operating flexibility global manufacturing and the option value of a multinational network the multinational corporation is a network of activities located in different countries the value of this network derives from the opportunity to benefit from uncertainty through the coordination of subsidiaries which are geographically dispersed we model this coordination as the operating flexibility to shift production between two manufacturing plants located in different countries a stochastic dynamic programming model treats explicitly this flexibility as equivalent to owning an option the value of which is dependent upon the real exchange rate the model is extended to analyze hysteresis effects and within country growth options we show that the management of across border coordination has led to changes in the heuristic rules used for performance evaluation and transfer pricing

testing for asymmetric information in insurance markets the first goal of this paper is to provide a simple and general test of the presence of asymmetric information in contractual relationships within a competitive context we also argue that insurance data are particularly well suited to such empirical investigations to illustrate this claim we use data on contracts and accidents to investigate the extent of asymmetric information in the french market for automobile insurance using various parametric and nonparametric methods we find no evidence for the presence of asymmetric information in this market

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

bank risk taking securitization supervision and low interest rates evidence from the euro area and the u s lending standards using a unique dataset of the euro area and the u s bank lending standards we find that low monetary policy short term interest rates soften standards for household and corporate loans this softening especially for mortgages is amplified by securitization activity weak supervision for bank capital and low monetary policy rates for an extended period conversely low long term interest rates do not soften lending standards finally countries with softer lending standards before the crisis related to negative taylor rule residuals experienced a worse economic performance afterward these results help shed light on the origins of the crisis and have important policy implications the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

state contingent bank regulation with unobserved actions and unobserved characteristics abstract optimal bank regulation is studied in a model where bank quality is private information and bank portfolio choice is subject to moral hazard regulators wish to control bank risk solely because high risk adversely affects a bank incentives to improve its mean return numerical methods are developed to study the model capital regulation alone has a limited ability to separate types including ex post fines achieve separation at lower cost resulting in improved welfare low quality banks are fined on high returns in order to control risk taking high quality banks face fines on lower returns mainly to ensure truth telling by low quality banks high quality banks bear the full cost of regulation

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

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

the high cost of incompletely funding the fslic shortage of explicit capital a useful parallel can be drawn between the alaskan oil spill of 1989 and the flood of red ink spilled in recent years by u s thrift institutions savings and loan associations and savings banks in each case initial damage from the spill was severely compounded by delaying and mishandling the clean up required for more than a decade federal officials refused to acknowledge that the thrift ink spill had compromised the integrity of the supporting deposit insurance fund instead of promptly shoring up the finances of this fund officials used accounting smoke and mirrors to cover up the fund s secularly increasing capital shortage this prolonged refusal to face up to the magnitude of the underfunding imposed enormous costs on society as a whole

global imbalances and financial fragility the united states is currently engulfed in the most severe financial crisis since the great depression the crisis was triggered by the crash in the real estate bubble and amplified by the extreme concentration of risk in a highly leveraged financial sector conventional wisdom is that both the bubble and the risk concentration were the result of mistakes in regulatory policy an expansionary monetary policy during the boom period of the bubble and failure to reign in the practices of unscrupulous lenders in this paper we argue that while correct in some dimensions this story misses two key structural factors behind the securitization process that supported the real estate boom and the corresponding lever age first over the last decade the us has experienced large and sustained capital inflows from foreigners seeking us assets to store value caballero emmanuel farhi and pierre olivier gourinchas 2008 second especially after the nasdaq tech bubble and bust excess world savings have looked predominantly for safe debt investments this should not be surprising because a large amount of the capital flow into the us has been from foreign central banks and governments that are not expert investors and are merely looking for a store of value krishnamurthy and annette vissing jorgenson 2008 in this paper we develop a stylized model that captures the essence of this environment the model accounts for three facts observed during the boom and bust phases of the current crisis first during a period of good shocks which we interpret as the period up to the end

the effect of large investors on asset quality evidence from subprime mortgage securities abstract fannie mae and freddie mac the gses the dominant investors in subprime mortgage backed securities before the 2008 crisis substantively affected collateral composition in this market mortgages included in securities designed for the gses performed better than those backing other securities in the same deals holding observable risk constant consistent with the transmission of private information these effects are concentrated in low documentation loans and for issuers that were highly dependent on the gses and were corporate affiliates of the mortgage originators additional analysis of yield spreads shows that these performance differences were not reflected in prices

a real options approach to labour shifts planning under different service level targets abstract firms that experience uncertainty in demand as well as challenging service levels face among other things the problem of managing employee shift numbers decisions regarding shift numbers often involve significant expansions or reductions in capacity in response to changes in demand in this paper we quantify the impact of treating shifts in workforce expansion as investments while considering required service level improvements the decision to increase shifts whether by employing temporary workers or hiring permanent employees is one that involves significant risks traditional theories typically consider reversible investments and thus do not capture the idiosyncrasies involved in shift management in which costs are not fully reversible in our study by using real options theory we quantify managers ability to consider this irreversibility aiming to enable them to make shift decisions under conditions of uncertainty with the maximum level of flexibility our model aims to help managers make more accurate decisions with regard to shift expansion under service level targets and to defer commitment until future uncertainties can be at least partially resolved overall our investigation contributes to studies on the time required to introduce labour shift changes while keeping the value of service level improvements in mind

