Why do emerging economies borrow short term?

We argue that one reason why emerging economies borrow short term is that it is cheaperthan borrowing long term. This is especially the case during crises, as in these episodes therelative cost of long-term borrowing increases. We construct a unique database of sovereignbond prices, returns, and issuances at di¤erent maturities for 11 emerging economies from 1990to 2009 and present a set of new stylized facts. On average, these countries pay a higher riskpremium on long-term than on short-term bonds. During crises, the di¤erence between the tworisk premia increases and issuance shifts towards shorter maturities. To illustrate our argument,we present a simple model in which the maturity structure is the outcome of a risk sharingproblem between an emerging economy subject to rollover crises and risk averse internationalinvestors.

Asset pricing implications of benchmarking: A two-factor CAPM

In this paper we consider the equilibrium effects of an institutionalinvestor whose performance is benchmarked to an index. In a partialequilibrium setting, the objective of the institutional investor is modeledas the maximization of expected utility (an increasing and concave function,in order to accommodate risk aversion) of final wealth minus a benchmark.In equilibrium this optimal strategy gives rise to the two-beta CAPM inBrennan (1993): together with the market beta a new risk-factor (that wecall active management risk) is brought into the analysis. This new betais deffined as the normalized (to the benchmark's variance) covariancebetween the asset excess return and the excess return of the market overthe benchmark index. Different to Brennan, the empirical test supports themodel's predictions. The cross-section return on the active management riskis positive and signifficant especially after 1990, when institutionalinvestors have become the representative agent of the market.

When in peril, retrench: Testing the portfolio channel of contagion

One plausible mechanism through which financial market shocks may propagate across countriesis through the impact that past gains and losses may have on investors risk aversion and behavior. This paper presents a stylized model illustrating how heterogeneous changes in investors risk aversion affect portfolio allocation decisions and stock prices. Our empirical findings suggest that when funds returns are below average, they adjust their holdings toward the average (or benchmark) portfolio. In so doing, funds tend to sell the assets of countries in which they were overweight , increasing their exposure to countries in which they were underweight. Based on this insight, the paper constructs an index of financial interdependence which reflects the extent to which countries share overexposed funds. The index helps in explain the pattern of stock market comovement across countries. Moreover, a comparison of this interdependence measure to indices of trade or commercial bank linkages indicates that our index can improve predictions about which countries are more likely to be affected by contagion from crisis centers.

Markups, gaps and the welfare costs of business fluctuations

In this paper we present a simple theory-based measure of the variations in aggregate economic efficiency: the gap between the marginal product of labor and the household s consumption/leisure tradeoff. We show that this indicator corresponds to the inverse of the markup of price over social marginal cost, and give some evidence in support of this interpretation. We then show that, with some auxilliary assumptions our gap variable may be used to measure the efficiency costs of business fluctuations. We find that the latter costs are modest on average. However, to the extent the flexible price equilibrium is distorted,the gross efficiency losses from recessions and gains from booms may be large. Indeed, we find that the major recessions involved large efficiency losses. These results hold for reasonable parameterizations of the Frisch elasticity of labor supply, the coefficient of relative risk aversion, and steady state distortions.

Reflections on gains and losses: A 2x2x7 experiment

We test whether risk attitudes change when losses instead of gains areinvolved. The study of gain-loss asymmetries has been largely confinedto reflected choices, where all the money amounts of a positiveprospect are multiplied by minus one. We define the decomposition reflection = translation + probability switch, and experimentally findboth a translation effect (risk attraction becomes more frequent whengains are translated into losses) and a probability switch effect (riskattraction becomes more frequent when the probability of the best outcomedecreases). Surprisingly, the switch effect is somewhat stronger than thetranslation effect, negating a conventional reflection effect when onestarts with choices between gains with a low probability of the bestoutcome. We conclude by arguing that, while both the translation effectand the switch effect contradict the expected utility hypothesis, thetranslation effect implies a deeper violation of standard preference theory.

