bank reserve requirements as an impediment to signaling bank reserve requirements as an impediment to signaling effective legal reserve requirements may hamper the private capital market s ability to price bank deposits in the model developed here the market has less information about bank assets than the banks have and a bank can therefore signal its superior information through its choice of excess reserves mandatory reserves can inhibit such signaling and therefore result in inefficient deposit pricing i introduction although the basic of fractional reserve banking were explained by edgeworth 1888 the rationale for legal reserve requirements as well as the details of their design have continued to evolve and the impetus for reform has been gathering momentum in recent years the time honored liquidity motivations as well as the more contemporary monetary control consideration have been widely debated and while the latter remains popular increasing skepticism has been expressed by benston 1978 greenbaum and kanatas 1982 laurent 1979 1981 robertson and phillips 1974 and starleaf 1975 among others like many of these papers this one questions the benefits of reserve requirements whereas most dispute their value as a monetary policy instruments however a new argument presented here shows that reserve requirements may subvert efficient deposit pricing and thereby aggravate asset quality and bank solvency problems the argument relates to the recent proposal that the private capital markets should play an expanded role in monitoring the exposure of banks we examine the potential of a commercial bank s excess reserves to signal asset quality in an environment without deposit insurance the results apply so long as deposit insurance remains incomplete and where the risk of each bank s assets is a priori unknown to all except the bank in such a setting the efficient pricing of deposit depends on a depositor s ability to ascertain the risk characteristics of the bank s assets it is shown that excess reserves can signal the unknown risk and thus resolve the informational asymmetry the ability to signal using excess reserves varies inversely however with reserve requirements thus reserve requirements may impede the ability of excess reserves to inform market participants reserve requirements are likely to impede signaling when i loan rates and reserve requirements are high or ii reserve requirements are low but a bank s deposit base is large reserve requirements are unlikely to impede signaling when banks are similar in their asset characteristics the underlying intuition is discussed in section iii excess reserves based signaling may be important because of its potential in facilitating the private sector s monitoring of banks we show that any effort to expand the private market s monitoring of bank asset quality through more accurate deposit pricing presupposes an appropriate regulatory milieu exposing large depositors to losses may be a precondition for expanding the role of the private capital markets but this analysis indicates that reserve requirements and or inappropriate discount window pricing can subvert such efforts the potential for conflict between the federal reserve focusing on monetary policy and the deposit insurers seeking to mitigate their monitoring burden and exposure is palpable thus the model clarifies the conditions necessary to engage the private market in monitoring bank asset quality through deposit pricing these requirements are formidable and the interdependence of regulatory constraints used for monetary policy and bank soundness purposes could frustrate programs based on piecemeal reform the model posits a risk neutral two period economy where each bank issues deposits and makes risky loans at the outset although asset quality varies across bank the choice of assets is not endogenous this is an important simplification since in general a bank s asset choice will impinge on the posited signaling problem

mark to market accounting for banks and thrifts lessons from the danish experience university of michigan tharvard university we appreciate helpful suggestions received from participants at the stanford summer camp and the price waterhouse symposium workshop participants at the university of chicago cornell university indiana university the ohio state university university of michigan university of pittsburgh university of rochester university of southern california tulane university and university of utah mary barth bill beaver george benston allen berger fisher black paul healy jack hughes robert kaplan richard leftwich jim leisenring niels nielsen finn ostrup bob ruland pete wilson and an anonymous referee we also appreciate the assistance of our contacts in denmark who shared their time and expertise with us so willingly these include mr ole bjarrum and mr lars nielsen of nykredit mr jesper jesperson and mr aksel olsen of kpmg revisionsfirmaet c jespersen mr lars tonnesen and mr birger schmidt of the danish bankers association mr kim hartvig olsen of the danish financial supervisoryauthority mr jorgen kock of den danske bank and professors jens elling merete christiansen finn ostrup and niels nielson of the copenhagen business school we thank professors dwight crane and bob kaplan of the harvard business school and bob swieringa and jim leisenring of the financial accounting standards board for help in conducting this research we are grateful for financial statement data furnished by the danish financial supervisory authority for access to the account database provided by professors elling and christensen of the copenhagen business school and for excellent research assistance by elizabeth andersen christine botosan marlene plumlee and james myers we also appreciate the willingness

