developing a stress testing framework based on market risk models the basel 2 accord requires regulatory capital to cover stress tests yet no coherent and objective framework for stress testing portfolios exists we propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods when applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

uncertainty risk and the financial crisis of 2008 the distinction between uncertainty and risk originally drawn by frank knight and john maynard keynes in the 1920s remains fundamentally important today in the presence of uncertainty market actors and economic policy makers substitute other methods of decision making for rational calculation specifically actors decisions are rooted in social conventions drawing from innovations in financial markets and deliberations among top american monetary authorities in the years before the 2008 crisis we show how economic actors and policy makers live in worlds of risk and uncertainty in that world social conventions deserve much greater attention than conventional ipe analyses accords them such conventions must be part of our toolkit as we seek to understand the preferences and strategies of economic and political actors

estimating financial risk measures for options abstract this paper proposes a simulation lattice procedure to estimate financial risk measures for option positions the framework proposed can be applied to many different kinds of options including exotic and vanilla options it can take account of early exercise features heavy tails in underlying processes estimate different risk measures including var expected shortfall and spectral risk measures and in a limited way it can be generalized to accommodate multiple factors it avoids many of the limitations of existing approaches and in particular avoids the problems associated approaches based on delta gamma and similar approximations it also generates some interesting results about the risk measures of some illustrative options positions

national minimum wages capital mobility and global economic growth abstract the paper considers a two country endogenous growth model with capital mobility and national minimum wages it identifies conditions on the technology and national preferences that determine whether national minimum wages are a stimulus or an obstacle to economic growth

redistribution policy and the expansion of the public sector abstract during the first part of this century life cycle and insurance type considerations seem to have dominated redistribution policy in particular when we look at the consequences for the expansion of public spending by contrast during recent decades fragmented horizontal redistributions between various minority groups have probably been the most important mechanisms the self interest of different groups of the electorate seems to have provided the most powerful motive behind these various policies although welfare altruism and what in this paper are called considerations of consequential externalities have probably been important motives behind redistribution in favor of the poor

nonlinearly weighted convex risk measure and its application abstract we propose a new class of risk measures which satisfy convexity and monotonicity two well accepted axioms a reasonable and realistic risk measure should satisfy through a nonlinear weight function the new measure can flexibly reflect the investor s degree of risk aversion and can control the fat tail phenomenon of the loss distribution a realistic portfolio selection model with typical market frictions taken into account is established based on the new measure real data from the chinese stock markets and american stock markets are used for empirical comparison of the new risk measure with the expected shortfall risk measure the in sample and out of sample empirical results show that the new risk measure and the corresponding portfolio selection model can not only reflect the investor s risk averse attitude and the impact of different trading constraints but can find robust optimal portfolios which are superior to the corresponding optimal portfolios obtained under the expected shortfall risk measure

evaluating interval forecasts a complete theory for evaluating interval forecasts has not been worked out to date most of the literature implicitly assumes homoskedastic errors even when this is clearly violated and proceed by merely testing for correct unconditional coverage consequently i set out to build a consistent framework for conditional interval forecast evaluation which is crucial when higher order moment dynamics are present the new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management

an analysis of turkey s accession to the european union we build a two country dynamic general equilibrium model to study whether european citizens would bene t from the eventual accession of turkey to the european union eu the results of the simulations show that turkey s accession is welfare enhancing for europeans provided that turkish total factor productivity tfp increases suf ciently after enlargement in the benchmark model with no capital mobility the europeans are better off if the turkish tfp increase bridges more than 21 of the initial tfp gap between turkey and the eu this gure increases to 33 when capital mobility is introduced

optimal dynamic trading with leverage constraints we solve for the optimal dynamic trading strategy of an investor who faces a leverage constraint i e a limitation on his ability to borrow for the purpose of investing in a risky asset we assume that the investor has constant relative risk aversion and that the value of the risky asset follows a geometric brownian motion in the absence of the leverage constraint the optimal strategy involves investing a fixed proportion of wealth in the risky asset we prove that in the presence of the leverage constraint the optimal investment also involves investing a fixed proportion of wealth in the risky asset when the leverage constraint is not binding however the two proportions are different reflecting the extent to which the investor alters his strategy even when the leverage constraint is not binding because of the possibility that the leverage constraint will become binding in the future

mean var portfolio optimization a nonparametric approach portfolio optimization involves the optimal assignment of limited capital to different available financial assets to achieve a reasonable trade off between profit and risk we consider an alternative markowitz s mean variance model in which the variance is replaced with an industry standard risk measure value at risk var in order to better assess market risk exposure associated with financial and commodity asset price fluctuations realistic portfolio optimization in the mean var framework is a challenging problem since optimizing var leads to a non convex np hard problem which is computationally intractable in this work an efficient learning guided hybrid multi objective evolutionary algorithm mode gl is proposed to solve mean var portfolio optimization problems with real world constraints such as cardinality quantity pre assignment round lot and class constraints a learning guided solution generation strategy is incorporated into the multi objective optimization process to promote efficient convergence by guiding the evolutionary search towards promising regions of the search space the proposed algorithm is compared against the non dominated sorting genetic algorithm nsga ii and the strength pareto evolutionary algorithm spea2 experimental results using historical daily financial market data from s p 100 and s p 500 indices are presented experimental results shows that mode gl outperforms two existing techniques for this important class of portfolio investment problems in terms of solution quality and computational time the results highlight that the proposed algorithm is able to solve the complex portfolio optimization without simplifications while obtaining good solutions in reasonable time and has significant potential for use in practice

portfolio optimization with mental accounts we integrate appealing features of markowitz s mean variance portfolio theory mvt 4 and shefrin and statman s behavioral portfolio theory bpt into a new mental accounting 5 ma framework features of the ma framework include an ma structure of portfolios 6 a definition of risk as the probability of failing to reach the threshold level in each mental 7 account and attitudes toward risk that vary by account we demonstrate a mathematical 8 equivalence between mvt ma and risk management using value at risk var the ag9

