Exchange-proofness or divorce-proofness? Stability in one-sided matching markets

Two stability concepts for one-sided matching markets are analyzed: Gale-Shapley stability and ξ-stability. The first one applies best to markets where no status quo allocation is considered, whereas the second one is a solution to be used when property rights are allowed. A common problem of existence is shared by both solution concepts. Hence, we study economic environments where this problem does not exist, and present a family of agents’ preferences for which existence is guaranteed for both Gale-Shapley stable and ξ-stable outcomes. This work was finished while the author was visiting Duke University, whose hospitality is gratefully acknowledged. Swveral discussions with Salvador Barberà, Hervé Moulin and Marilda Sotomayor and some advice by an anonymous referee were specially useful. This work is partially supported by Grants PB 92-0590 and PB 93-0938 from the DGICYT, the Spanish Ministery of Educación Ciencia, and the Institut Valencià d’Investigacions Econòmiques.     

On the impact of leverage constraints on asset prices and trading volume

Abstract. Researchers have used stylized facts on asset prices and trading volume in stock markets (in particular, the mean reversion of asset returns and the correlations between trading volume, price changes and price levels) to support theories where agents are not rational expected utility maximizers. This paper shows that this empirical evidence is in fact consistent with a standard infinite horizon – perfect information – expected utility economy where some agents face leverage constraints similar to those found in todays financial markets. In addition, and in sharp contrast to the theories above, we explain some qualitative differences that are observed in the price-volume relation on stock and on futures markets. We consider a continuous-time economy where agents maximize the integral of their discounted utility from consumption under both budget and leverage constraints. Building on the work by Vila and Zariphopoulou (1997), we find a closed form solution, up to a negative constant, for the equilibrium prices and demands in the region of the state space where the constraint is non-binding. We show that, at the equilibrium, stock holdings volatility as well as its ratio to stock price volatility are increasing functions of the stock price and interpret this finding in terms of the price-volume relation. We would like to thank the editor and two anonimous referees for valuable substantive comments. Our gratitude also to Franklin Allen, Kerry Back, Domenico Cuoco, Xavier Freixas, Sanford Grossman, Michel Habib, Lutz Hendricks, Richard Kihlstrom, Fernando Restoy, Mary Thomson, Jean-Luc Vila, participants to seminars at Birkbeck College, Carnegie-Mellon, Columbia, ESSEC, HEC, IAE, INSEAD, London Business School, London School of Economics, McGill, Michigan, National University of Singapore, Pompeu Fabra, North Carolina, Washington-St-Louis, Wharton, the Jornadas de Economía Financiera BBV, and the Meetings of the Society for Economic Dynamics and Control and the American Finance Association. Special thanks are due to Süleyman Basak for his enthusiastic support and many helpful suggestions. The usual disclaimer applies. We gratefully acknowledge the support of the BBV and Caja de Madrid Foundations and CREF (both authors) and of the Spanish Ministry of Education under DGICYT grant no. PB93-0388 (first author).     

Rumors

A Kyle (1985) model with private information diffusion is used to examine the motivation to spread stock tips. An informed investor with limited investment capacity spreads imprecise rumors to an audience of followers. Followers trade on the advice and move the price. Due to the imprecision of the rumor, the price overshoots with positive probability. This gives the rumormonger the opportunity to trade twice: First when she receives information, then when she knows the price to be overshooting. In equilibrium, rumors are informative and both rumormongers and followers increase their profits at the expense of uninformed liquidity traders.     

Capital Inflows,Exchange Rate Flexibility and Credit Booms

Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, this paper analyzes the impact of exchange rate flexibility on credit markets during periods of large capital inflows. It is shown that bank credit is larger and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. The findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks' incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency‐dependent liquidity requirements and higher capital requirement and/or dynamic provisioning on foreign exchange loans.     

Changing rewards in contests: Has the three-point rule brought more offense to soccer?