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

the demise of the national union in italy lessons for comparative industrial relations theory using data collected during field research in italy on the reorganization of the auto industry the author analyzes recent changes in italian industrial relations based on this case study he argues for a new approach to comparative industrial relations research and theory instead of treating national systems as the basic unit of analysis and searching for macro institutional features as the key dimensions to use in constructing comparative typologies of industrial relations systems the author develops an approach focusing on micro level developments and the politics of strategic choice to explain variation within nations two factors appear to be crucial in explaining this variation local socioeconomic conditions that shape the strategies of unions and management in firms undergoing adjustment and the choices unions make in reallocating responsibilities between local and national structures

centralized bargaining and reorganized work are they compatible the paper examines the implications for wage bargaining of an important aspect of the ongoing reorganization of work the move from occupational specialization toward multi tasking the analysis shows how on account of such reorganization centralized bargaining becomes increasingly ine cient and detrimental to rms pro t opportunities since it prevents rms from o ering their employees adequate incentives to perform the appropriate mix of tasks the paper also shows how centralized bargaining inhibits rms from using wages to induce workers to learn how to use their experience from one set of tasks to enhance their performance at other tasks in this way the paper may also help explain the increasing resistance to centralized bargaining in various advanced market economies 2001 elsevier science b v all rights reserved

private interest government beyond market and state market liberalism and state interventionism are both challenged as modes of democratic government by this book it suggests that the development of private interest governments might be a more viable policy alternative for the future it also questions whether the state could devolve certain public policy responsibilities to interest associations in specific economic sectors the book focuses specifically on interest associations in a disaggregated rather than global approach to economics and politics ten western industrialized countries are covered subjects ranging from advertising with self regulation private accountancy regulation and the british voluntary sector to four comparative papers on the corporatist arrangements in the governance of the dairy industry

additions to bank loan loss reserves good news or bad news abstract this paper examines the effects of citicorp s and succeeding banks loan loss reserve announcements in 1987 it was found that while the average effect on bank stock return portfolios was weak the effect on individual bank returns was heterogeneous tests were undertaken to determine which bank specific variables explained the latter result two significant variables were the size of a banks ldc debt exposure and its position in ldc rescheduling committees

partial market value accounting bank capital volatility and bank risk abstract this paper presents evidence on the costs and benefits for the u s banking system of a partial version of market value accounting in which only securities are marked to market because accounting for liabilities is unchanged this accounting system has the same potential for misvaluing bank capital as historical cost accounting evidence from bank failure prediction models indicates the new system will not reduce bank failure rates other evidence indicates that net benefits will be small in absolute value and of uncertain sign

prepayment and the valuation of mortgage backed securities this paper puts forward a valuation framework for mortgage backed securities rather than imposing an optimal value minimizing call condition we assume that at each point in time there exists a probability of prepaying this conditional probability depends upon the prevailing state of the economy to implement our valuation procedure we use maximum likelihood techniques to estimate a prepayment function in light of recent aggregate gnma prepayment experience by integrating this empirical prepayment function into our valuation framework we provide a complete model to value mortgagebacked securities given an optimal value minimizing call policy a mortgage should never be called when its market value is less than its call price similarly a mortgage should be called if it is worth more than its call price however mortgagors often call their loans when the prevailing refinancing rate exceeds the contract rate on the loan dunn and mcconnell 1981 in addition some mortgagors do not call their loans when the loan s contract rate exceeds the prevailing refinancing rate the purpose of this paper is to put forward a valuation framework for mortgagebacked securities consistent with these stylized facts associated with mortgage prepayments the mortgagor s prepayment decision is integral to our valuation framework however we do not impose an optimal value minimizing call condition to price these securities rather we assume that at each point in time there exists a probability of prepaying this conditional probability depending upon the prevailing state of the economy by integrating this prepayment function into our valuation framework we provide a complete model to value mortgage backed securities to implement our valuation procedures we estimate a prepayment function given recent gnma prepayment experience we follow green and shoven 1986 by using a proportional hazards model to estimate the influence of various explanatory variables or covariates on the mortgagor s prepayment decision distinct from green and shoven we explicitly model the effects of seasoning as well as investigating the influence of interest cost savings from refinancing in addition we also consider the effects of lagged refinancing rates heterogeneity

