15,556 research outputs found
Incomplete Financial Markets and Jumps in Asset Prices
A dynamic pure-exchange general equilibrium model with uncertainty is studied. Fundamentals are supposed to depend continuously on states of nature. It is shown that: 1. if financial markets are complete, then asset prices vary continuously with states of nature, and; 2. if financial markets are incomplete, jumps in asset prices may be unavoidable. Consequently incomplete financial markets may increase volatility in asset prices significantly.general equilibrium; financial markets; jumps in asset prices
Integration and Equilibrium in the Maize Markets in Southern Africa
For most countries in southern Africa, food security has been addressed through self-sufficiency, traditionally attained through widespread government involvement in the input and output markets for major food commodities. Food policies through the 1980s have been characterized by input subsidies for farmers; fixed, pan-seasonal and pan-territorial farm level pricing systems, mainly implemented through parastatal marketing boards; as well as subsidies and price controls at the wholesale and retail levels. Under Structural Adjustment Programs of the 1990s, most of those policies were abandoned for more market oriented policies. During the same period, many countries in the region joined the multilateral trading system, and on a regional level, two regional free trade agreements were ratified and bilateral preferential trading agreements continue to be negotiated. Those policy shifts have left in their wake a region characterized by a blend of food policies, with greater openness and a market-led economy in some countries, while substantial government involvement persists in others. In this policy environment, food supply volatility, price instability and weak coordination of trade policies remain fundamental problems. As the southern Africa region grapples with recurrent food shortages, reference is often made to increased intra-regional trade as an important integral component of a comprehensive food strategy. The assumption is that as countries reduce tariff and non-tariff barriers to trade, they become more integrated and more efficient, facilitating commodity movement at lower transfer costs, hence lower prices to the final consumer. In the southern Africa region, research efforts have focused on analyzing market integration at an intra-country level (Abdula 2005, TostĂŁo and Brorsen 2005, Alemu and Baucuana 2006, Penzhorn and Arndt 2002, Traub et al 2004, Mabaya 2003, Mutambatsere 2002, Barrett 1997) . Limited work has evaluated how well integrated or efficient the food markets are at the regional level, to ascertain if in fact trade is a viable food security strategy given existing market systems. In this paper, we evaluate the extent to which maize market systems in the region have become integrated and efficient, and identify the nature of inefficiency where it exists. The analysis employs the Parity Bounds (Baulch 1997) and Barrett-Li (Barrett and Li 2002) models, in collaboration with comprehensive non-parametric descriptions of market pairs, to provide a holistic assessment of pair-wise market interaction, in the process also providing a comparison of the methods as measures of integration and efficiency. Specifically, this paper investigates pair wise spatial integration and efficiency for five central markets in southern Africa: Gaborone in Botswana, Gauteng in South Africa, Blantyre in Malawi, and Maputo and Mocuba in Mozambique. The analyses use monthly retail level data on commodity prices, trade flows, and transfer costs, for the period June 1994 to December 2004. The study seeks to evaluate the nature of price and trade relations, establish the level of regional spatial integration, and evaluate the level of efficiency in these markets. Results reveal significant frequency of market integration, indicating tradability of commodities and contestability of markets. Efficiency holds less frequently, although non-trivially; we observe that for those markets characterized by near continuous trade, returns to arbitrage are exhausted about 25% of the time. Often however, when trade is observed, efficiency appears to be weakened by insufficient arbitrage. For those markets, positive trade is occasionally observed when arbitrage returns are negative. Where trade is not observed, efficiency holds with a slightly higher frequency, so that the lack of trade is often justified by the lack of positive arbitrage returns. Here again, efficiency is occasionally compromised by insufficient arbitrage, whereby trade sometimes fails to occur even when arbitrage incentives appear favorable. In order of frequency, we observe a high occurrence of positive returns imperfect integration (regime 3 in the Barrett-Li Model) and segmented equilibrium (regime 6), followed by a regular occurrence of perfect integration (regimes 1 and 2), and irregular segmented disequilibrium (regimes 4) and the negative returns type of imperfect integration (regime 5). Our results suggest a need for public policy in the areas of improved production to take advantage of unexploited arbitrage opportunities, as well as addressing structural barriers to trade that prevent market entry especially where positive returns are currently observed. Results highlight an important contribution to the trade food policy debate for the southern Africa region: that although restrictive transfer costs are observed in enough cases, the dominant form of inefficiency in regional markets is insufficient arbitrage, likely resulting more from supply side constraints, non-cost barriers to trade (infrastructural or regulatory) and imperfect information, than from restrictive tariffs. In some cases however, the lack of trade is an efficient outcome (indicating limited or negative arbitrage profits) that probably requires no immediate policy response.Crop Production/Industries, Marketing,
On the two-times differentiability of the value functions in the problem of optimal investment in incomplete markets
We study the two-times differentiability of the value functions of the primal
and dual optimization problems that appear in the setting of expected utility
maximization in incomplete markets. We also study the differentiability of the
solutions to these problems with respect to their initial values. We show that
the key conditions for the results to hold true are that the relative risk
aversion coefficient of the utility function is uniformly bounded away from
zero and infinity, and that the prices of traded securities are sigma-bounded
under the num\'{e}raire given by the optimal wealth process.Comment: Published at http://dx.doi.org/10.1214/105051606000000259 in the
Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute
of Mathematical Statistics (http://www.imstat.org
WHICH IMPROVES WELFARE MORE: NOMINAL OR INDEXED BOND?
