- Real estate development and infrastructure investment under asymmetric information and functional dependence
- (with Kanak Patel)
- Presentations: Cambridge Finance, Annual Cambridge-Princeton Exchange, Rome (ROC-2010)
- The costs of vertical disintegration
- Bubbles in open economies: Theory and empirical detection
- (with Henri Buchsteiner)
- [abstract] [SSRN:1787069]
- Presentations: Warwick (Woxbridge-2011), London (TADC-LBS-2011), Amsterdam (Annual Cambridge, DSF-TI & Penn Seminar)
- Awards: Woxbridge-2011 Best Paper Award, Cambridge Finance Best Paper Award 2011
Abstract. Common precursors of financial crises are credit expansion and rising leverage. These fuel bubbles that result in a severe economic downturn when they burst. However, existing literature on bubbles under rationality lacks explanatory power, and this paper argues that this may be partly due to an implicit focus on closed economies. We study risk-shifting bubbles in symmetric open economies with three different investor types: conventional, speculative and value investors. In open economies, credit bubbles tend to be 'displaced' abroad, have higher incidence, are larger, and last longer relative to the closed economy setting. We find that underpricing of default options embedded in loan agreements is a necessary but not a sufficient condition for risk-shifting incentives to emerge.
- Real investment and equilibrium credit rationing
- (with Kanak Patel)
Abstract. If prospective borrowers are capital constrained and can postpone their loan applications, the sign of reservation rate-risk relationship depends on the gearing ratio required to carry out investment. The paper shows that equilibrium credit rationing, in the sense of Stiglitz and Weiss (1981), can emerge only at sufficiently high gearing ratios.
- Real options approach to valuation of the 'voluntary targets' proposal
- [abstract] [SSRN:1118474]
- Awards: Forum pour l'Investissement Responsable (French SIF) research grant winner, 2008. [Le Monde Economie, 21/1/2008]
Abstract. This paper looks at the "voluntary targets" (VT) proposal and its extensions that have been put forward as a possible architecture of the post-2012 climate change mitigation regime. This proposal is unique in that it takes the principle of "common but differentiated responsibilities" emphasised in the existing international treaties governing climate change mitigation efforts to a new (proactive) level as opposed to other proposals that seek to abolish it. The main drawback of the existing literature on the VT proposal is its implicit focus on governments rather than firms as the governing dynamics of the greenhouse gas abatement process. This paper corrects this shortcoming by taking the VT proposal from macro to micro level. A real option valuation (ROV) framework is developed to account for managerial flexibility embedded in the VT proposal, for which the standard cost-benefit analysis is not suitable. Our analysis suggests that under current architecture of the VT proposal the optimal strategy of the firms is not to reduce emission but instead speculatively wait in anticipation of a greater spread between prices for emission credits and average unit abatement costs. It is proposed that governments and international financial institutions should provide firms in developing countries with finite-lived "cheap" borrowing opportunities, or even subsidies, for carrying out emission reduction projects, thus influence their opportunity costs of not investing in abatement technologies. Those measures coupled with more stringent emission limits in industrialised countries will make the VT proposal feasible. The paper provides empirical results as to the threshold prices of emission credits (for abatement projects in agriculture, power sector and forestry) that would generate climatic investments in developing countries, as well as their sensitivity analyses.
- Renewable energy investment and the Clean Development Mechanism
- Energy Poliy 40, 81-89, 2012.
- [abstract] [slides] [journal] [SSRN:1581724]
Abstract. This paper uses transaction and index data to empirically examine price formation in, and equilibrium characteristics of, the primary CDM market. Results point to the preemptive (and, possibly, speculative) behaviour among intermediaries (carbon firms), and inefficiencies in information transmission between secondary and primary markets. Since the primary carbon market is unstable and is prone to rational and irrational oscillations, the CDM, in its current form, is not a reliable policy tool for long-term renewable energy sector development plans, whenever fiscal regulatory instruments are available.
- Schumpeter on Queen Elizabeth's stockings and the co-evolutionary nature of innovation
- (with Kanak Patel) Homo Oeconomicus 21(1/2), 69-88, 2010.
- [abstract] [journal] [SSRN:1527212]
Abstract. Drawing from Schumpeter's ideas on innovation, we investigate its co-evolutionary nature. We find that Schumpeterian forces of "creative destruction" and "creative accumulation" do not operate in separate domains but rather form a co-evolutionary process of innovation. Co-evolutionary trends are prevalent in as diverse industries as information and communication technologies (ICT) and women's stocking, and our terse glance through the history of innovation in the stockings industry from Queen Elizabeth I era to the present reveals how "creative destruction" and "creative accumulation" have been operating in unison to spur and spawn innovation. We discuss the implications of our findings with reference to the pace of innovative activity.
- Outlook and regulation of the Russian market for project-based transactions under the Kyoto Protocol
- Problems of Economic Transition 52(1), 76-94, 2009.
- [abstract] [journal]
Abstract. Project-based transactions are a market mechanism for attracting foreign investments in order to abate greenhouse gas emissions and increase the energy efficiency of the country's enterprises. The article classifies and analyzes the advantages and drawbacks of project-based transactions from a host country's perspective. Russia currently lags behind the leaders of the project-based transactions market. A state carbon fund is proposed through which to channel project-based transactions. The incorporation of an option mechanism into the contract structure of a transaction is proposed as a form of market regulation.
- Mean-reversion in REITs discount to NAV & risk premium
- (with Kanak Patel and Ricardo Pereira) Journal of Real Estate Finance and Economics 39(3), 229-247, 2009.
- [abstract] [journal]
Abstract. REITs discount to NAV is a puzzling regularity. The sharp increase in volatility of REITs prices over the past few years has spurred a relatively new concern amongst academics, managers and investors about the consequences of, and causes of, property risk premium on discount to NAV. The two interrelated questions arising from the recent increase in volatility of REITs prices are: Is the increased volatility responsible for the observed widening in discount to NAV? What does the observed private and public risk premium tell us about discount to NAV? We attempt to address these questions by analysing risk premiums in private and public real estate markets. The analysis is conducted in the most recent years of high stock price volatility. Our analysis reveals two major results: a tendency for discount to NAV to revert to the long term mean value of 20% and, more significantly, a lower risk premium in equivalent yields in private market than in public market. These results suggest that investors in public market have a different conception of property risk and complexity of lease options than what is conveyed by private property valuation.