combining fair pricing and capital requirements for non life insurance companies the aim of this article is to identify fair equity premium combinations for non life insurers that satisfy solvency capital requirements imposed by regulatory authorities in particular we compare target capital derived using the value at risk concept as planned for solvency ii in the european union with the tail value at risk concept as required by the swiss solvency test the model framework uses merton s jump diffusion process for the market value of liabilities and a geometric brownian motion for the asset process valuation is conducted using option pricing theory in this setting we study the impact of model parameters and corporate taxation on fair pricing solvency capital requirements and shortfall probability for different safety levels measured by the default put option value we show that even though corporate taxes can have a substantial impact on pricing and capital structure they do not affect capital requirements if the safety level is retained before and after taxation

pricing and capital allocation in catastrophe insurance abstract this paper studies multi line pricing and capital allocation by insurance companies when solvency matters to consumers capital is costly to hold and the average loss is uncertain in this environment product quality concerns lead firms to diversify across markets and charge high prices for risk that threatens company solvency even if the risk is unrelated to other asset risk price differences across markets are traced to differences in capital required at the margin to maintain solvency finally the paper shows that capital costs have significant effects on catastrophe insurance markets because of high marginal capital requirements

deposit insurance reform what are the issues and what needs to be fixed abstract the current problems in the commercial banking industry have led to widespread calls for reform of the deposit insurance contract on the grounds that it promotes moral hazard we review the empirical evidence for the significance of moral hazard as an important cause of the present crisis we then evaluate various reform proposals grouped into two broad classes proposals that seek to impose greater discipline on bank stockholders and proposals to increase the disciplinary role of bank debtholders finally we identify some issues that have received inadequate attention in the literature on bank regulation

the limitations of market value accounting and a more realistic alternative abstract market value accounting mva might improve market and regulatory discipline on financial institutions unfortunately there are serious conceptual measurement and incentive problems with implementing mva that have not received significant attention these problems are suggested by the theory of asymmetric information and the role intermediaries play in solving information and monitoring problems after analyzing the problems with mva we develop an alternative approach that applies mva principles where they are most feasible and uses a statistical procedure where asymmetric information problems make mva particularly problematic an empirical analysis suggests that this procedure may substantially improve the distribution of regulatory discipline

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

the local political economy of industrial adjustment variations in trade union responses to industrial restructuring in the italian textile clothing sector this article observes that local trade union responses to industrial restructuring in the 1970s and 1980s varied widely in italy and that these variations reflect local economic political and organizational factors unions may oppose accept or seek to modify managerial restructuring they may pursue their goals at the factory level or at the territorial level and they may be generally successful or unsuccessful in accomplishing their objectives the article argues that economic differences between italy s industrial triangle of traditional fordist mass production and the third italy of flexible specialization explain the generally greater activism of the unions in the former where restructuring was a far more disruptive traumatic phenomenon than it was in the latter but the article also observes striking differences within the industrial triangle and within the third italy that cannot be explained in economic terms rather these differences are shown to result from variations in the local

the valuation of multiple claim insurance contracts this paper provides a closed form solution for the value of a multiple claim insurance contract that is subject to a deductible amount and or an upper limit on claims the solution is a time integral of european option prices the model provides three important insights first systematic risk in insurance policies is altered in the presence of deductibles and maximum indemnity levels second idiosyncratic risk affects policy valuation and the required rates of return on underwriting portfolios finally contrary to traditional actuarial intuition changes in the risk free interest rate may either increase or reduce policy values

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

who pays for bank insolvency this paper discusses proposals for handling bank failures in a manner that is rapid enough to allow the business to continue respects the ranking of claims makes none of the parties worse off than under traditional insolvency and does not require taxpayer funds except to guarantee the new organization until recapitalization it considers the relationship between the regime for bank exit and the rest of the framework for regulation and supervision the role of market discipline in enabling solutions before the point of insolvency is reached the problems in assessing the costs of different exit regimes and public intervention

corporatism in decline an empirical analysis of the impact of corporatism on macroeconomic performance and industrial disputes in 18 industrialized democracies during the 1970s and early 1980s most studies on corporatism indicated that corporatist policies led to lower unemployment and inflation and higher economic growth rates in the mid and late 1980s however voices claiming that corporatism is in decline became more and more frequent although hardly any empirical examinations were undertaken the purpose of this study is to estimate empirically the influence of corporatist arrangements on macroeconomic performance and industrial disputes in the 1980s as compared with the 1970s and 1960s this pooled time series cross sectional analysis provides evidence that corporatist policies have not lost their capacity to achieve the desired macroeconomic goals in the 1980s in addition corporatism significantly reduces the number of working days lost however no evidence was found that corporatism leads to increased economic growth there is evidence that economic growth is adversely affected by government outlays