tail risk of electricity futures abstract this paper compares the in sample and out of sample performance of several models for computing the tail risk of one month and one year electricity futures contracts traded in the nordpool french german and spanish markets in 2008 2017 as measures of tail risk we use the one day ahead value at risk var and the expected shortfall es with var the ar 1 garch 1 1 model with student t distribution is the best performing specification with 88 cases in which the fisher test accepts the model with a success rate of 94 in the left tail and of 81 in the right tail the model passes the test of model adequacy in the 100 of the cases in the nordpool and german markets but only in the 88 and 63 of the cases in the spanish and french markets with es this model passes the test of model adequacy in 100 of cases in all markets historical simulation and quantile regression based approaches misestimate tail risks the right hand tail of the returns is more difficult to model than the left hand tail and therefore financial regulators and the administrators of futures markets should take these results into account when setting additional regulatory capital requirements and margin account regulations to short positions

does the basle capital accord reduce bank fragility an assessment of the value at risk approach abstract we examine the economic implications arising from a bank using a var constrained mean variance model for the selection of its trading portfolio as a consequence of the basle capital accord surprisingly we show that when a var constraint is imposed it is plausible that certain banks will end up selecting riskier portfolios than they would have chosen in the absence of the constraint accordingly regulators such as the basle committee on banking supervision should be aware that allowing a bank to use var to determine its minimum regulatory capital may increase its fragility alternatives to var based bank capital regulation that mitigate or even preclude its perverse implications are presented

do banks overstate their value at risk abstract this paper is the first empirical study of banks risk management systems based on non anonymous daily value at risk var and profit and loss data using actual data from the six largest canadian commercial banks we uncover evidence that banks exhibit a systematic excess of conservatism in their var estimates the data used in this paper have been extracted from the banks annual reports using an innovative matlab based data extraction method out of the 7354 trading days analyzed in this study there are only two exceptions i e days when the actual loss exceeds the disclosed var whereas the expected number of exceptions with a 99 var is 74 for each sample bank we extract from historical vars a risk overstatement coefficient ranging between 19 and 79 we attribute var overstatement to several factors including extreme cautiousness and underestimation of diversification effects when aggregating vars across business lines and or risk categories we also discuss the economic and social cost of reporting inflated vars

the level and quality of value at risk disclosure by commercial banks in this paper we study both the level of value at risk var disclosure and the accuracy of the disclosed var figures for a sample of us and international commercial banks to measure the level of var disclosures we develop a var disclosure index that captures many different facets of market risk disclosure using panel data over the period 1996 2005 we find an overall upward trend in the quantity of information released to the public we also find that historical simulation is by far the most popular var method we assess the accuracy of var figures by studying the number of var exceedances and whether actual daily vars contain information about the volatility of subsequent trading revenues unlike the level of var disclosure the quality of var disclosure shows no sign of improvement over time we find that var computed using historical simulation contains very little information about future volatility

bank capital regulation of trading portfolios an assessment of the basel framework in setting minimum capital requirements for trading portfolios the basel committee on banking supervision 1996 2011a 2013 initially used value at risk var then both var and stressed var svar and most recently stressed conditional var scvar accordingly we examine the use of scvar to measure risk and set these requirements assuming elliptically distributed asset returns we show that portfolios on the mean scvar frontier generally lie away from the mean variance m v frontier in a plausible numerical example we find that such portfolios tend to have considerably higher ratios of risk measured by e g standard deviation to minimum capital requirement than those of portfolios on the m v frontier also we find that requirements based on scvar are smaller than those based on both var and svar but exceed those based on just var finally we find that requirements based on scvar are less procyclical than those based on either var or both var and svar overall our paper suggests that the use of scvar to measure risk and set requirements is not a panacea

a comparison of var and cvar constraints on portfolio selection with the mean variance model in this paper we analyze the portfolio selection implications arising from imposing a value at risk var constraint on the mean variance model and compare them with those arising from the imposition of a conditional value at risk cvar constraint we show that for a given confidence level a cvar constraint is tighter than a var constraint if the cvar and var bounds coincide consequently a cvar constraint is more effective than a var constraint as a tool to control slightly risk averse agents but in the absence of a risk free security has a perverse effect in that it is more likely to force highly risk averse agents to select portfolios with larger standard deviations however when the cvar bound is appropriately larger than the var bound or when a risk free security is present a cvar constraint dominates a var constraint as a risk management tool

a note on the importance of overnight information in risk management models this paper examines the economic value of overnight information to users of risk management models in addition to the information revealed by overseas markets that trade during the domestic overnight period this paper exploits information generated via recent innovations in the structure of financial markets in particular certain securities and associated derivative products can now be traded at any time over a 24 h period as such it is now possible to make use of information generated by trading in almost identical securities during the overnight period of the securities that are available over such time periods s p 500 related products are by far the most actively traded and are therefore the subject of this paper using a variety of conditional volatility models that allow time dependent information flow within and across three different s p 500 markets the results show that overnight information flow has a significant impact on the conditional volatility of daytime traded s p 500 securities moreover time consistent forecasts from models that incorporate overnight information are shown to have economic value to risk managers in particular value at risk var models based on these conditional volatility models are shown to be more accurate than var models that ignore overnight information

the productivity of trust this paper tests whether social trust affects total factor productivity tfp using both development and growth accounting we find strong evidence of a causal positive effect of social trust on the level and growth of tfp we moreover observe that the effect of social trust on tfp runs through economic judicial institutions but not through political institutions those findings resist a series of robustness checks

bank regulation and international financial stability a case against the 2006 basel framework for controlling tail risk in trading books abstract in attempting to promote international financial stability the basel committee on banking supervision 2006 provided a framework that sought to control the amount of tail risk that large banks around the world would take in their trading books relative to their corresponding minimum capital requirements however many of these banks suffered significant trading losses during the recent financial crisis our paper examines whether the basel framework allowed banks to take substantive tail risk in their trading books without a capital requirement penalty we find that it allowed banks to do so and that its minimum capital requirements can be notably procyclical hence focusing on the way the basel framework sought to control the amount of tail risk in trading books relative to their corresponding minimum capital requirements our paper supports the view that it was not properly designed to promote financial stability we also discuss alternative regulatory frameworks that would potentially be more effective than the basel framework in preventing banks from taking substantive tail risk in their trading books without a capital requirement penalty

