unobservable shocks as carriers of contagion we propose an identified structural garch model to disentangle the dynamics of financial market crises we distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non crisis markets and the contagion imported to a tranquil domestic market from foreign crises the model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses to illustrate we apply the method to data from the 1997 1998 asian financial crisis which consists of a complicated set of interacting crises we find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken impulse response functions for an equally weighted equity portfolio show the increasing dominance of korean and hong kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects

preconditions windows of opportunity and innovation strategies successive leadership changes in the regional jet industry abstract we analyse the drivers of two successive leadership changes in the regional or mid sized jet market a particularly dynamic segment of the commercial aircraft industry in the first instance bombardier a canadian newcomer assumed leadership over the incumbents bae and fokker in 1995 in 2005 the brazilian firm embraer became the market leader in terms of number of regional jet deliveries our theoretical framework considers discontinuities in the building blocks of sectoral innovation systems as windows of opportunity for which challenger firms can devise strategic responses allowing them to assume market leadership it also considers preconditions as necessary capabilities limiting the number of potential challenger companies the analysis of leadership change shows that more efficient engines and technological improvements in subsystems changing oil prices business cycles liberalization of air transport services scope clauses and government interventions provided technological demand and regulatory windows of opportunity launching new aircraft families an architectural innovation targeting the 50 and the 100 120 seat niche markets gave first bombardier s crj family and later embraer s e jet family the leadership the fate of failed challengers and incumbents point to the importance of incumbent traps technological and financial capabilities the timing of windows of opportunity speedy strategic response a proper evaluation of future demand and sheer luck as long lead times and sunk costs entrap incumbents and other inadequately responding companies

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

a comparative analysis of current credit risk models the new bis 1998 capital requirements for market risks allows banks to use internal models to assess regulatory capital related to both general market risk and credit risk for their trading book this paper reviews the current proposed industry sponsored credit value at risk methodologies first the credit migration approach as proposed by jp morgan with creditmetrics is based on the probability of moving from one credit quality to another including default within a given time horizon second the option pricing or structural approach as initiated by kmv and which is based on the asset value model originally proposed by merton merton r 1974 journal of finance 28 449 470 in this model the default process is endogenous and relates to the capital structure of the firm default occurs when the value of the firm s assets falls below some critical level third the actuarial approach as proposed by credit suisse financial products csfp with creditrisk and which only focuses on default default for individual bonds or loans is assumed to follow an exogenous poisson process finally mckinsey proposes creditportfolioview which is a discrete time multi period model where default probabilities are conditional on the macro variables like unemployment the level of interest rates the growth rate in the economy which to a large extent drive the credit cycle in the economy 2000 elsevier science b v all rights reserved

much ado about ideas the cognitive factor in economic policy this article examines recent works that investigate how ideas acquire influence over economic policy choice the revival of interest in the material power of ideas stems from discontent with the inability of rational interest based models to explain particular policy outcomes except by resorting to auxiliary assumptions the works under review primarily apply ideas approaches as supplementary analytical devices to clarify the dynamics of policy choices these studies succeed in illuminating the interpenetration of interests and ideas in order to plumb the problematic variability of interest formation and the degree of public influence over economic policy parameters the bolder thesis that ideas have a force of their own independent of all interests is however misconceived and unproved

an analytic approach to credit risk of large corporate bond and loan portfolios abstract we derive an analytic approximation to the credit loss distribution of large portfolios by letting the number of exposures tend to infinity defaults and rating migrations for individual exposures are driven by a factor model in order to capture co movements in changing credit quality the limiting credit loss distribution obeys the empirical stylized facts of skewness and heavy tails we show how portfolio features like the degree of systematic risk credit quality and term to maturity affect the distributional shape of portfolio credit losses using empirical data it appears that the basle 8 rule corresponds to quantiles with confidence levels exceeding 98 the limit law s relevance for credit risk management is investigated further by checking its applicability to portfolios with a finite number of exposures relatively homogeneous portfolios of 300 exposures can be well approximated by the limit law a minimum of 800 exposures is required if portfolios are relatively heterogeneous realistic loan portfolios often contain thousands of exposures implying that our analytic approach can be a fast and accurate alternative to the standard monte carlo simulation techniques adopted in much of the literature

