bank spread with uncertain deposit level and risk aversion abstract this paper derives a model of the banking firm under uncertainty and risk aversion the selection of the bank s optimal spread between loan and deposit rates is emphasized the model s results provide some implications for bank asset quality capital regulation and deposit insurance for example it is shown that increases in the level of equity capital tend to increase the bank s spread under dara this implies an improvement in bank asset quality on the other hand as the deposit supply function becomes more volatile the bank s spread narrows which implies a decline in the quality of the bank s assets

dynamic contracting under imperfect public information and asymmetric beliefs abstract we develop a dynamic principal agent model to show how imperfect public information and asymmetric beliefs about payoff relevant parameters agency conflicts and the agent s implicit incentives to influence the principal s posterior beliefs through his unobservable actions interact to affect optimal dynamic contracts we make a methodological contribution to the literature by solving the continuous time contracting problem using a discrete time approximation approach we obtain a simple characterization of optimal renegotiation proof contracts in terms of the solution to a nonlinear ordinary differential equation ode we then exploit the properties of the ode to derive a number of novel implications for the dynamics of long term contracts that alter the intuition gleaned from the previous literature optimism has a first order impact on incentives investment and output that could reconcile the private equity puzzle consistent with empirical evidence the interaction between asymmetric beliefs risk sharing and adverse selection costs could cause the time paths of the agent s incentive intensities to be increasing or decreasing our results also suggest that the incorporation of imperfect public information and asymmetric beliefs could potentially reconcile empirical evidence of an ambiguous relation between risk and incentives and a non monotonic relation between firm value and incentives permanent and transitory components of risk have differing effects on incentives which suggest that empirical investigations of the link between risk and incentives should appropriately account for different components of risk

on the determinants of bank interest margins under credit and interest rate risks abstract this paper explores the determinants of optimal bank interest margins based on a simple firm theoretical model under multiple sources of uncertainty and risk aversion the model demonstrates how cost regulation credit risk and interest rate risk conditions jointly determine the optimal bank interest margin decision we find that the bank interest margin is positively related to the bank s market power to the operating costs to the degree of credit risk and to the degree of interest rate risk an increase in the bank s equity capital has a negative effect on the spread when the bank faces little interest rate risk the effect of rising interbank market rate on the spread is ambiguous and depends on the net position of the bank in the interbank market our findings provide alternative explanations for the empirical evidence concerning bank spread behavior

when does the prime rate change abstract we study the frequency of prime rate changes we model the prime rate as a time series variable that can be changed only at some cost this yields a logit model in which the probability of a prime rate change is a function of market variables we test this model using data from a micro data set that gives the dating of prime rate changes the results indicate that adjustment costs are important to the prime rate adjustment process and that changes in exogenous variables have a significantly larger effect on the probability of a prime rate increase than decrease

a model of the financial firm with imperfect asset and deposit elasticities abstract the paper develops an intertemporal model to estimate the production technology of financial firms such as banks price taking is testable in each separate market for assets and liabilities and competitive price taking is a nested special case such tests are applied both to outputs and inputs empirical results for a sample of banks in new york and new jersey indicate that price taking applies only in markets for labor and time deposits in markets for loans demand deposits cash and materials the price taking hypothesis is not accepted

asymmetric quantile analysis of the swedish mortgage price discovery process based on swedish banking data we discover robust and significantly positive asymmetric price transmission apt effects over all analysed regression quantiles of our mortgage interest rates with even larger positive apt for the higher percentiles the analysis was enabled through unique access to a swedish bank s seb own records of their true borrowing costs our central contribution is that there is a higher propensity for the bank to rapidly increase its mortgage interest rates for customers following an increase in its borrowing costs compared with the propensity for the bank to decrease its customers mortgage rates subsequent to a corresponding borrowing cost decrease

reconciling trade and environment towards a comparative advantage for long term policy goals abstract for an economic order to remain within ecological boundaries countries need to respond to ecological feedback effects resulting environmental compliance costs have so far hardly influenced trade flows and firm location decisions future developments of economic integration and the increasing urgency of stricter environmental objectives are shown to change this picture primarily for the case of transnational and global environmental problems countries will need to be relieved from the threat of competitive disadvantage caused by environmental production process regulation that the current international regulatory trade framework implies the first option to do so international harmonization of environmental regulation is connected to a range of shortcomings especially for countries differing in natural endowments and preferences for counterbalancing measures two regulatory frameworks are analyzed based on a a physical inventory system or b a direct environmental compliance cost comparison the adequacy of the physical system is shown to be limited whereas the cost basis option can be applied on a broader range it cannot fully re establish the optimal situation that would be achieved by an often unlikely environmental agreement but would encourage countries to take necessary unilateral environmental action changing current trade regulation in that respect will be crucial to foster sustainable development

market evidence on the effective maturity of bank assets and liabilities the recent years increase in interest rate volatility has intensified concern over the exposure of commercial banks to interest rate or funding risk since the effect of interest rate changes on the equity value of a bank depends on the maturity or duration of the bank s assets and liabilities assessing an individual bank s interest rate risk exposure requires information about the maturity composition of its portfolio it is difficult however to assess a bank s risk exposure from balance sheet data because several important asset and liability items have theoretically ambiguous effective maturities in a frictionless market a security s effective maturity will equal its stated maturity or time to repricing with market imperfections e g depositors transaction or information costs however the equilibrium cost of some deposit items may respond sluggishly or incompletely to market rate changes see hester and pierce 1975 or flannery 1982 such liabilities market values discounted at market rates would therefore fluctuate with the level of interest rates these liabilities are sometimes called core deposits which manifest sticky responses to market rate changes we define an asset or liability s effective maturity as the maturity of a fixed rate perfectly elastically supplied security with the same market value elasticity as the bank balance sheet item under consideration naturally a balance sheet item s effective maturity is the relevant determinant of its contribution to the bank s overall interest rate risk sensitivity

profit efficiency for spanish savings banks abstract frontier profit efficiency is examined for spanish savings banks over 1986 1991 a period in which the spanish banking has seen considerable deregulation in spain the standard assumption that firms operate in a perfectly competitive output market is unlikely to be met thus we use an alternative profit function specification which allows for market power in the output market profit efficiency is determined using the thick frontier approach and estimated using both alternative and standard profit function specifications to illustrate the effect of different assumptions regarding the competitiveness of the output market estimation of the alternative profit function suggests that the profit inefficiency of spanish savings banks which averaged 28 fell by forty percent between 1986 to 1991 the standard profit function which we believe yields less reliable results generated greater average inefficiency there was no significant shift up or down in the profit frontier itself