predicting hedge fund failure a comparison of risk measures this paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure when controlling for investment strategies performance fund age size lockup high water mark and leverage we find that funds with larger downside risk have a higher hazard rate how ever standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model further we find that liquidation does not necessarily mean failure in the hedge fund industry by reexamining the attrition rate we show that the real failure rate of 3 1 is lower than the attrition rate of 8 7 on an annual basis during the period of 1995 2004

explicating political hazards and safeguards a transaction cost politics approach we apply the logical of comparative institutional analysis to the question of the governance of the relationship between private investors and the government we consider two strategies that investors may follow lobbying for the creation of a specialized political governance structure or the reliance on more general political mechanisms to influence policy in that sector on an ongoing basis we identify political hazards as crucial determinant of the choice of political governance and the transactional attributes that give rise to such hazards finally we highlight shift parameters in a nation s institutional environment that influence the choice between specialized and generalized political governance mechanisms

market oriented institutions and policies and economic growth a critical survey this paper surveys recent evidence suggesting that market oriented institutions and policies are strongly related to economic growth focusing on studies using the economic freedom ef indicator of the fraser institute this index is critically discussed also various serious shortcomings of empirical studies using this index are identified nevertheless there are strong indications that liberalization i e an increase in the ef index stimulates economic growth this paper also reviews studies on the determinants of ef political liberalization is often found to enhance economic liberalization whereas there is less evidence for causality running in the other direction

diversification and value at risk a pervasive and puzzling feature of banks value at risk var is its abnormally high level which leads to excessive regulatory capital a possible explanation for the tendency of commercial banks to overstate their var is that they incompletely account for the diversification effect among broad risk categories e g equity interest rate commodity credit spread and foreign exchange by underestimating the diversification effect bank s proprietary var models produce overly prudent market risk assessments in this paper we examine empirically the validity of this hypothesis using actual var data from major us commercial banks in contrast to the var diversification hypothesis we find that us banks show no sign of systematic underestimation of the diversification effect in particular diversification effects used by banks is very close to and quite often larger than our empirical diversification estimates a direct implication of this finding is that individual vars for each broad risk category just like aggregate vars are biased risk assessments

shortfall as a risk measure properties optimization and applications motivated from second order stochastic dominance we introduce a risk measure that we call shortfall we examine shortfall s properties and discuss its relation to such commonly used risk measures as standard deviation var lower partial moments and coherent risk measures we show that the mean shortfall optimization problem unlike mean var can be solved e7ciently as a convex optimization problem while the sample mean shortfall portfolio optimization problem can be solved very e7ciently as a linear optimization problem we provide empirical evidence a in asset allocation and b in a problem of tracking an index using only a limited number of assets that the mean shortfall approach might have advantages over mean variance 2003 elsevier b v all rights reserved

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments

optimal portfolio selection in a value at risk framework abstract in this paper we develop a portfolio selection model which allocates financial assets by maximising expected return subject to the constraint that the expected maximum loss should meet the value at risk limits set by the risk manager similar to the mean variance approach a performance index like the sharpe index is constructed furthermore when expected returns are assumed to be normally distributed we show that the model provides almost identical results to the mean variance approach we provide an empirical analysis using two risky assets us stocks and bonds the results highlight the influence of both non normal characteristics of the expected return distribution and the length of investment time horizon on the optimal portfolio selection

procyclical leverage and value at risk the availability of credit varies over the business cycle through shifts in the leverage of financial intermediaries empirically we find that intermediary leverage is negatively aligned with the banks value at risk var motivated by the evidence we explore a contracting model that captures the observed features under general conditions on the outcome distribution given by extreme value theory evt intermediaries maintain a constant probability of default to shifts in the outcome distribution implying substantial deleveraging during downturns for some parameter values we can solve the model explicitly thereby endogenizing the var threshold probability from the contracting problem

regulation and pension fund risk taking abstract we investigate the extent to which regulations governing investment valuation and funding affect the riskiness of defined benefit pension funds asset allocation we compare the regulatory frameworks of public corporate and industry pension funds in the united states canada and the netherlands over 1992 2011 derived from panel data analysis of a unique set of asset allocation details for close to 600 funds our results highlight that regulatory factors are more economically significant than pension funds characteristics in shaping asset allocation in particular risk based capital requirements and mark to market valuation are both associated with a 7 lower risky asset exposure especially equities regardless of market conditions by contrast the exposure of a pension fund subject to a 100 funding requirement does not differ significantly from that of an unconstrained pension fund during normal times but the constrained pension fund invests 4 less in risky assets during a financial crisis in line with theoretical predictions we find that risk based capital requirements and minimum funding limits have different consequences for pension funds risk taking

optimal portfolios under a value at risk constraint abstract this paper looks at the optimal portfolio problem when a value at risk constraint is imposed this provides a way to control risks in the optimal portfolio and to fulfil the requirement of regulators on market risks the value at risk constraint is derived for n risky assets plus a risk free asset and is imposed continuously over time the problem is formulated as a constrained utility maximization problem over a period of time the dynamic programming technique is applied to derive the hamilton jacobi bellman equation and the method of lagrange multiplier is used to tackle the constraint a numerical method is proposed to solve the hjb equation and hence the optimal constrained portfolio allocation under this formulation we find that investments in risky assets are optimally reduced by the imposed value at risk constraint

the anticipated and concurring effects of the emu exchange rate volatility institutions and growth abstract reduced exchange rate volatility and higher and less heterogeneous quality of institutional rules and macroeconomic policies are two of the main anticipated and concurring effects expected from a currency union in this paper we measure the magnitude of these two effects for the eurozone countries looking at real effective exchange rates reer and at different indicators of quality of institutional rules and macroeconomic policies qirmp we find that the first effect is much stronger than the second when we compare relative changes for eurozone countries and the rest of the world in the relevant period we further evaluate the impact of both effects on economic growth on a larger sample of countries our findings show that both have significant impact on levels more robust and on rates of growth weaker of per capita gdp

