contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

global factors and emerging market spreads this paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite as reflected in the spread of high yield corporate bonds in developed markets global liquidity measured by the international interest rates and contagion from systemic events like the russian default this link has remained relatively stable over the history of the emerging market class is robust to the inclusion of country specific factors and helps provide accurate long run predictions overall the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies

on the integration of production and financial hedging decisions in global markets we study the integrated operational and financial hedging decisions faced by a global firm who sells to both home and foreign markets production occurs either at a single facility located in one of the markets or at two facilities one in each market the company has to invest in capacity before the selling season starts when the demand in both markets and the currency exchange rate are uncertain the currency exchange rate risk can be hedged by delaying allocation of the capacity to specific markets until both the currency and demand uncertainties are resolved and or by buying financial option contracts on the currency exchange rate when capacity commitment is made a mean variance utility function is used to model the firm s risk aversion in decision making we derive the joint optimal capacity and financial option decision and analyze the impact of the delayed allocation option and the financial options on capacity commitment and the firm s performance we show that the firm s financial hedging strategy ties closely to and can have both quantitative and qualitative impact on the firm s operational strategy the use or lack of use of financial hedges can go beyond affecting the magnitude of capacity levels by altering global supply chain structural choices such as the desired location and number of production facilities to be employed to meet global demand

globalization and emerging markets with or without crash we analyze the effects of financial and trade globalization on the likelihood of financial crashes in emerging markets while trade globalization always makes crashes less likely financial globalization may make them more likely especially when trade costs are high pessimistic expectations can be self fulfilling and lead to a collapse in demand for goods and assets such a crash comes with a current account reversal and drops in income and investment lower income countries are more prone to such demand based financial crises a quantitative evaluation shows our model is consistent with the main stylized facts of financial crashes in emerging markets

sovereign debt as a contingent claim a quantitative approach abstract we construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt in the model benefits of defaulting are tempered by higher future interest rates for a wide set of parameters the only equilibrium is one in which the sovereign defaults in all states additional output losses however sustain equilibria that resemble the data we show that due to the adverse selection problem some countries choose to delay default to reduce loss of reputation moreover although equilibria with no default imply greater welfare levels they are not sustainable in highly indebted and volatile countries

how important is precautionary saving we estimate how much of the wealth of a sample of psid respondents is held because some households face more income uncertainty than others we begin by solving a theoretical model of saving which we use to develop appropriate measures of uncertainty we then regress measures of wealth on our measures of uncertainty and find evidence that households engage in precautionary saving finally we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest uncertainty group we find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest uncertainty group

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

branch banking bank competition and financial stability it is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios however previous empirical research on the great depression offers mixed support for this view using data on national banks from the 1920s and 1930s we show that branch banking raises the level of competition and increases exit from the banking system this consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s

investment capital structure and complementarities between debt and new equity we study simultaneous investment and financing decisions made by incumbent owners in the presence of capital market imperfections we present a theory for how the optimal combination of debt and equity financing depends on the firm s internal funds we identify complementarities between the two financial instruments we test these predictions empirically with panel data on 3 119 corporations in the compustat database our estimates using instrumental variable techniques support our theoretical predictions regarding the link between internal funds and capital investments as well as the interaction effects between debt and new equity we explore implications for managers financiers and policy makers

a model of financial crises in emerging markets recent events in mexico asia russia and brazil have underscored that a satisfactory explanation of financial crises in emerging markets remains elusive not too long ago the prevailing view was that crises were the inevitable outcome of ongoing fiscal imbalances coupled with fixed exchange rates but this first generation view pioneered by krugman 1979 has fallen out of fashion because in many crises the crucial fiscal disequilibria were absent and as obstfeld 1994 has argued currency crises have sometimes occurred even though central banks had more than enough resources to prevent them witness much of europe in the early 1990s obstfeld put forward a second generation view in which central banks may decide to abandon an exchange rate peg when the unemployment costs of defending it become too large this new perspective implied that crises could be driven by self fulfilling expectations since the costs of defending the peg may themselves depend on anticipations that the peg will be maintained but obstfeld s emphasis on mounting unemployment and domestic recession while appropriate for the erm 1992 crisis was at odds with the facts in mexico in 1994 and east asia in 1997 asian

