The adverse effects of environmental policy in green markets

We model green markets in which purchasers, either firms orconsumers, have higher willingness-to-pay for lesspolluting goods. The effectiveness of pollution reductionpolicies is examined in a duopoly setting. We show thatduopolists' strategic behaviour may increase pollutionlevels. Maximum emission standards, commonly used in greenmarkets, improve the environmental features of products.Nonetheless, overall pollution levels will rise becausegovernment regulation also affects market shares and bootsfirms' sales. Consequently, social welfare may be reduced.We also explore the effects of technological subsidies andproduct charges, including differentiation of charges.

Multimarket contact in pharmaceutical markets

We analyze the effect of multimarket contact on the pricing behavior of pharmaceutical firms controlling for different levels of regulatory constraints using the IMS MIDAS database for the industry. Theoretically, under product differentiation, firms may find it profitable to allocate their market power among markets where they are operating, specifically from more collusive to more competitive ones. We present evidence for nine OECD countries suggesting the existence of a multimarket effect for more market friendly countries (U.S. and Canada) and less regulated ones (U.K., Germany, Netherlands), while the results are more unstable for highly regulated countries with some countries being consistent with the theory (France) while others contradicting it (Japan, Italy and Spain). A key result indicates thatin the latter countries, price constraints are so intense, that there is little room for allocating market power. Thus equilibrium prices are expected in general to be lower in regulated countries.

Flexible multivariate GARCH modeling with an application to international stock markets

The goal of this paper is to estimate time-varying covariance matrices.Since the covariance matrix of financial returns is known to changethrough time and is an essential ingredient in risk measurement, portfolioselection, and tests of asset pricing models, this is a very importantproblem in practice. Our model of choice is the Diagonal-Vech version ofthe Multivariate GARCH(1,1) model. The problem is that the estimation ofthe general Diagonal-Vech model model is numerically infeasible indimensions higher than 5. The common approach is to estimate more restrictive models which are tractable but may not conform to the data. Our contributionis to propose an alternative estimation method that is numerically feasible,produces positive semi-definite conditional covariance matrices, and doesnot impose unrealistic a priori restrictions. We provide an empiricalapplication in the context of international stock markets, comparing thenew estimator to a number of existing ones.

Imitation of succesful behavior in Cournot markets

In an experimental standard Cournot Oligopoly we test the importance ofmodels of behavior characterized by imitation of succesful behavior. Wefind that the players appear to the rather reluctant to imitate.

Firm investment in imperfect capital markets: A structural estimation

We set up a dynamic model of firm investment in which liquidity constraintsenter explicity into the firm's maximization problem. The optimal policyrules are incorporated into a maximum likelihood procedure which estimatesthe structural parameters of the model. Investment is positively related tothe firm's internal financial position when the firm is relatively poor. This relationship disappears for wealthy firms, which can reach theirdesired level of investment. Borrowing is an increasing function of financial position for poor firms. This relationship is reversed as a firm's financial position improves, and large firms hold little debt.Liquidity constrained firms may be unused credits lines and the capacity toinvest further if they desire. However the fear that liquidity constraintswill become binding in the future induces them to invest only when internalresources increase.We estimate the structural parameters of the model and use them to quantifythe importance of liquidity constraints on firms' investment. We find thatliquidity constraints matter significantly for the investment decisions of firms. If firms can finance investment by issuing fresh equity, rather than with internal funds or debt, average capital stock is almost 35% higher overa period of 20 years. Transitory shocks to internal funds have a sustained effect on the capital stock. This effect lasts for several periods and ismore persistent for small firms than for large firms. A 10% negative shock to firm fundamentals reduces the capital stock of firms which face liquidityconstraints by almost 8% over a period as opposed to only 3.5% for firms which do not face these constraints.

