auctions aftermarket competition and risk attitudes with the experience of the sequence of umts auctions held worldwide in mind we consider a situation where firms participate in license auctions to compete in an aftermarket it is known that when a monopoly right is auctioned auctions select the bidder that is least risk averse this firm will choose a higher value of the aftermarket strategic variable than any other firm will do thereby implying a higher market price under price setting behavior and a lower price due to higher quantity under quantity setting behavior this paper extends the analysis to oligopoly aftermarkets and analyzes whether the monopoly result carries over to oligopoly settings we argue that with multiple licenses and demand uncertainty auctions actually perform even worse from a welfare point of view than the monopoly case would suggest a strategic effect strengthens the monopoly result with respect to prices but weakens the result with respect to quantities

potential biases from using only trade prices of related securities on different exchanges a comment equilibrium prices of the underlying stocks using daily trade prices this paper points out that a bias associated with the bid ask spread and nonsynchronous trading may create the impression that option prices contain information not reflected in the contemporaneous stock prices even during times when the two prices are in equilibrium the mr methodology is described in section i and the potential biases arising due to the bid ask bounce and the non synchroneity of stock and option prices are illustrated in section ii following an observation in their paper that the stock prices implied by the option prices are smaller than the corresponding stock prices only thirty seven percent of the time section iii looks at the distribution of trade prices relative to the last quoted bid ask prices for both stocks and options many more during the day option trades occur at the ask than at the bid whereas the distribution is approximately symmetric for stocks a likely implication is that the option trade prices and therefore the implied stock prices are upward biased estimates of the corresponding true prices this bias increases at day end for both stocks and options

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

the fiscal framework in a currency union lessons from a comparison between the euro area and the eastern caribbean currency union this paper draws out lessons from the euro area ea that are transferable to the eastern caribbean currency union eccu and other caribbean economies with fixed exchange rates based on observations from both the ea and the eccu we present a new policy framework which is capable of imposing fiscal discipline with the aim of avoiding the risk of unsustainable fiscal policies reappearing and of preventing monetary policy from being undermined by undisciplined national governments in the eccu case we find that fiscal deficits are more a result of financial and trade imbalances than fiscal indiscipline per se consequently constraints on overall debt public and private rather than direct limits on endogenous public deficits appear to be the appropriate response

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

fiscal sustainability using growth maximizing debt targets this article highlights the importance of debt related fiscal rules and derives growth maximizing public debt ratios from a simple theoretical model on the basis of evidence on the productivity of public capital we estimate public debt targets that governments should maintain if they wish to maximize growth for panels of oecd eu and euro area countries these are not arbitrary numbers but are founded on long run optimizing behaviour assuming that governments implement the golden rule of financing that is they contract debt only to finance public investment our estimates suggest that the euro area should target debt levels of around 50 of gdp if member states are to have common targets that is about 15 points lower than the estimate for the growth maximizing debt ratio in our oecd sample and comfortably within the stability and growth pact s debt ceiling of 60 of gdp we also indicate how forward looking budget reaction functions fit into a debt targeting framework

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

fiscal leadership and central bank design this article investigates the impact on economic performance of the timing of moves in a policy game between the government and the central bank for a government that has both redistributional and stabilization objectives it is shown that both inflation and income inequality are reduced without sacrificing output growth if the government assumes a leadership role compared with a regime in which monetary and fiscal policy are determined simultaneously further it is shown that government leadership benefits both the fiscal and monetary authorities through the enhanced coordination that this arrangement implies jel classification e52 e61 f42

selling licences for a process innovation the impact of the product market on the selling mechanism this article considers the sale by a research lab of licences for a cost reducing innovation the marginal cost of a firm that wins a licence is private information and the acquisition of a licence imposes a negative externality on the other firms the lab s optimal revenue is determined from a class of mechanisms in which the lab selects the number of licences and the reserve price before the sale the role of the downstream product market in the determination of the number of licences is analyzed furthermore it is also shown that the optimal reserve price may be zero jel classification d82 li3

an economic perspective on auctions the recent spectrum auctions in europe have shown that serious problems can wise in auctions where multiple complementary objects are being sold such as blocks of radio spectrum that will subsequently be used by the wining bidders to compete against each other in downstream markets other important instances of such situations include take off and landing slots at airports and rights for electricity and gas transmission t i first review some of the theory describing multi object auctions i i next outline the importance of strategic effects arising in auctions that are followed by competition between the bidders and the tension arising between various goals such as efficiency and revenue maximization although more flexible auction formats can have virtues particularly in taking into account complementarities they can also be manipulated by bidders to build market power to the detriment of consumers we next apply these insights to the recent european umts licence auctions finally we draw the main conclusions and policy implications

what should fiscal councils do fiscal watchdogs so called fiscal councils have been proposed as a method to counter deficit bias of fiscal policy the paper analyses theoretically what role fiscal councils could play and surve

patent licensing to bertrand competitors abstract a cost reducing process innovation protected by a patent is sold to one of several firms engaged in price competition incomplete information about production costs yields an auction model with both private and common value components our main result is that standard auction mechanisms lead to inefficient allocations this sharply contrasts with the result obtained under complete information the inefficiency result extends to patent race frameworks which resemble all pay auctions an auction where the lowest bidder gets the patent is shown to have several equilibria one of which is efficient

