domestic and international determinants of bank profits foreign banks in australia abstract this paper develops and tests a model that integrates the existing multinational bank literature with the domestic bank profits literature using data for australia this paper demonstrates that an integrated model results in a small increase in explanatory power when compared to models drawn solely from the multinational banking literature the paper finds that profits are a negative function of competitor market share and bank licence status and a positive function of australian size and home gdp growth it is argued that there is incomplete integration between the market segments of domestic and multinational banks due to the first mover advantages of incumbent banks

asset price dynamics and infrequent feedback trades this article combines the continuous arrival of information with the infrequency of trades and investigates the effects on asset price dynamics of positive and negative feedback trading specifically we model an economy where stocks and bonds are traded by two types of agents speculators who maximize expected utility and feedback traders who mechanically respond to price changes and infrequently submit market orders we show that positive feedback strategies increase the volatility of stock returns and the response of stock prices to dividend news conversely the presence of negative feedback traders makes stock returns less volatile and prices less responsive to dividends

comparing malmquist and hicks moorsteen productivity indices exploring the impact of unbalanced vs balanced panel data abstract we explore the effect of balancing unbalanced panel data when estimating primal productivity indices using non parametric frontier estimators first we list a series of pseudo solutions aimed at making an unbalanced panel balanced then we discuss some intermediate solutions e g balancing 2 years by 2 years furthermore we link this problem with a variety of literatures on infeasibilities statistical inference of non parametric frontier estimators and the index theory literature focusing on the dynamics of entry and exit in industries we then empirically illustrate these issues comparing both malmquist and hicks moorsteen productivity indices on two data sets in particular we test for the differences in distribution when comparing balanced and unbalanced results for a given index and when comparing malmquist and hicks moorsteen productivity indices for a given type of data set the latter tests are crucial in answering the question to which extent the malmquist index can approximate the hicks moorsteen index that has a total factor productivity tfp interpretation finally we draw up a list of remaining issues that could benefit from further exploration

a sparsity based model of bounded rationality this article defines and analyzes a sparse max operator which is a less than fully attentive and rational version of the traditional max operator the agent builds as economists do a simplified model of the world which is sparse considering only the variables of first order importance his stylized model and his resulting choices both derive from constrained optimization still the sparse max remains tractable to compute moreover the induced outcomes reflect basic psychological forces governing limited attention the sparse max yields a behavioral version of basic chapters of the microeconomics textbook consumer demand and competitive equilibrium i obtain a behavioral version of marshallian and hicksian demand arrow debreu competitive equilibrium the slutsky matrix the edgeworth box roy s identity and so on the slutsky matrix is no longer symmetric nonsalient prices are associated with anomalously small demand elasticities because the consumer exhibits nominal illusion in the edgeworth box the offer curve is a two dimensional surface rather than a one dimensional curve as a result different aggregate price levels correspond to materially distinct competitive equilibria in a similar spirit to a phillips curve the arrow debreu welfare theorems typically do not hold this framework provides a way to assess which parts of basic microeconomics are robust and which are not to the assumption of perfect maximization jel codes d01 d03 d11 d51

banking reforms performance and risk in china we investigate the impact of the banking reform started from 2005 on ownership structures in china on commercial banks profitability efficiency and risk over the period 2000 2012 providing comprehensive evidence on the impact of banking reform in china we find that banks on average tend to have higher profitability lower risk and lower efficiency after the reforms and the results are robust with our difference in difference approach our results also show that the big 5 state owned banks socb underperform banks with other types of ownership when risk is measured by non performing loans npls over the entire study period but tend to have fewer npls than other banks during the post reform period our results provide some supporting evidence on the ongoing banking reforms in china suggesting that attracting strategic foreign investors and listing socbs on stock exchanges appear to be effective ways to help socbs deal with the problem of npls and manage their risk

economic consequences of deregulation evidence from the removal of voting cap in indian banks abstract we examine the effect of the 2005 banking regulation amendment bill and the 2011 banking laws amendment bill proposals for removal of the 10 percent voting rights cap in indian banks the 2011 banking laws bill was first introduced in 2005 but lapsed with the dissolution of the 14th lok sabha the bill was passed in december 2012 and raised the voting cap in private sector banks from 10 to 26 percent we present evidence that the removal of the voting cap enhances the value of votes of bank stocks by reducing the wedge between cash flow and control rights thus increasing monitoring and the probability of takeover post deregulation analysis reveals that the passage of the bill was followed by increasing blockholders number and percentage of shares held in larger and government banks furthermore a stronger negative relationship between banks profitability and size as well as share of non performing loans is observed this study makes an important contribution to the growing literature on the valuation impact and efficiency gains of liberalization of ownership restrictions in emerging markets as well as the rich literature on corporate governance and control relating to the value of voting privilege in companies with disparate voting rights

utility based option evaluation with proportional transaction costs abstract we examine the problem of finding investors reservation prices of european contingent claims in a continuous time finite horizon economy with proportional transaction costs we derive analytically numerous properties of reservation prices reflecting their dependency on the size of the option position the risk aversion and the initial wealth for the special case of hara utility functions we consider the so called marginal reservation prices i e unit reservation prices of infinitesimal positions of the contingent claim and prove that these are independent of the initial wealth and the parameters of the utility function except for the exponent furthermore we present numerical examples suggesting that the marginal reservation prices are for reasonable parameter values insensitive to the drift of the underlying security and the exponent of the hara utility function

does bank efficiency matter market value relevance of bank efficiency in australia the stochastic frontier analysis is employed to investigate efficiency of publicly listed australian banks over the period 1985 to 2008 the results suggest that technical cost and profit efficiency of australian banks have improved over time large banks have attained a higher level of cost efficiency but a lower level of technical efficiency compared to small banks no substantial difference between the two groups is found in terms of profit efficiency a panel regression of bank stock return on bank efficiency suggests that an improvement in technical cost or profit efficiency contributes to the market value of a bank thus the shareholder wealth maximization goal is aligned with the goal of maximizing bank efficiency in the australian context

