On the relevance of modeling volatility for pricing purposes

This paper presents a two-factor (Vasicek-CIR) model of the term structure of interest rates and develops its pricing and empirical properties. We assume that default free discount bond prices are determined by the time to maturity and two factors, the long-term interest rate and the spread. Assuming a certain process for both factors, a general bond pricing equation is derived and a closed-form expression for bond prices is obtained. Empirical evidence of the model's performance in comparisson with a double Vasicek model is presented. The main conclusion is that the modeling of the volatility in the long-term rate process can help (in a large amount) to fit the observed data can improve - in a reasonable quantity - the prediction of the future movements in the medium- and long-term interest rates. However, for shorter maturities, it is shown that the pricing errors are, basically, negligible and it is not so clear which is the best model to be used.

Centralização versus Descentralização na Governação do Sistema Educativo de Cabo Verde: Lógicas em Análise

Nesta dissertação procura-se analisar a problemática da “Centralização versus Descentralização na Governação do Sistema Educativo de Cabo Verde: lógicas em análise” no período compreendido entre (1975 a 2006). Constata-se que Cabo Verde, depois de se tornar um país soberano e independente, assistiu a momentos de grande concentração e de grande centralização na administração do Sistema Educativo. Ao longo deste período assistiuse também a momentos de desconcentração e de ideias de descentralização que culminaram com a abertura do sistema político pluripartidário. Essa abertura abriu a possibilidade de uma nova dinâmica de transformação nos deferentes sectores da administração do sistema educacional. As mudanças políticas verificadas no país, permite-nos conhecer e desocultar as razões, as lógicas e as racionalidades que presidem a manutenção de um sistema centralizado de governação do Sistema Educativo, apesar da presença de forças políticas com diversidades ideológicas. Uma vez conhecido o historial da organização, administração e gestão do Sistema Educativo Cabo-verdiano, a partir de uma retrospectiva histórica, debruçámo-nos sobre as principais teorias que estão na base das perspectivas da centralização e descentralização, e seus conceitos associados enquanto modelo de análise teórica, para tentar perceber este aparente paradoxo. Na parte empírica, a metodologia utilizada apoia-se na abordagem qualitativa de investigação, na qual utilizámos a entrevista, a análise documental e conversas informais, que nos permitiram confirmar ou infirmar a problemática inicialmente formulada. Os dados obtidos dez entrevistados, nomeadamente os responsáveis da política educativa, os administradores do sistema, e os directores dos estabelecimentos de ensino público, levam-nos a tirar várias conclusões sobre um Sistema Educativo centralizado, com uma relativa margem de autonomia. Apesar de encontrarem algumas vantagens no modelo centralizado, a maioria dos entrevistados sublinha a relevância da opção por um modelo descentralizado de governação do Sistema Educativo.

How enforcement institutions affect markets

In an experiment we study market outcomes under alternative incentive structures for third-party enforcers. Our transactions resemble an anonymous credit market where lenders can give loans and borrowers can repay them. When borrowers default, judges are free to enforce repayment but are themselves paid differently in each of three treatments. First, paying judges according to lenders votes maximizes surplus and the equality of earnings. In contrast, paying judges according to borrowers votes triggers insufficient enforcement, destroying the market and producing the lowest surplus and the most unequal distribution of earnings. Lastly, judges paid the average earnings of borrowers and lenders achieve results close to those based on lender voting. We employ a steps-of-reasoning argument to interpret the performances of different institutions. When voting and enforcement rights are allocated to different classes of actors, the difficulty of their task changes, and arguably as a consequence they focus on high or low surplus equilibria.

Trade credit: Suppliers as debt collectors and insurance providers

There are two fundamental puzzles about trade credit: why does it appearto be so expensive,and why do input suppliers engage in the business oflending money? This paper addresses and answers both questions analysingthe interaction between the financial and the industrial aspects of thesupplier-customer relationship. It examines how, in a context of limitedenforceability of contracts, suppliers may have a comparative advantageover banks in lending to their customers because they hold the extrathreat of stopping the supply of intermediate goods. Suppliers may alsoact as lenders of last resort, providing insurance against liquidityshocks that may endanger the survival of their customers. The relativelyhigh implicit interest rates of trade credit result from the existenceof default and insurance premia. The implications of the model areexamined empirically using parametric and nonparametric techniques on apanel of UK firms.

