the behavior of extreme values in germany s stock index futures an application to intradaily margin setting recent defaults and large financial losses attributed to derivative security investing point to an area of finance not often researched i e the probabilities of observing extreme occurrences this paper examines this behavior for german stock index futures fdax contracts its empirical results indicate that large fdax intradaily price changes follow a frechet extreme value distribution and the extreme value distribution probabilities may be confidently used to help set intradaily margin levels

futures and actual markets how they are related in order to explore how futures markets affect the market for the commodity or asset underlying the futures contract this study takes as its central theme the analogy between futures and money the relation between monetary and real phenomena is isomorphic to the relation between a futures contract and the underlying asset success in establishing the validity of this isomorphism will have several advantages first it will throw new light on some important aspects of futures trading by pointing out the analogies with the corresponding monetary phenomena which are better understood this enables students of futures to learn from the lessons of the monetary branch of economics second students of money also can learn from that knowledge about futures which has been more thoroughly analyzed than the corresponding monetary phenomena by demonstrating that there is an isomorphism between money and futures these two branches of economics can illuminate each other this ap

price instability and commodity futures markets abstract the inability of individual developing nations to provide widescale commodity price support and the continual renegotiation of international commodity agreements have engendered a search for alternative mechanisms to reduce price volatility for soft commodities one possibility is the use of futures markets this paper takes four commodities cocoa coffee sugar and wheat and analyzes the efficiency of associated futures markets in terms of price discovery and risk reduction in essence all four markets exhibit efficiency and therefore provide in theory a viable policy alternative for developing economies

u s bilateral trade flows and exchange risk during the floating period abstract this paper tests for real exchange rate risk effects on u s bilateral trade flows during the floating period using several new as well as previously used risk measures significant negative effects occur in five of six u s import flows and in two of six u s export flows with one export flow showing a significant positive effect these results are consistent with several previous findings for aggregate u s trade two risk measures using the forward exchange rate and assuming a time varying risk premium provide marginally more significant results than the others

speculative leverage a false cure for pension woes the editor s corner is a regular feature of the financial analysts journal this piece reflects the views of the author and does not represent the official views of the faj or cfa institute

market trading structures and asset pricing evidence from the treasury bill markets earlier studies report signfficant price disparities betweenfutures andforward or spot markets examining the treasury bill markets this article demonstrates that differences in market trading structures explain these disparities treasury billfutures rates contain significantly lower liquidity and default premia than do syntheticforward rates this reflects the functioning of a futures clearing association and differences between an open outcry auction futures market and an over the counter dealer spot market the same factors that make futures contracts nonredundant securities also explain the existence in equilibrium of price disparities

forward and futures contracts as preharvest commodity marketing instruments empirically significant differences between forward and futures contracts evidence their imperfect substitutability as preharvest marketing instruments certain combinations of market conditions make the two types of contracts complementary rather than interchangeable forwards and futures differ conceptually because of lumpiness marking to market and basis of these differences basis constitutes the most important factor although lumpiness may affect smaller producers it represents an inconsequential detail for larger traders in given years interest income cost resulting from futures margin requirements may reach important absolute amounts relative to size of basis and price changes this factor fails to attain a magnitude of practical significance

the impact of group lending in northeast thailand abstract much of the literature on group lending focuses on its high repayment rates rather than its goal of promoting borrower welfare most studies that attempt to measure the impact of group lending neglect the issues of self selection and endogenous program placement thus leading to biased estimates of impact one reason for this neglect is the lack of data that would allow for identification of impact this paper surmounts these problems by using data from a quasi experiment conducted in northeast thailand in 1995 1996 program participants were identified in six control villages 1 year prior to receiving loans surveys were then conducted of these control members treatment members in eight older program villages and nonmembers in both types of village this survey design allows for straightforward estimation of impact the results indicate that program loans are having little impact although naive estimates of impact that fail to account for self selection and endogenous program placement significantly overestimate impact

futures trading market interrelationships and industry structure futures markets arise as a response to economic uncertainty one goal of this paper is to measure how futures trading in existing contracts changes in response to changes in uncertainty caused by inflation a difficult issue that other researchers have addressed is why only a small handful of all markets have successful futures markets see e g telser and higginbotham although we do not provide a complete answer to this question we make progress toward an answer by investigating the covariance structure of various futures prices this allows us to predict which markets are the least needed and to see whether

flexible and risk sharing supply contracts under price uncertainty we study supply contracts for deterministic demand but in an environment of uncertain prices we develop valuation methodologies for different types of supply contracts a time inflexible contract requires the firm to specify not only how many units it will purchase but also the timing of the purchase a time flexible contract allows the firm to specify the purchase amount over a given period of time without specifying the exact time of purchase other than time flexibility the suppliers may offer quantity flexibility to the firm as well i e purchase quantities could be within a prespecified quantity window finally risk sharing features can be incorporated in the contract in terms of the purchase price that the firm eventually pays to a supplier within a prespecified price window the firm pays the realized price but outside of it the firm shares in an agreed way added costs or benefits given the structure of a supply contract we study the firm s decision when to purchase and how many units in each purchase such that the expected net present value of the purchase cost plus inventory holding cost is minimized we discuss optimal purchasing strategies for both time flexible and time inflexible contracts with risk sharing features other interesting results include the analysis of two supplier sourcing environments and the exploitation of quantity flexibility in such contracts our discussion illustrates how time flexibility quantity flexibility supplier selection and risk sharing when carefully exercised can effectively reduce the sourcing cost in environments of price uncertainty