an exact solution to a dynamic portfolio choice problem under transactions costs the presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor it requires one to either act or do nothing an issue which of course does not arise in frictionless situations the investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all his objective is to maximize the expected utility derived from that terminal consumption we postpone the terminal point far into the future to obtain a stationary portfolio rule the portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate we show how to calculate them

investment opportunities and corporate demand for lines of credit abstract the behavior of a risk neutral corporation in selection of a line of credit is modeled in a new framework where demand for credit lines by a firm arises from the stochastic arrival in continuous time of short lived opportunities to capture investment projects the firm needs speed and secrecy to capture projects before competitors the firm chooses a credit line that balances its up front commitment cost against the expected extra cost of borrowing in the spot market upon exhaustion of its credit line the firm s demanded credit line depends upon both relative pricing within the contract and the nature of the firm s growth opportunities interestingly while credit line demand is positively related to business growth prospects it is potentially negatively related to uncertainty in those prospects

option pricing and replication with transactions costs transactions costs invalidate the black scholes arbitrage argument for option pricing since continuous revision implies infinite trading discrete revision using black scholes deltas generates errors which are correlated with the market and do not approach zero with more frequent revision when transactions costs are included this paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision hedging errors are uncorrelated with the market and approach zero with more frequent revision the technique permits calculation of the transactions costs of option replication and provides bounds on option prices

stochastic dominance bounds on derivatives prices in a multiperiod economy with proportional transaction costs by applying stochastic dominance arguments upper bounds on the reservation write price of european calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security the primary contribution is the derivation of bounds when intermediate trading in the underlying security is allowed over the life of the option a tight upper bound is derived on the reservation write price of a call and a tight lower bound is derived on the reservation purchase price of a put these results jointly impose tight upper and lower bounds on the implied volatility

deregulation and productivity decline the case of spanish savings banks abstract during the 1980s many regulatory constraints limiting competition in spanish banking were relaxed or removed although deregulation came later to savings banks than to the rest of the banking sector two consequences of partial deregulation of savings banks have been a rapid growth in branching activity much of it geographically dispersed and a burst of merger activity in this paper we investigate productive efficiency and total factor productivity change in spanish savings banks over the 1986 1991 post deregulation period neither branching nor mergers provide an adequate explanation for the magnitude or the nature of the productivity decline we observe over the period

risk pooling and intermediate trading agents this paper argues that intermediate trading agents itas besides providing services like the service of availability and information economizing activity serve another important role which is to provide producing firms with a vehicle to shift forward their retailing risks of unsold products the gains from trade from intermediation as risk bearers need not beg arbitrary assumptions that itas compared to firms must have better information regarding consumer demands or less costly retailing technologies neither does it necessarily rely on the assumption that itas are inherently less risk averse rather risk pooling via product diversification by itas under plausible conditions is sufficient to provide the profit incentive for intermediation for such insurance service producing firms pay risk premia embedded in price discounts which increase or decrease with bulk orders of itas depending on whether firms have increasing or decreasing returns to scale production technologies respectively la mise en commun des risques et les intermediaires commerciaux ce memoire sugg re que les interm6diaires commerciaux en plus de produire des services de disponibilite et une activite qui reduit les coats de l information peuvent aussi constituer un moyen pour les entreprises productrices de transferer les risques de produits invendus vers leur client le ou leurs agents pour que les intermediaires commerciaux jouent ce role et que des gains soient engendr6s par cette activite d interm6diation il n est pas n6cessaire de postuler que les intermediaires ont des renseignements plus clairs quant a la demande des consommateurs ou qu ils ont acc s a des technologies de mise en march6 moins cofiteuses ou que ces intermediaires ont moins de repugnance pour le risque il suffit que les intermediaires puissent esperer faire des profits par ces operations d intermediation en mettant en commun certains risques par une diversification de leurs activit6s pour obtenir cette sorte de service d assurance les entreprises productrices vont etre pretes h consentir des escomptes de prix qui vont croitre ou d6croitre a proportion que les commandes des intermediaires commerciaux prennent des dimensions plus importantes selon que les entreprises productrices ont des technologies dont les rendements h l echelle sont croissants ou decroissants the author is grateful to joel fried and john palmer for useful comments and discussions many thanks are also due to keizo nagatani and the anonymous referees for helpful suggestions to improve on an earlier version canadian journal of economics revue canadienne d economique xiv no 2 may mai 1981 printed in canada imprime au canada 0008 4085 81 0000 0261 01 50 1981 canadian economics association this content downloaded from 157 55 39 208 on fri 29 jul 2016 04 21 50 utc all use subject to http about jstor org terms

efficient trading strategies in the presence of market frictions we provide a price characterization of efficient contingent claims that is chosen by at least a rational agent in multiperiod economies with market frictions frictions include market incompleteness transaction costs short selling and borrowing costs we characterize the inefficiency cost of a trading strategy its required investment minus the largest amount necessary to obtain the same utility level and we propose a measure of portfolio performance we show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments we observe common investment strategies becoming inefficient with market frictions and others rationalized by them in this article we characterize efficient contingent claims to future consumption consumption bundles in multiperiod economies with uncertainty taking a wide range of market frictions into account 1 such as dynamic market

