The dog that did not bark: Insider trading and crashes

This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution. Finally we provide new evidence regarding crashes and the degree of information asymmetry.

The structural dynamics of US output and inflation: What explains the changes?

We examine the dynamics of US output and inflation using a structural time varyingcoefficient VAR. We show that there are changes in the volatility of both variables andin the persistence of inflation. Technology shocks explain changes in output volatility,while a combination of technology, demand and monetary shocks explain variations inthe persistence and volatility of inflation. We detect changes over time in the transmission of technology shocks and in the variance of technology and of monetary policyshocks. Hours and labor productivity always increase in response to technology shocks.

Overconfidence and market efficiency with heterogeneous agents

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not aect informational efficiency, price volatility, rational traders expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.

What explains the Great Moderation in the US? A structural analysis

This paper investigates what has caused output and inflation volatility to fall in the USusing a small scale structural model using Bayesian techniques and rolling samples. Thereare instabilities in the posterior of the parameters describing the private sector, the policyrule and the standard deviation of the shocks. Results are robust to the specification ofthe policy rule. Changes in the parameters describing the private sector are the largest,but those of the policy rule and the covariance matrix of the shocks explain the changes most.

Systemic crises and growth

In this paper, we document the fact that countries that have experienced occasional financial crises have on average grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where weak institutions lead to severe financial constraints and low growth. Financial liberalization policies that facilitaterisk-taking increase leverage and investment. This leads to higher growth, but also toa greater incidence of crises. Conditions are established under which the costs of crises are outweighed by the benefits of higher growth.

Asset pricing with idiosyncratic risk and overlapping generations

A number of existing studies have concluded that risk sharing allocations supported by competitive, incomplete markets equilibria are quantitatively close to first-best. Equilibrium asset prices in these models have been difficult to distinguish from those associated with a complete markets model, the counterfactual features of which have been widely documented. This paper asks if life cycle considerations, in conjunction with persistent idiosyncratic shocks which become more volatile during aggregate downturns, can reconcile the quantitative properties of the competitive asset pricing framework with those of observed asset returns. We begin by arguing that data from the Panel Study on Income Dynamics support the plausibility of such a shock process. Our estimates suggest a high degree of persistence as well as a substantial increase in idiosyncratic conditional volatility coincident with periods of low growth in U.S. GNP. When these factors are incorporated in a stationary overlapping generations framework, the implications for the returns on risky assets are substantial. Plausible parameterizations of our economy are able to generate Sharpe ratios which match those observed in U.S. data. Our economy cannot, however, account for the level of variability of stock returns, owing in large part to the specification of its production technology.