micro level transmission of monetary policy shocks the trading book channel abstract we open the black box of the monetary policy transmission mechanism with a granular model that considers the balance sheet composition and network relationships of each economic agent though there are several well documented channels through which monetary policy operates we focus on the overlooked trading book channel which arises because of adjustments in the accounting value of trading book exposures on banks balance sheets that have to be marked to market when interest rates change variations in banks net worth due these adjustments are used as input to a network model that incorporates the financial and corporate sectors the framework permits us to determine the effects of interest rate changes on every bank and firm in the economy and any second round contagion effects in the short run we apply the model to a comprehensive database of brazilian banks and firms from 2015 to 2020 we find that interest rate shocks affect more strongly financial stability in periods of monetary policy tightening we also find notable asymmetric effects of positive and negative interest rate shocks in the brazilian economy with positive interest rate shocks affecting more financial stability finally our results also suggest a non linear relationship between interest rate changes and financial stability reinforcing the need to mitigate monetary policy shocks through interest rate smoothing and adequate communication and transparency to society

the causes of government expenditure growth a survey of the u s evidence abstract the growth of government budgets can be broken down into a institutional and institutional components the former component the familiar substitution income and population public goods tax sharing effects is estimated to contribute about two fifths of the growth of u s government spending the latter component rent seeking political redistributions bureaucracy and perceptual informational impedimentia is important too but an exact imputation cannot be asserted given the state of the art in empirical public choice theory the cross effects on spending of the growth of regulation and tax preferences or tax expenditures though interesting is not pursued

optimal portfolios with minimum capital requirements abstract we propose a novel approach to active risk management based on the recent basel ii regulations to obtain optimal portfolios with minimum capital requirements in order to avoid regulatory penalties due to an excessive number of value at risk var violations capital requirements are minimized subject to a given number of violations over the previous trading year capital requirements are based on the recent basel ii amendments to account for the stressed var that is the downside risk of the portfolio under extreme adverse market conditions an empirical application for two portfolios involving different types of assets and alternative stress scenarios demonstrates that the proposed approach delivers an improved balance between capital requirement levels and the number of var exceedances furthermore the risk adjusted performance of the proposed approach is superior to that of minimum var and minimum stressed var portfolios

state owned and privately owned firms an empirical analysis of profitability leverage and labor intensity for some it is an article of faith that governmentowned firms must be less efficient or at least less profitable than privately owned firms maxim boycko et al 1996 argue that politicians cause government owned firms to employ excess labor inputs anne o krueger 1990 suggests that such firms may be pressured to hire politically connected people rather than those best qualified to perform desired tasks more generally government owned firms are thought to forgo maximum profit in the pursuit of social and political objectives such as wealth redistribution in addition the residual cash flow claims of these firms are not readily transferable like the shares of a private corporation this impairs residual claimant incentives to monitor managers and ultimately degrades firm performance as a consequence one expects government owned firms to be technically less efficient and therefore less profitable than private firms the implication is that in competitive markets without significant externalities private ownership is the superior organizational form the view that government firms are inherently less efficient than private ones however remains controversial among economists john vickers and george yarrow 1991 among others point out that agency problems arise in private firms as well as public ones in most large private corporations managers own little of the stock because monitoring managers is costly a divergence arises between their objectives and those of private shareholders private shareholders typically hold a small stake in any one firm and it may not pay any shareholder to bear the cost of monitoring management it follows from this discussion that whether government firms are more or less efficient than private firms is primarily an empirical issue to date the body of empirical evidence is mixed in this paper we report further empirical evidence on the relative efficiency of public and private enterprises we build on previous work by studying larger samples over longer time periods and by allowing for additional factors that influence firm performance in particular our analysis controls for time series variation in the general level of economic activity that may otherwise confound performance comparisons between government and private firms 2 we approach the issue in two different ways first using accounting numbers we conduct a large sample cross sectional comparison of government owned and privately owned corporations this comparison is similar in design to that of boardman and vining 1989 but our sample is three times the size of theirs and includes three

risk in banking and capital regulation this paper investigates the role of bank capital regulation in risk control it is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance bank capital regulation is a way to redress this bias toward risk utilizing the mean variance model the following results are shown a the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks b as a solution to problems of the capital ratio regulation the theoretically correct risk weights under the risk based capital plan are explicitly derived and c the theoretically correct risk weights are restrictions on asset composition which alters the optimal portfolio choice of banking firms the recent increase in bank failures especially after the 1980 and 1982 deregulatory acts has again ignited a controversy over the risk portfolio of the banking industry given the importance of this sector there has been increased scrutiny of the industry s motives for risk taking and possible regulatory changes to improve its stability these investigations have centered around two rather complementary areas the first of these is the role of deposit insurance and how its current pricing procedure encourages risk taking and justifies current bank regulations the works of buser chen and kane 4 kane 9 and benston et al 2 have made substantive contributions the authors demonstrates the way in which our current fixed rate insurance system rewards risk taking by the firm and insulates it through deposit insurance from the market discipline that needs to exist to ensure proper risk evaluation this realization has led these authors to propose a series of regulatory changes to encourage proper portfolio choice within the industry these include a shift to market value accounting risk based deposit insurance premiums and additional capital regulation the last of these serves as a method of coinsurance whereby higher capital levels require the bank to absorb greater losses in the event of failure and encourage additional prudence in management in essense it is one method of risk reduction that may offset the risk preference imposed on the industry due to the inappropriate insurance pricing because the amount of capital influences the probability of bank insolvency and thus the soundness of the entire banking system the regulators ceteris paribus prefer more capital to

equilibrium impact of value at risk regulation abstract we study the asset pricing implications of value at risk var regulation in incomplete continuous time economies with intermediate expenditure stochastic opportunity set and heterogeneous attitudes to risk our findings show that because of an anticipatory effect of var constraints on the optimal hedging demand the partial equilibrium incentives of var regulation can lead banks to increase their risk exposure in high volatility states in general equilibrium var constraints can produce unambiguously lower interest rates and higher equity sharpe ratios the var impact on equity volatility and equity expected returns is ambiguous

