stock exchange mergers and return co movement a flexible dynamic component correlations model the creation of a common cross border stock trading platform is found by use of a flexible dynamic component correlations fdcc model to have increased long run trends in conditional correlations between foreign and domestic stock market returns

multi resource investment strategies operational hedging under demand uncertainty abstract consider a firm that markets multiple products each manufactured using several resources representing various types of capital and labor and a linear production technology the firm faces uncertain product demand and has the option to dynamically readjust its resource investment levels thereby changing the capacities of its linear manufacturing process the cost to adjust a resource level either up or down is assumed to be linear the model developed here explicitly incorporates both capacity investment decisions and production decisions and is general enough to include reversible and irreversible investment the product demand vectors for successive periods are assumed to be independent and identically distributed the optimal investment strategy is determined with a multi dimensional newsvendor model using demand distributions a technology matrix prices product contribution margins and marginal investment costs our analysis highlights an important conceptual distinction between deterministic and stochastic environments the optimal investment strategy in our stochastic model typically involves some degree of capacity imbalance which can never be optimal when demand is known

the role of collateral in credit markets with imperfect information abstract the paper analyzes the structure of credit market equilibrium under imperfect information collateralization and credit rationing are compared as alternative means to cope with problems of adverse selection and moral hazard it is shown that lenders may use collateral as a self selection and incentive mechanism rationing occurs only if the borrowers collaterizable wealth is too small to allow perfect sorting or to create sufficiently strong incentives whenever there is rationing in an equilibrium some borrowers are charged the maximum amount of collateral

general equilibrium with endogenously incomplete financial markets abstract the present paper studies a class of general equilibrium economies with imperfectly competitive financial intermediaries and price taking consumers intermediaries optimally choose the securities they issue and the bid ask spread they charge financial intermediation is costly and hence markets are endogenously incomplete an appropriate equilibrium concept is developed and existence is proved competitive equilibria for this class of economies display full indexation of securities payoffs and monetary neutrality even if intermediaries are restricted to issue nominal securities and financial markets turn out to be incomplete this is in sharp contrast with the indeterminacy and non neutrality results established in the literature for incomplete markets economies with exogenously given nominal securities journal of economic literaturclassification numbers d52 g20

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

financial intermediation without exclusivity futures exchanges and other financial intermediaries assume counterparty risks and in return demand guarantees that these counterparties will deliver on their promises it is often argued that to attract volume financial intermediaries would settle for excessively low contractual guarantees in santos and scheinkman 2001 we model financial intermediation in an environment where traders may choose to default and we examine the characteristics of the equilibrium in particular we investigate whether competition implies excessively low standards we show that in fact when society punishes default and intermediaries can impose collateral requirements effectively to limit the size of positions competition leads to a constrained optimal amount of contractual guarantees in santos and scheinkman 2001 we assume that exchanges cannot control the size of the positions taken by individuals but we preclude investors from participating in more than one exchange this ignores the effect that trading with one financial intermediary may have on the risks faced by other intermediaries financial intermediaries typically cannot control the amount of risk that counterparties will take with other intermediaries in this paper we examine the effect of dropping the exclusivity assumption we show that the constrained optimum can no longer be implemented as a standard nash equilibrium with free entry nonetheless this allocation is the only one that can be sustained as an anticipatory equilibrium charles wilson 1977 to break a candidate anticipatory equilibrium it must be possible to add a contract that is profitable and that does not become unprofitable when the now unprofitable contracts from the original menu are withdrawn if one views this requirement as reasonable nonexclusivity reproduces the outcome that obtains when intermediaries enjoy exclusivity but cannot control the size of positions taken against them by traders a superficially similar result holds in the insurance model of richard arnott and joseph e stiglitz 1993 in that model the price of insurance is simply the ratio of what the client pays in the favorable state versus what he receives in the adverse state as a consequence if insurers cannot control the size of policies it makes no difference whether a client buys from one or many insurance companies clients will buy as much as desired at the lowest price as we will show below in our model of financial intermediation agents may want to combine several contracts and this is precisely the reason why the original equilibrium does not survive as a nash equilibrium once exclusivity is dropped

the information technology revolution and the unsecured credit market the information technology it revolution coincided with the transformation of the u s unsecured credit market households borrowing increased rapidly and there was an even faster increase in bankruptcy filings a risk of default model with asymmetric information and costly screening is introduced to study this period when information costs are high the design of contracts under private information prevents some households from borrowing with a risk of default as information costs drop households borrow more and bankruptcy filings increase quantitative exercises suggest that the it revolution may have played an important role in the transformation of the unsecured credit market jel e43 e44 g33

