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Regular version of the site

Publications in 2015

Robustness of equilibrium in the Kyle model of informed speculation

Author: Boulatov A., Bernhardt D.

Annals of Finance 11 (3-4), pp. 297-318

We analyze a static Kyle (Continuous auctions and insider trading. Princeton University, Princeton, 1983) model in which a risk-neutral informed trader can use arbitrary (linear or non-linear) deterministic strategies, and a finite number of market makers can use arbitrary pricing rules. We establish a strong sense in which the linear Kyle equilibrium is  robust : the first variation in any agent’s expected payoff with respect to a small variation in his conjecture about the strategies of others vanishes at equilibrium. Thus, small errors in a market maker’s beliefs about the informed speculator’s trading strategy do not reduce his expected payoffs. Therefore, the original equilibrium strategies remain optimal and still constitute an equilibrium (neglecting the higher-order terms). We also establish that if a non-linear equilibrium exists, then it is not robust.

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The Relevance of Political Affinity for the Initial Acquisition Premium in Cross-Border Acquisitions

Author: Betschinger  М.-А., Bertrand O., Settles A.

Strategic Management Journal, Volume 37, Issue 10, October 2016, Pages 2071–2091

In the context of economic nationalism, we investigate the relevance of political affinity between countries to the initial acquisition premium offered in cross-border acquisitions. Political affinity is defined as the similarity of national interests in global affairs. We argue that political affinity affects how foreign acquirers anticipate their bargaining position in their negotiations with domestic target firms. With decreasing political affinity, the host government becomes increasingly likely to intervene against foreign firms in an acquisition deal. Consequently, foreign acquirers need to provide a more lucrative initial offer to dissuade target firms from leveraging government intervention to oppose the acquisition. Our prediction is supported by strong evidence that political affinity, as revealed by UN general assembly voting patterns, leads to lower initial acquisition premiums.

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Do banks matter for the risk of a firm's investment portfolio? Evidence from foreign direct investment programs

Author: Betschinger  М.-А.

Strategic Management Journal, Volume 36, Issue 8, August 2015, Pages 1264-1276

The study explores the role of banks as debt and equity holders for the riskiness of a firm's investment strategy using a panel of Japanese firms in the electronics industry in the period 1992–2004 for the empirical analysis. Based on a conceptual framework grounded in agency and financial intermediation theories, we find that a larger involvement of banks as debt holders in a firm is associated with lower foreign direct investment portfolio risk, while the shareholdings of universal banks increase it, supporting the theoretical predictions.

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 Collateral and the efficiency of monetary policy

Author: Peiris U., Vardoulakis A.

Economic Theory, Volume 59, Issue 3, August 2015, Pages 579-603

This paper argues that in a monetary Real Business Cycle economy where a complete set of nominal contingent claims exist, the requirement to collateralize loans, alone, does not affect the equilibrium allocation when monetary policy is chosen optimally: The Pareto optimal allocation can be supported. A Friedman rule ( r  = 0), which would be optimal in the absence of collateral constraints, here is not. At the resulting prices, collateral constraints bind and the allocation is inefficient. However, positive interest rates (through an inflation tax on money balances) support the Pareto optimal allocation when the collateral constraint binds.

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International Monetary Equilibrium with Default 

Author: Peiris U., Tsomocos D.P.

Journal of Mathematical Economics, Volume 56, January 2015, Pages 47–57.

We present an integrated framework for the study of the international financial economy with trade, fiat money, monetary and fiscal policy, endogenous default and regulation. Money is introduced via a cash-in-advance requirement and real trade is endogenous. The standard international finance pricing results obtain. Market incompleteness and positive default in equilibrium allow for the study of the transmission of default through the international financial markets and imply a positive role for policy. Finally, we present an example where, due to the trade-off between the non-pecuniary cost of default and the resulting allocation, a Pareto improvement occurs following an increase in interest rates.

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