performance evaluation of portfolio insurance strategies using stochastic dominance criteria abstract this paper evaluates the performance of the stop loss synthetic put and constant proportion portfolio insurance techniques based on a block bootstrap simulation we consider not only traditional performance measures but also some recently developed measures that capture the non normality of the return distribution value at risk expected shortfall and the omega measure we compare them to the more comprehensive stochastic dominance criteria the impact of changing the rebalancing frequency and level of capital protection is examined we find that even though a buy and hold strategy generates higher average excess returns it does not stochastically dominate the portfolio insurance strategies nor vice versa our results indicate that a 100 floor value should be preferred to lower floor values and that daily rebalanced synthetic put and cppi strategies dominate their counterparts with less frequent rebalancing

a computational scheme for optimal investment consumption with proportional transaction costs abstract we consider the optimal investment consumption strategy of an investor who can invest in a stock and a bank we consider the case where proportional transaction costs are present and the objective is to maximize the discounted utility of consumption we describe an efficient computational scheme that transforms the arising free boundary problem to a sequence of fixed boundary problems we prove the convergence of the scheme and also show that the converged solution is the optimal value function finally we compare and contrast the results obtained by our procedure with certain well known results and approximations the proposed scheme also lends itself to optimizing portfolios with multiple risky assets

endogenous labor leisure investment choice under time constraints we posit the opportunity cost of time required to manage risky investments including conducting research and performance monitoring as a potential explanation for the equity premium puzzle an economic agent who should allocate a limited amount of time to labor leisure and risky investment is subject to the opportunity time cost of investment activity which is foregone labor or leisure our model envisages its impact on equity premium and volatility in the presence of such a time constraint in particular with closed form solutions to the risky asset returns volatility and risk free rate in a simple equilibrium framework wherein agents have log utility the model is shown to yield excess return and volatility consistent with historical values observed in the u s stock market even with a small amount of time cost in addition the model enables us to sort out the impact of endogenous labor leisure choice on return dynamics by comparing it with the exogenous labor income case

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

the systematic risk of discretely rebalanced option hedges this paper demonstrates that black scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals this systematic risk may have biased important empir ical tests of the option pricing model moreover this systematic risk means that the blackscholes option pricing model is inherently inconsistent with the discrete time version of the capital asset pricing model capm

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps

optimal consumption portfolio policies a convergence from discrete to continuous time models abstract we establish a convergence of optimal intertemporal consumption and portfolio policies from a sequence of discrete time multivariate and multinomial models to a continuous time multi dimensional diffusion model

on the mean variance tradeoff in option replication with transactions costs this paper analyzes the tradeoff between cost and risk of discretely rebalanced option hedges in the presence of transactions costs i present closed form solutions for expected hedging error transactions costs and variance of the cash flow from a time based hedging strategy similar to that analyzed by leland 1985 furthermore i characterize the cost and risk of a move based hedging strategy without resorting to monte carlo simulations all results are sufficiently general to accommodate the use of a transactions costs adjusted hedging volatility and an asset rate of return that differs from the risk free rate of return

price barriers and the dynamics of asset prices in equilibrium a price barrier is a price level at which a large number of investors either buy or sell securities we analyze the dynamics of asset prices in an economy in which price barriers exist our analysis suggests that asset prices and volatility can exhibit jumps when the price barrier is reached interestingly the market s anticipation of future trades can influence prices in the opposite direction from what one might expect for example when multiple barriers exist stock prices can be inflated rather than depressed in the proximity of an anticipated stock sale

foreign bank diversification and efficiency prior to and during the financial crisis does one business model fit all diversified and focused business models may affect foreign bank efficiency differently we investigate whether there is an optimal business model along three business dimensions assets funding and income and which business model is optimal for foreign banks in a financial center we apply recently developed non parametric methods with bootstrap to estimate group efficiency to test for differences across groups and finally to analyze the link between bank efficiency and diversification measures using luxembourg bank data that include the financial crisis we find that there is no unique business model the most efficient business model appears to be a focused asset funding and income strategy banks organizational forms play a role branches may be preferable to subsidiaries prior to the financial crisis whereas bank subsidiaries perform better than branches during the financial crisis however branches diversified in assets funding and income exploit efficiency advantages during the financial crisis

the pricing of convexity risk and timedecay in options markets abstract option valuation formulas typically assume all risk can be eliminated in a continuously rebalanced hedge but convexity of the option pricing function and time decay cause risk in real world hedges we find strong evidence in stock options transactions data from periods 10 years apart that the market prices these risks there is a significant price effect associated with convexity that becomes larger immediately following a period of larger stock price movements although time decay is highly correlated with convexity a multiple regression including both factors shows it to have a significant independent effect the results from the two sample periods are highly consistent as are pre and post crash results from the year 1987

multiproduct technology and market structure a recent line of research has exposed some technological determinants of the structure of industries that produce more than one good the analyses of both multiproduct perfect competition and natural monopoly require a generalized notion of average cost and in addition several newly identified technological characteristics pertinent only to joint production this paper provides an overview of these new results and suggests a unifying framework in which the theory can be further developed

optimal inattention to the stock market inattentive agents update their information sporadically and thus respond belatedly to news we generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio s contempo raneous value it is optimal for the consumer to check his investment portfolio at equally spaced points in time consuming from a riskless trans actions account in the interim the riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted we show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation quantitatively even a small observation cost one basis point of wealth implies a substantial eight month decision interval under conventional parameter values

malmquist indices of productivity growth during the deregulation of norwegian banking 1980 89 productivity growth during the deregulation of the norwegian banking industry is studied within the framework of data envelopment analysis which explicitly allows for multiple outputs introducing malmquist indices for productivity growth total growth can be decomposed into frontier growth and change in each bank s distance to the frontier both the total growth index and its components can be consistently chained over time we find productivity regress at the average bank prior to the deregulation but rapid growth when deregulation took place deregulation also led to less dispersion of productivity levels within the industry