profit sharing credit market imperfections and equilibrium unemployment we investigate the interaction between labour and credit market imperfections for equilibrium unemployment in the presence of profit sharing in a partial equilibrium with exogenous outside options increased bargaining power of banks has adverse employment effects in a general equilibrium with endogenous outside options this relationship is frequently reversed reduced credit market imperfections increase equilibrium unemployment if the labour market imperfections measured by the bargaining power of trade unions are sufficiently strong and the benefit replacement ratio is sufficiently high finally we show that higher bankruptcy risks increase equilibrium unemployment under similar conditions

capital market imperfections and the consumption function a model is presented in which there is asymmetric information between borrowers and lenders two questions are asked i would liquidity constraints in such a model take the form of credit rationing or of a wedge between borrowing and lending rates and ii how do these constraints affect the aggregate consumption function some empirical

global production planning under exchange rate uncertainty motivated by an aggregate production planning problem in an actual global manufacturing network we examine the impact of exchange rate uncertainty on the choice of optimal production policies when the allocation decision can be deferred until the realization of exchange rates this leads to the formulation of the problem as a two stage recourse program whose optimal policy structure features two forms of flexibility denoted as operational hedging 1 production hedging where the firm deliberately produces less than the total demand and 2 allocation hedging where due to unfavorable exchange rates some markets are not served despite having unused production our characterization of the optimal policy structure leads to an economic valuation of production and allocation hedging we show that the prevalence of production hedging is moderated by the degree of correlation between exchange rates a comprehensive examination under the following four generalized settings provides the depth scope and relevancy that our proposed operational hedges play to facilitate aggregate planning 1 multiple periods 2 demand uncertainty 3 price setting or monopolistic pricing and 4 price setting under demand uncertainty we show that production and allocation hedging are robust for these generalizations and should be integrated into the overall aggregate planning strategy of a global manufacturing firm

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

leverage induced systemic risk under basle ii and other credit risk policies abstract we use a simple agent based model of value investors in financial markets to test three credit regulation policies the first is the unregulated case which only imposes limits on maximum leverage the second is basle ii and the third is a hypothetical alternative in which banks perfectly hedge all of their leverage induced risk with options when compared to the unregulated case both basle ii and the perfect hedge policy reduce the risk of default when leverage is low but increase it when leverage is high this is because both regulation policies increase the amount of synchronized buying and selling needed to achieve deleveraging which can destabilize the market none of these policies are optimal for everyone risk neutral investors prefer the unregulated case with low maximum leverage banks prefer the perfect hedge policy and fund managers prefer the unregulated case with high maximum leverage no one prefers basle ii

optimal bank capital with costly recapitalization we study optimal bank capital choice as a dynamic trade off between the opportunity cost of equity the loss of franchise value following a regulatory minimum capital violation and the cost of recapitalization we introduce a recapitalization delay that results in a strictly positive probability of capital adequacy violation we calibrate the model to bank accounting return data and evaluate the model s ability to explain observed bank capital ratios differences in return volatility explain a significant fraction of the cross sectional variation in bank capital ratios differences in the level of capital market imperfections across banks constitute a secondary explanation

monetary policy bank leverage and financial stability abstract this paper shows that with limited liability banks lever up excessively to finance new loans lower monetary policy rates can worsen or reduce these incentives depending on the size of the shock when equity financing is ruled out when this constrained is relaxed but the bank faces costly dividend adjustment lower monetary policy rates always worsen risk taking incentives and the effect is persistent the reason is that costly dividend adjustment lowers the opportunity cost of lending in this model capital requirements are closer to the source of the distortion and thus work better than loan to value caps in reducing excessive risk taking