a simple general equilibrium model of large excess reserves abstract in a general equilibrium macroeconomic model with a banking system that can hold large excess reserves and is subject to possibly binding capital constraints i study how the quantity of government provided monetary assets is related to the price level in steady state when the central bank does not pay interest on reserves the price level moves one for one with the monetary base if instead the central bank can pay interest on reserves at market rates the price level can decouple from the quantity of monetary assets in the economy a larger monetary base need not imply a higher price level however for large enough levels of reserves the capital constraint binds and the tight link between money and prices reemerges

what drives bank securitisation the spanish experience abstract this paper analyses the reasons why spanish banks securitised in the period 2000 2007 on such a large scale that spain has become the european country with the second largest issuance volume after the uk the results obtained by applying a logistic regression model to a sample of 408 observations indicate that liquidity and the search for improved performance are the decisive factors in securitisation we find no evidence to support hypotheses regarding credit risk transfer and regulatory capital arbitrage our study also presents a more detailed analysis that differentiates between asset and liability securitisation programmes

tax evasion across italy rational noncompliance or inadequate civic concern the paper suggests anexplanation for the geographical dimensionof tax evasion that focuses on thestructure of territorial government taxesadministered by the central government arenot differentiated by regions poor areasmay prefer a combination of lower taxes andlower levels of public services at both thecentral and the local level this isespecially true when income and wealthlevels differ among the areas and thedemand for publicly provided goods iscorrelated to these levels but the use ofnationally uniform tax schedules imposes awelfare burden on poorer areas while thetax rates of local taxes can be adjusted tolocal preferences tax evasion may betacitly accepted as a compensation for thewelfare loss deriving from too highcentrally set tax rates

valuing interdependent multi stage it investments a real options approach in this paper we use the market asset disclaimer assumption and develop a binomial lattice based real options model to include cash flow interdependencies between multi stage information technology it investments using a simple two stage it investment problem with interdependent cash flows we apply the binomial lattice based real options model to obtain combined valuation of the two stage it investment in addition to investment valuation our experience with the two stage it investment valuation suggests that the binomial lattice based real options model provides a powerful decision aid tool for appropriate timing delaying and abandoning of the second stage it investment

is the glass steagall act justified a study of the u s experience with universal banking before the glass steagall act of 1933 removed commercial banks from the securities underwriting business we evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality a comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this instead the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high quality securities jel g21 g24 n22

per customer quantity limit and price discrimination evidence from the u s residential mortgage market abstract theoretically if firms face a regulatory per customer quantity limit they should have an incentive to discriminatively charge high demand customers higher prices and make them just willing to buy a quantity equal to the limit in the u s residential mortgage industry mortgages with origination balances above the conforming loan limits cannot be guaranteed by government sponsored enterprises which make lenders face a per customer quantity limit this paper finds that borrowers bunching at the limit pay higher interest rates due to price discrimination this study rules out the alternative explanation that those borrowers are of higher risk lending cost than other borrowers

outsourcing and capacity planning in an uncertain global environment firms employing offshore outsourcing strategies may face both exchange rate and demand uncertainties in this paper we show that the firms may benefit from operational option to switch production by keeping capacities with both domestic and foreign suppliers the value of the operational option increases as the exchange rate uncertainty or demand uncertainty increases in addition when the firms become risk averse they may use domestic capacity to hedge against offshore capacity as a result the firms may choose to hold local capacity even if it exhibits negative marginal contribution to the profit furthermore risk averse firms may keep more total capacity than risk neutral firms

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

extending the basel ii approach to estimate capital requirements for equity investments abstract under the basel ii banking regulatory capital regime the capital requirements for credit exposures are calculated using the asymptotic single risk factor asrf approach the capital requirement is taken to be the contribution of an exposure to the unexpected loss on the bank s diversified portfolio here we extend this approach to calculate capital requirements for equity investments we show that in the case when asset values have a normal distribution an analytical formula for the unexpected loss contribution may be developed we show that the capital requirements for equity investments are quite different to those of credit exposures since equity investments can suffer substantial loss of value even when the underlying company has not defaulted unexpected loss is commonly used as a measure of capital requirements but it ignores the ability of earnings to absorb loss we propose a definition of capital requirement that recognises the expected earnings on assets and show how to combine the asrf model and the capital asset pricing model to compute this quantity for credit and equity exposures

financing flexibility the case of outsourcing abstract we investigate the relationship between the extent and timing of vertical flexibility and the financial choices of a firm by vertical flexibility we mean partial total and reversible outsourcing of a necessary input a firm simultaneously selects the vertical setting and the financial sources of investment in flexibility in particular debt and venture capital a loan may come from a lender that requires the payment of a fixed coupon over time and an option to buy out the firm in certain circumstances debt leads to the same level of flexibility of an unlevered firm yet investment occurs earlier the injection of venture capital reduces the quest for vertical flexibility and speeds up investment then there arises a fresh substitutability between a financial venture capital and a real variable vertical flexibility