evolution of bank efficiency in brazil a dea approach abstract this paper investigates cost technical and allocative efficiencies for brazilian banks in the recent period 2000 2007 we use data envelopment analysis dea to compute efficiency scores brazilian banks were found to have low levels of economic cost efficiency compared to banks in europe and in the us for the period with high macroeconomic volatility 2000 2002 the economic inefficiency in brazilian banks can be attributed mainly to technical inefficiency rather than allocative inefficiency state owned banks are significantly more cost efficient than foreign private domestic and private with foreign participation there is no evidence of differences in economic efficiency due to type of activity and bank size these results may provide some useful guidance for financial regulators and bank managers

durable consumption and asset management with transaction and observation costs this paper provides a contribution to the recent growing literature on rational inattention we start by testing the implications of recent rational inattention models of asset management liquidity holdings and savings using two novel datasets some predictions of these models are at odds with the data which motivates us to introduce a new model that shifts the focus from non durable to durable consumption and features both information and adjustment costs the focus on non durable consumption which departs from the previous literature is key to improve the fit of the model the investor s behavior in our setup combines elements of what the literature refers to as state dependent and time dependent adjustments the model allows us to quantify the information and transactions costs that are consistent with observed patterns of information review and asset trades a calibration of the model shows that very small information costs are sufficient to reproduce the relatively high frequency of observation that is found in the data we test a novel prediction of the model on the relationship between assets trades and durable goods trades and find it aligned with the data

optimal price setting with observation and menu costs we study the price setting problem of a firm in the presence of both observation and menu costs in this problem the firm optimally decides when to collect costly information on the adequacy of its price an activity which we refer to as a price review upon each review the firm chooses whether to adjust its price subject to a menu cost and when to conduct the next price review this behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment the goal of the paper is to study how the firm s choices map into several observable statistics depending on the level and relative magnitude of the observation vs the menu cost the observable statistics are the frequency of price reviews the frequency of price adjustments the size distribution of price adjustments and the shape of the hazard rate of price adjustments we provide an analytical characterization of the firm s decisions and a mapping from the structural parameters to the observable statistics we compare these statistics with the ones obtained for the models with only one type of cost the predictions of the model can with suitable data be used to quantify the importance of the menu cost vs the information cost we also consider a version of the model where several price adjustment are allowed between observations a form of price plans or indexation we find that no indexation is optimal for small inflation rates

estimating a bayesian stochastic frontier for the indian banking system abstract this paper employs a bayesian stochastic frontier providing exact inference on both cost and profit efficiencies of the indian banking sector in the period of 2000 2006 we also test for the inclusion of off balance sheet data in model specification the findings suggest that public banks are the most efficient followed by private and foreign banks however the latter largely improved profit efficiency outperforming domestic banks by the end of the sample accounting for off balance sheet activities significantly improves profit efficiency levels

cost structures in multinational and domestic banking abstract prior research on international banking has proposed many reasons for the multinationalization of u s banks but provided little empirical support for its propositions using a pooled time series data set from 1987 to 1990 this study analyzes the ray and expansion path scale economies and expansion path subadditivity of u s based multinational banks mnbs both at the firm and the plant levels it also measures and analyzes inefficiencies for these banks inefficiencies are measured relative to a thick frontier cost function a similar analysis is conducted for domestic banks dbs for comparison purposes no support is found for the prior belief that similar cost structures exist for mnbs and dbs in general we find that mnbs are able to fully exploit economies of scale and face lesser diseconomies from joint production and lower inefficiencies than dbs

portfolio rebalancing and asset pricing with heterogeneous inattention can households inattention to the stock market quantitatively account for the inertia in portfolio rebalancing i address this question by introducing an observation cost into a production economy with heterogeneous agents in this environment inattention changes endogenously over time and across agents i find that inattention explains the inertia in portfolio rebalancing and its heterogeneity across households inattention also rationalizes the limited stock market participation observed in the data and improves the asset pricing performance of the model finally i present a novel testable implication linking the effects of inattention on portfolio choices and asset prices to households funding liquidity

a note on banking efficiency in portugal new vs old banks following entry into the european community in 1986 portugal transformed rapidly its repressed banking system with deregulation the opening of borders the granting of new banking licenses and privatization in a more competitive banking system one would expect a priori an increase in operational efficiency this paper attempts to quantify the magnitude of efficiency gains over the years 1990 1995 moreover the paper documents the relative efficiency performance of new domestic banks not hampered by a legacy of inefficiency from the past they could operate nearer the efficiency frontier the case of portugal provides unique information on the joint effect of deregulation and the granting of new banking licenses on the change in operational efficiency of a previously repressed banking system

static hedging of multivariate derivatives by simulation we propose an approximate static hedging procedure for multivariate derivatives the hedging portfolio is composed of statically held simple univariate options optimally weighted minimizing the variance of the difference between the target claim and the approximate replicating portfolio the method uses simulated paths to estimate the weights of the hedging portfolio and is related to monte carlo control variates techniques we report numerical results showing the performance of this static hedging procedure on bivariate options on the maximum of two assets and on 2 and 7 dimensional portfolio options it is shown that in the presence of transaction costs value at risk and expected shortfall of the dynamically hedged positions can be higher than the ones obtained by a static hedge

portfolio choice under transitory price impact abstract we consider a portfolio optimization problem for a short term investor who faces an illiquid stock market the illiquidity of this market results from a transitory price impact that is captured by the transaction costs that are convex in the number of shares traded by an investor the linear component in these costs defines a no trading zone while the nonlinear component does not allow trading the stock at an arbitrary rate the portfolio choice problem is solved when the stock path is continuous and when the stock may crash we find that an economy could be in states where the conditional liquidity premium is of the same order of magnitude as the historical risk premium of the stock market if the illiquid stock undergoes crashes then in many states an investor demands a premium for crashes that is much higher than that in the liquid market finally we study the shape of the no trading zone when the nonlinearity in the transitory price impact is strong or moderate we find that this shape is significantly different from that when the transitory price impact is linear