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

technical note financial market approaches to facility location under uncertainty this paper examines financial market approaches for facility location models incorporating uncertainty and risk aversion as an example it compares a model based on the capital asset pricing model with one using a mean variance objective function there are dramatically different computational implications the financial market approach yields simpler procedures and is able to handle more complex problems however as discussed in the concluding observations there are situations where the financial market perspective is less appropriate consequently the mean variance model still has a role in analyzing facility location decisions

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

complexity and economic policy a paradigm shift or a change in perspective a review essay on david colander and roland kupers s complexity and the art of public policy in their recent book colander and kupers 2014 argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy this would necessitate a paradigm shift economics has over time tried to produce a coherent model to underpin the dominant laissez faire liberal approach but we have never proved in that model that left to their own devices the participants in an economy will self organize into a satisfactory state this is an assumption complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self equilibrate and will undergo endogenous crises economists should concentrate on the emergence of certain patterns colander and kupers suggest that we may be able to nudge the system into good basins of attraction a more radical view is that there are no fixed basins of attraction these change with the evolution of the system and it is illusory to believe that we can choose good basins we may be able to recognize and influence the emergence of certain states of the economy but we are far from leon walras s dream of economics as a science like astrophysics

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

persistent gaps and default traps we show how vicious circles in countries credit histories arise in a model where output persistence is coupled with asymmetric information about output shocks in such an environment default signals the borrower s vulnerability to adverse shocks and creates a pessimistic growth outlook this translates into higher interest spreads and debt servicing costs relative to income raising the cost of future repayments thereby creating default traps we build a long and broad cross country dataset to show the existence of a history dependent default premium and of significant effects of output persistence on sovereign creditworthiness consistent with the model s predictions

supply chain network equilibrium with strategic financial hedging using futures abstract in this paper we develop a network equilibrium model for supply chain networks with strategic financial hedging we consider multiple competing firms that purchase multiple materials and parts to manufacture their products the supply chain firms procurement activities are exposed to commodity price risk and exchange rate risk the firms can use futures contracts to hedge the risks our research studies the equilibrium of the entire network where each firm optimizes its own operation and hedging decisions we use variational inequality theory to formulate the equilibrium model and provide qualitative properties we provide analytical results for a special case with duopolistic competition and use simulations to study an oligopolistic case the analytical and simulation studies reveals interesting managerial insights

an experiment on the efficiency of bilateral exchange under incomplete markets abstract we test in a controlled laboratory environment whether traders in a bilateral exchange internalize the impact of their actions on market prices better than in a large market in this model traders choose asset holdings constrained by a technology frontier next each trader experiences a random shock which makes only one type of asset profitable in a general equilibrium environment with incomplete markets this leads to pecuniary externalities because traders increase scarce asset holdings beyond what is socially optimal this behavior is especially exacerbated in large experimental markets as traders fail to internalize the impact of their actions on prices we find that when markets are incomplete a bilateral exchange can slightly mitigate the extent of pecuniary externalities and weakly increase welfare

is there a tradeoff between bank competition and financial fragility abstract we use a model of mean shifting investment technologies to study the relationship between market structure risk taking and social welfare in lending markets introduction of loan market competition is shown to reduce lending rates and to generate higher investments without increasing the equilibrium bankruptcy risk of borrowers hence there need not be a tradeoff between lending market competition and financial fragility such a tradeoff may not emerge either when banks compete by conditioning interest rates on investment volumes irrespectively of whether credit rationing takes place or not

bank regulation and the credit crunch abstract this study investigates the direct link between regulatory enforcement actions and the shrinkage of bank loans to sectors likely to be bank dependent we partition the shrinkage due to loan supply into the component due to explicit regulatory enforcement actions and that due to a voluntary response by bank management to low capital to asset ratios we find that banks with formal actions shrink at a significantly faster rate than those without even after controlling for differences in capital to asset ratios furthermore much of the reduced lending has been in categories containing primarily loans to bank dependent borrowers

