Corporate capital structure revisited: incomplete markets and default

After Modigliani and Miller (1958) presented their capital structure irrelevance proposition, analysis of corporate Önancing choices involving debt and equity instruments have generally followed two trends in the literature, where models either incorporate informational asymmetries or introduce tax beneÖts in order to explain optimal capital structure determination (Myers, 2002). None of these features is present in this paper, which develops an asset pricing model with the purpose of providing a positive theory of corporate capital structure by replicating main aspects of standard contractual practice observed in real markets. Alternatively, the imperfect market structure of the economy is tailored to match what is most common in corporate reality. Allowance for default on corporate debt with an associated penalty of seizure of Örmís future cash áows by creditors is introduced, for instance. In this context, a qualitative assessment of Önancial managersídecisions is carried out through numerical procedures.

Collateral avoids Ponzi schemes in incomplete markets

Without introducing neither debt constraints nor transversality conditions to avoid the possibility of Ponzi schemes, we show existence of equilibrium in an incomplete markets economy with a collateral structure.

Fiscal multipliers in an incomplete markets economy

This paper studies the behavior of fiscal multipliers in two different economic environments: complete markets and incomplete markets. Based on steady state analysis, output multipliers are found within a range between 0.49 and 0.66, when the markets are complete. Under incomplete markets, output multiplier was found in an interval between 0.75 and 0.94. These results indicates that the market structure, which reflects the degree of risk sharing and the intensity of the precautionary motive faced by individuals, plays a key role in determining the fiscal multipliers. In the second part of the paper, was performed an exercise to analyze the dynamic response of macroeconomic aggregates to an exogenous and unexpected rise in government spending financed by lump-sum taxes. In this case, impact output multipliers varies in a range between 0.64 and 0.68, under complete markets, and within 1.05 and 1.20 when markets are incomplete. The results found under incomplete markets are very close to that found on related literature which usually uses an econometric approach or calibrated/estimated New Keynesian models. These results shows that taking into account the deficiencies in the insurance mechanisms can be an interesting way to reconcile theoretical models with the results found on related current literature, without the need of ad-hoc assumptions relative to price stickness.

Endogenous borrowing constraints and default when markets are incomplete

Incomplete markets and non-default borrowing constraints increase the volatility of pricing kernels and are helpful when addressing assetpricing puzzles. However, ruling out default when markets are in complete is suboptimal. This paper endogenizes borrowing constraints as an intertemporal incentive structure to default. It modeIs an infinitehorizon economy, where agents are allowed not to pay their liabilities and face borrowing constraints that depend on the individual history of default. Those constraints trade off the economy's risk-sharing possibilities and incentives to prevent default. The equilibrium presents stationary properties, such as an invariant distribution for the assets' solvency rate.

Collateral, default penalties and almost finite-time solvency

We argue that it is possible to adapt the approach of imposing restrictions on available plans through finitely effective debt constraints, introduced by Levine and Zame (1996), to encompass models with default and collateral. Along this line, we introduce in the setting of Araujo, Páscoa and Torres-Martínez (2002) and Páscoa and Seghir (2008) the concept of almost finite-time solvency. We show that the conditions imposed in these two papers to rule out Ponzi schemes implicitly restrict actions to be almost finite-time solvent. We define the notion of equilibrium with almost finite-time solvency and look on sufficient conditions for its existence. Assuming a mild assumption on default penalties, namely that agents are myopic with respect to default penalties, we prove that existence is guaranteed (and Ponzi schemes are ruled out) when actions are restricted to be almost finite-time solvent. The proof is very simple and intuitive. In particular, the main existence results in Araujo et al. (2002) and Páscoa and Seghir (2008) are simple corollaries of our existence result.

Bubbles, collateral and monetary equilibrium

Consider an economy where infinite-lived agents trade assets collateralized by durable goods. We obtain results that rule out bubbles when the additional endowments of durable goods are uniformly bounded away from zero, regardless of whether the asset’s net supply is positive or zero. However, bubbles may occur, even for state-price processes that generate finite present value of aggregate wealth. First, under complete markets, if the net supply is being endogenously reduced to zero as a result of collateral repossession. Secondly, under incomplete markets, for a persistent positive net supply, under the general conditions guaranteeing existence of equilibrium. Examples of monetary equilibria are provided.

Speculative attacks on debts and optimum currency area: a welfare analysis

Traditionally the issue of an optimum currency area is based on the theoretical underpinnings developed in the 1960s by McKinnon [13], Kenen [12] and mainly Mundell [14], who is concerned with the benefits of lowering transaction costs vis-à- vis adjustments to asymmetrical shocks. Recently, this theme has been reappraised with new aspects included in the analysis, such as: incomplete markets, credibility of monetary policy and seigniorage, among others. For instance, Neumeyer [15] develops a general equilibrium model with incomplete asset markets and shows that a monetary union is desirable when the welfare gains of eliminating the exchange rate volatility are greater than the cost of reducing the number of currencies to hedge against risks. In this paper, we also resort to a general equilibrium model to evaluate financial aspects of an optimum currency area. Our focus is to appraise the welfare of a country heavily dependent on foreign capital that may suffer a speculative attack on its public debt. The welfare analysis uses as reference the self-fulfilling debt crisis model of Cole and Kehoe ([6], [7] and [8]), which is employed here to represent dollarization. Under this regime, the national government has no control over its monetary policy, the total public debt is denominated in dollars and it is in the hands of international bankers. To describe a country that is a member of a currency union, we modify the original Cole-Kehoe model by including public debt denominated in common currency, only purchased by national consumers. According to this rule, the member countries regain some influence over the monetary policy decision, which is, however, dependent on majority voting. We show that for specific levels of dollar debt, to create inflation tax on common-currency debt in order to avoid an external default is more desirable than to suspend its payment, which is the only choice available for a dollarized economy when foreign creditors decide not to renew their loans.

