The EC internal market,Lomé IV and the ACP countries

The implications that the internal market could hold for the EC's foreign trade relations are a cause of considerable worry to countries in the Third World. Particularly the ACP countries, for many of whom the EC is their foremost product and import market, fear the possible strengthening of protectionist barriers and a Europe increasingly preoccupied with itself. This article examines the perspectives of EC-ACP trade relations in the light of the Lomé IV agreement.     

International Telecom Settlements: Gaming Incentives, Carrier Alliances and Pareto-Superior Reform

Liberalized countries that allow competition in international telecommunications favor traffic re-routing practices as arbitrage against foreign monopolists. This view is seriously incomplete. Monopolists, allied with carriers in liberalized countries, can use these practices to reduce termination payments to nonalliance carriersöthereby harming also consumers in liberalized countriesöby gaming regulations that require equal termination rates at both ends and 'proportional return' (the monopolist's traffic is allocated among carriers in proportion to their shares of traffic to its country). We also present a simple bilateral settlements reform that eliminates gaming incentives and other proportional-return distortions, yet benefits both countries.     

Generalizations of the KPSS-test for stationarity

We propose automatic generalizations of the KPSS-test for the null hypothesis of stationarity of a univariate time series. We can use these tests for the null hypotheses of trend stationarity, level stationarity and zero mean stationarity. We introduce the asymptotic null distributions and we determine consistency against relevant nonstationary alternatives. We compare the properties of the tests with those of other proposed tests for stationarity. Monte Carlo simulations support the relevance of the tests when an autoregressive process with large positive autocorrelations is likely under the null hypothesis.     

Intra-Industry Trade and Labour-Market Adjustment: A Reassessment Using Data on Individual Workers

We re-examine the relationship between intra-industry trade and labour reallocation, using individual-level data on manufacturing worker moves in the United Kingdom. The contribution of this analysis is twofold. First, we estimate the impact of intra-industry trade on worker moves between occupations as well as between industries. Second, we run individual-level regressions that allow us to control for worker heterogeneity. Our results suggest that intra-industry trade does have the stipulated attenuating effect on worker moves, both between occupations and between industries, but that this effect is relatively small compared to other determinants of labour reallocation. JEL no. F1, J62, C25     

Hedging structured credit products during the credit crisis: A horse race of 10 models

Pricing and hedging structured credit products poses major challenges to financial institutions. This paper puts several valuation approaches through a crucial test: How did these models perform in one of the worst periods of economic history, September 2008, when Lehman Brothers went under? Did they produce reasonable hedging strategies? We study several bottom-up and top-down credit portfolio models and compute the resulting delta hedging strategies using either index contracts or a portfolio of single-name CDS contracts as hedging instruments. We compute the profit-and-loss profiles and assess the performances of these hedging strategies. Among all 10 pricing models that we consider the Student-t copula model performs best. The dynamical generalized-Poisson loss model is the best top-down model, but this model class has in general problems to hedge equity tranches. Our major finding is however that single-name and index CDS contracts are not appropriate instruments to hedge CDO tranches.     

Competitive differential pricing

We analyze welfare under differential versus uniform pricing across oligopoly markets that differ in costs of service, and establish general demand conditions for differential pricing by symmetric firms to increase consumer surplus, profit, and total welfare. The analysis reveals why competitive differential pricing is generally beneficial—more than price discrimination—but not always, including why profit may fall, unlike for monopoly. The presence of more competitors tends to enlarge consumers' share of the gain from differential pricing, though profits often still rise. When firms have asymmetric costs, however, profit or consumer surplus can fall even with ‘simple’ linear demands.     

Too dynamic to fail: empirical support for an autocatalytic model of Minsky’s financial instability hypothesis

Solomon and Golo (Account Econ Law 3(3):167–260, 2013) have recently proposed an autocatalytic (self-reinforcing) feedback model which couples a macroscopic system parameter (the interest rate), a microscopic parameter that measures the distribution of the states of the individual agents (the number of firms in financial difficulty) and a peer-to-peer network effect (contagion across supply chain financing). In this model, each financial agent is characterized by its resilience to the interest rate. Above a certain rate the interest due on the firm’s financial costs exceeds its earnings and the firm becomes susceptible to failure (ponzi). For the interest rate levels under a certain threshold level, the firm loans are smaller then its earnings and the firm becomes ‘hedge.’ In this paper, we fit the historical data (2002–2009) on interest rate data into our model, in order to predict the number of the ponzi firms. We compare the prediction with the data taken from a large panel of Italian firms over a period of 9 years. We then use trade credit linkages to discuss the connection between the ponzi density and the network percolation. We find that the ‘top-down’–‘bottom-up’ positive feedback loop accounts for most of the Minsky crisis accelerator dynamics. The peer-to-peer ponzi companies contagion becomes significant only in the last stage of the crisis when the ponzi density is above a critical value. Moreover the ponzi contagion is limited only to the companies that were not dynamic enough to substitute their distressed clients with new ones. In this respect the data support a view in which the success of the economy depends on substituting the static ‘supply-network’ picture with an interacting dynamic agents one.