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on All new papers |
| By: | Tepper, Alexander (Federal Reserve Bank of New York); Borowiecki, Karol Jan (Department of Business and Economics) |
| Abstract: | We employ a model of leverage-induced explosive behavior in financial markets to develop a measure of financial market instability. Specifically, we derive a quantitative condition for how large levered investors can become relative to the whole market before the demand curve for securities suddenly becomes upward-sloping and small price declines cascade as levered investors are forced to liquidate. The size and leverage of all levered investors and the elasticity of demand of unlevered investors define the minimum market size for stability (or MinMaSS), the smallest market size that can support a given group of levered investors. The ratio of actual market size to MinMaSS is termed the instability ratio, and can give regulators and policymakers advance warning of financial crises. We apply the instability ratio in an investigation of the 1998 demise of the hedge fund Long-Term Capital Management. We find that a forced liquidation of the fund threatened to destabilize some financial markets, particularly for bank funding and equity volatility. |
| Keywords: | Leverage; financial crisis; financial stability; minimum market size for stability (MinMass); instability ratio; Long-Term Capital Management (LTCM) |
| JEL: | E58 G01 G10 G20 G21 |
| Date: | 2014–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sdueko:2014_014&r=cfn |
| By: | Olfa Bouasker; Jean-Luc Prigent |
| Abstract: | This paper examines the strategy in resource allocation of a firm which must choose between several production functions. These latter ones can differ by their respective initial investment amounts, input costs, output levels and prices...Such management problem is often posed when input values increase significantly, as for example energy and commodity prices. We determine the values of exchange options when we have to evaluate all the "Profits and Losses" (P&L) depending on the different production models, to take account of potential switches between projects during the management period. We provide a general valuation formula of the exchange options associated to these P&L by using a family of switching options. |
| Keywords: | corporate investment; real options; production functions; exchange options |
| JEL: | C6 G11 G24 L10 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-511&r=cfn |
| By: | Federico Cingano; Marco Leonardi; Julián Messina; Giovanni Pica |
| Abstract: | This paper estimates the causal impact of dismissal costs on capital deepening and productivity exploiting a reform that introduced unjust-dismissal costs in Italy for firms below 15 employees, leaving firing costs unchanged for larger firms. We show that the increase in firing costs induces an increase in the capital-labour ratio and a decline in total factor productivity in small firms relative to larger firms after the reform. Our results indicate that capital deepening is more pronounced at the low-end of the capital distribution - where the reform hit arguably harder - and among firms endowed with a larger amount of liquid resources. We also find that stricter EPL raises the share of high-tenure workers, which suggests a complementarity between firm-specific human capital and physical capital in moderate EPL environments. |
| Keywords: | Capital deepening, severance payments, regression discontinuity design, financial market imperfections, credit constraints |
| JEL: | J65 G31 D24 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:itt:wpaper:2014-4&r=cfn |
| By: | David E. Giles (Department of Economics, University of Victoria); Qinlu Chen |
| Abstract: | Gold, and other precious metals, are among the oldest and most widely held commodities used as a hedge against the risk of disruptions in financial markets. The prices of such metals fluctuate substantially, introducing a risk of its own. This paper’s goal is to analyze the risk of investment in gold, silver, and platinum by applying Extreme Value Theory to historical daily data for changes in their prices. The risk measures adopted in this paper are Value at Risk and Expected Shortfall. Estimates of these measures are obtained by fitting the Generalized Pareto Distribution, using the Peaks-Over-Threshold method, to the extreme daily price changes. The robustness of the results to changes in the sample period is discussed. Our results show that silver is the most risky metal among the three considered. For negative daily returns, platinum is riskier than gold; while the converse is true for positive returns. |
| Keywords: | Inequality; Precious metals; extreme values; portfolio risk; value-at-risk; generalized Pareto distribution |
| JEL: | C46 C58 G10 G32 |
| Date: | 2014–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicewp:1402&r=cfn |
| By: | Tsangyao Chang; Goodness C. Aye; Rangan Gupta |
| Abstract: | In this study, we apply a new recursive test proposed by Philips et al (2013) to investigate whether there exist multiple bubbles in the BRICS (Brazil, Russia, India, China and South Africa) stock markets, using monthly data on stock price-dividend ratio. Our empirical results, the first of its kind for these economies, indicate that there did exist multiple bubbles in the stock markets of the BRICS. Further, the dates of the bubbles also corresponded to specific events in the stocks markets of these economies. This finding has important economic and policy implications. |
| Keywords: | Multiple bubbles; BRICS stock markets; GSADF test |
| JEL: | C12 C15 G12 G15 |
| Date: | 2014–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-462&r=cfn |