the informational role of stock and bond volume in a kyle 1985 model the sign of the correlation between a firm s debt and equity returns is the same as the sign of the cross market kyle s lambda the sign is positive negative if private information concerns the mean risk of the firm s assets we show empirically that information conveyed by order flows is primarily about asset means the cross market lambdas are quite large consequently the portions of bond and stock returns explained by order flows are highly correlated even though the order flows themselves are virtually uncorrelated

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

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

equilibrium behavior in crisis bargaining games this paper analyzes a general model of two player bargaining in the shadow of war where one player possesses private information concerning the expected benefits of war i derive conclusions about equilibrium behavior by examining incentive compatibility constraints where these constraints hold regardless of the game form hence the qualitative results are game free i show that the higher the informed player s payoff from war the higher is his or her equilibrium payoff from settling the dispute short of war and the higher is the equilibrium probability of war the latter result rationalizes the monotonicity assumption prevalent in numerous expected utility models of war i then provide a general result concerning the equilibrium relationship between settlement payoffs and the probability of war

from global economic modelling to household level analyses of food security and sustainability how big is the gap and can we bridge it policy and decision makers have to make difficult choices to improve the food security of local people against the background of drastic global and local changes ex ante impact assessment using integrated models can help them with these decisions this review analyses the state of affairs of the multi scale modelling of policy interventions with an emphasis on applications in developing countries and livestock systems existing models do not sufficiently capture the complexity of human environment interactions across different scales and especially the link between landscape and local market levels and national and sub national level policies and markets is missing the paper suggests a step wise approach with increasing data needs to bridge this gap improvements need to be made at the description of effects of the distribution of local markets on price formation and the representation of farm diversity within a landscape analyses in contrasting agro ecological systems are needed to derive generic summary functions that can be used as input for macro level model analyses this is especially pertinent for macro level descriptions of crop and livestock production in relation to price developments and of the mosaic of different agricultural land use responses in regions with contrasting socio economic conditions and developments

bargaining in the shadow of power abstract often a bargainer can use some form of power legal military or political to impose a settlement how does the outside option of being able to impose a settlement albeit at some cost affect the bargaining and how does the probability that the bargaining will break down vary with the distribution of power between the bargainers these questions are examined by adding the option of imposing a settlement to rubinstein s game of dividing a pie each actor can accept an offer make a counteroffer or try to impose a solution imposing a settlement is however costly and each bargainer has private information about its cost journal of economic literatureclassification number c72

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

do european banks with a covered bond program issue asset backed securities for funding abstract the decline in the issuance of asset backed securities abss since the financial crisis and the comparative advantage of covered bonds cbs as a funding alternative to abss raise the question of whether banks still issue abss as a way to receive funding by applying double hurdle regression models to a dataset of 134 european banks observed during the period from 2007 to 2013 this study reveals that banks with a covered bond program cbp securitize ceteris paribus less of their assets the estimated difference in abs issuance is driven mainly by banks being more likely to issue abss as a funding tool rather than trying to manage their credit risk exposure or to meet regulatory capital requirements consistently a worse liquidity funding position results in higher levels of securitization only for banks without a cbp

multilateral negotiations a spatial analysis of the arab israeli dispute a model for forecasting political choices and for explaining the perceptual conditions that lead to those choices is delineated the model based on the median voter theorem and on the axioms of expected utility maximization is applied to the prospects for a multilateral peace conference in the middle east the analysis helps provide insights into the motivations behind recent actions by leaders in the soviet union the united states jordan the palestine liberation organization and israel

the relative contributions of private information sharing and public information releases to information aggregation we calculate learning rates when agents are informed through public and private observation of other agents actions we characterize the evolution of the distribution of posterior beliefs if the private learning channel is present convergence of the distribution of beliefs to the perfect information limit is exponential at a rate equal to the sum of the mean arrival rate of public information and the mean rate at which individual agents are randomly matched with other agents if however there is no private information sharing then convergence is exponential at a rate strictly lower than the mean arrival rate of public information c 2009 elsevier inc all rights reserved

commodity liquidity measurement and transaction costs we examine the performance of liquidity proxies in commodities the amihud measure has the largest correlation with liquidity benchmarks amivest and effective tick measures also perform well these proxies are useful for studies of commodity liquidity over a long time period and those that lack access to high frequency data we use various aspects of transaction costs such as spread depth immediacy and resiliency to give insight into the costs of different execution approaches transaction costs increase with volatility and exhibit mean reversion splitting trades over one hour can reduce trading costs by two thirds compared to an immediate execution the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

