Endogenous collateral

We study an economy where there are two types of assets. Consumers’ promises are the primitive defaultable assets secured by collateral chosen by the consumers themselves. The purchase of these personalized assets by financial intermediaries is financed by selling back derivatives to consumers. We show that nonarbitrage prices of primitive assets are strict submartingales, whereas nonarbitrage prices of derivatives are supermartingales. Next we establish existence of equilibrium, without imposing bounds on short sales. The nonconvexity of the budget set is overcome by considering a continuum of agents.

Endogenous collateral: arbitrage and equilibrium without bounded short sales

We study the implications of the absence of arbitrage in an two period economy where default is allowed and assets are secured by collateral choosen by the borrowers. We show that non arbitrage sale prices of assets are submartingales, whereas non arbitrage purchase prices of the derivatives (secured by the pool of collaterals) are supermartingales. We use these non arbitrage conditions to establish existence of equilibrium, without imposing bounds on short sales. The nonconvexity of the budget set is overcome by considering a continuum of agents. Our results are particularly relevant for the collateralized mortgage obligations(CMO) markets.

Essays in asset price bubbles

This thesis studies the field of asset price bubbles. It is comprised of three independent chapters. Each of these chapters either directly or indirectly analyse the existence or implications of asset price bubbles. The type of bubbles assumed in each of these chapters is consistent with rational expectations. Thus, the kind of price bubbles investigated here are known as rational bubbles in the literature. The following describes the three chapters. Chapter 1: This chapter attempts to explain the recent US housing price bubble by developing a heterogeneous agent endowment economy asset pricing model with risky housing, endogenous collateral and defaults. Investment in housing is subject to an idiosyncratic risk and some mortgages are defaulted in equilibrium. We analytically derive the leverage or the endogenous loan to value ratio. This variable comes from a limited participation constraint in a one period mortgage contract with monitoring costs. Our results show that low values of housing investment risk produces a credit easing effect encouraging excess leverage and generates credit driven rational price bubbles in the housing good. Conversely, high values of housing investment risk produces a credit crunch characterized by tight borrowing constraints, low leverage and low house prices. Furthermore, the leverage ratio was found to be procyclical and the rate of defaults countercyclical consistent with empirical evidence. Chapter 2: It is widely believed that financial assets have considerable persistence and are susceptible to bubbles. However, identification of this persistence and potential bubbles is not straightforward. This chapter tests for price bubbles in the United States housing market accounting for long memory and structural breaks. The intuition is that the presence of long memory negates price bubbles while the presence of breaks could artificially induce bubble behaviour. Hence, we use procedures namely semi-parametric Whittle and parametric ARFIMA procedures that are consistent for a variety of residual biases to estimate the value of the long memory parameter, d, of the log rent-price ratio. We find that the semi-parametric estimation procedures robust to non-normality and heteroskedasticity errors found far more bubble regions than parametric ones. A structural break was identified in the mean and trend of all the series which when accounted for removed bubble behaviour in a number of regions. Importantly, the United States housing market showed evidence for rational bubbles at both the aggregate and regional levels. In the third and final chapter, we attempt to answer the following question: To what extend should individuals participate in the stock market and hold risky assets over their lifecycle? We answer this question by employing a lifecycle consumption-portfolio choice model with housing, labour income and time varying predictable returns where the agents are constrained in the level of their borrowing. We first analytically characterize and then numerically solve for the optimal asset allocation on the risky asset comparing the return predictability case with that of IID returns. We successfully resolve the puzzles and find equity holding and participation rates close to the data. We also find that return predictability substantially alter both the level of risky portfolio allocation and the rate of stock market participation. High factor (dividend-price ratio) realization and high persistence of factor process indicative of stock market bubbles raise the amount of wealth invested in risky assets and the level of stock market participation, respectively. Conversely, rare disasters were found to bring down these rates, the change being severe for investors in the later years of the life-cycle. Furthermore, investors following time varying returns (return predictability) hedged background risks significantly better than the IID ones.

