in the same or lower ex ante investment than under r d competition and social welfare may also be less our results have relevance for empirical studies of the impact of r d cooperation on r d outcomes

tax induced trading the effect of the 1986 tax reform act on stock market activity the end of favorable tax treatment for long term capital gains caused investors to reassess traditional tax induced trading strategies this study compares trading behavior in december 1986 and january 1987 with previous years our results indicate that these tax code changes had a powerful effect on trading behavior relative trading volume was considerably higher in december 1986 for long term winners but not significantly lower for long term losers results also indicate altered trading patterns based on shortterm gains in december 1986 and for long term winners in january 1987 the most sweeping revision of the united states tax code in many years became law in september 1986 one key aspect of that law was the elimination of the favorable tax treatment of long term capital gains under prior law capital gains on assets held at least six months were generally1 taxed at only forty percent of the rate applied to ordinary income under the new tax law assets sold after december 31 1986 are to be taxed with a few exceptions 2 at the same rate at which ordinary income is taxed this change represented the largest capital gains tax rate increase in at least half a century the purpose of this study is to assess the short run investor reaction to this change in the tax treatment of capital gains the nearly four month lag between the passage of the legislation and the effective date of the tax rate change gave investors ample opportunity to assess the law s consequences for their portfolios and adjust their behavior accordingly since investors are seeking to maximize the risk adjusted after tax return on their portfolio this record increase in capital gains tax rates is likely to induce significant changes in investment strategy the extreme sensitivity of capital gains realizations to the capital gains tax rate by holders of common stock has been frequently demonstrated a permanent or long term and recurring investor response is evidenced by the findings of

taxation of capital gains on owner occupied homes the paper compares taxation on realization with taxation on accrual in the context of owner occupied housing it considers a model where the utility a household derives from housing relative to other consumption varies over the life cycle as there are sizeable transaction costs housing consumption will not even in the absence of taxes be adjusted continuously but at discrete intervals the focus of the paper is on tax effects on the length of these intervals the following results are shown u taxing true economic appreciation at the same rate as imputed rental income and other capital income will lead to a shortening of the intervals if the capital gains are taxed on accrual an increase in this tax rate holding other rates constant will lead to a shortening of the intervals if the capital gains are taxed only as they are realized an increase in this tax rate holding other rates constant may either lead to a lengthening or a shortening of the holding period shortening is more likely if transaction costs are large whereas lengthening will occur if the rate of price increase is high

capital requirements under the credit risk based framework abstract this work aims to study the hypothesis of lower capitalization of banks under the risk based rules introduced in basel ii in this sense an assessment of the impact of these rules on the capital requirements for non financial firms credit risk is performed a comparison with basel i is presented and intervals of variation for the risk drivers such that capital requirements exceed the ones under basel i are established data for a european country supports the hypothesis of a smaller capitalization of banks under the risk based framework as far as credit risk in concerned

the credit risk in sme loans portfolios modeling issues pricing and capital requirements abstract this paper is devoted to the credit risk modeling issues of small commercial loans portfolios we propose specific solutions dealing with the most important peculiarities of these portfolios their large size and the limited information about the financial situation of borrowers we then compute the probability density function of futures losses and var measures in a portfolio of 220 000 french smes we also compute marginal risk contributions in order to discuss the loan pricing issue of small commercial loans and to compare the capital requirements derived from our model with those derived from the new ratings based basel capital accord

on the possibility of an inverse relationship between tax rates and government revenues abstract when arthur laffer and other supply side advocates plot total tax revenue as a function of a particular tax rate they draw an upward sloping segment called the normal range followed by a downward sloping segment called the prohibitive range a brief literature review indicates that tax rates on the prohibitive range in theoretical and empirical models have been the result of particularly high tax rates high elasticity parameters or both the labor tax rate which maximizes total revenue for example will depend on the assumed labor supply elasticity this paper introduces a new curve which summarizes the tax rate and elasticity combinations that result in maximum revenues separating the normal area from the prohibitive area a general purpose empirical u s general equilibrium model is used to plot the laffer curve for several elasticities and to plot the newly introduced curve using the labor tax example results indicate that the u s could conceivably be operating in the prohibitive area but that the tax wedge or labor supply elasticity would have to be much higher than most estimates would suggest

measuring permanent responses to capital gains tax changes in panel data the authors use panel data and information about differences in state tax rates to separate the effects of transitory and permanent tax rate changes on capital gains realizations behavior the estimated effect of permanent change is substantially smaller than the effect of transitory change the difference is even larger than differences between estimates from past micro data studies which have primarily measured the transitory effect and time series studies which have primarily measured the permanent effect the authors results resolve a long standing conflict between micro data and time series studies of how marginal tax rates affect capital gains realizations behavior copyright 1994 by american economic association

