Habit formation and the equity–premium puzzle: a skeptical view

We argue that, ceteris paribus, introducing a habit that resolves the equity–premium puzzle is equivalent to increasing the Arrow-Pratt coefficient of relative risk aversion, AP-RRA. If we constrain the AP-RRA to a constant ‘acceptable’ level, the effect on the equity premium is quantitatively insignificant. In a dynamic setting, the fluctuations of the habit increase the equity premium, slightly, though generates unrealistic fluctuations in the risk-free interest rate. We conclude a habit is observationally equivalent, up to a first-order approximation, to a higher AP-RRA and to a preference shock. These effects cannot resolve the equity–premium puzzle.      

Commodity money inflation: theory and evidence from France in 1350–1436

This paper presents a theory of inflation in commodity money and supports it by evidence from inflationary episodes in France during the 14th and 15th centuries. The paper shows that commodity money can be inflated similarly to fiat money through repeated debasements, which act like devaluations. Furthermore, as with fiat money, demand for commodity money falls with inflation. However, at high rates of inflation demand for commodity money becomes insensitive to inflation, since commodity money has intrinsic value in addition to its transactions value. Finally, we show that anticipated stabilization reduces demand for commodity money.     

William Huskisson and the bullion controversy, 1810 *

The debate concerning the return to the gold standard in England during and in the aftermath of the Napoleonic Wars, and the subsequent resumption of convertibility in 1819, played a significant role in British monetary orthodoxy. Its impact culminated in the 1925 decision to return to gold at prewar parity. Examining the contribution of William Huskisson - one of the authors of the Bullion Report - to the bullion controversy I argue that he played a major role in shaping British monetary policy of the nineteenth century.     

Ex-dividend price behavior of common stocks

This study examines common stock prices around ex-dividend dates.Such price data usually contain a mixture of observations -some with and some without arbitrageurs and/or dividend capturersactive. Our theory predicts that such mixing will result ina nonlinear relation between percentage price drop and dividendyield - not the commonly assumed linear relation. This predictionand another important prediction of theory are supported empirically.In a variety of tests, marginal price drop is not significantlydifferent from the dividend amount. Thus, over the last severaldecades, one-for-one marginal price drop has been an excellent(average) rule of thumb.     

Financial distress, bankruptcy law and the business cycle

This paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that ‘softens’ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust or actively managing the interest rate across the cycle could stabilize the economy in the long run. A comprehensive welfare analysis of these policies is provided as well.      

Financial Distress and Bank Restructuring of Small to Medium Size UK Companies

We use a unique data set to study how U.K. banks deal with financially distressed small and medium-sized companies under a contractualist bankruptcy system. Unlike in the U.S., these procedures limit the discretion of courts to strict enforcement of debt contracts, without any dilution of creditors claims. We show that lenders and borrowers select a debt structure that avoids some of the market failures often attributed to a contractualist system. Collateral and liquidation rights are highly concentrated in the hands of the main bank, giving it a dominant position in restructuring or liquidating a defaulting firm. There is little litigation, and no evidence of co-ordination failures or creditors runs. However, there is some evidence that the banks dominance makes it lazy in monitoring, relying heavily on the value of its collateral in timing the bankruptcy decision.