optimal international hedging in commodity and currency forward markets abstract this paper derives optimal hedging and production rules for an exporting firm which faces both commodity price and foreign exchange rate uncertainty the size of the commodity hedge is independent of the properties of the foreign exchange market however the optimal foreign exchange hedge depends on the commodity hedge and the properties of the commodity forward market the firm s production decision is independent of its objective function if both forward markets exist but depends on the consumption beta of the unhedgeable risks in the absence of one or both of the markets

fractional reserve banking in grain fractional reserve banks namely enterprises being legally liable to pay some substance on demand while regularly having too little on hand to satisfy all their obligations are commonly associated exclusively with money conceivably fractional reserve banks can deal in substances other than money as it happens chicago s warehousemen of the 1860s practiced fractional reserve banking not in dollars or sterling but in grain l these warehousemen operated in the style of a conventional financial intermediary borrowing short through demand deposits in order to lend long the natural evolution of fractional reserve banking in grain in nineteenth century chicago was interrupted however ever more stringent laws the result of repeated campaigns against fraudulent receipts eventually forced chicago s warehousemen to keep 100 percent reserves consequently the organization of the grain trade past and present not only provides information about the development of fractional reserve banking in general but reveals the effects of a rare experiment in outlawing fractional reserve banking

detecting spot price forecasts in futures prices futures markets are often described as having two important social functions first they facilitate the transfer of commodity price risk and second they provide forecasts of commodity prices the evidence that futures markets transfer price risk is irrefutable however there is some debate about the markets forecasting ability in particular forecasts based on the current spot price are often as good as those based on the futures price some economists cite a failure to detect superior forecast power in futures prices as evidence of market inefficiency see e g leuthold 1974 and martin and garcia 1981 there are at least two other explanations first there may be nothing for the futures market to forecast if the current spot price equals the true expectation of the future spot price the futures market cannot provide a better forecast second a superior futures market forecast may be obscured by the unexpected component of the realized spot price the true expectation of the future spot price is unobservable one must approximate this expectation with the actual future spot price

economic determinants of trading volume in futures markets abstract in this paper we test first the hypothesis that the volume of trade in futures markets follows a random walk process next we examine the role of several monthly macroeconomic variables and find that these variables have a statistically significant impact on the trading volume the economic consequences of our findings indicate that futures traders futures exchanges regulatory agencies and others associated with futures markets activities act rationally in watching closely these macroeconomic variables

assessing the impact of microcredit a zambian case study expectations are high but evidence of the impact of microcredit remains in short supply this article estimates the impact of an urban credit programme in zambia on business performance and on a range of indicators of wellbeing borrowers who obtained a second loan experienced significantly higher average growth in business profits and household income inflexible group enforcement of loan obligations resulted in some borrowers especially amongst those who had taken only one loan being made worse off our methodological investigations suggest that the supply of rigorous impact studies can be increased by basing them on data collection that serves a wider range of purposes including market research

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

microfinance and poverty in bolivia both in its institutional range and in its penetration of financial markets the microfinance sector in bolivia rivals any in the world and has played a major part in extracting the macro economy from meltdown since the mid 1980s we seek specifically to assess its impact on poverty and do this through small sample surveys on four microfinance institutions two urban and two rural using a range of poverty concepts income generated both through the borrower s enterprise and through the labour market asset holdings and diversity and various measures of vulnerability all the institutions studied had on balance positive impacts on income and asset levels with income impacts correlating negatively with income on account of poor households choosing to invest in low risk low return assets microfinance may however augment vulnerability average debt service ratios of microfinance clients are disturbingly high and if the coping mechanisms used by borrowers fail borrowers may be forced out of the

microfinance and poverty a macro perspective we test the hypothesis that microfinance reduces poverty at the macro level using cross country and panel data which are constructed by the microfinance information exchange data on microfinance institutions mfis and the world bank data taking account of the endogeneity associated with mfis loans we show that a country with higher mfis gross loan portfolio per capita tends to have lower levels of poverty indices contrary to recent micro evidence our results suggest that microfinance significantly reduces poverty at macro level and thus reinforce the case for channeling funds from development finance institutions and governments of developing countries into mfis

paper oil real oil and the price of oil abstract the purpose of this paper is to provide a non technical explanation of the effect of derivative markets on oil pricing during the first three months of the gulf crisis and to make some observations concerning the utility of oil inventories when panic buying occurs some attention is also paid to the outlook for oil prices in the light of the gulf crisis the basic point brought out here is that oil futures markets have functioned as shock transmitters in that they have increased the sensitivity of oil prices to the minute by minute judgements of oil traders and their clients who at least a part of the time are completely out of touch with oil market fundamentals an opinion is also given taht in the post crisis era long run supply could be enhanced and oil market turbulence reduced by an expanded cooperation between oil exporters and importers

quantitative analysis of feasibility of hydrous ethanol futures contracts in brazil abstract brazil s first ethanol futures contract which was implemented in 2000 failed to offer sufficient liquidity to attract market agents the purpose of this study is to determine whether the new ethanol futures contracts launched by bmf bovespa in 2010 meet the requirements to render them feasible the originality of this work stems from its approach in analyzing different cross hedging possibilities in the food and energy chains this analysis which covers the period of may 2010 to april 2012 evaluates the degree of competition in the sector the price volatility of the spot market the price correlations between its possible substitutes as well as the possibility of cross hedging brazil s ethanol with contracts in international futures markets and their potential degree of substitution the results of this study indicate that the new configuration of bmf bovespa ethanol futures contracts meets the most requirements for viability nevertheless the ethanol distribution sector is relatively concentrated which may limit the liquidity of bmf bovespa ethanol futures contracts