fiscal requirements for dynamic and real determinacies in economies with private provision of liquidity a monetarist assessment we study the impact of fiscal policies on the inherent links between inflation unemployment and asset prices in an environment where firms provide liquidity and the central bank follows a constant money growth rate rule firms other than hiring workers also supply private assets that are not only useful as a store of value but also as collateral when firms are not taxed and public debt is scarce the economy is non ricardian so that real indeterminacies can be observed moreover labor market characteristics do not affect the demand for government liabilities however when agents face public and private asset scarcity labor market conditions then impact asset prices and inflation we further show that irrespective of the type of asset scarcity agents face when firms are taxed non ad valorem not only the level of tax revenues but also its composition matter for real allocations moreover we show that labor market conditions directly affect the dynamics of all government liabilities and inflation

the expected utility theory of conflict measuring theoretical progress we examine the progressivity of bruce bueno de mesquita s theory of conflict as originally developed in the war trap and as extended later bueno de mesquita offers the progressivity of the expected utility theory relative to other theories and approaches to conflict as his major defense in responding to critics bueno de mesquita essentially relies on imre lakatos definition of theoretical progress in presenting his argument a review of the literature addressing the concept of theoretical progress indicates that bueno de mesquita s application of lakatosian criteria is incomplete and that lakatos criteria are themselves flawed we review the philosophy of science literature dealing with theoretical progress or rational criteria for theory choice and evaluate the progressivity of the expected utility theory of conflict in light of criteria other than lakatos while we do recommend further elaboration of bueno de mesquita s theory we do not find it more progressive than its rivals

global land use implications of first and second generation biofuel targets recently an active debate has emerged around greenhouse gas emissions due to indirect land use change iluc of expanding agricultural areas dedicated to biofuel production in this paper we provide a detailed analysis of the iluc effect and further address the issues of deforestation irrigation water use and crop price increases due to expanding biofuel acreage we use globiom an economic partial equilibrium model of the global forest agriculture and biomass sectors with a bottom up representation of agricultural and forestry management practices the results indicate that second generation biofuel production fed by wood from sustainably managed existing forests would lead to a negative iluc factor meaning that overall emissions are 27 lower compared to the no biofuel scenario by 2030 the iluc factor of first generation biofuels global expansion is generally positive requiring some 25 years to be paid back by the ghg savings from the substitution of biofuels for conventional fuels second generation biofuels perform better also with respect to the other investigated criteria on the condition that they are not sourced from dedicated plantations directly competing for agricultural land if so then efficient first generation systems are preferable since no clear technology champion for all situations exists we would recommend targeting policy instruments directly at the positive and negative effects of biofuel production rather than at the production itself

policy analysis and advocacy for livestock based development the gap between household level analysis and higher level models the dichotomy in approaches to policy analysis for developing countries livestock sectors is presented substantial experience and information generated from a large number of household level studies is not being utilised by macro and aggregate models which fail to recognise heterogeneity dynamics and fundamental drivers of change in livestock systems household level studies are not standardised and rarely identify and characterise key drivers and mechanisms for exploiting heterogeneity in policy analysis the paper provides an overview of a set of six papers contained in a special edition which define and address this gap in analytical approaches and identify aspects of the way forward evidence is presented of inconsistencies and practicalities which emphasise the gap but all papers present evidence of integrative progress and list opportunities for accelerating it constraints on the subject matter are outlined and a challenge to livestock policy analysts is made

strategic estimation of asset fair values abstract we examine whether fair value fv input levels and estimation sources are related to fv inflation the difference between an insurer s fv estimate and the consensus fv estimate across the security s holders fv inflation is higher and self estimation more likely when insurers report using level 3 inputs when the consensus level is 2 regardless of the level fv is greater when self estimated public insurers that inflate fv through self estimation potentially obfuscate detection by reporting the use of level 2 inputs insurers with stronger incentives to appear financially healthy choose to self estimate resulting in greater aggregate portfolio fv inflation

dealer balance sheets and bond liquidity provision abstract do regulations decrease dealer ability to intermediate trades using a unique dataset of dealer bond level transactions we link changes in liquidity of individual u s corporate bonds to dealers transaction activity and balance sheet constraints we show that prior to the financial crisis bonds traded by more levered institutions and institutions with investment bank like characteristics were more liquid but this relationship reverses after the financial crisis in addition institutions that face more regulations after the crisis both reduce their overall volume of trade and have less ability to intermediate customer trades

