New financial markets: who gains and who loses

Summary. We evaluate the effects of new financial markets in a two-period incomplete markets model with heterogenous agents. For analytical tractability, we focus on the special case where utility is exponential and risks are normally distributed. We provide a complete characterization of life-cycle consumption and portfolio choice. The effect of new financial markets on individual welfare equals the sum of what we call the portfolio effect and the price effect. The portfolio effect is proportional to the square of the difference between the average exposure to the new asset in the economy and an individual investors exposure adjusted for risk aversion. The portfolio effect is always positive and measures the improved ability of investors to transfer consumption across states. The price effect captures the effect on individual welfare of changes in asset prices. We show that new financial markets drive down the prices of all assets which raises the interest rate and thus affects the ability of investors to transfer consumption across time. The price effect is positive for net savers but can be negative for net borrowers. For net borrower households, the price effect can wipe out the portfolio effect and lead to welfare reductions.Received: 24 July 2003, Revised: 22 March 2004, JEL Classification Numbers: D31, D52, G11, G12.Paul Willen: Thanks to Viral Acharaya, Alberto Bisin, Steve Davis, John Geanakoplos and a thoughtful anonymous referee for helpful comments and suggestions. Thanks also to seminar audiences at Stanford, Berkeley and at the 2001 Stony Brook workshop on incomplete markets for comments and suggestions. I gratefully acknowledge research support from the Graduate School of Business at the University of Chicago.     

A model to analyse financial fragility

Summary. This paper sets out a tractable model which illuminates problems relating to individual bank behaviour, to possible contagious inter-relationships between banks, and to the appropriate design of prudential requirements and incentives to limit ‘excessive’ risk-taking. Our model is rich enough to include heterogeneous agents, endogenous default, and multiple commodity, and credit and deposit markets. Yet, it is simple enough to be effectively computable and can therefore be used as a practical framework to analyse financial fragility. Financial fragility in our model emerges naturally as an equilibrium phenomenon. Among other results, a non-trivial quantity theory of money is derived, liquidity and default premia co-determine interest rates, and both regulatory and monetary policies have non-neutral effects. The model also indicates how monetary policy may affect financial fragility, thus highlighting the trade-off between financial stability and economic efficiency.Received: 6 November 2003, Revised: 6 October 2004 JEL Classification Numbers: D52, E4, E5, G11, G21.C.A.E. Goodhart, P. Sunirand, D.P. Tsomocos: We are grateful to T.F. Bewley, S. Bhattacharya, F. Hahn, C. Mayer, H.S. Shin and seminar participants at the Bank of Austria, Bank of England, Bank of Norway, Bank for International Settlements, Brown University, the 7th Annual Macroeconomic Conference, Crete, EcoMod-IIOA International Conference, Brussels, the 2nd Oxford Finance Summer Symposium and Nuffield, Oxford, the Hong Kong Institute for Monetary Research, Purdue University, the University of Birmingham, the VI SAET Conference, Rhodes, Yale University, and especially an anonymous referee and H.M. Polemarchakis for helpful comments. The views expressed are those of the authors and do not necessarily reflect those of the Bank of England. Correspondence to: D.P. Tsomocos     

Generic inefficiency of equilibria in the general equilibrium model with incomplete asset markets and infinite time

Summary. We consider a Lucas asset-pricing model with heterogeneous agents, exogenous labor income, and a finite number of exogenous shocks. Although agents are infinitely lived, endowments and dividends are time-invariant functions of the exogenous shock alone and are thus restricted to lie in a finite-dimensional space; genericity analysis can be conducted on sets of zero Lebesgue measure. When financial markets are incomplete, that is, there are fewer financial securities than shocks, we show that generically in individual endowments all competitive equilibria are Pareto inefficient. Received: November 22, 1999; revised version: March 4, 2002 RID="*" ID="*" We are grateful to an anonymous referee for very insightful comments on earlier drafts.     

Incomplete markets: transverse financial structures

Summary. In a multiperiod economy with incomplete markets and assets with payoff depending on the price history (e.g., asset and derivatives), we show that in order to get endowment generic existence of an equilibrium it is not needed to alter settlement features such as when payments are made and when the asset is traded. This is non-trivial as each such characteristic introduces a non-generic subclass of financial instruments. We show essentially that expiry date payments are the only payments that one needs perturbing (if at all). For previous periods - the P&L discovery map - is the one relevant for wealth transfers. This map transfers wealth between one period and the next by associating to each portfolio next period potential profit and losses as a function of the revealed information at the node. All present values involved can in general - because of backward induction pricing structure - be appropriately controlled via expiry payoffs only. This enables us to extend two-period work and introduce Transverse Financial Structures for multiperiod economies, where one cannot identify the payoffs of financial instruments to the P&L discovery map (in other words we introduce some financial ingeneering for Transverse Financial Structures). We capitalize on that difference using unexploited “maturity payout degrees of freedom” and rolling back the uncertainty tree. As an application of this approach we prove a conjecture by Magill and Quinzii that commodity forward contracts lead to endowment generic existence of an equilibrium in a multiperiod set-up. Received: June 25, 1999; revised version: April 4, 2001     