a network model of financial system resilience abstract we examine the role of macroeconomic fluctuations asset market liquidity and network structure in determining contagion and aggregate losses in a stylized financial system systemic instability is explored in a financial network comprising three distinct but interconnected sets of agents domestic banks overseas banks and firms calibrating the model to advanced country banking sector data this preliminarily model generates broadly sensible aggregate loss distributions which are bimodal in nature we demonstrate how systemic crises may occur and analyse how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy we also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices

cyclical correlations credit contagion and portfolio losses abstract we model aggregate credit losses on large portfolios of financial positions contracted with firms subject to both cyclical default correlation and direct default contagion processes cyclical correlation is due to the dependence of firms on common economic factors contagion is associated with the local interaction of firms with their business partners we provide an explicit normal approximation of the distribution of portfolio losses we quantify the relation between the variability of global economic fundamentals strength of local firm interaction and the fluctuation of losses we find that cyclical oscillations in fundamentals dominate average losses while local interaction causes additional fluctuations of losses around their average the strength of the contagion induced loss variability depends on the complexity of the business partner network

is child labor inefficient we build a model of child labor and study its implications for welfare we assume that there is a trade off between child labor and the accumulation of human capital even if parents are altruistic and child labor is socially inefficient it may arise in equilibrium because parents fail to fully internalize its negative effects this occurs when bequests are zero or when capital markets are imperfect we also study the effects of a simple ban on child labor and derive conditions under which it may be pareto improving in general equilibrium we show that the implications of child labor for fertility are ambiguous

latin america s new economic model micro responses and economic restructuring abstract this paper introduces a special issue on the microeconomics of latin america under the new economic model nem the paper reviews the rationale and policies of the nem and analyzes the impact of the reforms at the macroeconomic sectoral and microeconomic levels at the firm level the contributions to this issue demonstrate that a considerable adjustment process is taking place as sectoral structural change indices demonstrate however this has not resulted in widespread shifts of resources between sectors nor has it resulted in significant improvement in overall employment productivity and growth the authors analyze the reasons for this disjuncture and suggest policy alternatives

estimation of correlations in portfolio credit risk models based on noisy security prices portfolio credit risk models are very often constructed with correlation matrices serving as proxies for interrelations in the creditworthiness of each company in addition to the size of the matrix estimation of correlation is also complicated by the fact that defaults are rare and credit sensitive securities such as stocks bonds and credit default swaps cds are noisy therefore we present in this paper an estimation approach based on credit sensitive instruments that accounts for noise and is highly parallelizable the latter being a very important feature for large portfolios in finance a simulation study shows that the method is reliable and has better statistical properties when benchmarked against other correlation estimators in an empirical study based on the cds premiums and stock prices of 225 firms listed on the cdx north american indices we analyze the correlations computed using numerous approaches overall we find that ignoring noise severely underestimates correlations whereas equity correlation is poorly related to the best correlation estimates inferred from the cds market

the political economy of strategic trade policy and the brazil canada export subsidies saga in this paper we study the on going trade dispute between canada and brazil on export subsidies in the aircraft industry and the reasons for its escalation this is a peculiar case of strategic trade policy insofar as the good i e regional jets is heavily dependent on sub systems that are imported in the two countries the hypothesis that the dispute solely derives from the search for rents and externalities is therefore incomplete without downplaying the role of interest politics we argue that in both countries ideas about the goals of trade policy have an important place in explaining why this dispute drags on for canada the belief in a rules based trading regime has led it to strongly oppose violations while insecurity about its competitiveness has led to a variety of government schemes to support firms in advanced sectors like aerospace for brazil its place as a leader of the developing world acted as a rallying point for government and firms alike the research also argues that the wto process has actually made a resolution of the dispute more difficult by making it too costly for firms and countries to comply with the costs of losing