call center outsourcing contract analysis and choice this paper considers a call center outsourcing contract analysis and choice problem faced by a contractor and a service provider the service provider receives an uncertain call volume over multiple periods and is considering outsourcing all or part of these calls to a contractor each call brings in a fixed revenue to the service provider answering calls requires having service capacity thus implicit in the outsourcing decision is a capacity decision insufficient capacity implies that calls cannot be answered which in turn means there will be a revenue loss faced with a choice between a volume based and a capacity based contract offered by a contractor that has pricing power the service provider determines optimal capacity levels the optimal price and capacity of the contractor together with the optimal capacity of the service provider determine optimal profits of each party under the two contracts being considered this paper characterizes optimal capacity levels and partially characterizes optimal pricing decisions under each contract the impact of demand variability and the economic parameters on contract choice are explored through numerical examples it is shown that no contract type is universally preferred and that operating environments as well as cost revenue structures have an important effect

bank underwriting of debt securities modern evidence this article examines debt securities underwritten by section 20 subsidiaries of bank holding companies relative to those underwritten by investment houses consistent with a net certification effects for banks bank underwriting of lower credit rated firms to whom the bank lends results in relatively higher prices lower yields we find no evidence of conflicts of interest even when an issue is used to repay bank debt further banks bring a relatively larger proportion of small issues to the market contrary to the contention that universal banking stunts availability of finance to small firms bank underwritings appear to benefit small firms article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effects of commodity price stabilization programs in this paper the authors analyze the effects of commodity programs in which the government attempts to support and stabilize price through open market purchases and sales specifically they as sess the effects of such programs on the u s soybean market using a rational expectations model that allows for private storage expected price responsive production and arbitrary support and release price s a salient feature of the model is that private storage and product ion behavior adjusts to changes in government policy stochastic simu lations of the market model demonstrate that price stabilization prog rams can reduce long run market price and destabilize producer revenu e copyright 1988 by american economic association

do capital adequacy requirements reduce risks in banking abstract in a dynamic framework it is shown that capital adequacy rules may increase a bank s riskiness in addition to the standard negative effect of rents on risk attitudes of banks a further intertemporal effect has to be considered the intuition behind the result is that under binding capital requirements an additional unit of equity tomorrow is more valuable to a bank if raising equity is excessively costly the only possibility to increase equity tomorrow is to increase risk today

screening location strategies to reduce exchange rate risk abstract a firm that markets its products and services world wide may face significant financial risk due to exchange rate fluctuations unless it maintains an international sourcing production network thus the firm must evaluate various sourcing production network designs the selection of the appropriate design is not straight forward since decisions are made in an environment of uncertainty and involve multiple time periods we propose a two phase approach to screen various alternative designs configurations utilizing a number of criteria and illustrate it using a popular harvard business school case as by products we introduce a new criterion for making a pairwise stochastic comparison of alternatives and demonstrate the value of maintaining excess geographically dispersed production capacity

competition and outsourcing with scale economies scale economies are commonplace in operations yet because of analytical challenges relatively little is known about how firms should compete in their presence this paper presents a model of competition between two firms that face scale economies i e each firm s cost per unit of demand is decreasing in demand a general framework is used which incorporates competition between two service providers with price and time sensitive demand a queuing game and competition between two retailers with fixed ordering costs and pricesensitive consumers an economic order quantity game reasonably general conditions are provided under which there exists at most one equilibrium with both firms participating in the market we demonstrate in the context of the queuing game that the lower cost firm in equilibrium may have a higher market share and a higher price an enviable situation we also allow each firm to outsource their production process to a supplier even if the supplier s technology is no better than the firms technology and the supplier is required to establish dedicated capacity so the supplier s scale can be no greater than either firm s scale we show that the firms strictly prefer to outsource we conclude that scale economies provide a strong motivation for outsourcing that has not previously been identified in the literature

ownership structure speculation and shareholder intervention an institution holding shares in a firm can use information about the firm both for trading speculation and for deciding whether to intervene to improve firm performance intervention increases the value of the institution s existing shareholdings but intervention only increases the institution s trading profits if it enhances the precision of the institution s information relative to that of uninformed traders thus the ability to speculate can increase or decrease institutional intervention we examine key factors that affect the intervention decision the usefulness of short swing provisions and restricted shares in encouraging institutional intervention and implications for ownership structure across different firms institutional investors hold an ever greater fraction of corporate america s equity traditionally these institutions were stock pickers who tried to beat the market through trading if a firm whose stock they held seemed headed for trouble these investors headed for the door the wall street rule more recently some of these institutions have been using the ownership rights attached to their shares to pressure firms to act in the shareholders interest some have even argued that there is a synergy between gathering information for use in trading shares speculation and intelligently pressuring firms to improve performance intervention we argue that these motives can also conflict analyzing these motives allows us to predict which firms are most likely to attract institutional intervention which in turn has crosssectional implications for firm ownership structure recent examples suggest that institutional investors with large stakes sometimes intervene and sometimes follow the wall street rule so that there is indeed a choice to be studied in the early 1990s there was a wave of activism by a variety of large institutional investors among them calpers the california public employees pension fund putnam management a mutual fund manager and j p morgan a bank holding company these institu

