This thesis comprises three essays in the field of applied microeconomic theory. In the first essay we present a generalized Nash model of household decision making that does not restrict a priori the household's location on the Pareto frontier and that allows the opportunity cost of household membership to influence the intrahousehold allocation of resources. This approach generalizes both the collective and the symmetric Nash models of household decision making. Formally, we derive the restrictions on household demands implied by the generalized Nash model and we show that the collective model, the symmetric Nash model and the traditional (unitary) model of the household are all special cases of the generalized Nash model. In the second essay we analyze the optimal risk-sharing contract to emerge between two risk averse individuals under repeated double moral hazard. Several interesting properties of the optimal contract emerge. First, the contract is less sensitive to the performance of any single individual than would have been the case under single moral hazard. Second, a well-known condition describing the optimal level of intertemporal consumption smoothing under repeated single agency is generalized to take account of the double incentive problem. In particular, when both individuals face binding incentive constraints then the expectation of the ratio of person i's to person j's marginal utility in period t is strictly greater than the known ratio of person i's to person j's marginal utility in period t - 1, i,j = 1,2, i /= j. In the final essay we examine the optimal balance between the provision of income insurance through family networks and provision through the redistributive tax system. We demonstrate that even when there is full risk-sharing within the family there are nevertheless further welfare gains to be achieved through an appropriate level of government intervention. We also demonstrate that where intra-family moral hazard implies that only partial risk-sharing is achieved within the family, the existence of further welfare gains from government intervention will depend on the effects of such intervention on the intra-family income transfer and on effort incentives.

The current literature does not provide efficient models for commodity prices and futures valuation. This inadequacy is partly due to the fact that the two main streams of the literature - structural models and reduced form models - are largely disjoint. In particular, existing structural models are developed under rigid discrete time framework that does not take into account the mean-reverting properties of commodity prices. Furthermore, most of the literature within this class does not analyze the properties of the futures prices. Current reduced-form models allow cash-and-carry arbitrage possibilities and do not take into account the dependence between the spot price volatility and the inventory levels. This thesis investigates three new models for the price of a storable commodity and futures valuation. Specifically, we develop a structural model and two reduced-form models. In doing so, we expand the leading models within each of the two streams of the literature, by establishing a link between them. Each of these models provide an advance of their type. This study makes several contributions to the literature. We provide a new structural model in continuous time that takes into account the mean reversion of commodity prices. This model is formulated as a stochastic dynamic control problem. The formulation provided is flexible and can easily be extended to encompass alternative microeconomic specifications of the market. The results provide an optimal storage policy, the equilibrium prices and the spot price variability. We also develop a numerical method that allows the construction and analysis of the forward curves implied by this model. We provide a separate analysis considering a competitive storage and considering a monopolistic storage. The results are consistent with the theory of storage. Furthermore, the comparison between monopoly and competition confirm the economic theory. We developed a simple reduced-form model that focuses both on the mean reverting properties of commodity prices and excludes cash-and-carry arbitrage possibilities. This model is compared with a standard single-factor model in the literature. This new model adds two important features to the standard model and motivates the development of a more sophisticated reduced-form model. Accordingly, the last model developed in this thesis is a reduced-form model. It is a two-factor model that represents the spot price and the convenience yield as two correlated stochastic factors. This model excludes cash-and-carry arbitrage possibilities and takes into account the relationship between the spot price volatility and the inventory level. We find an analytical solution for the futures prices. This model is tested empirically using crude oil futures data and it Is compared with one of the leading models in the literature. Both models are calibrated using Kalman filter techniques. The empirical results suggest that both models need to be improved in order to better fit the long-term volatility structure of futures contracts.