institutions investment and growth new cross country and panel data evidence this paper outlines the alternative channels through which institutions affect growth and studies the empirical relationship between institutions investment and growth the empirical results indicate that i free market institutions have a positive effect on growth ii economic freedom affects growth through both a direct effect on total factor productivity and an indirect effect on investment iii political and civil liberties may stimulate investment iv an important interaction exists between freedom and human capital investment v milton friedman s conjectures on the relation between political and economic freedom are correct vi promoting economic freedom is an effective policy toward facilitating growth and other types of freedom jel o17 o40 p51

an evaluation of bank measures for market risk before during and after the financial crisis abstract we study the performance and behavior of value at risk measures used by a number of large u s banks before during and after the financial crisis alternative benchmark var measures including garch based measures are estimated directly from the banks trading revenues to explain the bank var performance results while overly conservative in both the pre crisis and post crisis periods bank var exceedances were excessive and clustered in the crisis period this contrasted with mostly unbiased benchmark hs and garch vars in the pre crisis and post crisis periods and vastly superior garch based var performance in the crisis period with lower exceedance rates and no exceedance clustering our results document the bank vars very slow adjustment to changing market conditions and their systematic bias in all studied periods our results indicate that bank vars could be improved by the use of models with time varying volatility and built on banks knowledge of their current positions

the impact of off balance sheet activities on banks returns an application of the arch m to canadian data abstract this paper revisits the impact of off balance sheet obs activities on banks risk return trade off recent studies e g stiroh and rumble 2006 show that increasing obs activities does not necessarily yield straightforward diversification benefits for banks however introducing a risk premium in the standard banks returns models and resorting to an arch m procedure canadian data suggest that banks risk return trade off displays a structural break around 1997 in the second subperiod of our sample 1997 2007 we find that the noninterest income generated by obs activities no longer impacts banks returns negatively while during the first period 1988 1996 the volatility variable is not significant in any returns equations a risk premium eventually emerges pricing the risk associated to obs activities

behavioral portfolio theory we develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design the optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets consistent with friedman and savage s 1948 observation we compare the bpt efficient frontier with the mean variance efficient frontier and show that in general the two frontiers do not coincide optimal bpt portfolios are also different from optimal capm portfolios in particular the capm twofund separation does not hold in bpt we present bpt in a single mental account version bpt sa and a multiple mental account version bpt ma bpt sa investors integrate their portfolios into a single mental account while bpt ma investors segregate their port folios into several mental accounts bpt ma portfolios resemble layered pyramids where layers are associated with aspirations we explore a two layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

an evaluation of the basle guidelines for backtesting banks internal risk management models the 1996 amendment to the baste capital accord to incorporate market risks constitutes a breakthrough in the determination of capital requirements rather than dictating these requirements through a uniform supervisory approach banks are allowed to use their own internal models for computing the capital required in order to mitigate moral hazard problems and stimulate banks to use adequate internal models the models must be subjected to a backtesting procedure if a model produces too many incorrect predictions increased capital requirements result this paper provides an evaluation of the current internal models approach in conjunction with the proposed backtesting procedure in particular using a stylized representation of the present supervisory framework we investigate whether banks are provided with the right incentives to come up with the correct internal model we find that under the current regulatory framework banks are prone to under reporting their true market risk a much stricter penalty scheme is required in order to align banks incentives with those of the supervisor we check the sensitivity of our results to changes in the length of the planning horizon portfolio risk time preferences risk attitudes and the distribution of financial returns

crisis and risk management from theory alternative investments require a premium return because they are less liquid than market investments this liquidity premium varies considerably over time as a function of preferences leverage technology the developments in financial technology and changes in institutional arrangements the dynamics of the liquidity premium depend on institutional reactions to financial crises during 1997 1998 we have seen the movement of a financial crisis around the world it started in southeast asia moved through latin america and then visited russia and returned again to south america the financial crisis has also infected europe and the united states especially during august october 1998 the increase in volatility particularly in the equity markets and the flight to liquidity around the world resulted in an extraordinary reduction in the capital base of the firm that i was associated with long term capital management ltcm this reduction in capital culminated in a form of negotiated bankruptcy a consortium of 14 institutions with outstanding claims against ltcm infused new equity capital into ltcm and took over it and the management of its assets they hired ltcm s former employees to manage the portfolio under their direct supervision and with sufficient incentives to undertake the task efficiently although the federal reserve bank frb facilitated the takeover it did not bail out ltcm many debtor entities found it in their self interest not to post the collateral that was owed to ltcm and other creditor entities claimed to be ahead of others to secure earlier payoffs without the frb acting quickly to mitigate these holdup activities ltcm would have had to file for bankruptcy for some a more efficient outcome but a far more costly outcome for society if there was a bailout it failed ltcm has been effectively liquidated because of ltcm the press and others have taken the opportunity to criticize financial modeling and in particular the value of optionpricing models in truth mathematical models and option pricing models played only a minor role if any in ltcm s failure at ltcm models were used to hedge local risks ltcm was in the business of supplying liquidity at levels that were determined by its traders in 1998 ltcm had large positions concentrated in less liquid assets as a result of the financial crisis ltcm was forced to switch from being a large supplier to being a large demander of liquidity at a cost that eliminated its capital although the russian default the ltcm bankruptcy and the financial difficulties of other financial service firms are the most visible manifestations of the crisis of the late summer and fall of 1998 to this day we observe much greater volatility and lack of liquidity in many debtrelated and equity related financial markets for example during the summer of 1999 3 5 yearlong dated volatility on the standard and poor s sp bengt holmstrom massachusetts institute of technology jeremy stein massachusetts institute of technology

capital market integration and fiscal sustainability abstract by constructing a two country endogenous growth model with a debt financing government this paper studies the relationship between the sustainability of public finance and increases in inter regional factor mobility to this end it identifies the minimum tax rate that ensures fiscal sustainability against the backdrop of capital tax competition and studies whether competition for mobile capital lowers or improves fiscal sustainability the main findings are as follows i when countries are symmetric increasing capital flows promotes economic growth through the expansion of romer type knowledge spillovers resulting in increased fiscal sustainability in all countries and ii when a marked difference exists between countries tax competition caused by capital movements might lower fiscal sustainability in a country with abundant capital and large outstanding debt