insurance cycles interest rates and the capacity constraint model insurance profits exhibit cyclical behavior that has been attributed to capital market constraints the authors show that changes in interest rates simultaneously affect the insurer s capital structure and the equilibrium underwriting profit depending upon asset and liability maturity structure capital market access and reinsurance availability insurers will be differently affected by changing interest rates the authors find that the average market response to changing interest rates roughly tracks market clearing prices these cyclical effects are enhanced for firms with mismatched assets and liabilities and more costly access to new capital and reinsurance this evidence supports the capacity constraint hypothesis copyright 1995 by university of chicago press

price regulation in property liability insurance a contingent claims approach a discrete time option pricing model is used to derive the fair rate of return for the property liability insurance firm the rationale for the use of this model is that the financial claims of shareholders policyholders and tax authorities can be modeled as european options written on the income generated by the insurer s asset portfolio this portfolio consists mostly of traded financial assets and is therefore relatively easy to value by setting the value of the shareholders option equal to the initial surplus an implicit solution for the fair insurance price may be derived unlike previous insurance regulatory models this approach addresses the ruin probability of the insurer as well as nonlinear tax effects

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

the winner s curse and bidder competition in acquisitions evidence from failed bank auctions this study examines the effect of bidder competition in acquisitions we use predictions from auction theory to test whether acquirers of failed banks overpay the winner s curse when bidding in fdic sealed bid purchase and assumption p a transactions auctions the empirical results indicate that winning bids tend to increase as the number of competitors increases as predicted by theory we also find that bid levels of all bidders increase with increased competition which is consistent with bidders failing to adjust for the winner s curse in a common value auction setting however additional tests using winning bids only are consistent with both a common value and a private values model so this result should be interpreted with caution the winner s curse hypothesis states that the winner of a sealed bid auction in which the value of the object being competed for is uncertain tends to be the one who most overestimates the true value of the auctioned object as a result auction winners who fail to recognize this possibility are likely to be cursed by having paid more for the object than its true worth this hypothesis has been applied to various situations including bidding on oil and gas leases capen et al 3 and corporate takeovers roll 16 varaiya 19 support for the existence of the winner s curse has been reported primarily from laboratory experiments bazerman and samuelson 1 kagel and levin 12 testing of the winner s curse hypothesis with market data is in its early stages gilley karels and leone s 7 study of bidding for oil leases provides mixed suport brannman klein and weiss 2 examine bidding behavior in a variety of auction markets and interpret some of their results as supporting the winner s curse hypothesis our study examines the effects of bidder competition and the winner s curse hypothesis within the context of fdic auctions of failed banks our study may also have relevance for the broader corporate control literature this literature uniformly indicates that shareholders of acquired firms earn large

government partisanship labor organization and macroeconomic performance governments of the left and right have distinct partisan economic policies and objectives that they would prefer to pursue their propensity to do so however is constrained by their desire for reelection we argue that the ability of governments to further their partisan interests and preside over reelectable macroeconomic outcomes simultaneously is dependent on the organization of the domestic economy particularly the labor movement we hypothesize that there are two different paths to desirable macroeconomic performance in countries with densely and centrally organized labor movements leftist governments can promote economic growth and reduce inflation and unemployment conversely in countries with weak labor movements rightist governments can pursue their partisan preferred macroeconomic strategies and achieve similarly beneficial macroeconomic outcomes performance will be poorer in other cases these hypotheses are supported by analysis of pooled annual time series data for 16 advanced industrial democracies between 1967 and 1984

three paradigms for the role of capitalization requirements in insured financial institutions standard models for deposit insurance strike analogies to more familiar financial contracts and conceive of risk as exogenous the oldest model of deposit insurance likens it to passively underwriting casualty insurance a more sophisticated but still bilateral model likens deposit insurance to writing a passive put option on the enterprise whose funding is insured delays in acknowledging the wreck of the s l industry and its federal insurer fslic discredit these models as guides to managing a deposit insurance fund deposit insurance is better interpreted as a trilateral performance bond that enhances the credit of an insured institution this interpretation endogenizes risk emphasizes incentive conflict and underscores the need to optimize loss control activity the bonding model clarifies that a subset of the monitoring and disciplinary activities traditionally undertaken by government officials can usefully be privatized