financial frictions and policy cooperation a case with monopolistic banking and staggered loan contracts abstract do financial frictions call for cross border policy cooperation this paper investigates the implications of financial frictions in the form of staggered loan contracts supplied by monopolistic banks for monetary policy using the linear quadratic lq framework we show that policy cooperation yields long run gains in addition to gains from stabilizing inefficient fluctuations over the business cycle as usually found in models with price rigidities the ramsey optimal steady states differ between cooperation and noncooperation such gains from cooperation arise irrespective of capital account liberalization

banks as multioutput oligopolies an empirical evaluation of the retail and corporate banking markets the distinction between retail and corporate banking markets is of much importance in real life banking organizations the two markets differ with respect to concentration the importance of informational asymmetries and the extent of customer mobility within a standard conjectural variation model estimated on cost efficient banks as well as on the full sample of banks the authors empirically characterize the strategic behavior in each of these markets and also focus on cross market interactions to see whether initial moves in one market affect the equilibrium in the other market they compare their findings to the predictions that would follow from merely considering concentration ratios such as the herfindahl index

imperfect competition in bank retail markets deposit and loan rate dynamics and incomplete pass through this paper examines determinants of pass through from the market interest rate to bank retail deposit and loan rates a dynamic adjustment cost model with imperfect competition implies that these rates depend on own lagged values and on lagged current and expected future values of the security rate greater competition in retail markets reduces the impact of lagged and expected rates on current retail rates while raising the effect of the current security rate yielding greater pass through these results have important implications for both the specifications used in empirical work and biases introduced into estimates of pass through effects

modeling the banking firm a survey this paper reports on the status of the literature on micro bank modeling and assesses our understanding of the banking firm s optimal behavior this is no mean task for much has been written on banking broadly defined over the past couple of decades the review is developed in pieces each major subproblem is outlined and the analysis used to deal with the issue explicated this is not the best way to summarize the development of a field it should be immediately recognized one would prefer to have a smooth continuum of development moving the frontier of knowledge evenly through time and across subareas yet this is rarely the way a field develops more likely individual questions attract attention and are the subjects of a substantial number of contributions after a time the field moves on to the new area of interest the banking field is no exception before embarking upon the review however a couple of lines should be devoted to previous attempts there have been essentially three first pyle 1972 analyzes the uncertainty portfolio models at a time when little existed in the literature and hence one finds the review a bit vague and sketchy baltensperger s contributions 1978 1980 are the next serious and rather extensive reviews the quality of these

financial flexibility and the cost of external finance for u s bank holding companies this paper models a bank with access to two segmented capital markets the market for insured deposits and the market for uninsured claims we illustrate how higher costs of accessing either market leads to lower firm values and a greater incentive to carry liquid assets we test our model on a sample of large banking firms and label banks with relatively lower costs of accessing the two markets as more financially flexible our two key findings are 1 banks with greater financial flexibility have greater value and 2 banks with greater financial flexibility devote a smaller percentage of assets to cash and marketable securities consistent with the notion that financial flexibility reduces the sensitivity of firm profits to internal wealth shocks thus reducing the firm s need to carry financial slack

trade and pollution linkages piecemeal reform and optimal intervention we demonstrate how coordinated trade and environmental policy can achieve ef ficiency and pollution mitigation gains superior to those obtained without such coordination we show how trade and environment linkages give rise to complex second best policy issues and derive optimal interventions and sufficient conditions for welfare improving piecemeal trade and environmental policy reforms in a small economy changing trade and environ ment distortions in proportion to their optimal levels increases welfare we decompose the economic and environment effects of policies targeted at trade and pollution in both con sumption and production we also decompose production responses into output adjustments and changes in pollution intensities

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

optimal contracts in a continuous time delegated portfolio management problem this article studies the contracting problem between an individual investor and a professional portfolio manager in a continuous time principal agent framework optimal contracts are obtained in closed form these contracts are of a symmetric form and suggest that a portfolio manager should receive a fixed fee a fraction of the total assets under management plus a bonus or a penalty depending upon the portfolio s excess return relative to a benchmark portfolio the appropriate benchmark portfolio is an active index that contains risky assets where the number of shares invested in each asset can vary over time rather than a passive index in which the number of shares invested in each asset remains constant over time fund managers compensation schemes in a delegated portfolio management setting have been of special interest to both academics and practitioners academic interest stems in part from the rapid growth of managed funds over the last two decades gompers and metrick 1998 report that by december 1996 mutual funds pension funds and other financial intermediaries held discretional control over more than half of the u s equity market it is thus of importance to study the impact of institutional trading on asset prices and to integrate into one model both asset pricing and delegated portfolio management compensation as advocated by brennan 1993 allen and santomero 1997 and allen 2001 it is also important to understand the relationship between a manager s trading strategies and his implicit incentives or career concerns see e g brown harlow and starks 1996 brown goetzmann and park 1997 chevalier and ellison 1999 and chen and pennacchi 2000 these concerns include internal promotion from a small to a large fund higher outside offers and the flow of money through the fund under management 1 the importance of fund manager compensation is also underscored by congressional passage in 1970 of the amendment to

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

the delegated lucas tree we analyze the effects of the observed increased share of delegated capital for trading strategies and equilibrium prices by introducing delegation into a standard lucas exchange economy in equilibrium some investors trade on their own account but others decide to delegate trading to professional fund managers flow performance incentive functions describe how much capital clients provide to funds at each date as a function of past performance convex flow performance relations imply that the average fund outperforms the market in recessions and underperforms in expansions when the share of capital that is delegated is low all funds follow the same strategy however when the equilibrium share of delegated capital is high funds with identical incentives employ heterogeneous trading strategies a group of managers borrows to take on a levered position on the stock thus fund returns are dispersed in the cross section and the outstanding amounts of borrowing and lending increase the relation between the share of delegated capital and the sharpe ratio typically follows an inverse u shaped pattern jel g11 g12 g23 d02 d81 over the past thirty years there has been a gradual but profound change in the way money is invested in financial markets while almost 50 of u s equities were held directly in 1980 by 2007 this proportion decreased to approximately 20 see french 2008 what are the equilibrium implications of this shift in particular how does the increased presence of delegation affect trading strategies and prices to analyze the link between the incentives of financial institutions and asset prices we introduce financial intermediaries into a lucas exchange economy rather than study an optimal contracting problem we rely on empirical regularities inflows and assume a convex relation betweenflows and performance relative to the market as documented for example in chevalier and ellison 1997