options and structured products in behavioral portfolios abstract options and structured products have no roles in mean variance portfolios but they have roles in behavioral portfolios behavioral portfolios are composed of mental account sub portfolios each associated with a goal such as retirement income or bequest investors optimize each mental account by finding the assets and asset allocation that maximizes the expected return of each mental account sub portfolio subject to the condition that the probability of failing to reach a preset threshold aspiration level not exceed a preset probability put options are useful in downside protection mental accounts whose goal is avoiding poverty whereas call options are useful in upside potential mental accounts whose goal is a shot at riches we also explore the roles in behavioral portfolios of option collars capital guaranteed notes and barrier range notes

assessing comparative efficiency of the state owned mixed and private sectors in indian industry this paper evaluates performance differences between government owned mixed sector and private sector enterprises in india for the period 1973 1974 to 1988 1989 the results establish that enterprises owned by the central government and state governments are less efficient than mixed or private sector enterprises while mixed sector enterprises are less efficient than those in the private sector the results contradict extant evidence finding no performance differences between government owned and private firms in india there have however been inter temporal efficiency gains for the sector as a whole perhaps resulting from reforms undertaken towards improving government owned enterprises performance

the pernicious effects of contaminated data in risk management banks hold capital to guard against unexpected surges in losses and long freezes in financial markets the minimum level of capital is set by banking regulators as a function of the banks own estimates of their risk exposures as a result a great challenge for both banks and regulators is to validate internal risk models we show that a large fraction of us and international banks uses contaminated data when testing their models in particular most banks validate their market risk model using profit and loss p l data that include fees and commissions and intraday trading revenues this practice is inconsistent with the definition of the employed market risk measure using both bank data and simulations we find that data contamination has dramatic implications for model validation and can lead to the acceptance of misspecified risk models moreover our estimates suggest that the use of contaminated data can significantly reduce market risk induced regulatory capital

capital requirements and the behaviour of commercial banks abstract i study the consequences of capital regulations on the portfolio choices of commercial banks elaborating on previous work by kareken and wallace 1978 koehn and santomero 1980 and kim and santomero 1988 i obtain the following results if the objective of commercial banks is maximization of the market value of their future profits value maximizing banks capital regulations cannot prevent banks from choosing very specialized and very risky portfolios risk based insurance premia are in fact the relevant instrument for that purpose on the other hand if banks behave as portfolio managers utility maximizing banks capital regulations can be effective but only if the weights used in the computation of the ratio are proportional to the systematic risks of the assets their betas because of limited liability of commercial banks a minimum capital regulation or a closing rule may become necessary as well to prevent failing banks from betting for resurrection

a comparison of the original and revised basel market risk frameworks for regulating bank capital abstract recognizing that many banks suffered trading losses that notably exceeded their minimum capital requirements during the recent crisis the basel committee on banking supervision 2011 revised its regulatory framework for trading portfolios in this paper we compare 1 the relative effectiveness of risk management systems based on the original and revised frameworks in controlling tail risk and 2 the relative adequacy of these frameworks in setting minimum capital requirements our main findings are as follows first both systems allow the selection of portfolios with substantive tail risk but one based on the revised framework tends to be less effective in controlling tail risk second the minimum capital requirements set by the revised framework are much less likely to be wiped out by trading losses than those set by the original framework hence on balance the revised framework improves upon the original framework we also suggest further improvements for consideration by bank regulators

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

relative price variability real shocks and the stock market in this paper we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return inflation regressions the evidence shows that the negative stock returninflation relations proxy for the adverse effects of relative price variability on economic activity particularly during the seventies when the u s experienced oil supply shocks hence it appears that inflation spuriously affects the stock market in two ways the aggregate output link of fama 1981 and the supply shocks reflected in relative price variability a number of papers have attempted to explain the anomalous negative relations between stock returns and inflation witnessed in the post war period one hypothesis that has held up well in light of empirical evidence suggests that the negative relation between stock returns and unexpected inflation simply reflects the more fundamental positive relation between stock returns and future real variables see e g fama 1981 geske and roll 1983 and kaul 1987 1989 in this paper we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return inflation regressions first relative price variability can have detrimental effects on output and employment see e g friedman 1977 and barro 1976 second absolute relative price confusion models of the lucas 1973 type suggest that monetary shocks can induce a positive relation between inflation and relative price variability see e g cukierman 1983 hence the negative stock return inflation relations could simply be a reflection of the negative effects of relative price variability on the stock market we use data for the 1947 1985 period to test the various links of our hypothesis the results indicate that relative price variability is positively related to both expected and unexpected inflation measures relative price variability also has a significant negative effect on output and the stock market more importantly

theory of constant proportion portfolio insurance abstract we study constant proportion portfolio insurance cppi a dynamic strategy that maintains the portfolio s risk exposure a constant multiple of the excess of wealth over a floor up to a borrowing limit we use this simple rule to investigate how transaction costs and borrowing constraints affect portfolio insurance type strategies absent transaction costs cppi is equivalent to investing in perpetual american call options and is optimal for a piecewise hara utility function with a minimum consumption constraint as the multiple increases the payoffs under cppi approach those of a stop loss strategy the expected holding period return is not monotonic in the multiple and a higher expected return can be obtained under cppi than with a stop loss strategy

forecasting the var of crude oil market do alternative distributions help abstract accurate modeling of the empirical distribution of crude oil market returns is extremely important in estimating risk measures in addition to several commonly used distributions alternative distributions are explored in this study some of which account for the asymmetry and heavy tails simultaneously found in distributions and contain more tail parameters to separately depict the right and left tails when forecasting the value at risk var of crude oil markets during highly volatile periods seven backtests are also conducted to compare the var forecasting accuracy among different distributions the empirical results indicate that a highly volatile environment challenges the commonly used distributions and the four risk models based on commonly used distributions are rejected about 27 to 38 of the time the alternative distributions i e skewed general error distributions sged generalized hyperbolic skewed student t distributions ghst and generalized asymmetric student t gast distributions generally produce more accurate var measurement and gast gives the best measurement accuracy the empirical results imply that risk managers or policymakers should further consider more flexible distributions such as sged ghst or gast in particular when quantifying or managing the risk in turbulent market times

