Ronald W. Anderson

Some theory of inverse demand for applied demand analysis

Inverse demand functions are often useful econometric representations of consumer behavior. This paper establishes some theoretical properties of inverse demands which aid their interpretation and facilitate calculations related to them. We introduce the notion of scale elasticity which is shown to play for inverse demands much the same role that income elasticity does for direct demands. It is used in a decomposition of Antonelli effects which is analogous to the Slutsky equation for direct demands.

A Comparative Study of Structural Models of Corporate Bond Yields: An Exploratory Investigation

This paper empirically compares a variety of firm-value-based models of contingent claims. We formulate a general model which takes the perpetual coupon bond models of Merton (1974), Leland (1994) and Anderson, Sundaresan and Tychon (1996), as well as some immediate generalizations thereof, as special cases. We estimate these using aggregate time series data for the US corporate bond market, monthly, from August 1970 through December 1996. The data are average yields for industrial corporate bonds rated BBB, Treasury yields, leverage measures derived from the Flow of Funds Accounts, interest coverage measures derived from the National Income Accounts, and volatility measures derived from the stock market. In the basic specification with constant default free rates, we find that models with endogenous bankruptcy barriers (the Leland and the Anderson, Sundaresan and Tychon models) fit quite well. Thus, in these models, variations of leverage and asset volatility are found to account for much of the time-series variations of observed corporate yields. We then use the estimates to calculate the implied probability of default within N years. We find under plausible assumptions on the market risk-premium for levered firms that the models produce default probabilities for 5 years or more which are in line with the historical experience reported by Moodys.

HEDGER DIVERSITY IN FUTURES MARKETS

This paper is a theoretical study of the equilibrium relationship between futures prices and spot prices. A much discussed but still unresolved issue is whether a futures price coincides with the expected value of the spot price for the date when the futures contract matures. One view is that speculative trading acts to assure that the futures price equals the expected spot price and in this sense is an unbiased predictor of the spot price. Another view is that the two are unequal and that hedgers pay a risk premium to speculators in the form of a futures price which lies below the expected spot price by an amount called the normal backwardation. These two views are based on different, implicit assumptions concerning the trading opportunities, beliefs, and preferences of hedgers and speculators. We investigate the relationship between fundamental economic structures and the bias reflected in equilibrium futures prices. This is not a simple task. To accomplish it we must consider in some detail the expected-utility-maximisation problems of the individual producers and users of the good traded on the futures markets. Based on these explicit micro-foundations we then study the properties of equilibrium futures prices in a variety of settings, in each case ultimately closing the model with the assumption that expectations are rational. It is shown that systematic backwardation or contangol can exist if there is an imbalance of futures sales and purchases carried out for hedging purposes. Such an imbalance can arise if an element of future cash market participation is withheld from the futures market. An important example of this is a storage companys next period demand for cash good. Alternatively, hedging imbalance may follow from asymmetries in the types of uncertainty faced by agents. This may arise, for example, when processors of a futures-traded good face a random output price, an uncertainty not shared by the original producers of the good. As a result of these different hedging needs, futures positions of producers and users may be, in a sense, incompatible, in which case the futures price will be biased. All these factors can operate for both perishable and storable goods, and all can contribute to the predominance of either short or long hedgers even in a rational expectations equilibrium. Only the bounded participation of * This paper is based on one presented at the North American and European Meetings of the

Strategic analysis of contingent claims

Traditional contingent claims analysis provides an elegant and complete model of the. financing of the dynamic firm but has difficulty fitting the observations in the market. Recent work in corporate finance suggests this is because of its failure to model financial distress realistically. We survey recent efforts to address this issue by deriving valuation formulae from the analysis of non-cooperative equilibria in extensive form games. We illustrate how a simple static bankruptcy model can be incorporated in a dynamic game. We then show how to find the continuous time equivalent of this game. This we use to find closed-form bond formulae in special cases and to exploit efficient numerical techniques generally.

Contribution of the ocean sector to the United States economy.

The national income accounts have been reorganized to estimate the contribution to the gross national product of the ocean sector and its various subsectors for the year 1972. The new account is the first within the national income accounts to be organized along geographic, rather than productive, sectors. If properly updated and disseminated, this new account will give government and business interests a solid and consistent data base to measure, and choose among, the alternative uses of the oceans.

