if this message does not display correctly, click here | Table of Contents Annalisa Fabretti, University of Rome II - Tor Vergata Economics University Foundation
Tommy Garling, Göteborg University
Stefano Herzel, University of Rome II - Faculty of Economics
Martin Holmen, University of Gothenburg - Department of Economics, University of Gothenburg - Centre for Finance Samantha Leorato, University of Rome II - Centre for International Studies on Economic Growth (CEIS)
Maura Mezzetti, University of Rome II - Centre for International Studies on Economic Growth (CEIS) Fabrizio Cacciafesta, University of Rome II - Department of Economics and Finance | |
CEIS: CENTRE FOR ECONOMIC & INTERNATIONAL STUDIES
Vincenzo Atella - Director "Convex Incentives in Financial Markets: An Agent-Based Analysis" 
CEIS Working Paper No. 337 ANNALISA FABRETTI, University of Rome II - Tor Vergata Economics University Foundation
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TOMMY GARLING, Göteborg University
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STEFANO HERZEL, University of Rome II - Faculty of Economics
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MARTIN HOLMEN, University of Gothenburg - Department of Economics, University of Gothenburg - Centre for Finance
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This paper uses agent-based simulation to analyze how financial markets are affected by market participants with convex incentives, e.g. option-like compensation. We document that convex incentives are associated with (i) higher prices, (ii) larger variations of prices, and (iii) larger bid-ask spreads. We conclude that convex incentives may lead to decreased stability of financial markets. Our analysis suggests that the decreased stability is driven by the fact that convex incentives pushes agents towards more extreme decisions. Furthermore, while risk preferences affect agent behavior if they have linear incentives, the effect of risk preferences vanishes with convex incentives. "Spatial Panel Data Model with Error Dependence: A Bayesian Separable Covariance Approach"
CEIS Working Paper No. 338 SAMANTHA LEORATO, University of Rome II - Centre for International Studies on Economic Growth (CEIS)
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MAURA MEZZETTI, University of Rome II - Centre for International Studies on Economic Growth (CEIS)
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A hierarchical Bayesian model for spatial panel data is proposed. The idea behind the proposed method is to analyze spatially dependent panel data by means of a separable covariance matrix. Let us indicate the observations as yit, i = 1, ... ,N regions and t = 1,... , T time, var(y), the covariance matrix of y is written as a Kronecker product of a purely spatial and a purely temporal covariance. On the one hand, the structure of separable covariances dramatically reduces the number of parameters, while on the other, the lack of a structured pattern for spatial and temporal covariances permits to capture possible unknown dependencies (both in time and space). The use of the Bayesian approach allows to overcome some of the difficulties of the classical (MLE or GMM based) approach. We present two illustrative examples: the estimation of cigarette price elasticity and of the determinants of the house price in 120 municipalities in the Province of Rome. "Using the WACC to Rate a New Project"
CEIS Working Paper No. 339 FABRIZIO CACCIAFESTA, University of Rome II - Department of Economics and Finance
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Warnings commonly formulated about the use of the "weighted average cost of capital" (WACC) are at all inapplicable when dealing with a new project. In this case, namely, the WACC must be calculated with respect to properly defined book values, not to yet non-existing market ones; nor can a really new project be a "carbon copy" of the firm that undertakes it (even admitting that this last already exists). Finally, it is highly improbable that the ratio between debt and equity components of the outstanding invested capital remains constant, nor can be supposed that a Modigliani-Miller type relation connects the two required rates of return. As a consequence, the WACC of the project will in principle be yearly variable, and have therefore the nature of a vector: it is impossible to use it for comparisons, and is exceedingly complicate to use it for discounting. In the whole, to the aim of rating a new project, it can be judged a highly inadvisable tool.
Two further remarks. The first: Miller's "non linear WACC" is, on its side, a scalar parameter, but can reliably be used to decide about a new project only in trivial cases.
The second: explicitly considering the "tax shield effect" is not necessary to rate a new project. Anyway, the cash flow it generates should be discounted at a rate not bigger than the one used for the debt. | | ^top
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