We consider capital structure including equity, straight bonds (SBs), and contingent convertibles (CoCos) for nonfinancial firms. We price equity and CoCos by a utility-based method. We show that benefits from issuing CoCos increase dramatically with idiosyncratic risk and risk aversion. The firm value is concave in CoCos' conversion ratio and the optimal conversion ratio increases with risk aversion and idiosyncratic risk. If risk aversion is sufficiently high, shareholders' risk-shifting incentives disappear, and the firm issues less CoCos and equity and more SBs as idiosyncratic risk rises. The higher the idiosyncratic risk or risk aversion, the higher the leverage.
{"title":"Pricing contingent convertibles with idiosyncratic risk","authors":"Xiaolin Wang, Zhaojun Yang, Pingping Zeng","doi":"10.1111/ijet.12372","DOIUrl":"10.1111/ijet.12372","url":null,"abstract":"<p>We consider capital structure including equity, straight bonds (SBs), and contingent convertibles (CoCos) for nonfinancial firms. We price equity and CoCos by a utility-based method. We show that benefits from issuing CoCos increase dramatically with idiosyncratic risk and risk aversion. The firm value is concave in CoCos' conversion ratio and the optimal conversion ratio increases with risk aversion and idiosyncratic risk. If risk aversion is sufficiently high, shareholders' risk-shifting incentives disappear, and the firm issues less CoCos and equity and more SBs as idiosyncratic risk rises. The higher the idiosyncratic risk or risk aversion, the higher the leverage.</p>","PeriodicalId":44551,"journal":{"name":"International Journal of Economic Theory","volume":"19 3","pages":"660-693"},"PeriodicalIF":0.5,"publicationDate":"2023-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44259786","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Issue Information: International Journal of Economic Theory 1/2023","authors":"","doi":"10.1111/ijet.12348","DOIUrl":"https://doi.org/10.1111/ijet.12348","url":null,"abstract":"","PeriodicalId":44551,"journal":{"name":"International Journal of Economic Theory","volume":"19 1","pages":"1-2"},"PeriodicalIF":0.5,"publicationDate":"2023-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/ijet.12348","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"50117808","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
It is a well-known observation that, in the overlapping generations (OLG) model with the complete market, we can judge optimality of an equilibrium allocation by examining the associated equilibrium price. Motivated by recent development in decision theory under ambiguity, this study reexamines the above observation in a stochastic OLG model with convex but not necessarily smooth preferences. It is shown that optimality of an equilibrium allocation depends on the set of possible supporting prices, not necessarily on the associated equilibrium price itself. Therefore, observations of an equilibrium price do not necessarily tell us precise information on optimality of the equilibrium allocation.
{"title":"Optimality in an OLG model with nonsmooth preferences","authors":"Eisei Ohtaki","doi":"10.1111/ijet.12371","DOIUrl":"10.1111/ijet.12371","url":null,"abstract":"<p>It is a well-known observation that, in the overlapping generations (OLG) model with the complete market, we can judge optimality of an equilibrium allocation by examining the associated equilibrium price. Motivated by recent development in decision theory under ambiguity, this study reexamines the above observation in a stochastic OLG model with convex but not necessarily smooth preferences. It is shown that optimality of an equilibrium allocation depends on the set of possible supporting prices, not necessarily on the associated equilibrium price itself. Therefore, observations of an equilibrium price do not necessarily tell us precise information on optimality of the equilibrium allocation.</p>","PeriodicalId":44551,"journal":{"name":"International Journal of Economic Theory","volume":"19 3","pages":"611-659"},"PeriodicalIF":0.5,"publicationDate":"2023-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/ijet.12371","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43082590","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The General Deviation Measure introduces a progressive definition for financial risk measurement, which presents an alternative to the Coherent Risk Measure. This definition replaces the Translation Invariance and Monotonicity axioms with the Shift Invariance and Nonnegativity axioms, and it includes the Mean Absolute Deviation measure and other variations of the Value-at-Risk measurements. This research shows that Coherent Risk Measure holds an intrinsic contradiction regarding riskless assets, and it proves that the Gini coefficient is also a General Deviation Measure. These contributions improve the efficiency of risk measurement and asset pricing in the financial markets.
{"title":"On the General Deviation Measure and the Gini coefficient","authors":"Doron Nisani","doi":"10.1111/ijet.12370","DOIUrl":"10.1111/ijet.12370","url":null,"abstract":"<p>The General Deviation Measure introduces a progressive definition for financial risk measurement, which presents an alternative to the Coherent Risk Measure. This definition replaces the Translation Invariance and Monotonicity axioms with the Shift Invariance and Nonnegativity axioms, and it includes the Mean Absolute Deviation measure and other variations of the Value-at-Risk measurements. This research shows that Coherent Risk Measure holds an intrinsic contradiction regarding riskless assets, and it proves that the Gini coefficient is also a General Deviation Measure. These contributions improve the efficiency of risk measurement and asset pricing in the financial markets.</p>","PeriodicalId":44551,"journal":{"name":"International Journal of Economic Theory","volume":"19 3","pages":"599-610"},"PeriodicalIF":0.5,"publicationDate":"2023-01-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/ijet.12370","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44010618","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Two independent approaches have been used to analyze choices. A prominent notion is rationalizability: individuals choose maximizing binary relations. An alternative is to analyze choices in terms of standards of behavior with the notion of von Neumann–Morgenstern (vNM)-stability. We introduce a new concept (