ENDOGENOUS TRADE POLICY: A TIME-SERIES APPROACH*

This paper provides a time-series analysis on the relationship between the extent of endogenous trade policy and both political and economic variables. The chosen trade policy indicator is the number of foreign-trade regulations passed each year for the benefit of a single firm or industry. The data are from Uruguay, 1925–1983. This country, which experienced an impressive economic decline, is an outstanding example of the rent-seeking society. The paper shows that endogenous regulations increased with discretionary policies, with adverse macroeconomic shocks and under dictatorship. It also shows that these regulations had a negative long-run effect on the growth rates of output and exports. The short-run effect was positive however.     

Modeling Foreign Bank Performance and Lending Behavior

This paper examines the profitability and commercial loan growth of foreign banks using a simultaneous‐equation framework. Maximizing behavior provides a two‐equation system in which bank profitability depends on variables related to expected returns, costs, and risks and in which loan growth is determined by risk and return variables. The model is tested to evaluate the determinants of foreign bank performace and lending behavior in the United States between 1987 and 1991. Overall the results indicate that factors such as capital strength, commercial and industrial loan growth, and assets composition were important in determining foreign banks' return‐on‐assets in the period under study. The role of capital appears to be particularly important in explaining foreign bank performance. The single significant determinant of loan growth was found to be previous period's loan growth.     

EQUITY CORRELATIONS IMPLIED BY INDEX OPTIONS: ESTIMATION AND MODEL UNCERTAINTY ANALYSIS

We propose a method for constructing an arbitrage‐free multiasset pricing model which is consistent with a set of observed single‐ and multiasset derivative prices. The pricing model is constructed as a random mixture of N reference models, where the distribution of mixture weights is obtained by solving a well‐posed convex optimization problem. Application of this method to equity and index options shows that, whereas multivariate diffusion models with constant correlation fail to match the prices of index and component options simultaneously, a jump‐diffusion model with a common jump component affecting all stocks enables to do so. Furthermore, we show that even within a parametric model class, there is a wide range of correlation patterns compatible with observed prices of index options. Our method allows, as a by product, to quantify this model uncertainty with no further computational effort and propose static hedging strategies for reducing the exposure of multiasset derivatives to model uncertainty.     

Super Bowl ad likeability: Enduring and emerging predictors

US advertisers love the Super Bowl because it reaches a huge and highly receptive audience. One metric that Super Bowl advertisers watch closely is ad likeability as this is correlated with sales success. Tomkovick, Yelkur, and Christians (2001, Journal of Marketing Communications 7: 89–108) studied ad likeability for Super Bowl ads in the 1990s. In this paper, we replicate and extend their research using USA Today's measurement of Super Bowl ad likeability in the decade of the 2000s as our dependent variable of interest. Our findings on 438 Super Bowl ads show that humor, animals, and product category were enduring predictors of ad likeability. Product information and the presence of children in Super Bowl ads were found to be emerging predictors of ad likeability. Most notably, the amount of product information provided in Super Bowl commercials was inversely related to ad likeability. Implications for advertisers are presented, as are conclusions, study limitations and directions for future research.     

Robustness and sensitivity analysis of risk measurement procedures

Measuring the risk of a financial portfolio involves two steps: estimating the loss distribution of the portfolio from available observations and computing a ‘risk measure’ that summarizes the risk of the portfolio. We define the notion of ‘risk measurement procedure’, which includes both of these steps, and introduce a rigorous framework for studying the robustness of risk measurement procedures and their sensitivity to changes in the data set. Our results point to a conflict between the subadditivity and robustness of risk measurement procedures and show that the same risk measure may exhibit quite different sensitivities depending on the estimation procedure used. Our results illustrate, in particular, that using recently proposed risk measures such as CVaR/expected shortfall leads to a less robust risk measurement procedure than historical Value-at-Risk. We also propose alternative risk measurement procedures that possess the robustness property.     

