Contributions published at Department of Banking and Finance (Pablo Koch Medina)

The conflict between shareholders and bondholders in a levered firm over the choice of the risk level for firm assets is well-known. The original contingent claims approach to this issue had the firm reaching a critical point at the bond maturity date, similar to what happens at expiration of an option. In that model, equity is shown to be like a call option on the value of the firm. But the reality is that firms are continuously monitored by investors, customers and employees, and may potentially experience financial distress if the value of its assets Falls too low at any point in time. In this article, Chesney and Gibson present an alternative contingent claims analysis, in which equity is modeled as a down and out call, with an outstrike equal to the asset level that would precipitate distress. In this revised framework, they are able to study how the use of convertible debt, or debt with attached warrants, in place of straight debt affects the problem of volatility choice, and may perhaps eliminate the conflict of interest entirely.

The purpose of this paper is to demonstrate that in the Capital Asset Pricing Model (CAPM) the mean Slutsky-income effect is positive if on average investors have non-increasing absolute risk aversion. Together with some lower bounds on the degree to which absolute risk aversion decreases with income this result will be shown to be sufficient for the uniqueness of CAPM-equilibria.

In the incomplete markets model with numeraire asset and a single consumption good we show that, even with homothetic preferences, on compact sets of prices Continuity, Walras' identity and Homogeneity characterize the properties of market excess demand. This result is proved by an extension of Mantel (1976) to the case of incomplete markets.

We view debt and outside equity as serving to elicit credible information from different specialists about the value of an enterprise in its various uses. The equity valuation specialist provides a price forecast for equity that reveals information about the value of the enterprise in its primary use. The debt valuation specialist provides a price forecast for debt that reveals information about the value of the enterprise in its alternative use. The prices forecast by the valuation specialists credibly reveal their private information because they are required to buy the associated claims at the forecast prices, thereby bonding their valuations.

In this report, the input/output relations in an isolated ganglion of the leech Hirudo medicinalis were studied by simultaneously using six or eight suction pipettes and two intracellular electrodes. Sensory input was mimicked by eliciting action potentials in mechanosensory neurons with intracellular electrodes. The integrated neural output was measured by recording extracellular voltage signals with pipettes sucking the roots and the connectives. A single evoked action potential activated electrical activity in at least a dozen different neurons, some of which were identified. This electrical activity was characterized by a high degree of temporal and spatial variability. The action potentials of coactivated neurons, i.e. activated by the same mechanosensory neuron, did not show any significant pairwise correlation. Indeed, the analysis of evoked action potentials indicates clear statistical independence among coactivated neurons, presumably originating from the independence of synaptic transmission at distinct synapses. This statistical independence may be used to increase reliability when neuronal activity is averaged or pooled. It is suggested that statistical independence among coactivated neurons may be a usual property of distributed processing of neuronal networks and a basic feature of neural computation.

"- This paper replaces the paper ""Existence and Uniqueness of Equilibria in the CAPM"" -nIn the standard CAPM with a riskless asset we give a sufficient condition for uniqueness. This condition is a joint restriction on the agents' endowments and their preferences which is compatible with non-increasing absolute risk aversion and which is in particular satisfied with constant absolute risk aversion. Moreover in the CAPM without a riskless asset we give an example for multiple equilibria even though all agents have constant absolute risk aversion."

"The purpose of this paper is to explain why some markets for financial products take off while others vanish as soon as they have emerged. To this end, we model an infinite sequence of CAPM-economies in which financial products can be used for insurance purposes. Agents' participation in these financial products, however, is restricted. Consecutive stage economies are linked by a mapping (""transition function"") which determines the next period's participation structure from the preceding period's participation. The transition function generates a dynamic process of market participation which is driven by the percentage of informed traders and the rate at which a new asset is adopted. We then analyze the evolutionary stability of stationary equilibria. In accordance with the empirical literature on financial innovation, it is obtained that the success of a financial innovation, a mutation, depends on a sufficiently high trading volume, marketing, and new and differentiated hedging opp"

This article analyses whether the representation of asset prices by Choquet integration can be justified from a general equilibrium point of view. We demonstrate that if transaction costs functionals are increasing in the volume of trade, positive homogeneous and satisfy an additivity condition, the equilibrium price functional typically does not satisfy all the Choquet properties. Whereas subadditivity and positive homogeneity can be shown to hold for the equilibrium price functional, this is generally not the case for monotonicity and additivity of prices for comonotone income streams.

We investigate the determinants of multiple-bank relationships using a new data set comprising 1079 firms across 20 European countries. We document large cross-country variation in the average number of bank relationships per firm, uncovering a richness in European financial systems that extends beyond the standard description of being "bank-dominated". After controlling for a variety of firm-specific characteristics, we find that firms maintain more bank relationships, on average, in countries with inefficient judicial systems and poor enforcement of creditor rights. Firms also maintain more relationships in countries with unconcentrated but stable banking systems and active public bond markets.

This paper analyzes how an investor who is convinced that he can "beat the market" should behave when the equilibrium price process is endogenous. The investor's optimal portfolio is shown to consist of three components: (1) a tangency portfolio, (2) a hedge portfolio against changes in the market's valuation of securities, and (3) a hedging position against changes in the divergence between the investor's and the market's beliefs. The sign and magnitude of this third component will depend on investor preferences and on the divergence in the investor's and the market's quality of information. A numerical example illustrates that the effect of heterogeneous beliefs on optimal portfolio allocations can be significant.

null