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

clearing and settlement during the crash this article is a reexamination of the clearing and settlement process in financial markets particularly the futures market and its performance during the 1987 stock market crash it provides both some institutional background and some conceptual perspective on the problems faced by the system during the week of october 19 much of the discussion is based on the useful analogies that can be drawn between the clearing house and other financial intermediaries such as banks and insurance companies a major conclusion is that the federal reserve played a vital rob in protecting the integrity of the clearing and settlements system during the crash

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

the democratization of credit and the rise in consumer bankruptcies financial innovations are a common explanation for the rise in credit card debt and bankruptcies to evaluate this story we develop a simple model that incorporates two key frictions asymmetric information about borrowers risk of default and a fixed cost of developing each contract lenders offer innovations that ameliorate asymmetric information or reduce this fixed cost have large extensive margin effects via the entry of new lending contracts targeted at riskier borrowers this results in more defaults and borrowing and increased dispersion of interest rates using the survey of consumer finances and federal reserve board interest rate data we find evidence supporting these predictions specifically the dispersion of credit card interest rates nearly tripled while the new cardholders of the late 1980s and 1990s had riskier observable characteristics than existing cardholders our calculation suggest these new cardholders accounted for over 25 of the rise in bank credit card debt and delinquencies between 1989 and 1998

revolving credit lines and targeted search abstract i propose a model of revolving credit lines and targeted search to analyze what accounts for the profitability of the u s credit card industry my analyses lead to two main findings first the search friction has minimal impact on the level of profitability of the credit card industry most of the profitability is a result of the lender choosing the terms of contract second improved information about consumers accounts for the fall in profitability since the 1980s consistent with the data lenders respond to more information by increasing credit card limits and lowering markups

debt contracts and financial intermediation with costly screening we develop a credit market model with adverse selection where risk neutral bor rowers self select because lenders make use of a costly screening technology equilibrium contracts are debt contracts and this is robust to randomization in contrast to results for the costly state verification model this framework permits optimal financial intermediary structures in that there is delegated screening in equilibrium if many borrowers are required to fund individual investment projects contrats de dette et internendiation financiere quand le tamisage est couteux les auteurs developpent un modele de marche du credit avec selection adverse otu les emprunteurs qui sont neutres par rapport au risque se selectionnent eux memes parce que les pr6teurs utilisent une technologie de tamisage qui est cohteuse les contrats d equilibre sont des contrats de dette et ces resultats s averent robustes meme quand on utilise des processus au hasard contrairement a ce qui se passe dans le cas du modele cooteux de verification par l etat ce cadre d analyse suggere des structures d intermediation financiere optimales en ce que en equilibre il y a delegation du tamisage si plusieurs emprunteurs sont necessaires pour

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

the impact of consumer credit access on unemployment unemployed households access to unsecured revolving credit more than tripled over the last three decades this article analyses how both cyclical fluctuations and trend increases in credit access impact the business cycle the main quantitative result is that credit expansions and contractions have contributed to moderately deeper and more protracted recessions over the last 40 years as more individuals obtained credit from 1977 to 2010 cyclical credit fluctuations affected a larger share of the population and became more important determinants of employment dynamics even though business cycles are more volatile newborns strictly prefer to live in the economy with growing but fluctuating access to credit markets

