A Dynamic Model of Mesh Size Regulatory Compliance

This paper employs a dynamic model for crimes that involve time and punishment to analyze the use of a net with illegal mesh size in a management regime where each community claims territorial use right over a fishery but has a discount rate that may differ from the social discount rate. The equilibrium stock and harvest levels are found to be much lower if the regulation is violated. Moreover, the optimal penalty for violation must be decreasing in the shadow cost of taking the risk to fish illegally, and increasing the risk of punishment increases the equilibrium stock level.crime, dynamic model, fishery, regulation, Resource /Energy Economics and Policy,

Do Low Interest Rates Sow the Seeds of Financial Crises?

A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount of safe bonds that intermediaries use as collateral in the repo market. In this model with properly-priced collateral, lower than optimal interest rates reduce risk taking. We also consider the possibility that intermediaries can augment their collateral by issuing assets whose risk is underestimated by credit rating agencies, as was observed prior to the crisis. In the presence of such mispriced collateral, lower than optimal interest rates contribute to excessive risk taking and amplify the severity of recessions.Transmission of monetary policy; Financial system regulation and policies

On the Informational Content of Changing Risk for Dynamic Asset Allocation

The informational content of changing risk for dynmaic asset allocation is analyzed in order to investigate its importance in determining expected index returns. We consider a class of optimal dynamic strategies taking into account both changing risk and expected returns that vary accordingly to changing risk. We compare their risk adjusted performance to that of a buy and hold strategy under different hypotheses on the form of conditionally expected returns. The statistical evidence in favour of expected returns varying accordingly to changing risk is elusive. On the other hand, we find some evidence of a superior unconditional risk adjusted performance of volatility based trading rules compared to buy and hold strategies. This suggests that changing risk conveys information useful to improve performance.

Mortality Risk and Educational Attainment of Black and White Men

This paper investigates to what extent the differences in education between black and white men can be explained by the differences in their mortality risks. A dynamic optimal stopping-point life cycle model is examined, in which group-level mortality risk plays an important role in determining individual-level mortality risk, health expenditure,and the amount of schooling. The model is calibrated to quantify the effect of mortality risks on schooling by taking the black and white male population as the respective reference groups for black men and white men. We find that the impact of mortality risk on schooling explains more than two-thirds of the empirical education differences between black and white males. This conclusion is robust to a set of plausible parameter values.

A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk

Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) have to communicate their daily risk estimates to the monetary authorities at the beginning of the trading day, using a variety of Value-at-Risk (VaR) models to measure risk. Sometimes the risk estimates communicated using these models are too high, thereby leading to large capital requirements and high capital costs. At other times, the risk estimates are too low, leading to excessive violations, so that realised losses are above the estimated risk. In this paper we analyze the profit maximizing problem of an ADI subject to capital requirements under the Basel II Accord as ADI's have to choose an optimal VaR reporting strategy that minimizes daily capital charges. Accordingly, we suggest a dynamic communication and forecasting strategy that responds to violations in a discrete and instantaneous manner, while adapting more slowly in periods of no violations. We apply the proposed strategy to Standard & Poor's 500 Index and show there can be substantial savings in daily capital charges, while restricting the number of violations to within the Basel II penalty limits.

"A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk"

Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) have to communicate their daily risk estimates to the monetary authorities at the beginning of the trading day, using a variety of Value-at-Risk (VaR) models to measure risk. Sometimes the risk estimates communicated using these models are too high, thereby leading to large capital requirements and high capital costs. At other times, the risk estimates are too low, leading to excessive violations, so that realised losses are above the estimated risk. In this paper we analyze the profit maximizing problem of an ADI subject to capital requirements under the Basel II Accord as ADI's have to choose an optimal VaR reporting strategy that minimizes daily capital charges. Accordingly, we suggest a dynamic communication and forecasting strategy that responds to violations in a discrete and instantaneous manner, while adapting more slowly in periods of no violations. We apply the proposed strategy to Standard&Poor's 500 Index and show there can be substantial savings in daily capital charges, while restricting the number of violations to within the Basel II penalty limits.

Using Ex Ante Payments in Self-Enforcing Risk-Sharing Contracts

In this paper we analyze a long-term risk-sharing contract between two risk-averse agents facing self-enforcing constraints. We enlarge the contracting space to allow for an ex ante transfer (at the beginning of the period) before the state of nature is realized. We analyze the trade-off between the self-enforcing constraints of the two agents by characterizing the optimal ex ante and ex post transfer payments. We show that optimal ex ante payments are non-stationary. They optimally depend on the surplus from the relationship each agent expects. The size of the ex ante payment an agent makes is inversely related to its expected surplus from the relationship. The introduction of ex ante payments generates interesting dynamic properties. In a two-state example with i.i.d. shocks, the dynamics of the optimal contract exhibit experience rating even though there is no private information or learning taking place. Ce papier analyse les propriétés dynamiques d'un contrat de partage de risque entre deux agents riscophobes qui font face à des contraintes de faillite. L'espace des contrats est élargi pour permettre aux agents d'effectuer un transfert au début de chacune des périodes avant la réalisation de l'incertitude. Ces paiements ex ante ne sont pas stationnaires. Ils dépendent du surplus que chaque agent attend de la relation. Ce paiement est inversement proportionnel à ce surplus. Dans un environnement i.i.d. à deux états de la nature, les propriétés dynamiques de la consommation de chacun des agents démontrent un lissage qui ressemble à de la tarification a posteriori.Risk sharing; Dynamic relationship; Self enforcing contracts, Partage de risque ; Relation dynamique ; Contrats auto-exécutoires

On Dynamic Coherent and Convex Risk Measures : Risk Optimal Behavior and Information Gains

We consider tangible economic problems for agents assessing risk by virtue of dynamic coherent and convex risk measures or, equivalently, utility in terms of dynamic multiple priors and dynamic variational preferences in an uncertain environment. Solutions to the Best-Choice problem for a risky number of applicants are well-known. In Chapter 2, we set up a model with an ambiguous number of applicants when the agent assess utility with multiple prior preferences. We achieve a solution by virtue of multiple prior Snell envelopes for a model based on so called assessments. The main result enhances us with conditions for the ambiguous problem to possess finitely many stopping islands. In Chapter 3 we consider general optimal stopping problems for an agent assessing utility by virtue of dynamic variational preferences. Introducing variational supermartingales and an accompanying theory, we obtain optimal solutions for the stopping problem and a minimax result. To illustrate, we consider prominent examples: dynamic entropic risk measures and a dynamic version of generalized average value at risk. In Chapter 4, we tackle the problem how anticipation of risk in an uncertain environment changes when information is gathered in course of time. A constructive approach by virtue of the minimal penalty function for dynamic convex risk measures reveals time-consistency problems. Taking the robust representation of dynamic convex risk measures as given, we show that all uncertainty is revealed in the limit, i.e. agents behave as expected utility maximizers given the true underlying distribution. This result is a generalization of the fundamental Blackwell-Dubins theorem showing coherent as well as convex risk measures to merge in the long run