New Products and Financial Risk Changes

The historic focus of new products research has been on the ability of new products to enhance the profitability and competitive position of the innovating firm. In this article, Timothy Devinney shows that there exists an overlooked and potentially significant side effect associated with new product innovations: financial risk changes. He reports that significant financial risk changes occurred in approximately 50% of the new product announcements he examined. The magnitude of these financial risk changes translates into overestimates or underestimates of the firm's cost of capital by 17% to 18% and is strongly and positively related to the size of the firm and the firm's new product innovation activity.     

Pricing Options on an Asset with Bernoulli Jump-Diffusion Returns

The price movements of certain assets can be modeled by stochastic processes that combine continuous diffusion with discrete jumps. This paper compares values of options on assets with no jumps, jumps of fixed size, and jumps drawn from a lognormal distribution. It is shown that not only the magnitude but also the direction of the mispricing of the Black-Scholes model relative to jump models can vary with the distribution family of the jump component. This paper also discusses a methodology for the numerical valuation, via a backward induction algorithm, of American options on a jump-diffusion asset whose early exercise may be profitable. These cannot, in general, be accurately priced using analytic models. The procedure has the further advantage of being easily adaptable to nonanalytic, empirical distributions of period returns and to nonstationarity in the underlying diffusion process.     

Bond Yields, Ratings, and Financial Information: Evidence from Public Utility Issues

This study investigates the relative roles of bond ratings and financial information in the setting of bond yields. Structural equation modeling techniques are used to learn whether ratings determine yields or whether both ratings and yields are determined by a concurrent set of economic and financial factors. Tests of alternative structural model configurations provide evidence regarding the associations between bond ratings, financial information, and bond yields. Both ratings and financial information are found to play an important role in determining bond yields. In addition, yields are consistent with the higher rating in cases of split ratings.     

The Structural Relation Between Mortgage and Market Interest Rates

This paper analyzes the dynamic relationship between primary and secondary mortgage markets and the short-term and long-term market interest rates. Using a series of monthly data on fixed rate mortgage rates and GNMA rates, we explore the dependence and speed of adjustment in these primary and secondary mortgage rates to each other as well as to the long and short-term government rates. The results indicate that residential mortgage rates in general, appear to follow the long-term rate and are not very sensitive to movements in the short-term interest rate.     

Financing budget deficits in the Netherlands

Summary In The Netherlands public debt management is in the hands of the budgetary policy-maker, whose recourse to the capital market can exceed or fall short of the total borrowing requirement in order to absorb or create liquidity. The conduct of that policy since the early 1960's is analyzed in this paper, emphasizing the importance of medium-term control over the public finances as a prerequisite for the ability of debt management to make a flexible contribution to monetary policy. During the 1960's this condition was satisfied and debt management followed a stable countercyclical pattern which, however, was abandoned after the early 1970's as the public finances swung into substantial disequilibrium.The author thanks J. Boughton, L. Bovenberg, D. Hendry, P. Masson, J. Muellbauer, and the referees for comments on earlier versions. However, the views expressed are his alone and do not necessarily represent those of the International Monetary Fund.     

Protection versus Promotion: An Empirical Investigation

Using Turkish industry-level data from 1983 to 1990, we find that politically organized industries receive both higher protection and promotion than unorganized ones. Tariff rates are decreasing (increasing) in the import-penetration ratio and the absolute value of the import-demandelasticity for organized (unorganized) industries. Subsidy rates are decreasing (increasing) in the output-supply elasticity for organized (unorganized) industries. The results are consistent with the predictions of the Grossman–Helpman model and its extension in this paper. The mix of protection and promotion is inversely related to the ratio of their respective marginal deadweight cost measures.