the effects of asset specificity on maintenance financial performance an empirical application of transaction cost theory to the medical device maintenance field abstract this study uses multivariate regression analysis to examine the effects of asset specificity on the financial performance of both external and internal governance structures for medical device maintenance and investigates how the financial performance of external governance structures differs depending on whether a hospital is private or public the hypotheses were tested using information on 764 medical devices and 62 maintenance service providers resulting in 1403 maintenance transactions as such our data sample is significantly larger than those used in previous studies in this area the results empirically support our core theoretical argument that governance financial performance is influenced by assets specificity

managing food price risks and instability in a liberalizing market environment overview and policy options abstract managing food price risks and instability is a major challenge in the midst of ongoing food market reforms key findings from the papers in this special volume revolve around five broad areas i the sources and magnitudes of food price instability in different country contexts ii the economic and social costs stemming from price instability iii the lessons from food market reforms to date iv the design of policy reforms in ways that promote efficient and stable market development and protect the interests of the poor and v potential policy responses to food price instability in a liberalizing market environment

the pricing effect of certification on syndicated loans abstract to verify if a delegated monitor can certify its ability to perform its assigned tasks we test whether syndicated loans in which a larger share of the facility is retained by the arranger have lower interest rates for a large sample of syndicated loans in over 80 countries we find that this certification effect exists and is greater for facilities characterized by greater due diligence and monitoring efforts further for listed companies the announcement effect of the new loan on the stock price is an increasing function of the portions of the loan retained by the arranger

coordinating investment production and subcontracting we value the option of subcontracting to improve financial performance and system coordination by analyzing a competitive stochastic investment game with recourse the manufacturer and subcontractor decide separately on their capacity investment levels then demand uncertainty is resolved and both parties have the option to subcontract when deciding on their production and sales we analyze and present outsourcing conditions for three contract types 1 price only contracts where an ex ante transfer price is set for each unit supplied by the subcontractor 2 incomplete contracts where both parties negotiate over the subcontracting transfer and 3 state dependent price only and incomplete contracts for which we show an equivalence result while subcontracting with these three contract types can coordinate production decisions in the supply system only state dependent contracts can eliminate all decentralization costs and coordinate capacity investment decisions the minimally sufficient price only contract that coordinates our supply chain specifies transfer prices for a small number 6 in our model of contingent scenarios our game theoretic model allows the analysis of the role of transfer prices and of the bargaining power of buyer and supplier we find that sometimes firms may be better off leaving some contract parameters unspecified ex ante and agreeing to negotiate ex post also a price focused strategy for managing subcontractors can backfire because a lower transfer price may decrease the manufacturer s profit finally as with financial options the option value of subcontracting increases as markets are more volatile or more negatively correlated

securitization and loan performance ex ante and ex post relations in the mortgage market this study examines the relation between securitization and loan performance using a comprehensive dataset from a major national mortgage lender loans remaining on the bank s balance sheet ex post incurred higher delinquency rates than sold loans contrasting the negative relation between screening efforts and ex ante probability of loan sale explored by prior studies moreover the performance gap between sold and retained loans was wider among the subsample of loans that were perceived as easier to resell the investors seeming advantage over the originating bank can mostly be explained by information revealed during the time between loan origination and sale

asymmetric information in insurance general testable implications several recent articles on empirical contract theory and insurance have tested for a positive correlation between coverage and ex post risk as predicted by standard models of pure adverse selection or pure moral hazard we show here that the positive correlationproperty can be extended to general setups competitive insurance markets and cases where risk aversion is public we test our results on a french dataset our tests confirm that the estimated correlation is positive they also suggest the presence of market power

banks and loan sales marketing nonmarketable assets theories of financial intermediation predict that bank loans should not be marketable because of moral hazard problems banks will not conduct credit risk analysis or monitor borrowers if they are not at risk for failing to perform these services throughout most of history bank loans have not in fact been marketable yet by the end of the 1980 s the amount of commercial and industrial loan sales outstanding had grown to over 250 billion from trivial amounts at the beginning of the decade to explain the opening of this loan sales market we present a model of incentive compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers we then test for the presence of these features using a sample of over 800 recent loan sales

financial regulation and securitization evidence from subprime mortgage loans we examine the consequences of existing regulations on the quality of mortgage loans originations in the originate to distribute otd market the information asymmetries in the otd market can lead to moral hazard problems on the part of lenders we find using a plausibly exogenous source of variation in the ease of securitization that the quality of loan origination varies inversely with the amount of regulation more regulated lenders originate loans of worse quality we interpret this result as a possible evidence that the fragility of lightly regulated originators capital structure can mitigate moral hazard in addition we find that incentives which require mortgage brokers to have skin in the game and stronger risk management departments inside the bank partially alleviate the moral hazard problem in this setting finally having more lenders inside a mortgage pool is associated with higher quality loans suggesting that sharper relative performance evaluation made possible by more competition among contributing lenders can also mitigate the moral hazard problem to some extent overall our evidence suggests that market forces rather than regulation may have been more effective in mitigating moral hazard in the otd market the findings caution against policies that impose stricter lender regulations which fail to align lenders incentives with the investors of mortgage backed securities 2009 elsevier b v all rights reserved

emerging problems with the basel capital accord regulatory capital arbitrage and related issues in recent years securitization and other financial innovations have provided unprecedented opportunities for banks to reduce substantially their regulatory capital requirements with little or no corresponding reduction in their overall economic risks a process termed regulatory capital arbitrage these methods are used routinely to lower the eaective risk based capital requirements against certain portfolios to levels well below the basel capital accord s nominal 8 total risk based capital standard this paper discusses the principal techniques used to undertake capital arbitrage and the diaculties faced by bank supervisors in attempting to deal with these activities under the current capital framework 2000 elsevier science b v all rights reserved