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

credit rationing and credit view empirical evidence from an ethical bank in italy attempts have been made in the empirical literature to identify credit rationing and its determinants using balance sheet data or evidence from corporate surveys however observational equivalence identification problems and interview biases are serious problems in these studies we analyze directly the determinants of credit rationing in credit files by examining the differencebetweentheamountsdemandedbyandsuppliedtoeachborrower as shown by official bank records our findings provide microeconomic evidence that supports the credit view hypothesis by showing that the european central bank refinancing rate is significantly and positively related to partial but not total credit rationing this finding is consistent with the hypothesis that this variable affects the total volume of bank loans

bank forward lending in alternative funding environments this paper examines the effects of loan commitments on bank lending behavior in both deposit funding and liability management environments assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain the bank must choose its supply of commitments given this choice the bank becomes a passive lender to commitment holders our focus on forward credit markets sheds new light on the private bankers assertion that they do not directly determine their level of lending but merely accommodate the credit needs of their customers similarly the central banker s claimed inability to control monetary aggregates in the short run becomes understandable in a new context it is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system it is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments expected bank and banking system size

a test of the law of one price in retail banking this paper investigates the level and the determinants of retail banking interest rate differences among spanish banks in the period 1989 2003 we find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long term values in response to external shocks as the relative version of the law of one price predicts but the evidence runs contrary to the absolute version of the law credit risk premium part of the marginal cost of the loans granted by a particular bank is an important source of interest rate dispersion across banks and loan products both before and after spain joined the euro zone therefore differences in credit risk policies across banks must be taken into account when forming expectations about european retail banking integration

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

security design with status concerns abstract this paper provides a status based explanation for convertible securities an entrepreneur with status concerns inducing risk taking decides how to finance the firm and how to dynamically manage it solving analytically for the optimal security we find that it is substantially similar to a convertible security our model can explain why convertible securities are mainly issued by start ups and small firms as we show that their salient characteristics higher volatility and dynamic flexibility accentuate incentives to issue convertible securities we also provide analytical results relevant to quantifying how status concerns affect credit risk an established factor behind security choice

the first best sharing rule in the continuous time principal agent problem with exponential utility abstract the continuous time principal agent model with exponential utility developed by holmstrom and milgrom admits a simple closed form solution the second best sharing rule is a linear function of aggregated output here we show that the first best sharing rule is also linear in aggregated output the result follows immediately from the separability of the problem and the fact that principal and agent both have cara utility journal of economic literature classification numbers d82 j33

the value of risk measuring the service output of u s commercial banks rather than charging direct fees banks often charge implicitly for their services via interest spreads as a result much of bank output has to be estimated indirectly in contrast to current statistical practice dynamic optimizing models of banks argue that compensation for bearing systematic risk is not part of bank output we apply these models and find that between 1997 and 2007 in the u s national accounts on average bank output is overestimated by 21 percent and gdp is overestimated by 0 3 percent moreover compared with current methods our new estimates imply more plausible estimates of the share of capital in income and the return on fixed capital

how does equity capital cost affect bank performance during a financial crisis this article theoretically examines how equity capital cost affects return performance and safety of a bank and how this effect varies across a financial crisis comparing to a normal time when the bank manager s performance reveals the like of higher equity return and the dislike of higher equity risk we derive two main results first an increase in the bank s equity capital cost from an increase of the interest rate of the federal funds results in a reduced loan risk taking at an increased optimal bank interest margin implying better bank performance second by ignoring the dislike we find that the better performance is reinforced during a financial crisis but is reduced during a normal time financial crises and the dislike preference as such contribute a relatively low return and the stability of banking activities

economies of superscale in commercial banking most previous studies of scale economies in banking have excluded banks larger than 1 billion in assets thus study by contrast estimates cost functions for the 100 largest us commercial banks hedonic terms are incorporated to correct for the aggregated nature of the call report data available for these banks in addition we attempt to quantify the cost benefit of diversification in the model we estimate efficient bank scale to range from 15 billion to 37 billion in total assets a thousandfold increase over some previous findings these results are supported by comparison of actual average costs as well as by casual historical observation and the level of widespread concern over interstate banking our findings suggest some cost incentive or benefit to expansion or consolidation among large regional banks including interstate expansion or consolidation

a model of the commercial loan rate this paper explores the theoretical and empirical determinants of the commercial loan rate charged by commercial banks based on a model of financial intermediary behavior which assumes monopolistic competition in asset and liability markets the model incorporates the constraint that banks must maintain at least a minimum quantity of bonds in asset portfolios equations are estimated on a time series basis to explain the behavior of commercial loan rates over the period 1953 to 1980 the evidence appears consistent with the hypothesis that commercial banks operate in a market characterized by imperfect competition and that they explicitly set loan rates the development of large scale econometric models has focused attention on the operation of the commercial loan market because of the importance of commercial loan activity in the transmission of monetary policy moreover it is commonly accepted that the quantity of commercial loans or changes in these loans has an important influence on the holding of free reserves by commercial banks and this implies that the commercial loan market has an effect on the supply of money 2 nevertheless the determinants of commercial loan rates have drawn relatively little analytical attention previous work on the commercial loan market has generally focused on the question of whether this market is characterized by credit rationing 3 most studies assume that the commercial loan market is generally competitive but at times the commercial loan rate does not clear the market the quantity of loans transacted is constrained by the supply function and commercial banks engage in nonprice rationing of customers a corollary of this rationing hypothesis is that events in the deposit market have an important influence on the quantity of commercial loans 4 the purpose of this paper is to explore the determinants of the commercial

a time series cross section analysis of the determinants of australian trading bank loan deposit interest margins 1962 1981 abstract a theoretical model of the determination of trading bank interest margins based on the hedging theory of interest margin determination is tested on time series cross section data of australian trading banks generally the results are consistent with that theory that is there exists a stable non linear relationship between australian trading bank net loan deposit interest margins and measures of market power degree of absolute risk aversion and to interest rate uncertainty furthermore the shift from business sector to personal sector loan and deposit business is associated with increased bank interest margins