Cape Verde - Diagnostic Trade Inttegration study Update - 2013

This Report is an update of the Cape Verde Diagnostic Trade Integration Study, titled Cape Verde’s Insertion into the Global Economy, produced and validated by the Government of Cape Verde in December 2008. Like the previous 2008 study, this Cape Verde Diagnostic Trade Integration Study Update provides a critical examination of the major institutional and production constraints that hinder Cape Verde’s ability to capitalize fully on the growth and welfare gains from its integration into the world economy. As a policy report, this study offers a set of priority policies and measures that can be implemented by both the public and private sectors to mitigate and surmount these supply side and institutional constraints. These recommendations are summarized in an Action Matrix. The Report is fruit of the generous support of the multi-donor program the Enhanced Integrated Framework (EIF). In every crisis there is an opportunity. Four years after the validation of the country’s first Diagnostic Trade Integration Study in 2008, Cape Verde finds itself in a drastically altered external environment. Cape Verde faces a worsened external environment than four years ago, when it was also traversing years of crisis as global food and energy prices escalated. Just as the country was validating its first trade study in late 2008, and celebrating its graduation from the list of Least Developed Countries, the onset of the deepest global recession in recent memory triggered an even worse external situation as the country’s principal source of markets, investments, remittances and aid, the Eurozone, unraveled economically and politically. As the Eurozone crisis spread, it was Cape Verde’s misfortune that the crisis contaminated precisely its biggest Eurozone partners and donors, such as Portugal, Spain and Italy. For such a highly dependent and exposed economy like that of Cape Verde, the deteriorating external sector has had a substantial negative impact on its macroeconomic performance. At the time of the validation workshop and graduation in 2008, no one could have foreseen or predicted the severity of the global crisis that followed. Despite traversing these years of adversity and external shocks, and suffering palpable setbacks, Cape Verde’s economy had proven surprisingly resilient, especially its principal sector, tourism. To its great credit, the country’s economic fundamentals are solid, and have been carefully and prudently managed over the years. For this reason alone, the country has thus far weathered the global and Eurozone crisis. Yet the near and medium term future remains uncertain. The country’s margin for maneuver has narrowed, its options far more limited, and hard choices lie ahead. Thus, there is no better time than now to analyze Cape Verde’s position in the global economy, and to examine the many challenges and opportunities it faces. The first diagnostic trade study outlined an ambitious agenda and set of policy strategies to enhance Cape Verde’s participation in the global economy. Written prior to the global crisis, the study did not, and could not, anticipate the scope and depth of the subsequent global and Eurozone crises. A few short months before the validation of the first DTIS Cape Verde joined the World Trade Organization (WTO). It has spent these four years adjusting to this status and implementing its commitments. At the same time, the country seeks greater economic integration with the European Union. Since 2008 the government has been investing heavily in the country’s economic infrastructure, focusing especially on fostering transformation in key sectors like agriculture, fisheries, tourism and creative industries. For these and many other reasons, it is both timely and urgent to review the road traveled since 2008. It is an opportune moment to reassess the country’s options, to rethink strategies, and to chart a new way forward that it is practical, implementable, and that builds on the country’s competitive advantages and current successes.

Mixed equilibrium in a Downsian model with a favored candidate

This paper examines competition in the standard one-dimensional Downsian model of two-candidate elections, but where one candidate (A) enjoys an advantage over the other candidate (D). Voters' preferences are Euclidean, but any voter will vote for candidate A over candidate D unless D is closer to her ideal point by some fixed distance \delta. The location of the median voter's ideal point is uncertain, and its distribution is commonly known by both candidates. The candidates simultaneously choose locations to maximize the probability of victory. Pure strategy equilibria often fails to exist in this model, except under special conditions about \delta and the distribution of the median ideal point. We solve for the essentially unique symmetric mixed equilibrium, show that candidate A adopts more moderate policies than candidate D, and obtain some comparative statics results about the probability of victory and the expected distance between the two candidates' policies.

Why are capital flows so much more volatile in emerging than in developed countries?

The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks ( crises ) than those to developed countries, (ii) shocks are subject to contagion, and (iii) the most important one shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility.

On the sources of the Great Moderation

The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. That evidencepoints to structural change, as opposed to just good luck, as an explanation for the Great Moderation. We use a simple macro model to suggest some of the immediate sources which are likely to be behindthe observed changes.

Downsizing, job insecurity and firm reputation

This paper studies how firms make layoff decisions in the presence of adverse shocks. In this uncertain environment, workers' expectations about their job security affect their on-the-job performance. This productivity effect on job insecurity forces firms to strike a balance between laying off redundant workers and maintaining survivors' commitment when deciding on the amount and timing of downsizing. This framework offers an explanation of conservative employment practices (such as zero or reduced layoffs) based on firms having private information about their future profits. High retention rates and wages can signal that the firm has a bright future, boosting workers' confidence. Moreover, the model provides clear predictions about when waves of downsizing will occur as opposed to one-time massive cuts.

Financing constraints and fixed-term employment contracts

This paper studies the interactions between financing constraints and theemployment decisions of firms when both fixed-term and permanent employmentcontracts are available. We first develop a dynamic model that shows theeffects of financing constraints and firing costs on employment decisions. Oncecalibrated, the model shows that financially constrained firms tend to use moreintensely fixed term workers, and to make them absorb a larger fraction of thetotal employment volatility than financially unconstrained firms do. We testand confirm the predictions of the model on a unique panel data of Italian manufacturingfirms with detailed information about the type of workers employedby the firms and about firm financing constraints.

