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The recent financial crisis has highlighted the limits of the “originate to distribute” model of banking, but its nexus with the macroeconomy and monetary policy remains unexplored. I build a DSGE model with banks (along the lines of Holmström and Tirole [28] and Parlour and Plantin [39] and examine its properties with and without active secondary markets for credit risk transfer. The possibility of transferring credit reduces the impact of liquidity shocks on bank balance sheets, but also reduces the bank incentive to monitor. As a result, secondary markets allow to release bank capital and exacerbate the effect of productivity and other macroeconomic shocks on output and inflation. By offering a possibility of capital recycling and by reducing bank monitoring, secondary credit markets in general equilibrium allow banks to take on more risk. Keywords: Credit Risk Transfer , Dual Moral Hazard , Monetary Policy , Liquidity , Welfare JEL Classification: E3, E5, G3 First Draft: December 2009, This Draft: September 2010
Exit strategies
(2010)
We study alternative scenarios for exiting the post-crisis fiscal and monetary accommodation using the model of Angeloni and Faia (2010), that combines a standard DSGE framework with a fragile banking sector, suitably modified and calibrated for the euro area. Credibly announced and fast fiscal consolidations dominate – based on simple criteria – alternative strategies incorporating various degrees of gradualism and surprise. The fiscal adjustment should be based on spending cuts or else be relatively skewed towards consumption taxes. The phasing out of monetary accommodation should be simultaneous or slightly delayed. We also find that, contrary to widespread belief, Basel III may well have an expansionary macroeconomic effect. Keywords: Exit Strategies , Debt Consolidation , Fiscal Policy , Monetary Policy , Capital Requirements , Bank Runs JEL Classification: G01, E63, H12
We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. Keywords: Risk Aversion , Preference Uncertainty , Risk-taking , Asset Allocation JEL Classification: D81, D84, G11 This Version: November 25, 2010
According to disposition effect theory, people hold losing investments too long. However, many investors eventually sell at a loss, and little is known about which psychological factors contribute to these capitulation decisions. This study integrates prospect theory, utility maximization theory, and theory on reference point adaptation to argue that the combination of a negative expectation about an investment’s future performance and a low level of adaptation to previous losses leads to a greater capitulation probability. The test of this hypothesis in a dynamic experimental setting reveals that a larger total loss and longer time spent in a losing position lead to downward adaptations of the reference point. Negative expectations about future investment performance lead to a greater capitulation probability. Consistent with the theoretical framework, empirical evidence supports the relevance of the interaction between adaptation and expectation as a determinant of capitulation decisions. Keywords: Investments , Adaptation , Reference Point , Capitulation , Selling Decisions , Disposition Effect , Financial Markets JEL Classification: D91, D03, D81
We investigate the incentives for vertical or horizontal integration in the financial security service industry, consisting of trading, clearing and settlement. We thereby focus on firms’ decisions but also look on the implications of these decisions on competition and welfare. Our analysis shows that the incentives for vertical integration crucially depend on industry as well as market characteristics. A more pronounced demand for liquidity clearly favors vertical integration whereas deeper financial integration increases the incentives to undertake vertical integration only if the efficiency gains associated with vertical integration are sufficiently large. Furthermore, we show that market forces can suffer from a coordination problem that end in vertically integrated structures that are not in the best interest of the firms. We believe this problem can be addressed by policy measures such as the TARGET2-Securities program. Furthermore, we use our framework to discuss major industry trends and policy initiatives. Keywords: Vertical Integration , Horizontal Integration , Competition , Trading , Settlement JEL Classification: G15, L13, L22
During the last decades households in the U.S. have experienced that residential house prices move in a persistent manner, i.e. that returns are positively serially correlated. Since an owner-occupied home is usually the largest investment of a household it is important to understand how households act when they base their consumption and investment decisions on this experience. We show in a setting with housing market cycles and households who can decide whether they rent or own the home, that - besides the consumption and the precautionary savings motive - serial correlation in house prices generates a new speculative motive for homeownership. In particular, we show how good and bad housing market cycles affect homeownership rates, leverage, stock investments and consumption and can explain empirically observed household behavior during housing market boom and bust periods. Keywords: Asset Allocation , Portfolio Choice , Housing Market Cycles , Real Estate JEL Classification: G11, D91
We test whether asymmetric preferences for losses versus gains as in Ang, Chen, and Xing (2006) also affect the pricing of cash flow versus discount rate news as in Campbell and Vuolteenaho (2004). We construct a new four-fold beta decomposition, distinguishing cash flow and discount rate betas in up and down markets. Using CRSP data over 1963–2008, we find that the downside cash flow beta and downside discount rate beta carry the largest premia. We subject our result to an extensive number of robustness checks. Overall, downside cash flow risk is priced most consistently across different samples, periods, and return decomposition methods, and is the only component of beta that has significant out-of-sample predictive ability. The downside cash flow risk premium is mainly attributable to small stocks. The risk premium for large stocks appears much more driven by a compensation for symmetric, cash flow related risk. Finally, we multiply our premia estimates by average betas to compute the contribution of the different risk components to realized average returns. We find that up and down discount rate components dominate the contribution to average returns of downside cash flow risk. Keywords: Asset Pricing, Beta, Downside Risk, Upside Risk, Cash Flow Risk, Discount Rate Risk JEL Classification: G11, G12, G14
Capturing the zero: a new class of zero-augmented distributions and multiplicative error processes
(2010)