discriminating monopoly forward markets and international trade recent empirical studies see e g kravis and lipsev 1977 1978 isard 1977 aspe and giavazi 1982 demonstrate that there are notable divergencies between domestic and export prices this empirical evidence suggests that the law of one price is systematically violated kravis and lipsey 1977 p 155 argue that many firms involved in international trade particularly manufacturers are in the position of a discriminating monopolist faced with separate markets each characterized by a different demand elasticity a model which explicitly allows for price discrimination has been used by several authors see for example aspe and giavazi 1982 ethier 1982 katz paroush and kahana 1982 and tarr 1979 katz paroush and kahana 1982 hereafter kpk used a model of a price discriminating firm which operates under price uncertainty to investigate its optimal level of output and sales in the two markets the main assumption made in kpk 1982 is that the firm determines its level of output and the allocation of sales between the two markets before the resolution of uncertainty furthermore no forward markets were available to this firm in this paper we analyze a price discriminating firm which sells its produce both in the domestic and on world markets under either exchange rate uncertainty or foreign price uncertainty this firm is a monopoly in the domestic market but a price taker on the world market our model differs substantially from the kpk model and in some cases conforms better with reality due to the following two assumptions first the firm determines its level of output before the resolution of uncertainty but decides about the optimal allocation of sales only after it observes the foreign price denominated in domestic currency secondly forward markets to share the exchange rate risk or the uncertain foreign commodity price are available and their impact on the firm s policy is analyzed hence this work integrates two strands of literature it combines studies on price discriminating firms some were mentioned above and studies on firm behavior when forward markets are available danthine 1978 holthausen 1979 katz and paroush 1979 feder just and schmitz 1980 in this paper we are mainly concerned with a firm which always exports this includes large

the impact of short term credit on microenterprises evidence from the fincomun bimbo program in mexico abstract the lack of credit is often mentioned as one of the major constraints facing small businesses we use differences in the phasing in of a new lending program designed to serve clients of the largest snack food company in mexico to identify the impact of credit on outcomes of small retail enterprise in mexico city we find that the loans have positive impacts on the smallest firms but negative impacts on larger firms these results are consistent with hypotheses that smaller firms have higher returns to capital and face greater credit constraints given that the program involved loans given for 4 month terms we find surprisingly large effects on investment in fixed assets

why there are organized futures markets i shall present an explanation of the existence of organized futures markets with more predictive power than the two prevailing rival views my explanation briefly is this an organized futures market facilitates trade among strangers one of the rival prevailing views is a defense of futures trading it asserts that an organized futures market furnishes legitimate businessmen with a means of hedging so that they can obtain insurance against price risk the other prevailing view is an attack on organized futures markets it asserts that such markets enable speculators to manipulate prices to the detriment of outsiders who are less well informed and to the detriment of legitimate businessmen such as farmers the attack on organized futures markets likens them to gambling casinos the defense sees them as a form of insurance neither the attack nor the defense is valid the correct explanation is closely related to why we conduct trade using money instead of by barter

the evolution of a free banking system the institutional features of models of unregulated monetary systems have often been arbitrarily and implausibly assumed this paper instead provides realistic grounding for important features by constructing a logical evolutionary account of free banking sophisticated and orderly arrangements are shown to emerge from competition and the pursuit of less costly methods of payment the emergence of standardized commodity money is followed by the development in turn of basic money transfer banking easily transferable bank liubilities and clearinghouses the features of an evolved free banking system differ from those assumed in recent models of competitive payments systems

determinants of levered portfolio performance the cumulative return to a levered strategy is determined by five elements that fit together in a simple and useful formula a previously undocumented element is the covariance between leverage and excess return to the fully invested source portfolio underlying the strategy in an empirical study of volatility targeting strategies over the 84 year period 1929 2013 this covariance accounted for a reduction in return that substantially diminished the sharpe ratio in all cases

oil and water do not mix or aliud est credere aliud deponere the financial crisis has led to new interest in the ethics of financial markets in this article we further the debate on the nature of banking contracts by showing that the fundamental subjective purposes of loan and deposit contracts are irreconcilable any resultant mixture of the two contracts is a legal aberration we consider a mutual fund as an important and legitimate alternative to the common demand deposit to provide high liquidity and some yield without offering full availability of a nominal sum besides being a close substitute for how many deposit accounts function today the mutual fund has the additional benefit of satisfying all legal and ethical requirements loan and investment contracts such as money market mutual funds allow for the bank to make use of their clients funds while the intents of money owners are clearly classified without running into legal or ethical problems

market structure marketing method and price instability data for metals sold on commodity exchanges and at prices set by producers are used to test the relationship between the organization of markets and the behavior of prices on the production side the question is whether prices are more stable in concentrated industries and on the sales side the question is whether markets where buyers are consumers have more stable prices than those with consumers and speculators the recent increase in metal price instability is explained by changes in the market structure and organization variables foremost is increased reliance on commodity exchanges declines in concentration are of less importance

