Alon Raviv - Academia.edu (original) (raw)
Drafts by Alon Raviv
Textual analysis of 14,270 NBER Working Papers published during 1999–2016 is done to assess the e... more Textual analysis of 14,270 NBER Working Papers published during 1999–2016 is done to assess the effects of the 2008 crisis on the economics literature. The volume of crisis-related WPs is counter-cyclical, lagging the financial-instability-index. WPs by the Monetary-Economics, Asset-Pricing, and Corporate-Finance program members, hardly refer to “crisis/crises” in the pre-crisis period. As the crisis develops, however, their study-efforts of crisis-related issues increase rapidly. In contrast, WPs in macroeconomics-related programs refer quite extensively in the pre-crisis period to “crisis/crises” and to crises-related topics. Overall, our findings are consistent with the claim that economists were not engaged sufficiently in crises studies before the 2008 crisis. However, counter to the popular image, as soon as the crisis began to unravel, the NBER affiliated economists responded dramatically by switching their focus and efforts to studying and understanding the crisis, its causes and its consequences.
Papers by Alon Raviv
RePEc: Research Papers in Economics, 2014
Social Science Research Network, 2017
The effect of non-marketability on security prices is one of the most important issues in finance... more The effect of non-marketability on security prices is one of the most important issues in finance (Longstaff, 1995). Theoretical models that estimate the non-marketability discount assume that marketable securities are continuously traded in unlimited amounts. In practice, however, many securities are illiquid and exhibit low trading frequency, with a limit on the traded quantity. We expand the theoretical models by developing a method in which the frequency of trading and the quantity of trading are limited. We find that accounting for illiquidity constrains reduces significantly the non-marketability discount. In addition, we show that for a given quantity, our method generalizes existing models (Longstaff, 1995; and Finnerty, 2012a) such that these models are the corner solutions of our generalization. Thus, our method can be applied to a wide variety of illiquidity constrains.
Review of Financial Studies, Feb 9, 2021
Journal of Banking and Finance, Dec 1, 2007
In‡ation targeting –the central bank practice of attempting to keep in‡ation levels within …xed b... more In‡ation targeting –the central bank practice of attempting to keep in‡ation levels within …xed bounds around a quantitative target –has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of in‡ation and, consequently, on the pricing of in‡ation derivatives. We develop a ‡exible model of in‡ation targeting in which the central bank’s intervention to steer in‡ation towards the target depends on past deviations and the policymaker’s ability or will to enforce the target. We use our model to price in‡ation derivatives and demonstrate the impact of in‡ation targeting on derivative pricing. JEL classi…cations: G12, G13
We propose and implement a method that provides quantitative estimates of the extent to which hig... more We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.
We present a novel theory to explain the puzzling issue regarding why certain firms in financial ... more We present a novel theory to explain the puzzling issue regarding why certain firms in financial distress, that must renegotiate their debt prefer a formal bankruptcy procedure, which is more costly, over direct negotiations with their debtholders. Specifically, we show that claimholders’ heterogeneous beliefs about the possible results of a formal plan – and about judicial discretion in particular – may lead to such a preference. In our model, informal processes are preferred when the total value of all corporate claims in a formal procedure, according to each claimholder’s beliefs, is less than the total value of the firm’s assets in an informal process. In such a case, all claimholders believe that they will be better off under an informal process because there is a positive surplus that can be divided among the parties (Pareto Improving). The proposed model can predict which resolution would be chosen under any set of claimholders’ beliefs about the different determinants drivin...
Excessive risk taking by financial institutions has been widely identified as a major cause of th... more Excessive risk taking by financial institutions has been widely identified as a major cause of the 2008 financial crisis. The crisis raised a number of crucial issues: What is the effect of a financial institution’s pay package, executive ownership and the type of regulations on risk taking? What should be the relationship between the different policy tools for controlling risk: regulation of compensation, traditional measures such as capital adequacy and direct control of bank activities? Are these measures complementary or substitutes? To answer these questions we develop a valuation model for the different positions held by the claimholders in a financial institution- the stockholder, an executive that hold equity based compensation and has potential loss in financial failure, and the government which acts as the deposits insurer. By using an equilibrium solution we show the level of assets risk chosen by the executive, the level of executive’s ownership set by the stockholders, ...