This thesis examines the interest rate, market entry and credit decisions which banks are expected to make following financial liberalization. It uses analytic tools from information economics and industrial organization theory to consider the policy implications of behaviour which responds to the constraints of imperfect information. The financial markets of the Caribbean Commonwealth supply the stylized facts which inform the analysis. Chapter 1 introduces the topics treated. The financial liberalization hypothesis is based on the 1973 works of McKinnon and Shaw. Chapter 2 describes their characterization of market fundamentals and behaviour in LDCs. It discusses the descriptions of equilibrium, and the welfare implications of these equilibria, in models which analyze economies with similar fundamentals. Chapter 3 derives stylized facts from the descriptions of the economic institutions and financial systems of the four Caribbean countries whose banking behaviour we model. Chapter 4 analyzes deposit rate determination by banks in the long-run equilibrium of a search market. It posits that in long-run equilibrium depositors find it costly to switch banks because doing so requires that they forego improved service at their current banks. The inelastic deposit supply which results from these switching costs implies that monopsonistic deposit rates are a noncooperative equilibrium. It is argued that this facilitates tacit collusion among banks and that a deposit rate floor is the appropriate policy corrective. Chapter 5 argues that the enhancement of intermediation service responsible for depositor switching costs reflects the information banks acquire about customers and their ability to offer suitably tailored service. Chapter 6 considers bank entry into a market where established customers of certain value have switching costs. Entering banks attract new customers of lower expected value. If new banks are therefore unable to generate sufficient revenue to cover their fixed costs, they exit. This chapter argues that liberal entry policy is not sufficient to ensure competition. Chapter 7 develops a simple model of bank screening by loan size in one sector of an economy. It finds a sequential equilibrium in which low-risk borrowers , self-select by the choice of contracts with a loan size below that they demand at the interest rate for their risk class. In Chapter 8 the partial equilibrium model of Chapter 7 is embedded in a general equilibrium framework to demonstrate that the market equilibrium is not constrained Pareto efficient. It argues that subsidizing the highest interest rates will improve loan allocation while maintaining the separation induced by private contracts. Chapter 9 summarizes the main results and conclusions of the thesis.

A new class of interest rate models is proposed where the main driving terms for the large scale dynamics of the system are deterministic. As an example, an economically motivated two factor model of the term structure is presented that generalises existing stochastic mean term structure models. By allowing a certain parameter to acquire dynamical behaviour the model is extended to three factors. It is shown, that in a deterministic version, the model is equivalent to the Lorenz system of differential equations. With reasonable parameter values the model exhibits chaotic behaviour. It successfully emulates certain properties of interest rates including regime switching and behaviour of a business cycle nature. Pricing and term structure issues are discussed. Standard PCA techniques used to estimate HJM type models are observed to be equivalent to dimensional estimates commonly applied to 'spatial data' in non-linear systems analysis. An empirical investigation uncovers surprising structure consistent with the existence of a low dimensional attractor. Issues of control of the chaotic system with reference to the underlying economic model are discussed. A heuristic approach is made to estimating the three factor model. Exploiting properties of the term structure, the existence of noise, and the geometry of the system allows a variety of methods for uncovering the parameters of the model. A better approach is found in the application of the Kalman filter to the estimation problem. Lack of explicit solutions motivates an investigation into the use of approximated forms for the term structure. The traditional Kalman filter is seen to be unstable when applied to the chaotic three factor model. A stable variant, from the class known as 'square-root' filters, is adopted. A new method is created for finding the analytical derivatives of the log-likelihood function such that it is consistent with the 'square-root' filter. Estimates for the empirical estimation of the models developed earlier in the thesis are given. It is concluded that there is much scope for expanding the literature within the new class of models proposed. The particular three factor model developed has been shown to have realistic properties and be amenable to bond and contingent claim pricing. The chaotic nature of the model, underpinned by an economic derivation, opens up new methods for authorities to control/stabilise the economy. An analysis of the underlying dynamical structure of UK money market rates is consistent with a low dimensional deterministic driving force. Heuristic methods employed to estimate the parameters of the model allow for an insight into exploiting the geometry of the system. Application of the Kalman filter to estimation of non-linear models is found to be problematic due to the linearisations/approximations that are necessary. An outline of areas for future research is given, providing ideas for extending the economic formulation, further investigating control of chaotic interest rate systems, testing empirical data for evidence of chaotic invariants and methods for quantifying and improving the Kalman filtering procedures for better handling non-linear models.

In this dissertation, we consider the stochastic volatility of short rates, the jump property of short rates, and market expectation of changes in interest rates as the crucial factors in explaining the term structure of interest rates. In each chapter, we model the term structure of interest rates in accordance with these factors.