technical efficiency and scale efficiency in the italian banking sector a non parametric approach measures of technical and scale efficiencies are derived in the italian banking industries by implementing non parametric data envelopment analysis on a cross section of 174 italian banks taken in 1991 the methodology of the parametric and non parametric approaches to measure efficiency are discussed the existence of both technical and allocative efficiency is established this result is robust to modifications in the specification of inputs and outputs suggested by the intermediation approach and by the asset approach in implementing both the intermediation and the asset approach the traditional specification of inputs is modified to allow an explicit role for financial capital in addition regression analysis is used on a bank specific measure of inefficiency to investigate determinants of banks efficiency efficiency is best explained by productive specialization size and to a lesser extent by location

dynamic market participation and endogenous information aggregation abstract this paper studies information aggregation in financial markets with recurrent investor exit and entry i consider a dynamic general equilibrium model of asset trading with private information and collateral constraints investors differ in their aversion to knightian uncertainty when uncertainty is high some investors exit the market since exiting investors information is not fully revealed by prices conditional return volatility and risk premia both increase the model also implies that exit is more likely when wealth is more concentrated in the hands of less uncertainty averse investors the model thus predicts less informative prices toward the end of a long boom moreover economies with looser collateral constraints should see more volatility due to exit and partial revelation higher capital requirements potentially improve welfare by inducing more information revelation by prices

optimal consumption and investment with transaction costs and multiple risky assets we consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion cara investor who faces fixed and proportional transaction costs when trading multiple risky assets we show that when asset returns are uncorrelated the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds to trade to the corresponding optimal targets an extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature this paper studies the optimal intertemporal consumption and investment policy of an investor with a constant absolute risk aversion cara preference and an infinite horizon the investor can trade in one risk free asset and n 1 risky assets in contrast to the standard setting the investor faces both fixed and proportional transaction costs in trading any of these risky assets in the absence of transaction costs and when risky asset prices follow geometric brownian motions the optimal investment policy is to keep a constant dollar amount in each risky asset as shown by merton 1971 this trading strategy requires continuous trading in all the risky assets in addition the optimal consumption is affine in the total wealth in the presence of transaction costs however trading continuously in a risky asset would incur infinite transaction costs therefore risky assets are traded only infrequently in this case the literature on optimal consumption and investment with multiple risky assets subject to transaction costs is limited leland 2000 examines a multiasset investment fund that is subject to transaction costs and capital gains taxes under the assumption that the fund has an exogenous target for each risky asset he develops a relatively simple numerical procedure to compute the no transaction region akian menaldi and sulem 1996 consider an optimal consumption and investment problem with proportional transaction costs for

optimal replication of contingent claims under portfolio constraints we determine the minimum cost of superreplicating a nonnegative contingent claim when there are convex constraints on portfolio weights we show that the optimal cost with constraints is equal to the price of a related claim without constraints the related claim is a dominating claim that is a claim whose payoffs are increased in an appropriate way relative to the original claim the results hold for a variety of options including some path dependent options constraints on the gamma of the replicating portfolio constraints on portfolio amounts and constraints on the number of shares are also considered article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

foreign bank entry deregulation and bank efficiency lessons from the australian experience abstract this study considers the impact of foreign bank entry on banking efficiency in australia during the post deregulation period 1988 2001 using data envelopment analysis malmquist indices and stochastic frontier analysis we find foreign banks more efficient than domestic banks which however did not result in superior profits major australian banks have used size as a barrier to entry to new entrants furthermore bank efficiency has increased post deregulation and the competition resulting from diversity in bank types was important to prompt efficiency improvements finally the recession of the early 1990s resulted in a distinct shift in the process of efficiency changes

benchmarking portfolio insurance and technical analysis a monte carlo comparison of dynamic strategies of asset allocation abstract this paper makes an extensive simulation comparison of popular dynamic strategies of asset allocation for each strategy alternative measures have been calculated for risk return and risk adjusted performance sharpe ratio sortino ratio return at risk moreover the strategies are compared in different market situations bull bear no trend markets and with different market volatility taking into account transaction costs and discrete rebalancing of portfolios the simulations show a dominant role of constant proportion strategies in bear and no trend markets and a preference for benchmarking strategies in bull markets these results are independent of the volatility level and the risk adjusted measure adopted

option replication in discrete time with transaction costs option replication is discussed in a discrete time framework with transaction costs the model represents an extension of the cox ross rubinstein binomial option pricing model to cover the case of proportional transaction costs the method proceeds by constructing the appropriate replicating portfolio at each trading interval numerical values of these prices are presented for a range of parameter values the paper derives a simple black scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values

the effects of transaction costs and different borrowing and lending rates on the option pricing model a note this paper modifies the black scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates the paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option the paper also shows that under some conditions the option pricing hedge may be society s lowest cost financial intermediary

the demand of liquid assets with uncertain lumpy expenditures abstract we consider an inventory model for a liquid asset where the per period net expenditures have two components one that is frequent and small and another that is infrequent and large we give a theoretical characterization of the optimal management of liquid asset as well as of the implied observable statistics we use our characterization to interpret some aspects of households currency management in austria as well as the management of demand deposits by a large sample of italian investors

pricing methods and hedging strategies for volatility derivatives abstract we explore the valuation and hedging of discretely observed volatility derivatives using three different models for the price of the underlying asset geometric brownian motion with constant volatility a local volatility surface and jump diffusion we begin by comparing the effects on valuation of variations in contract design such as the differences between specifying log returns or actual returns and incorporating caps on the level of realized volatility we then focus on the difficulties associated with hedging these products delta hedging strategies are ineffective for hedging volatility derivatives since they require very frequent rebalancing moreover they provide limited protection in the jump diffusion context we study the performance of a hedging strategy for volatility swaps that establishes small fixed positions in vanilla options at each volatility observation

