We develop a dynamic model of a firm facing agency costs of free cash flow and externalfinancing costs, and derive an explicit solution for the firm’s optimal balance sheet dynamics. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns.
We analyze the demand for hedging and insurance by a firm facingcash-flow risks. We study how the firm’s liquidity managementpolicy interacts with two types of risk: a Brownian risk that canbe hedged through a financial derivative, and a Poisson risk thatcan be insured by an insurance contract. We find that the patternsof insurance and hedging decisions are pole apart: cash-poor firmsshould hedge but not insure, whereas the opposite is true for cashrichfirms. We also find non-monotonic effects of profitability. Thismay explain the mixed findings of empirical studies on corporatedemand for hedging and insurance.
Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore must accept excessively high merchant discounts. The paper attempts to shed light on this must-take cards view from two angles. First, the paper gives some operational content to the notion of must-take card through the avoided-cost test or tourist test: would the merchant want to refuse a card payment when a non-repeat customer with enough cash in her pocket is about to pay at the cash register? It analyzes its relevance as an indicator of excessive interchange fees. Second, it identifies four key sources of potential social biases in the payment card systems' determination of interchange fees and compares the industry and social optima both in the short term (fixed number of issuers) and the long term (in which issuer offerings and entry respond to profitability).
Für Professor Urs W. Birchler vom Swiss Banking Institute
der Uni Zürich ist die Kritik der UBS am Swiss Finish
nicht nachvollziehbar. Die Einführung von CoCos hält
der ehemalige Nationalbanker für sehr sinnvoll.
The disposition effect is the observation that investors hold winning stocks too long and sell losing stocks too early. A standard explanation of the disposition effect refers to prospect theory and in particular to the asymmetric risk aversion according to which investors are risk averse when faced with gains and risk-seeking when faced with losses. We show that for reasonable parameter values the disposition effect can however not be explained by prospect theory as proposed by Kahneman and Tversky. The reason is that those investors who sell winning stocks and hold loosing assets would in the frst place not have invested in stocks. That is to say the standard prospect theory argument is sound ex-post, assuming that the investment has taken place, but not ex-ante, requiring that the investment is made in the first place.
This paper presents a general reward-risk portfolio selection model and derives sufcient conditions for two-fund separation. In particular we show that many reward-risk models presented in the literature satisfy these conditions.