competing for order flow in otc markets we develop a model of a two sided asset market in which trades are intermediated by dealers and are bilateral dealers compete to attract order flow by posting the terms at which they execute trades which can include prices quantities and execution times and investors direct their orders toward dealers that offer the most attractive terms of trade equilibrium outcomes have the following properties first investors face a trade off between trading costs and speeds of execution second the asset market is endogenously segmented in the sense that investors with different asset valuations and different asset holdings will trade at different speeds and different costs for example under a leontief technology to match investors and dealers per unit trading costs decrease with the size of the trade in accordance with the evidence from the market for corporate bonds third dealers implicit bargaining powers are endogenous and typically vary across sub markets finally we obtain a rich set of comparative statics both analytically by studying a limiting economy where trading frictions are small and numerically for instance we find that the relationship between trading costs and dealers bargaining power can be hump shaped

measurement of competitiveness in smallholder livestock systems and emerging policy advocacy an application to botswana farm level cross sectional data of 556 randomly selected livestock producers were used to investigate the competitiveness of smallholder beef farmers in botswana the results show the presence of inefficiency with about 74 of the variation in actual profit from maximum profit profit frontier between farms mainly arising from differences in farmers practices rather than random variability further the mean profit efficiency level of 0 58 suggests that there is a substantial scope to improve beef profitability in botswana significant profit efficiency drivers include among others education distance to market herd size access to information and access to income from crop production considering the importance of livestock sector for wealth creation and poverty eradication in the rural areas where poverty is more pronounced there is a need for appropriate development strategies and policies directed towards addressing these factors in particular there is need to invest in market infrastructure in order to improve market access hence profit efficiency of smallholder livestock farmers

information spillovers in asset markets with correlated values we study information spillovers in a dynamic setting with privately informed traders and correlated asset values a trade of one asset or lack thereof can provide information about the value of other assets the information content of trading behavior is endogenously determined in equilibrium we show that this endogeneity leads to multiple equilibria when the correlation between asset values is suciently high the

synthetic or real the equilibrium effects of credit default swaps on bond markets we provide a model of nonredundant credit default swaps cdss building on the observation that cdss have lower trading costs than bonds cds introduction involves a trade off it crowds out existing demand for the bond but improves the bond allocation by allowing long term investors to become levered basis traders and absorb more of the bond supply we characterize conditions under which cds introduction raises bond prices the model predicts a negative cds bond basis as well as turnover and price impact patterns that are consistent with empirical evidence we also show that a ban on naked cdss can raise borrowing costs

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

when do power shifts lead to war we present and test a choice theoretic model of war decisions during shifts in power the model assumes a rising state that overtakes a declining state in capabilities in equilibrium the declining state yields at a critical point in the transition war can occur only before that critical time power shifts are more likely to lead to war as the challenger becomes more risk acceptant the declining state more risk averse the expected costs of war decrease the rising state s dissatisfaction with the status quo increases and during periods of equality between the two sides the rate of growth of the rising state s capabilities and the transition point do not affect the probability of war all these hypotheses are supported by an empirical analysis of all major power dyads since 1815 we also find that expected support from allies must be included in the calculation of a nation s capabilities the implications of the model for theories of hegemonic decline and war are discussed

rockets and feathers in power futures markets evidence from the second phase of the eu ets abstract this paper examines the possibility of asymmetric transmission of co 2 prices to electricity futures prices in the second phase of the european emission trading scheme we would like to assess whether output prices tend to respond more quickly to input price increases than decreases this phenomenon is known as rockets and feathers in the literature compared to zachmann and von hirschhausen 2008 who carried out a similar analysis for germany in the first phase of the emission trading scheme with data from 2005 to 2006 our study spans a longer timeframe july 2007 june 2010 with a presumably more mature permit market and includes three additional european countries france belgium and the netherlands results do not provide empirical evidence of statistically significant differences in the response of power prices to positive and negative shocks in co 2 allowance and fuel markets

liquidity credit quality and the relation between volatility and trading activity evidence from the corporate bond market this paper investigates the roles of illiquidity and credit risk in determining the relations between price volatility of a bond and its trading frequency and trade size based on a large transaction dataset from october 2004 to june 2012 we find a positive relation between volatility and trading frequency and a negative relation between volatility and trade size consistent with the prediction of the search based theory the relations are much stronger for illiquid and risky bonds furthermore both liquidity and credit risk become more important in times of stress and their effects are reinforcing results strongly suggest that search frictions and credit risk are important factors driving the relation between volatility and trading activity in the corporate bond market

the role of insider influence in mutual to stock conversions using a sample of 347 demutualizing thrifts from 1991 to 2004 we show that the level of inside participation is not a traditional signal of firm performance we conclude that unanticipated inside participation reflects the incentives of insiders to reduce the size of the offer to influence the level of expected initial public offer ipo returns we find unanticipated inside participation is related to lower offer size and higher initial returns but we do not find a relationship between inside participation and post ipo performance