Betting on Hitler: The value of political connections in Nazi Germany

This paper examines the value of connections between German industry andthe Nazi movement in early 1933. Drawing on previously unused contemporarysources about management and supervisory board composition and stock returns,we find that one out of seven firms, and a large proportion of the biggest companies,had substantive links with the National Socialist German Workers Party. Firmssupporting the Nazi movement experienced unusually high returns, outperformingunconnected ones by 5% to 8% between January and March 1933. These resultsare not driven by sectoral composition and are robust to alternative estimatorsand definitions of affiliation.

Credit derivatives in emerging markets

Credit Derivatives are securities that offer protection against credit or default risk ofbonds or loans. The credit derivatives emerging market has grown rapidly and creditderivatives are widely used. This paper describes the emerging credit derivativesmarket structure. The current market activity is analyzed through elementary pricingdynamics and the study of the term structure of default risk. Focusing on theperformance of credit derivatives in stress situation, including legal and market risks,we discuss the potential consequences of a debt restructuring in a large emergingmarket borrower. The contribution of credit derivatives to the risk sharing in emergingmarkets is also examined.

Bank liquidity, interbank markets and monetary policy

A major lesson of the recent financial crisis is that the interbank lending marketis crucial for banks facing large uncertainty regarding their liquidity needs. Thispaper studies the efficiency of the interbank lending market in allocating funds. Weconsider two different types of liquidity shocks leading to different implications foroptimal policy by the central bank. We show that, when confronted with a distributional liquidity-shock crisis that causes a large disparity in the liquidity held amongbanks, the central bank should lower the interbank rate. This view implies that thetraditional tenet prescribing the separation between prudential regulation and monetary policy should be abandoned. In addition, we show that, during an aggregateliquidity crisis, central banks should manage the aggregate volume of liquidity. Twodifferent instruments, interest rates and liquidity injection, are therefore required tocope with the two different types of liquidity shocks. Finally, we show that failureto cut interest rates during a crisis erodes financial stability by increasing the riskof bank runs.

Insurance with frequent trading: A dynamic analysis of efficient insurance markets

This paper extends existing insurance results on the type of insurance contracts needed for insurance market efficiency toa dynamic setting. It introduces continuosly open markets that allow for more efficient asset allocation. It alsoeliminates the role of preferences and endowments in the classification of risks, which is done primarily in terms of the actuarial properties of the underlying riskprocess. The paper further extends insurability to include correlated and catstrophic events. Under these very general conditions the paper defines a condition that determines whether a small number of standard insurance contracts (together with aggregate assets) suffice to complete markets or one needs to introduce such assets as mutual insurance.

Irreversible investment in stochastically cyclical markets

This paper presents a new framework for studying irreversible (dis)investment whena market follows a random number of random-length cycles (such as a high-tech productmarket). It is assumed that a firm facing such market evolution is always unsure aboutwhether the current cycle is the last one, although it can update its beliefs about theprobability of facing a permanent decline by observing that no further growth phasearrives. We show that the existence of regime shifts in fluctuating markets suffices for anoption value of waiting to (dis)invest to arise, and we provide a marginal interpretationof the optimal (dis)investment policies, absent in the real options literature. Thepaper also shows that, despite the stochastic process of the underlying variable has acontinuous sample path, the discreteness in the regime changes implies that the samplepath of the firm s value experiences jumps whenever the regime switches all of a sudden,irrespective of whether the firm is active or not.

Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects

In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and lowspreads. Then the financial crisis erupted and pushed them into deep recessions, raising theirdeficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and,surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocatedfrom the private to the public sectors, reducing investment and deepening the recessions evenfurther. To account for these facts, we propose a simple model of sovereign risk in which debtcan be traded in secondary markets. The model has two key ingredients: creditor discriminationand crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereigndebt offers a higher expected return to domestic creditors than to foreign ones. This providesincentives for domestic purchases of debt. Crowding-out effects arise because private borrowingis limited by financial frictions. This implies that domestic debt purchases displace productiveinvestment. The model shows that these purchases reduce growth and welfare, and may lead toself-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countriesin the Eurozone, and how they may be addressed by policies at the European level.