the effects of taxation on the selling of corporate stock and the realization of capital gains this study provides the first econometric analysis of the effect of taxation on the realization of capital gains the analysis thus extends and complements the earlier study by feldstein and yitzhaki 1978 of the effect of taxation on the selling of corporate stock the present analysis using a large new body of data obtained from individual tax returns supports the earlier finding that corporate stock sales are quite sensitive to tax rates and then shows that the effect on the realization of capital gains is even stronger

the effects of public r d subsidies on firms innovation activities the case of eastern germany this study analyzes the effects of public r d policy schemes on the innovation activities of firms in eastern germany the main question in this context is whether public funds stimulate r d activities or simply crowd out privately financed r d empirically we investigate the average causal effects of all public r d schemes in eastern germany using a nonparametric matching approach compared to the case in which no public financial means are provided it turns out that firms increase their innovation activities by about four percentage points

capital gains taxes and asset prices capitalization or lock in this paper demonstrates that the equilibrium impact of capital gains taxes reflects both the capitalization effect i e capital gains taxes decrease demand and the lock in effect i e capital gains taxes decrease supply depending on time periods and stock characteristics either effect may dominate using the taxpayer relief act of 1997 as our event we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock in effect in the week after the rate reduction became effective this paper jointly tests two effects of capital gains taxation on equity trading a demand side capitalization effect and a supply side lock in effect while previous studies have tested these effects separately to the best of our knowledge this is the first study to evaluate them jointly and empirically document the relative dominance of each effect surrounding a change in a tax rate employing an equilibrium approach we show that these effects net tax impact on asset prices is ambiguous evaluating returns and trading volume around the 1997 reduction in the capital gains tax rate we find evidence that the capitalization and the lock in effects jointly affect trading in particular the capitalization effect dominates the lock in effect in the week following an increase in the probability of a reduction in the capital gains tax rate as buyers respond to information that future capital gains tax rates will be lower the lock in effect however dominates the capitalization effect after the rate reduction actually becomes effective taxation is one of the most prevalent market frictions in financial markets affecting investors decisions and distorting the valuation of assets capital gains taxes in particular play an important role in determining an investor s trading strategies and can ultimately affect asset prices because investors

forecasting bank loans loss given default abstract with the advent of the new basel capital accord banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach in order to be compliant with this approach institutions must estimate the loss given default the fraction of the credit exposure that is lost if the borrower defaults this study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses the out of sample predictive ability of these models is evaluated at several recovery horizons after the default event the out of time predictive ability is also estimated for a recovery horizon of 1 year the performance of the models is benchmarked against recovery estimates given by historical averages the results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss given default

support vector regression for loss given default modelling abstract loss given default modelling has become crucially important for banks due to the requirement that they comply with the basel accords and to their internal computations of economic capital in this paper support vector regression svr techniques are applied to predict loss given default of corporate bonds where improvements are proposed to increase prediction accuracy by modifying the svr algorithm to account for heterogeneity of bond seniorities we compare the predictions from svr techniques with thirteen other algorithms our paper has three important results first at an aggregated level the proposed improved versions of support vector regression techniques outperform other methods significantly second at a segmented level by bond seniority least square support vector regression demonstrates significantly better predictive abilities compared with the other statistical models third standard transformations of loss given default do not improve prediction accuracy overall our empirical results show that support vector regression techniques are a promising technique for banks to use to predict loss given default

tax motivated trading by individual investors we study the stock trades of a large number of individual investors to investigate how tax incentives affect the realization of capital gains and losses we compare investors realization behavior in their taxable and tax deferred accounts and thereby identify the effect of taxes on trading decisions we reach four conclusions first we find clear evidence of a lock in effect for capital gains in taxable accounts relative to tax deferred accounts we find evidence of the disposition effect the tendency for investors to hold losses and sell gains in both types of accounts and especially at short holding periods the lock in effect is stronger for large stock transactions than for small ones second we find tax loss selling throughout the calendar year though it is most pronounced in december tax loss trading is more pronounced among investors who have realized capital gains elsewhere in the portfolio during the year third we observe substantial heterogeneity in individual investors propensity to trade controlling for this heterogeneity however does not alter the relation between a stock s past performance and the realization decision finally we find that relatively few investors repurchase stocks that they have sold at a loss even after the 30 day wash sale holding period has expired

subsidizing research programs with if and when uncertainty in the face of severe informational constraints we study government optimal subsidy policies for research programs in the face of servere information asymmetry when firms have private information about the likelihood of project viability but the government cannot form a unique prior belief about this likelihood the paper makes two contributions first we show that the way in which rd under r d competition the first best outcome can also be achieved through a simple combination of a matching subsidy and an unrestricted subsidy if the shadow cost of public funds is positive an ex post equilibrium in general does not exist either under monopoly or competition we then consider two alternative policy decision criteria that are appropriate for belief free games rationalizability and max min criteria we argue that the max min criteria is preferable in our context and by way of doing so establish that the set of max min subsidy policies under either monopoly or competitive r d consists entirely of simple pure matching subsidies we further establish that allowing firms to form an r d consortium reduces the matching rate for the highest max min subsidy suggesting that cooperative r d has the potential to economize on the shadow costs of public funding of subsidies