the domino effect of credit defaults test of asymmetric default correlations using realised default data using the research framework of a domino effect in firms we first make theoretical contributions by addressing several testable hypotheses regarding asymmetrical default correlations we then employ lucas s method to provide empirical evidence based on realised historical default data in the united states from 1992 to 2013 our empirical results are consistent with the following notions first default correlations increase with the time horizon second firms with low credit quality small size illiquidity and a high beta exhibit higher default correlations credit risk management without considering asymmetrical default correlations could underestimate portfolio risk due to default clustering

var and expected shortfall in portfolios of dependent credit risks conceptual and practical insights in the first part of this paper we address the non coherence of value at risk var as a risk measure in the context of portfolio credit risk and highlight some problems which follow from this theoretical deficiency in particular a realistic demonstration of the non subadditivity of var is given and the possibly nonsensical consequences of var based portfolio optimisation are shown the second part of the paper discusses var and expected shortfall estimation for large balanced credit portfolios all standard industry models creditmetrics kmv creditrisk are presented as bernoulli mixture models to facilitate their direct comparison for homogeneous groups it is shown that measures of tail risk for the loss distribution may be approximated in large portfolios by analysing the tail of the mixture distribution in the bernoulli representation an example is given showing that for portfolios of lower quality choice of model has some impact on measures of extreme risk 2002 elsevier science b v all rights reserved

legalization trade liberalization and domestic politics a cautionary note if the purpose of legalization is to enhance international cooperation more may not always be better achieving the optimal level of legalization requires finding a balance between reducing the risks of opportunism and reducing the potential negative effects of legalization on domestic political processes the global trade regime which aims to liberalize trade has become increasingly legalized over time increased legalization has changed the information environment and the nature of government obligations which in turn have affected the pattern of mobilization of domestic interest groups on trade from the perspective of encouraging the future expansion of liberal trade we suggest some possible negative consequences of legalization arguing that these consequences must be weighed against the positive effects of legalization on increasing national compliance since the weakly legalized gatt institution proved sufficient to sustain widespread liberalization the case for further legalization must be strong to justify far reaching change in the global trade regime

contagion and bank failures during the great depression the june 1932 chicago banking panic the authors examine the social costs of asymmetric information induced bank panics in an environment without government deposit insurance their case study is the chicago bank panic of june 1932 the authors compare the ex ante characteristics of panic failures and panic survivors despite temporary confusion about bank asset quality on the part of depositors during the panic which was associated with widespread depositor runs and bank stock price declines the panic did not produce significant social costs in terms of failures among solvent banks copyright 1997 by american economic association

trade policy issues and empirical analysis interest in u s trade policy has been stimulated in recent years by the massive american trade deficit by the belief that intervention by foreign governments in international markets has given other countries a competitive edge over the united states and by concern about the increase in protectionism among industrial countries in turn major analytical developments in international economics have revolutionized trade theory broadening its scope both by introducing in a more formal manner such concepts as imperfect competition increasing returns product differentiation and learning effects and by including the study of political and economic factors that shape trade policy decisions this collection of papers the result of a conference held by the nber applies these new trade theories to existing world cases and also presents complementary empirical studies that are grounded in more traditional trade theories the volume is divided into four parts the papers in part 1 consider the problem of imperfect competition empirically assessing the economic effect of various trade policies introduced in industries in which the new trade theory seems to apply those in part 2 isolate the effects of protection from the influences of the many economic changes that accompany actual periods of protection and also examine how the effects from exogenous changes in economic conditions vary with the form of protection part 3 provides new empirical evidence on the effect of foreign production by a country s firms on the home country s exports finally in part 4 two key bilateral issues are analyzed recent u s japanese trade tensions and the incident involving the threat of the imposition of countervailing duties by the united states on canadian softwood lumber

