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on Corporate Finance |
| By: | Luis H. R. Alvarez; Erkki Koskela |
| Abstract: | We analyze optimal harvesting policy under stochastic price and stock dynamics. We state a set of weak conditions under which the optimal policy can be characterized by a single exercise threshold and show that the value of optimal harvesting and depletion policies can be expressed as the separable form according to which only the current price and the expected per capita growth rate affect the threshold, while under risk neutrality volatility of price dynamics will have no effect. Uncertainty makes waiting valuable and the optimal threshold is higher when harvesting can be exercised only once than in the sequential case. |
| Keywords: | optimal harvesting, stochastic price and stock dynamics, single and sequential harvesting opportunity |
| JEL: | D80 G31 H25 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1384&r=cfn |
| By: | Emanuele Bacchiocchi; Alessandro Missale |
| Abstract: | This paper presents a simple model in which debt management stabilizes the debt-to-GDP ratio in face of shocks to real returns and output growth and thus supports fiscal restraint in ensuring sustainability. The optimal composition of public debt is derived by looking at the relative impact of the risk and cost of alternative debt instruments on the cost of missing the stabilization target. The optimal debt structure is a function of the expected return differentials between debt instruments, of the conditional variance of their returns and of the conditional covariances of their returns with output growth and inflation. We then explore how the relevant covariances and thus the optimal choice of debt instruments depend on the monetary regime and on Central Bank preferences for output stabilization, inflation control and interest-rate smoothing. Finally, we estimate the composition of public debt that would have supported debt stabilization in OECD countries over the last two decades. The empirical evidence suggests that the public debt should have a long maturity and a large share of it should be indexed to the price level. |
| Keywords: | debt management, debt structure, debt stabilization, inflation indexation, interest rates |
| JEL: | E63 H63 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1388&r=cfn |
| By: | Angel Leon; Diego Piñeiro (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | The aim of this paper consists of valuating a real biotechnology firm that is based on a portfolio of several drug development projects at different phases. They are patentprotected R&D projects and their values are obtained by implementing an extension of the real options approach in Schwartz (2004). To be precise, the life cycle of the drug is modeled by considering an alternative and more realistic behavior for the evolution of the FCF, different from the standard Geometric Brownian motion, once the peak sales is reached till the patent expiration, we will also allow for the possibility of the generic entrance once the patent expires. Different expected costs to completion are considered here, that is one equation to each compound; a different probability of catastrophic event depending on the phase and so on. It is shown that the abandonment value is higher for those compounds being in preclinical testing than those in clinical trials. |
| Keywords: | Patent, R&D phase, drug, real options, investment cost, free cash flow, generics, life cycle, Monte Carlo simulation. |
| JEL: | C15 C61 C63 G13 G31 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2004_0420&r=cfn |
| By: | Christian Bauer |
| Abstract: | In this paper we consider the theoretical and empirical relevance of a new family of conditionally heteroskedastic models with a trend dependent conditional variance equation: the Trend-GARCH model. The interest in these models lies in the fact that modern microeco- nomic theory often suggests the connection between the past behavior of time series and the subsequent reaction of market individuals and thereon changes in the future characteristics of the time series. Our results reveal important properties of these models, which are con- sistent with stylized facts in ?financial data sets. They can also be employed for model identifi?cation, estimation, and testing. The em- pirical analysis of a broad variety of asset prices signi?ficantly supports the existence of trend effects. The Trend-GARCH model proves to be superior to alternative models such as EGARCH, AGARCH, or TGARCH in replicating the leverage effect in the conditional variance and in fi?tting the news impact curve. |
| Keywords: | GARCH, trend, volatility, news impact curve |
| JEL: | C22 C52 G12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:uba:hadfwe:trend-garch-bauer_2005-02&r=cfn |
| By: | Javier Alvarez; Manuel Arellano (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We develop likelihood-based estimators for autoregressive panel data models that are consistent in the presence of time series heteroskedasticity. Bias corrected conditional score estimators, random effects maximum likelihood (RML) in levels and first differences, and estimators that impose mean stationarity and considered for AR(p) models with individual effects. We investigate identification under unit roots, and show that RML in levels may achieve substantial efficiency gains relative to estimators from data in differences. In an empirical application, we find evidence against unit roots in individual earnings processes from the PSID and the Spanish section of the European Panel. |