optimal technology policy under asymmetric information in a research joint venture abstract we analyze the optimal technology policy to solve a free riding problem between the members of an rjv assuming that government intervention is subject to an additional adverse selection problem caused by its inability to distinguish the value of the potential innovation although subsidies and monitoring may be equivalent policy tools to solve firms free riding problem they imply different social losses if the government is not able to distinguish perfectly the value of the potential innovation the advantage of monitoring tools relative to subsidies is proved to depend on which type of information the government can obtain about firms r d performance

taxing away m a capital gains taxation and acquisition activity abstract capital gains taxation distorts the market for corporate control by imposing a cost on selling shareholders in acquisitions this lock in effect increases premiums required for deal completion preventing some m as from taking place at all we estimate the effect of capital gains taxation on the quantity of realized m a deals and compute the deadweight loss related to taxing these transactions we find that a one percentage point increase in the capital gains tax rate reduces acquisition activity by around 1 annually for the united states this implies unrealized synergy gains of 9 3 billion each year due to capital gains taxes

cyclicality in losses on bank loans based on unique data we show that macro variables the default rate and loss given default of bank loans share common cyclical components the innovation in our model is the distinction between loans with either severe or mild losses the variation in the proportion of these two types drives the cyclic behavior of the loss given default and constitutes the links with the default rate and macro variables these links vary according to loan and borrower characteristics during downturns the proportion of defaults with severe losses increases but the distribution of losses conditional on their being mild or severe does not change although loans are monitored more closely than bonds and are more senior the cyclical variation in their losses resembles those for bonds albeit around a lower average level this variation leads to an increase in the capital reserves required for loan portfolios

credit risk in the leasing industry abstract this paper is devoted to the credit risk modeling issues of retail lease portfolios using a re sampling method i estimate the probability density function of losses and var measures in a portfolio of 46 732 leases issued between 1990 and 2000 by a major european financial institution my results show that physical collaterals play a major role in reducing the credit risk associated with lease portfolios however because of insufficient recognition of such collaterals under the new regulatory capital framework basel ii significant differences are observed between the estimated capital requirements and those calculated in accordance with the various basel ii approaches

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

negatively correlated bandits we analyse a two player game of strategic experimentation with two armed bandits either player has to decide in continuous time whether to use a safe arm with a known pay off or a risky arm whose expected pay off per unit of time is initially unknown this pay off can be high or low and is negatively correlated across players we characterize the set of all markov perfect equilibria in the benchmark case where the risky arms are known to be of opposite type and construct equilibria in cut off strategies for arbitrary negative correlation all strategies and pay offs are in closed form in marked contrast to the case where both risky arms are of the same type there always exists an equilibrium in cut off strategies and there always exists an equilibrium exhibiting efficient long run patterns of learning these results extend to a three player game with common knowledge that exactly one risky arm is of the high pay off type

determinants of banks risk exposure to new account fraud evidence from germany abstract this paper studies empirically the determinants of new account fraud risk within two dimensions the probability of fraud and the expected and unexpected monetary loss per account due to fraud by fraud risk we mean the risk that a bank fails to enforce a debt because the identity of the person incurring the debt cannot be ascertained using a unique and rich data set of account applicants provided by a german internet only bank we find that fraud risk is highly sensitive to demographic and socio economic variables like nationality gender marital status age occupation and urbanisation for example foreigners are 22 25 times more likely to commit account fraud than germans and men are 2 5 times more risky than women

loss functions for loss given default model comparison abstract we propose a new approach for comparing loss given default lgd models which is based on loss functions defined in terms of regulatory capital charge our comparison method improves the banks ability to absorb their unexpected credit losses by penalizing more heavily lgd forecast errors made on credits associated with high exposure and long maturity we also introduce asymmetric loss functions that only penalize the lgd forecast errors that lead to underestimate the regulatory capital we show theoretically that our approach ranks models differently compared to the traditional approach which only focuses on lgd forecast errors we apply our methodology to six competing lgd models using a sample of almost 10 000 defaulted credit and leasing contracts provided by an international bank our empirical findings clearly show that models rankings based on capital charge losses differ from those based on the lgd loss functions currently used by regulators banks and academics