Unemployment insurance with endogenous search intensity and precautionary saving

A welfare analysis of unemployment insurance (UI) is performed in a generalequilibrium job search model. Finitely-lived, risk-averse workers smooth consumption over time by accumulating assets, choose search effort whenunemployed, and suffer disutility from work. Firms hire workers, purchasecapital, and pay taxes to finance worker benefits; their equity is the assetaccumulated by workers. A matching function relates unemployment, hiringexpenditure, and search effort to the formation of jobs. The model is calibrated to US data; the parameters relating job search effort to the probability of job finding are chosen to match microeconomic studies ofunemployment spells. Under logarithmic utility, numerical simulation shows rather small welfaregains from UI. Even without UI, workers smooth consumption effectivelythrough asset accumulation. Greater risk aversion leads to substantiallylarger welfare gains from UI; however, even in this case much of its welfareimpact is due not to consumption smoothing effects, but rather to decreased work disutility, or to a variety of externalities.

Behavioural queueing : cellular automata and a laboratory experiment

Dans cette thèse, nous étudions les aspects comportementaux d'agents qui interagissent dans des systèmes de files d'attente à l'aide de modèles de simulation et de méthodologies expérimentales. Chaque période les clients doivent choisir un prestataire de servivce. L'objectif est d'analyser l'impact des décisions des clients et des prestataires sur la formation des files d'attente. Dans un premier cas nous considérons des clients ayant un certain degré d'aversion au risque. Sur la base de leur perception de l'attente moyenne et de la variabilité de cette attente, ils forment une estimation de la limite supérieure de l'attente chez chacun des prestataires. Chaque période, ils choisissent le prestataire pour lequel cette estimation est la plus basse. Nos résultats indiquent qu'il n'y a pas de relation monotone entre le degré d'aversion au risque et la performance globale. En effet, une population de clients ayant un degré d'aversion au risque intermédiaire encoure généralement une attente moyenne plus élevée qu'une population d'agents indifférents au risque ou très averses au risque. Ensuite, nous incorporons les décisions des prestataires en leur permettant d'ajuster leur capacité de service sur la base de leur perception de la fréquence moyenne d'arrivées. Les résultats montrent que le comportement des clients et les décisions des prestataires présentent une forte "dépendance au sentier". En outre, nous montrons que les décisions des prestataires font converger l'attente moyenne pondérée vers l'attente de référence du marché. Finalement, une expérience de laboratoire dans laquelle des sujets jouent le rôle de prestataire de service nous a permis de conclure que les délais d'installation et de démantèlement de capacité affectent de manière significative la performance et les décisions des sujets. En particulier, les décisions du prestataire, sont influencées par ses commandes en carnet, sa capacité de service actuellement disponible et les décisions d'ajustement de capacité qu'il a prises, mais pas encore implémentées. - Queuing is a fact of life that we witness daily. We all have had the experience of waiting in line for some reason and we also know that it is an annoying situation. As the adage says "time is money"; this is perhaps the best way of stating what queuing problems mean for customers. Human beings are not very tolerant, but they are even less so when having to wait in line for service. Banks, roads, post offices and restaurants are just some examples where people must wait for service. Studies of queuing phenomena have typically addressed the optimisation of performance measures (e.g. average waiting time, queue length and server utilisation rates) and the analysis of equilibrium solutions. The individual behaviour of the agents involved in queueing systems and their decision making process have received little attention. Although this work has been useful to improve the efficiency of many queueing systems, or to design new processes in social and physical systems, it has only provided us with a limited ability to explain the behaviour observed in many real queues. In this dissertation we differ from this traditional research by analysing how the agents involved in the system make decisions instead of focusing on optimising performance measures or analysing an equilibrium solution. This dissertation builds on and extends the framework proposed by van Ackere and Larsen (2004) and van Ackere et al. (2010). We focus on studying behavioural aspects in queueing systems and incorporate this still underdeveloped framework into the operations management field. In the first chapter of this thesis we provide a general introduction to the area, as well as an overview of the results. In Chapters 2 and 3, we use Cellular Automata (CA) to model service systems where captive interacting customers must decide each period which facility to join for service. They base this decision on their expectations of sojourn times. Each period, customers use new information (their most recent experience and that of their best performing neighbour) to form expectations of sojourn time at the different facilities. Customers update their expectations using an adaptive expectations process to combine their memory and their new