the tail risk premia of the carry trades abstract we study the relationship between the excess returns of portfolios invested in carry trade positions and an innovative global tail risk factor we find that high interest rate currencies are related to innovations in global currency tail risk they deliver low returns in times of unexpected high tail risk and high returns in times of unexpected low tail risk suggesting a standard asset pricing theory approach to explain the returns to the carry trade our tail risk factor can be understood as the interaction of moment based factors such as volatility skewness and kurtosis our results tend to indicate that the interaction of moments i e tail risk rather than the moments alone drives investor behavior this makes sense since the ultimate risk for carry traders is to reach their funding limits which are set because of the regulations on the back of tail risk statistics value at risk and not simply on the back of the volatility the skewness or the kurtosis alone the result holds in other cross sections of currencies and whether the global tail risk indicators are estimated in the currency the equity or the bond market

a general index of technical change this paper outlines a procedure for estimating a general index of technical change within the context of a quite general production technology specifically when panel data are available for firms in an industry time specific dummies can be combined in a nonlinear estimation procedure to yield a general index of technical change that may be both nonneutral and scale augmenting this approach offers numerous advantages over the traditional time trend representation of technical change for example the general index can serve as the basis for analysis of the determinants of technical change results for a sample of 30 electric utilities over the period 1951 78 show that the productivity decline of the 1970s can be attributed primarily to sulphur oxide restrictions and secularly declining capacity utilization due to rapidly increasing peak load demands

politics and productivity i introduction economic studies of long run performance are focusing increasingly on political legal financial and social factors development is no longer regarded as a gradual inevitable transformation from self sufficiency to specialization and participation in the division of labor instead progress follows the creation and evolution of institutions that support social and commercial relationships the new institutional economics explains that growth requires that the potential hazards of trade shirking opportunism risk and so on be controlled by institutions like secure property rights reliable procedures for resolving disputes and means of enforcing contracts in the absence of close social ties these institutions reduce information costs encourage capital formation and capital mobility allow risks to be priced and shared and otherwise facilitate cooperation north and thomas 1973 north 1990 drobak and nye 1997 levine 1997 in particular political authorities must make credible commitments not to expropriate private resources once investments have been made 1 despite widespread agreement that institutions matter there is no consensus on how they should be incorporated into the analysis even the best empirical studies of productivity and growth treat institutional characteristics in an eclectic way barro s 1991 influential article for example uses the numbers of assassinations and revolutions per capita as proxies for political instability finding these measures negatively correlated with growth and investment scully 1988 regresses growth rates on dummy variables derived from gastil s 1982 ordinal rankings of political and economic liberty king and levine 1993a 1993b 1993c derive various measures of the quality of financial intermediaries and show that these measures are good predictors of growth this article presents a different approach to analyzing the relationship between institutions and aggregate economic performance following the modem productivity literature see for example fried et al 1993 we model economic performance with a stochastic production frontier frontier analysis is a form of benchmarking it analyzes a group of branches firms nations or other units by identifying best practices and evaluating each member s performance relative to the best practice frontier the results produce not only qualitative rankings of the group members but also numerical efficiency scores that can be used to assess the effects of various policies and characteristics for this reason frontier analysis is well suited for studying the effects of legal and political institutions on the economic performance of nations to capture institutional factors we use two comprehensive indexes of legal regulatory and political conditions working with a broad sample of countries from 1975 to 1990 we incorporate a widely used measure of economic freedom along with a new measure of policy stability to represent a country s institutional environment the new institutional economics suggests that countries with high levels of economic freedom protection of private property rights respect for the rule of law an unhampered price system and so on and policy stability commitment not to change the rules of the game ex post will be closer to the best practice frontier in our model economic freedom and policy stability affect economic performance by enhancing technical efficiency in other words these institutions do not alter the state of technology but they allow producers to squeeze more out of current technology for instance countries with more stable policies attract more foreign investment than countries with less stable policies ceteris paribus this leads to increased competition among producers which in turn brings efficiency gains similarly countries with lower taxes milder regulatory burdens lower inflation fewer restrictions on foreign ownership and so on are likely to produce output more efficiently than countries with policies that restrict production inhibit capital formation and reduce competition

asset bubbles and endogenous growth abstract we study the interaction between productive and nonproductive savings in economies with endogenous long run growth as in the neoclassical growth setting with overlapping generations asset bubbles can exist in an economy with endogenous growth provided that they are not too large and that the growth rate in the equilibrium without bubbles exceeds the interest rate here the existence conditions for bubbles reflect parameters of tastes and technology we find that bubbles when they exist retard the growth of the economy perhaps even in the long run and reduce the welfare of all generations born after the bubble appears

when more is less using multiple constraints to reduce tail risk abstract financial institutions suffered large trading losses during the 2007 2009 global financial crisis these losses cast doubt on the effectiveness of regulations and risk management systems based on a single value at risk var constraint while some researchers have recommended using conditional value at risk cvar to control tail risk var remains popular among practitioners and regulators accordingly our paper examines the effectiveness of multiple var constraints in controlling cvar under certain conditions we theoretically show that they are more effective than a single var constraint furthermore we numerically find that the maximum cvar permitted by the constraints is notably smaller than with a single constraint these results suggest that regulations and risk management systems based on multiple var constraints are more effective in reducing tail risk than those based on a single var constraint

economic freedom and growth decomposing the effects most studies of the relation between economic freedom andgrowth of gdp have found a positive relation one problem inthis area is the choice of economic freedom measure a singlemeasure does not reflect the complex economic environment anda highly aggregated index makes it difficult to draw policyconclusions in this paper we investigate what specific typesof economic freedom measures that are important for growth the robustness of the results is carefully analysed since thepotential problem with multicollinearity is one of thenegative effects of decomposing an index the results showthat economic freedom does matter for growth this does notmean that increasing economic freedom defined in generalterms is good for economic growth since some of thecategories in the index are insignificant and some of thesignificant variables have negative effects

incentives for effective risk management under the new capital accord banks choose between two different types of risk management systems the standard or the internal rating based approach the paper considers how a bank s preference for a risk management system is affected by the presence of supervision by bank regulators the model uses a principal agent setting between a bank s owner and its risk management the main conclusion is that previously unregulated institutions can be expected to switch to the lower quality standard approach subsequent to becoming regulated i e the presence of regulation may induce a bank to decrease the quality of its risk management system