a critical reexamination of the empirical evidence on the arbitrage pricing theory this paper demonstrates that the roll and ross rr and other previously published tests of the apt are subject to several basic limitations there is a general nonequivalence of factor analyzing small groups of securities and factor analyzing a group of securities sufficiently large for the apt model to hold it is found that as one increases the number of securities the number of factors determined increases this increase in the number of factors with larger groups of securities cannot readily be explained by a distinction between priced and nonpriced risk factors as it is impermissible to carry out tests on whether a given risk factor is priced using factor analytic procedures the apt model as exposited by ross 17 18 and extended by huberman 9 has provided the basis of an extensive literature as for example brown and weinstein 1 chen 3 hughes 10 ingersoll 11 jobson 12 reinganum 15 roll and ross rr 16 and shanken 17 to mention but a few it has also been treated in a more general context by chamberlain and rothschild 2 our purpose here is not to comment on this collection of papers many of which are unpublished but to reexamine the evidence presented by rr and point out major pitfalls involved in the empirical methodology employed by them and others who have followed their lead rr claim that on theoretical and more importantly on empirical grounds arbitrage pricing theory apt is an attractive alternative to the capital asset pricing model capm the apt it is argued requires less stringent and presumably more plausible assumptions is more readily testable since it does not require the measurement of the market portfolio and may be better able to explain the anomalies found in the application of the capm to asset returns the acceptability of the apt like that of the capm or any other theory ultimately depends on its ability to explain the relevant empirical evidence our subsequent discussion will show that many of the prqblems associated with the capm are also present in the apt context and that its ability to explain the relevant empirical evidence is not markedly superior moreover it raises questions not only about the rr and related empirical investigations of the apt but also about the testability of that theory in the present state of the art a major part of the problem results from the necessity to break down the universe being analyzed through the apt model this is forced upon the investigator by the fact

the use of loan sales and standby letters of credit by commercial banks abstract this paper examines the incentives banks have to engage in off balance sheet activities such as commercial loan sales and the issuance of standby letters of credit slcs i show that loan sales and loans backed by slcs have payoff characteristics similar to secured debt like secured debt off balance sheet activities permit banks to sell a portion of the cash flows associated with new investment oppurtunities this ability permits banks to invest in loans with positive net present values that they would pass up if restricted to deposit financing an examination of the risk premium on large certificates of deposit provides evidence consistent with the model

the valuation of multivariate contingent claims in discrete time models there are several examples in the literature of contingent claims whose payoffs depend on the outcomes of two or more stochastic variables familiar cases of such claims include options on a portfolio of options options whose exercise price is stochastic and options to exchange one asset for another this paper derives risk neutral valuation relationships rnvrs in a discrete time setting that facilitate the pricing of such complex contingent claims in two specific cases joint lognormally distributed underlying variables and constant proportional risk aversion on the part of investors and joint normally distributed underlying variables and constant absolute risk aversion preferences respectively this methodology is then applied to the valuation of several interesting complex contingent claims such as multiperiod bonds multicurrency option bonds and investment options

information spillovers margins scale and scope with an application to canadian life insurance a model of the production of life insurance services is developed the focus is on price setting ability and the cost advantages from size and diversity the model characterizes insurers decisions on the face value and number of policies and the number of insurance lines the model is applied to canadian life insurance firms unit revenue cost margins average from 13 per cent to 40 per cent across lines of insurance these margins emanate from information spillovers generated by marketing activities cost advantages due to size are small but are substantial from diversity returns to scale average from 1 13 to 1 40 while returns to scope from offering multiple insurance lines average from 70 per cent to 100 per cent

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

fair value disclosures by bank holding companies abstract this paper examines the value relevance of fair value data disclosed under sfas 107 by banks for 1992 and 1993 collectively the evidence suggests differences between fair and book values of financial instruments are associated with market to book ratios however fair value disclosures for financial instruments other than securities are value relevant only in limited settings in addition only in 1992 are fair value variables associated with market to book ratios after incorporating existing historical cost information further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers

time dependent variance and the pricing of bond options in this paper we develop a model for valuing debt options that takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond s duration the resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the black scholes approach the paper provides comparisons between option prices computed using this model and those using the black scholes and brennan and schwartz models the last decade has seen a dramatic increase in the volatility of bond markets leading to a growing interest in financial instruments that can be used to hedge this risk thus in the u s canada and the u k there has been a proliferation of new interest rate dependent securities such as bond futures options on bonds options on bond futures swap agreements and bonds with option features such as callability putability retractability and so forth with the development of these markets the problems of valuation and the derivation of the hedging strategies have become subjects of increasing importance to both practitioners and academics several valuation methods have been suggested in the literature but so far no consensus has emerged as to the best solution to these problems the simplest approach to the valuation of debt options and probably the most widely used in practice is the black scholes model 3 this method originally developed for the valuation of stock options assumes that the variance of the rate of return on the underlying security is constant while this assumption is plausible for common stocks it is clearly unreasonable for bonds with a finite maturity the distinctive feature of the problem of debt option valuation is that the characteristics of the underlying asset change over time because the price is constrained to converge to the face value of the bond at maturity a second drawback of the black scholes approach is that it assumes a constant short term interest rate an assumption that is clearly inconsistent with stochastic returns on bonds in spite of these problems the black scholes model has been frequently used in practice to value debt options because of its overwhelming simplicity in comparison with other available methods

the rise and decline of nations economic growth stagflation and social rigidities the years since world war ii have seen rapid shifts in the relative positions of different countries and regions leading political economist mancur olson offers a new and compelling theory to explain these shifts in fortune and then tests his theory against evidence from many periods of history and many parts of the world

measuring the true profile of taxpayer losses in the s l insurance mess abstract this research shows that conservative methods of projecting and discounting cash flows if applied to information already collected in the fhlbb s reporting system would have reflected the size of the s l deposit insurance losses long before taxpayers were aware of the extent of the mess official data show fslic reserves of 4 6 billion in 1986 in sharp contrast our conservative estimate puts imbedded losses for that year at 45 3 billion these methods prove insensitive to arbitrariness in the assumptions needed to operationalize the discounting process and measure the extent of guilty knowledge it is fair to presume officials possessed supporting an incentive breakdown theory of the problem over presumptions of innocent ignorance the policy implication is that taxpayers need to impose on government regulatory agents a better information system and better enforcement of those agents obligations to the public

accounting for banks capital regulation and risk taking this paper examines risk taking incentives in banks under dierent accounting regimes with capital regulation in the model the bank s decisions of capital issuance and investment policy are jointly determined given exogenous minimum capital requirement the bank is more likely to issue equity capital in excess of the minimum required level and implement less risky investment policy under either lower of cost ormarket accounting or fair value accounting than under historical cost accounting but fair value accounting may induce more risk taking compared to lower of cost or market accounting due to short term interest in the part of the bank however the disciplining role of lower of cost or market accounting may discourage bank s incentive to exert project discovery eort

natural catastrophe insurance when should the government intervene this paper develops a theoretical framework for analyzing the decision to provide or buy insurance against the risk of natural catastrophes in contrast to conventional models of insurance the insurer has a non zero probability of insolvency which depends on the distribution of the risks the premium rate and the amount of capital in the company when the insurer is insolvent each loss reduces the indemnity available to the victims thus generating negative pecuniary externalities our model shows that government provided insurance will be more attractive in terms of expected utility as it allows these negative pecuniary externalities to be spread equally among policyholders however when heterogeneous risks are introduced a government program may be less attractive in safer areas which could yield inefficiency if insurance ratings are not chosen appropriately

pricing in microinsurance markets summary microinsurance markets have exhibited strong growth rates in recent years great parts of the industry are however challenged by fundamental issues of providing insurance products one of the most significant of which is pricing risk in this paper we provide a nontechnical analysis of insurance pricing problems and a review of the set of opportunities that can address some of the specific pricing constraints in microinsurance markets a key contribution of this paper is the investigation of conventional techniques as potential solutions for improving the pricing of insurance risk in microinsurance markets

economic development and sectoral unions in china drawing on qualitative fieldwork in china s guangdong and zhejiang provinces the author asks how post socialist unions respond to worker unrest and why the development of sectoral level bargaining has been uneven in different regions of china while zhejiang has had relative success in establishing the organizational infrastructure for sectoral bargaining guangdong has had little success despite ongoing attempts by unions the author explains variation in sectoral level bargaining through an analysis of the different models of economic development which are characterized as local entrepreneurialism and global integration for zhejiang and guangdong respectively despite having different organizational forms unions in both places suffer from a lack of credibility and capacity to enforce contracts given the acftu s ongoing focus on sectoral level bargaining however experiments will likely continue in various regions and industries throughout china