Competitive equilibria in infinite-horizon collateralized economies with default penalties

Araújo, Páscoa and Torres-Martinez (2002) have shown that, without imposing either debt constraints or transversality conditions, Ponzi schemes are ruled out in infinite horizon economies with default when collateral is the only mechanism that partially secures loans. Páscoa and Seghir (2008) subsequently show that Ponzi schemes may reappear if, additionally to the seizure of the collateral, there are sufficiently harsh default penalties assessed (directly in terms of utility) against the defaulters. They also claim that if default penalties are moderate then Ponzi schemes are ruled out and existence of a competitive equilibrium is ensured. The objective of this paper is two fold. First, contrary to what is claimed by Páscoa and Seghir (2008), we show that moderate default penalties do not always prevent agents to run a Ponzi scheme. Second, we provide an alternative condition on default penalties that is sufficient to rule out Ponzi schemes and ensure the existence of a competitive equilibrium.

Endogenous Transaction Costs

The paper proposes an alternative general equilibrium formulation of financial asset economies with transactions costs. Transaction costs emerge endogenously at equilibrium and reflect agents decisions of intermediating financial activities at the expense of providing labor services. An equilibrium is shown to exist in the case of real asset structures.

Endogenous debt constraints in collateralized economies with default penalties

In infinite horizon financial markets economies, competitive equilibria fail to exist if one does not impose restrictions on agents' trades that rule out Ponzi schemes. When there is limited commitment and collateral repossession is the unique default punishment, Araujo, Páscoa and Torres-Martínez (2002) proved that Ponzi schemes are ruled out without imposing any exogenous/endogenous debt constraints on agents' trades. Recently Páscoa and Seghir (2009) have shown that this positive result is not robust to the presence of additional default punishments. They provide several examples showing that, in the absence of debt constraints, harsh default penalties may induce agents to run Ponzi schemes that jeopardize equilibrium existence. The objective of this paper is to close a theoretical gap in the literature by identifying endogenous borrowing constraints that rule out Ponzi schemes and ensure existence of equilibria in a model with limited commitment and (possible) default. We appropriately modify the definition of finitely effective debt constraints, introduced by Levine and Zame (1996) (see also Levine and Zame (2002)), to encompass models with limited commitment, default penalties and collateral. Along this line, we introduce in the setting of Araujo, Páscoa and Torres-Martínez (2002), Kubler and Schmedders (2003) and Páscoa and Seghir (2009) the concept of actions with finite equivalent payoffs. We show that, independently of the level of default penalties, restricting plans to have finite equivalent payoffs rules out Ponzi schemes and guarantees the existence of an equilibrium that is compatible with the minimal ability to borrow and lend that we expect in our model. An interesting feature of our debt constraints is that they give rise to budget sets that coincide with the standard budget sets of economies having a collateral structure but no penalties (as defined in Araujo, Páscoa and Torres-Martínez (2002)). This illustrates the hidden relation between finitely effective debt constraints and collateral requirements.

Targeting the poor: a macroeconomic analysis of cash transfer programs

This paper introduces cash transfers targeting the poor in an incomplete markets model with heterogeneous agents facing idiosyncratic risk. These transfers change the degree of insurance in the economy and affect precautionary motives asymmetrically, leading the poorest households to decrease savings proportionally more than their richer counterparts. In a model economy calibrated to Brazil, once the cash transfer program is adopted, wealth inequality and social welfare increase, poverty decreases, while employment and income inequality remain about the same. Imperfect access to financial markets is important for these results, whereas whether the program is funded with lump sum or distortive taxes is not.

Approximate recursive equilibrium with minimal state space

This paper shows existence of approximate recursive equilibrium with minimal state space in an environment of incomplete markets. We prove that the approximate recursive equilibrium implements an approximate sequential equilibrium which is always close to a Magill and Quinzii equilibrium without short sales for arbitrarily small errors. This implies that the competitive equilibrium can be implemented by using forecast statistics with minimal state space provided that agents will reduce errors in their estimates in the long run. We have also developed an alternative algorithm to compute the approximate recursive equilibrium with incomplete markets and heterogeneous agents through a procedure of iterating functional equations and without using the rst order conditions of optimality.

Ensaios em Finanças

Esta tese é composta de três artigos sobre finanças. O primeiro tem o título "Nonparametric Option Pricing with Generalized Entropic Estimators " e estuda um método de apreçamento de derivativos em mercados incompletos. Este método está relacionado com membros da família de funções de Cressie-Read em que cada membro fornece uma medida neutra ao risco. Vários testes são feitos. Os resultados destes testes sugerem um modo de definir um intervalo robusto para preços de opções. Os outros dois artigos são sobre anúncios agendados em diferentes situações. O segundo se chama "Watching the News: Optimal Stopping Time and Scheduled Announcements" e estuda problemas de tempo de parada ótimo na presença de saltos numa data fixa em modelos de difusão com salto. Fornece resultados sobre a otimalidade do tempo de parada um pouco antes do anúncio. O artigo aplica os resultados ao tempo de exercício de Opções Americanas e ao tempo ótimo de venda de um ativo. Finalmente o terceiro artigo estuda um problema de carteira ótima na presença de custo fixo quando os preços podem saltar numa data fixa. Seu título é "Dynamic Portfolio Selection with Transactions Costs and Scheduled Announcement" e o resultado mais interessante é que o comportamento do investidor é consistente com estudos empíricos sobre volume de transações em momentos próximos de anúncios.