rationalizable strategic behavior and the problem of perfection this paper explores the fundamental problem of what can be inferred about the outcome of a noncooperative game from the rationality of the players and from the information they possess the answer is summarized in a solution concept called rationalizability strategy profiles that are rationalizable are not always nash equilibria conversely the information in an extensive form game often allows certain unreasonable nash equilibria to be excluded from the set of rationalizable profiles a stronger form of rationalizability is appropriate if players are known to be not merely rational but also cautious what constitutes rational behavior in a noncooperative strategic situation this paper explores the issue in the context of a wide class of finite noncooperative games in extensive form the traditional answer relies heavily upon the idea of nash equilibrium nash 17 the position developed here however is that as a criterion for judging a profile of strategies to be reasonable choices for players in a game the nash equilibrium property is neither necessary nor sufficient some nash equilibria are intuitively unreasonable and not all reasonable strategy profiles are nash equilibria the fact that a nash equilibrium can be intuitively unattractive is well known the equilibrium may be imperfect introduced into the literature by selten 20 the idea of imperfect equilibria has prompted game theorists to search for a narrower definition of equilibrium while this research some of which will be discussed here has been extremely instructive it remains inconclusive theorists often agree about what should happen in particular games but to capture this intuition in a general solution concept has proved to be very difficult if this paper is successful it should make some progress in that direction the other side of the coin has received less scrutiny can all non nash profiles really be excluded on logical grounds i believe not the standard justifications for considering only nash profiles are circular in nature or make gratuitous assumptions about players decision criteria or beliefs the following discussion of these points is extremely brief due to space constraints more detailed arguments may be found in pearce 18

the case for ending the capital gains tax the treasury department s recent tax proposals call for taxing capital gains at ordinary rates although indexing such gains for inflation those who oppose preferential treatment for capital gains have traditionally based their arguments on grounds of equity preferential treatmnent they argue allows wealthy individuals to escape paying their fair share of taxes but taxing capital gains to investors even at a low rate while also taxing the return on capital represents double taxation inasmuch as an increase in share price for example

samsung card lending model samsung card lending model sclm analyzes cash flow in individual accounts and measures the level of company wide risk serving as a risk and portfolio management model in the consumer lending business the main features of sclm are as follows default ratios such as intrinsic balance default probability and annual default ratio are computed using the past present and future cash flows of accounts the provision is shown as the total sum of write offs the size of capital required is determined by default probability distribution the price for new accounts is quoted based on cash flow simulations reflecting future business environments sclm has shown good performance in samsung card consumer lending business since the korean credit card crisis of 2003

the determinants of bank loan recovery rates in good times and bad new evidence abstract we find that factors explaining bank loan recovery rates differ depending on the state of an underlying credit cycle our modelling approach incorporates a two state markov switching mechanism to capture underlying economic conditions this latent credit cycle variable helps to explain differences in observed recovery rates over time using us bank default loan data from moody s ultimate recovery database and covering the pre and post global financial crisis gfc period the paper develops and implements a dynamic model for bank loan recovery rates we accommodate the distinctive empirical features of the recovery rate data while incorporating a large number of possible determinants we find that certain loan specific and other variables hold different explanatory power with respect to recovery rates in good versus bad times in the credit cycle i e depending on underlying credit market conditions our findings demonstrate the importance of accounting for counter cyclical expected recovery rates when determining capital retention levels

venture capital financing moral hazard and learning we consider the provision of venture capital in a dynamic agency model the value of the venture project is initially uncertain and more information arrives by developing the project the allocation of the funds and the learning process are subject to moral hazard the optimal contract is a time varying share contract which provides intertemporal risk sharing between venture capitalist and entrepreneur the share of the entrepreneur reflects the value of a real option the option itself is based on the control of the funds the dynamic agency costs may be high and lead to an inefficient early stopping of the project a positive liquidation value explains the adoption of strip financing or convertible securities finally relationship financing including monitoring and the occasional replacement of the management improves the efficiency of the financial contracting

capital gains taxation in an economy with an austrian sector abstract this paper examines the effects of a proportional capital gains in an economy with an austrian sector with wine and trees and an ordinary sector we analyze the effect of capital gains taxation on both an accrual and a realization basis on the efficiency with which resources are used within the austrian sector since time is the only input which can be varied in the austrian sector this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets accrual taxation decreases the selling time of austrian assets realization taxation decreases the selling time of some austrian assets and leaves it unchanged for others inflation further reduces the selling time of assets taxed on an accrual basis often but not always inflation increases the selling time of austrian assets taxed on a realization basis we also examine the effect of the special tax treatment of capital gains at death and find that the current u s tax system under which capital gains taxes are waived at death encourages investors to hold assets longer in contrast to these results which suggest that the capital gains tax can reduce the holding period of an asset we show that there is a sense in which such taxes at least when levied on a realization basis discourage transactions and increase holding periods it is never profitable to change the ownership of an austrian asset between the time of the original constraint and the ultimate harvesting of the asset for final use capital gains taxation diverts resources from the austrian sector to the ordinary sector the effects on the efficiency of the allocation of investment between sectors are complicated and not easy to summarize