bank lending in uncertain times abstract we study the impact of economic uncertainty on credit supply using monthly data on more than two million corporate loan applications received by italian banks between 2004 and 2012 we find that an increase in aggregate uncertainty has two effects it lowers the likelihood that firms applications will be successful and it prolongs the time firms have to wait for their loans to be disbursed this financial acceleration mechanism varies in the cross section affecting mainly banks with low capital buffers and firms that are geographically distant from the bank to which they apply

financial development and the instability of open economies this paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies our basic model is a dynamic open economy model with a tradeable good produced with capital and a country specific factor we also assume that firms face credit constraints with the constraint being tighter at a lower level of financial development a basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies this is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles thus countries that are going through a phase of financial development may become more unstable in the short run similarly full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development phases of growth with capital inflows are followed by collapse with capital outflows on the other hand foreign direct investment does not destabilize

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

why does bad news increase volatility and decrease leverage a recent literature shows how an increase in volatility reduces leverage however in order to explain pro cyclical leverage it assumes that bad news increases volatility that is it assumes an inverse relationship between first and second moments of asset returns this paper suggests a reason why bad news is more often than not associated with higher future volatility we show that in a model with endogenous leverage and heterogeneous beliefs agents have the incentive to invest mostly in technologies that become more volatile in bad times agents choose these technologies because they can be leveraged more during normal times together with the existing literature this explains pro cyclical leverage the result also gives a rationale to the pattern of volatility smiles observed in stock options since 1987 finally the paper presents for the first time a dynamic model in which an asset is endogenously traded simultaneously at different margin requirements in equilibrium

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

competitive pooling rothschild stiglitz reconsidered we build a model of competitive pooling which incorporates adverse selection and signaling into general equilibrium pools are characterized by their quantity limits on contributions households signal their reliability by choosing which pool to join in equilibrium pools with lower quantity limits sell for a higher price even though each household s deliveries are the same at all pools the rothschild stiglitz model of insurance is included as a special case we show that by recasting their hybrid oligopolistic competitive story in our perfectly competitive framework their separating equilibrium always exists even when they say it does not and is unique

did risk based capital allocate bank credit and cause a credit crunch in the united states this paper examines the reallocation of bank credit from loans to securities in the early 1990s using data on virtually all u s banks from 1979 to 1992 the authors investigate implementation of risk based capital and other regulatory and nonregulatory changes as possible causes of a supply driven credit crunch the main empirical implication of these credit crunch hypotheses that the reallocation of credit would be most associated with low capital high risk banks generally is not consistent with the data much of the reallocation is associated with demand side factors but it is difficult to differentiate cleanly among these factors copyright 1994 by ohio state university press

simulation based stress tests of banks regulatory capital adequacy abstract banks holding of reasonable capital buffers in excess of minimum requirements could alleviate the procyclicality problem potentially exacerbated by the rating sensitive capital charges of basel ii determining the sufficient buffer size is an important risk management task for banks which the basel committee suggests should be approached via stress testing we present here a simulation based approach to stress testing of regulatory capital adequacy where rating transitions are conditioned on business cycle phase and which takes into account business cycle dynamics our approach is an extension of a typical credit portfolio analysis in that we simulate actual bank capital and minimum capital requirements simultaneously actual bank capital absent mark to market accounting is driven by bank income and default losses whereas capital requirements within basel ii are driven by rating transitions the joint dynamics of these determine the necessary capital buffers given a confidence level for regulatory capital adequacy chosen by bank management we provide a tentative calibration of this confidence level to data on actual bank capital ratios which enables a ceteris paribus extrapolation of bank capital under the current regime to bank capital under basel ii