Multi-sided Böhm-Bawerk assignment markets: the nucleolus and the core-center

En aquest treball mostrem que, a diferència del cas bilateral, per als mercats multilaterals d'assignació coneguts amb el nom de Böhm-Bawerk assignment games, el nucleolus i el core-center, i. e. el centre de masses del core, no coincideixen en general. Per demostrar-ho provem que donant un m-sided Böhm-Bawerk assignment game les dues solucions anteriors poden obtenir-se respectivament del nucleolus i el core-center d'un joc convex definit en el conjunt format pels m sectors. Encara més, provem que per calcular el nucleolus d'aquest últim joc només les coalicions formades per un jugador o m-1 jugadors són importants. Aquests resultats simplifiquen el càlcul del nucleolus d'un multi-sided ¿¿ohm-Bawerk assignment market amb un número molt elevat d'agents.

Vertical Syndication-Proof Competitive Prices in Multilateral Markets

[eng] A multi-sided Böhm-Bawerk assignment game (Tejada, to appear) is a model for a multilateral market with a finite number of perfectly complementary indivisible commodities owned by different sellers, and inflexible demand and support functions. We show that for each such market game there is a unique vector of competitive prices for the commodities that is vertical syndication-proof, in the sense that, at those prices, syndication of sellers each owning a different commodity is neither beneficial nor detrimental for the buyers. Since, moreover, the benefits obtained by the agents at those prices correspond to the nucleolus of the market game, we provide a syndication-based foundation for the nucleolus as an appropriate solution concept for market games. For different solution concepts a syndicate can be disadvantageous and there is no escape to Aumman’s paradox (Aumann, 1973). We further show that vertical syndicationproofness and horizontal syndication-proofness – in which sellers of the same commodity collude – are incompatible requirements under some mild assumptions. Our results build on a self-interesting link between multi-sided Böhm-Bawerk assignment games and bankruptcy games (O’Neill, 1982). We identify a particular subset of Böhm-Bawerk assignment games and we show that it is isomorphic to the whole class of bankruptcy games. This isomorphism enables us to show the uniqueness of the vector of vertical syndication-proof prices for the whole class of Böhm-Bawerk assignment market using well-known results of bankruptcy problems.

Symmetrically multilateral-bargained allocations in multi-sided assignment markets

[cat] Aquest treball tracta d’extendre la noció d’equilibri simètric de negociació bilateral introduït per Rochford (1983) a jocs d’assignació multilateral. Un pagament corresponent a un equilibri simètric de negociación multilateral (SMB) és una imputación del core que garanteix que qualsevol agent es troba en equilibri respecte a un procés de negociación entre tots els agents basat en allò que cadascun d’ells podria rebre -i fer servir com a amenaça- en un ’matching’ òptim diferent al que s’ha format. Es prova que, en el cas de jocs d’assignació multilaterals, el conjunt de SMB és sempre no buit i que, a diferència del cas bilateral, no sempre coincideix amb el kernel (Davis and Maschler, 1965). Finalment, responem una pregunta oberta per Rochford (1982) tot introduïnt un conjunt basat en la idea de kernel, que, conjuntament amb el core, ens permet caracteritzar el conjunt de SMB.

Complements and substitutes in multilateral assignment markets

[cat] En aquest treball provo que, en mercats d’assignació amb més de dos costats, agents de diferents sectors poden no ser complementaris mentre que agents del mateix sector poden no ser substituts. Shapley (1962) va provar que això mai pot succeïr quan el mercat d’assignació només té dos costats. No obstant, demostro que existeixen condicions suficients que garanteixen la substitutabilitat i la complementarietat entre agents en aquests tipus de mercats. A més, provo que, quan els béns al mercat son homogenis, el resultat de Shapley (1962) es manté.