optimal risk sharing with effort and project choice we consider first best risk sharing problems in which the agent can control both the drift effort choice and the volatility of the underlying process project selection in a model of delegated portfolio management it is optimal to compensate the manager with an option type payoff where the functional form of the option is obtained as a solution to an ordinary differential equation in the general case the optimal contract is a fixed point of a functional that connects the agent s and the principal s maximization problems we apply martingale duality methods familiar from optimal consumption investment problems

real exchange rate dynamics revisited a case with financial market imperfections abstract in this paper we investigate the relationship between real exchange rate dynamics and financial market imperfections for this purpose we first construct a new open economy macroeconomics noem model that incorporates staggered loan contracts as a simple form of the financial market imperfections our model with such a financial market friction replicates persistent volatile and realistic hump shaped responses of real exchange rates which have been thought very difficult to materialize in standard noem models remarkably these realistic responses can materialize even with both supply and demand shocks such as cost push loan rate and monetary policy shocks this implies that the financial market development is a key element for understanding real exchange rate dynamics

bank size collateral and net purchase behavior in the federal funds market empirical evidence differences between large and small banks net purchase behavior in the uncollaterized federal funds and collateralized repurchase agreements markets are documented the larger a bank s asset size the larger ceteris paribus its federal funds purchases the threshold asset size is in the region of 1 billion to 2 5 billion for any size class banks located in major banking centers are more likely to be net federal funds purchasers than are banks located outside money centers in the collateralized repurchases agreements market there appears to be no size of locational discrimination indeed the smallest banks are the largest net purchasers as a fraction of assets of funds on the repurchases agreements market copyright 1989 by the university of chicago

a computational approach to the optimal structure of bank input prices abstract most bank deposits contain an embedded option which permits the depositor to withdraw funds at will demand deposits generally allow costless withdrawal while time deposits often require payment of an early withdrawal penalty managing the risk that depositors will exercise their withdrawal option is an important aspect of input pricing this paper acknowledges the threat of deposit withdrawal and then solves for the optimal structure of bank deposit rates

information reusability competition and bank asset quality this paper explains the recent decline in bank asset quality using the notion of information reusability banks are viewed as information processors they exist because of their advantage in extracting the surplus associated with the reusability of borrower specific information it is shown that a bank s incentive to screen loan applicants and hence maintain the quality of its assets depends on the surplus this screening can produce which in turn depends on information reusability two recent changes in banks operating environment are increased competitition and greater temporal volatility in borrower credit risks the former has directly reduced banks informational surplus while the latter has impaired information reusability hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets it is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality

the efficiency of the scandinavian banking sector a wavelet quantile regression analysis in this article the scandinavian housing financing market is analysed in order to determine whether the interest rate price discovery processes of denmark norway and sweden are efficient based o

rewarding trading skills without inducing gambling this paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds we show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient their trading skills are scalable and generate higher prot per unit of risk we study investment management contracts that deter this behavior if investors are short lived then the manager must leave rents to investors in order to credibly commit not to gamble if investors are long lived contracts that increase but defer expected bonuses after an outstanding performance implement the rstbest our model can explain a number of observed dierences

financial consumption and the cost of finance measuring financial efficiency in europe 1950 2007 this paper proposes to assess financial intermediation efficiency in germany france the uk and europe more broadly over the past 60 years i rely on philippon s 2012 methodology which calculates the unit cost of financial intermediation through the ratio of financial consumption measured by financial income to financial output approximated by the sum of outstanding assets intermediated the contribution of this paper is threefold first because financial industry va ignores banks capital income capital gains dividends and interest on securities it is an imperfect measure of the consumption of financial intermediation so long as capital income generates wages and profits to financial intermediaries it is akin to an implicit consumption of financial services using banking income instead of banking va to measure the consumption of banking services i show that the gdp share of finance has increased continuously in germany france the uk and europe as a whole second the unit cost of financial intermediation increased over the past 40 years except in france where overall it stagnated in addition the european unit cost matches the us unit cost calculated by philippon 2012 finally because financial intermediaries deal with nominal stocks and ows and because the unit cost increases during periods of monetary troubles i focus here on nominal rates of interest to explain the evolution of unit cost i show that a rise in nominal rates of interest increases the spread of bank interest so that 1970s and 1980s high unit costs are statistically explained by increases in short term interest rates on the other hand post 1990s high unit cost seems to coincide with the development of new market based activities

asset pricing under optimal contracts we consider the problem of finding equilibrium asset prices in a financial market in which a portfolio manager agent invests on behalf of an investor principal who compensates the manager with an optimal contract we extend a model from buffa vayanos and woolley 2014 by allowing general contracts and by allowing the portfolio manager to invest privately in individual risky assets or the index to alleviate the effect of moral hazard agent is optimally compensated by benchmarking to the index which however may incentivize him to be too much of a closet indexer to counter those incentives the optimal contract rewards agent for taking specific risk of individual assets in excess of the systematic risk of the index by rewarding the deviation between the portfolio return and the return of an index portfolio and the deviation s quadratic variation

consumption and portfolio policies with incomplete markets and short sale constraints the infinite dimensional case abstract we employ a martingale approach to study a dynamic consumption portfolio problem in continuous time with incomplete markets and short sale constraints we introduce a notion of minimax local martingale and transform the dynamic problem into a static problem of maximizing expected utility over the consumption bundles that satisfy a single budget constraint formed using that measure we establish the existence of and characterize the minimax local measure provide sufficient conditions for the dynamic consumption portfolio problem to have a solution and relate the optimal policies to the solution of quasi linear partial differential equation

the determinants of bank interest rate margins an international study abstract this paper studies the determinants of bank net interest margins nims in six selected european countries and the us during the period 1988 1995 for a sample of 614 banks we apply the ho and saunders model ho t saunders a 1981 the determinants of bank interest margins theory and empirical evidence journal of financial and quantitative analyses 16 581 600 to a multicountry setting and decompose bank margins into a regulatory component a market structure component and a risk premium component the regulatory components in the form of interest rate restrictions on deposits reserve requirements and capital to asset ratios have a significant impact on banks nims the empirical results suggest an important policy trade off between assuring bank solvency high capital to asset ratios and lowering the cost of financial services to consumers low nims the more segmented or restricted the banking system both geographically and by activity the larger appears to be the monopoly power of existing banks and the higher their spreads macro interest rate volatility was found to have a significant impact on bank nims this suggests that macro policies consistent with reduced interest rate volatility could have a positive effect in reducing bank margins

the cost of market versus regulatory discipline in banking1 abstract we present evidence that insured deposit financing shields banks from the full costs of market discipline moody s downgrades indicators of increasing risk are associated with negative abnormal equity returns that are increasing in the bank s reliance on insured deposits moreover banks raise their use of insured deposits following increases in risk these findings cast doubt on the ability of capital market participants to effectively discipline bank behavior within the current regulatory environment more generally our findings highlight the potential for regulation to undermine market discipline in regulated industries