SSRN Electronic Journal, 2020
In Issuing convertible bonds has become a popular way of raising capital by corporations in the l... more In Issuing convertible bonds has become a popular way of raising capital by corporations in the last few years. An important subgroup is convertibles linked to a price index or exchange rate. The valuation model of inflation-indexed (or equivalently foreign-currency) convertible bonds derived in this paper considers two sources of uncertainty allowing both the underlying stock and the consumer-price-index to be stochastic and incorporates credit risk in the analysis. We approximate the pricing equations by using a Rubinstein (1994) three-dimensional binomial tree, and we describe the numerical solution. We investigate the sensitivity of the theoretical values with respect to the characteristics of the issuer, the economic environment and the security s characteristics (number of principal payments). Moreover, we demonstrate the usefulness and the limitations of the pricing model by using inflation-indexed and foreign-currency linked convertibles traded on the Tel- Aviv stock exchange.
The Quarterly Journal of Finance
Including contingent convertible bonds (coco) in the capital structure of a bank affects the sens... more Including contingent convertible bonds (coco) in the capital structure of a bank affects the sensitivity to risk of its equity-based compensation. Such risk-shifting incentives can be reduced if the coco bonds are well-designed. Similarly, we show that compensating executives with well-designed coco bonds can also reduce risk-shifting incentives. In practice, however, most coco bonds have characteristics that result in both stock and coco compensation having large sensitivities to changes in asset risk — equity-based compensation encourages executives to increase risk, coco compensation to reduce risk. We show that a pay package combining both stock and coco can practically eliminate risk-shifting incentives and that it can be implemented with a bank’s preexisting coco bonds.
Textual analysis of 14,270 NBER Working Papers published during 1999–2016 is done to assess the e... more Textual analysis of 14,270 NBER Working Papers published during 1999–2016 is done to assess the effects of the 2008 crisis on the economics literature. The volume of crisis-related WPs is counter-cyclical, lagging the financial-instability-index. WPs by the Monetary-Economics, Asset-Pricing, and Corporate-Finance program members, hardly refer to “crisis/crises” in the pre-crisis period. As the crisis develops, however, their study-efforts of crisis-related issues increase rapidly. In contrast, WPs in macroeconomics-related programs refer quite extensively in the pre-crisis period to “crisis/crises” and to crises-related topics. Overall, our findings are consistent with the claim that economists were not engaged sufficiently in crises studies before the 2008 crisis. However, counter to the popular image, as soon as the crisis began to unravel, the NBER affiliated economists responded dramatically by switching their focus and efforts to studying and understanding the crisis, its causes and its consequences.
RePEc: Research Papers in Economics, 2014
Social Science Research Network, 2017
The effect of non-marketability on security prices is one of the most important issues in finance... more The effect of non-marketability on security prices is one of the most important issues in finance (Longstaff, 1995). Theoretical models that estimate the non-marketability discount assume that marketable securities are continuously traded in unlimited amounts. In practice, however, many securities are illiquid and exhibit low trading frequency, with a limit on the traded quantity. We expand the theoretical models by developing a method in which the frequency of trading and the quantity of trading are limited. We find that accounting for illiquidity constrains reduces significantly the non-marketability discount. In addition, we show that for a given quantity, our method generalizes existing models (Longstaff, 1995; and Finnerty, 2012a) such that these models are the corner solutions of our generalization. Thus, our method can be applied to a wide variety of illiquidity constrains.