information. We label "conservative" those customers who give more weight to their memory than to the xiv Summary new information. In contrast, when they give more weight to new information, we call them "reactive". In Chapter 2, we consider customers with different degree of risk-aversion who take into account uncertainty. They choose which facility to join based on an estimated upper-bound of the sojourn time which they compute using their perceptions of the average sojourn time and the level of uncertainty. We assume the same exogenous service capacity for all facilities, which remains constant throughout. We first analyse the collective behaviour generated by the customers' decisions. We show that the system achieves low weighted average sojourn times when the collective behaviour results in neighbourhoods of customers loyal to a facility and the customers are approximately equally split among all facilities. The lowest weighted average sojourn time is achieved when exactly the same number of customers patronises each facility, implying that they do not wish to switch facility. In this case, the system has achieved the Nash equilibrium. We show that there is a non-monotonic relationship between the degree of risk-aversion and system performance. Customers with an intermediate degree of riskaversion typically achieve higher sojourn times; in particular they rarely achieve the Nash equilibrium. Risk-neutral customers have the highest probability of achieving the Nash Equilibrium. Chapter 3 considers a service system similar to the previous one but with risk-neutral customers, and relaxes the assumption of exogenous service rates. In this sense, we model a queueing system with endogenous service rates by enabling managers to adjust the service capacity of the facilities. We assume that managers do so based on their perceptions of the arrival rates and use the same principle of adaptive expectations to model these perceptions. We consider service systems in which the managers' decisions take time to be implemented. Managers are characterised by a profile which is determined by the speed at which they update their perceptions, the speed at which they take decisions, and how coherent they are when accounting for their previous decisions still to be implemented when taking their next decision. We find that the managers' decisions exhibit a strong path-dependence: owing to the initial conditions of the model, the facilities of managers with identical profiles can evolve completely differently. In some cases the system becomes "locked-in" into a monopoly or duopoly situation. The competition between managers causes the weighted average sojourn time of the system to converge to the exogenous benchmark value which they use to estimate their desired capacity. Concerning the managers' profile, we found that the more conservative Summary xv a manager is regarding new information, the larger the market share his facility achieves. Additionally, the faster he takes decisions, the higher the probability that he achieves a monopoly position. In Chapter 4 we consider a one-server queueing system with non-captive customers. We carry out an experiment aimed at analysing the way human subjects, taking on the role of the manager, take decisions in a laboratory regarding the capacity of a service facility. We adapt the model proposed by van Ackere et al (2010). This model relaxes the assumption of a captive market and allows current customers to decide whether or not to use the facility. Additionally the facility also has potential customers who currently do not patronise it, but might consider doing so in the future. We identify three groups of subjects whose decisions cause similar behavioural patterns. These groups are labelled: gradual investors, lumpy investors, and random investor. Using an autocorrelation analysis of the subjects' decisions, we illustrate that these decisions are positively correlated to the decisions taken one period early. Subsequently we formulate a heuristic to model the decision rule considered by subjects in the laboratory. We found that this decision rule fits very well for those subjects who gradually adjust capacity, but it does not capture the behaviour of the subjects of the other two groups. In Chapter 5 we summarise the results and provide suggestions for further work. Our main contribution is the use of simulation and experimental methodologies to explain the collective behaviour generated by customers' and managers' decisions in queueing systems as well as the analysis of the individual behaviour of these agents. In this way, we differ from the typical literature related to queueing systems which focuses on optimising performance measures and the analysis of equilibrium solutions. Our work can be seen as a first step towards understanding the interaction between customer behaviour and the capacity adjustment process in queueing systems. This framework is still in its early stages and accordingly there is a large potential for further work that spans several research topics. Interesting extensions to this work include incorporating other characteristics of queueing systems which affect the customers' experience (e.g. balking, reneging and jockeying); providing customers and managers with additional information to take their decisions (e.g. service price, quality, customers' profile); analysing different decision rules and studying other characteristics which determine the profile of customers and managers.