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

the determinants of bank interest margins theory and empirical evidence this paper has developed a model of bank margins or spreads in which the bank is viewed as a risk averse dealer it was demonstrated that an interest spread or margin would always exist and that this was the result of transactions uncertainty faced by the bank moreover it was shown that this pure spread depended on four factors the degree of managerial risk aversion the size of transactions undertaken by the bank bank market structure and the variance of interest rates the model implied that liability and asset structures had to be analyzed together since they were directly interrelated through transactions uncertainty it was shown that because of this transactions uncertainty hedging behavior was perfectly rational within an expected utility maximizing framework extending the model from a structure with one kind of loan and deposit to loans and deposits with many maturities should lead to further interesting insights into margin determination especially as portfolio effects may become apparent

do firms get the financing they want measuring credit rationing experienced by small businesses in the u s this paper measures the extent to which small businesses in the united states in the late 1980s were able to access the external credit finance they desired we argue that a comprehensive definition of credit rationing must account for both a creditworthy firms that apply for and are denied financing and b creditworthy firms that decide not to apply for desired external financing given expectations about how long it may take to obtain financing and the evolution of investment opportunities

capital regulation and deposit insurance abstract a model of deposit insurance in which the bank closure rule can systematically deviate from the economic insolvency condition used in earlier models is developed simulation of that model for plausible parameter values suggests that the failure to close banks on a timely basis has a profound effect in increasing the insurer s liability the implications of these results for capital regulation are discussed

a study on long run inefficiency levels of a panel dynamic cost frontier under the framework of forward looking rational expectations abstract this paper aims to provide a theoretical underpinning of the dynamic efficiency model pioneered by ahn s c good d h sickles r c 2000 estimation of long run inefficiency levels a dynamic frontier approach econometric reviews 19 461 492 in the context of a quadratic loss function this paper formulates a multi period forward looking rational expectations model on the evolution of the technical inefficiency level which correctly produces a dynamic panel data model the model is illustrated using panel data of 112 french banks encouraging evidence of superiority in favor of the model is reached substantial cost inefficiency prevails in this industry where the constituent banks are characterized as having volatile adjustment speeds toward their long run steady states the sample banks exhibit increasing returns to scale and product mix economies

foreign entry and the mexican banking system 1997 2007 proquest denotes formulae omitted in recent years governments around the world have been opening up their banking systems to foreign competition with the expectation of making them more efficient stable and resilient to shocks academics and policymakers have therefore been exploring the effects of foreign bank entry from both a theoretical and an empirical point of view most studies conclude that foreign entry increases the contestability of markets thereby reducing administrative costs lowering net interest margins nims and driving down bank rates of return nevertheless as clarke and others note much of what we know comes from cross country studies that are heavily weighted toward developed economies 1 this is particularly crucial because the impact of foreign entry may vary with the level of economic development 2the literature to date on foreign bank entry in developing economies does not provide a consensus set of results there is some evidence that foreign entry increases social welfare clarke cull and martinez peria find that enterprises in countries with high levels of foreign bank participation tend to rank interest rates and access to long term loans as lesser constraints on their operations and growth than do enterprises in countries with low levels of foreign bank participation 3 martinez peria and mody analyzing a group of latin american cases in a pooled time series cross sectional framework find that foreign banks charge lower interest rate spreads than domestically owned banks 4 they also find that foreign bank entry is associated with an overall increase in administrative efficiency and a decrease in interest spreads suggesting that foreign entry spurred competition denizer obtains similar results in a study of turkey foreign entry reduced domestic bank overhead expenses as well as bank profitability 5 unite and sullivan find that foreign entry was associated with declines in interest rate spreads overhead expenses and profits in the philippines but the effect was confined to domestic banks that had been tied to business groups 6 kasekende and sebudde report that foreign banks in uganda have better internal control mechanisms than domestic banks in terms of judging the quality of borrowers 7not all the evidence points in the same direction however havrylchyk finds that foreign banks in poland are more efficient than domestic banks but then shows that the efficiency gains are all located in so called greenfield banks domestic banks that are acquired by foreign banks do not become more efficient 8 cardim de carvalho finds no differences between foreign and domestic banks in brazil in terms of credit allocation or technical efficiency 9 indeed technical progress in online banking and automation in brazil has been introduced more aggressively by domestically owned banks claessens demirguc kunt and huizinga find that foreign banks operating in developing economies have higher overhead expenses charge higher interest margins and earn higher rates of return than domestic banks 10foreign banks may also be less willing to extend credit on the basis of softknowledge about firms than domestically owned banks studies of argentina and pakistan suggest that foreign entry may therefore give larger firms even greater advantages by exacerbating problems of differential access to capital 11 the finding that foreign banks eschew soft knowledge lending is supported by multicountry studies that use panel data techniques detragiache tressel and gupta report that foreign entry in a panel of poor economies is associated with a net reduction in total lending to the private sector foreign banks appear to have skimmed offthe best credit risks leaving domestic banks with a pool of weaker borrowers from which to select 12 a related body of research suggests that foreign banks represent a trade offfor a developing country galindo micco and powell develop a model and present evidence indicating that foreign banks may be less susceptible to funding shocks than domestic banks because they can tap capital from their home institutions but at the same time foreign banks are more reactive to shocks that affect expected returns

the global stability of efficient intertemporal allocations this paper describes a continuous time model of an economy with finitely many infinitely lived consumers and a finite number of capital goods two objectives are achieved first recursive nonadditive utility functionals are formulated and analyzed second these preference functionals are applied to analyze the nature of efficient allocations in a dynamic economy two classes of global turnpike propositions are proven which provide the basis for a model of the long run distribution of wealth these propositions also provide new perspective regarding existing stability literature based on additive utilities copyright 1987 by the econometric society

does organizational form impact pricing asymmetry evidence from nonprofit financial institutions why output prices tend to rise faster in response to input cost increases than they fall in response to input cost decreases is a hotly debated issue in modern economics in this article i contribute to this asymmetric pricing debate by expanding the domain of organizational forms where this question has been investigated more specifically previous research has focused on for profit firms i expand the investigation by focusing on nonprofit organizations credit unions are the nonprofit organization used in my analysis credit unions provide essentially identical types of consumer financial services and products as commercial banks but do so from a very different not for profit orientation however in this study i document similar asymmetric rate setting behavior by credit unions this suggests that pricing asymmetry is likely to be much more widespread as it relates to nonprofit institutions as well as those in the for profit sector