Capital Structure, Firm Liquidity and Growth

This paper is an exploration of the relationships among the firms financial structure, its choice of liquid asset holdings, and growth. We present a theoretical model of the firm where external finance is costly and where retaining earnings as liquid assets serves a precautionary motive. One of the predictions of this model is that a long-term reliance on high levels of debt finance tends to be associated with high levels of liquid asset holding. We test this empirically by estimating the determinants of liquid asset holdings using panel data sets of Belgian and UK firms. We find evidence of a positive relation between leverage and liquid asset holding. This result leads us to identify a possible linkage from high debt to high liquidity to slow growth. In light of this we discuss the possible implications of the development of stock markets, private equity, and venture capital markets.

COMMODITY AGREEMENTS AND COMMODITY MARKETS: LESSONS FROM TIN*

In what follows we study the history of the tin market over the period I982-5. Important questions this exercise will help to answer are: Was the collapse of the tin market a failure of the buffer stock operation and was it inevitable? Was the activity of the buffer stock a commodity market manipulation? Was there a deficiency in the drafting of the tin agreement?Was there a failure of commodity market regulation? More generally, while it has long been recognised that stabilisation schemes are vulnerable to speculative attacks, the interconection between buffer stock managements and futures markets has not been explored. In this sense, our historical analysis will

Perfect Price Aggregation and Empirical Demand Analysis

THIS PAPER CONSIDERS how certain theoretical results on consistent commodity aggregation can be applied to the problem of the estimation of a complete system of demand equations. The method proposed here builds upon the classic results of Gorman [16], particularly the case he calls perfect price aggregation. These results are well known in the literature on two-stage budgeting but have not been widely applied to problems of empirical demand analysis. This relative neglect of perfect price aggregation is regrettable because several of their features recommend their use in econometric applications. In the perfect price aggregate approach to demand analysis, demand equations are characterized as a two-level system consisting of a system of group expenditure functions and a number of systems of conditional demand functions. This two-level system provides a manageable way of introducing greater detail into a complete system of demand equations. Information about particular commodities may be introduced in the specification of conditional demand functions. As will be discussed below, the two-level system can be estimated by an iterative estimation method in which the maximum number of demand equations which can be estimated is greatly increased over the number found in past estimates of complete systems of demand equations. Even when one is principally interested in estimating group expenditures the perfect price aggregate approach is attractive because the intragroup substitutions due to detailed price changes can affect total group expenditures and this effect is taken into consideration through the computation of the perfect price indices. Thus it may be possible that a perfect price aggregate model will yield better estimates of group expenditures than would an approach which did not explicitly treat aggregation problems. Another pleasing feature of the perfect price aggregate approach to demand analysis is that it avoids the misspecification which results when the commodity

Futures Trading for Imperfect Cash Markets: A Survey

The purpose of this essay is to survey the literature concerning the role of trading futures contracts when those contracts call for the delivery of a good which is produced under imperfectly competitive conditions. This literature makes up only a small part of the overall literature on futures markets where the normal form of the market is typically assumed to be perfect competition. Indeed, for some, the vigorous rivalry of open outcry trading in a futures market pit seems to epitomize a perfectly competitive market. Nevertheless, there has been an increasing awareness that a number of interesting issues concerning futures markets require a departure from the competitive assumption at least for certain aspects of the analysis. In the present essay the studies covered share the assumption that in some respect the underlying market which will determine the price of the futures contract at its maturity is imperfectly competitive.2 By and large these markets take the futures market to be one in which there is free entry and exit so that there is no natural market power endowed in any futures trader. Thus any element of imperfect competition in the futures market would be inherited from the underlying cash market.

Securitization and Commodity Contingency in International Lending

Securitization of LDC debt would significantly aid the international debt problem by increasing liquidity and expanding the range of investors. Securitization is problematic, however, in large part due to sovereign risks involved. At present sovereign risks, commodity price risks and currency risks remain unbundled in general obligation loan contracts. Using a game theoretic model we illustrate the need to separate sovereign risks from other risks and associate the sovereign default with a third party guarantee, whose fair-value premium can be calculated. We argue that issuing commodity price contingent assets may provide the best means of securitizing LDC obligations.