another look at models of the short term interest rate the short term rate of interest is fundamental to much of theoretical and empirical finance yet no consensus has emerged on the dynamics of its volatility we show that models which parameterize volatility only as a function of interest rate levels tend to over emphasize the sensitivity of volatility to levels and fail to model adequately the serial correlation in condi tional variances on the other hand serial correlation based models like garch models fail to capture adequately the relationship between interest rate levels and volatility we introduce and test a new class of models for the dynamics of short term interest rate volatility which allows volatility to depend on both interest rate levels and information shocks two important conclusions emerge first the sensitivity of interest rate volatility to interest rate levels has been overstated in the literature while this relationship is important adequately modeling volatility as a function of unexpected information shocks is also important sec ond we conclude that the volatility processes in many existing theoretical models of interest rates are misspecified and suggest new paths toward improving the theory

differences in relative prices and international differences in growth rates the new growth literature following paul m romer 1986 and robert e lucas jr 1988 has formulated models in which growth rates can differ systematically across countries a large empirical literature has used cross sectional techniques to examine the cause of international differences in growth rates this paper examines whether this work has used data which have been constructed in such a way as to introduce inadvertently a spurious correlation between growth and income levels this effect occurs because relative prices evolve because of different rates of technological progress in different industries many of the new growth models assume single goods or goods produced by the same technology so this phenomenon has so far escaped analysis if technological progress is more rapid in some sectors than others relative prices will change during the process of development the change of relative prices has two effects on measured growth rates first the choice of base prices affects the growth rate this phenomenon is sometimes called the gerschenkron effect second using any base prices or weights introduces a spurious correlation between income and growth less developed countries would tend to have lower growth rates not because they grew more slowly but because of data construction techniques for the sake of simplicity these phenomena will be called the gerschenkron or the level effect and the spurious correlation effect 3 this paper examines the international comparison program icp and the penn world tables pwt which are based on the icp the penn world tables are the data most widely used in empirical studies of international differences in economic growth both the icp and pwt use international prices to adjust for differences in the purchasing power of currencies these prices most closely resemble hungarian prices using such prices tends to produce time series with lower growth rates than those in the national accounts for countries less developed than hungary conversely the growth rates would be higher for countries more developed than hungary however the growth rates of poorer countries are not systematically lower in the penn world tables the paper examines why the growth rates are not distorted and makes some specific recommendations for data construction and use virginia polytechnic institute and state university blacksburg va 24061 0316 part of this work was supported by a grant from the institute of international studies at brown university and by a summer internship at the division of international finance at the federal reserve board i am grateful to peter garber david weil oded galor and anonymous referees for helpful comments alan heston and robert summers have also helped me understand icp and pwt methodology of course i alone am responsible for any mistakes in this paper iexamples include steve dowrick and duc tho nguyen 1989 robert j barro 1991 j bradford de long and lawrence h summers 1991 and n gregory mankiw et al 1992 2a series of papers by christina d romer 1986a b 1989 has already emphasized the importance of data construction techniques in another context 3there is a third effect a real acceleration effect caused by shifting consumption patterns and the reallocation of resources between sectors growth accountants such as angus maddison 1987 adjust estimates of total factor productivity for this sort of shift william j baumol et al 1989 have also referred to this phenomenon for an analysis in terms of a simple multisector solow model see nuxoll 1992a

risk models at risk the experience from the global financial crisis has raised serious concerns about the accuracy of standard risk measures as tools for the quantification of extreme downward risks a key reason for this is that risk measures are subject to a model risk due e g to specification and estimation uncertainty while regulators have proposed that financial institutions assess the model risk there is no accepted approach for computing such a risk we propose a remedy for this by a general framework for the computation of risk measures robust to model risk by empirically adjusting the imperfect risk forecasts by outcomes from backtesting frameworks considering the desirable quality of var models such as the frequency independence and magnitude of violations we also provide a fair comparison between the main risk models using the same metric that corresponds to model risk required corrections

productivity growth and firm ownership an analytical and empirical investigation we focus on the effect of state versus private ownership on the rates of firm specific productivity growth and cost decline by developing a model of endogenous firm specific productivity growth and testing its implications against panel data on 23 international airlines of varying levels of state ownership over the period 1973 83 our model and empirical results show that state ownership can lower the long run annual rate of productivity growth or cost decline but not necessarily their levels in the short run observed level differences in productive efficiency across private and state owned firms may thus be a function of the age distribution of the firms being compared these results appear to be independent of whether the firms operate under apparently more or less competitive or regulated markets and whether they differ in production scales the analysis offers new insights concerning the recent trend toward privatizing state owned enterprises that has been observed in many countries

generating volatility forecasts from value at risk estimates statistical volatility models rely on the assumption that the shape of the conditional distribution is fixed over time and that it is only the volatility that varies the recently proposed conditional autoregressive value at risk caviar models require no such assumption and allow quantiles to be modeled directly in an autoregressive framework although useful for risk management caviar models do not provide volatility forecasts such forecasts are needed for several other important applications such as option pricing and portfolio management it has been found that for a variety of probability distributions there is a surprising constancy of the ratio of the standard deviation to the interval between symmetric quantiles in the tails of the distribution such as the 0 025 and 0 975 quantiles this result has been used in decision and risk analysis to provide an approximation of the standard deviation in terms of quantile estimates provided by experts drawing on the same result we construct financial volatility forecasts as simple functions of the interval between caviar forecasts of symmetric quantiles forecast comparison using five stock indices and 20 individual stocks shows that the method is able to outperform generalized autoregressive conditional heteroskedasticity garch models and moving average methods

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

government expenditure and economic growth a cross country study this paper examines the relationship between the share of government consumption expenditure in gdp and the rate of growth of real per capita gdp the work of the u n international comparison project has recently made available new estimates for over 100 countries of both per capita gdp and the share of government consumption these new estimates are based on direct price comparisons rather than exchange rate conversions as a result the statistics for different countries are more comparable and cross country studies will be more reliable