complete markets informed trading and equity option introductions this paper proposes and tests a new hypothesis concerning the price impact of option introductions on the underlying asset we argue that the leverage properties of options induce a higher level of informed trading in the aggregate market underlying plus derivative resulting in excess listing day price movements in the newly optioned equity using an alternative dataset our results suggest that this may be an explanation for the observed positive than negative excess listing day returns of us optioned stocks over the past thirty years

dividend capture in nasdaq stocks abstract we examine the importance of dividend capture trading in nasdaq stocks by testing for cross sectional relations between ex day abnormal returns and bid ask spreads throughout we find that ex day returns and spreads are positively related the relation increases across dividend yield quintiles and is strongest in high yield stocks the relation does not appear in a sample of non ex dividend days these findings indicate that dividend capture trading affects the ex day returns of at least some particularly high yield nasdaq stocks and that dividend capture trading is important for understanding ex dividend day returns

bidding for a process innovation under alternative modes of competition abstract this paper examines whether a first price sealed bid auction is efficient in allocating a process innovation amongst oligopolists engaged in either cournot or bertrand competition standard bidding behavior is modified by the incentive to signal private information in order to influence the oligopoly outcome it is shown that for cournot there exists a unique equilibrium in strictly increasing strategies that is symmetric and therefore allocatively efficient for bertrand an efficient equilibrium may not exist however efficiency is restored as the market becomes perfectly competitive the results underline the sensitivity of efficient auction design to downstream market structures

a transaction data study of weekly and intradaily patterns in stock returns abstract weekly and intradaily patterns in common stock prices are examined using transaction data for large firms negative monday close to close returns accrue between the friday close and the monday open for smaller firms they accrue primarily during the monday trading day for all firms significant weekday differences in intraday returns accrue during the first 45 minutes after the market opens on monday mornings prices drop while on the other weekday mornings they rise otherwise the pattern of intraday returns is similar on all weekdays most notable is an increase in prices on the last trade of the day

price changes of related securities the case of call options and stocks this paper tests the hypothesis that option prices contain information not reflected in con temporaneous stock prices an options transactions data base is used for the purpose the evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid ask spread for intra day holding periods implications of the profits in the overnight holding periods are discussed

volume and turn of the year behavior abstract this paper studies the trading characteristics of listed companies by size and year end behavior there were no transactions on nearly 25 of the days for the smallest decile even at the turn of year which is an active trading period for small companies as a result of low levels of trading and the regulations governing exchange specialists transaction prices and quotations of small listed companies may require several days to fully reflect equilibrium price changes the data confirm the existence of a year end seasonal pattern in rates of return for small companies and suggest that there may be a seasonal pattern for large companies as well

the pricing of japanese equity warrants discrepancies between the black scholes value of japanese equity warrants and their observed prices are explained in part by the stochastic volatility of changes in prices of the underlying stocks we fit garch and egarch models to the stochastic volatility and briefly compare their performance to the cev model a hopscotch algorithm is used to value the warrants in the presence of the stochastic stock price volatility the stochastic volatility hopscotch warrant values still differ substantially from corresponding prices in contrast away from the money short term nikkei 225 options valued with the same stochastic volatility models are close to observed prices a regression model is used to fit the differences between warrant values and prices as a function of proxies for market impediments

competition of firms discriminatory pricing and location1 two costlessly mobile firms are to be located in a market region a subset of the plane the firms compete by setting locations and delivered price schedules to study this competitive stiuation an appropriate extensive form game is defined along with an appropri ate noncooperative solution concept existence and general properties of the equilibrium are demonstrated among the results are each firm increases its profit by locating so as to decrease total cost to both firms of serving the market firms will never locate coinciden tally if they have identical production costs and transport cost rates or if these are different and the firms are located in a circular market region having a uniform demand distribution this paper studies competition between two profit maximizing firms in space who are costlessly mobile and may discriminate in price we will allow the firms to set locations and delivered price schedules and we will be concerned with the existence and properties of equilibria in location and price starting with hotelling 9 the spatial competition literature has focused on location on bounded linear markets by two or more firms hotelling assumed identical firms that produced a single good with constant cost of production and considered consumers to be uniformly distributed and to have inelastic demand he also assumed that the consumers pay transport cost and purchase the good from the cheapest source hotelling claimed that a nash equilibrium in locations for the two firm market existed and yielded back to back locations at the center of the market many authors most recently d aspremont gabszewicz and thisse 2 have noted that an equilbrium in prices and location does not exist for hotelling s model however if the firms employ identical exogeneously specified prices hotelling s conclusions hold subsequent work by smithies 14 hartwick and hartwick 7 and eaton 3 claimed to show that a nash equi librium in f o b prices and locations can exist in markets with a uniform distribu tion of consumers each of whom have identical elastic demand functions for the two and three firm problems the work of d aspremont et al casts doubt on these conclusions without the adoption of restrictive conditions our work contrasts with these works and related research which has dealt with linear markets with uniform distributions of customers and with identical firms our work will involve markets that are subsets of the plane having nonuniform distributions of customers our firms will be allowed to be different that is have differences in production and transport costs however the fundamental difference in our approach is that our firms will set discriminatory prices and not price f o b in many ways our work will represent the discriminatory pricing