A note on wealth effect under CARA utility

There is a simple but overlooked way of capturing the wealth effect under CARA utility via making the absolute-risk aversion parameter wealth-dependent. We implement this approach in the asymmetric information setting of Verrecchia (1982), and compare it with the alternative approach of changing the utility function (Peress, 2004). Ours is a straightforward tractable extension of Verrecchia, while Peress has to resort to approximate methods. Importantly, our closed-form solution reveals that the relation between wealth and wealth share invested in a risky asset can be negative, while Peress’s main result is that this relation is uniquely positive.     

Debt Overhang and Barter in Russia

This paper develops a model in which costly barter is used by firms to protect working capital against outside creditors. Although creditors could agree to postpone debt payments and to avoid destroying the firm's working capital, if the firm cannot commit not to divert cash ex post, the outcome of renegotiation still provides ex ante incentives to use barter. We show that the greater is the debt overhang, the more likely is the use of barter, with and without the possibility of debt restructuring. Empirical evidence from Russian firm-level data is shown to be consistent with the model's predictions. J. Comp. Econ., December 2002, 30(4), pp. 635–656. New Economic School, CEFIR, CEPR, and WDI, Nakhimovsky pr. 47, Moscow 117418, Russia; Sloan School of Management, M.I.T., 50 Memorial Drive, Cambridge, Massachusetts 02142; and ROSES–CNRS and CEPR, Maison des Sciences économiques, 106–112 Bd de l'Hôpital, 75647 Paris Cedex 13, France. © 2002 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.Journal of Economic Literature Classification Numbers: E41, G34, P31.     

Difference in interim performance and risk taking with short-sale constraints

Absent much theory, empirical works often rely on the following informal reasoning when looking for evidence of a mutual fund tournament: If there is a tournament, interim winners have incentives to decrease their portfolio volatility as they attempt to protect their lead, while interim losers are expected to increase their volatility so as to catch up with winners. We consider a rational model of a mutual fund tournament in the presence of short-sale constraints and find the opposite: Interim winners choose more volatile portfolios in equilibrium than interim losers. Several empirical works present evidence consistent with our model. However, based on the above informal argument, they appear to conclude against the tournament behavior. We argue that this conclusion is unwarranted. We also demonstrate that tournament incentives lead to differences in interim performance for otherwise identical managers and that mid-year trading volume is inversely related to mid-year stock return.     

World energy forecast and consequences for Russia

This article reviews the results of the second Russian forecast of world energy development by 2040, threats to the Russian economy and energy development as a result of transformations in world energy markets, and ways to eliminate them.     

ON PROPERTIES OF ANALYTICALLY SOLVABLE FAMILIES OF LOCAL VOLATILITY DIFFUSION MODELS

We present some further developments in the construction and classification of new solvable one‐dimensional diffusion models having transition densities, and other quantities that are fundamental to derivatives pricing, representable in analytically closed form. Our approach is based on so‐called diffusion canonical transformations that produce a large class of multiparameter nonlinear local volatility diffusion models that are mapped onto various simpler diffusions. Using an asymptotic analysis, we arrive at a rigorous boundary classification as well as a characterization with respect to probability conservation and the martingale property of the newly constructed diffusions. Specifically, we analyze and classify in detail four main families of driftless regular diffusion models that arise from the underlying squared Bessel process (the Bessel family), Cox–Ingersoll–Ross process (the confluent hypergeometric family), the Ornstein‐Uhlenbeck diffusion (the OU family), and the Jacobi diffusion (the hypergeometric family). We show that the Bessel family is a superset of the constant elasticity of variance model without drift. The Bessel family, in turn, is nested by the confluent hypergeometric family. For these two families we find further subfamilies of conservative strict supermartingales and nonconservative martingales with an exit boundary. For the new classes of nonconservative regular diffusions we also derive analytically exact first exit time densities that are given in terms of generalized inverse Gaussians and extensions. As for the two other new models, we show that the OU family of processes are conservative strict martingales, whereas the Jacobi family are nonconservative nonmartingales. Considered as asset price diffusion models, we also show that these models demonstrate a wide range of local volatility shapes and option implied volatility surfaces that include various pronounced skew and smile patterns.     

Some results on general assumptions about the existence of economic equilibrium

In the present paper we maximally use the possibilities provided by the Nash approach and the Kakutani fixed point theorem for proving the existence of an economic equilibrium. We obtain a general existence theorem which does not require a special form for income distribution functions and producer's objectives, independence of consumers' tastes, ordered preference and zero degree homogeneous price dependence. The role of the non-satiation assumption becomes more clear.     

Strategic Development Outlook for the Energy Complex of Russia

The article discusses the long-term development of the energy complex and its role in the Russian economy in the context of the restructuring of world energy markets and considering the draft Energy Strategy of the Russian Federation for the period through to 2035. Using the SCANER modelling and information complex, representative scenarios for the evolution of world energy markets have been developed, as well as relevant scenarios for the development of Russia’s economy and energy, including the dynamics of domestic consumption of major fuels and energy in view of energy conservation, as well as effective volumes and directions of basic fuel exports. Based on this, the dynamics of extraction and processing of basic fuels, the use of renewable energy resources, and electricity production by various types of power plants are optimized, and the necessary capital investments and returns on the dynamics of domestic prices for fuel and energy are determined. Changes in the main macroeconomic indicators of the contribution of the energy complex to the development of the Russian economy, corresponding to these scenarios, indicate a possible relatively rapid decrease in its dependence on energy exports.     

Anti-competitive agreements in Russian courts (2008–2012): antitrust law implementation and interpretation

This article analyses antitrust enforcement practice in Russian courts in the area of competition-restricting agreements. The analysis is based on the court decision database of litigations with the Russian competition authority (the Federal Antimonopoly Service (FAS)). In the database litigations that officially started in the period 2008–2012 were included. Final court decisions were evaluated, taking into account litigation duration (sometimes up to 3 years). The database contains 400 cases, including 236 horizontal agreements and 164 other agreements (mostly vertical agreements). Based on the evidence of this database, important features and problems of the interpretation and implementation of competition law in Russia and priority areas of enforcement were identified. Antitrust policy was analysed taking into account the risks of type 1 and type 2 errors, including the problem of flexibility of prohibitions (per se vs Rule of reason (ROR) approaches), standards of proof and the problem of consistency of enforcement.     

Forecasting the forecasts of others: Implications for asset pricing

We study the properties of rational expectation equilibria (REE) in dynamic asset pricing models with heterogeneously informed agents. We show that under mild conditions the state space of such models in REE can be infinite dimensional. This result indicates that the domain of analytically tractable dynamic models with asymmetric information is severely restricted. We also demonstrate that even though the serial correlation of returns is predominantly determined by the dynamics of stochastic equity supply, under certain circumstances asymmetric information can generate positive autocorrelation of returns.