do taxes matter lessons from the 1980 s the response of the economy to two major although in important respects offsetting tax reforms has been much smaller than ardent supply side revolutionaries expected thus suggesting that a reassessment of the grounds for revolt is in order this paper offers such a reassessment by first discussing how the evidence from the tax reforms of 1981 and 1986 reflects on our understanding of the response to taxation with particular reference to savings and capital gains realizations i then reconstruct a 1992 view about how taxes affect behavior a unifying theme is that the tax system does much more than alter the relative prices of real variables it also provides incentives to misreport income restructure financial claims time transactions change the legal form of organization and so on for this reason observed low tax elasticities of real variables may be due to either low elasticities of substitution or the fact that tax policy changes opportunity sets in complex ways disentangling these explanations requires an emphasis on the transaction based nature of the tax system and the administration and enforcement of tax laws this abstract was borrowed from another version of this item

systematic effects among loss given defaults and their implications on downturn estimation abstract banks are obliged to provide downturn estimates for loss given defaults lgds in the internal ratings based approach while downturn conditions are characterized by systematically higher lgds it is unclear which factors may best capture these conditions as lgds depend on recovery payments which are collected during varying economic conditions in the resolution process it is challenging to identify suitable economic variables using a bayesian finite mixture model we adapt random effects to measure economic conditions and to generate downturn estimates we find that systematic effects vary among regions i e the us and europe and strongly deviate from the economic cycle our approach offers straightforward supportive tools for decision makers risk managers are enabled to select their individual margin of conservatism based on their portfolios while regulators might set a lower bound to guarantee conservatism in comparison to other approaches our proposal appears to be conservative enough during downturn conditions and inhibits over conservatism

the relation between return and income this paper presents evidence that the corporate stock owned by high income investors appreciates substantially faster than the stock owned by investors with lower incomes the evidence indicates that the differences are large and that they have persisted for a long period of time some potential explanations of this phenomenon are discussed and it seems that the best explanation is that the rich have a higher tendency to invest in risky stock

recovery rates uncertainty certainly matters abstract previous studies identify default rate as the main systematic determinant of bond recovery rates we revisit this paradigm by investigating the impact of another factor economic uncertainty based on a wide sample of american default issues and relying on beta regression models well suited for the bounded heteroskedastic and skewed sample of recovery rates we analyze the determinants of recovery rate distributions we find economic uncertainty to be of paramount importance as it proves to be the most important systematic determinant of recovery rate distributions significant for both their mean and dispersion by contrast default rate remains a key determinant of the dispersion of these distributions but not for their means considering this evidence is critical to the sound implementation of stochastic recovery rate models used by financial institutions for the computation of regulatory capital

downturn loss given default mixture distribution estimation abstract the internal estimates of loss given default lgd must reflect economic downturn conditions thus estimating the downturn lgd as the new basel capital accord basel ii establishes we suggest a methodology to estimate the downturn lgd distribution to overcome the arbitrariness of the methods suggested by basel ii we assume that lgd is a mixture of an expansion and recession distribution in this work we propose an accurate parametric model for lgd and we estimate its parameters by the em algorithm finally we apply the proposed model to empirical data on italian bank loans

operating leases and the assessment of lease debt substitutability operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases on average in recognition of this the paper investigates the degree of substitutability between leasing and non lease debt using a comprehensive measure of leasing improving on the partial measures used in prior research operating lease liabilities are estimated using the constructive capitalisation approach suggested by imhoff lipe and wright 1991 accounting horizons 5 pp 51 63 modified to incorporate company specific and uk relevant assumptions the results imply that leasing and debt are partial substitutes with 1 of leasing displacing approximately 0 23 of non lease debt on average consistent with the argument that lessors bear some risks which are not inherent in debt contracts these findings suggest that substitution effects are not uniform across lease types

transaction costs capital gains taxes and housing demand abstract the paper considers the effect of transaction costs particularly in the form of capital gains taxes on the aggregate demand for owner occupied housing the framework is an overlapping generations model where consumers can avoid the transaction costs taxes by keeping the same house for both periods of life the first part of the paper analyzes the consumer s choice problem it distinguishes between costs that are fixed irrespective of the size of the house bought or sold and costs such as capital gains taxes that are related to the house value it is shown that higher transaction costs have lock in effects inducing consumers to keep the same house for both periods also it is found that under a wide variety of circumstances the amount of housing demanded will increase as the household is being locked in finally the paper looks at the effects on aggregate demand from an increase in capital gains taxes it is shown that an increased rate of taxation decreases demand for low tax rates but for high tax rates when lock in effects become important one generally gets the opposite effect high tax rates tend to increase housing demand

aspects of r d subsidization it is well known that the market fails to provide the socially optimal level of r d expenditure because of the public properties of information see arrow 1963 and usher 1964 in the frictionless perfectly competitive market with no barriers to the use of information the market will provide no r d investment one widely used policy approach to deal with this appropriability problem is patent protection which temporarily assigns the property right to the patented information for some period of time investment in r d can be further stimulated through subsidization though issues in patent protection have been extensively discussed in the literature see nordhaus 1967 1972 scherer 1972 stiglitz 1969 and romano forthcoming the economics of r d subsidization have been largely ignored in spite of its frequent use as a policy tool 1 the purpose of this paper is to explore the usefulness of r d subsidization in markets where patent protection is available with the opportunity to secure a patent firms will have an incentive to invest in r d however only in exceptional circumstances will the market produce the socially optimal r d outlay subsidization can be a useful supplemental policy tool the usefulness of r d subsidization depends on a number of variables including the length of the patent life the character of competition for the patent and on the extent of any excess burdens associated with subsidization our focus is on how optimal subsidization is affected by these variables it is shown that when there is monopoly in the research market the optimal subsidy is always positive no matter how long is the finite patent life or how high is any finite excess burden associated with subsidization in contrast when there are no barriers to entering the research market the optimal subsidy is zero if the patent life is long or the excess burden is high moreover

