Sector-specific capital, “Bang-bang” investment,and the Filippov solution

Bang-bang investment in a two-sector growth model with immobile capital is rational and leads to a unique and globally stable long-run equilibrium along a sliding trajectory. This steady state coincides with the stationary equilibrium in the traditional model with non-sector-specific capital.This article was written while the authors were visiting scholars at Cornell University. We gratefully acknowledge financial assistance from the Erasmus University Trust Fund and the Netherlands Scientific Organization. We would like to thank, without implicating, two anonymous referees, Martijn Herrmann, Jean-Marie Viaene, Claus Weddepohl, and the participants of seminars at the University of Maryland, the University of Montreal, and Erasmus University Rotterdam for perceptive remarks and useful comments. Jeroen Hinloopen and Rien Wagenvoort provided able graphical assistance. The views expressed in this article are those of the authors and not necessarily those of the World Bank.     

Valuing and Pricing Retail Leases with Renewal and Overage Options

We consider retail leases with landlord overages options, with tenant renewal options, with both and with neither. We illustrate how the ratio of initial expected sales to the sales threshold can be manipulated to equate the value of the landlord overage options to that of the tenant renewal option at the same initial rent. Not only are the values equal, but the cumulative distributions of potential IRRs on the two leases are nearly identical, suggesting that these leases are equally attractive to risk-averse investors and thus that the same risky discount rate can be used in valuing the leases. In contrast, the appropriate risky discount rate for the overage lease is calculated to be 75–160 basis points greater than that for the renewal lease.     

ASSET BACKED COMMERCIAL PAPER: GET WITH THE PROGRAM

Asset backed commercial paper, or ABCP for short, is commercial paper that is issued by a special purpose corporation against undivided interests in corporate receivables, including retail, trade, or export receivables. Since the inception of the market in 1983, the volume of ABCP has grown to represent about 16% of the total commercial paper market.
ABCP is a valuable source of liquidity for companies that generate a steady flow of quality receivables. Many ABCP programs restrict purchases to companies with investment grade ratings. For such companies, ABCP may help diversify funding sources and allow the firms to lower their funding costs by arbitraging different markets. But ABCP programs can also prove a low-cost source of funding for companies that either do not have access to the CP market through their own balance sheets or have used up their prime CP and bank borrowing capacity. ABCP is also an important source of funds for smaller companies requiring liquidity to support rapid growth.
ABCP programs can be viewed as "synthetic" revolving bank credit facilities in the sense that they can provide the same flow of funds as revolving credits by using a vehicle constructed specifically to refinance pools of receivables. The benefits of ABCP relative to bank lines of credit may take the form of either lower interest rates, less restrictive financial covenants, or both. Although ABCP is at best a partial substitute for bank credit, the liquidity provided by an asset backed commercial paper program can be used to hold down the costs of bank borrowing.     

Calibrating an algorithm for estimating transactions from FXFX exchange rate quotes

In this paper we investigate the efficiency of a class of transaction-generating algorithms, originally suggested in Bollerslev and Domowitz (1993). Our comparison utilizes real transaction data recorded over Reuters D2000-2 electronic broking system for 7 h in June 1993 and transaction data generated from FXFX quotations over an identical period. Results suggest that, at this high-frequency data sampling, the performance of these transaction-generating algorithms is poor, with the most likely explanation of this outcome due to the high-frequency characteristics of FXFX spreads and quotation intensity.     

Measuring abnormal daily trading volume for samples of NYSE/ASE and NASDAQ securities using parametric and nonparametric test statistics

We extend prior research on the empirical properties of daily trading volume and methods to detect abnormal trading volume in two ways. We compare the performance of a nonparametric test statistic with the parametric test statistic used in prior research and we study samples of NASDAQ securities as well as samples of NYSE/ASE securities. Prior research has focused exclusively on NYSE securities. We find the nonparametric test statistic is more powerful in detecting abnormal trading volume than the parametric test statistic in both samples of NYSE/ASE and NASDAQ securities. We also document that abnormal trading volume will be detected more often in samples of NYSE/ASE securities compared to NASDAQ securities.     

Time diversification and security preferences: A stochastic dominance analysis

We use stochastic dominance to test whether investor should prefer riskier securities as the investment horizon lengthens. Return distributions for stocks, bonds, and U.S. Treasury bills are generated for holding periods of one to 25 years by simulation. For each holding period, stochastic dominance tests are run to establish preferences between the alternative security classes. Contrary to previous mean-variance based studies, we find no evidence that high-risk securities (stocks) dominate low-risk securities (bonds, Treasury bills) as the investment horizon lengthens. However, we do find that corporate bonds systematically dominate government bonds.     

THE ROLE OF FINANCIAL RELATIONSHIPS IN THE HISTORY OF AMERICAN CORPORATE FINANCE

The American corporate financing system, unlike that of most other countries, has not been organized around a set of “universal banks” that perform a variety of functions for their clients. Indeed, the distinguishing feature of American financial history is the number and variety of financial intermediaries, and their relationships with corporations (and one another). Besides commercial banks, there are investment banks, insurance companies, venture capitalists, commercial paper dealers, mutual funds, and many others. The economic role of such intermediaries is to reduce market frictions such as “asymmetric information” and “agency problems” that otherwise raise the cost of outside capital for U.S. companies. This article views the changing menu of such intermediaries and their networks as the driving force behind the evolution of American corporate finance. U.S. financial history is seen as a series of institutional and financial innovations designed in large part to work around costly restrictions on relationships–particularly, limits on the scale and scope of U.S. banks–that do not exist in most other countries. In terms of its success in reducing the information and control costs of corporate finance, the history of the American financial system includes periods of significant progress as well as major reversals. Three relatively successful periods– the early 19th-century in New England, the “incipient” universal banking of the 1920s, and modernday financial capitalism–are separated by periods of drastic reductions in the menu of financial relationships– particularly the Great Depression and its 20-year aftermath. Besides new financial claims like preferred stock and new intermediaries such as venture capitalists, another important innovation is new forms of cooperation among intermediaries– especially among banks, venture capitalists, trusts, pensions, and investment banks–that have enabled the U.S. financial system to provide some of the key advantages of universal banking systems. Some of the largest U.S. commercial banks today can be viewed as positioning themselves to play a central coordinating role in these new coalitions of intermediaries. In so doing, they may become the platform for a distinctively American universal banking system.     

Revenue Sharing versus Expenditure Sharing in a Federal System

Problems of intergovernmental policy coordination can take many forms and are becoming increasingly important with continuing economic integration. In this paper we focus on the fiscal competition problem where the non-cooperative choice of taxes and transfers among governments typically leads to a suboptimal outcome. We look at the effect of two widely used corrective policies: revenue sharing and expenditure sharing (or intergovernmental matching grants). Our main result is that these two corrective policies have opposite effects depending on the form of competition between governments, namely whether governments compete in taxes or expenditures. More precisely, for any form of competition, revenue sharing is desirable exactly when expenditure sharing is not and vice versa. The implication is that the choice of the optimal corrective policy requires a complete understanding of the underlying non-cooperative behavior among governments. Our second main result is that neither revenue sharing or expenditure sharing can be sustained as a Nash equilibrium among governments, although all governments would benefit from one of these two corrective policies. Central intervention is therefore inevitable unless governments can pre-commit to the optimal corrective policy before setting their fiscal policies.