Computable general equilibrium with financial markets

Summary. There are a wide variety of theoretical general equilibrium models with incomplete security markets. In this paper we give a general recipe for using homotopy algorithm to compute equilibria in these models. In many models, taxes, transaction-costs or other market frictions introduce the additional difficulty that equilibrium prices or choices (but not equilibrium allocations) may be undetermined. In order to demonstrate how these difficulties can be dealt with, we develop a globally convergent algorithm to compute equilibria in a model with cash-in-advance constraints, several goods and incomplete financial markets. Furthermore we describe how to implement the algorithm using a publicly available suite of subroutines for homotopy-pathfollowing. Received: October 1, 1999; revised version: December 16, 2000     

国际金融危机与我国宏观经济政策反思

国际金融危机使得全球贸易与金融旧秩序被重新审视,新的变革即将开始。面对国际局势,我国必须立足国情,认真分析与反思当前一揽子经济刺激计划,在政策方针和微观经济活动之间建立有效的宏观政策传导机制,以政府投资引导和激发民间投资,改革阻碍发展的体制机制约束,尽早考虑大规模计划的退出机制,为获得长期发展战略竞争优势未雨绸缪,在国际政策博弈中牢牢争取把握主动。     

Saving up or settling down: Home ownership over the life cycle

In a Bewley model with endogenous price volatility, home ownership and mobility across locations and jobs, we assess the contribution of financial constraints, housing illiquidities and house price risk to home ownership over the life cycle. The model can explain the rise in home ownership and fall in mobility over the life cycle. While some households rent due to borrowing constraints in the mortgage market, factors that affect propensities to save and move, such as risky house values and transactions costs, are equally important determinants of the ownership rate.     

Modelling price pressure in financial markets

We present experimental evidence that, unlike traditional assumptions in economic theory, security prices do not respond to pressure from their own excess demand. Instead, prices respond to excess demand of all securities, despite the absence of a direct link between markets. We propose a model of price pressure that explains these findings. In our model, agents set order prices that reflect the marginal valuation of desired future holdings, called “aspiration levels.”In the short run, as agents encounter difficulties executing their orders, they scale back their aspiration levels. Marginal valuations, order prices, and hence, transaction prices change correspondingly. The resulting price adjustment process coincides with the Global Newton Method. The assumptions of the model as well as its empirical implications are fully borne out by the data. Our model thus provides an economic foundation for why markets appear to search for equilibrium according to Newton’s procedure.     

财政、货币政策作用空间的历史变迁及其启示——基于中国财政、货币政策实践

财政政策发挥调控功能以国家财政拥有一定财力为基础,货币政策发挥调控功能以商业银行体系对中央银行的资金依赖为前提。失却此基础和前提,财政政策和货币政策调控功能就会大打折扣甚或完全丧失调控功能。新中国财政政策与货币政策作用空间的变迁经历了三个阶段,与之相适应,财政政策与货币政策调控功能分别经历了“强、弱、强”和“弱、强、弱”三种状态。经验表明,财政政策与货币政策作用空间的变迁与经济体制、国民经济运行格局息息相关。财政政策和货币政策要真正发挥宏观调控功能必须改善其赖以发挥作用的经济运行环境并加强两者之间的协调。     

Information-based contagion and the implications for financial fragility

This paper explores a global game model of information-based financial contagion. By revealing information on a common fundamental factor and thereby affecting the behavior of creditors, the failure of a single firm can trigger the failure of another firm. The model provides a unique equilibrium framework to assess the consequences of contagion and yields some hitherto unnoticed insights. While contagion increases the correlation among the financial failures of different firms, its impact on the incidence of failure is ambiguous. I consider an analytically tractable version of the model in which the effect on the ex ante failure probabilities is exactly zero. Moreover, the impact of contagion increases with the relevance of a common underlying fundamental, but is limited to firms near the brink of success or failure.     

Credit crunch in a model of financial intermediation and occupational choice

In this paper, we introduce a dynamic general equilibrium model with numerous and heterogeneous investment projects and endogenous occupational choice to study a credit crunch. Asset accumulation of assets by households as they face various employment and return risks over a long lifetime determines whether they are entrepreneurs or workers. The origin of a credit crunch may be found in the conservative lending by banks during periods of financial duress and reduced profitability because of capital requirements. Using an example from Canada, monetary policy is shown to be largely ineffective in alleviating the credit crunch, while flexible loan regulation can erase it.     

