Financial intermediation and the role of price discrimination in the foreign exchange market

Foreign exchange trading is performed in opaque and decentralized markets. The two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We develop a theoretical pricing model that accounts for market-power considerations and analyze a database of the trades of a foreign exchange market maker. We find that the market maker generally exerts low bargaining power vis-á-vis customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information.     

Human error in high hazard systems: Do we treat the problem in an appropriate way?

This article addresses the problem of human error within a technical environment. A model of a human-machine interface is presented to illustrate the work situation in an open perspective. The term human error is defined and briefly discussed. A general framework for controlling human error is presented with proactive and reactive approaches. Some well-known methods of human reliability assessment are discussed and the general limitations of the methods are elaborated. The reactive approaches are compared with proactive approaches, and the term 'safety culture' is elucidated. The importance of high reliability organizations to serve as model companies for other organizations is briefly discussed.     

Network topology of the interbank market

We provide an empirical analysis of the network structure of the Austrian interbank market based on Austrian Central Bank (OeNB) data. The interbank market is interpreted as a network where banks are nodes and the claims and liabilities between banks define the links. This allows us to apply methods from general network theory. We find that the degree distributions of the interbank network follow power laws. Given this result we discuss how the network structure affects the stability of the banking system with respect to the elimination of a node in the network, i.e. the default of a single bank. Further, the interbank liability network shows a community structure that exactly mirrors the regional and sectoral organization of the current Austrian banking system. The banking network has the typical structural features found in numerous other complex real-world networks: a low clustering coefficient and a short average path length. These empirical findings are in marked contrast to the network structures that have been assumed thus far in the theoretical economic and econo-physics literature.     

Investment timing,liquidity, and agency costs of debt

This paper examines the effect of debt and liquidity on corporate investment in a continuous-time framework. We show that stockholder–bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt.     

A generalization of Panjer’s recursion and numerically stable risk aggregation

Portfolio credit risk models as well as models for operational risk can often be treated analogously to the collective risk model coming from insurance. Applying the classical Panjer recursion in the collective risk model can lead to numerical instabilities, for instance if the claim number distribution is extended negative binomial or extended logarithmic. We present a generalization of Panjer’s recursion that leads to numerically stable algorithms. The algorithm can be applied to the collective risk model, where the claim number follows, for example, a Poisson distribution mixed over a generalized tempered stable distribution with exponent in (0,1). De Pril’s recursion can be generalized in the same vein. We also present an analogue of our method for the collective model with a severity distribution having mixed support.