The overhang hangover

We revisit the debt overhang question. We first use non-parametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent)growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, we depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, we ask whether, as overhang level of debt is reached: (i)investment falls precipitously as it should when it becomes optimal to default, (ii) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor, and (iii) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to pre-empt default and exact punitive interest rates. We find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing, or the burden of debt.

The acquisition of pronouns by French children: A parallel study of production and comprehension

This study examines syntactic and morphological aspects of the production and comprehension of pronouns by 99 typically developing French-speaking children aged 3 years, 5 months to 6 years, 5 months. A fine structural analysis of subject, object, and reflexive clitics suggests that whereas the object clitic chain crosses the subject chain, the reflexive clitic chain is nested within it. We argue that this structural difference introduces differences in processing complexity, chain crossing being more complex than nesting. In support of this analysis, both production and comprehension experiments show that children have more difficulty with object than with reflexive clitics (with more omissions in production and more erroneous judgments in sentences involving Principle B in comprehension). Concerning the morphological aspect, French subject and object pronouns agree in gender with their referent. We report serious difficulties with pronoun gender both in production and comprehension in children around the age of 4 (with nearly 30% errors in production and chance level judgments in comprehension), which tend to disappear by age 6. The distribution of errors further suggests that the masculine gender is processed as the default value. These findings provide further insights into the relationship between comprehension and production in the acquisition process.

Will the Convention on Biological Diversity put an end to biological control?

Will the Convention on Biological Diversity put an end to biological control? Under the Convention on Biological Diversity countries have sovereign rights over their genetic resources. Agreements governing the access to these resources and the sharing of the benefits arising from their use need to be established between involved parties. This also applies to species collected for potential use in biological control. Recent applications of access and benefit sharing principles have already made it difficult or impossible to collect and export natural enemies for biological control research in several countries. If such an approach is widely applied it would impede this very successful and environmentally safe pest management method based on the use of biological diversity. The International Organization for Biological Control of Noxious Animals and Plants has, therefore, created the "Commission on Biological Control and Access and Benefit Sharing". This commission is carrying out national and international activities to make clear how a benefit sharing regime might seriously frustrate the future of biological control. In addition, the IOBC Commission members published information on current regulations and perceptions concerning exploration for natural enemies and drafted some 30 case studies selected to illustrate a variety of points relevant to access and benefit sharing. In this article, we summarize our concern about the effects of access and benefit sharing systems on the future of biological control.

A two-mean reverting-factor model of the term structure of interest rates

This paper presents a two--factor model of the term structure ofinterest rates. We assume that default free discount bond prices aredetermined by the time to maturity and two factors, the long--term interestrate and the spread (difference between the long--term rate and theshort--term (instantaneous) riskless rate). Assuming that both factorsfollow a joint Ornstein--Uhlenbeck process, a general bond pricing equationis derived. We obtain a closed--form expression for bond prices andexamine its implications for the term structure of interest rates. We alsoderive a closed--form solution for interest rate derivatives prices. Thisexpression is applied to price European options on discount bonds andmore complex types of options. Finally, empirical evidence of the model'sperformance is presented.

Gross capital flows: Dynamics and crises

This paper analyzes the behavior of international capital flows by foreign and domestic agents,dubbed gross capital flows, over the business cycle and during financial crises. We show thatgross capital flows are very large and volatile, especially relative to net capital flows. Whenforeigners invest in a country, domestic agents invest abroad, and vice versa. Gross capital flowsare also pro-cyclical. During expansions, foreigners invest more domestically and domesticagents invest more abroad. During crises, total gross flows collapse and there is a retrenchmentin both inflows by foreigners and outflows by domestic agents. These patterns hold for differenttypes of capital flows and crises. This evidence sheds light on the sources of fluctuations drivingcapital flows and helps discriminate among existing theories. Our findings seem consistent withcrises affecting domestic and foreign agents asymmetrically, as would be the case under thepresence of sovereign risk or asymmetric information.

Recreating the South Sea bubble: Lessons from an experiment in financial history

Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which aspect might have had the most impact in creating the South Sea bubble. The results of the experiment suggest that the company?s attempt to exchange its shares for government debt was the single biggest contributor to the stock price explosion, because of the manner in which the swap affected fundamental value. Issuing new shares with only partial payments required, in conjunction with the debt-equity swap, also had a significant effect on the size of the bubble. Limited contract enforcement, on the other hand, does not appear to have contributed significantly.