market efficiency a theoretical distinction and so what with the aid of some simplifying assumptions the capital asset pricing model comes to dramatic conclusions about practical matters such as how to choose an investment portfolio and how to value financial assets as illustrated in this article when one particular clearly unrealistic capm assumption is replaced by a more real world version some of the dramatic practical conclusions of capm no longer follow this result has implications for financial practice research and pedagogy

the commercialization of the microfinance industry is there a personal mission drift among credit officers recent research suggests that many microfinance institutions increasingly focus on financial performance at the expense of the social component of their dual objectives existing studies typically assume that capital providers and managers mainly drive this so called mission drift in this study we investigate whether personal mission drift at the credit officer level can further explain the reduced emphasis on poorer clients among microfinance institutions we present both qualitative and quantitative evidence that more experienced credit officers tend to serve fewer vulnerable clients specifically we show that all else being equal credit officer experience is negatively correlated with the provision of small loans loans to young clients and loans to clients with disabilities our qualitative analysis suggests that perceived client risk and preferences for increased time efficiency mainly drive more experienced credit officers relative neglect of more vulnerable clients this drift appears to be reinforced by the industry s incentive schemes therefore credit officer incentives and training should be designed to prevent this mission drift which is observed at the microfinance institution level but is actually initiated at the credit officer level

cross hedging foreign currency risk abstract this paper provides empirical evidence on the effectiveness of cross hedging to reduce foreign exchange risk simple cross hedges for currencies with and without futures contracts multiple cross hedges portfolio hedges and commodity cross hedges are examined cross hedges are found to be less effective than traditional similar asset hedges in some instances inter temporal instability causes hedged positions to be riskier than unhedged ones although on the whole cross hedging is shown to be a useful risk reduction technique

the hubris of hybrids in the pages of this journal a fruitful debate has evolved on the ethical legitimacy of fractional reserve banking in this article we respond to the new arguments raised by evans j bus ethics 2014 as we clarify our bagus et al in j bus ethics 128 197 206 2015a position on the unethical and illegitimate nature of fractional reserve banking fractional reserve banking is not a recent financial innovation unlike e g money market mutual funds but represents a long standing legal aberration the co mingling of two mutually exclusive financial contracts deposit and loan confounds the contracting parties purposes intents rights and obligations as a result it creates unsolvable legal difficulties and ethical dilemmas while these problems are most evident in the case of a bank run they also arise when trying to answer the simple question of who owns a deposit

forward market and international trade many studies on hedging currency risk and international trade 6 14 18 17 have investigated the simultaneous hedging and production decisions with the nonstochastic home and foreign earnings assumption these studies derived a separation theorem which shows that the production decision made by a multinational firm for international trade is independent of the distribution of the exchange rate and dependent only on the forward price the separation theorem has two different implications first although the production decision is shown to depend on the forward price there is still a missing link connecting the trading activity in the forward markets with international trade second exchange rate uncertainty will not have an impact on the level on trade since the forward price can be used by multinational firms as a guide for the expected future spot rate the first implication seems to contradict results by britto 8 and telser 37 demonstrating that futures price has a real impact on resource allocation and production within an economy the second implication is inconsistent with a number of other empirical studies 2 11 12 22 29 that have shown exchange rate uncertainty has an adverse effect on trade and other studies 5 13 that have found exchange rate volatility to have a positive impact on trade although some studies 7 27 do recognize stochastic foreign income in the foreign hedging they ignore the two kinds of issues discussed above thus this paper attempts to investigate the simultaneous decisions for foreign exchange hedging and production under a stochastic assumption of foreign earnings a simple model is developed here to examine a the interaction of forward markets with international trade and b the impact of exchange risk on trade by endogenizing the forward price in a variety of scenarios this paper derives several interesting results under the stochastic foreign income scenario a new foreign exchange hedging rule which incorporates the covariability of foreign earnings and exchange risk is derived further we find that the separation theorem breaks down under such a situation interestingly we are able to show a positive linkage between trading activity in forward markets and export furthermore

the effects of real exchange rate risk on international trade abstract by assuming real profit maximization and uncertain prices as well as exchange rates we conclude that it is uncertain percentage changes in the real exchange rate that are risky in international trade empirical estimation of fourteen bilateral trade flows among industrialized countries finds a significant negative effect on trade quantity from such risk in a number of these cases the expectation variable has a positive effect in a larger number of cases significant price effects from the expectation variable are fewer and from risk are negligible

the division of markets is limited by the extent of liquidity spatial competition with externalities liquidity considerations will limit the number of markets in a competitive economy welfare implications are ambigious since liquidity is a positive externality there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus maximizing market structure but liquidity is also self reinforcing given an existing equilibrium new markets may not open because nobody wants to use a new market with low liquidity there may be too few markets to achieve efficiency a nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers copyright 1988 by american economic association

can position limits restrain rogue trading this paper studies the imposition of position limits on commodity futures from the perspective of curbing excessive speculation and thus manipulation we present a simple general equilibrium model in a static rational expectations framework and agent heterogeneity to illustrate that excessive speculation serves to enrich other agents at the expense of the speculator position limits on the contrary are not only superfluous but also counter productive as they exacerbate market power and lead to a deterioration in efficiency position limits not only reduce social welfare but also cannot restrain market manipulation