is historical cost accounting a panacea market stress incentive distortions and gains trading we provide new empirical evidence concerning the contentious debate over the use of historical cost versus fair value accounting in regulating financial institutions these accounting rules through their interactions with capital regulation alter financial institutions optimal portfolio choice and trading behavior the insurance industry provides a natural laboratory in which to explore these interactions first there exist significant differences in regulatory accounting rules life insurers have greater flexibility to hold speculative grade instruments at historical cost than property and casualty insurers second within an insurer s investment portfolio detailed data are available on transactions positions and most importantly the regulatory accounting treatment for each security when faced with severe downgrades among their holdings in asset backed securities abs life insurers largely continue to hold the downgraded securities at historical cost and instead selectively sell their corporate bond holdings with the highest unrealized gains inducing significant price declines this is particularly true for life insurers facing regulatory capital constraints and with high abs exposures this behavior is largely absent among property and casualty insurers they instead disproportionately sell their re marked abs holdings historical cost accounting creates an altered incentive environment in which constrained financial institutions sell assets to realize gains insofar as this behavior transmits shocks across potentially unrelated markets historical cost accounting is not a panacea

regulation and market liquidity we examine the effects of postcrisis financial regulation encompassing the dodd frank act and basel iii on market liquidity of the u s fixed income market we estimate structural breaks in a large panel of liquidity measures of corporate and treasury bonds our methodology does not require a priori knowledge of the timing of breaks can capture not only sudden jumps but also breaks in slow moving trends and displays excellent power properties against the popular claim that postcrisis regulation hurt liquidity we find no evidence of liquidity deterioration during periods of regulatory intervention instead breaks toward higher liquidity are often detected the online appendix is available at https doi org 10 1287 mnsc 2017 2876 this paper was accepted by tomasz piskorski finance

measuring liquidity in bond markets in the literature there is no consensus on a common approach to measure bond liquidity this paper is the first to comprehensively compare all commonly employed liquidity measures based on intraday and daily data for the u s corporate bond market we find that high frequency measures based on intraday data are very strongly correlated implying that previous results should be robust regarding the chosen measure most low frequency proxies based on daily data generally also measure transaction costs well however three proxies clearly take the lead corwin and schultz s 2012 high low spread estimator roll s 1984 measure and hasbrouck s 2009 gibbs measure

stability and the distribution of power the relation between stability and the distribution of power is an important and long debated problem in international relations theory the balance of power school argues that an even distribution of power is more stable while the preponderance of power school argues that a preponderance of power is more stable empirical efforts to estimate this relation have yielded contradictory results this essay examines the relation between stability and the distribution of power in an infinite horizon game theoretic model in which two states are bargaining about revising the international status quo the states make offers and counteroffers until they reach a mutually acceptable settlement or until one of them becomes so pessimistic about the prospects of reaching an agreement that it uses force to impose a new settlement the equilibrium of the game contradicts the expectations of both schools and offers an explanation for the conflicting empirical estimates in the model stability is greatest when the status quo distribution of benefits reflects the expected distribution of benefits that the use of force would impose

limits to arbitrage and the term structure of bond illiquidity premiums abstract theoretical models suggest that the relation of speculators capital and market liquidity is highly nonlinear changes in capital only marginally affect liquidity when capital is available abundantly but have a large effect when capital is scarce in this paper we confirm this relation within a regime switching model using three broad measures of german bond market liquidity we then analyze how the term structure of illiquidity premiums of german agency bonds is related to intermediaries capital and foreign flows illiquidity premiums are related to both variables only in the stress regime the effect of intermediaries capital is most strongly pronounced at the short end of the term structure in contrast flows into and out of the illiquid bond market segment constitute a level effect as they are related to illiquidity premiums of all maturities

how much can marketability affect security values how marketability affects security prices is one of the most important issues in finance we derive a simple analytical upper bound on the value of marketability using option pricing theory we show that discounts for lack of marketability can potentially be large even when the illiquidity period is very short this analysis also provides a benchmark for assessing the potential costs of exchange rules and regulatory requirements restricting the ability of investors to trade when desired furthermore these results provide new insights into the relation between discounts for lack of marketability and the length of the marketability restriction

the impact of bond rating changes on corporate bond prices new evidence from the over the counter market abstract i study the information content of bond ratings changes using daily corporate bond data from trace abnormal bond returns over a two day event window that includes the downgrade upgrade are negative positive and statistically significant although the reaction to upgrades is economically small monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two day abnormal returns unlike the bond market the stock market reaction to upgrades is statistically insignificant evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies in the cross section the bond market response is stronger for rating changes that appear more surprising rating changes of lower rated firms and upgrades that move the firm from speculative grade to investment grade