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.

Health, endogenous time preference, and inequality : a political economy perspective

We study an overlapping-generations model in which agents' mortality risks, and consequently impatience, are endogenously determined by private and public investment in health care. Revenues allocated for public health care arc determined by a voting process. We find that the degree of substitutability between public and private health expenditures matters for macroeconomic outcomes of the model. Higher substitutability implies a “crowding-out" effect, which in turn impacts adversely on morality risks and impatience leading to lower public expenditures on health care in the political equilibrium. Consequently, higher substitutability is associated with greater polarization in wealth, and long-run distributions that are bimodal.

A dog of a QCAT : collateral effects of mandated English assessment in the Torres Strait

This paper critiques a 2008 Queensland Studies Authority (QSA) assessment initiative known as Queensland Comparable Assessment Tasks, or QCATs. The rhetoric is that these centrally devised assessment tasks will provide information about how well students can apply what they know, understand and can do in different contexts (QSA, 2009). The QCATs are described as ‘authentic, performance-based assessment’ that involves a ‘meaningful problem’, ‘emphasises critical thinking and reasoning’ and ‘provides students with every opportunity to do their best work’ (QSA, 2009). From my viewpoint as a teacher, I detail my professional concerns with implementing the 2008 middle primary English QCAT in one case study Torres Strait Island community. Specifically I ask ‘QCATs: Comparable with what?’ and ‘QCATs: Whose authentic assessment?’. I predict the possible collateral effects of implementing this English assessment in this remote Indigenous community, concluding, rather than being an example of quality assessment, colloquially speaking, it is nothing more than a ‘dog’.

Endogenous mortality, human capital and economic growth

We consider growth and welfare effects of lifetime-uncertainty in an economy with human capital-led endogenous growth. We argue that lifetime uncertainty reduces private incentives to invest in both physical and human capital. Using an overlapping generations framework with finite-lived households we analyze the relevance of government expenditure on health and education to counter such growth-reducing forces. We focus on three different models that differ with respect to the mode of financing of education: (i) both private and public spending, (ii) only public spending, and (iii) only private spending. Results show that models (i) and (iii) outperform model (ii) with respect to long-term growth rates of per capita income, welfare levels and other important macroeconomic indicators. Theoretical predictions of model rankings for these macroeconomic indicators are also supported by observed stylized facts.

Endogenous musculoskeletal tissue engineering : a focussed perspective

Two major difficulties facing widespread clinical implementation of existing Tissue Engineering (TE) strategies for the treatment of musculoskeletal disorders are (1) the cost, space and time required for ex vivo culture of a patient’s autologous cells prior to re-implantation as part of a TE construct, and (2) the potential risks and availability constraints associated with transplanting exogenous (foreign) cells. These hurdles have led to recent interest in endogenous TE strategies, in which the regenerative potential of a patient’s own cells is harnessed to promote tissue regrowth without ex vivo cell culture. This article provides a focused perspective on key issues in the development of endogenous TE strategies, progress to date, and suggested future research directions toward endogenous repair and regeneration of musculoskeletal tissues and organs.

Continuous intravenous infusion of glucose induces endogenous hyperinsulinaemia and lamellar histopathology in Standardbred horses