automobiles and the national industrial recovery act evidence on industry complementarities this paper investigates the automobile industry code negotiated in 1933 and modified in 1935 under the national industrial recovery act the amended code contained a provision calling for automobile producers to alter the timing of new model introductions and the annual automobile show as a means of regularizing employment in the industry our analysis of this period provides evidence against the hypothesis that changes in fundamentals led to the dramatic changes in the seasonal pattern of production and sales starting in 1935 instead it appears that the national industrial recovery act succeeded in coordinating activity on an alternative nash equilibrium

microfinance and household poverty reduction new evidence from india the objective of the present study is to examine whether household access to microfinance reduces poverty using national household data from india treatment effects model is employed to estimate the poverty reducing effects of micro finance institutions mfis loans for productive purposes such as investment in agriculture or non farm businesses on household poverty levels these models take into account the endogenous binary treatment effects and sample selection bias associated with access to mfis despite some limitations such as those arising from potential unobservable important determinants of access to mfis significant positive effect of mfi productive loans on multidimensional welfare indicator has been confirmed the significance of treatment effects coefficients has been verified by both tobit and propensity score matching psm models in addition we found that loans for productive purposes were more important for poverty reduction in rural than in urban areas however in urban areas simple access to mfis has larger average poverty reducing effects than the access to loans from mfis for productive purposes this leads to exploring service delivery opportunities that provide an additional avenue to monitor the usage of loans to enhance the outreach

prudent margin levels in the finnish stock index futures market futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity one way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements the objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the finnish stock index futures market the extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution the extrapolated results provide decision makers information on extreme events that have not yet occurred

entrepreneurial error does not equal market failure barnett and block 2015 claim that bagus and howden 2012b support indirectly the concept of market failure in this paper we show that maturity mismatching in an unhampered market may imply entrepreneurial error but cannot be considered a market failure we demonstrate why fractional reserve banking leads to business cycles even if there is no central bank and why maturity mismatching does not per se lead to clusters of errors in a free market finally in contrast to the examples provided by barnett and block we assure that maturity mismatching does not imply the creation of two incompatible contracts due to the fungible nature of money

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

financial inclusion gender dimension and economic impact on poor households summary we examine the question in the context of gender dimension what is the evidence of the impact of the financial inclusion programs on poor households represented by women relative to that represented by men by constructing a good counterfactual and comparison group we employ the difference in difference estimator approach with panel least squares and generalized methods of moments using standard errors for a robust analysis we notice that income growth cagr net of inflation effect was 8 40 for women as against 3 97 for men indicating that the gender of participating poor undoubtedly affects the outcomes of these programs

firm market share price flexibility and imperfect information this paper argues that firms with larger market shares will be relatively better informed about demand conditions the main implications are 1 more rapid price adjustments in concentrated industries 2 price leadership in industries with dominant firms and 3 price setting behavior by the concentrated side of the market

communication and inventory as substitutes in organizing production a major organizational design decision for manufacturing firms is the extent to which production should be to stock versus to order inventories and communication with customers are substitutes we show that profits are convex in the share of the market supplied from inventory thus firms will tend to specialize in one mode of organization we examine how this choice depends on market size the level and variability of demand the costs of communication price levels production costs and the costs of expanding product lines the results are consistent with observed patterns in several industries

currency hedging and goods trade abstract a puzzle in empirical international finance is the difficulty in finding a large and negative effect of exchange rate volatility on international trade a common explanation is the availability of hedging instruments this paper examines the empirical validity of this explanation using data on over 1000 country pairs which countries have currency hedging instruments is not perfectly observable this paper deals with the problem by specifying an endogenous regime switching regression there are two main findings first there is no evidence in the data to support the validity of the hedging hypothesis second for country pairs with large trade potential exchange rate volatility deters goods trade to an extent much larger than that typically has been documented in the literature without using the switching regression specification

information as a substitute for inventories abstract in recent years the ratio of inventories to sales in north american manufacturing has fallen without the offsetting increases in unfilled orders or price variation that are predicted by some theoretical models the explanation offered here is that in the face of falling relative costs of communications firms will substitute information for inventories thereby allowing their production systems to absorb a greater part of demand shocks the implicit hypothesis that the demands for communications and inventories are therefore determined simultaneously is tested with data on canadian inventories and on telecommunications between canada and europe and is not rejected

international trade with forward futures markets under exchange rate and price uncertainty abstract the paper examines a risk averse firm s decisions on the level of trade when the exchange rate and the commodity price are uncertain and the extent of forward exchange and commodity futures commitments first we verify the separation theorem and the full double hedging theorem second we investigate the implications of the existence of both forward foreign exchange and commodity futures markets in comparison to the case where only one or no market is available to the firm the second exercise enables us to focus on conditions under which establishing forward futures arrangements promotes international trade

measuring and analysing the effects of short term volatility in real exchange rates this paper examines short term volatility in the real effective exchange rates of industrial countries and its impact on their imports it yields three conclusions first volatility has not diminished as markets have gained experience with floating exchange rates the trend appears to be in the opposite direction for some countries second exposure to short term volatility has differed among countries japan and sweden have experienced much more than most other industrial countries third volatility appears to depress the volume of international trade this third finding is consistent with results reported by cushman and by akhtar and hilton and challenges earlier findings by hooper and kohlhagen

