Corporate Risk Management and the Incentive Effects of Debt

This paper demonstrates how the incentive of manager-equityholders to substitute toward riskier assets, commonly referred to as the “asset substitution problem,” is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager-equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager-equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level.     

Trading Patterns and Prices in the Interbank Foreign Exchange Market

The behavior of quote arrivals and bid-ask spreads is examined for continuously recorded deutsche mark-dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid-ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.     

External and Internal Pricing in Multidivisional Firms

Multidivisional firms frequently rely on external market prices in order to value internal transactions across profit centers. This paper examines market‐based transfer pricing when an upstream division has monopoly power in selling a proprietary component both to a downstream division within the same firm and to external customers. When internal transfers are valued at the prevailing market price, the resulting transactions are distorted by double marginalization. The imposition of intracompany discounts will always improve overall firm profits provided the supplying division is capacity constrained. Under certain conditions it is then possible to design discount rules so that the resulting prices and sales quantities are efficient from the corporate perspective. In contrast, the impact of intracompany discounts remains ambiguous when the capacity of the selling division is essentially unlimited. It is then generally impossible to achieve fully efficient outcomes by means of market‐based transfer pricing unless the external market for the component is sufficiently large relative to the internal market.     

Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long-Run in High Frequency Returns

Recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean-reverting fractionally integrated process. Meanwhile, much shorter lived volatility dynamics are typically observed with high frequency intradaily returns. The present article demonstrates, that by interpreting the volatility as a mixture of numerous heterogeneous short-run information arrivals, the observed volatility process may exhibit long-run dependence. As such, the long-memory characteristics constitute an intrinsic feature of the return generating process, rather than the manifestation of occasional structural shifts. These ideas are confirmed by our analysis of a one-year time series of five-minute Deutschemark-U.S. Dollar exchange rates.     

Tails,Fears, and Risk Premia

We show that the compensation for rare events accounts for a large fraction of the average equity and variance risk premia. Exploiting the special structure of the jump tails and the pricing thereof, we identify and estimate a new Investor Fears index. The index reveals large time‐varying compensation for fears of disasters. Our empirical investigations involve new extreme value theory approximations and high‐frequency intraday data for estimating the expected jump tails under the statistical probability measure, and short maturity out‐of‐the‐money options and new model‐free implied variation measures for estimating the corresponding risk‐neutral expectations.     

Financial Constraints, Competition, and Hedging in Industry Equilibrium

We analyze the hedging decisions of firms, within an equilibrium setting that allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. Within this equilibrium some firms hedge while others do not, even though all firms are ex ante identical. The fraction of firms that hedge depends on industry characteristics, such as the number of firms in the industry, the elasticity of demand, and the convexity of production costs. Consistent with prior empirical findings, the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries.     

HAS NEW ZEALAND'S EMPLOYMENT CONTRACTS ACT INCREASED EMPLOYMENT AND REDUCED WAGES?*

The Employment Contracts Act 1991 substantively altered the structure of the industrial relations system in New Zealand. This study estimates the effects of this legislation on employment levels and average hourly earnings in this country using disaggregate industry level data from 1986(1) to 1996(2). In the five years following the enactment of the ECA, nonagricultural union membership declined from 49.5 to 27.2 per cent of the work force. This is an important consideration because our regression analysis suggests that this decrease in unionisation is solely responsible for any effects of the ECA on the labour market. Full-time equivalent employment grew by 14.2 per cent between 1991(2) and 1996(2). At least 2.3 percentage points of this employment growth can be attributed to this legislation. If the ECA was partly responsible for the recent economic recovery, then more of this employment growth could be credited to this act. There are two basic reasons why the ECA might have increased employment over the past five years. It could have lowered hourly earnings, or increased effective labour demand. Estimates of a reduced-form wage equation and a structural labour demand function both point to the latter explanation. Since there is no statistical evidence that ECA reduced hourly earnings, falling unionisation must have increased effective labour demand.     

Crisis? What Crisis? The Normality of the Current Food Crisis

The 2005–8 food crisis was a shock to political elites, but in some respects the situation was normal. Food policies are failing to respond adequately to the squeeze on land, people, health and environment. Strong evidence of systems failure and stress, termed here New Fundamentals, ought to reframe twenty‐first century food politics and effort. Yet so far, international discourse is too often narrow and technical. The paper suggests that 2005–8 reinforced how the dominant twentieth century productionist policy paradigm is running out of steam. This assumed that producing more food would resolve social problems. Yet distortions in markets, access and culture remain. At national and international levels of governance, despite realization of the enormity of the challenge ahead, there is still a belief in slow incremental change.     

Report of the Managing Editor

Overall, 2003 was a fair year for the Journal. Importantly, the target of a four‐month average turnaround for submissions has been achieved and further steps have been set in train to reduce lags on papers in the tail of the distribution. Although the JAE slipped in to second place behind the AJAE in 2002 on the Institute of Scientific Information's ranking, the JAE's impact factor was higher than the average for recent years. An initial assessment of the JAE on‐line usage is positive with nearly 9,000 hits being recorded since the service was introduced in July 2002. This activity translates to over 500 hits per month, of which around 12% are downloads of full papers. Future growth of online usage is expected.     

Global City Frontiers: Singapore's Hinterland and the Contested Socio‐political Geographies of Bintan,Indonesia

During the 1980s, Singapore's policy‐makers perceived that the continued expansion of the Singapore economy required more spaces and workers beyond the 680‐square‐kilometre territorial limits of the city‐state. While planning to extend these limits through further land reclamation, Singapore also began to foster economic cooperation with regional neighbours, most famously in the form of a so‐called Growth Triangle incorporating proximate areas of Malaysia and Indonesia. The empirical focus of this article is on the tourist enclave developed on the Indonesian island of Bintan, a 45‐minute ferry ride from Singapore. This enclave embodies complex re‐territorializations. We specify how, despite a decade of re‐fashioning zones of Bintan into quasi‐enclaves and the literal and metaphorical cultivation of a tourist haven, other claims on these transfrontier zones resurfaced in the form of resistances and struggles over the terms of access to land and resources. It is argued that the trajectory of Bintan is symptomatic of wider transformations and epitomizes new configurations of sovereignty, urbanity and ‘gated globalism’.