| Keywords: | Autoregressive panel data model, bias corrected score, time series heteroskedasticity, random effects, unit root identification, mean stationarity, individual earnings. |
| JEL: | C23 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2004_0421&r=cfn |
| By: | Zuleyca Díaz Martínez (Universidad Complutense de Madrid. Facultad de Económicas y Empresariales.Departamento de Economía Financiera y Contabilidad I.); José Fernández Menéndez (Universidad Complutense de Madrid. Facultad de Económicas y Empresariales.Departamento de Organización de Empresas.); Paloma Martínez Almodovar (Universidad Complutense de Madrid. Facultad de Económicas y Empresariales.Departamento de Organización de Empresas.) |
| Abstract: | Prediction of insurance companies insolvency has arised as an important problem in the field of financial research, due to the necessity of protecting the general public whilst minimizing the costs associated to this problem. Most methods applied in the past to tackle this question are traditional statistical techniques which use financial ratios as explicative variables. However, these variables do not usually satisfy statistical assumptions, what complicates the application of the mentioned methods.In this paper, a comparative study of the performance of a well-known parametric statistical technique (Linear Discriminant Analysis) and a non-parametric machine learning technique (See5) is carried out. We have applied the two methods to the problem of the prediction of insolvency of Spanish non-life insurance companies upon the basis of a set of financial ratios. Results indicate a higher performance of the machine learning technique, what shows that this method can be a useful tool to evaluate insolvency of insurance firms. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doctra:04-12&r=cfn |
| By: | Christian Gollier |
| Abstract: | We examine a static one-risk-free-one-risky asset portfolio choice when the investor’s well-being is affected by the anticipatory feelings associated to potential capital gains and losses. These feelings can be manipulated by the choice of subjective beliefs on the distribution of returns. However, the bias of these endogenous subjective beliefs induces the choice of a portfolio that is suboptimal with respect to the objective expected utility of final wealth. We characterize the structure of these optimal beliefs. We first show that optimal subjective beliefs must be degenerated with only two possible returns. Moreover, under some weak conditions on the utility function, these two atoms are at the lower and upper bounds of the objectively feasible returns. When the intensity of anticipatory feelings is small, the formation of beliefs must be biased in favor of optimism, which implies an increase in the equilibrium demand for the risky asset. We also show that the optimal beliefs are approximately independent of the investor’s degree of risk aversion. |
| Keywords: | anticipatory feelings, portfolio choice, overconfidence, positive thinking, endogenous beliefs |
| JEL: | D81 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1382&r=cfn |
| By: | Sanjay Basu (National Institute of Bank Management, Pune); Swapnendu Bandyopadhyay (Banerjee) (National University of Singapore) |
| Abstract: | We develop a lending game in which relationship-specific investments by firms benefit banks and vice versa. We show that even if all firms and banks prefer high-tech relationship loans under the first-best, asymmetric information and investment non-contractibility make them choose low-tech transaction loans. However, governments with intermediate risk ratings can use Groves subsidies for a concerted switch to long-term relationship loans. To avoid premature liquidation, they finance the scheme with long-term foreign debt. Thus, we try to explain the positive correlation between subsidies and long-term domestic and foreign debt, which was a salient feature of the East Asian development experience. |
| Keywords: | Relationship Banking; Groves Subsidies; Intermediate Rating; Long-term Debt |
| JEL: | G21 H63 L14 O30 |
| URL: | http://d.repec.org/n?u=RePEc:nus:nusewp:wp0502&r=cfn |
| By: | Neville N. Jiang (Department of Economics, Vanderbilt University); Ping Wang (Department of Economics, Vanderbilt University, NBER); Haibin Wu (University of Alberta) |
| Abstract: | This paper develops an overlapping-generations model of finance and growth with intrinsic heterogeneity in loanable fund conversion ability, where agents make occupational choice between becoming entrepreneurs and becoming workers. For a given ability distribution, a decrease in the number of entrepreneurs may create an occupational choice effect, enhancing the rate of growth of the economy, as the average conversion ability of the remaining entrepreneurs is higher. A change in ability distribution parameters may generate a permanent growth effect. Due to the presence of an occupational choice effect, a scale effect and general-equilibrium wage adjustments, however, financial market thickness and income growth need not be positively correlated, in response to such distribution shifts. While both a reduction in the unit financial operation cost and an improvement in manufacturing productivity are growth enhancing, they have different effects on equilibrium prices and financial markup. |
| Keywords: | Occupational Choice, financial market, distribution and growth |
| JEL: | D90 G20 O4 |
| Date: | 2002–04 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0228&r=cfn |