Méthylphénydate et abus

Le méthylphénidate est un stimulant du système nerveux central, proche des amphétamines par son mécanisme d'action, commercialisé depuis les années cinquante, initialement pour le traitement de la narcolepsie et de la fatigue chronique. Son potentiel addictif est connu de longue date: un des premiers cas publiés remonte à 19601). Il est soumis à la Loi fédérale sur les stupéfiants. Reconnu ultérieurement comme un traitement efficace des troubles déficitaires de l'attention avec ou sans hyperactivité (TDA-H) de l'enfant et de l'adolescent, le méthylphénidate (Ritaline®, Concerta®) a vu ses ventes fortement augmenter à partir des années quatre-vingt-dix, d'abord en Amérique du Nord puis en Europe. Le diagnostic de TDA-H pourrait concerner 3 à 5% des moins de dix-huit ans, voire plus selon certaines études. Plus récemment, on a identifié ce trouble chez des adultes, auxquels s'est alors élargi le champ de prescription du médicament. Cet engouement, de loin pas toujours justifié2), pour le méthylphénidate peut faire craindre une recrudescence des abus. L'objectif de cet article est de comparer le potentiel addictif du méthylphénidate à celui d'autres stimulants et de passer en revue la fréquence et les modalités d'abus dans différentes populations. Enfin, les abus de méthylphénidate recensés par le Centre Suisse d'Information Toxicologique (CSIT) entre 1996 et 2009, seules données disponibles en Suisse, sont analysés rétrospectivement.

Relationship and transaction lending in a crisis

We study how relationship lending and transaction lending varyover the business cycle. We develop a model in which relationshipbanks gather information on their borrowers, which allows them toprovide loans for profitable firms during a crisis. Due to the servicesthey provide, operating costs of relationship-banks are higher thanthose of transaction-banks. In our model, where relationship-bankscompete with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread in normal times, butoffer continuation-lending at more favorable terms than transactionbanks to profitable firms in a crisis. Using detailed credit registerinformation for Italian banks before and after the Lehman Brothers'default, we are able to study how relationship and transaction-banksresponded to the crisis and we test existing theories of relationshipbanking. Our empirical analysis confirms the basic prediction of themodel that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response tothe crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.

Essays in general equilibrium asset pricing

ABSTRACT : Research in empirical asset pricing has pointed out several anomalies both in the cross section and time series of asset prices, as well as in investors' portfolio choice. This dissertation aims to discover the forces driving some of these "puzzling" asset pricing dynamics and portfolio decisions observed in the financial market. Through the dissertation I construct and study dynamic general equilibrium models of heterogeneous investors in the presence of frictions and evaluate quantitatively their implications for financial-market asset prices and portfolio choice. I also explore the potential roots of puzzles in international finance. Chapter 1 shows that, by introducing jointly endogenous no-default type of borrowing constraints and heterogeneous beliefs in a dynamic general-equilibrium economy, many empirical features of stock return volatility can be reproduced. While most of the research on stock return volatility is empirical, this paper provides a theoretical framework that is able to reproduce simultaneously the cross section and time series stylized facts concerning stock returns and their volatility. In contrast to the existing theoretical literature related to stock return volatility, I don't impose persistence or regimes in any of the exogenous state variables or in preferences. Volatility clustering, asymmetry in the stock return-volatility relationship, and pricing of multi-factor volatility components in the cross section all arise endogenously as a consequence of the feedback between the binding of no-default constraints and heterogeneous beliefs. Chapters 2 and 3 explore the implications of differences of opinion across investors in different countries for international asset pricing anomalies. Chapter 2 demonstrates that several international finance "puzzles" can be reproduced by a single risk factor which captures heterogeneous beliefs across international investors. These puzzles include: (i) home equity preference; (ii) the dependence of firm returns on local and foreign factors; (iii) the co-movement of returns and international capital flows; and (iv) abnormal returns around foreign firm cross-listing events in the local market. These are reproduced in a setup with symmetric information and in a perfectly integrated world with multiple countries and independent processes producing the same good. Chapter 3 shows that by extending this framework to multiple goods and correlated production processes; the "forward premium puzzle" arises naturally as a compensation for the heterogeneous expectations about the depreciation of the exchange rate held by international investors. Chapters 2 and 3 propose differences of opinion across international investors as the potential resolution of several international finance `puzzles'. In a globalized world where both capital and information flow freely across countries, this explanation seems more appealing than existing asymmetric information or segmented markets theories aiming to explain international finance puzzles.