numerical valuation of high dimensional multivariate european securities we consider the problem of pricing a contingent claim whose payoff depends on several sources of uncertainty using classical assumptions from the arbitrage pricing theory the theoretical price can be computed as the discounted expected value of future cash flows under the modified risk neutral information process although analytical solutions have been developed elsewhere for a few particular option pricing problems computing the arbitrage prices of securities under several sources of uncertainty is still an open problem in many instances in this paper we present efficient numerical techniques based upon monte carlo simulation for pricing european contingent claims depending on an arbitrary number of risk sources we introduce in particular the method of quadratic resampling qr a new powerful error reduction technique for monte carlo simulation quadratic resampling can be efficiently combined with classical variance reduction methods such as importance sampling our numerical experiments show th

rational insurance purchasing consideration of contract nonperformance much of the analysis of rational insurance purchasing and hedging strategies has been undertaken on the basis of the expected utility hypothesis this decision framework has been used to reformulate the bernoulli principle that a risk averter rationally would fully insure at a fair premium other applications include the analysis of insurance at unfair premiums mossin 1968 and smith 1968 the effects of state dependent utility on the rational insurance purchase cook and graham 1977 the effects of risky background wealth doherty and schlesinger 1983 and mayers and smith 1983 and the design of the optimal insurance policy raviv 1979 such analyses have been conducted on the assumption that insurance policies are free of insolvency default risk this assumption stands in sharp contrast to the actuarial literature in which the insolvency risk or probability of ruin is a central focus of attention

the determination of fair profits for the property liability insurance firm although the property liability insurance industry has been subject to price regulation for many years surprisingly little research has been directed at producing valuation models of a property liability insurance firm although property liability price regulation has historically involved setting minimum prices to reduce the risk of insolvency some commissions have begun to move toward setting prices more in the spirit of public utility regulation 1 if in an effort to promote efficiency the working objective of such regulation requires the determination of prices that would prevail under competition then regulation must be founded on some model of the costs of regulated firms under competition with free entry prices just cover all economic costs including the opportunity costs of investment by suppliers of capital and a valuation model is required to explain how the market value of the firm and therefore the cost of capital reacts to changes in the prices it charges our objective in this chapter is to provide such a framework

heterogeneous creditors and the market value of bank ldc loan portfolios abstract a standard proposition used in many empirical studies is that the value of an ldc loan does not depend on the identity of the lender i test this proposition using bank securities prices and prices for ldc loans trading in the secondary market i find significant cross sectional differences in the sensitivity of bank stocks to changes in the price of ldc loans differences in sensitivity appear to be related to changes in bank exposure to ldcs i also find evidence consistent with the hypothesis that cds are implicitly insured

capital and risk in property liability insurance markets abstract this paper investigates the capital and portfolio risk decisions of property liability insurance firms a theoretical model based on option pricing theory is developed which predicts a positive relationship between insurer capital and risk as firms balance these two factors to achieve their desired overall insolvency risk the implications of the model are then tested empirically using a simultaneous equations methodology the results support the predictions of the model they also provide evidence that managerial incentives play a role in determining capital and risk in insurance markets the findings have significant implications for insurance solvency regulation

a market evaluation of the risk based capital standards for the u s financial system abstract this paper evaluates u s risk based capital guidelines by comparing stock market measures of institutions risk with current regulatory risk based capital measures the first part of the evaluation compares overall market and regulatory risk based capital measures of current capital adequacy required capital and the capital infusion required to meet the capital requirement the second part compares regulatory risk weights on individual risk categories with market determined risk weights the results suggest that the market and risk based capital standards agree to some extent on the adequacy of institutions current capital and required capital infusion but that their measures of asset risk are not positively correlated further the 100 percent risk category for banks and the 50 and 200 percent categories for s ls do distinguish activities that are riskier by market measures however the market model makes limited distinctions among the other categories in addition the results suggest that some off balance sheet activities for banks may reduce asset risk

the equilibrium valuation of risky discrete cash flows in continuous time this paper values a contingent claim to discrete stochastic cash flows generated by a poisson arrival process with a randomly varying intensity parameter in the most general case both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy assuming the conditions of an intertemporal capital aset pricing model solutions for the value of the contingent claim can be found using various techniques the paper suggests immediate applications to the valuation of insurance contracts the decision to build a firm with unknown future investment opportunities and the pricing of mortgage backed securities

