Crash-neutral currency carry trades

Currency carry trades exploiting violations of uncovered interest rate parity in G10 currencies deliver significant excess returns with annualized Sharpe ratios equal to or greater than those of equity market factors (1990–2012). Using data on out-of-the-money foreign exchange options, I compute returns to crash-hedged portfolios and demonstrate that the high returns to carry trades are not due to peso problems. A comparison of the returns to hedged and unhedged trades indicates crash risk premia account for at most one-third of the excess return to currency carry trades.     

Regime change and debt default: the case of Russia, Austro-Hungary, and the Ottoman empire following World War One

We consider the effect of the three largest regime changes following World War One on the foreign debt repayments of the succeeding regimes. The Bolsheviks repudiated the Tsarist debt, both external and internal in early 1918, and could not borrow internationally until the 1970s. The Austro-Hungarian successor states, with the exception of Romania, remained on good terms with lenders, and quickly gained access to foreign capital. However, the Ottoman successor states entered into protracted negotiations before accepting responsibility for a share of the debt, which meant they faced a lengthy delay before being able to re-enter the international capital market. We analyze these events using a game theoretical model of incomplete information, whereby capital markets can not directly observe a government’s ‘type.’ We find that there were two main economic reasons why countries did not settle their debts after their regimes changed. Some countries, in particular Russia, did not value continued credit market access as highly as before, and second that international lenders will not trust a regime in default with a new loan.     

A new class of production functions and an argument against purely labor‐augmenting technical change

This paper derives the macro‐level production function from idea‐based microfoundations. Labor‐augmenting and capital‐augmenting developments are assumed to be Pareto‐distributed and mutually dependent. Using the Clayton copula family to capture this dependence, a new “Clayton–Pareto” class of production functions is derived that nests both the Cobb–Douglas and the constant elasticity of substitution. In the most general case, technical change is not purely labor‐augmenting over the long run, but it augments both capital and labor. Under certain parametrizations, the derived elasticity of substitution between capital and labor exceeds unity and, therefore, gives rise to long‐run endogenous growth.     

The effects of risk preferences in mixed-strategy equilibria of games

We consider the effects of risk preferences in mixed-strategy equilibria of 2×2 games, provided such equilibria exist. We identify sufficient conditions under which the expected payoff in the mixed equilibrium increases or decreases with the degree of risk aversion. We find that (at least moderate degrees of) risk aversion will frequently be beneficial in mixed equilibria.     

Beyond the Linearity Critique: The Knife-edge Assumption of Steady-state Growth

The “linearity critique” of endogenous growth models is presented in a general context of an arbitrary growth model and reassessed. It is argued that presence of linearities is not a valid criterion for rejecting growth models. Existence of exponential/geometrical steady-state growth (i.e. of a balanced growth path with strictly positive growth rates) necessarily requires some knife-edge condition which is not satisfied by typical parameter values. Hence, balanced growth paths are fragile and sensitive to smallest disturbances in parameter values. Adding higher order differential/difference equations to a model does not change the knife-edge character of steady-state growth.     

Poland's Accession to the European Union: Demand for Protection of Selected Sensitive Products

This paper analyses the expected changes in external tariffs and imports in Poland after accession to the European Union. We find that around 14% of all manufacturing commodity groups in the Harmonised System will experience tariff reductions of over 10 percentage points, while for agricultural goods tariff comparisons are complicated by very different tariff systems and may be overrated, since applied tariffs are often lower than those legislated. Based on gravity estimates we also find onlly few relatively narrowly defined commodities will experience import growth rates of above 20%. More widely defined sensitive commodities are subject to much smaller but still important import growth     

Bank Capital and Liquidity Creation: Granger-Causality Evidence

We examine the relation between capital and liquidity creation. This issue is interesting because of the potential impact on liquidity creation from tighter capital requirements such as those in Basel III. We perform Granger-causality tests in a dynamic GMM panel estimator framework on an exhaustive data set of Czech banks, which mainly includes small banks from 2000 to 2010. We observe a strong expansion in liquidity creation until the financial crisis that was mainly driven by large banks. We show that capital negatively Granger-causes liquidity creation in this industry, where majority of banks are small. But we also observe that liquidity creation Granger-causes a reduction in capital. These findings support the view that Basel III can reduce liquidity creation, but also that greater liquidity creation can reduce banks’ solvency. Thus, we show that this reverse causality generates a trade-off between the benefits of financial stability induced by stronger capital requirements and the benefits of increased liquidity creation.     

Coordination cycles

Players repeatedly face a coordination problem in a dynamic global game. By choosing a risky action (invest) instead of waiting, players risk instantaneous losses as well as a loss of payoffs from future stages, in which they cannot participate if they go bankrupt. Thus, the total strategic risk associated with investment in a particular stage depends on the expected continuation payoff. High continuation payoff makes investment today more risky and therefore harder to coordinate on, which decreases today's payoff. Thus, expectation of successful coordination tomorrow undermines successful coordination today, which leads to fluctuations of equilibrium behavior even if the underlying economic fundamentals happen to be the same across the rounds. The dynamic game inherits the equilibrium uniqueness of the underlying static global game.     

NegoManage: A System for Supporting Bilateral Negotiations

In this paper we present the NegoManage system, which aims at supporting the bilateral negotiation during all negotiation phases. The support includes the problem structure identification, the analysis of individual preferences of both parties, the messaging and offers exchange and the post-negotiation improvements of the agreement. The preference analysis is supported with a novel mechanism involving the specification of the classes of alternatives’ quality that represent particular levels of potential satisfaction from accepting this alternative as the negotiation solution. The consistency of preferences is also checked. The actual negotiation phase is performed in a typical way, namely the negotiators exchange multiple offers and messages. The novelty introduced in this phase is the mechanism for profiling the negotiators based on the classification of exchanged messages. The post-negotiation optimization phase employs the concept of a bargaining solution for improving the solution obtained in the previous negotiation phase. We present the way the mechanisms proposed work using simple numerical examples.