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

securitization and moral hazard evidence from credit score cutoff rules abstract a growing literature exploits credit score cutoff rules as a natural experiment to estimate the moral hazard effect of securitization on lender screening however these cutoff rules can be traced to underwriting guidelines for originators not for securitizers moreover loan level data reveal that lenders change their screening at credit score cutoffs in the absence of changes in the probability of securitization credit score cutoff rules thus cannot be used to learn about the moral hazard effect of securitization on underwriting by showing that this evidence has been misinterpreted our analysis should move beliefs away from the conclusion that securitization led to lax screening

financial regulation and securitization evidence from subprime loans we examine the consequences of existing regulations on the quality of mortgage loans originations in the originate to distribute otd market the information asymmetries in the otd market can lead to moral hazard problems on the part of lenders we find using a plausibly exogenous source of variation in the ease of securitization that the quality of loan origination varies inversely with the amount of regulation more regulated lenders originate loans of worse quality we interpret this result as a possible evidence that the fragility of lightly regulated originators capital structure can mitigate moral hazard in addition we find that incentives which require mortgage brokers to have skin in the game and stronger risk management departments inside the bank partially alleviate the moral hazard problem in this setting finally having more lenders inside a mortgage pool is associated with higher quality loans suggesting that sharper relative performance evaluation made possible by more competition among contributing lenders can also mitigate the moral hazard problem to some extent overall our evidence suggests that market forces rather than regulation may have been more effective in mitigating moral hazard in the otd market the findings caution against policies that impose stricter lender regulations which fail to align lenders incentives with the investors of mortgage backed securities

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

selection of contract suppliers under price and demand uncertainty in a dynamic market in this paper we consider a supply contracting problem in which the buyer firm faces non stationary stochastic price and demand first we derive analytical results to compare two pure strategies i periodically purchasing from the spot market and ii signing a long term contract with a single supplier the results from the pure strategies show that the selection of suppliers can be complicated by many parameters and is particularly affected by price uncertainty we then develop a stochastic dynamic programming model to incorporate mixed strategies purchasing commitments and contract cancellations computational results show that increases in price demand uncertainty favor long term short term suppliers by examining the two way interactions of contract factors price demand purchasing bounds learning and technology effect salvage values and contract cancellation both intuitive and non intuitive managerial insights in outsourcing strategies are derived

hedging grain price risk in the sadc case studies of malawi and zambia abstract we use simulation methods to examine the results of hedging maize food security imports into malawi and zambia on the south african exchange safex results show that hedging using either futures or options can spread import costs over time thereby reducing variability and also possibly generating lower average costs these benefits are increased if hedging only takes place when local prices are at less than import parity and also if the hedge is levered however problems will remain so long as intra regional transport costs remain high

the real output losses associated with modern banking crises this study investigates the real output losses associated with modern banking crises we find a remarkable diversity of experience in a number of instances banking crises have not been associated with any significant reduction in the growth of real per capita gdp often this has been the case in mature and developed economies on the other hand estimated output losses are extremely large for some other countriesnamounting to several years of lost gdp interestingly such large losses can be associated with banking crises that were designated as non systemic our sample mean and median output loss estimates are also big for the average sample country the estimated present discounted value of crisis related output losses is bounded between 63 and 302 of real per capita gdp in the last year before the crisis onset average loss estimates are this large primarily because we find evidence that post crisis economic slowdowns often persist long after the crisis is officially over such delayed costs have been largely overlooked in previous empirical work and resultantly our loss estimates are much larger than those that have appeared elsewhere

the use of organized commodity markets to manage food import price instability and risk the article explores the possibility of insuring the price risks of wheat and maize imports of low income food deficit countries lifdcs optimal strategies for an importing agent who hedges with futures and options are derived based on the objective of minimizing the unpredictability of import bills ex post simulations for a set of lifdcs are run on wheat and maize imports hedged with futures and options in the chicago board of trade to explore the extent to which hedging reduces the unpredictability in import bills simulations encompass both periods of normal price behavior as well as the period of global upheaval that occurred in 2007 and 2008 results show that hedging with futures alone affords agents considerable opportunities for reducing import cost unpredictability and the same holds with options albeit to a lesser extent however during the recent price spike of 2007 2008 hedging with options would have increased the unpredictability of some countries maize import bills due to the combination of erratic import patterns and pronounced market uncertainty