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

a general model of the banking firm under conditions of monopoly uncertainty and recourse abstract we develop a stochastic programming model of the monopolistic competition banking firm it assumes the bank faces a downward sloping loan demand curve and is a price taker in securities markets uncertainty and liquidity requirements are incorporated bank decisions are made within a two stage framework where realized disturbances that violate constraints can be rectified ex post at a cost the results are 1 optimal loan and deposit rates are positive functions of the recourse penalty 2 asset liability decisions are interdependent and elastically supplied deposits lower the loan rate 3 the effect of uncertainty depends upon the penalty rate level

central bank secrecy interest rates and monetary control we construct a dynamic rational expectations model of the federal funds and deposit market that provides a rationale for central bank secrecy about current monetary aggregate objectives in this analysis the trading desk values secrecy because it reduces the influence of monetary control policy on interest rates we then examine actual u s experience with monetary control and determine that the reserve bias predicted by the model is present in the data from 1978 to 1985 finally we demonstrate that central bank secrecy may not lower the value of commercial banks

retail bank deposit pricing an intertemporal asset pricing approach fundamentally spreads between market and deposit interest rates increase when interest rates rise and decline when rates fall recent empirical studies have found this phenomenon to be related to market concentration static equilibrium models are poorly equipped to explain this behavior in this paper the author applies an intertemporal asset pricing model incorporating bank deposits as a form of money in order to analyze the pricing behavior of a banking sector exercising market power his results extend the theoretical literature on deposit pricing and provide some insights into the behavior of interest rate spreads through time copyright 1995 by ohio state university press

liability management of financial intermediaries in a dynamic and uncertain perspective this paper examines the effect of rate uncertainty first for the loan rate alone next for both asset and liability rates on the liability funding decisions of a risk neutral intermediary in this model a la pindyck rates evolve according to stochastic processes convex adjustment costs arise from the dichotomy of existing core deposits and new savings balances and the intermediary s cash flow is embedded into capital market theory then we show that the stationary equilibrium obtains at the intersection of the locus of no change in deposit holdings with the isocline of zero change in savings balances loan rate uncertainty alone shifts the savings isocline outward when marginal adjustment costs are rising at an increasing rate but when asset and liability rates are uncertain their impact on the mean intermediation spread core deposit holdings and adjustment costs depends on whether they are correlated or not

optimal bank interest margin under capital regulation and deposit insurance this paper examines the relationships among capital regulation deposit insurance and the optimal bank interest margin in a model where loan losses are the source of uncertainty changes in capital regulation or deposit insurance premiums have direct effects on the bank s interest margin an increase in bank capital requirement or in deposit insurance premiums results in a reduced interest margin under nonincreasing risk aversion comparative static analysis also explores the relation between asset quality and interest margin it is shown that a mean preserving spread of the distribution of loan losses results in a reduced margin

on repeated moral hazard with discounting in this paper we analyze optimal contracts in an infinitely repeated agency model in which both the principal and agent discount the future we show that there is a stationary representation of the optimal contract when the agent s conditional discounted expected utility is used as a state variable this representation reduces the multi period problem to a static variational problem which can be analyzed using standard variational techniques this reduction is used to obtain several properties of the contract

retail bank deposits as quasi fixed factors of production neoclassical models of the banking firm for example michael klein 1971 treat all deposit liabilities as fully variable factors of production banks then maximize profits minimize liability costs by equating the marginal costs of all liability types during each period the empirical relevance of these models is difficult to establish because binding deposit rate ceilings regulation q force bank competition for many retail deposits into implicit interest channels that are not readily measured it is therefore noteworthy that during two recent periods when deposit rate ceilings were not binding banks paid retail deposit rates considerably in excess of the rate at which they could borrow via large unregulated certificates of deposit such behavior seems inconsistent with the cost minimization prescribed by neoclassical bank models however if retail deposit accounts are interpreted as quasi fixed gary becker 1962 walter oi 1962 donald parsons 1972 sherwin rosen 1968 inputs to the banking firm these important historical observations can be reconciled with bank profit maximization this paper first describes two historical episodes during which the bank retail deposit rate exceeded the negotiable certificate of deposit rate for substantial periods of time while no profit maximizing cost minimizing bank would pay such a rate differential if retail deposit quantities are costlessly variable interpreting retail deposit accounts as quasi fixed inputs to the bank explains the peculiar rate structures a simple two period model of bank liability selection formalizes the analysis i two puzzling historical episodes

bank credit rationing and the customer relation abstract this paper investigates the theory that preference in situations of bank rationing is given to those customers with the strongest customer relation it has shown that within a certainty model where competitive pressure among banks requires full compensation for other bank relationships neither deposit levels nor intertemporal demand would produce the preferential treatment claimed it has also been shown that the prime borrowers would be unable to bargain effectively for credit line protection from such occasions of credit restriction

moral hazard in dynamic risk management we consider a contracting problem in which a principal hires an agent to manage a risky project when the agent chooses volatility components of the output process and the principal observes the output continuously the principal can compute the quadratic variation of the output but not the individual components this leads to moral hazard with respect to the risk choices of the agent to find the optimal contract we develop a novel approach to solving principal agent problems first we identify a family of admissible contracts for which the optimal agent s action is explicitly characterized then we show that we do not lose on generality when finding the optimal contract inside this family up to integrability conditions to do this we use the recent theory of singular changes of measures for ito processes we solve the problem in the case of cara preferences and show that the optimal contract is linear in these factors the contractible sources of risk including the output the quadratic variation of the output and the cross variations between the output and the contractible risk sources thus like sample sharpe ratios used in practice path dependent contracts naturally arise when there is moral hazard with respect to risk management in a numerical example we show that the loss of efficiency can be significant if the principal does not use the quadratic variation component of the optimal contract