This thesis examines two key areas where macroeconomic policy and stability in international financial markets intersect. Part one examines the extent to which economic policy can limit the development of misalignments in exchange rates, without sacrificing policy tools that are needed to maintain internal macroeconomic balance. This issue is addressed in a model where endogenous exchange rate fluctuations are generated by traders selecting alternative forecasting strategies on the basis of an ‘evolutionary fitness rule’, in the spirit of work by Brock and Hommes (1997, 1998). In this setting it is shown how, by changing the relative profitability of available strategies, sterilized intervention can coordinate traders onto strategies based on macroeconomic fundamentals. Empirical evidence in support of the model is provided based on data from interventions by the Japanese authorities in the 1990’s. In addition, simulations of the estimated model are used to calculate confidence intervals for the ex ante probability that interventions of a given size will be effective in pricking bubbles in the exchange rate. Part two moves on to examine the implications for macroeconomic policy of the exponential growth in recent years of the use of financial derivatives. A theoretical model is developed which demonstrates how firms’ use of derivatives for risk management purposes, while increasing the robustness of the financial system to shocks, at the same time reduces the impact of monetary policy on the macroeconomy. This effect arises because the agency costs, which enhance the impact of monetary policy through the credit channel, are reduced by firms’ usage of hedging instruments, in particular interest rate swaps. Using quarterly data on total outstanding swap contracts from 1990, empirical evidence is then presented to show how increased usage of derivatives may have influenced the impact of monetary policy in the United States.

Chapter one is a brief discussion of a few methodological premises. The second chapter is meant to show (by means of a theoretical analysis) the effective macroeconomic relevance of oligopsony in the market for credit. This is done by using two models. In the first (simplified) model - where the behaviour of the supply function of bank credit to industrial firms is captured by a "Cobb-Douglas" reduced form - an exogenous decrease in the market power of the industrial firms on the credit market increases the effectiveness of monetary policy. In the second model, where the banking sector behaves consistently with the portfolio allocation theory, the results are weakened: it is still true that, apart from extreme cases, reductions in the market power of industrial firms in the credit markets increase the macroeconomic level of investment and affect the monetary policy multiplier, but the sign of the latter effect becomes ambiguous and depends on the analytical forms of the behavioural functions. Both models, however, show that modifications of the market structure in the banking sector have, in general, macroeconomic effects. The third chapter suggests an interpretation of the phenomenon of “securitization" on the basis of Williamson's [1985] contractual framework. It is pointed out that in securitized financial systems substitutability between securities and intermediated credit is an empirically relevant phenomenon that makes the demand for bank credit to industry more unstable than the supply. For this purpose, a comparative econometric analysis has been performed with British and German data, because the two countries had (apart from the phenomenon of securitization) many similarities in their regulatory systems, as well as in the degree of concentration of their banking sectors and in the magnitude of the respective economies, at least until German Unification. The analytical form of the bank credit supply function is based on the "credit view". This specific aspect of the behaviour of banks is analyzed in Chapter 4, which contains an empirical analysis (performed with Italian data) of the free liquidity ratio for commercial banks, interpreted on the basis of the recent literature on investment decisions under conditions of investments' irreversibility and uncertainty. Chapters 5 and 6 examine the interactions between industrial firms and financial intermediaries in a "microeconomic" perspective. The focus is on the investment decision, and one of the main concerns is to perform a theoretical and empirical analysis on the connections between risk, cost of capital and investment decisions. Chapter 5 contains an empirical analysis of the firms' investment decision based on a theoretical model where the decisions concerning investment and the firms' financial structure are taken simultaneously. The results are not conclusive, in part because of the complexity of the causal links among market structure, investment and financing decisions suggested by various contributions in finance as well as in industrial economics. The study of such causal links is precisely the concern of Chapter 6, which contains an analysis of the implications of a few alternative hypotheses (based on precise results of the industrial economics literature) on the link existing between the cost of capital, the market structure and the profit margins.