bank size and risk taking under basel ii this paper discusses the relationship between bank size and risk taking under pillar i of the new basel capital accord using a model with imperfect competition and moral hazard we find that small banks and hence small borrowers may profit from the introduction of an internal ratings based irb approach if this approach is applied uniformly across banks however the banks right to choose between the standardized and the irb approaches unambiguously hurts small banks who are pushed towards higher risk taking due to fiercer competition this may even lead to higher aggregate risk in the economy

basel iii leverage ratio requirement and the probability of bank runs abstract a new argument for the basel iii leverage ratio requirement is proposed the need to limit the risk of a bank run when there is imperfect information on the value of a bank s assets in addition to screening and monitoring borrowers banks provide liquidity insurance with the supply of short term deposits withdrawable on demand the maturity mismatch creates the risk of a disorderly bank run which can be exacerbated by imperfect information about the value of bank assets it is shown in a stylized basel iii framework that capital regulation should incorporate a liquidity risk component credit risk diversification and or a reduced probability of loan default which lead to a reduction of basel iii regulatory capital will increase the probability of a bank run the leverage ratio rule puts a floor on the basel iii risk weighted capital ratio allowing the limitation of such a risk

a leverage ratio rule for capital adequacy abstract this paper studies the economic foundations for maximum leverage ratio capital adequacy rules the paper makes three contributions to the literature first we show how to determine the maximum leverage ratio such that the probability of insolvency is less than some predetermined quantity two we show that a leverage ratio rule controls for the same risks as does a value at risk var capital adequacy rule third we argue that leverage ratio rules are better than var rules because they are more intuitive and easier to compare across firms

credit booms and lending standards evidence from the subprime mortgage market this paper links the u s subprime mortgage crisis to demand side factors that contributed to the rapid expansion of the u s mortgage market we show that denial rates were relatively lower in areas that experienced faster credit demand growth and that lenders in these high growth areas attached less weight to applicants loan to income ratios the results are robust to controlling for supply side factors including house price appreciation mortgage securitization and other economic fundamentals and to several robustness tests controlling for endogeneity the results are consistent with the notion that a relaxation of lending standards triggered by an increased demand for loans contributed to the boom and the ensuing crisis together with other supply side explanations these findings shed new light on the relationship between credit booms and financial instability

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

asymmetric information in securitization an empirical assessment abstract asymmetric information in securitization deals is analyzed based on a unique dataset comprising a million mortgages both securitized and not and using a methodology previously applied to insurance data that looks at the correlation between risk transfer and default probability the main finding is that for given observable characteristics securitized mortgages have a lower default probability than non securitized ones we show that this finding is consistent with banks caring about their reputation for not selling lemons

impact of sourcing flexibility on the outsourcing of services under demand uncertainty abstract this paper investigates the relationship between market conditions and the value and use of sourcing flexibility for service processes we develop and analyze a series of models and we derive expressions for the optimal switching decision the value of the option to outsource the value of the option to backsource and the probability and timing of switches between the alternative sources one contribution is the models and associated derivations which are largely new to the literature and may serve as a tool to support service sourcing plans and decisions the second contribution is a series of results with managerial implications 1 the probability of outsourcing is generally increasing in volatility for high skill process and decreasing in volatility for low skill processes earlier work has found that the hysteresis band is increasing in volatility which is interpreted as an indicator of increasing organizational inertia we also find that the hysteresis band is increasing in volatility but interestingly for the case of high skill processes organizational inertia tends to be decreasing in volatility 2 the option to backsource is generally more valuable for high skill processes than for low skill processes this result suggests that investments to make it easier to backsource should have a higher priority for high skill processes 3 the value of the option to backsource a high skill service process can be decreasing in volatility the result suggests that a rather nuanced consideration of volatility is in order when considering investments in the flexibility to backsource a high skill process

food price seasonality in africa measurement and extent everyone knows about seasonality but what exactly do we know this study systematically measures seasonal price gaps at 193 markets for 13 food commodities in seven african countries it shows that the commonly used dummy variable or moving average deviation methods to estimate the seasonal gap can yield substantial upward bias this can be partially circumvented using trigonometric and sawtooth models which are more parsimonious among staple crops seasonality is highest for maize 33 percent on average and lowest for rice 16 percent this is two and a half to three times larger than in the international reference markets seasonality varies substantially across market places but maize is the only crop in which there are important systematic country effects malawi where maize is the main staple emerges as exhibiting the most acute seasonal differences reaching the sustainable development goal of zero hunger requires renewed policy attention to seasonality in food prices and consumption

what makes a bank risky insights from the optimal capital structure of banks abstract assessing the risk of bank failures is the paramount concern of bank regulation this paper argues that in order to assess the default risk of a bank it is important to consider its financing decisions as an endogenous dynamic process we provide a continuous time model where banks choose the deposit volume in order to trade off the benefits of earning deposit premiums against the costs that occur at future capital structure adjustments the bank s asset value may suffer from shocks and follows a jump diffusion process our main finding is that the dynamic endogenous financing decision introduces an important self regulation mechanism where it is crucial to distinguish between the diffusion risk and the jump risk component

