New Strategies for Emerging Domestic Sovereign Bond Markets in the Global

                                    (2) 

with  K  fixed (physical) capital and 

.

1

0

p

p

α

  The constraint in making 

investment decisions is determined by the notion that the firm cannot invest more 

than a multiple 

1

f

λ

 of its capital-adjusted cash flow 

θ

K

28

: 

θ

λ

K

W

≤

 

 

 

 

 

 

(3) 

The degree of financial market development is given by 

.

λ  That is, for a 

given level of assets, a firm can borrow more when the financial market is more 

                                                      

25

 

Denizer, Iyigun and Owen, 2002; and Beck, Lundberg, and Majnoni 2006.  

26

 

For other key areas of consensus and a good survey of proposals, see Mishkin, 2006. 

27

   

Raddatz, 2006. 

28

 

Raddatz notes that this kind of constraints can be derived from ex post moral hazard 

considerations.  

23

Blommestein and Santiso: New Strategies for Emerging Domestic Sovereign Bond Markets

Published by The Berkeley Electronic Press, 2007

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developed. Good and bad times (volatility)  can be expressed via the size of cash 

flows, with 

H

θ

 the cash flow in good times (with probability P) and 

L

θ