markets transparency and the corporate bond market for decades corporate bonds primarily traded in an opaque environment quotations which indicate prices at which dealers are willing to transact were available only to market professionals most often by telephone prices at which bond transactions were completed were not made public the u s corporate bond market became much more transparent with the introduction of the transaction reporting and compliance engine trace in july 2002 beginning that date bond dealers were required to report all trades in publicly issued corporate bonds to the national association of security dealers which in turn made transaction data available to the public in this paper we describe trading protocols in the corporate bond market and assess the impact of the increase in transparency on the market we review how trace has affected the costs that corporate bond investors paid to bond dealers for their transactions we canvass the opinions of a variety of finance professionals and consider articles in the trade press to obtain a broader view of the impact of transparency on the corporate bond market

automation versus intermediation evidence from treasuries going off the run this paper examines the choice of trading venue by dealers in u s treasury securities to determine when services provided by human intermediaries are difficult to replicate in fully automated trading systems when treasury securities go off the run their trading volume drops by more than 90 this decline in trading volume allows us to test whether intermediaries knowledge of the market and its participants can uncover hidden liquidity and facilitate better matching of customer orders in less active markets consistent with this hypothesis the market share of electronic intermediaries falls from 81 to 12 when securities go off the run electronic trading systems have been steadily increasing their share of securities trading in almost all financial markets as the amount of automation in financial markets increases it is natural to ask what services human intermediaries provide that are difficult or impossible to replicate in a fully automated trading system existing theory suggests that human intermediaries play at least two important functions first an intermediary s knowledge of the market and its participants may uncover hidden liquidity that facilitates quicker and more efficient matching of customer orders grossman 1992 the value of this matching function is greater when trading volume is low and matches are difficult to find second when information asymmetry is high the repeated interaction between an intermediary and its customers allows the intermediary to protect itself against informed trades and offer better prices to its customers seppi 1990 these two factors explain for example why electronic communications networks ecns have a greater market share for the largest and most actively traded nasdaq stocks while nasdaq market makers have a larger share in smaller less liquid stocks characterized by greater information asymmetry barclay hendershott and mccormick 2003 and why nyse specialists have higher participation rates in smaller less liquid stocks madhavan and sofianos 1998

the impact of biofuel growth on agriculture why is the range of estimates so wide the rapid expansion of biofuel production has generated considerable interest within the body of empirical economic literature that has sought to understand the impact of biofuel growth on the global food economy while the consensus within the literature is that biofuel emergence is likely to have some effect on future world agricultural market there is a considerable range in the estimated size of the impact despite the importance of this topic to policy makers there has been no study that has tried to reconcile the differences among various outlook studies this paper undertakes an in depth review of some key outlook studies which quantify the impacts of biofuels on agricultural commodities and which are based on either general equilibrium ge or partial equilibrium pe modeling approaches we attempt to reconcile the systematic differences in the estimated impacts of biofuel production growth on the prospective prices and production of three major feedstock commodities maize sugar cane and oilseeds across these studies despite the fact that all models predict positive impacts on prices and production there are large differences among the studies our findings point to a number of key assumptions and structural differences that seem to jointly drive the variations we observe across these studies the differences among the pe models are mainly due to differences in the design of scenarios the presence or absence of biofuel trade and the structural way in which agricultural and energy market linkages are modeled the differences among the ge models are likely to be driven by model assumptions on agricultural land supply the inclusion of the byproducts and assumptions on crude oil prices and the elasticity of substitution between petroleum and biofuels

stability and centrality of legislative choice in the spatial context majority rule spatial voting games lacking a core still always present a near core outcome more commonly known as the copeland winner this is the alternative that defeats or ties the greatest number of alternatives in the space previous research has not tested the copeland winner as a solution concept for spatial voting games without a core lacking a way to calculate where the copeland winner was with an infinite number of alternatives we provide a straightforward algorithm to find the copeland winner and show that it corresponds well to experimental outcomes in an important set of experimental legislative voting games we also provide an intuitive motivation for why legislative outcomes in the spatial context may be expected to lie close to the copeland winner finally we show a connection between the copeland winner and the shapley value and provide a simple but powerful algorithm to calculate the copeland scores of all points in the space in terms of the modified power values of each of the voters and their locations in the space