false promise or false premise the experience of food and input market reform in eastern and southern africa abstract the literature on the effects of agricultural market reform in africa is sharply divided and inconsistent this article attempts to reconcile opposing viewpoints on the effects of food and input market policy reform in eastern and southern africa drawing from studies of ethiopia kenya malawi zambia and zimbabwe we argue that a major source of the controversy stems from assumptions that countries have actually moved to a liberalized market environment we find that many of the most fundamental elements of the reform programs either remain unimplemented were reversed within several years or were implemented in such a way as to negate private sector investment incentives a framework is developed for explaining why some countries have been able to liberalize their food and fertilizer markets while others have not these findings have implications for how donor assistance and policy oriented research can more constructively contribute to an improved policy environment

exchange rates and the choice of ownership structure of production facilities the aim of this research is to study the effects of real exchange rates on the long term ownership strategies of production facilities of firms entering foreign markets among the strategies considered are exporting exp joint ventures with local partners jv and wholly owned production facilities wos in the foreign country our research takes a first step in modeling the influence of exchange rates on the choice and dynamic adjustment of such strategies the insights obtained from our modeling analysis are then translated into testable hypotheses and empirically verified with the use of firm level data from u s multinational corporations both at the firm and a more aggregate level an insightful result of our model is the identification of a hysteresis phenomenon that characterizes switching behavior between strategies in the presence of switchover cost the magnitude of the hysteresis band which is a measure of the inertia associated with keeping the current ownership structure is affected by a multiplicity of factors such as exchange rate volatility and market power of the entering firm analytical and numerical results on the effects of such factors on the hysteresis band are provided the four testable hypotheses generated from our modeling analysis are rigorously tested with the use of a multinomial logit model on data obtained from the harvard multinational enterprise database and a data set maintained by the bureau of economic analysis the u s department of commerce the empirical results strongly support our insights that relatively depreciated real exchange rates i e weak home currency favor a the jv over the wos and b exp mode over the wos or jv finally we summarize our results into useful guidelines for global production managers

loan sales and relationship banking firms raise money from banks and the bond market banks sell loans in a secondary market to recycle their funds or to trade on private information liquidity in the loan market depends on the relative likelihood of each motive for trade and affects firms optimal financial structure the endogenous degree of liquidity is not always socially optimal there is excessive trade in highly rated names and insufficient liquidity in riskier bonds we provide testable implications for prices and quantities in primary and secondary loan markets and bond markets further we posit that risk based capital requirements may be socially desirable the term collateralized loan obligations clos was coined in 1989 when corporate loans were first used as collateral in collateralized debt obligations cdos 1 since then the growth in loan sales has been enormous according to lucas et al 2006 1 1 trillion of cdos were outstanding as of 2005 and 50 of their collateral was comprised of loans in addition to pooled securities banks also trade first loss positions on single names through direct sales of individual loans in the united states loan sales have grown from 8 billion in 1991 to 154 8 billion by 2004 2 if a bank securitizes or sells a loan that it originated it is buying insurance on credit events over which it has either more control or more information than the buyer in the face of this informational friction why did the secondary market for corporate loans develop in the 1990s what effect has this had on relationship banking in this paper we characterize when a liquid secondary market for loans arises when a liquid secondary loan market is socially desirable and we provide testable predictions on the effect of the emergence of this market on prices and quantities in bond and primary loan markets our predictions are based on both changes in the parameters that lead to higher loan liquidity and changes in the contracts that are written between banks and firms given this higher liquidity

flexible waste management under uncertainty in this paper we use stochastic dynamic programming to model the choice of a municipality which has to design an optimal waste management program under uncertainty about the price of recyclables in the secondary market the municipality can by undertaking an irreversible investment adopt a flexible program which integrates the existing landfill strategy with recycling keeping the option to switch back to landfilling if profitable we determine the optimal share of waste to be recycled and the optimal timing for the investment in such a flexible program we find that adopting a flexible program rather than a non flexible one the municipality i invests in recycling capacity under circumstances where it would not do so otherwise ii invests earlier and iii benefits from a higher expected net present value c 2013 elsevier b v all rights reserved less

partial outsourcing monitoring cost and market structure we investigate firms outsourcing decisions when production requires a large number of inputs the novelty of our approach is that it provides a testable framework to characterize the equilibrium fraction of outsourced inputs we demonstrate that intensified competition in a cournot market for the final good typically enlarges the set of outsourced components relative to those produced in house the proportions of outsourced inputs are found to be strategic substitutes independently of whether firms compete with respect to quantities or prices in the market for the final good jel classification d20 l22 sous traitance partielle cout de monitarisation et structure de marche l auteur examine les decisions de sous traitance des entreprises quand la production reclame un grand nombre d intrants la nouveaute de l approche proposee est qu elle fournit un cadre conceptuel testable pour definir en equilibre la fraction des intrants obtenue en sous traitance on montre qu une concurrence plus intense pour le produit final dans un marchea la cournot accroit l ensemble des intrants obtenus en sous traitance par rapport a l ensemble de ceux qui sont produit a l interne il s avere que les proportions des divers intrants obtenus en sous traitance sont des substituts que les firmes se concurrencent par les prix ou les quantites dans le marche du produit final