Firms vs. insiders as traders of last resort

We explore the role of corporate insiders vs. firms as traders of last resort. We develop a simple model of insider trading in which insiders provide price support, as well as liquidity, in security markets. Consistent with the model predictions we find that in the US markets insiders trading activities have a clear impact on return distributions. Furthermore, we provide empirical evidence on insiders transactions and firm transactions affecting returns in a different manner. In particular, while insiders transactions (both purchases and sales) have a strong impact on skewness in the short run and to a lesser extent in short run volatility, company repurchases only have a clear impact on volatility, both in the short and the long run. We provide explanations for this asymmetry.

Reputation and honesty in a market for information

Previous works on asymmetric information in asset markets tendto focus on the potential gains in the asset market itself. We focus on the market for information and conduct an experimental study to explore, in a game of finite but uncertain duration, whether reputation can be an effective constraint on deliberate misinformation. At the beginning of each period, an uninformed potential asset buyer can purchase information, at a fixed price and from a fully-informed source, about the value of the asset in that period. The informational insiders cannot purchase the asset and are given short-term incentives to provide false information when the asset value is low. Our model predicts that, in accordance with the Folk Theorem, Pareto-superior outcomes featuring truthful revelation should be sustainable. However, this depends critically on beliefs about rationality and behavior. We find that, overall, sellers are truthful 89% of the time. More significantly, the observed frequency of truthfulness is 81% when the asset value is low. Our result is consistent with both mixed-strategy and trigger strategy interpretations and provides evidence that most subjects correctly anticipate rational behavior. We discuss applications to financial markets, media regulation, and the stability of cartels.

ARE PPARS NOVEL THERAPEUTIC TARGETS TO IMPROVE MELANOMA TREATMENT ?

