Securitization and optimal retention under moral hazard

Securitization improves liquidity in capital markets by allowing originators to remove issued loans from its balance sheet and use the proceeds for other purposes. Securitization is often suspected of being one of the main reasons for the recent financial crisis. One concern is that securitization leads to moral hazard in lender screening and monitoring. By selling loans to investors and removing them from their books, banks have a lesser incentive to carefully evaluate and monitor borrowers’ credit quality to ensure that they can repay their loans. One problem in the literature is that the analysis of securitization is very general and suffers from a lack of specific security design analysis under asymmetric information. We address the moral hazard problem using a principal–agent model where the investor is the principal and the lender is the agent. We show that the optimal contract must contain a retention clause in the presence of moral hazard. The optimal retention is affected by tranching and credit enhancement.     

Optimal interest rate stabilization in a basic sticky-price model

This paper studies optimal monetary policy with the nominal interest rate as the single policy instrument. Firms set prices in a staggered way without indexation and real money balances contribute separately to households’ utility. The optimal deterministic steady state under commitment is the Friedman rule—even if the importance assigned to the utility of money is small relative to consumption and leisure. We approximate the model around the optimal steady state as the long-run policy target. Optimal monetary policy is characterized by stabilization of the nominal interest rate instead of inflation stabilization as the predominant principle.     

Combining historical and preliminary information to obtain timely time series data

A method is presented to improve the precision of timely data, which are published when final data are not yet available. Explicit statistical formulae, equivalent to Kalman filtering, are derived to combine historical with preliminary information. The application of these formulae is validated by the data, through a statistical test of compatibility between sources of information. A measure of the share of precision of each source of information is also derived. An empirical example with Mexican economic data serves to illustrate the procedure.     

Description, modelling and forecasting of data with optimal wavelets

Cascade processes have been used to model many different self-similar systems, as they are able to accurately describe most of their global statistical properties. The so-called optimal wavelet basis allows to achieve a geometrical representation of the cascade process-named microcanonical cascade- that describes the behavior of local quantities and thus it helps to reveal the underlying dynamics of the system. In this context, we study the benefits of using the optimal wavelet in contrast to other wavelets when used to define cascade variables, and we provide an optimality degree estimator that is appropriate to determine the closest-to-optimal wavelet in real data. Particularizing the analysis to stock market series, we show that they can be represented by microcanonical cascades in both the logarithm of the price and the volatility. Also, as a promising application in forecasting, we derive the distribution of the value of next point of the series conditioned to the knowledge of past points and the cascade structure, i.e., the stochastic kernel of the cascade process.     

Optimal investment with taxes: an existence result

We study the deterministic control problem of maximizing utility from consumption of an agent who seeks to optimally allocate his wealth between consumption and investment in a financial asset subject to taxes on benefits with first-in–first-out priority rule on sales. Short sales are prohibited and consumption is restricted to be non-negative. Such a problem has been introduced in a previous paper by the same authors where the first-order conditions have been derived. In this paper, we establish an existence result for this non-classical optimal control problem.     

Robust row-column designs for complete diallel cross experiments

This paper investigates the robustness of variance-balanced row-column designs for complete diallel cross experiments for estimating the comparisons among the general combining ability parameters against the loss of observations. A necessary and sufficient condition of robustness as per connectedness criterion is obtained. The robustness of optimal row-column designs of Gupta and Choi (1998) has been investigated for the loss of any m(≥1) observations in a column and for the loss of any two observations in the design. The study of robustness has also been conducted as per A-efficiency criterion.     

Optimality and efficiency of small chessboard designs for correlated errors

Optimal p × q row–column designs are obtained via complete enumeration of all possible designs for two treatments in some fixed effects models with errors specified by a doubly geometric covariance structure. This is done, in part, by a computer search, for a finite set of sizes of the correlation coefficients and in cases where p and q are small enough to make such a search feasible.     

Regulatory Optimal Bank Size

This paper presents a study of potential outcomes of bank growth. Banks grow by expanding market presence within the geographic region within which they are domiciled and by expanding presence into other regions via new implantations. Growth leads to improved diversification, but also results in an increase in the risk of catastrophe that a bank’s failure may engender. The conclusion is that there will exist a threshold size of bank at which the rate of growth in its systemic risk exceeds the rate of decline in its risk of insolvency. An empirical study of US bank call report data provides results that are consistent with the theory presented in the first part of the paper.

Optimal fishery harvesting rules under uncertainty

This paper derives the optimal fishery harvest policy in a real-option model with a stochastic logistic growth process, harvest-sensitive output price, and both fixed and variable harvesting costs. The policy specifies the harvest trigger and harvest size, while outputs from the model include the value of the fishery and the risk of extinction. The optimal policy is illustrated with data from the Pacific Halibut Fishery. For this particular case, the optimal policy recommends harvesting when the fish stock rises to about three-quarters the environmental carrying capacity, and the amount harvested should be approximately a quarter of the prevailing stock. This harvesting policy maximizes the value of the fishery, and importantly, the resulting risk of extinction is negligible. We also carry out some sensitivity analysis to see how the optimal policy (and the resulting fishery value and risk of extinction) change when the input parameters are varied, particularly the ecological parameters intrinsic growth rate and volatility of the stock, and also the economic parameters that have been ignored in previous papers (price sensitivity and fixed cost). If the optimal policy is followed, the risk of extinction will be negligible, except for very low growth rate and high volatility.