valuing operational flexibility under exchange rate risk in this paper we develop a stochastic dynamic programming formulation for the valuation of global manufacturing strategy options with switching costs overall we adopt a hierarchical approach first exchange rates are modeled as stochastic diffusion processes that exhibit intercountry correlation second the firm s global manufacturing strategy determines options for alternative product designs as well as supply chain network designs product options introduce international supply flexibility supply chain network options determine the firm s manufacturing flexibility through production capacity and supply chain network linkages third switching costs determine the cost of operational hedging i e the costs associated with reducing downside risks overall the firm maximizes its expected discounted global after tax value through the exercise of product and supply chain network options and or through exploitation of operational flexibility contingent on exchange rate realizations in this environment the firm must trade off fixed operating costs switching costs and the economic benefits derived from exploiting differentials in factor costs and corporate tax rates a multinomial approximation of correlated exchange rate processes is proposed that leads to a consistent and tractable lattice model for this compound option valuation problem we then demonstrate how the global manufacturing strategy planning model framework can be utilized to analyze financial and operational hedging strategies

a walrasian theory of markets with adverse selection the paper describes a walrasian theory of markets with adverse selection and shows how refinements of equilibrium can be used to characterize uniquely the equilibrium outcome equilibrium exists under standard conditions it is shown that under certain conditions a stable set exists and is contained in a connected set of equilibria for generic models there exists a stable outcome that is all the equilibria in the stable set have the same outcome these ideas are applied to markets with one sided and two sided uncertainty under standard monotonicity conditions it is shown that the stable outcome is separating and implies a particular pattern of matches of buyers and sellers

house price beliefs and mortgage leverage choice we study the relationship between homebuyers beliefs about future house price changes and their mortgage leverage choices whether more pessimistic homebuyers choose higher or lower leverage depends on their willingness and ability to reduce the size of their housing market investments when households primarily maximize the levered return of their property investments more pessimistic homebuyers reduce their leverage to purchase smaller houses on the other hand when considerations such as family size pin down the desired property size pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly sized homes to determine which scenario better describes the data we investigate the cross sectional relationship between house price beliefs and mortgage leverage choices in the u s housing market we use plausibly exogenous variation in house price beliefs to show that more pessimistic homebuyers make smaller downpayments and choose higher leverage in particular in states where default costs are relatively low as well as during periods when house prices are expected to fall on average our results highlight the important role of heterogeneous beliefs in explaining households financial decisions

efficient credit rationing abstract this paper shows that credit rationing is endemic to competitive capital markets in which information is symmetrically distributed equilibrium contracts may restrict loans to a size well below that at which backruptcy is a threat the model predicts that credit rationing will be most severe on projects of intermediate risk and decreases the more costly it is for creditors to recover bad debts however there is no case for government intervention despite the usual identification of credit rationing as a per se capital market imperfection

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

bank capital and uncertainty abstract financial frictions in raising external finance can induce banks to self insure against future shocks through holding more bank capital as uncertainty about future losses increases the above reasoning implies that they would choose to increase their capital position this paper tests this hypothesis in a dataset with u s commercial banks by exploiting a cross sectional variation in uncertainty to explain the distribution of bank capital ratios i find statistically significant and robust evidence in support of a self insurance mechanism a counterfactual experiment suggests that a decline in uncertainty to its lowest level generates an average reduction in bank capital ratios of up to 2 percentage points furthermore uncertainty explains on average about half of banks regulatory capital buffers

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

global plant capacity and product allocation with pricing decisions trade offs in global manufacturing decisions involve markets resource costs trade barriers currency exchange rates joint ventures and investments we develop a model that optimizes plant investment decisions while ensuring that the plant investment overhead is optimally absorbed by products produced from that plant the model also simultaneously determines prices by products and countries the special structure of the model is exploited to construct a fast solution procedure the model is used to study the implications of labor cost transportation cost demand and import tariff on production quantities investment and overhead absorption pattern implications of changes in other global parameters such as local content rule local taxes size of the market in a country and long term exchange rates are also studied