The Journal of Finance

A Catastrophe Model of Bank Failure

Published: 12/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb02203.x

THOMAS HO, ANTHONY SAUNDERS

Most models of bank failure have assumed that the path towards bankruptcy or insolvency is smooth and continuous. As a consequence a number of early‐warning systems have been suggested in the banking and financial literature to aid regulators in the identification of potential problem banks. However, these systems may be of little use when the path towards failure is explosive, involving a sudden crash or catastrophe. This paper seeks to examine such cases by applying the theory of catastrophes to bank failure. A model is developed to show how the interaction between bank management, regulators and depositors can induce catastrophic failure. It is argued that there is a crucial relationship between the power of regulatory intervention and depositors confidence levels which is both necessary and sufficient for catastrophe to occur. It is also argued that catastrophe appears to be more likely for large money market banks rather than small banks. Finally, some suggestions are made for regulatory policy and for further research in the area.

Intertemporal Commodity Futures Hedging and the Production Decision

Published: 06/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb02314.x

THOMAS S. Y. HO

This paper deals with the producer's optimal use of commodity futures in hedging. The framework for analysis is an intertemporal consumption and investment model. The producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval. During the period, he faces both price and output uncertainties. In applying stochastic dynamic programming methods, this paper shows the effect of these risks on his consumption behavior. Further, the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions. Finally, implications of these results on the futures markets are discussed.

On Dealer Markets Under Competition

Published: 05/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb02153.x

THOMAS HO, HANS R. STOLL

Order Arrival, Quote Behavior, and the Return‐Generating Process

Published: 09/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb03926.x

JOEL HASBROUCK, THOMAS S. Y. HO

This paper establishes three empirical results. We find positive autocorrelation in actual intra‐day stock returns, in intra‐day returns computed from quote midpoints, and in the arrival of buy and sell orders. We present a model of return generation that incorporates these features via lagged adjustment of the limit‐order price and positive dependence in bid and ask transactions. The return model is observationally equivalent to an ARMA process, which is consistent with the observed return behavior.

A Micro Model of the Federal Funds Market

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05026.x

THOMAS S. Y. HO, ANTHONY SAUNDERS

This paper demonstrates that valuable insights into the determination of Federal funds rates can be gained through modeling the micro‐decisions of market participants. Fed fund demand functions are derived for different bank valuation functions and several implications are discussed. Specifically, it is: (i) possible to rationalize the observation that large banks are net purchasers and small banks net sellers of Fed funds; (ii) to explain the positive spread of Fed funds rates over other short‐term money market rates; and (iii) to link the size of this spread to the Federal Reserve's underlying monetary policy strategy.

Term Structure Movements and Pricing Interest Rate Contingent Claims

Published: 12/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb02528.x

THOMAS S. Y. HO, SANG‐BIN LEE

This paper derives an arbitrage‐free interest rate movements model (AR model). This model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free. We then show that the AR model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates. This paper also studies the behavior and the economics of the model. Our approach can be used to price a broad range of interest rate contingent claims, including bond options and callable bonds.

Dealer Bid‐Ask Quotes and Transaction Prices: An Empirical Study of Some AMEX Options

Published: 03/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03858.x

THOMAS S. Y. HO, RICHARD G. MACRIS

This paper, utilizing dealer's “trading book” information, presents some empirical evidence supporting the validity of a dealer pricing model. It shows that much of the transaction prices variation may be explained by the specialist's optimal determination of his bid and ask quotes. Furthermore, it demonstrates that the dealer's bid‐ask spread is an important explanatory variable in the observed transaction return. Finally, it indicates that the dealer's inventory level may affect his quotes and thus the transaction prices and order arrivals. The paper provides insights into the relationship between transaction prices and equilibrium prices, which will permit more extensive use of transaction data in empirical investigations. It also provides a better understanding of optimal dealer pricing strategies, suggesting that the proposed empirical model may be used to evaluate a dealer's trading performance.

The Dynamics of Dealer Markets Under Competition

Published: 09/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02282.x

THOMAS S. Y. HO, HANS R. STOLL

The behavior of competing dealers in securities markets is analyzed. Securities are characterized by stochastic returns and stochastic transactions. Reservation bid and ask prices of dealers are derived under alternative assumptions about the degree to which transactions are correlated across stocks at a given time and over time in a given stock. The conditions for interdealer trading are specified, and the equilibrium distribution of dealer inventories and the equilibrium market spread are derived. Implications for the structure of securities markets are examined.

The Trading Decision and Market Clearing under Transaction Price Uncertainty

Published: 03/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04935.x

THOMAS S. Y. HO, ROBERT A. SCHWARTZ, DAVID K. WHITCOMB

This paper models an individual's trading decision, given: (1) his/her demand function to hold shares of an asset, (2) his/her expectation on what the market clearing price will be, and (3) the design of the market which determines how orders will be translated into trades. The particular market design we consider is the batched trading (periodic call) regime. Assuming investors are distributed according to their propensities to hold shares, we model the aggregation of orders to obtain market clearing values of price and volume and to show the way in which, with trading friction, these solutions differ from Pareto efficient values. The importance of this analysis for various issues concerning market design is noted.