We propose a novel approach to model serially dependent positive-valued variables which realize a non-trivial proportion of zero outcomes. This is a typical phenomenon in financial time series observed on high frequencies, such as cumulated trading volumes or the time between potentially simultaneously occurring market events. We introduce a flexible pointmass mixture distribution and develop a semiparametric specification test explicitly tailored for such distributions. Moreover, we propose a new type of multiplicative error model (MEM) based on a zero-augmented distribution, which incorporates an autoregressive binary choice component and thus captures the (potentially different) dynamics of both zero occurrences and of strictly positive realizations. Applying the proposed model to high-frequency cumulated trading volumes of liquid NYSE stocks, we show that the model captures both the dynamic and distribution properties of the data very well and is able to correctly predict future distributions. Keywords: High-frequency Data , Point-mass Mixture , Multiplicative Error Model , Excess Zeros , Semiparametric Specification Test , Market Microstructure JEL Classification: C22, C25, C14, C16, C51
Despite sensible guidelines for the use of opioid analgesics, respiratory depression remains a significant risk with a possibility of fatal outcomes. Clinicians need to find a balance of analgesia with manageable respiratory effects. The ampakine CX717 (Cortex Pharmaceuticals, Irvine, CA, USA), an allosteric enhancer of glutamate-stimulated AMPA receptor activation, has been shown to counteract opioid-induced respiratory depression in rats while preserving opioid-induced analgesia. Adopting a translational approach, we orally administered 1500 mg of CX717 to 16 male healthy volunteers in a placebo controlled double-blind study. Starting 100 min after CX717 or placebo intake, alfentanil was administered by computerized intravenous infusion targeting a plateau of effective alfentanil plasma concentrations of 100 ng/ml. One hour after start of opioid infusion, its effects were antagonized by intravenous injection of 1.6 mg of the classical opioid antidote naloxone. Respiration was quantified prior to drug administration (baseline), during alfentanil infusion and after naloxone administration by (i) counting the spontaneous respiratory frequency at rest and (ii) by employing hypercapnic challenge with CO2 rebreathing that assessed the expiratory volume at a carbon dioxide concentration in the breathable air of 55% (VE55). Pain was quantified at the same time points, immediately after assessment of respiratory parameters, by (i) measuring the tolerance to electrical stimuli (5 Hz sine increased by 0.2 mA/s from 0 to 20 mA and applied via two gold electrodes placed on the medial and lateral side of the mid-phalanx of the right middle finger) and (ii) by measuring the tolerance to heat (increased by 0.3°C/s from 32 to 52.5°C applied to a 3 x 3 cm2 skin area of the left volar forearm, after sensitization with 0.15 g capsaicin cream 0.1%). CX717 was tolerated by all subjects without side effects that would have required medical intervention. We observed that CX717 was approximately as effective as naloxone in reversing the opioid induced reduction of the respiratory frequency. Despite the presence of high plasma alfentanil concentrations, the respiratory frequency decreased only by 8.9 ± 22.4% when CX717 was pre-administered, which was comparable to the 7.0 ± 19.3% decrease observed after administration of naloxone. In contrast, after placebo pre-administration the respiratory rate decreased by 30.0 ± 21.3% (p=0.0054 for CX717 versus placebo). In agreement with this, periods of a very low respiratory frequency of <= 4 min-1 under alfentanil alone were shortened by ampakine pre-dosing by 52.9% (p=0.0182 for CX717 versus placebo). Furthermore, VE55 was decreased during alfentanil infusion by 55.9 ± 16.7% under placebo preadministration but only by 46.0 ± 18.1% under CX717 pre-administration (p=0.017 for CX717 versus placebo). Most importantly, in contrast to naloxone, CX717 had no effect on opioid induced analgesia. Alfentanil increased the pain tolerance to electrical stimuli by 68.7 ± 59.5% with placebo pre-administration. With CX717 pre-administration, the increase of the electrical pain tolerance was similar (54.6 ± 56.7%, p=0.1 for CX717 versus placebo). Similarly, alfentanil increased the heat pain tolerance threshold by 24.6 ± 10.0% with placebo pre-administration. Ampakine co-administration had also no effect on the increase of the heat pain tolerance of the capsaicin-sensitized skin (23.1 ± 8.3%, p=0.46 for CX717 versus placebo). The results of this study allow us to draw the conclusion, that opioid induced ventilatory depression can be selectively antagonized in humans by co-administering an ampakine. This is the first successful translation of a selective antagonism of opioidinduced respiratory depression from animal research into application in humans. Ampakines, namely CX717, thus are the first selective antidote for opioid-induced respiratory depression without loss of analgesia, available for the use in humans.
Within this thesis, an experimental study of the photo double ionization (PDI) and the simultaneous ionization-excitation is performed for lithium in different initial states Li (1s22l) (l = s, p). The excess energy of the linearly polarized VUV-light is between 4 and 12 eV above the PDI-threshold. Three forefront technologies are combined: a magneto-optical trap (MOT) for lithium generating an ultra-cold and, by means of optical pumping, a state-prepared target; a reaction microscope (ReMi), enabling the momentum resolved detection of all reaction fragments with high-resolution and the free-electron laser in Hamburg (FLASH), providing an unprecedented brilliant photon beam at favourable time structure to access small cross sections. Close to threshold the total as well as differential PDI cross sections are observed to critically depend on the excitation level and the symmetry of the initial state. For the excited state Li (1s22p) the PDI dynamics strongly depends on the alignment of the 2p-orbital with respect to the VUV-light polarization and, thus, from the population of the magnetic substates (mp = 0, ±1). This alignment sensitivity decreases for increasing excess energy and is completely absent for ionization-excitation. Time-dependent close-coupling calculations are able to reproduce the experimental total cross sections with deviations of at most 30%. All the experimental observations can be consistently understood in terms of the long range electron correlation among the continuum electrons which gives rise to their preferential back-to-back emission. This alignment effect, which is observed here for the first time, allows controlling the PDI dynamics through a purely geometrical modification of the target initial state without changing its internal energy.