Asset market linkages in crisis periods

We characterize asset return linkages during periods of stress by an extremal dependence measure. Contrary to correlation analysis, this non-parametric measure is not predisposed towards the normal distribution and can account for non-linear relationships. Our estimates for the G-5 countries suggest that simultaneous crashes in stock markets are about two times more likely than in bond markets. Moreover, stock-bond contagion is about as frequent as flight to quality from stocks into bonds. Extreme cross-border linkages are surprisingly similar to national linkages, illustrating a potential downside to international financial integration JEL Classification: G1, F3, C49Bivariate Extreme Value Analysis, Extreme Co-movements, Flight to Quality

Comparative Analysis of Litigation Systems: An Auction-Theoretic Approach

A simple auction-theoretic framework is used to examine symmetric litigation environments where the legal ownership of a disputed asset is unknown by the court. The court observes only the quality of the case presented by each party, and awards the asset to the party presenting the best case. Rational litigants influence the quality of their cases by hiring skillful attorneys. This framework permits us to compare the equilibrium legal expenditures that arise under a continuum of legal systems. The British rule, American rule, and some recently proposed legal reforms are special cases of our model.Auctions, contests, litigation, fee-shifting

Ons Maximale Inkomen

We schrijven het begin van een nieuw millennium. Een Amsterdamse, Maastrichtse en Rotterdamse hoogleraar economie zitten in de skybox van het Tinbergen Instituut voor fundamenteel economisch onderzoek naar Feyenoord-Ajax te kijken en bespreken onderwijl het inburgeringsprogramma van de toekomstige prinses. Hen is door Kok gevraagd een salaris vast te stellen passend bij haar status en toekomstige werkzaamheden, maar tevens te letten op de bodem van de schatkist die al weer in zicht is door de komende ambtelijke loonronde. Dit doet de temperatuur in de skybox flink stijgen

Beyond the sample: extreme quantile and probability estimation

Economic problems such as large claims analysis in insurance and value-at-risk in fi- nance, require assessment of the probability P of extreme realizations Q. This paper provides a semi-parametric method for estimation of extreme (P, Q) combinations for data with heavy tails. We solve the long standing problem of estimating the sample threshold of where the tail of the distribution starts. This is accomplished by the combination of a control variate type device and a subsample bootstrap technique. The sub- sample bootstrap attains convergence in probability, whereas the full sample bootstrap would only provide convergence in distribution. This permits a complete and comprehensive treatment of extreme (P, Q) estimation

Value-at-risk and extreme returns

Accurate prediction of extreme events are of primary importance in many financial applications. The properties of historical simulation and RiskMetrics techniques for computing Value-at-Risk (VaR) are compared with a method which involves modelling the tails of financial returns explicitly with a tail estimator. The methods are compared using a sample of U. S. stock returns. For predictions of low probability worst outcomes, RiskMetrics type analysis underpredicts while historical simulation overpredicts. However, the estimates obtained from applying the tail estimator are more accurate in the VaR prediction. This implies that capital requirements can be lower by doing VaR with the tail estimator

Banking System Stability: A Cross-Atlantic Perspective

This paper derives indicators of the severity and structure of banking system risk from asymptotic interdependencies between banks%u2019 equity prices. We use new tools available from multivariate extreme value theory to estimate individual banks%u2019 exposure to each other (%u201Ccontagion risk%u201D) and to systematic risk. Moreover, by applying structural break tests to those measures we study whether capital markets indicate changes in the importance of systemic risk over time. Using data for the United States and the euro area, we can also compare banking system stability between the two largest economies in the world. Finally, for Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that systemic risk in the US is higher than in the euro area, mainly as cross-border risks are still relatively mild in Europe. On both sides of the Atlantic systemic risk has increased during the 1990s.

The Herodotus Paradox

The Babylonian bridal auction, described by Herodotus, is regarded as one of the earliest uses of an auction in history. Yet, to our knowledge, the literature lacks a formal equilibrium analysis of this auction. We provide such an analysis for the two-player case with complete and incomplete information, and in so doing identify what we call the “Herodotus Paradox.”

The Forward Premium Puzzle and Latent Factors Day by Day

We use futures instead of forward rates to study the complete maturity spectrum of the forward premium puzzle from two days to six months. At short maturities the slope coefficient is positive, but these turn negative as the maturity increases to the monthly level. Futures data allow us to control for the influence of an unobserved factor that can be decomposed into a contract-specific and a time- to-maturity effect. Once we do this, we find that the coefficients on the forward premium are much closer to one. The latent factor is shown to be related to conventional proxies of risk.forward premium puzzle, futures rates, latent factor