Despite economists'' long standing arguments in favor of systematic indexation of loan contracts to remove the risks associated with fluctuations in the purchasing power of money (Jevons (1875), Marshall (1887, 1923), F~lsher (1922), Friedman (1991)), surprisingly few loan contracts are indexed in most Western Eclonomies. fin the United States even thirty year corporate and government bonds are not indexed. The situation is however different in many Latin American countries where indexing is widely used as a way of coping with high and variable inflation rates. What seems difiicult to eicplain is that it takes lvgh variability in inflation rates before private sector agents shift from lmindexed to indexed contracts. In practice, indexing a loan contract m.eans linking its payoff to the value of an officially computed price index such as the Consumer Price Index (CPI). Such an index is always an imperfect measure of the purchasing power of money: in particular, it fluctuates not only with variations in the general level of prices but also varies with changes in the relative prices of goods. This paper formalizes the idea that the imperfections of indexing may serve tal explain why agents prefer nominal bonds in economies with a low variability in purchasing power of money and only resort to indexing when the variability becomes sufficiently high. The model is a variant of the two-period general equilibrium model with incomplete markets (GEI) in which the purchasing power of money depends on a (broadly defined) measure of the amount of money available in the economy and on an index of real output. The objective of the analysis is to compare two second-best situations, in which in addition to a given security structure, there is either a nominal bond which has the risks induced by fluctuations in the purchasing power of money or an indexed bond which has the risks induced by relative price fluctuations. Adding a bond to an existing market structure has two effects: the first is the direct effect of increasing the span of the fmancial markets i.e. increasing the opportunity sets of agents for transferring income; the second is the indirect effect of changing spot and security prices, which can either increase or decrease agents'' welfare. This paper only compares direct effects, all indirect effects being absent by virtue of the specification of agents'' preferences. The direct effects are always present, even with more general preferences, but some of the results that we
Efficiency and Equilibria in Games of Optimal Derivative Design
In this paper the problem of optimal derivative design, profit maximization and risk minimization under adverse selection when multiple agencies compete for the business of a continuum of heterogenous agents is studied. In contrast with the principal-agent models that are extended within, here the presence of ties in the agents' best-response correspondences yields discontinuous payoff functions for the agencies. These discontinuities are dealt with via efficient tie-breaking rules. The main results of this paper are a proof of existence of (mixed-strategies) Nash equilibria in the case of profit-maximizing agencies, and of socially efficient allocations when the firms are risk minimizers. It is also shown that in the particular case of the entropic risk measure, there exists an efficient "fix-mix" tie-breaking rule, in which case firms share the whole market over given proportions.Adverse selection, Nash equilibria, Pareto optimality, risk transfer, socially efficient allocations, tie-breaking rules
Dynamic Asset Allocation With Event Risk
Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event-risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy-and-hold strategies. Jumps in prices and volatility both have important effects.
Quantum Finance
Quantum theory is used to model secondary financial markets. Contrary to
stochastic descriptions, the formalism emphasizes the importance of trading in
determining the value of a security. All possible realizations of investors
holding securities and cash is taken as the basis of the Hilbert space of
market states. The temporal evolution of an isolated market is unitary in this
space. Linear operators representing basic financial transactions such as cash
transfer and the buying or selling of securities are constructed and simple
model Hamiltonians that generate the temporal evolution due to cash flows and
the trading of securities are proposed. The Hamiltonian describing financial
transactions becomes local when the profit/loss from trading is small compared
to the turnover. This approximation may describe a highly liquid and efficient
stock market. The lognormal probability distribution for the price of a stock
with a variance that is proportional to the elapsed time is reproduced for an
equilibrium market. The asymptotic volatility of a stock in this case is
related to the long-term probability that it is traded.Comment: Improved 32 page version that is to appear in Physica A. One appendix
scrapped, typos corrected, section on conditions for efficient markets
extended. References adde
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