the theory of food price stabilisation a small and very volatile fraction of total domestic food production many countries aim at food self sufficiency with the consequence that the country may be an exporter in good years but an importer in bad years international and domestic transport and handling costs are a significant fraction of the average price of cereals so the domestic price fluctuations will tend to be an amplified version of international price fluctuations the difference between the domestic price in exporting and importing years will be twice the transport costs if the world price is unchanged it would require a strong negative correlation between domestic and world supply to offset this additional source of instability 1

why basel ii may need a leverage ratio restriction abstract we analyze regulatory capital requirements where the amount of required capital depends on the level of risk reported by the banks it is shown that if the supervisors have a limited ability to identify or to sanction dishonest banks an additional risk independent leverage ratio restriction may be necessary to induce truthful risk reporting the leverage ratio helps to offset the banks potential capital savings of understating their risks by i reducing banks put option value of limited liability ex ante and by ii increasing the banks net worth which in turn enhances the supervisors ability to sanction banks ex post

capital controls and bank risk abstract we analyze the effects of deposit guarantees on banks loan portfolio in contrast to earlier work we view bank loans net of evaluation and monitoring costs as non zero npv investments e g market securities deposit guarantees lead to inefficient investment and under plausible circumstances capital requirement increases lead banks to increase asset risk the risk increase reduces the beneficial effects of capital increases on the probability of default and on the economic efficiency of bank lending in some cases a tightening of the capital constraint even leads to an increase in the probability of default and financial instability and to higher expected costs of transferring assets to regulatory agencies increases in bank capital are not a substitute for risk monitoring and control and may imply an increased need for such surveillance

optimal operating policies in the presence of exchange rate variability we study the structure of the optimal policies for a firm operating plants in different countries the relative costs of production between the plants are assumed to vary over time due to economic and political factors such as exchange rates inflation taxes and tariffs based on the costs the firm can alter the quantity produced in each plant we determine the structure of the optimal policies for deciding when and by how much to alter the production quantities when the switch over costs are linear or step functions regardless of whether the variable production costs are concave or piece wise linear convex and regardless of whether the firm is supplying one or more markets the optimal policy is always a barrier policy the optimal barriers can be determined by using linear programming techniques and the optimal costs can be computed by solving a system of linear equations when the number of optimal barriers is two the optimal expected costs and the condition that determines the optimal barriers are explicitly derived

default insurance and debt over the life cycle abstract the widespread use of debt and default suggests that unsecured credit markets play an important role in consumption smoothing in this paper i address two previously unanswered questions first how does policy towards debt default affect the evolution of consumption and net worth over the life cycle second how does debt default policy interact with social insurance over the life cycle the findings are as follows first us default policy appears lax in the sense that it creates severe credit constraints especially for the young second eliminating default will lower consumption inequality among the young but will increase it among the old third social insurance alters default risk and in turn loan pricing and therefore matters for purely intertemporal smoothing

risk based capital requirements for mortgage loans abstract we contribute to the debate over the reform of the basel accord by developing risk based capital requirements for mortgage loans held in portfolio by financial intermediaries our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification hence rules that offer little risk differentiation including the current basel i regime and standardized approach proposed in basel ii result in significant divergence between regulatory and economic capital these results highlight the incentive problems inherent in simplified methods of capital regulation

evaluating the effectiveness of inter regional trade and storage in malawi s private sector maize markets abstract this paper evaluates the effectiveness of the private sector maize marketing system in malawi using threshold autoregression models two dimensions of maize market performance are evaluated 1 inter regional trade and spatial price transmission and 2 storage and seasonal price relationships in both cases threshold autoregression models which account for nonlinearities predicted by economic theory are applied results indicate that spatial price transmission and seasonal price patterns in private sector maize markets in malawi are generally consistent with long run competitive inter regional trade and storage behavior and that in most cases shocks to long run equilibrium are arbitraged away quickly this suggests the private sector in malawi is generally doing a good job of transporting maize from surplus to deficit regions and smoothing maize consumption between harvests

regulating a model abstract we study a situation in which a regulator relies on risk models that banks produce in order to regulate them a bank can generate more than one model and choose which models to reveal to the regulator the regulator can find out the other models by monitoring the bank but in equilibrium monitoring induces the bank to produce less information we show that a high level of monitoring is desirable when the bank s private gain from producing more information is either sufficiently high or sufficiently low when public models are more precise banks produce more information but the regulator may end up monitoring more

are bank capital ratios pro cyclical new evidence and perspectives this paper analyses how the new basel iii leverage ratio and risk weighted regulatory capital ratio behave over the cycle the analysis proposes a set up to test for the cyclical properties of bank capital ratios taking into account structural shifts in banks behaviour during the global financial crisis and its aftermath using a large data set covering international banks headquartered in 14 advanced economies for the period 1994 2012 we find that the basel iii leverage ratio is significantly more countercyclical than the risk weighted regulatory capital ratio it is a tighter constraint for banks in booms and a looser constraint in recessions

banks non traditional activities under regulatory changes impact on risk performance and capital adequacy using the big six canadian chartered banks quarterly financial statements and daily stock market data from 1982 to 2018 we examine the impact of non interest income on canadian banks risk perfor