cross base tax elasticity of capital gains abstractthis paper studies the cross base tax elasticity of capital gains realizations to labour income taxes when capital gains are taxed at a separate proportional tax rate using a longitudinal panel of over 265 000 individuals in sweden this paper shows in a regression kink design that labour income taxes affect capital gains realizations in two ways an increase in the marginal labour income tax rate increases the likelihood of realizing capital gains and the amount of realized capital gains one implication of this result is that labour income taxes have a lock out effect but that the magnitude of this effect is smaller than the lock in effect of the actual capital gains tax

the delivery option in credit default swaps abstract under standard assumptions the reduced form credit risk model is not capable of accurately pricing the two fundamental credit risk instruments bonds and credit default swaps cds simultaneously using a data set of euro denominated corporate bonds and cds our paper quantifies this mispricing by calibrating such a model to bond data and subsequently using it to price cds resulting in model cds spreads up to 50 lower on average than observed in the market an extended model is presented which includes the delivery option implicit in cds contracts emerging since a basket of bonds is deliverable in default by using a constant recovery rate standard models assume equal recoveries for all bonds and hence zero value for the delivery option contradicting this common assumption case studies of chapter 11 filings presented in the paper show that corporate bonds do not necessarily trade at equal levels following default our extension models the implied expected recovery rate of the cheapest to deliver bond and applied to data largely eliminates the mispricing calibrated recovery values lie between 8 and 47 for different obligors exhibiting strong variation among rating classes and industries a cross sectional analysis reveals that the implied recovery parameter depends on proxies for the delivery option primarily the number of available bonds and bond pricing errors no evidence is found for a direct influence of the bid ask spread notional amount coupon or rating used as proxies for bond market liquidity

the financing of innovation learning and stopping we consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success we distinguish between two financing modes namely relationship financing where the allocation decision of the entrepreneur is observable and arm s length financing where it is unobservable we find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes the rate at which funding is released becomes tighter over time under relationship financing and looser under arm s length financing the tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm s length financing

intangible investment and ramsey capital taxation the standard analysis of optimal fiscal policy aggregates different types of assets into a unique capital good and all types of capital taxes into a unique capital tax this paper considers a disaggregated framework an economy with corporate and dividend taxes where firms invest in both tangible and intangible assets which can be expensed or sweat in our setup firms can always respond to changes in the timing of taxation we find that the optimal long run policy features zero corporate taxes and positive dividend taxes with labor and dividend taxes being identical moreover the initial capital levy is relatively small

price discovery and trade fragmentation in a multi market environment evidence from the mts system this paper proposes new metrics for the process of price discovery on the main electronic trading platform for euro denominated government securities analysing price data on daily transactions for 107 bonds over a period of twenty seven months we find a greater degree of price leadership of the dominant market when our measures as opposed to the traditional price discovery metrics are used we also present unambiguous evidence that a market s contribution to price discovery is crucially affected by the level of trading activity the implications of these empirical findings are discussed in the light of the debate about the possible restructuring of the regulatory framework for the treasury bond market in europe

ambiguous beliefs and mechanism design abstract this paper develops a payoff equivalence theorem for mechanisms with ambiguity averse participants with preferences of the maxmin expected utility meu form gilboa and schmeidler 1989 we use our payoff equivalence result to explicitly characterize the revenue maximizing private value auction mechanism for agents with arbitrary forms of ambiguous beliefs we also show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion our payoff equivalence techniques allow us to study the constrained efficient budget balanced bilateral trade mechanism and show that increased ambiguity improves the efficiency of the mechanism in addition we characterize the revenue maximizing efficient bilateral trade mechanism and show that heightened ambiguity lowers ex ante budget deficits

does reducing the capital gains tax rate raise or lower investment abstract the effect of taxation of capital gains on the decision to purchase a risky asset is explored within a theoretical framework similar to that of the capital asset pricing model tax rate reductions have two offsetting effects one is to raise the after tax expected return while the other is to increase the amount of risk borne by private agents conditions for determining which effect dominates are derived