Empirical Tests of Asset Pricing Models in Finnish Stock Market

Tämän tutkielman tavoitteena on selvittää mitkä riskitekijät vaikuttavat osakkeiden tuottoihin. Arvopapereina käytetään kuutta portfoliota, jotka ovat jaoteltu markkina-arvon mukaan. Aikaperiodi on vuoden 1987 alusta vuoden 2004 loppuun. Malleina käytetään pääomamarkkinoiden hinnoittelumallia, arbitraasihinnoitteluteoriaa sekä kulutuspohjaista pääomamarkkinoiden hinnoittelumallia. Riskifaktoreina kahteen ensimmäiseen malliin käytetään markkinariskiä sekä makrotaloudellisia riskitekijöitä. Kulutuspohjaiseen pääomamarkkinoiden hinnoinoittelumallissa keskitytään estimoimaan kuluttajien riskitottumuksia sekä diskonttaustekijää, jolla kuluttaja arvostavat tulevaisuuden kulutusta. Tämä työ esittelee momenttiteorian, jolla pystymme estimoimaan lineaarisia sekä epälineaarisia yhtälöitä. Käytämme tätä menetelmää testaamissamme malleissa. Yhteenvetona tuloksista voidaan sanoa, että markkinabeeta onedelleen tärkein riskitekijä, mutta löydämme myös tukea makrotaloudellisille riskitekijöille. Kulutuspohjainen mallimme toimii melko hyvin antaen teoreettisesti hyväksyttäviä arvoja.

Bienestar social e impuesto sobre la renta

El presente artículo pretende ampliar el modelo original de SANDMO (Journal of Public Economics, 1981 , Vol. 16), relativo a evasión e imposición óptima, en dos direcciones. De un lado, haciendo extensivo el marco de preferencias redistributivas hacia otros objetivos sociales distintos del utilitarista; asimismo, permitiendo el que los sujetos no defraudadores puedan diferir entre sí, de acuerdo con la bibliografía más corriente sobre el tema, por razón de la capacidad productiva que posean en el mercado de trabajo. Dichas modificaciones, además de deslindar los aspectos de aversión al riesgo de lo que propiamente es el grado de concavidad de la función de bienestar, facilitan una más completa descripción del modo como operan los factores que inciden en la conducta del contribuyente.

Safety Traps

Fear of risk provides a rationale for protracted economic downturns. We develop a real business cycle model where investors with decreasing relative risk aversion choose between a risky and a safe technology that exhibit decreasing returns. Because of a feedback effect from the interest rate to risk aversion, two equilibria can emerge: a standard equilibrium and a "safe" one in which investors invest in safer assets. We refer to the dynamics of this second equilibrium as a safety trap because it is self-reinforcing as investors accumulate more wealth and show it to be consistent with Japan's lost decade.

An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries.

An update on EMU sovereign yield spread drivers in times of crisis: A panel data analysis

We empirically investigate the determinants of EMU sovereign bond yield spreads with respect to the German bund. Using panel data techniques, we examine the role of a wide set of potential drivers. To our knowledge, this paper presents one of the most exhaustive compilations of the variables used in the literature to study the behaviour of sovereign yield spreads and, in particular, to gauge the effect on these spreads of changes in market sentiment and risk aversion. We use a sample of both central and peripheral countries from January 1999 to December 2012 and assess whether there were significant changes after the outbreak of the euro area debt crisis. Our results suggest that the rise in sovereign risk in central countries can only be partially explained by the evolution of local macroeconomic variables in those countries.

