LUIS M.B. CABRAL, Leonard N. Stern School of Business - Department of Economics, Centre for Economic Policy Research (CEPR)
Email: lcabral@stern.nyu.edu

I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate. Firms compete for new consumers to join their network by offering network entry prices (which may be below cost). New consumers have a privately known preference for each network. Upon joining a network, in each period consumers enjoy a benefit which is increasing in network size during that period. Firms receive revenues from new consumers as well as from consumers already belonging to their network.Using a combination of analytical and numerical methods, I discuss various properties of the equilibrium. I show that very small or very large networks tend to price higher than networks of intermediate size. I also show that, around symmetric states, the gap between the large and the small network tends to widen (increasing dominance) whereas the opposite is true (reversion to the mean) around very asymmetric states.

MARIAGIOVANNA BACCARA, Leonard N. Stern School of Business - Department of Economics
Email: mbaccara@stern.nyu.edu
HESKI BAR-ISAAC, Leonard N. Stern School of Business - Department of Economics
Email: heski@nyu.edu

We examine how the structure of terror networks varies with legal limits on interrogation and the ability of authorities to extract information from detainees. We assume that terrorist networks are designed to respond optimally to a trade-off caused by information exchange: Diffusing information widely leads to greater internal efficiency,but it leaves the organization more vulnerable to law enforcement. The extent of this vulnerability depends on the law enforcement authority s resources, strategy and interrogation methods. Recognizing that the structure of a terrorist network respondsto the policies of law enforcement authorities allows us to begin to explore the most effective policies from the authorities point of view.

YONGGAN ZHAO, Dalhousie University - School of Business Administration
Email: yonggan.zhao@dal.ca

This paper investigates the relation between stock market returns and volatility using a bivariate factor model governing the evolution of volatility and the market price of risk. The time-varying risk premiums on a market portfolio are derived from an intertemporal constant correlation structure between a volatility indicator and the market price of risk. The accuracy of a measured volatility is verified by comparing the predictable volatility with the conditional standard deviation of excess stock returns. Using the Standard and Poor's Composite Index and three volatility indicators (option-based implied volatility, historical volatility, and a GARCH(1,1)-predicted volatility), we study a predictive model with the observed market state variables, such as up-to-date excess stock returns, current level of the volatility indicator, aggregate dividend yield, changes in the aggregate consumption, changes in the production output, and stock earnings. Although the time-varying risk premiums follow similar patterns for the three volatility indicators, the GARCH(1,1) indicator provides the most consistent predictability. While a positive relation between the intertemporal risk premium and volatility is plausible, the correlations between unexpected returns and volatility indicators are mixed with different measures of volatility. For the selected sample data, we find both strong leverage and volatility feedback effects. Finally, we discuss a portfolio strategy to show the predictive power of the model.

KIAN-PING LIM, Monash University - Department of Econometrics & Business Statistics, Universiti Malaysia Sabah
Email: KianPing.Lim@buseco.monash.edu.au
JAE H. KIM, Monash University
Email: Jae.Kim@buseco.monash.edu.au

Basu and Morey [Trade opening and the behavior of emerging stock market prices, Journal of Economic Integration 20(1), 2005, 68-92] develop a theoretical model that predicts financial opening without trade reform does not lead to higher weak-form efficiency. The present paper brings their proposition to the data of 23 emerging stock markets. In general, the key results from fixed effects panel regressions support their prediction that trade liberalization, rather than financial openness, matters the most for informational efficiency. However, our empirical findings are not consistent with their postulated mechanisms through which it occurs. Firstly, it is not the official removal of non-tariff barriers that leads to higher stock price informativeness. What really matters for stock market investors is the actual level of economy integration in the reforming country with the world. Secondly, it is not the actual gain in productive efficiency in the real sector that leads to higher weak-form market efficiency. Instead, stock prices incorporate information about the expected gain from trade openness, such as higher future profitability or greater future productivity growth.

JULIEN PENASSE, Natixis
Email: penasse@crans.org

The Asset Backed CDS contract was introduced in 2005 as an extension of the standard corporate CDS. It generally trades under the ISDA "pay-as-you-go'' (PAUG) confirmation which handles the unique features of ABS - amortization, principal writedowns and interest shortfalls. The current market standard for pricing is a simple adaptation of the widely used intensity based model, where the amortization schedule of the security is deterministic.

Taking example from some European ABS, we establish stylized facts about their default. In particular, we show that principal writedowns often come along with an extension of the ABS' maturity and can also be preceded by interest shortfalls. This paper introduces adjustments to the classical framework to account for these specificities, with amortization profile becoming a default-dependent function. We show that the resulting duration becomes an increasing function of spread, capturing the fact that distressed ABS shift toward slower amortization.

NGUYEN VAN CUONG, University of Victoria - Faculty of Law
Email: cuongnv77@yahoo.com

This Article analyzes the current provisions on cartels in Vietnamese Competition Law of 2004 and provides some comments about the approaches of this Law in dealing with cartels.

YANN BRAOUEZEC, Higher School Engineers Léonard de Vinci (ESILV) - Department of Mathematics and Financial Engineering
Email: yann.braouezec@devinci.fr

In this paper, we develop a dynamic monopoly pricing model as a non-stationary Multi-armed bandit problem. At each time, the monopolist chooses a price in a finite set and each customer decides stochastically but independently to visit or not his store. Each customer is characterized by two parameters, an ability-to-pay and a probability to visit. Our problem is non-stationary for the monopolist because each customer modifies his probability with experience. We define an ex-ante optimal price for our problem and then look at two different ways of learning this optimal price. In the first part of this paper, assuming the monopolist knows everything but the ability-to-pay, we suggest a simple counting rule based on purchase behavior which allows him to obtain enough information to compute the optimal price. In the second part, assuming no particular knowledge, we consider the case in which the monopolist uses an adaptive stochastic algorithm. When learning is easy (difficult), our simulations suggest that the monopolist (does not) choose the optimal price on each sample path.