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

the effects of ownership on bank efficiency in latin america in recent years many countries have privatised their state owned banks and encouraged foreign investment this article investigates the roles of state and private ownership and foreign and domestic ownership on the performance of banks across latin america using a range of financial and economic ratios data envelopment analysis dea and regression modelling the study reveals that by 2001 there was surprisingly little difference in performance between state owned and privately owned banks and between foreign and domestically owned banks the study also reports significantly different levels of bank performance in different latin american countries suggesting that country differences outweighed ownership differences in explaining performance

the impact of regulatory reforms on cost structure ownership and competition in indian banking this paper evaluates the impact of financial sector reforms on the cost structure characteristics and on the ownership cost efficiency relationship in indian banking it also examines the impact of reforms on the dynamics of competition in the lending market we find evidence that deregulation improves banks performance and fosters competition in the lending market results suggest technological progress once indian commercial banks have adjusted to the new regulatory environment this however does not translate in efficiency gains there is also evidence of an ownership effect on the level and pattern of efficiency change finally competition keeps building pace even in the re regulation period and technological improvements are not hampered by the tightening of prudential norms

arbitrage with fixed costs and interest rate models in this paper we study securities market models with fixed costs we characterize the absence of arbitrage opportunities and we provide fair pricing rules we then apply these results to extend some popular interest rate and option pricing models which present arbitrage opportunities in the absence of fixed costs in particular we prove that the quite striking result obtained by dybvig ingersoll and ross 1996 which asserts that under the assumption of absence of arbitrage long zero coupon rates can never fall is no longer true in models with fixed costs even arbitrarily small ones for instance models where the long term rate follows a diffusion process are arbitrage free in the presence of fixed costs including arbitrarily small ones we also rationalize models with partially absorbing or reflecting barriers on the price processes in particular we propose a version of the cox ingersoll and ross 1985 model which as in longstaff 1992 produces yield curves with realistic humps but does not assume an absorbing barrier for the short term rate this is made possible by the presence of even arbitrarily small fixed costs

the impact of liberalization on the productive efficiency of indian commercial banks abstract we examine the productive efficiency of 70 indian commercial banks during the early stages 1986 1991 of the ongoing period of liberalization we use data envelopment analysis to calculate radial technical efficiency scores we then use stochastic frontier analysis to attribute variation in the calculated efficiency scores to three sources a temporal component an ownership component and a random noise component we find publicly owned indian banks to have been the most efficient followed by foreign owned banks and privately owned indian banks we also find a temporal improvement in the performance of foreign owned banks virtually no trend in the performance of privately owned indian banks and a temporal decline in the performance of publicly owned indian banks we attempt to explain these patterns in terms of the government s evolving regulatory policies

determinants of bank efficiency the case of brazil abstract this paper analyzes the efficiency of the brazilian banking sector over the post privatization period of 2000 2007 we employ a bayesian stochastic frontier approach which provides exact efficiency estimates and confidence intervals and thus allows an accurate comparison across institutions and bank groups the results suggest that large banks are the most cost and profit efficient supporting the concentration process observed in recent years foreign banks have achieved a good performance through either the establishment of new affiliates and the acquisition of local banks the remaining public banks have had improvements in cost efficiency but are relatively profit inefficient finally we observe a positive impact of capitalization on efficiency

credit rationing as a temporary suboptimal equilibrium with imperfect information abstract jaffee and russell 1976 characterized partial rationing as a contract rate and contract size below those of the no rationing equilibrium their non price rationing here obtains as a suboptimal equilibrium for a risk averse rate setting intermediary with marginal increasing cost and a monopolistically competitive loan demand the temporary dis equilibrium corresponds to a dominated strategy and the wider class of models of which j r s solution is but a singular case is touched upon

a note on efficiency and productivity growth in the korean banking industry 1992 2002 abstract in this paper we present estimates of korean bank inefficiency and productivity change for the period 1992 2002 that are derived from the directional technology distance function our method controls for loan losses that are an undesirable by product arising from the production of loans and allows the aggregation of individual bank inefficiency and productivity growth to the industry level our findings indicate that technical progress during the period was more than enough to offset efficiency declines so that the banking industry experienced productivity growth

hedging options under transaction costs and stochastic volatility in this paper we consider the problem of hedging contingent claims on a stock under transaction costs and stochastic volatility extensive research has clearly demonstrated that the volatility of most stocks is not constant over time as small changes of the volatility can have a major impact on the value of contingent claims hedging strategies should try to eliminate this volatility risk we propose a stochastic optimization model for hedging contingent claims that takes into account the effects of stochastic volatility transaction costs and trading restrictions simulation results show that our approach could improve performance considerably compared to traditional hedging strategies

the american put under transactions costs abstract this paper examines the optimal super replication of american put options with physical delivery of the underlying asset such as stock options by means of a stock plus riskless asset portfolio the framework of the analysis is the binomial model with proportional transactions costs on stock transactions the paper extends the model for european options originally presented in merton geneva papers risk insurance 14 1989 225 and boyle and vorst j of finance 47 1992 271 and generalized in bensaid et al math finance 2 1992 63 the optimizing framework of this latter study is adapted to put options held by investors and perfectly hedged by a market maker and to put options written by investors and both held and hedged perfectly by a market maker it is shown that a unique optimal super replicating portfolio exists at every node of the binomial tree for the long option as well as for the short option when transactions costs are low