Prospektiteoria ja sijoitusten hajauttaminen

Tämä tutkielma replikoi vuonna 1979 tehtyä Prospect Theory: An Analysis of Decision under Risk tutkimusta. Tutkielman tarkoituksena on tutkia odotetun hyödyn teorian ja prospektiteorian välistä eroa. Lisäksi tutkielmassa pyritään tutkimaan onko vastaajien vastauksilla yhteyttä heidän hajauttamiseensa ulkomaisiin sijoituskohteisiin. Kysymykset ovat suoraan replikoituja lukuun ottamatta viimeistä kysymystä, joka on tutkielman laatijan oma kysymys. Vastaukset on kerätty pörssiyhtiöiden yhtiökokouksissa Suomessa keväällä 2011 ja Lappeenrannan teknillisen yliopiston opiskelijoiden keskuudessa.

Public-private partnership investments in dry ports – Russian logistics markets and risks

The investments have always been considered as an essential backbone and so-called ‘locomotive’ for the competitive economies. However, in various countries, the state has been put under tight budget constraints for the investments in capital intensive projects. In response to this situation, the cooperation between public and private sector has grown based on public-private mechanism. The promotion of favorable arrangement for collaboration between public and private sectors for the provision of policies, services, and infrastructure in Russia can help to address the problems of dry ports development that neither municipalities nor the private sector can solve alone. Especially, the stimulation of public-private collaboration is significant under the exposure to externalities that affect the magnitude of the risks during all phases of project realization. In these circumstances, the risk in the projects also is becoming increasingly a part of joint research and risk management practice, which is viewed as a key approach, aiming to take active actions on existing global and specific factors of uncertainties. Meanwhile, a relatively little progress has been made on the inclusion of the resilience aspects into the planning process of a dry ports construction that would instruct the capacity planner, on how to mitigate the occurrence of disruptions that may lead to million dollars of losses due to the deviation of the future cash flows from the expected financial flows on the project. The current experience shows that the existing methodological base is developed fragmentary within separate steps of supply chain risk management (SCRM) processes: risk identification, risk evaluation, risk mitigation, risk monitoring and control phases. The lack of the systematic approach hinders the solution of the problem of risk management processes of dry port implementation. Therefore, management of various risks during the investments phases of dry port projects still presents a considerable challenge from the practical and theoretical points of view. In this regard, the given research became a logical continuation of fundamental research, existing in the financial models and theories (e.g., capital asset pricing model and real option theory), as well as provided a complementation for the portfolio theory. The goal of the current study is in the design of methods and models for the facilitation of dry port implementation through the mechanism of public-private partnership on the national market that implies the necessity to mitigate, first and foremost, the shortage of the investments and consequences of risks. The problem of the research was formulated on the ground of the identified contradictions. They rose as a continuation of the trade-off between the opportunities that the investors can gain from the development of terminal business in Russia (i.e. dry port implementation) and risks. As a rule, the higher the investment risk, the greater should be their expected return. However, investors have a different tolerance for the risks. That is why it would be advisable to find an optimum investment. In the given study, the optimum relates to the search for the efficient portfolio, which can provide satisfaction to the investor, depending on its degree of risk aversion. There are many theories and methods in finance, concerning investment choices. Nevertheless, the appropriateness and effectiveness of particular methods should be considered with the allowance of the specifics of the investment projects. For example, the investments in dry ports imply not only the lump sum of financial inflows, but also the long-term payback periods. As a result, capital intensity and longevity of their construction determine the necessity from investors to ensure the return on investment (profitability), along with the rapid return on investment (liquidity), without precluding the fact that the stochastic nature of the project environment is hardly described by the formula-based approach. The current theoretical base for the economic appraisals of the dry port projects more often perceives net present value (NPV) as a technique superior to other decision-making criteria. For example, the portfolio theory, which considers different risk preference of an investor and structures of utility, defines net present value as a better criterion of project appraisal than discounted payback period (DPP). Meanwhile, in business practice, the DPP is more popular. Knowing that the NPV is based on the