Design and valuation of debt contracts

This articles studies the design and valuation of debt contractsin a general dynamic setting under uncertainty. We incorporatesome insights of the recent corporate finance literature intoa valuation framework. The basic framework is an extensive form game determined bythe terms of a debt contract and applicable bankruptcy laws.Debtholders and equityholders behave noncooperatively. The firm'sreorganization boundary is determined endogenously. Strategic debt service results in significantly higher defaultpremia at even small liquidation costs. Deviations from absolutepriority and forced liquidations occur along the equilibriumpath. The design tends to stress higher coupons and sinkingfunds when firms have a higher cash payout ratio.     

Exchange risk and unanticipated changes in exchange rates

In this paper exchange risk is defined as the unanticipated part of the future changes in the exchange rates of a given currency. The unanticipated component in the fluctuations of a given currency is identified on the basis of a dynamic equilibrium process which determines the anticipated changes in the future exchange rates. Following the basic definition, a hypothetical process of dynamic adjustment and an empirical illustration of a possible estimation are discussed.     

Determination of trade flows and choice of trade partners: Reconciling the Heckscher-Ohlin and the Burenstam Linder models of international trade

Zusammenfassung Die Bestimmung der Handelsstr?me und Auswahl der Handelspartner: Wie man die Au\enhandelsmodelle von Heckscher-Ohlin und von Burenstam Linder in Einklang bringt. — In der Au\enhandelsliteratur werden zwei Ans?tze zur Bestimmung der komparativen Vorteile unterschieden: (i) das Heckscher-Ohlin-Modell, das die relative Verfügbarkeit der Produktionsfaktoren als die ent-scheidende Determinante der Handelsbeziehungen ansieht; und (ii) das Burenstam Linder-Modell, das untersucht, wie sich gleichartige Pr?ferenzen der Konsumenten in der Nachfrage und im internationalen Handel niederschlagen. Dieser Artikel verbindet beide Ans?tze in einem einzigen Modell, in dem jeder der beiden Ans?tze nur einen Spezialfall darstellt. In dem Aufsatz wird die Bedeutung des gemeinsamen Modells für die Handelsstr?me, die Konsumm?glichkeiten und die Relation zwischen dem Au\enhandel und der Gr?\e einer Volkswirtschaft analysiert. Im empirischen Teil wird demonstriert, wie nützlich das Modell bei der Vorhersage des Handels mit unterschiedlichen Produktgruppen ist.

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Résumé La détermination des flux d’échanges et le choix des partenaires com-merciaux: La réconciliation des modèles de l’échange international de Heckscher-Ohlin et de Burenstam Linder. — La littérature sur les échanges internationaux distingue entre deux approches à la détermination de l’avantage comparatif: (i) le modèle de Heckscher-Ohlin qui regarde l’abondance relative des facteurs de production comme déterminant principal des relations commerciales; (ii) le modèle de Burenstam Linder qui examine la similarité des préférences des consommateurs comme elle est reflétée sur la situation de demande et les effets sur le commerce extérieur. Cet article incorpore les deux approches dans un seul modèle dans lequel chaque approche constitue un cas spécial. L’article examine les implications du modèle unifié pour les relations commerciales, les possibilités de consommation et le rapport entre les échanges internationaux et la dimension de l’économie. La section empirique démontre l’utilité du modèle pour prédire les relations commerciales des différents groupes des biens.

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Resumen Determination de los flujos comerciales y la elección de los socios comerciales: Reconciliando los modelos de comercio international de Heckscher-Ohlin y Burenstam Linder. — La literatura del comercio internacional distingue entre dos planteamientos para la determinatión de las ventajas comparativas: (i) el modelo de Heckscher-Ohlin, que considera la abundancia relativa de factores de production como el determinante más importante para el patrón de comercio; (ii) el modelo de Burenstam Linder, que examina las similitudes en los gustos re-flejados en el acondicionamiento de la demanda y su impacto sobre el comercio. En este artículo se incorporan los dos planteamientos dentro de un modelo único en el que cada uno constituye un caso especial. El artículo examina las implicaciones del modelo unificado para los patrones de comercio, posibilidades de consumo y la relatión del comercio con respecto al tama?o del país. La parte empírica del artículo demuestra la utilidad del modelo para predecir patrones de comercio de distintos grupos de productos.