transaction costs and asset prices a dynamic equilibrium model in this article we study the effects of transaction costs on asset prices we assume an overlapping generations economy with a riskless liquid bond and many risky stocks carrying proportional transaction costs we obtain stock prices and turnover in closed form surprisingly a stock s price may increase in transaction costs and a more frequently traded stock may be less adversely affected by an increase in transaction costs calculations based on the marginal investor overestimate the effects of transaction costs for realistic parameter values transaction costs have very small effects on stock prices but large effects on turnover

hedging demand and market intraday momentum hedging short gamma exposure requires trading in the direction of price movements thereby creating price momentum using intraday returns on over 60 futures on equities bonds commodities and currencies between 1974 and 2020 we document strong market intraday momentum everywhere the return during the last 30 minutes before the market close is positively predicted by the return during the rest of the day from previous market close to the last 30 minutes the predictive power is economically and statistically highly significant and reverts over the next days we provide novel evidence that links market intraday momentum to the gamma hedging demand from market participants such as market makers of options and leveraged etfs

hedging demands in hedging contingent claims minimum variance hedging of a contingent claim in discrete time is suboptimal when the contingent claim is hedged for multiple periods and the objective is to maximize the expected utility of cumulative hedging errors this is because the hedging errors are not independent the difference between a minimum variance hedge and the optimal multiperiod hedge is called the hedging demand and depends on the hedger s preferences the characteristics of the contingent claim the trading frequency and horizon and most importantly the joint distribution of the contingent claim and the underlying security prices since modeling this joint distribution is empirically controversial i examine nonparametrically the economic importance of hedging demands in the case of hedging standard poor s 500 index options

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

sluggish responses of prices and inflation to monetary shocks in an inventory model of money demand we examine the responses of prices and inflation to monetary shocks in an inventory theoretic model of money demand we show that the price level responds sluggishly to an exogenous increase in the money stock because the dynamics of households money inventories leads to a partially offsetting endogenous reduction in velocity we also show that inflation responds sluggishly to an exogenous increase in the nominal interest rate because changes in monetary policy affect the real interest rate in a quantitative example we show that this nominal sluggishness is substantial and persistent if inventories in the model are calibrated to match u s households holdings of m2

option pricing and implicit volatilities abstract this paper demonstrates that black scholes implied volatilities can be used to value options in many situations where the assumptions of the black scholes model are violated including i alternative stock processes ii stochastic interest rates and iii market frictions given its computational simplicity this procedure provides an attractive alternative to the more complex models with a direct estimation procedure

x efficiency in australian banking an empirical investigation this paper empirically investigates the x eaciency technical and allocative in australian banks a non parametric method of data envelopment analysis dea has been used to arrive at the eaciency scores banks in this sample were found to have low levels of overall eaciency compared with the banks in the european countries and in the us the results indicate that as a source of overall ineaciency the technical component was more important than the allocative component thus the ineaciency in australian banks can be attributed to wasting of inputs technical ineaciency rather than choosing the incorrect input combinations allocative ineaciency domestic banks were found to be more eacient than foreign owned banks the study has important implications such as guiding the government policy regarding deregulation and mergers since the study pinpoints the sources of ineaciency it would also help banks with strategic planning 2001 elsevier science b v all rights reserved

multi directional efficiency analysis of efficiency patterns in chinese banks 1997 2008 dea type efficiency studies are often used to investigate levels of efficiencies differences in those levels between subgroups within a data set and possible determinants of such differences in the current paper we show how differences in the efficiency patterns between different subgroups within a data set can be investigated using the more recent mea methodology we specifically look at the case of joint stock banks and state owned banks in china and are able to empirically test hypotheses of whether there are differences not only in the levels but also in the patterns of inefficiencies between the two types of banks that is which variables the inefficiencies are located on we argue that certain differences are expected based on differences in objectives and constraints in the two types of banks and find empirical support for most of those expected patterns

delta hedging strategies comparison abstract in this paper we implement dynamic delta hedging strategies based on several option pricing models we analyze different subordinated option pricing models and we examine delta hedging costs using ex post daily prices of s p 500 furthermore we compare the performance of each subordinated model with the black scholes model

optimal inattention to the stock market with information costs and transactions costs recurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values when consumers observe the value of their wealth they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds transfers of funds are subject to a transactions cost that reduces wealth and consists of two components one is proportional to the amount of assets transferred and the other is a fixed resource cost because it is costly to transfer funds the consumer may choose not to transfer any funds on a particular observation date in general the optimal adjustment rule including the size and direction of transfers and the time of the next observation is state dependent surprisingly unless the fixed resource cost of transferring funds is large the consumer s optimal behavior eventually evolves to a situation with a purely time dependent rule with a constant interval of time between observations this interval of time can be substantial even for tiny observation costs when this situation is attained the standard consumption euler equation holds between observation dates if the consumer is sufficiently risk averse

credit to government and banking sector performance abstract the impact of credit to government on three aspects of banking sector performance its deepening over time profitability and efficiency is examined for 142 countries country regressions suggest a sizeable negative effect of credit to government on bank deepening in developing countries but no impact in advanced economies bank regressions find that credit to government raises the profitability but reduces the efficiency of banks in developing countries in advanced economies there appears to be no impact on profitability but a positive one on efficiency

foreign owned banks in the united states earning market share or buying it foreign owned u s banks have been chronically unprofitable for more than a decade the authors employ a profit efficiency model introduced by allen n berger diana hancock and david b humphrey 1993 modified to be less sensitive to variations in asset size to estimate the relative profit efficiency of 62 foreign owned and 240 u s owned banks between 1985 and 1990 their results indicate that foreign owned banks were significantly less profit efficient than were u s owned banks primarily due to foreign banks reliance on expensive purchased funds for foreign owned banks the results are consistent with a strategy of sacrificing profits in exchange for fast growth and increased market share during the 1980s copyright 1996 by ohio state university press