credit contagion and aggregate losses abstract credit contagion refers to the propagation of economic distress from one firm to another this article proposes a reduced form model for these contagion phenomena assuming they are due to the local interaction of firms in a business partner network we study aggregate credit losses on large portfolios of financial positions contracted with firms subject to credit contagion in particular we provide an explicit gaussian approximation of the distribution of portfolio losses this enables us to quantify the relation between the volatility of losses and the determinants of credit contagion we find that contagion processes have typically a second order effect on portfolio losses they induce additional fluctuations of losses around their averages whose size depends on the number of business partners of the firms

counterparty risk and the pricing of defaultable securities motivated by recent financial crises in east asia and the united states where the downfall of a small number of firms had an economy wide impact this paper generalizes existing reduced form models to include default intensities dependent on the default of a counterparty in this model firms have correlated defaults due not only to an exposure to common risk factors but also to firm specific risks that are termed counterparty risks numerical examples illustrate the effect of counterparty risk on the pricing of defaultable bonds and credit derivatives such as default swaps it has been well documented in moody s reports on historical default rates of corporate bond issuers that the number of defaults the number of credit rating downgrades and credit spreads are all strongly correlated with the business cycle this has motivated reduced form models such as duffie and singleton 1999 and lando 1994 1998 which assume that the intensity of default is a stochastic process that derives its randomness from a set of state variables such as the short term interest rate this approach has the convenient features that conditioning on the state variables defaults become independent events and default correlation arises due to the common inf luence of these state variables on the other hand a default intensity that depends linearly on a set of smoothly varying macroeconomic variables is unlikely to account for the clustering of defaults around an economic recession this is evident from a casual inspection of the exhibits in the latest moody s report see keenan 2000 within the usual affine framework one can model the state variables as jump diffusions see duffie pan and single

credit risk in a network economy we develop a structural model of credit risk in a network economy where any firm can lend to any other firm so that each firm is subject to counterparty risk either from direct borrowers or from remote firms in the network this model takes into account the role of each firm s cash management we show that we can obtain a semiclosed form formula for the price of debt and equity when cash accounts are buffers to bankruptcy risk as in other structural models the strategic bankruptcy decision of shareholders drives credit spreads and differentiates debt from equity cash flow risk also causes credit risk interdependencies between firms our model applies to the case where not only financial flows but also operations are dependent across firms we use queueing theory to obtain our semiclosed form formulae in steady state we perform a simplified implementation of our model to the u s automotive industry and show how we infer the impact on a supplier s credit spreads of revenue changes in a manufacturer or even in a large car dealer we also obtain prices for first to default and second to default basket credit default swaps

trade disputes in the commercial aircraft industry t he recent launch of airbus s new super jumbo the a 380 has provoked yet another trade conflict between the united states and european union eu in the aircraft industry the industry has strained trade relationship between the us and the eu ever since the airbus s entry into the market in 1974 these tensions tapered with the signing of the 1992 us eu agreement on trade in civil aircraft the 1992 agreement in fact boeing and airbus shortly considered cooperating on the superjumbo project during the early 1990s but the collaboration faltered because the two sides disagreed on the commercial viability of the aircraft while airbus forecasted that over the next 20 years airlines would demand approximately 1 500 superjumbos yielding around 345 billion in revenues boeing s projections were much more reserved it forecasted only 700 planes hence boeing doubted the project could break even the economist 2001 as a result airbus proceeded with the development of the new aircraft on its own like in previous airbus s programmes the eu will provide some direct financial support to airbus to partially cover the a 380 s 12 billion launch costs us trade officials question the legitimacy of this financial arrangement especially since boeing doubts the commercial viability of the project their objections are illustrated in the 2000 foreign trade barriers report of the us trade representative