how do banks respond to shocks a dynamic model of deposit taking institutions abstract this paper proposes a dynamic model of the optimal choices of a bank that benefits from market power and takes into account the impact of the deposit generation process interbank lending borrowing emerges as a buffer that assists the bank in smoothing intertemporal adjustments in interdependent loan and deposit choices the bank smooths the impact of interest rates shocks on its customers to minimize the adjustments over time of the stocks of deposits and loans it does not however provide insurance against negative shocks of real origin that increase its expected default costs the predictions of the model help to shed light on the available empirical evidence and to analyze some recent developments of the banking industry

a note on the risk adjusted price concentration relationship in banking abstract price concentration studies in banking typically find a significant and negative relationship between consumer deposit rates i e prices and market concentration this implies highly concentrated banking markets are bad for depositors it also provides support for the structure conduct performance hypothesis and rejects the efficient structure hypothesis however these studies have focused almost exclusively on supply side control variables and neglected demand side variables when estimating the reduced form price concentration relationship for example previous studies have not included in their analysis bank specific risk variables as measures of cross sectional derived deposit demand we find that when bank specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 we offer an explanation for these results based on the correlation between a bank s risk profile and the structure of the market in which it operates these results suggest that it may be necessary to reconsider the well established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks this has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies and in a more general sense these results suggest that any structure conduct performance based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables and thus the results from those studies may be spurious

the impact of loan prepayment risk and deposit withdrawal risk on the optimal intermediation margin abstract numerous studies have analyzed how a bank s intermediation margin varies with respect to such factors as credit quality funding risk bank capital deposit insurance and other factors however these studies ignore the potential that loans tend to prepay if interest rates decline and deposits tend to be withdrawn if interest rates rise taking this very fundamental fact into account we derive optimal loan rates and deposit rates when the bank is subject to loan prepayments and deposit withdrawals among other things we find that greater volatility of interest rates tends to increase the margin the strength of the correlation between the level of interest rates and the propensity to prepay loans withdraw deposits also plays an interesting role

financial innovation systematic risk and commercial banks stability in china theory and evidence abstractwe are dedicated to revealing the impacts of financial innovation and systematic risk on commercial banks stability in china both theoretically and empirically we established a theoretical model and derived a theoretical mechanism from this model revealing two distinctive patterns of the impacts determined by the profitability of financial derivatives the impacts of financial innovation and systematic risk on banks stability in china are linear under the circumstances of a positive expected risk premium of financial derivatives conversely the impacts can be linear u shaped or cubic when the expected risk premium is negative we make three propositions to analyse the patterns and conditions of these impacts in detail in the empirical analysis we do not focus only on the banking industry but also on individual commercial banks the empirical results demonstrate that the impact of financial innovation on both the banking industry s and most individual commercial banks stability are u shape

the banking industry under uncertain monetary policy abstract the optimal loan decisions of banks are shown to be dependent on the banks rational forecast of the future federal funds rate which in turn is related to the policy rule used by the fed consequently a change in the policy of the fed will alter the reduced form model of the banking industry this result brings into question the fed s ability to predict and control the money stock under the procedure adopted by the fed between october 1979 and september 1982

optimal security design and dynamic capital structure in a continuous time agency model we derive the optimal dynamic contract in a continuous time principal agent setting and implement it with a capital structure credit line long term debt and equity over which the agent controls the payout policy while the project s volatility and liquidation cost have little impact on the firm s total debt capacity they increase the use of credit versus debt leverage is nonstationary and declines with past profitability the firm may hold a compensating cash balance while borrowing at a higher rate through the credit line surprisingly the usual conflicts between debt and equity asset substitution strategic default need not arise in this paper we consider a dynamic contracting environment in which a riskneutral agent or entrepreneur with limited resources manages an investment activity while the investment is profitable it is also risky and in the short run it can generate arbitrarily large operating losses the agent will need outside financial support to cover such losses and continue the project the difficulty is that while the probability distribution of the cash flows is publicly known the agent may distort these cash flows by taking a hidden action that leads to a private benefit specifically the agent may i conceal and divert cash flows for his own consumption and or ii stop providing costly effort which would reduce the mean of the cash flows therefore from the perspective of the principal or investors that fund the project there is the concern that a low cash flow realization may be a result of the agent s actions rather than the project s fundamentals to provide the agent with appropriate incentives investors control the agent s wage and may also withdraw their financial support for the project and force its early termination we seek to characterize an optimal contract in this framework and relate it to the firm s choice of capital structure we develop a method to solve for the optimal contract given the incentive constraints in a continuous time setting and study the properties of the credit line debt and equity that implement the contract as in the discrete time model of demarzo and fishman 2003 the continuous time setting offers several peter m demarzo is from stanford university and yuliy sannikov is from u c berkeley we

dynamic monetary control and interest rate stabilization abstract interest rate stabilization results in an instrument shortage that complicates monetary control by introducing strategic considerations into the trading desk s decision problem the paper demonstrates that when expected future open market operations influence current bank and depositor behavior an instrument shortage is necessary and sufficient for the commitment policy to be time inconsistent and for the discretionary policy to be suboptimal i e worse than the commitment policy the moving average component of the commitment policy is of higher order than the discretionary policy under either regime the expected value of the representative bank is increasing in the trading desk s emphasis on interest rate stability