Constant Proportion Debt Obligations (CPDOs): modeling and risk analysis

Constant Proportion Debt Obligations (CPDOs) are structured credit derivatives that generate high coupon payments by dynamically leveraging a position in an underlying portfolio of investment-grade index default swaps. CPDO coupons and principal notes received high initial credit ratings from the major rating agencies, based on complex models for the joint transition of ratings and spreads for all names in the underlying portfolio. We propose a parsimonious model for analysing the performance of CPDO strategies using a top-down approach that captures the essential risk factors of the CPDO. Our approach allows us to compute default probabilities, loss distributions and other tail risk measures for the CPDO strategy and analyse the dependence of these risk measures on various parameters describing the risk factors. We find that the probability of the CPDO defaulting on its coupon payments can be made arbitrarily small—and thus the credit rating arbitrarily high—by increasing leverage, but the ratings obtained strongly depend on assumptions on the credit environment (high spread or low spread). More importantly, CPDO loss distributions are found to exhibit a wide range of tail risk measures inside a given rating category, suggesting that credit ratings are insufficient performance indicators for such complex leveraged strategies. A worst-case scenario analysis indicates that CPDO strategies have a high exposure to persistent spread-widening scenarios and that CPDO ratings are shown to be quite unstable during the lifetime of the strategy.     

Public Sector Downsizing: An Introduction

Authorities throughout the developing world are turning to downsizingin an effort to reduce budget deficits and address the inefficienciesengendered by state-led development strategies. Because large-scaleinvoluntary dismissals are often politically difficult, a voluntaryapproach to reductions in public sector employment is increasinglypopular among developing-country governments, multilateral organizations,and donor countries. This article (and, more generally, theresearch project on Public Sector Retrenchment) attempts tosketch a protocol for public sector downsizing that takes intoaccount the costs and benefits for the workers and the economy. After reviewing the international experience with downsizing,the article addresses five questions: how to identify the redundantworkers, how to predict their losses from separation, how todesign compensation and assistance packages, how to assess thefinancial and economic returns to downsizing, and how to dealwith downsizing in one-company towns. Based on the answers tothese questions, a decision tree is proposed.     

Agricultural Comparative Advantage and Government Policy Interventions

International trade patterns are often explained by comparative advantage which is frequently thought to depend on variations in national factor endowments. Government intervention in agricultural markets may also have an impact on trade patterns. This study explores the relation between factor endowments and agricultural trade patterns and examines the impact of agricultural and environmental policies on trade flows. Measures of national endowments of capital, labour, land and energy reserves are computed for a sample of 40 countries and used to estimate Heckscher‐Ohlin‐Vanek equations with net trade in several agricultural commodities as the dependant variable. Variables measuring agricultural policy and environmental regulations are added to the equations and tested for significance. The variables representing government intervention do not contribute to the explanation of trade patterns while national factor endowments do account for much of the variation in trade patterns of grains, oilseeds, cotton, and, to a lesser extent, meat products and an aggregate of all agricultural goods. Commodities such as sugar, tropical products and fruits and vegetables do not appear to be well explained by factor endowments.     

Labor Market Institutions and the Second-Best Tariff

Labor market distortions provide a second-best case for protection. However, the implications are less obvious when the product market is imperfectly competitive too, as suggested by several partial equilibrium studies. This paper adopts a general equilibrium approach, combining unionization in labor markets with monopolistic competition in product markets. Two labor market settings are considered: fully centralized wage bargaining ("Scandinavia", for short) and negotiation at the firm level ("Latin America"). The competitive labor market case is used as a benchmark. It is shown that in Latin America the second-best tariff is higher, and the welfare level lower, than in the benchmark case. Scandinavia reaches the first best under free trade.     

Anti-corruption commissions: lessons for the Asia-Pacific region from a proposed Australian federal anti-corruption watchdog

ABSTRACT

This paper reviews the experience of anti-corruption commissions in the region and argues that the debate on the establishment of a national anti-corruption body in Australia is dependent on the country’s political culture, institutions and elites. Corruption and integrity coexist and are conceived as the obverse and converse, respectively, of a functional and dysfunctional system. Anti-corruption bodies in the Asia-Pacific region are compared against applicable global anti-corruption frameworks, policies and principles. The paper proposes a conceptual model for a National Integrity Ecosystem (NIE), premised on community values and trust and situates the Australian experience within such an ecosystem. A federal anti-corruption watchdog is the missing piece in Australia’s institutional infrastructure. Its acceptance and effectiveness require difficult and sustained change in the underlying political culture of the country and its elites.