presidential address issuers underwriter syndicates and aftermarket transparency i model strategic interaction among issuers underwriters retail investors and institutional investors when the secondary market has limited price transparency search costs for retail investors lead to price dispersion in the secondary market while the price for institutional investors is infinitely elastic because retail distribution capacity is assumed to be limited for each underwriter dealer bertrand competition breaks down in the primary market and new issues are underpriced in equilibrium syndicates emerge in which underwriters bid symmetrically with quantities allocated internally to efficiently utilize retail distribution capacity underwriters and dealers appear to compete vigorously for new security issues and yet also appear to earn high profits in this business what value are they generating that warrants high compensation are there obstacles that keep this value from flowing through to security issuers despite apparently fierce competition in the market for these financial services the model in this paper combines three elements a lack of price transparency in the secondary market limited retail distribution capacity and bertrand competition in the primary market dealer underwriters bid for new securities as bertrand competitors they then sell these securities in a secondary market with limited price transparency retail investors face costs of gathering price information while institutional investors who are frequent repeat customers do not this leads to price dispersion in the secondary market where some retail customers get attractive terms and others do not the rents that accrue to broker dealers who can sell to retail customers are limited by their distribution capacity this in turn limits their incentives to bid aggressively in the primary market in equilibrium they share the new issues through arrangements that resemble underwriter syndicates new issues are underpriced relative to average subsequent transactions prices the results illustrate how noncompetitive outcomes in the secondary market can lead to breakdowns in competition in the primary market and why issuers may have little to gain from improved price transparency while more transparency limits the rents dealers can extract from retail investors in the secondary market the lost rents are not absorbed by issuers mechanisms green is from the tepper school of business carnegie mellon university i would like to thank my long time colleagues and friends burton hollifield uday rajan and mike trick as well as the doctoral students in 47 724 for patiently listening to me think out loud about these issues roni israelov and bruce carlin provided helpful comments on an earlier draft

integrating livestock feeds and production systems into agricultural multi market models the example of impact the various ways in which livestock production systems can be incorporated into economic partial equilibrium multi market models are presented and the challenges outlined a particular focus and illustrative case is livestock feed foremost among the challenges is the reconciliation of scientific understanding of livestock feed requirements and production characteristics with the available national data another challenge is in estimating herd structures an economic multi market modeling approach is presented which has been widely used in policy analysis and advocacy and an account is given of the necessary recent enhancements for addressing livestock

the informational role of bond analysts this study uses a large sample of sell side bond analysts reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities first we document that the distribution of bond analysts buy hold and sell recommendations is skewed positively but less so than the distribution of equity analysts recommendations the positive skewness in bond analysts recommendations is greater for

portfolio choice and pricing in illiquid markets abstract this paper studies portfolio choice and pricing in markets in which immediate trading may be impossible it departs from the literature by removing restrictions on asset holdings and finds that optimal positions depend significantly and naturally on liquidity when expected future liquidity is high agents take more extreme positions given that they do not have to hold those positions for long when they become undesirable consequently larger trades should be observed in markets with more frequent trading liquidity need not affect the price significantly however because liquidity has offsetting impacts on different agents demands this result highlights the importance of unrestricted portfolio choice the paper draws parallels with the transaction cost literature and clarifies the relationship between the price level and the realized trading frequency in this literature

bond illiquidity and excess volatility we find that the empirical volatilities of corporate bond and cds returns are higher than implied by equity return volatilities and the merton model this excess volatility may arise because structural models inadequately capture either fundamentals or illiquidity our evidence supports the latter explanation we find little relation between excess volatility and measures of firm fundamentals and the volatility of firm fundamentals but some relation with variables proxying for time varying illiquidity consistent with an illiquidity explanation firm level bond portfolio returns which average out bond specific effects significantly decrease excess volatility the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

secondary trading costs in the municipal bond market using new econometric methods we separately estimate average transaction costs for over 167 000 bonds from a 1 year sample of all u s municipal bond trades municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency also municipal bond trades are substantially more expensive than similar sized equity trades we attribute these results to the lack of bond market price transparency additional cross sectional analyses show that bond trading costs increase with credit risk instrument complexity time to maturity and time since issuance investors and perhaps ultimately issuers might benefit if issuers issued simpler bonds

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

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

how pastoralists perceive and respond to market opportunities the case of the horn of africa this article examines how pastoralists of the horn of africa negotiate the need for herd mobility production under conditions of variable rainfall and grazing conditions with the necessity to market animals at fixed market locations it addresses a set of related questions 1 are herder mobility and other production decisions being altered by improved market opportunities 2 what roles do markets play in pastoralist drought and drought recovery strategies 3 which groups of producers are taking advantage of and or benefiting from which market chains and 4 what factors other than price help to explain why and when pastoralists sell livestock the article concludes that macro economic forecasts about supply response in the region may be overly optimistic and off target because they fail to appreciate the non price factors that influence pastoralist households decisions to sell livestock

