A note on capital budgeting in the purchase of information

A capital budgeting problem of purchasing perfect information is defined. The relationship between this problem and the Expected Value measure is shown and an illustrative example provided.     

Random competitive exchange: Price distributions and gains from trade

This paper studies the behavior of a competitive exchange under uncertain preferences and random indivisible endowments. We obtain explicit closed-form results for the price distribution and expected gains from trade, both for case where the market is “thin” and the number of traders is low, and for the asymptotic case where the number of traders tends to infinity. We demonstrate that increasing the number of traders reduces price variability and increases the expected gains from trade, and that increasing the variability of traders' reservation prices increases price variability as well as the expected asymptotic gains from trade.     

Two polar cases of dynamic stability: voluntary exchange and income redistribution

Summary. It is known that when voluntary exchange is permitted at disequilibrium, dynamic stability may fail because of lack of liquidity. In this paper it is shown that when the economy runs out of liquidity dynamic stability can still be restored by means of a planning procedure of redistributing personal incomes.Received: 30 May 2003, Revised: 20 January 2005, JEL Classification Numbers: D01, D50.I wish to thank a referee for helpful comments.     

Environmental amenities and optimal agricultural land use: The case of Israel

This paper evaluates the effectiveness of changing land allocation among crops as a mechanism for increasing net-social benefits, where production profits and amenity values are augmented. A positive mathematical programming model is calibrated and applied to 43 regions in the northern part of Israel, using a crop-discriminating amenity-value function. Changes in land allocation increase net-social benefits by 2.4% nationwide and by up to 15% on the regional level, where in some regions the net-social-benefits-increase/profit-loss ratio exceeds 20. Therefore, the results indicate that a policy encouraging amenity-enhancement of agricultural land use is warranted, provided that it is implemented on a regional scale, rather than as a comprehensive nationwide-enforced program.     

Guanxi,political connections and resource acquisition in Chinese publicly listed private sector firms

In this study, we examined the role of guanxi as entrepreneurs’ resource-obtaining mechanism in private sector firms, using a data-set of 184 publicly listed firms in China. We found that guanxi indeed played a positive role that helped private sector firms gain easier access to resources. We also found that guanxi exerted even a greater positive effect on private sector firms’ resource obtaining compared to entrepreneurs’ political participation, due to being the lifeblood of business conduct and social interaction in Chinese culture.     

Usury and Just Compensation: Religious and Financial Ethics in Historical Perspective

Usury is a concept often associated more with religiously based financial ethics, whether Christian or Islamic, than with the secular world of contemporary finance. The problem is compounded by a tendency to interpret riba, prohibited within Islam, as both usury and interest, without adequately distinguishing these concepts. This paper argues that in Christian tradition usury has always evoked the notion of money demanded in excess of what is owed on a loan, disrupting a relationship of equality between people, whereas interest was seen as referring to just compensation to the lender. Although it is often claimed that hostility towards ‘usury’ has been in retreat in the West since the protestant Reformation, we would argue that the crucial break came not with Calvin, but with Jeremy Bentham, whose critique of the arguments of Adam Smith, upholding the reasonableness of the laws against usury, led to the abolition of the usury laws in England in 1854. There has to be a role for law, whether Islamic or secular, in regulating financial relationships. We argue that by retrieving the necessary distinction between demanding usury as illegitimate predatory lending and interest as legitimate compensation, we can discover common ground behind the driving principles of financial ethics within both Islamic and Christian tradition that may still be of relevance today. By re-examining past ethical discussions of the distinction between usury and just compensation, we argue that the world’s religious traditions can make significant contributions to contemporary debate. Constant Mews is Director of the Centre for Studies in Religion and Theology at Monash University. He holds PhD and Masters degrees in medieval history, and pursues research in medieval religion, thought and ethics. Ibrahim Abraham is a PhD student in the School of Political and Social Inquiry, Monash University, with degrees in religion studies as well as law. His research interests include religion and culture, fair trade, and human rights.     

The Notching Rule for Subordinated Debt and the Information Content of Debt Rating

This paper provides new evidence regarding the information content of debt ratings. We show that noninvestment grade subordinated issues are consistently priced too high (the yield is too low), and the reverse is true for some investment grade bonds. We relate this empirical bias to a notching rule of thumb that is used in order to rate subordinated debt without expending additional resources for information production. We propose an explanation for these findings based upon a balance between an attempt to please the companies that pay the raters versus a concern for lawsuits and regulatory investigations should ratings be too optimistic.     

THE COUPON EFFECT ON TERM PREMIUMS

Monthly holding period returns for U.S. Treasury bills and notes of identical maturity indicate a significant coupon effect upon term premiums. Hotelling's T² test of the vectors of mean term premiums indicates that term premiums are not statistically significant for notes but are significant for bills. Mean-variance and stochastic dominance criteria indicate an investment preference for bills over notes on a pretax basis. Because the data set is Treasury bills and notes, which are identical except for coupon level, these results are evidence of a coupon effect on term premiums.     