income and employment effects of micro credit programmes village level evidence from bangladesh micro credit programmes having made their mark in providing credit and other development services to the poor in a non traditional way are able to make significant changes in a rural economy this article attempts to quantify the village level impacts of the three most important micro credit programmes of bangladesh namely grameen bank bangladesh rural advancement committee brac and bangladesh rural development board s brdb rd 12 project descriptive and econometric analyses show that these programmes have positive impacts on income production and employment particularly in the rural non farm sector also growth in self employment has been achieved at the expense of wage employment which implies an increase in rural wages the article emphasises that an upward shift in the labour demand curve is required for both improved productivity and wage gains on a sustainable basis which can only be supported through a structural transformation of the rural economy

trade and market thickness effects on organizations globalization by raising the number of buyers available to each seller and the number of sellers available to each buyer raises the thickness or the effective number of participants of every market market thickness can have subtle effects on incentives and organizations alleviating hold up problems resulting in less vertical integration more informal contracting and more cooperative and innovative relationships with subcontractors however it can also weaken long run relationships distorting relationship specific investments and risk sharing this paper surveys the theory and empirical evidence indicating when market thickness helps and when it hurts jel f15 l14 l22

on the extent of the market wholesale gasoline in the northeastern united states this paper develops the classical view of the extent of markets by introducing explicitly in the analysis the concept of arbitrage costs arbitrage or transaction costs imply that market boundaries are essentially stochastic while a set of products or regions may have binding arbitrage conditions i e may be in the same market at a given point in time they may not at another thus in defining a market the probability that a set of agents or regions would h3ve binding arbitrage conditions has to be assessed this paper develops an econometric methodology to estimate the transaction costs required to arbitrage among a given set of products as well as the probability that that set of products would be bound by binding arbitrage condi tions finally the methodology is applied to wholesale gasoline in the northeastern part of the united states address for communications pablo t spiller herbert hoover memorl l bldg 9348 stanford ca 94305

default market microstructure and changing trade patterns in forward markets a case study of north sea oil abstract default or credit risk is a central difference between forward and futures markets empirical tests have found little difference between forwards and futures prices but these tests have been conducted on markets where such risk is minimal e g foreign exchange so that even if default risk is in general an important difference between forward and futures trading they would have been unable to detect its effects in contrast this paper presents a case study of a market for forward delivery of a type of crude oil from the north sea that experienced widespread and well documented defaults when the spot price of the underlying commodity plunged from roughly 30 to roughly 10 per barrel in a short period of time in early 1986 the defaults were by relatively small lightly capitalized trading companies firms that neither produce nor consume the physical commodity because information on defaults in financial markets is scarce the paper describes the circumstances surrounding the default episode in some detail the market survived the default episode with market microstructure unaltered and still flourishes despite the successful introduction of a futures market in the same commodity by the london international petroleum exchange patterns of trade changed however the paper examines the hypothesis that investment banks which entered the market following the default period provided intermediation services to market participants thereby substituting to an extent for a clearinghouse taking advantage of the information on the buyer and seller in each transaction the paper presents nonparametric tests for changing patterns of forward trade

the impact of the listing of options in the foreign exchange market abstract this paper documents the impact of the introduction of foreign currency options and options on foreign currency futures on the underlying securities we find that the volatility of exchange rates decreases following the listing of options for a majority of the currencies under consideration in addition we find that trading volume and open interest in currency futures increases after option introduction this evidence is consistent with the notion that derivative securities are important innovations for stabilizing and increasing liquidity in the market for the underlying assets

the simultaneous determination of spot and futures prices in a simple model with production risk this paper deals with properties of a rational expectations equilibrium when there is futures trading a simple two good model is analyzed where one of the goods is produced subject to production risk although the futures market provides insurance against price risk to producers it is income risk that concerns them whether they hedge in equilibrium is shown to depend on the price and income elasticity of demand for their output as well as on the degree to which consumers the other party in the futures transaction are risk averse

futures markets and the fluctuations in inflation monetary growth and asset returns inflation and nominal interest rates have been volatile in recent years futures contracts in price indices would help in this environment by enhancing information about prices and by providing a convenient means for people to hedge against inflation there is some evidence that the availability of these instruments would encourage investment and reduce the mean real rate of return on long term bonds indexed bonds which are now significant in britain serve a similar purpose in the absence of such bonds there would be a market for price index futures although the volume of trading would probably be modest this abstract was borrowed from another version of this item

will my risk parity strategy outperform the authors gauged the return generating potential of four investment strategies value weighted 60 40 fixed mix and unlevered and levered risk parity they report three main findings 1 even over periods lasting decades the start and end dates of a backtest can have a material effect on results 2 transaction costs can reverse ranking especially if leverage is used and 3 a statistically significant return premium does not guarantee outperformance over reasonable investment horizons see comments and response on this article