The thesis presents four papers that begin to analyse transnational monopoly capitalism: (1) Paper One attempts to fill a gap in the literature by examining the impact of intra-firm imports (and exports) on the theoretical specification of the degree of monopoly. It shows that an industry's degree of monopoly need not fall when import penetration-rises. United Kingdom car industry data is used to examine the bias in estimating the degree of monopoly when ignoring intra-firm imports. (2) Paper Two explores the conjectural variation model underlying such a theoretical specification. In particular, it criticises the model for saying little about the determinants of industry equilibrium. It suggests collusion amongst firms focusing on the possibility of joint profit maximisation be given the centre stage, and that equilibrium be analysed in terms of its deviation from the joint maximum, the deviation depending upon firms' retaliatory power, cost functions, and demand functions. (3) Paper Three considers another question arising in (1): why are there transnational corporations? It pursues a Marglinian analysis. A general theoretical framework based upon product market domination is developed, and one aspect of this - labour market domination - is taken up in theoretical and empirical detail. Particular emphasis is given to distributional as against efficiency considerations. Throughout, the analysis is compared to other approaches - for instance, internalisation. (4) Paper Four pursues the theory of the firm by taking up the fundamental issue of who controls firms. In contrast to existing literature, it criticises ex post analysis of' share distributions, and uses a dynamic, historical framework in concluding that owners control firms. This is supported by examining recently reported empirical evidence. Consideration of the M-form organisation, and savings behaviour is used to further discriminate the analysis from managerialism and neoclassicism respectively.

This thesis consists of four main chapters, together with a general introduction and conclusion. The thesis examines, both separately and together, the formation of trade blocs and global market integration. All the models use a partial equilibrium framework, with firms competing as Cournot oligopolists. Chapter 2 presents two models of trade bloc formation under segmented markets. In the first model, with common constant marginal costs, global free trade is optimal for all countries when there are no more than four countries, but with five or more countries there is an incentive to form a trade bloc containing most countries, but excluding at least one. The second model introduces a cost function where a firm's marginal cost is lower when it is located in a larger trade bloc, with little effect on the results. Chapter 3 analyses the formation of trade blocs between countries with different market sizes under segmented markets. The formation of a two country customs union or free trade area will always raise the smaller country's welfare, while the larger country will usually lose from a free trade area, and sometimes from a customs union. Chapter 4, which is joint work with David R. Collie and Morten Hviid, presents a model of strategic trade policy under integrated markets, under complete and incomplete information. In the former case, a low cost country will give an export subsidy which is fully countervailed by the high cost country's import tariff. In the simultaneous signalling game, each country's expected welfare is higher than under free trade. Chapter 5 considers models of trade bloc formation under integrated markets. With common constant costs, there is no incentive for blocs to form. When costs are decreasing in membership of a bloc, either global free trade is optimal or countries would prefer to belong to the smaller of two blocs.

We argue interest rate derivative pricing models are misspecified so that when they are fitted to historical data they do not produce prices consistently with the market. Interest rate models have to be calibrated to prices to ensure consistency. There are few published works on calibration to derivatives prices and we make this the focus of our thesis. We show how short rate models can be calibrated to derivatives prices accurately with a second time dependent parameter. We analyse the misspecification of the fitted models and their implications for other models. We examine the Duffle and Kan Affine Yield Model, a class of short rate models, that appears to allow easier calibration. We show that, in fact, a direct calibration of Duffle and Kan Affine Yield Models is exceedingly difficult. We show the non-negative subclass is equivalent to generalised Cox, Ingersoll and Ross models that facilitate an indirect calibration of nonnegative Duffle and Kan Affine Yield Models. We examine calibration of Heath, Jarrow and Morton models. We show, using some experiments, Heath, Jarrow and Morton models cannot be calibrated quickly to be of practical use unless we restrict to special subclasses. We introduce the Martingale Variance Technique for improving the accuracy of Monte Carlo simulations. We examine calibration of Gaussian Heath Jarrow and Morton models. We provide a new non-parametric calibration using the Gaussian Random Field Model of Kennedy as an intermediate step. We derive new approximate swaption pricing formulae for the calibration. We examine how to price resettable caps and floors with the market- Libor model. We derive a new relationship between resettable caplets and floorlets prices. We provide accurate approximations for the prices. We provide practical approximations to price resettable caplets and floorlets directly from quotes on standard caps and floors. We examine how to calibrate the market-Libor model.