hedging your bets and assessing the outcome abstract hedging offsets the risk of an existing stake by counterbalancing it with a new stake for example complementing a bet on the race favorite with another bet on a promising upstart in three experiments the authors find that rather than assessing the hedge as a whole people tend to react to the hedging outcome by focusing on either the original stake or the new one the authors show that the hedger s focus is linked to a psychological motivation of whether to pursue safety and security by minimizing losses known as a prevention orientation or to pursue growth and advancement by maximizing gains known as a promotion orientation when the context is gambling prevention oriented people fixate on what happens to the status quo stake whereas promotion oriented people attend to the new stake experiment 1 the same conclusion emerges from a stock investing context experiments 2a and 2b moreover because selective attention to status quo and change is the mechanism at work the authors fin

competition among exchanges does competition among e nancial intermediaries lead to excessively low standards to examine this question we construct a model where intermediaries design contracts to attract trading volume taking into consideration that traders differ in credit quality and may default when credit quality is observable intermediaries demand the right amount of guarantees a monopolist would demand fewer guarantees private information about credit quality has an ambiguous effect in a competitive environment when the cost of default is large small private information leads to higher lower standards we exhibit examples where private information is present and competition produces higher standards than monopoly does i introduction in spite of the general acceptance of the competitive mechanism as an allocation scheme many observers consider e nancial intermediation an exception competition is thought to lead to a race to the bottom in which e nancial intermediaries settle for excessively low levels of contractual guarantees in an attempt to increase volume evaluating futures exchanges a joint report from the treasury and the federal reserve board written in the wake of the 1987 crash states that t here is sufe cient possibility that at some point sros self regulatory organizations might establish margins that were inconsistent enough to present market problems or set them at levels that might present potential costs to other parties that regulatory approval should be established in all markets 1

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

arbitrage short sales and financial innovation the authors describe a model of general equilibrium with incomplete markets in which firms can innovate by issuing arbitrary costly securities when short sales are prohibited firms behave competitively and equilibrium is efficient when short sales are allowed these classical properties may fail if unlimited short sales are allowed imperfect competition may persist even when the number of potential innovators is large if limited short sales are allowed perfect competition may obtain in the limit but equilibrium can be inefficient because of the presence of an externality the private benefits of innovation for firms differ from the social benefits copyright 1991 by the econometric society

margin requirements price fluctuations and market participation in metal futures margin requirements in metal futures contracts have a negative impact on market participation that seems causal because it is absent from a benchmark group of metals that do not undergo similar margin changes it is less clear whether margins restrict primarily rational or irrational investors the stronger positive relation between margins and future target metal volatility than benchmark metal volatility can simply be attributed to the selection rule of the exchanges as they increase margins in those metals for which they anticipate a comparatively higher future volatility copyright 1995 by ohio state university press

how unsecured credit policies influence mortgage and unsecured loan defaults before the global financial crisis the proportion of households defaulting on the mortgage while remaining current on the unsecured loan was almost the same as the proportion of households current on the mortgage but defaulting on the unsecured loan after the crisis the former ratio became higher than the latter by using a heterogeneous agent model with the mortgage and the unsecured loan i examine how the order of defaults changed before and after the crisis i then analyze the impacts of unsecured credit policies on households mortgage and unsecured loan defaults my quantitative exercise shows that both default rates can decrease as the cost for unsecured loan defaults increases

valuing operational flexibility under exchange rate risk in this paper we develop a stochastic dynamic programming formulation for the valuation of global manufacturing strategy options with switching costs overall we adopt a hierarchical approach first exchange rates are modeled as stochastic diffusion processes that exhibit intercountry correlation second the firm s global manufacturing strategy determines options for alternative product designs as well as supply chain network designs product options introduce international supply flexibility supply chain network options determine the firm s manufacturing flexibility through production capacity and supply chain network linkages third switching costs determine the cost of operational hedging i e the costs associated with reducing downside risks overall the firm maximizes its expected discounted global after tax value through the exercise of product and supply chain network options and or through exploitation of operational flexibility contingent on exchange rate realizations in this environment the firm must trade off fixed operating costs switching costs and the economic benefits derived from exploiting differentials in factor costs and corporate tax rates a multinomial approximation of correlated exchange rate processes is proposed that leads to a consistent and tractable lattice model for this compound option valuation problem we then demonstrate how the global manufacturing strategy planning model framework can be utilized to analyze financial and operational hedging strategies