logics of action globalization and changing employment relations in china india malaysia and the philippines the authors develop a logics of action framework to conceptualize the impact of globalization on employment relations er and to predict the trajectory of er they argue that the interplay among three different logics of action the logic of competition the logic of industrial peace and the logic of employment income protection determines the er patterns in any given nation the strengths of the logics themselves are influenced by five often related factors economic development strategy globalization intensity union strength labor market features and government responsiveness to workers the authors extensive field research on national policies and workplace practices in four asian countries supports this framework er patterns apparently reflect different combinations of logic strengths and globalization s impact on er is both complex and contingent militating against long term convergence in er are national variations in the combinations of logic strengths and changes in logic strengths over

yes the apt is testable the arbitrage pricing theory apt has been proposed as an alternative to the meanvariance capital asset pricing model capm this paper considers the testability of the apt and points out the irrelevance for testing of the approximation error we refute shanken s objections including his assertion that roll s critique of the capm is applicable to the apt we also explain the testability of the apt on subsets and we explore the relationship between the apt and the capm the arbitrage pricing theory apt has been the subject of extensive research efforts since it was introduced by ross 36 37 the research has included theoretical papers and a growing empirical literature 2 nonetheless there seems to be some confusion in the literature about the relation between the theoretical underpinnings of the apt and its empirical tests this paper is an attempt to alleviate the confusion to illustrate the issues and to provide a focus section i of this paper is devoted to examining and refuting some points raised in shanken 40 which considers the testability of the apt the underlying premise of the apt is that asset returns ri are generated by a factor model of the form

arbitrage pricing theory and utility stock returns this paper presents some new evidence that arbitrage pricing theory may lead to different and better estimates of expected return than the capital asset pricing model particularly in the case of utility stock returns results for monthly portfolio returns for 1971 1979 lead to the conclusion that regulators should not adopt the single factor risk approach of the capm as the principal measure of risk but give greater weight to apt whose multiple factors provide a better indication of asset risk and a better estimate of expected return notwithstanding initial skepticism and recent challenges the capital asset pricing model capm has been used to develop project screening rates value companies measure the impact of policy change on risk and construct portfolios recently the federal energy regulatory commission ferc proposed it as the principal measure of risk for the electric utilities it regulates it would be ironic for acceptance of capm by policymakers to occur just as arbitrage pricing theory apt threatens to replace it as an explanation of the relationship between return and risk and it would be a pity if ferc were to adopt the single risk factor approach of capm when it could be demonstrated that the multiple factors of apt provide a better indication of asset risk and a better estimate of expected return this paper presents some new evidence that apt may lead to different and better estimates of expected return than capm and that it may be more helpful to policymakers as a result we describe capm and apt note work done by others show how estimates of required returns for utilities developed by applying each model may differ and finally report the evidence that convinces us that if one model is to be relied upon for policy purposes apt would be the better choice

interest rates and insurance price cycles abstract property liability insurance prices and profits appear to move in a six year cycle the common explanation for the cycle amongst many industry analysts is that the insurance market is inherently unstable and that prices fail to converge on clearing levels our explanation is different we identify spot equilibrium prices using the capital asset pricing model but informational regulatory and contractual lags preclude instantaneous adjustment we therefore model the temporal movement of prices using a partial adjustment model in which actors form rational expectations the actual movement of insurance prices does seem to track closely those estimated by the partial adjustment model the cycle may be better viewed as a series of converging responses to changing spot prices

fair insurance guaranty premia in the presence of risk based capital regulations stochastic interest rate and catastrophe risk abstract a multiperiod model is developed to measure the costs posed to the guaranty fund in a setting that incorporates risk based capital regulations interest rate risk and the possibility of catastrophic losses the guaranty contract is modeled as a put option on the asset of the insurance company with a stochastic strike price and an uncertain maturity the impacts of the key factors of this model are examined numerically and shown to make material differences in the costs to the guaranty fund

securitization with recourse an instrument that offers uninsured bank depositors sequential claims abstract this paper expands on the observation that securitization with recourse offers a lender the protections of an uninsured bank deposit with an additional senior claim if the bank fails the senior claim derives from the commitment of the revenues from a group of securitized assets that pay off the securitized lender first thus securitization with recourse provides sequential claims for bank liability holders which improves the allocation of risk sharing among them securitization with recourse may also improve the selection of loans granted by partially offsetting the moral hazard incentives toward risk taking created by fixed rate deposit insurance empirical results are given which are consistent with the theoretical model