Cutaneous melanoma is an aggressive malignant tumor of melanocytes, the pigment- producing cells of the epidermis, with a high incidence in developed countries. Despite some major clinical breakthroughs in the last few years, efficient therapies for metastatic melanoma, which portends a very bad prognosis, are still lacking. Among the potential therapeutic targets that have been attracting at-tention in melanoma are the peroxisome proliferator-activated receptors (PPARs). These members - a, ß and 7 - of the nuclear hormone receptor family, which are ligand-gated transcription factors endowed with a multitude of functions besides metabolism homeostasis, have displayed promising antitumor properties in a wide range of cancer cells, including melanoma. However, our knowledge of PPARs' functions in this skin cancer is far from complete, making the usefulness of any of the a, ß or 7 isotype as a therapeutic target uncertain. In this work, we showed that all three PPAR isotypes are expressed in normal melanocytes, in most melanoma cell lines and in primary and metastatic melanomas, and that PPAR/3 and 7 display transcriptional activity in normal melanocytes and melanoma cells. We also showed that the PPAR7 agonist rosiglitazone had anti-melanoma properties largely independent of PPAR7 expression, which was widely varying across the different cell lines and melanoma biopsies we evaluated and was not correlated with cell line stage. Consistent with the general view of PPAR7 as a tumor suppressor gene, we found that, in human samples, PPAR7 was less expressed in melanoma than in normal skin. Transcriptornic profiling of metastatic melanoma cells in which PPAR7 was pharmacologically modulated revealed an association with epithelial-to-mesenchymal transition, though the functional relevance of this finding remains to be determined. Collectively, our results suggests that PPAR7 activity in melanoma is highly complex and that a straightforward picture of PPAR7's role in this skin cancer is difficult to draw. In this study, we also provided compelling evidence that thioredoxin interacting protein (TXNIP) is, in melanoma, a bona fide PPAR7 target gene, the expression of which is repressed by PPAR7 activation. Although TXNIP is mostly known as an inhibitor of the major antioxidant thioredoxin, it has demonstrated a range of biological functions and is generally considered as a tumor suppressor gene. Consistently, we found that TXNIP expression is associated with growth arrest of melanoma cells in vitro and that forced expression of TXNIP strongly impairs cell proliferation. Interestingly, we also discovered that TXNIP favors melanoma cell migration while it diminishes their adhesion. Finally, we provided several lines of evidence that TXNIP may regulate these processes at the transcriptional level as well as by direct protein-protein interactions in the plasma membrane. Altogether, our findings suggest that the PPAR7 target TXNIP may be a double-edged sword in melanoma, hindering tumor growth but promoting invasion and dissemination. Experiments to evaluate the net biological outcome of TXNIP modulation in vivo are ongoing. -- Le mélanome cutané est une tumeur maligne agressive des mélanocytes, cellules de l'épiderme qui produisent la mélanine. Ce cancer présente un taux d'incidence élevé dans les pays développés et est grevé d'un pronostic très sombre une fois qu'il a disséminé. Malgré les importants progrès réalisés ces dernières années, aucune thérapie lie s'est encore montrée véritablement efficace contre le mélanome métastatique. Parmi les cibles thérapeutiques potentielles, nombre de groupes de recherche se sont penchés sur les peroxisome proliferator-activated receptors (PPARs). Ces récepteurs - a, ß et 7 - font partie de la famille des récepteurs nucléaires aux hormones, des facteurs de transcription activés par des ligands et dotés d'une multitude de fonctions en sus de la régulation du métabolisme. Ces protéines ont démontré des propriétés anti-tumorales prometteuses dans une large gamme de cellules cancéreuses, y compris le mélanome. Cependant, nous connaissons encore très mal les fonctions des PPARs dans ce cancer de la peau, rendant l'utilité thérapeutique de l'un des isotypes a, ß ou 7 incertaine. Dans ce travail, nous avons montré que les trois isotypes sont exprimés dans les mélanocytes normaux, dans la plupart des lignées de mélanome ainsi que dans des mélanomes primaires et métastatiques; nous avons aussi montré que PPAR/3 et 7 sont actifs sur le plan transcriptionnel dans les mélanocytes normaux et les cellules de mélanome. La rosiglitazone, un agoniste de PPAR7, a démontré des propriétés anti-mélanome essentiellement indépendantes de l'expression de PPAR7, qui semble très variable dans les lignées et les biopsies que nous avons évaluées; de plus, l'expression de PPAR7 n'est pas corrélée avec le stade de la lignée. En accord avec la vision communément admise de PPAR7 comme étant un gène suppresseur de tumeur, nous avons observé dans des échantillons humains que PPAR7 est moins exprimé dans les mélanomes que dans la peau normale. Une étude transcrip- tomique de cellules de mélanome métastatique a révélé que la modulation phar-macologique de PPAR7 est associée avec la transition épithélio-mésenchymateuse, même si la pertinence fonctionnelle de cette trouvaille reste à déterminer. Collec-tivement, ces résultats suggèrent que l'activité de PPAR/y dans le mélanome est hautement complexe et qu'une image claire du rôle de PPAR7 dans ce cancer est difficile à dessiner. Dans cette étude, nous avons également fourni de solides preuves que la thiore-doxin interacting protein (TXNIP) est, dans le mélanome, un gène cible bona fide de PPAR7 dont l'expression est réprimée par l'activation de PPAR7. Bien que TXNIP soit surtout connu comme un inhibiteur de la thiorédoxine -un anti-oxydant majeur - cette protéine a démontré une large gamme de fonctions biologiques et est généralement considérée comme un gène suppresseur de tumeur. En accord avec cette conception, nous avons trouvé que l'expression de TXNIP est associée avec l'arrêt de croissance des cellules de mélanome in vitro et que l'expression forcée de TXNIP freine considérablement la prolifération cellulaire. Nous avons aussi découvert que TXNIP favorise la migration des cellules de mélanome alors qu'elle diminue leur adhésion. Enfin, nous avons obtenu plusieurs preuves que TXNIP pourrait réguler ces processus tant au niveau transcriptionnel que par des interactions protéine-protéine au sein de la membrane plasmique. En conclusion, nos résultats suggèrent que la cible de PPAR7 TXNIP pourrait être une épée à double tranchant dans le mélanome, freinant la croissance tumorale mais favorisant l'invasion et la dissémination. Des expériences permettant d'évaluer l'effet biologique net de la modulation de TXNIP in vivo sont en cours.