Review of Financial Studies, Feb 9, 2021
Journal of Banking and Finance, Dec 1, 2007
In‡ation targeting –the central bank practice of attempting to keep in‡ation levels within …xed b... more In‡ation targeting –the central bank practice of attempting to keep in‡ation levels within …xed bounds around a quantitative target –has been adopted by more than twenty economies. Such practice has an important impact on the stochastic nature of in‡ation and, consequently, on the pricing of in‡ation derivatives. We develop a ‡exible model of in‡ation targeting in which the central bank’s intervention to steer in‡ation towards the target depends on past deviations and the policymaker’s ability or will to enforce the target. We use our model to price in‡ation derivatives and demonstrate the impact of in‡ation targeting on derivative pricing. JEL classi…cations: G12, G13
We propose and implement a method that provides quantitative estimates of the extent to which hig... more We propose and implement a method that provides quantitative estimates of the extent to which higher-than-expected inflation can lower the real value of outstanding government debt. Looking forward, we derive a formula for the debt burden that relies on detailed information about debt maturity and claimholders, and that uses option prices to construct risk-adjusted probability distributions for inflation at different horizons. The estimates suggest that it is unlikely that inflation will lower the US fiscal burden significantly, and that the effect of higher inflation is modest for plausible counterfactuals. If instead inflation is combined with financial repression that ex post extends the maturity of the debt, then the reduction in value can be significant.
We present a novel theory to explain the puzzling issue regarding why certain firms in financial ... more We present a novel theory to explain the puzzling issue regarding why certain firms in financial distress, that must renegotiate their debt prefer a formal bankruptcy procedure, which is more costly, over direct negotiations with their debtholders. Specifically, we show that claimholders’ heterogeneous beliefs about the possible results of a formal plan – and about judicial discretion in particular – may lead to such a preference. In our model, informal processes are preferred when the total value of all corporate claims in a formal procedure, according to each claimholder’s beliefs, is less than the total value of the firm’s assets in an informal process. In such a case, all claimholders believe that they will be better off under an informal process because there is a positive surplus that can be divided among the parties (Pareto Improving). The proposed model can predict which resolution would be chosen under any set of claimholders’ beliefs about the different determinants drivin...
Excessive risk taking by financial institutions has been widely identified as a major cause of th... more Excessive risk taking by financial institutions has been widely identified as a major cause of the 2008 financial crisis. The crisis raised a number of crucial issues: What is the effect of a financial institution’s pay package, executive ownership and the type of regulations on risk taking? What should be the relationship between the different policy tools for controlling risk: regulation of compensation, traditional measures such as capital adequacy and direct control of bank activities? Are these measures complementary or substitutes? To answer these questions we develop a valuation model for the different positions held by the claimholders in a financial institution- the stockholder, an executive that hold equity based compensation and has potential loss in financial failure, and the government which acts as the deposits insurer. By using an equilibrium solution we show the level of assets risk chosen by the executive, the level of executive’s ownership set by the stockholders, ...
SSRN Electronic Journal, 2020
In Issuing convertible bonds has become a popular way of raising capital by corporations in the l... more In Issuing convertible bonds has become a popular way of raising capital by corporations in the last few years. An important subgroup is convertibles linked to a price index or exchange rate. The valuation model of inflation-indexed (or equivalently foreign-currency) convertible bonds derived in this paper considers two sources of uncertainty allowing both the underlying stock and the consumer-price-index to be stochastic and incorporates credit risk in the analysis. We approximate the pricing equations by using a Rubinstein (1994) three-dimensional binomial tree, and we describe the numerical solution. We investigate the sensitivity of the theoretical values with respect to the characteristics of the issuer, the economic environment and the security s characteristics (number of principal payments). Moreover, we demonstrate the usefulness and the limitations of the pricing model by using inflation-indexed and foreign-currency linked convertibles traded on the Tel- Aviv stock exchange.
The Quarterly Journal of Finance
Including contingent convertible bonds (coco) in the capital structure of a bank affects the sens... more Including contingent convertible bonds (coco) in the capital structure of a bank affects the sensitivity to risk of its equity-based compensation. Such risk-shifting incentives can be reduced if the coco bonds are well-designed. Similarly, we show that compensating executives with well-designed coco bonds can also reduce risk-shifting incentives. In practice, however, most coco bonds have characteristics that result in both stock and coco compensation having large sensitivities to changes in asset risk — equity-based compensation encourages executives to increase risk, coco compensation to reduce risk. We show that a pay package combining both stock and coco can practically eliminate risk-shifting incentives and that it can be implemented with a bank’s preexisting coco bonds.