assumptions of certainty of project life, it cannot be an accurate appraisal approach alone to determine whether or not the project should be accepted for the approval in the environment that is not without of uncertainties. In order to reflect the period or the project’s useful life that is exposed to risks due to changes in political, operational, and financial factors, the second capital budgeting criterion – discounted payback period is profoundly important, particularly for the Russian environment. Those statements represent contradictions that exist in the theory and practice of the applied science. Therefore, it would be desirable to relax the assumptions of portfolio theory and regard DPP as not fewer relevant appraisal approach for the assessment of the investment and risk measure. At the same time, the rationality of the use of both project performance criteria depends on the methods and models, with the help of which these appraisal approaches are calculated in feasibility studies. The deterministic methods cannot ensure the required precision of the results, while the stochastic models guarantee the sufficient level of the accuracy and reliability of the obtained results, providing that the risks are properly identified, evaluated, and mitigated. Otherwise, the project performance indicators may not be confirmed during the phase of project realization. For instance, the economic and political instability can result in the undoing of hard-earned gains, leading to the need for the attraction of the additional finances for the project. The sources of the alternative investments, as well as supportive mitigation strategies, can be studied during the initial phases of project development. During this period, the effectiveness of the investments undertakings can also be improved by the inclusion of the various investors, e.g. Russian Railways’ enterprises and other private companies in the dry port projects. However, the evaluation of the effectiveness of the participation of different investors in the project lack the methods and models that would permit doing the particular feasibility study, foreseeing the quantitative characteristics of risks and their mitigation strategies, which can meet the tolerance of the investors to the risks. For this reason, the research proposes a combination of Monte Carlo method, discounted cash flow technique, the theory of real options, and portfolio theory via a system dynamics simulation approach. The use of this methodology allows for comprehensive risk management process of dry port development to cover all aspects of risk identification, risk evaluation, risk mitigation, risk monitoring, and control phases. A designed system dynamics model can be recommended for the decision-makers on the dry port projects that are financed via a public-private partnership. It permits investors to make a decision appraisal based on random variables of net present value and discounted payback period, depending on different risks factors, e.g. revenue risks, land acquisition risks, traffic volume risks, construction hazards, and political risks. In this case, the statistical mean is used for the explication of the expected value of the DPP and NPV; the standard deviation is proposed as a characteristic of risks, while the elasticity coefficient is applied for rating of risks. Additionally, the risk of failure of project investments and guaranteed recoupment of capital investment can be considered with the help of the model. On the whole, the application of these modern methods of simulation creates preconditions for the controlling of the process of dry port development, i.e. making managerial changes and identifying the most stable parameters that contribute to the optimal alternative scenarios of the project realization in the uncertain environment. System dynamics model allows analyzing the interactions in the most complex mechanism of risk management process of the dry ports development and making proposals for the improvement of the effectiveness of the investments via an estimation of different risk management strategies. For the comparison and ranking of these alternatives in their order of preference to the investor, the proposed indicators of the efficiency of the investments, concerning the NPV, DPP, and coefficient of variation, can be used. Thus, rational investors, who averse to taking increased risks unless they are compensated by the commensurate increase in the expected utility of a risky prospect of dry port development, can be guided by the deduced marginal utility of investments. It is computed on the ground of the results from the system dynamics model. In conclusion, the outlined theoretical and practical implications for the management of risks, which are the key characteristics of public-private partnerships, can help analysts and planning managers in budget decision-making, substantially alleviating the effect from various risks and avoiding unnecessary cost overruns in dry port projects.

Asset Pricing in a Production Economy with Chew–Dekel Preferences

In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew–Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein–Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model.