Efficiency,predictability and news on the foreign exchange markets: Floating exchange rates versus adjustable E.M.S. rates

Zusammenfassung Effizienz, Vorhersehbarkeit und neue Informationen auf den Devisenm?rkten: Floatende Wechselkurse versus anpassungsf?hige EWS-Kurse. - In diesem Aufsatz wird untersucht, ob die Kurse auf dem Brüsseler Devisenmarkt effizient und unverzerrt zustande kommen und wie sich neue Informationen auf die Bildung der Wechselkurse auswirken. Betrachtet werden die Wechselkurse zwischen D-Mark und Belgischem Franken sowie zwischen US-Dollar und Belgischem Franken in der Zeit von Januar 1979 bis Juli 1983. D-Mark und Belgischer Franken sind durch das Europ?ische W?hrungssystem (EWS) verbunden, w?hrend der Dollar-Franken Kurs ein typisches Beispiel für einen frei floatenden Wechselkurs ist. Dieser Unterschied sowie die weitere Unterscheidung auf dem Brüsseler Devisenmarkt zwischen dem offiziellen Markt für Handelstransaktionen und dem freien Markt für Kapitaltransaktionen erm?glichen einen ausführlichen Vergleich zwischen alternativen W?hrungen und Wechselkurssystemen. Die Ergebnisse zeigen, daΒ auch auf kleineren und st?rker verzerrten Devisenm?rkten (wie dem Brüsseler) die Marktteilnehmer zukünftige Kassakurse genau vorhersagen und neue Informationen effizient verwerten. Es l?Βt sich allerdings nicht feststellen, daΒ das EWS die Effizienz und Vorhersehbarkeit auf dem Devisenmarkt erheblich verbessert. Neue Informationen spiegeln sich in unerwarteten Ver?nderungen der Zinsdifferenz wider. Den Ergebnissen zufolge führt eine Erh?hung dieser Differenz zu einem Anstieg der Kassakurse; auΒerdem kommen solche unerwarteten Schocks bei floatenden Wechselkursen h?ufiger vor als im EWS.

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Résumé Efficacité, prévisibilité et informations nouvelles aux marchés de change: Taux de change flottants versus taux SME ajustables. - Dans cet article l’auteur analyse si le marché de change de Bruxelles forme les cours de change d’une maniére efficace et quelles sont les conséquences des informations nouvelles sur la formation du taux de change. Les taux de change entre la Deutschmark (DM) et les Francs Belges (BF) et entre le $ et les BF sont considérés pour la période Janvier 1979 - Juillet 1983. La DM et les BF sont liés étroitement par le Systéme Monétaire Européen (SME), pendant que la relation $/BF est l’exemple typique d’un taux de change complétement flottant. Cela et la distinction entre marché officiel pour les transactions commerciales et marché libre pour des transactions des capitaux rendent possible une comparaison extensive entre des monnaies alternatives et des systémes différents de taux de change. Les résultats démontrent que les agents économiques prédisent précisément des taux au comptant futurs et absorbent des informations nouvelles d’une maniére efficace même dans les marchés de change plus petits et plus déformés (comme celui de Bruxelles). Mais cependant, il ne se trouve aucune évidence que le SME significativement améliore l’efficacité et la prévisibilité du marché de change. Les informations nouvelles sont reflétées en changements imprévus des différences entre les taux d’intérêt. Les résultats indiquent qu’une augmentation de cette différence cause une augmentation du taux au comptant et que ces chocs imprévus se passent plus souvent dans un systéme de taux de change flottant que dans le SME.

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Resumen Eficiencia, predictabilidad y noticias en los mercados de cambios: tipos de cambio flotantes versus tipos del cambio ajustables del Sistema Monetario Europeo. - En este trabajo estudiamos la eficiencia y el sesgo del mercado de cambios de Bruselas e investigamos el impacto de las noticias sobre la determinaci?n del tipo de cambio. Dos tipos de cambio, el del Marco alemán (DM) / Franco belga (BF) y el del US $ / BF, son observados entre enero de 1979 y julio de 1983. EL DM y el BF están vinculados através del Sistema Monetario Europeo (SME), mientras que el tipo de cambio US $ / BF constituye un tipico ejemplo de un cambio flotante. Estas caracteris icas, además de la dife enciación entre el mercado oficial para transacciones comerciales y el libre para transacciones financieras, permiten una comparaci?n entre distintos sistemas de mercado de cambios. Nuestros resultados demuestran que también en los mercados más pequenos y distorsionados, como el de Bruselas, los agentes econ?micos predicen los tipos de cambio spot futuros con precision y absorben nuevas informaciones eficientemente. En cambio no encontramos evidencia alguna que demuestre que el SME contribuye significativamente a mejorar la eficiencia y la predictabilidad del mercado de cambios. Las noticias se reflejan en variaciones inesperadas en la diferencia entre las tasas de interés. Nuestros resultados indican que un aumento de esta diferencia se traduce en un aumento del tipo de cambio spot, y que tales shocks inesperados ocurren más a menudo en un sistema de cambios flotantes que en uno de cambios ajustables como el SME.