Asset pricing in a production economy with Chew–Dekel preferences

In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew–Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein–Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model.     

The Effect of EU Antitrust Investigations and Fines on a Firm's Valuation

EU antitrust investigations involve a sequence of events which affect the investigated firm's market value. We model these relationships and estimate their impact on firms' share prices. On average, a surprise inspection reduces a firm's share price by 2.89%, an infringement decision reduces it by 3.57%. The Court judgments do not have a statistically significant effect. Overall, we find that the total effect of the antitrust action ranges from ?3.03% to ?4.55% of a firm's market value. Fines account for no more than 8.9% of this loss, and we conjecture that most of the loss is due to the cessation of illegal activities.     

Least-squares Importance Sampling for Monte Carlo security pricing

We describe a simple Importance Sampling strategy for Monte Carlo simulations based on a least-squares optimization procedure. With several numerical examples, we show that such Least-squares Importance Sampling (LSIS) provides efficiency gains comparable to the state-of-the-art techniques, for problems that can be formulated in terms of the determination of the optimal mean of a multivariate Gaussian distribution. In addition, LSIS can be naturally applied to more general Importance Sampling densities and is particularly effective when the ability to adjust higher moments of the sampling distribution, or to deal with non-Gaussian or multi-modal densities, is critical to achieve variance reductions.     

Dynamic capital structure and the contingent capital option

The financial crisis has emphasized the difficulties for financial companies to raise funds through conventional liabilities. In this environment, hybrid securities are becoming popular. In this paper we study the optimal capital structure of a company issuing a particular type of hybrid security: perpetual contingent capital, i.e., debt that converts into equity under some conditions. A two-period model with endogenous bankruptcy for a company with equity, straight debt and contingent capital is analyzed. We investigate the instrument under different conversion rules: automatic or optimally chosen by equity holders. We show that contingent capital reduces the coupon of straight debt and expected bankruptcy costs but can require a high spread. A trigger imposed by the regulatory authority in terms of par value of debt may induce a little use of contingent capital with an increase of bankruptcy costs.     

A copula–GARCH model for macro asset allocation of a portfolio with commodities

Many authors have suggested that the mean-variance criterion, conceived by Markowitz (The Journal of Finance 7(1):77–91, 1952), is not optimal for asset allocation, because the investor expected utility function is better proxied by a function that uses higher moments and because returns are distributed in a non-Normal way, being asymmetric and/or leptokurtic, so the mean-variance criterion cannot correctly proxy the expected utility with non-Normal returns. In Riccetti (The use of copulas in asset allocation: when and how a copula model can be useful? LAP Lambert, Saarbrücken 2010), a copula–GARCH model is applied and it is found that copulas are not useful for choosing among stock indices, but can be useful in a macro asset allocation model, that is, for choosing stock and bond composition of portfolios. In this paper I apply that copula–GARCH model for the macro asset allocation of portfolios containing a commodity component. I find that the copula model appears to be useful and better than the mean-variance one for the macro asset allocation also in presence of a commodity index, even if it is not better than GARCH models on independent univariate series, probably because of the low correlation of the commodity index returns to the stock, the bond and the exchange rate returns.     

FISCAL POLICY AND ASSET PRICES

We analyse the impact of fiscal policy on asset prices using a panel vector auto‐regressive (PVAR) approach and quarterly data for ten industrialized countries. We find that positive fiscal shocks lead to a temporary fall in stock prices and a gradual and persistent decrease in housing prices. The empirical findings also point to: (i) a contractionary effect of fiscal policy on output in line with the existence of crowding‐out effects and the deterioration of credit conditions; (ii) a weakening of the effectiveness of fiscal policy in recent times; (iii) a more persistent response of asset prices for countries with a lower degree of openness; (iv) a larger impact of fiscal policy on asset prices for small countries; (v) a close link between the responsiveness of asset prices to fiscal policy and the government’s size; (vi) an increase of the sensitivity of asset prices to fiscal policy shocks following the process of financial deregulation and mortgage liberalization; and (vii) significant fiscal multiplier effects in the context of severe housing busts. Finally, the evidence suggests that changes in equity prices may help governments towards consolidation of public finances.     

When Economics Faces the Economy: John Bates Clark and the 1914 Antitrust Legislation

The aim of this paper is to analyze John Bates Clark's influence in the passing of the Clayton and Federal Trade Commission Acts of 1914. It is argued that Clark was important to the passage of these acts in two ways. First, he exercised an indirect influence by discussing in academic journals and books problems concerning trusts, combinations, and the measures necessary to preserve the working of competitive markets. At least as importantly, Clark took an active role in the reform movement, both contributing to draft proposals for the amendment of existing antitrust legislation and providing help and advice during the Congressional debates that led to the passage of the FTC and Clayton Acts.     

American institutionalism at Chicago: A documentary note

Abstract

This note provides new evidence concerning American institutionalism at Chicago during the 1920s and 1930s.     

When Consumers and Products Come From the Same Place: Preferences and WTP for Geographical Indication Differ Across Regional Identity Groups

ABSTRACT

This article contributes to the existing literature on geographical indications by observing consumers’ stated preference for extra-virgin olive oil in two groups differing in their regional identity. In particular, consumers from two groups were asked to rank products in a contingent ranking survey. One group (“insiders,” Sicilian consumers) shared origin with a good product (Sicilian oil); the other group (“outsiders,” Rome and Milan) presented “no association” consumer-product. Results indicate that insiders are willing to pay more for goods originating from the region they identify with compared with a region associated with outsiders. Identity seems to give a bias by which a local product is not necessarily perceived as superior in absolute terms, but in relative terms: outside products are never considered better than inside options but are either inferior or equal in perceived value.     

Did the 2008–2009 Food and Financial Crises Affect Child Mortality? The Case of Sub-Saharan Africa

We estimate an aggregate model of child mortality on a panel of 40 African countries over the period 1995–2007. This model is then used to assess the impact of the 2008–2009 food and financial crises on child mortality, by comparing the number of child deaths computed under a “business-as-usual scenario” with those computed under the actual 2008–2009 “crisis scenario”. According to the simulation results, the 2008–2009 food price rise and recession caused a statistically non-significant additional 27,000 child deaths. However, if the 2008–2009 changes in other determinants of child mortality are factored in, the number of child deaths declined by 15,000. This unexpected result is explained by the fact that the effects of the rise in domestic food prices and the recession were offset in most of the region by the protective effect on the under-five mortality rate of a surge in food production, and by a rise in public expenditure on and foreign aid to the health sector.