the term structure of bond liquidity we analyze the impact of market frictions on the trading volume and liquidity premia of finite maturity assets when investors differ in their trading needs our equilibrium model generates a clientele effect frequently trading investors hold only short term assets and predicts i a hump shaped relation between trading volume and maturity ii lower trading volumes of older compared with younger assets iii an increasing liquidity term structure from ask prices iv a decreasing or u shaped liquidity term structure from bid prices and v spillovers of liquidity from short term to long term maturities empirical tests for u s corporate bonds support our theoretical predictions

testing theories of strategic choice the example of crisis escalation strategic choice explanations of international crisis escalation imply that because actors anticipate the likely responses of others and choose actions that avoid undesirable responses our observations of nations decisions to use force are interdependent and censored for example suppose a weak nation b is threatened by a powerful neighbor a if b believes a s threat then it should back down unfortunately this censors our ability to observe whether a would actually use violence many traditional methods ignore this censoring and mis specify the extent to which variables influence crisis behavior to ameliorate the problems of interdependence and censoring i develop the strategically censored discrete choice model estimating this model using bayesian markov chain monte carlo simulation methods i analyze bueno de mesquita and lalman s 1992 dyadically coded version of the militarized interstate dispute data gochmann and maoz 1984 based on bayesian model comparison statistics i conclude that strategic explanations outperform nonstrategic ones in explaining crisis behavior

cross listed bonds information asymmetry and conservatism in credit ratings we propose information asymmetry as an additional explanation for rating conservatism because information asymmetry is likely higher for cross listed bonds than for u s bonds we expect and find that cross listed bonds are rated more conservatively than u s domestic bonds at issuance further cross listed bonds receive less frequent upgrades and take longer to be upgraded after issuance because lower ratings might also reflect higher default risk based on agencies private information we conduct additional tests to discriminate between the rating conservatism and private information explanations the results are consistent with ratings conservatism and inconsistent with the private information explanation

does a parent subsidiary structure enhance financing flexibility i examine whether firms exploit a publicly traded parent subsidiary structure to issue equity of the overvalued firm regardless of which firm needs funds and whether this conveys opposite information about firm values using 90 subsidiary and 37 parent seasoned equity offering seo announcements during 1981 2002 i document negative returns to issuers but insignificant returns to nonissuers in both samples and insignificant changes in combined firm value and parent s nonsubsidiary equity value in subsidiary seos firms issue equity to meet their own financing needs my evidence contrasts with previous studies and suggests that parent subsidiary structures

reason and war a new specification of the expected utility model of international conflict places expected utilities within a polar coordinate system treats thirdparty choices in a manner more consistent with classical forms estimates the expected utilities derived from not challenging existing policies more fully represents the expected costs of conflict and normalizes expected utilities regardless of system size by assuming that the probability of escalation of a dispute increases monotonically with leaders expectations of gain we derive continuous functions for the probabilities of war intervention violence and peace the revised theory significantly improves our ability to discriminate between violent and nonviolent disputes and between violent disputes that escalated to warfare and those that did not in europe between 1816 and 1970 in this essay

the costs of war a rational expectations approach a model of war costs is presented that is based on the utility nations expect to derive from the war as well as on the technological gap between adversaries and the short term tactical tit for tat calculations that must occur on the battlefield this model explains nearly three quarters of the variance in battle deaths per million population per month of war experienced by war initiators approximately one quarter of the variance in war costs is accounted for by considering the position of the initiator s opponent a second model based on marginal changes in expected utility technological differences and tit for tat is shown to account for more than one third the variance regardless of whether war costs are viewed by the initiator or an opponent in a war this study therefore provides a useful explanation of war intensity and contributes to the cumulative lawlike implications of the expected utility approach on which it is based

when does the bond price reaction to earnings announcements predict future stock returns abstract in this paper i show that the bond price reaction to earnings announcements has predictive power for post announcement stock returns and that this predictive ability is driven by the bonds of non investment grade firms i find that bonds predictive ability is more pronounced in firms that have a lower level of institutional shareholder ownership and whose bonds are more liquid this paper enhances our understanding of the relation between the stock and bond markets and complements the literature which documents whether and under what circumstances various accounting based measures and financial statement components predict post announcement stock returns

conflict resolution and peace this paper analyzes the escalation of conflict in crisis situations as the outcome of choices made by rational individuals in times of crisis national leaders must confront the conflicts of interest that might lie dormant under other circumstances a crisis is characterized as a constraint in the options available to decision makers they must choose either to negotiate or to fight the form that the resolution of the conflict takes is determined by the options chosen by assuming that the probability of a rational leader choosing a particular strategy is monotonic with the expected utility associated with that choice marginal contributions to the probability of an event are combined to provide functional forms that predict peace asymmetric escalation and war this approach yields a single theory of war and peace that also accounts for the occurrence of military interventions the more frequently observed form of conflict escalation it is also shown that peace is not simply the absence of war the theory is tested using a revised specification of the expected utility measures in 133 disputes involving european states