volume for winners and losers taxation and other motives for stock trading capital gains taxes create incentives to trade our major finding is that turnover is higher for winners stocks the prices of which have increased than for losers which is not consistent with the tax prediction however the turnover in december and january is evidence of tax motivated trading there is a relatively high turnover for losers in december and for winners in january we conclude that taxes influence turnover but other motives for trading are more important we were unable to find evidence that changing the length of the holding period required to qualify for long term capital gains treatment affected turnover investors responding to the tax incentives in the capital gains laws should produce predictable patterns in the volume of trading in a stock but not necessarily in its price this study uses past price patterns as a proxy to measure the incentives to sell or avoid selling a stock and observes trading volumes to estimate the extent to which investors respond to these incentives past price patterns may influence trading volumes for other non tax related reasons as well these are also considered we find that past prices influence current incentives to trade through both tax and non tax motives winners tend to have higher abnormal volumes than losers this would be expected if non tax related motives were predominant however the influence of tax related motives on trading volume is shown by seasonal variations in the relationship between past price changes and turnover as predicted by tax induced trading theories the volume of losers is higher than normal in december and the volume of winners is higher than normal in january we found no evidence that trading volume was affected by changes in the length of the holding period required to qualify for long term capital gains investors reactions to capital gains taxes are important for several reasons first a comprehensive understanding of investor behavior would include both price and volume understanding the relationship between taxes and volume is a fruitful and convenient method of contributing to this subject the resource allocation consequences of capital gains taxes are controversial in part because

policy watch cutting capital gains taxes from 1922 to 1986 long term capital gains were taxed at lower rates than other income generally by allowing a portion of long term capital gains to be excluded from taxable income while taxing capital gains at the same rates as other income has been hailed by some as a major accomplishment of tax reform it has been criticized by others as one of its main flaws as a result there have been proposals each year since 1986 to restore some type of capital gains preference these proposals have sparked a lively debate centered on three main questions would reducing the capital gains tax lower or raise federal revenues who benefits most from cutting the capital gains tax would lower tax rates on capital gains improve economic performance

bequest taxes and capital gains realizations abstract contrary to popular view capital gains do not escape taxation at death as they are subject to the estate tax the presence of the step up in basis increases the lock in effect of capital gains taxes as individuals are induced to hold assets until death this effect however is mitigated by the estate tax which applies to assets passed to heirs using a sample of matched income and estate tax records in a period that straddles significant changes in capital gains and estate tax rates the estate tax is found to have an unlocking effect on capital gains realizations the realization elasticity with respect to the estate tax rate is estimated at 0 36 in the basic model

european exchange trading funds trading with locally weighted support vector regression in this paper two different locally weighted support vector regression wsvr algorithms are generated and applied to the task of forecasting and trading five european exchange traded funds the trading application covers the recent european monetary union debt crisis the performance of the proposed models is benchmarked against traditional support vector regression svr models the radial basis function the wavelet and the mahalanobis kernel are explored and tested as svr kernels finally a novel statistical svr input selection procedure is introduced based on a principal component analysis and the hansen lunde and nason 2011 model confidence test the results demonstrate the superiority of the wsvr models over the traditional svrs and of the v svr over the e svr algorithms we note that the performance of all models varies and considerably deteriorates in the peak of the debt crisis in terms of the kernels our results do not confirm the belief that the radial basis function is the optimum choice for financial series

credit risk in private debt portfolios default loss severity and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds the chance of very large portfolio losses is estimated and some determinants of such losses are analyzed results show ex ante riskier classes of private debt perform better on average than public debt both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution private placements are similar to corporate loans in that both are monitored private debt the results are thus relevant to management and securitization of private debt portfolios generally more than half of nonfinancial corporate debt finance is iss ued privately and decisions of the financial intermediaries that invest in such debt depend importantly on its credit risk regulators of such institutions are similarly attentive to portfolio credit risk and it is an important consideration in the design of securitizations of pools of private debt in spite of its importance little is known empirically about private debt credit risk especially ex ante risk as a function of portfolio characteristics many studies have examined the loan portfolio performance of banks thrifts and insurance companies but the ex ante risk characteristics of the portfo

technology policy and the organization of r d abstract in this study we examine how technology policy in the form of r d subsidies and encouragement of research joint ventures rjvs affects the investment incentives of firms in various types of imperfectly competitive markets we find that joint ventures yield lower research intensities in the absence of subsidies in the presence of optimal subsidy policy higher expected welfare is obtained with rjvs but the optimal policy may also involve a more costly subsidy program the analysis also identifies possible difficulties in implementing socially optimal policies arising from private incentives conflicting with the public interest

capital market imperfections and the incentive to lease abstract this paper evaluates the influence of financial contracting costs on public corporations incentives to lease fixed capital we argue that firms facing high costs of external funds can economize on the cost of funding by leasing we construct several measures of leasing propensity plus some a priori indicators of the severity of financial constraints facing firms we find that the share of total annual fixed capital costs attributable to either capital or operating leases is substantially higher at lower rated non dividend paying cash poor firms those likely to face relatively high premiums for external funds

a computational approach to pricing a bank credit line abstract using trended brownian motion to characterize borrower cash needs over time we are able to derive a probability density function for the time to depletion of a bank credit line as well as the likelihoods for the time to exhausting the sources of liquidity that fund the loan armed with these analytic results we solve for the credit line mark up rate and the configuration of stored liquidity that maximizes the bank s intertemporal expected profits from the loan the optimality conditions produce a system of integral differential equations whose solutions we then simulate over a host of scenarios