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

comment on what drives bank competition some international evidence the question of bank competition is vitally important for a number of reasons the essential role of bank credit and other financial services as an input in the production of most other goods and services places banks in a unique and influential position such that any allocative inefficiency or other market distortions in banking are almost certain to be felt throughout the economy moreover recent history has provided numerous instances where the textbook paradigm of atomistic competition has proven inadequate as a policy guide for efficient banking either because there are simply too few banks to rely on sheer numbers as a guarantee of vigorous competition as in canada or because of evidence that there can be such a thing as too much competition in banking as suggested by several studies or because of instances where nearly competitive pricing has been observed in markets containing only one or two banks or because conversely substantially noncompetitive pricing has sometimes been deduced in banking products such as credit cardswith thousands of suppliers thus the study of bank competition remains an urgent field of research claessens and laeven 2004 this issue of jmcb make two key contributions here first they extend a proven empirical method to an unprecedentedly large and varied crosscountry sample second they offer the logical and policy relevant additional step of seeking to identify factors associated with variations in measured conduct this step is needed to assess the empirical validity of the traditional structure conductperformance paradigm in their sample and is especially important where that paradigm is found lacking as a predictor of bank conduct indeed although the authors

optimal monetary policy with countercyclical credit spreads we study optimal monetary policy in a new keynesian dynamic stochastic general equilibrium dsge model with a credit channel and relationship lending in banking we show that borrowers bank specific deep habits give rise to countercyclical credit spreads which in turn make optimal monetary policy depart substantially from price stability under both discretion and commitment our analysis shows that the welfare costs of setting monetary policy under discretion with respect to the optimal ramsey plan and of using simpler suboptimal policy rules are strictly increasing in the magnitude of deep habits in credit markets and market power in banking

consumer s surplus and price uncertainty this paper investigates the conditions under which expected equivalent variation provides a correct ranking of stabilized and uncertain price situations expected equivalent variation can be recovered from ordinal preferences whereas ex ante equivalent variation requires additional information regarding con sumer attitudes toward income risk the two measures are equal for income risk neutral consumers more important for applied welfare analysis where income risk aversion is presumed expected equivalent variation provides a lower bound for ex ante equivalent variation these two features of expected equivalent variation commend it as a viable welfare measure for applied work copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

short run cost inefficiency of commercial banks a flexible stochastic frontier approach we adopt the intermediation approach and use a flexible stochastic frontier to examine the cost efficiency of united states commercial banks with total assets in excess of million we find an average overall inefficiency of just under 10 percent a level somewhat lower than found in previous work our analysis of intra industry variation concludes that inefficiency generally rises with bank size further banks that have branching networks either domestic or foreign have higher inefficiency on average but at the same time inefficiency falls as the number of offices in the branch network expands state level data on the ease of serviceing the market competition from savings institutions and the financial sophistication of depositors significantly affect bank inefficiency generally with the expected signs finally our findings suggest that regulatory changes that increase capital requirements may lead to increased bank efficiency in the short run copyright 1994 by ohio state university press

optimal consumption choices for a large investor abstract this paper examines the optimal consumption and investment problem for a large investor whose portfolio choices affect the instantaneous expected returns on the traded assets alternatively our analysis can be interpreted in terms of an optimal growth problem with nonlinear technologies existence of optimal policies is established using martingale and duality techniques under general assumptions on the securities price process and the investor s preferences as an illustration of our characterization result explicit solutions are provided for specific examples involving an agent with logarithmic utilities and a generalized two factor version of the ccapm is derived the analogy of the consumption problem examined in this paper to the consumption problem with constraints on the portfolio choices is emphasized

competition in portfolio management theory and experiment we explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor manager relationship is nonexclusive our theory predicts that competition forces managers to promise portfolios that mimic arrow debreu ad securities which investors then combine to fit their preferences a weak version of the capital asset pricing model capm obtains where state prices relative to state probabilities implicit in prices of traded securities will be inversely ranked to aggregate wealth across states our experiment broadly corroborates the price and choice predictions of the theory however price quality deteriorates when only a few managers attract most of the available wealth wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating ad securities as in the theory but also because funds flow to managers who had better performance in the immediate past an observation unrelated to the theory this paper was accepted by jerome detemple finance

economic incentives and natural resource management among small scale farmers addressing the missing link small scale farmers face numerous challenges to invest in natural resource management practices the problems are interlinked with such perverse economic problems as high transaction costs and risk rooted in the lack of comprehensive institutional and organizational services to farmers for risk reduction and incentive creation failure to address such a missing link undermines success in natural resource management this paper ponders the importance of such a missing link and proposes analytic framework that explicitly integrates the economics of natural resource management into institutional and organizational analysis the framework features the instrumentality of integrated institutional and organizational innovation to create opportunities and incentives to small scale farmers to encourage investment in natural resource management practices

optimal risk taking with flexible income we study the portfolio selection problem of an investor who can optimally exert costly effort for more income the possibility of generating more income if necessary increases the risk taking appetite of the investor we find the optimal allocation to the risky security as a proportion of financial wealth and as a proportion of the total wealth defined as the combination of the financial wealth and the human capital of the investor when the investor s objective is the maximization of the terminal wealth we show that the optimal allocation to the risky security is a hump shaped function of the investment horizon however when the investor maximizes utility from intertemporal consumption the optimal allocation in the risky security is a constant proportion of the total wealth of the investor

interest rate pass through and asymmetric adjustment evidence from the federal funds rate operating target period this study examines the long run interest rate pass through of the federal funds rate to the prime rate and whether there is asymmetric adjustment in the prime rate using the enders siklos 2001 momentum threshold autoregressive model over the period february 1987 to october 2005 once allowance is made for the endogenously determined structural break in the cointegrating relationship in april 1996 the adjustment of the prime rate to changes in the federal funds rate appears asymmetric with upward rigidity a result contrary to previous studies which found that the prime rate exhibits downward rigidity the finding of upward rigidity in the prime rate lends support for the customer reaction and adverse selection hypotheses moreover the empirical evidence seems to support the observation of increased pass through as a result of heightened competition in the banking industry as well as the federal reserve s enhanced transparency in monetary policy during the 1990s

regulation of externalities in an open economy abstract this paper considers the ranking of second best policies for an open economy that regulate externalities arising from the production of an exportable pesticides and other chemicals used in us agriculture are good examples uncertainty originates from three sources random shifts in production cost and external costs and the random fluctuations in the world price of a traded good world prices become unreliable indicators of comparative advantages in the presence of external costs nonintervention of free trade can encourage excessive production and exports of commodities with spurious comparative advantages the paper analyses the properties of the optimal state contingent tax or first best tax which is difficult to implement these properties are then used to rank second best policies that are determined before uncertainties are resolved it is shown that ex ante taxes and quotas are equivalent when the marginal external cost is subject to random shifts when the world price is uncertain the optimal ex ante effluent charge dominates the optimal quantity standard when the marginal production cost of the exportable is subject to random shifts the ranking of second best policies is generally ambiguous