Financial Risk: Theory, Evidence and Implications: Proceedings of the Eleventh Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

237 Pages·1988·5.272 MB·English

by  Hal R. Varian (auth.), Courtenay C. Stone (eds.)

Financial Risk: Theory, Evidence
and Implications
Financial Risk: Theory, Evidence and
Implications
Proceedings of the Eleventh Annual Economic Policy
Conference of the Federal Reserve Bank of St. Louis
edited by
c.
Courtenay Stone
The Federal Reserve Bank of St. Louis
Kluwer Academic Publishers
Boston Dordrecht London
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Library of Congress Cataloging-in-Publication Data
Economic Conference, (Federal Reserve Bank of SI. Louis).
(11th: 1986: Federal Reserve Bank of Saint Louis)
Financial risk.
Bibliography: p.
1. Finance-Congresses. 2. Risk-Congresses.
I. Stone, Courtenay C. II.· Title.
HG63.E36 1986 332 87~32516
ISBN-13: 978-94-010-7701-9 e-ISBN-13: 978-94-009-2665-3
DOl: 10.1007/978-94-009-2665-3
Copyright © 1989 by Kluwer Academic Publishers
Sollcover reprint of ihe hardcover lsi edition 1989
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any
means, mechanical, photocopying, recording, or otherwise, without
the prior written permission of the publisher, Kluwer Academic
Publishers, 101 Philip Drive, Assinippi Park, Norwell,
Massachusetts 02061.
Typeset by Macmillan India Ltd, Bangalore 25
Contents
Contributing Authors vii
Preface ix
Risk: A General Overview
1
Differences of Opinion in Financial Markets 3
Hal R. Varian
Commentary by V. V. Chari 38
2
Risk, Exchange Market Intervention, and Private Speculative Behavior in a
Small Open Economy 41
Stephen J. Turnovsky
Commentary by Charles I. Plosser 73
II
Risk: A Domestic Overview 77
3
Risk and the Economy: A Finance Perspective 79
K. C. Chan and Rene M. Stulz
Commentary by Arnold Zellner 118
4
Management versus Economic Conditions as Contributors to the Recent
Increase in Bank Failures 125
Richard W. Nelson
Commentary by George G. Kaufman 149
v
VI CONTENTS
III
Risk: An International Overview 155
5
Empirical Assessment of Foreign Currency Risk Premiums 157
Richard Meese
Commentary by Maurice Obstfeld 181
6
Country Risk and the Structure of International Financial Intermediation 197
Donald R. Lessard
Commentary by Thomas D. Willett 228
Contributing Authors
K. C. Chan Richard W. Nelson
Department of Finance Vice President and Chief Economist
Ohio State University Federal Home Loan Bank
Columbus, Ohio 43210 of San Francisco
P.O. Box 7948
San Francisco, California 94120
Varadarajan V. Chari
Economist
Maurice Obstfeld
Federal Reserve Bank of Minneapolis
Department of Economics
Minneapolis, Minnesota 55480
University of Pennsylvania
Philadelphia, Pennsylvania 19104
George G. Kaufman
Department of Finance Charles Plosser
Loyola University Department of Economics
820 N. Michigan Avenue University of Rochester
Chicago, Illinois 60611 Rochester, NY 14627
Rene M. Stulz
Donald R. Lessard
Department of Finance
Sloan School of Management
Ohio State University
Massachusetts Institute of Technology
Columbus, Ohio 43210
Cambridge, Massachusetts 02139
Stephen J. Turnovsky
Richard A. Meese Department of Economics
School of Business Administration University of Washington
University of California at Berkeley 301 Savery Hall
Berkeley, California 94720 Seattle, Washington 98195
vii
Vlll CONTRIBUTING AUTHORS
Hal R. Varian Arnold Zellner
Department of Economics Graduate School of Business
University of Michigan University of Chicago
Ann Arbor, Michigan 48109 Chicago, Illinois 60637
Thomas D. Willett
Claremont Center for Economic
Policy Studies
ylaremont Colleges
Claremont, Cal ifornia 91711
Preface
The Federal Reserve Bank held its Eleventh Annual Economic Policy
Conference on November 14 and 15, 1986. The topic of the conference was
Financial Risk: Theory, Evidence and Implications; this volume contains the
papers and discussants' comments that were presented at this conference. As
the reader will note, these papers cover the broad aspects of financial risk,
from some key general concepts to specific domestic and international
financial risk problems. And, of equal importance, they provide some
interesting insights into reasons for the continuing turmoil in domestic and
international financial markets that we have witnessed in recent years.
ix
I
RISK: A GENERAL
OVERVIEW
1
DIFFERENCES OF OPINION
IN FINANCIAL MARKETS
Hal R. Varian
The standard models of financial markets such as the Sharpe-Lintner mean
variance model or the Rubinstein-Breeden-Litzenberger contingent con
sumption model both assume more-or-Iess homogenous probability beliefs.!
There has been some work on extending the mean-variance model to allow for
differences in beliefs across agents; see Jarrow (1980), Lintner (1969), Mayshar
(1983), and Williams (1977). Differences in beliefs in contingent commodities
models have received much less attention. The major references are
Rubinstein (1975, 1976a), Breeden and Litzenberger (1978), Hakansson
et al. (1982), and Milgrom and Stokey (1982).
Cragg and Malkiel (1982) have done some empirical work concerning the
effect of the diversity of beliefs on asset prices. According to them:
This work was supported by the National Science Foundation. I thank Sudipto Bhattacharya,
Fisher Black, Robert Holbrook, Jeff Mackie-Mason, Dale Morse, Paul Milgrom, Tom Russell,
Duane Seppi, Sarab Seth, Joseph Swierzbinski, and Jean Tirole for helpful discussions and
references.
3