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

correlated default and financial intermediation financial intermediation naturally arises when knowledge about the aggregate state is valuable for managing investments and lenders cannot easily observe the aggregate state i show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans and borrowers payoffs are correlated when projects have correlated outcomes learning the state of one project via enforcement provides information about the states of other projects a large correlated portfolio provides ex post incentives for enforcement as a result intermediation dominates direct lending intermediaries are financed with risk free deposits earn positive profits and hold systemic default risk

recovery rates default probabilities and the credit cycle in recessions the number of defaulting firms rises on top of this the average amount recovered on the bonds of defaulting firms tends to decrease this paper proposes an econometric model in which this joint time variation in default rates and recovery rate distributions is driven by an unobserved markov chain which we interpret as the credit cycle this model is shown to fit better than models in which this joint time variation is driven by observed macroeconomic variables we use the model to quantitatively assess the importance of allowing for systematic time variation in recovery rates which is often ignored in risk management and pricing models

international r d rivalry and industrial strategy this paper presents a theory of government intervention which provides an explanation for industrial strategy policies such as r d or export subsidies in imperfectly competitive international markets domestic net welfare is improved by the capture of a greater share of the output of rent earning industries although the subsidy ridden noncooperative international equilibrium is jointly suboptimal behaviour of governments and firms is modelled as a three stage subgame perfect nash equilibrium the assumption that the government is the first player in this game allows it to influence equilibrium outcomes by altering the set of credible actions open to firms

dividend taxation and household dividend portfolio decisions evidence from the u s jobs and growth tax relief reconciliation act of 2003 abstractthis study examines the dividend clientele hypothesis by focusing on the preferential tax treatment of qualified dividends provided by the 2003 jobs and growth tax relief reconciliation act jgtrra in the united states using the public use tax file data the author finds that the ratios of dividends to long term capital gains before the 2003 tax act significantly declined with household tax rate differentials between dividends and long term capital gains but such a negative tax effect on the ratios disappears afterwards this seemingly tax inefficient composition of dividends and long term capital gains after the tax act arises from households ability to reduce their tax burdens on stocks by exploiting the new preferential tax treatments on qualified dividends under jgtrra that is households in the upper tax bracket hold significantly greater shares of qualified dividends relative to ordinary dividends after the tax act

capital gains tax policy and the behavior of common stock returns abstract consistent with the lock in effect empirically documented in the economic literature and developed in theoretical work by stiglitz we find evidence of an increase in stock market volatility following an increase in the capital gains tax rate we further observe a corresponding decrease in volatility subsequent to a reduction in the capital gains tax rate we also note an inverse relationship between stock market trading volume and the tax rate on capital gains that is further consistent with the lock in effect

high tech r d subsidies estimating the effects of sematech abstract sparked by concerns about their shrinking market share 14 leading u s semiconductor producers with the financial assistance of the u s government in the form of 100 million in annual subsidies formed a joint r d consortium sematech in 1987 using compustat data on all u s semiconductor firms we estimate the effects of sematech on members r d spending profitability investment and productivity in so doing we examine two hypotheses the commitment hypothesis that sematech obligates member firms to spend more on high spillover r d and the sharing hypothesis that sematech reduces duplication of member r d spending whereas the commitment hypothesis provides a rationale for the government subsidies the sharing hypothesis does not we find that sematech induced members to cut their overall r d spending on the order of 300 million per year providing support for the sharing hypothesis

loss given default for leasing parametric and nonparametric estimations abstract this study employs a dataset from three german leasing companies with 14 322 defaulted leasing contracts to analyze different approaches to estimating the loss given default lgd using the historical average lgd and simple ols regression as benchmarks we compare hybrid finite mixture models fmms model trees and regression trees and we calculate the mean absolute error root mean squared error and the theil inequality coefficient the relative estimation accuracy of the methods depends among other things on the number of observations and whether in sample or out of sample estimations are considered the latter is decisive for proper risk management and is required for regulatory purposes fmms aim to reproduce the distribution of realized lgds and therefore perform best with respect to in sample estimations but they show poor performance with respect to out of sample estimations model trees by contrast are more robust and outperform all other methods if the sample size is sufficiently large

effects of debt collection practices on loss given default abstract in this article we propose an lgd model that is solely based on legal and internal debt collection actions our model is supported by empirical tests in which it performs better than a usual firm specific model this result is noteworthy when we recall that the model has only binary variables that indicate whether an action was taken our model can be applied to update the lgd of distressed firms in a timely manner reflecting the actions taken during the debt collection period it also can be used to assess the effect of a recovery action and to determine whether to apply an action to certain types of debt