commodity bonds and consumption risks this paper analyzes the economic role of commodity bonds by examining the nature of the demand for these securities i show that while commodity bonds protect against relative price changes they do so by introducing variability into the future real income stream this variability limits the desirability of using commodity bonds to provide price insurance for future consumption however this variability may allow commodity bonds to hedge risks to consumption caused by stochastic changes in income the analysis also suggests that it is this income insurance rather than price insurance that is important in hedging risks to future consumption in 1863 the confederate states of america csa took the unusual step of issuing bonds payable in bales of cotton in 1980 the sunshine mining company took the unusual step of issuing bonds payable in ounces of silver although the csa commodity bond offering proved to be of an isolated and rather shortlived nature recent developments suggest that commodity bond offerings like that of sunshine mining may become more commonplace for example both mexico and the british oil and gas corporation have issued petroleum bonds and the reagan administration has proposed issuing oil indexed bonds to finance the strategic oil reserve france has experimented with gold bonds as have several private companies commodity indexed debt also has appeared outside of organized bond markets shared appreciation mortgages for example represent a debt indexed to the price of housing even bank loans can be indexed to underlying commodities as evidenced by the oil indexed loans between japanese banks and the soviet union 2 such developments suggest that debts linked to a wide variety of commodity indices are certainly feasible this paper analyzes the economic role of commodity bonds by considering the nature of the demand for these securities because commodity bonds can hedge graduate school of management cornell university this paper has benefitted greatly from discussions with david easley seymour smidt and piet sercu i would also like to acknowledge the extremely valuable comments of an anomymous referee 1 for discussion of the reagan petroleum bond plan see a new plan to finance oil reserve new york times january 15 1981 devious device to trim a budget new york times february 6 1981 and building an oil reserve the thrifty way new york times february 16 1981 britain s oil bonds are discussed in oil bonds may not bring riches world business weekly october 27 1980 gold bonds are featured in gold indexed bond is costly for france new york times june 30 1980 hot seller bonds indexed to oil and gold business week august 3 1979 and sale of gold bonds in europe planned new york times january 28 1981 2 numerous articles on such indexed loans have appeared in the wall street journal see for example wsj february 15 1979 p 33 june 11 1979 p 18 august 15 1979 p 29 april 7 1980 p 7 april 8 1980 p 35 and may 14 1981 p 31

inventories in a competitive environment trade is sequential buyers arrive in batches and each batch completes trade before the next arrives producers allocate the available supply among all potential batches of buyers inventories accumulate whenever a batch does not arrive shocks to cost and demand are serially independent there is a stationary relationship between inventories and prices with the following properties larger beginning of period inventories tend to depress prices inventories are positively serially correlated a unit increase in inventories reduces output by less than one unit an increase in inventories leads to an increase in the price spread output tends to vary more than sales

the fable of fisher body abstract general motors s gm s acquisition of fisher body is the classic example of market failure in the literature on contracts and the theory of the firm according to the standard account in 1926 gm merged vertically with fisher body a maker of auto bodies because of concerns over transaction specific investment and contractual holdup that account exhibits errors of historical fact and interpretation general motors acquired a 60 percent interest in fisher body in 1919 moreover the contractual arrangements and working relationship prior to the 1926 merger exhibited trust rather than opportunism fisher body s production technology did not exhibit asset specificity the merger reflected economic considerations specific to that time not some immutable market failure we demonstrate that vertical integration was directed at improving coordination of production and inventories assuring gm of adequate supplies of auto bodies and providing gm with access to the executive talents of the fisher bro

diversification return portfolio rebalancing and the commodity return puzzle diversification return is an incremental return earned by a rebalanced portfolio of assets the author argues that the underlying source of the diversification return is the rebalancing in contrast the incremental return of a buy and hold portfolio is driven by the fact that the best performing assets become a greater fraction of the portfolio on the basis of these findings the author resolves two aspects of a puzzle associated with gorton and rouwenhorst s index of commodity futures

the impact of group based credit programs on poor households in bangladesh does the gender of participants matter this paper estimates the impact of participation by gender in the grameen bank and two other group based micro credit programs in bangladesh on labor supply schooling household expenditure and assets the empirical method uses a quasi experimental survey design to correct for the bias from unobserved individual and village level heterogeneity we find that program credit has a larger effect on the behavior of poor households in bangladesh when women are the program participants for example annual household consumption expenditure increases 18 taka for every 100 additional taka borrowed by women from these credit programs compared with 11 taka for men

imperfect hedging and export production firms engaged in international operations are highly interested in developing ways to protect themselves from exchange rate risk the incentive for risk management comes from the enormous volatility of the floating foreign exchange rates our study shows that an exporting firm can benefit from hedging exchange rate risks even when no perfect hedge is possible since in reality not every currency is traded in a futures market 7 chap 15 the exporting firm uses futures contracts with other underlying assets whose spot prices are highly correlated with the foreign exchange spot rate in the real world hedging must often be accomplished by using futures contracts on different deliverable instruments such hedging may result in imperfect hedging as shown by anderson and danthine 1 eaker and grant 11 dellas and zilberfarb 9 broll wahl and zilcha 6 it has been shown in recent publications 12 8 15 13 23 16 2 14 5 18 22 that an international firm facing exchange rate risk can eliminate this risk altogether if it can use a currency forward market another financial asset or a portfolio of assets which is perfectly correlated to the exchange rate in the absence of such markets the firm can reduce its income risk by engaging in a hedging activity of assets correlated to the foreign exchange recent studies of firm behavior under exchange rate uncertainty examine the influence of futures markets on the export and hedging decision these papers derive two major theorems one is the separation theorem which states that when futures markets exist the firm s export production decision is determined solely by technology and input output prices including the futures prices this result holds if the gain from the futures contract is perfectly correlated with export revenue the other theorem is the full hedging theorem which asserts that with unbiased futures markets the firm completely avoids exchange rate risk by entering into optimum futures contracts