     

Correlations in price changes and volatility across international stock markets

The short-run interdependence of prices and price volatilityacross three major international stock market is studied. Dailyopening and closing prices of major stock indexes for the Tokyo,London, and New York stock markets are examined. The analysisutilizes the autoregressive conditionally heteroskedastic (ARCH)family of statistical models to explore these pricing relationship.Evidence of price volatility spillovers from New York to Tokyo,London to Tokyo, and New York to London is observed, but noprice volatility spillover effects in other directions are foundfor the pre-October 1987 period.     

The term structure of interest rates and the Mexican economy

Can the yield spread, which has been found to predict with surprising accuracy the movement of key macroeconomic variables of developed countries, also predict such variables for a developing country experiencing economic turmoil? This article presents empirical results that suggest significant forecasting ability for the yield spread for segments of the Mexican economy during the 1995–1997 period of economic volatility. The actual and predicted variable changes sometimes conflict with those experienced by developed countries in part because of the unusually close relationship between the Mexican Treasury and the Banco de México. Consequently, analysts and policy officials may exploit the forecast potential of the yield spread, but only in the context of evolving institutional considerations.     

Quantity and price controls by the firm under demand uncertainty and welfare implications

A monopoly facing an uncertain demand can affect its profit distribution through the choice of ex ante controls. This paper compares two modes of behavior - price-setting and quantity-setting - in the context of a mean-variance model. The main results are: (a) With nonlinear cost, the monopoly will not be indifferent between the two modes. In the particular case of quadratic cost, conditions for the dominance of price-setting over quantity-setting behavior are derived. (b) Whereas it is well-known that the risk averse, quantity-setting monopoly will produce less under uncertainty than under certainty (or risk neutrality), the price-setting monopoly increases its expected output when faced by uncertain demand, possibly exceeding even the competitive output under uncertainty. (c) Using expected social surplus as a welfare criterion, price-setting emerges as the welfare-dominant behavior when there is a conflict between the privately and the socially preferred modes. (d) Finally, there exist conditions where price-setting monopolies welfare-dominate a competitive industry facing the same random demand.     

Currency-related risk and risk premium in the world's currency market

The foreign exchange market has become a major arena for investment activity for both corporate and individual investors. Intensive and widespread international investment activity makes the empirical estimation of exchange risk a very topical subject. In this connection, the classic controversy between Hicks and Telser assumes new relevance. In this paper, exchange risk is estimated in the context of the systematic-risk framework. The estimation is performed for three major floating currencies: the English pound, the Swiss franc, and the Deutsche mark, over a four-year period. The results suggest that although the total risk (measured by the variance) is high, the systematic risk is close to zero. This result provides an explanation for the apparent inconsistency between the Hicks-Keynes hypothesis which indicates the existence of a positive risk premium in the forward exchange market and the empirical evidence of a zero risk premium.     

The collective good motive for immigration policy

The authors consider immigration policy in the particular setting of scale economies in consumption. A model of a jurisdiction with a collective good motive for instituting an immigration policy is developed, and comparative statistical results are derived     

FX spreads and dealer competition across the 24-hour trading day

This study examines the impact of competition on bid-ask spreadsin the spot foreign exchange market. We measure competitionprimarily by the number of dealers active in the market andfind that bid-ask spreads decrease with an increase in competition,even after controlling for the effects of volatility. The expectedlevel of competition is time varying, highly predictable, anddisplays a strong seasonal component that in part is inducedby geographic concentration of business activity over the 24-hourtrading day. Our estimates show that the expected addition ofone more competing dealer lowers the average quoted spread by1.7%     

Embargo threat,learning and departure from comparative advantage

This paper extends the current analysis of trade embargo threats, initiated by Bhagwati and Srinivasan, Mayer, and others using general-equilibrium analysis, to a situation where there is the possibility of lowering the future cost of production of the potentially embargoed good as a result of learning-by-doing.