Pooling and endogenous market incompleteness

Summary. We study a financial market economy with a continuum of borrowers and pooling of borrowers promises. Under these conditions and in the absence of designing costs, utility-maximizing decisions of price-taking borrowers may lead to financial market incompleteness. Parametrizing equilibria through the borrowers no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowers beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations.Received: 29 May 2003, Revised: 13 February 2004, JEL Classification Numbers: D50, D52.Correspondence to: Alessandro CitannaWe would like to thank David Cass, John Geanakoplos, Thorsten Hens, Atsushi Kajii, and an anonymous referee for their comments. The first author also thanks CERMSEM (Paris I) and Columbia University Graduate School of Business for the hospitality. A first version of this paper has appeared as GSIA Working Paper #1997-E137, Carnegie Mellon University, which itself revised Citanna and Villanacci (1995).     

Equilibrium with arbitrary market structure

Summary. Fifty years ago Arrow [1] introduced contingent commodities and Debreu [4] observed that this reinterpretation of a commodity was enough to apply the existing general equilibrium theory to uncertainty and time. This interpretation of general equilibrium theory is the Arrow-Debreu model. The complete market predicted by this theory is clearly unrealistic, and Radner [10] formulated and proved existence of equilibrium in a multiperiod model with incomplete markets.In this paper the Radner result is extended. Radner assumed a specific structure of markets, independence of preferences, indifference of preferences, and total and transitive preferences. All of these assumptions are dropped here. We - like Radner - keep assumptions implying compactness.Received: 17 April 2003, Revised: 26 March 2004, JEL Classification Numbers: D52, D40.     

浅谈集团企业财务战略及财务管理

财务战略。是指为谋求企业资金均衡有效的流动和实现企业整体战略,为增强企业财务竞争优势,在分析企业内外环境因素对资金流动影响的基础上,对企业资金流动进行全局性、长期性与创造性的谋划,并确保其执行的过程。财务管理则是在一定的整体目标下,关于资产的购置,资本的融通和经营中现金流量,以及利润分配的管理。财务战略主要是考虑财务领域全局的,长期的发展方向问题,而财务管理则是为企业财务战略提供资金支持,是为提高经营活动的价值而进行的管理。财务管理对于企业的长期生存和健康发展具有重要意义。     

Macroeconomic policy uncertainty shocks on the Chinese economy: a GVAR analysis

This article studies the spillovers of economic policy uncertainty (EPU) from developed economies to China in terms of the source, extent and persistence by estimating a global vector autoregressive (GVAR) model with both financial and trade variables acting as the transmission channels. Our findings confirm the existence of international transmissions of policy uncertainty, while the patterns differ markedly. The US EPU appears to be the most significant cause of the fall of export, industrial production, equity price and exchange rate, meanwhile, the EU EPU is also to be blamed for the depreciation of RMB. In contrast to industrial production, which shows the largest negative impact, Chinese inflation increases to a relatively smaller extent with the EPU shocks ranking as the US, Japanese and the EU. Regardless of the minor impact on a long-term interest rate, the short-term interest rate in China reacts positively to the European and US EPU shocks. Despite the independent national monetary policies, EPUs from the EU, Japan and the UK can decrease the Chinese monetary aggregate. In summary, the Chinese economy responds the most to the US EPU, especially to its inflation expectation disagreement component, whereas it responds the least to the UK EPU.     

International stock markets comovements: the role of economic and financial integration

The contribution of economic and financial integration to international stock markets comovements are investigated by means of a large scale macroeconometric model, set in the factor vector autoregressive framework (F-VAR). The findings point to a relevant role for both economic and financial integration in explaining international stock markets comovements for the G-7 countries. While economic integration would exercise its effects through the common response of stock markets to global economic shocks, financial integration would operate through financial shocks spillovers, particularly at the regional level.      

On the Non-Existence of Redundant Options

In a seminal paper, Ross (Q J Econ 90:75–89, 1976) shows that if security markets are resolving, then there exist (non-redundant) options that generate complete security markets. Complementing his work, Aliprantis and Tourky (2002) show that if security markets are strongly resolving and the number of primitive securities is less than half the number of states, then every option is non-redundant. Our paper extends Aliprantis and Tourky’s result to the case when their condition on the number of primitive securities is not imposed. Specifically, we show that if there exists no binary payoff vector in the asset span, then for each portfolio there exists a set of exercise prices of full measure such that any option on the portfolio with an exercise price in this set is non-redundant. Since the condition that there exists no binary payoff vector in the asset span holds generically, redundant options are thus rare. I am grateful to an anonymous referee for very helpful comments. Research support from the School of Business at The George Washington University is gratefully acknowledged