In the mid-nineties FIFA decided to increase from two to three the number of points assigned to the winning team of a soccer match played under traditional round-robin national leagues. Since a game of soccer can be regarded as a contest, FIFA's measure provides an interesting case-study for analysing how a change in the system of rewards (from a zero to a non-zero sum rule) may affect the contestants' equilibrium behaviour. In this paper we try to assess, both theoretically and empirically, whether FIFA's new point rule has changed soccer towards a more offensive game, in which teams adopt more risky strategies. In particular, we evaluate the “na?ve hypothesis” according to which the measure would induce every team to play always more offensively, and we explore the extent to which the change in teams' behaviour may be affected by quality differentials between teams. Our most important hypothesis is that when the asymmetry between opposing teams is large enough, an increase in the reward for victory induces the weaker team to play more defensively, rather than the opposite. By looking at a subset of matches held in the Portuguese first division league, which approximate the conditions of our model, we find support for this hypothesis. First version received: July 1999/Final version received: May 2001     

Does self-regulation work? Experimental evidence of the reputational incentives of Self-Regulatory Organizations

Self-regulation (SR) is a common way of enforcing quality in markets (such as banking, financial services and several professions) and in a variety of public and private organizations. We provide experimental evidence of the reputational incentives of self-regulatory organizations (SROs) to publicly disclose versus cover-up fraud in an incomplete information environment. We find that observed behaviour is generally consistent with Bayesian equilibrium when subjects are informed about the relative likelihood of fraud detection by a ‘vigilant’ versus a ‘lax’ SRO type. In particular, a fraud disclosure equilibrium is supported when subjects are informed that the ‘vigilant’ SRO is more likely to detect fraud; otherwise, a cover-up equilibrium is supported. However, when subjects are not informed about the relative likelihood of fraud detection by the SRO types (as expected in real SR situations), no equilibrium is strongly supported. Our results suggest that in practice, the reputation-based incentives for effective SR may be inherently ambiguous and weak.     

Conditional ordering extensions

We produce a solution to the problem of extending a quasiordering conditional on a finite list of ex-ante comparisons between pairs. This constitutes yet another extension of the classical Szpilrajn’s theorem. Some examples of use of our result follow.     

Short-term asymptotics for the implied volatility skew under a stochastic volatility model with Lévy jumps

The implied volatility skew has received relatively little attention in the literature on short-term asymptotics for financial models with jumps, despite its importance in model selection and calibration. We rectify this by providing high order asymptotic expansions for the at-the-money implied volatility skew, under a rich class of stochastic volatility models with independent stable-like jumps of infinite variation. The case of a pure-jump stable-like Lévy model is also considered under the minimal possible conditions for the resulting expansion to be well defined. Unlike recent results for “near-the-money” option prices and implied volatility, the results herein aid in understanding how the implied volatility smile near expiry is affected by important features of the continuous component, such as the leverage and vol-of-vol parameters. As intermediary results, we obtain high order expansions for at-the-money digital call option prices, which furthermore allow us to infer analogous results for the delta of at-the-money options. Simulation results indicate that our asymptotic expansions give good fits for options with maturities up to one month, underpinning their relevance in practical applications, and an analysis of the implied volatility skew in recent S&P 500 options data shows it to be consistent with the infinite variation jump component of our models.     

Environmental Policy Instruments: Technology Adoption Incentives with Imperfect Compliance

We study the incentives to adopt advanced abatement technologies in the presence of imperfect compliance. Interestingly, incentives under emission taxes and pollution abatement subsidies are the same that in the perfect compliance scenario. However, under emission standards imperfect compliance can increase firms’ incentives to invest, whereas under an emission permit mechanism investment incentives decrease only if widespread non-compliance induces a reduction in the permit price. Our results are valid for fairly general characteristics of the monitoring and enforcement strategies commonly found in both, theoretical and empirical applications.     

The effects of macroeconomic stability on foreign trade. An analysis for Spain, 1986–2000

Two main factors underlie the rebirth of interest in the study of the influence of the real exchange rate on trade, the reduction of its volatility and the current trend towards price stability. The objective of this study is to analyse the effects of the process of nominal convergence, required of the European member states for the fulfilment of monetary integration, on foreign trade flows. The case of Spain, which is especially interesting in this context, is studied for the period 1986 to 2000. The results of estimating the aggregate functions of the export and import of goods shows how macroeconomic stability has altered the behaviour of trade with respect to the two basic determinants – income and prices – how it has caused a significant structural change in the real exchange rate and, finally, how it has laid the explanatory bases for transactions in the twenty-first century with the single currency – the euro.