liquidity misallocation in an over the counter market abstract to understand the illiquidity of the over the counter market when dealers and traders are in long term relationships i develop a framework to study the endogenous liquidity distortions resulting from the profit maximizing screening behavior of dealers the dealer offers the trading mechanism contingent on the aggregate history of his customers summarized by the asset allocation the equilibrium distortion is type dependent trade with small surplus breaks down trade with intermediate surplus may be delayed trade with large surplus is carried out with a large bid ask spread but without delay because of dealers limited commitment the distortions become more severe when the valuation shock is frequent the valuation dispersion is large or the matching friction to form new relationships is large calibrating the model and running a horse race between matching efficiency trading speed and relationship stability i found that the liquidity disruption in the market during the recent financial crisis is more consistent with declining matching efficiency of forming trading relationships the optimal mechanism can be implemented by random quote posting

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

experiments on percolation of information in dark markets in dark markets order submissions are bilateral and transaction prices are known only to the trading counterparties here we study to what extent the information aggregation theory proposed by duffie and collaborators predicts outcomes in a laboratory version of such markets we find that prices aggregate the available information but not in the strict sense of the theory where prices converge exponentially fast to average private signals prices instead fluctuate within bands around this average the band widths reflect in the best case the precision of the average signal and otherwise the precision of a single private signal

corporate bond market transaction costs and transparency using a complete record of u s over the counter otc secondary trades in corporate bonds we estimate average transaction costs as a function of trade size for each bond that traded more than nine times between january 2003 and january 2005 we find that transaction costs decrease significantly with trade size highly rated bonds recently issued bonds and bonds close to maturity have lower transaction costs than do other bonds costs are lower for bonds with transparent trade prices and they drop when the trace system starts to publicly disseminate their prices the results suggest that public traders benefit significantly from price transparency

price discovery in illiquid markets do financial asset prices rise faster than they fall we study price discovery in municipal bonds an important otc market as in markets for consumer goods prices rise faster than they fall round trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets further effective half spreads increase or decrease more when movements in fundamentals favor dealers yield spreads relative to treasuries also adjust with asymmetric speed in rising and falling markets finally intraday price dispersion is asymmetric in rising and falling markets as consumer search theory would predict in a wide variety of consumer markets prices for retail goods rise faster than they fall 1 this asymmetric price adjustment referred to as rockets and feathers is generally understood by economists to be inconsistent with perfect competition between sellers sellers appear to exploit local market power due to the search frictions that their customers face we document asymmetric price adjustment in a major over the counter otc financial market using a comprehensive sample of all trades in municipal bonds over a 5 year period we provide evidence that the asymmetric price adjustment is associated with opportunistic timing by the broker dealers who intermediate trades in the market movements in fundamentals that increase spreads earned by broker dealers are reflected quickly in prices while prices respond more slowly to changes that reduce their spreads further the asymmetries are more pronounced in states where tax treatment of the bonds would induce market segmentation we also document asymmetries in withinday price dispersion as implied by theoretical models of rockets and feathers price adjustments based on costly consumer search and learning

rational deterrence theory i think therefore i deter deterrence theories purport to supply the auxiliary assumptions rational choice theories need to predict rational strategic behavior they generally assume that would be initiators are i instrumentally rational 2 risk prone gain maximizers 3 free of domestic constraints and 4 able to identify themselves correctly as defenders or challengers these assumptions are contradicted by empirical studies that indicate that risk prone gain maximizing initiators are relatively uncommon that leaders at times calculate as deterrence theories expect but behave contrary to their predictions and that the calculus of initiators generally depends on factors other than those identified by deterrence theories deductive theories of deterrence are also inadequate because they do not define their scope conditions nor can they accommodate deviation by initiators from processes of rational calculation rational deterrence theories are poorly specified theories about nonexistent decision makers operating in nonexistent environments

time varying risk aversion abstract exploiting portfolio data and repeated surveys of an italian bank s clients we test whether investors risk aversion increases following the 2008 crisis we find that after the crisis both qualitative and quantitative measures of risk aversion increase substantially and that affected individuals divest more stock we investigate four explanations changes in wealth expected income perceived probabilities and emotion based changes of the utility function our data are inconsistent with the first two channels while they suggest that fear is a potential mechanism underlying financial decisions whether by increasing the curvature of the utility function or the salience of negative outcomes