the self regulation of commodity exchanges the case of market manipulation influential economists argue that government regulation of manipulative practices in financial markets is unnecessary because exchanges have incentives to take nearly first best precautions against the exercise of market power this article shows that the theoretical arguments underlying this proposition are weak because exchange members are likely to ignore the effects of manipulation on inframarginal traders and price informativeness competition between exchanges may be limited and collective action problems preclude efficient exchange intervention for these reasons exchanges will likely take few precautions against market power an examination of the history of self regulation at 10 exchanges prior to the passage of laws proscribing manipulation shows that they took few if any measures to curb manipulation since the characteristics of manipulation imply that it can be deterred efficiently through the use of harm based sanctions this theory and evidence strongly suggest that self regulation is a

do microfinance institutions benefit from integrating financial and nonfinancial services this article examines the impact of microfinance plus i e coordinated combination of financial and nonfinancial services on the performance of microfinance institutions mfis using a global data set of mfis in 77 countries we find that the provision of nonfinancial services does not harm nor improve mfis financial sustainability and efficiency the results however suggest that the provision of social services is associated with improved loan quality and greater depth of outreach

transactions costs and covered interest arbitrage theory and evidence the extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored it is shown that such deviations should be no greater than the lowest of the transactions costs in one of three markets the swap market or either of the two relevant securities markets this reconciles the theory with the data which show spreads of no more than a few basis points however the empirical results have no direct bearing on the conventional market efficiency hypothesis

information and competitive advantage the rise of general motors during the mid 1920s alfred p sloan instituted a number of innovations designed to provide the operating divisions at general motors with more accurate and more timely information regarding final consumer demand these innovations have not received much attention in attempts to explain general motors remarkable rise to dominance of the u s domestic automobile industry the present article reviews these events and provides statistical tests affirming the success of these innovations at the same time as general motors increases in profitability and market share

the role of liquidity in futures market innovations i characterize the optimal design of a new futures market an innovation by an exchange in the presence of market frictions futures markets am characterized by both the contract and the level of trader participation both can be determined by an exchange a game in which exchanges simultaneously design markets is c onsidered and a particular equilibrium not necessarily unique is constructed a game in which exchanges sequentially design markets and incur design costs is also considered and the generically unique equilibrium is constructed the nature of equilibrium with multiple exchanges is discussed in these simultaneous and sequential settings illustrating the role played by liquidity considerations both in market design and in the nature of competition between exchanges

has exchange risk depressed international trade the impact of third country exchange risk abstract this paper argues that the effect of exchange risk on bilateral and aggregate trade flows should be analyzed by including the impact of third country exchange risk factors in addition to direct bilateral or multilateral risk after a theoretical examination of these effects us bilateral export flow to its six largest trading partners are analyzed empirically i find individuality and jointly significant third country risk effects in most cases in contrast to some recent bilateral efforts i find a steadily growing negative impact on trade flows from exchange risk during floating and in contrast to recent aggregate trade flow studies i conclude that there was no temporary decline in exchange risk during the late 1970s

ronald coase and methodology ronald coase wrote two great theoretical articles that earned him the nobel prize the nature of the firm in 1937 and the problem of social cost in 1960 he also wrote many articles dealing with the methodology of economics often in the setting of a discussion of a particular economist such as adam smith or alfred marshall the methodological articles will be my particular focus here

when do futures markets destabilise spot prices futures markets allow agents to shift price risk onto speculators and encourages them to take riskier decisions historically their main impact has been to encourage the storage of commodities thus arbitraging prices over time and reducing price fluctuations this paper presents a simple model in which opening futures markets in a nonstorable commodity encourages producers to choose riskier production techniques which destabilizes supply and hence the spot price copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

information and normal backwardation as determinants of trading performance evidence from the north sea oil forward market this paper utilizes transaction specific data on forward trading in the international petroleum market to test directly predictions from the theory of normal backwardation against information based predictions of trader performance with the ability to identify buyers and sellers the authors find that no traders make significant profits on interday measures within the day however traders likely to have superior information make significant profits the results are not supportive of normal backwardation but are consistent with the time pattern of information dissemination in this market deals made during the day are widely reported only at day s end copyright 1994 by royal economic society

an analysis of the economic justification for consolidation in a secondary security market abstract this paper considers whether all trading in a listed security should be required to go through an exchange to this end the incentives for a brokerage firm to offer in house execution services are discussed and an analytical framework is developed which shows that under idealized conditions fragmentation of the market through in house execution services would not result in any overall deterioration of market performance characteristics however when some of the idealized conditions are relaxed the market fragmentation arising from in house execution causes the gains to some customers to be more than overcome by the losses to others the analysis which also takes account of the desirability of enforcing reasonable trading priority rules such as priority by price and time across all traders yields several public policy implications for some unlikely scenarios it would be possible through appropriate commission sharing and a perfectly operating intermarket trading system for optimal overall market performance to be consistent with the market fragmentation inherent in in house execution services however for most realistic scenarios fragmentation would cause a deterioration in the quality of the market thus it seems desirable to require that all trading go through a central exchange with a consolidated limit order book

diversification returns and asset contributions 1992 diversification returns and asset contributions financial analysts journal vol 48 no 3 pp 26 32

production and inventory control at the general motors corporation during the 1920 s and 1930 s this paper analyzes dynamics of production and inventories at the general motors corporation during the 1920s and 1930s the authors begin by examining anecdotal evidence on the nature of the production control system in force during that period motivated by that evidence they then extend the conventional linear quadratic model of production behavior to take account of annual shutdown finally the authors apply the modified model to newly available data on monthly unit production sales and inventories during 1924 40 general motors appears to have been aiming to maintain a targeted level of inventory relative to expected sales and secondarily to smooth production copyright 1993 by american economic association