the impact of islamic banking on the cost efficiency and productivity change of malaysian commercial banks this study employs stochastic frontier analysis sfa to analyse malaysian commercial banks during 1996 2002 and particularly focuses on determining the impact of islamic banking on performance we derive both net and gross efficiency estimates thereby demonstrating that differences in operating characteristics explain much of the difference in costs between malaysian banks we also decompose productivity change into efficiency technical and scale change using a generalized malmquist productivity index on average malaysian banks experience moderate scale economies and annual productivity change of 2 68 with the latter driven primarily by technical change tc which has declined over time our gross efficiency estimates suggest that islamic banking is associated with higher input requirements however our productivity estimates indicate that full fledged islamic banks have overcome some of these cost disadvantages with rapid tc although this is not the case for conventional banks operating islamic windows merged banks are found to have higher input usage and lower productivity change suggesting that bank mergers have not contributed positively to bank performance finally our results suggest that while the east asian financial crisis had a short term costreducing effect in 1998 the crisis triggered a long lasting negative impact by increasing the volume of nonperforming loans

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

transactions costs and portfolio choice in a discrete continuous time setting abstract this paper makes the following observation concerning a new formulation of the consumption and portfolio choice model of merton 1971 with transaction costs suppose an investor observes his or her current wealth only when making a transaction that transactions are costly and that decisions to transact can be made at any time based on all current information if at each transaction the agent is charged a fixed fraction of current portfolio value an optimal policy exists and the optimal interval of time between transactions is fixed independent of time and current wealth

differential impact of korean banking system reforms on bank productivity abstract we study the impact of banking system reforms during a crisis following a period of undisciplined lending regulatory changes aimed at strengthening the banks capital structure and risk management practices do not have a uniform impact on bank productivity but rather favor financially sound or strategically privileged banks we present evidence documenting the differential impact of regulatory reforms on korean commercial bank productivity over the period 1995 2005 average technical efficiency of banks decreased during the financial crisis of 1997 1998 it improved following the subsequent bank restructuring and continued to improve through 2005 the capital adequacy ratio is positively associated with banks technical efficiency the non performing loans ratio is negatively associated with technical efficiency both relationships are accentuated during the crisis but attenuated after the reforms

learning and asset price jumps w e develop a general equilibrium model in which income and dividends are smooth but asset prices contain large moves jumps these large price jumps are triggered by optimal decisions of investors to learn the unobserved state we show that learning choice is determined by preference parameters and the conditional volatility of income process an important model prediction is that income volatility predicts future jump periods while income growth does not consistent with the model large moves in returns in the data are predicted by consumption volatility but not by consumption growth the model quantitatively captures these novel features of the data jel g00 g12 g14 d83 a prominent feature of financial markets is infrequent but large price movements jumps 1 in this article we develop a model in which income and dividends have smooth gaussian dynamics however asset prices are subject to large infrequent jumps in our model large moves in asset prices obtain from the actions of the representative agent to acquire more information about the unobserved state of the economy for a cost we show that the optimal decision to incur a cost and learn the true economic state is directly related to the level of uncertainty in the economy this implies that aggregate economic volatility as well as market volatility should predict jumps in returns we show that indeed in the data consistent with the model return jumps are predicted by consumption volatility market volatility further the implied asset price implications from our model are consistent with the key findings from parametric models about frequency and predictability of jumps as well as nonparametric jump detection analysis of barndorff nielsen and shephard 2006 based on

dynamic hedging under jump diffusion with transaction costs if the price of an asset follows a jump diffusion process the market is in general incomplete in this case hedging a contingent claim written on the asset is not a trivial matter and other instruments besides the underlying must be used to hedge in order to provide adequate protection against jump risk we devise a dynamic hedging strategy that uses a hedge portfolio consisting of the underlying asset and liquidly traded options where transaction costs are assumed present due to a relative bid ask spread at each rebalance time the hedge weights are chosen to simultaneously i eliminate the instantaneous diffusion risk by imposing delta neutrality and ii minimize an objective that is a linear combination of a jump risk and transaction cost penalty function because reducing the jump risk is a competing goal vis a vis controlling for transaction cost the respective components in the objective must be appropriately weighted hedging simulations of this procedure are carried out and our results indicate that the proposed dynamic hedging strategy provides sufficient protection against the diffusion and jump risk while not incurring large transaction costs

the price of options illiquidity the purpose of this paper is to examine the effect of illiquidity on the value of currency options we use a unique dataset that allows us to explore this issue in special circumstances where options are issued by a central bank and are not traded prior to maturity the value of these options is compared to similar options traded on the exchange we find that the nontradable options are priced about 21 percent less than the exchange traded options this gap cannot be arbitraged away due to transactions costs and the risk that the exchange rate will change during the bidding process

characteristics determining the efficiency of foreign banks in australia abstract the factors determining foreign bank efficiency are investigated using a three stage research method it is found that host market incumbency reduces efficiency of foreign banks in australia resulting in over use of inputs factors underlying the limited global advantage hypothesis of berger et al berger allen n deyoung robert genay hesna udell gregory f 2000 globalisation of financial institutions evidence from cross border banking performance brookings wharton papers on financial service 3 23 120 are identified in that nationality specific factors represented by dummy variables are not significant once other relevant effects are controlled for parent profitability is not found to result in increased host nation efficiency while parent credit rating effects are mixed some evidence is presented that banks from more financially sophisticated nations are more efficient the implications of these results are explored from the perspectives of bank management and bank regulators