Endocrinopathic laminitis is frequently associated with hyperinsulinaemia but the role of glucose in the pathogenesis of the disease has not been fully investigated. This study aimed to determine the endogenous insulin response to a quantity of glucose equivalent to that administered during a laminitis-inducing, euglycaemic, hyperinsulinaemic clamp, over 48. h in insulin-sensitive Standardbred racehorses. In addition, the study investigated whether glucose infusion, in the absence of exogenous insulin administration, would result in the development of clinical and histopathological evidence of laminitis. Glucose (50% dextrose) was infused intravenously at a rate of 0.68 mL/kg/h for 48. h in treated horses (n = 4) and control horses (n = 3) received a balanced electrolyte solution (0.68 mL/kg/h). Lamellar histology was examined at the conclusion of the experiment. Horses in the treatment group were insulin sensitive (M value 0.039 ± 0.0012. mmol/kg/min and M-to-I ratio (100×) 0.014 ± 0.002) as determined by an approximated hyperglycaemic clamp. Treated horses developed glycosuria, hyperglycaemia (10.7 ± 0.78. mmol/L) and hyperinsulinaemia (208 ± 26.1. μIU/mL), whereas control horses did not. None of the horses became lame as a consequence of the experiment but all of the treated horses developed histopathological evidence of laminitis in at least one foot. Combined with earlier studies, the results showed that laminitis may be induced by either insulin alone or a combination of insulin and glucose, but that it is unlikely to be due to a glucose overload mechanism. Based on the histopathological data, the potential threshold for insulin toxicity (i.e. laminitis) in horses may be at or below a serum concentration of ∼200. μIU/mL.

Computer-assisted measurements of coronal knee joint laxity in vitro are related to low-stress behavior rather than structural properties of the collateral ligaments

The relationship between coronal knee laxity and the restraining properties of the collateral ligaments remains unknown. This study investigated correlations between the structural properties of the collateral ligaments and stress angles used in computer-assisted total knee arthroplasty (TKA), measured with an optically based navigation system. Ten fresh-frozen cadaveric knees (mean age: 81 ± 11 years) were dissected to leave the menisci, cruciate ligaments, posterior joint capsule and collateral ligaments. The resected femur and tibia were rigidly secured within a test system which permitted kinematic registration of the knee using a commercially available image-free navigation system. Frontal plane knee alignment and varus-valgus stress angles were acquired. The force applied during varus-valgus testing was quantified. Medial and lateral bone-collateral ligament-bone specimens were then prepared, mounted within a uni-axial materials testing machine, and extended to failure. Force and displacement data were used to calculate the principal structural properties of the ligaments. The mean varus laxity was 4 ± 1° and the mean valgus laxity was 4 ± 2°. The corresponding mean manual force applied was 10 ± 3 N and 11 ± 4 N, respectively. While measures of knee laxity were independent of the ultimate tensile strength and stiffness of the collateral ligaments, there was a significant correlation between the force applied during stress testing and the instantaneous stiffness of the medial (r = 0.91, p = 0.001) and lateral (r = 0.68, p = 0.04) collateral ligaments. These findings suggest that clinicians may perceive a rate of change of ligament stiffness as the end-point during assessment of collateral knee laxity.

Efficient silencing of endogenous microRNAs using artificial microRNAs in Arabidopsis thaliana

We report here that the expression of endogenous microRNAs (miRNAs) can be efficiently silenced in Arabidopsis thaliana (Arabidopsis) using artificial miRNA (amiRNA) technology. We demonstrate that an amiRNA designed to target a mature miRNA directs silencing against all miRNA family members, whereas an amiRNA designed to target the stem-loop region of a miRNA precursor transcript directs silencing against only the individual family member targeted. Furthermore, our results indicate that amiRNAs targeting both the mature miRNA and stem-loop sequence direct RNA silencing through cleavage of the miRNA precursor transcript, which presumably occurs in the nucleus of a plant cell during the initial stages of miRNA biogenesis. This suggests that small RNA (sRNA)-guided RNA cleavage in plants occurs not only in the cytoplasm, but also in the nucleus. Many plant miRNA gene families have been identified via sequencing and bioinformatic analysis, but, to date, only a small tranche of these have been functionally characterized due to a lack of effective forward or reverse genetic tools. Our findings therefore provide a new and powerful reverse-genetic tool for the analysis of miRNA function in plants. © The Author 2010. Published by the Molecular Plant Shanghai Editorial Office in association with Oxford University Press on behalf of CSPP and IPPE, SIBS, CAS.