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on Corporate Finance |
| By: | Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University) |
| Abstract: | International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets. Classification-JEL Codes: D52; F36; G11. |
| Keywords: | Globalization; Portfolio Choice; Financial Integration; Incomplete Markets; Asset Prices. |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~05-05-17&r=cfn |
| By: | Martin D. D. Evans (Georgetown University) and Viktoria Hnatkovska (Georgetown University) (Department of Economics, Georgetown University) |
| Abstract: | This paper presents a new numerical method for solving general equilibrium models with many assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete markets. It also can be used to study models where the equilibrium dynamics are non-stationary. We illustrate how the method is used by solving a one— and two-sector versions of a two—country general equilibrium model with production. We check the accuracy of our method by comparing the numerical solution to the one-sector model against its known analytic properties. We then apply the method to the two-sector model where no analytic solution is available. Classification-JEL Codes: C68; D52; G11. |
| Keywords: | Portfolio Choice; Perturbation Methods; Incomplete Markets; Asset Prices. |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~05-05-18&r=cfn |
| By: | Alexandros Kontonikas, Alberto Montagnoli and Nicola Spagnolo |
| Abstract: | In this paper we investigate the interaction between inflation and stock market volatility. We employ unconditional and conditional volatility measures, the latter derived from a Bivariate GARCH model with the BEKK representation. The results indicate that once the impact of IT is taken into account, the relationship between inflation and stock market volatility ceases to be positive and be comes negative in line with the New Environment Hypothesis. The implication for monetary policy design is that focusing on price stability alone may not be a suffcient condition for financial stability. |
| JEL: | C22 E31 E44 E52 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2005_11&r=cfn |
| By: | Robert P. Flood; Andrew K. Rose |
| Abstract: | This paper develops a simple methodology to test for asset integration, and applies it within and between American stock markets. Our technique relies on estimating and comparing expected risk-free rates across assets. Expected risk-free rates are allowed to vary freely over time, constrained only by the fact that they must be equal across (risk-adjusted) assets in well integrated markets. Assets are allowed to have standard risk characteristics, and are constrained by a factor model of covariances over short time periods. We find that implied expected risk-free rates vary dramatically over time, unlike short interest rates. Further, internal integration in the S&P 500 market is never rejected and is generally not rejected in the NASDAQ. Integration between the NASDAQ and the S&P, however, is always rejected dramatically. |
| Keywords: | Financial assets , United States , Stock markets , Risk premium , Asset prices , Economic models , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/110&r=cfn |
| By: | Garry J. Schinasi |
| Abstract: | This paper articulates a logical foundation-drawn from disparate literatures-for understanding why safeguarding financial stability is an important economic policy objective. The paper also explains why private aspects of finance provide broader social economic benefits and have the characteristics of public goods. Unique aspects of finance are examined, as are the linkages between finance, money, and the real economy. Sources of market imperfections in finance are identified and their implications are analyzed. The arguments imply that reaping the full private and social economic benefits of finance requires both private-collective and public-policy involvement as well as a delicate balance between maximizing the benefits of positive externalities (and public goods) and minimizing the costs (including potential instabilities) of other sources of market imperfections in finance. |
| Keywords: | Private sector , Financial sector , Markets , Money , Public finance , |
| Date: | 2004–07–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/120&r=cfn |
| By: | Olivier Jeanne |
| Abstract: | This paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture. It presents a general equilibrium model in which the need to roll over external debt disciplines the policies of debtor countries but makes them vulnerable to unwarranted debt crises owing to bad shocks. The paper presents a welfare analysis of several measures that have been discussed in recent debates, such as the adoption of renegotiation-friendly clauses in debt contracts and the establishment of an international bankruptcy regime for sovereigns. |
| Keywords: | External debt , International financial system , Collective action clauses , Insolvency , Economic models , |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/137&r=cfn |
| By: | Pablo Druck; Raul Susmel; Ritu Basu; David Marston |
| Abstract: | We examine a large panel of more than 100 banks from Argentina to study the effects of bank consolidation on performance between December 1995 and December 2000, a period of heavy bank consolidation and relative calm. Overall, we find a positive and significant effect of bank consolidation on bank performance. Bank returns increase with consolidation, and insolvency risk is reduced. Additionally, the study suggests that mergers and privatizations have a beneficial effect on bank returns. The effects of a bank acquisition on return on equity is, however, negative. Acquisitions do not seem to have any effect on risk-adjusted returns. The study also finds that a bank's insolvency risk is reduced significantly through mergers and privatization and is unrelated to bank acquisitions. |
| Keywords: | Banking , Argentina , Emerging markets , Bank restructuring , Financial crisis , Privatization , Economic models , |
| Date: | 2004–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/149&r=cfn |
| By: | Jorge A. Chan Lau |
| Abstract: | This paper focuses on the investment behavior of pension funds in developed and emerging market countries. First, it analyzes the main determinants of the emerging market asset allocation of pension funds in developed countries. Second, it assesses how pension funds in emerging markets have contributed to the development of local securities markets. Third, it analyzes the determinants of pension funds' investment performance. The paper concludes with a discussion of why the emerging market asset allocation of pension funds in developed countries is likely to increase and what the challenges faced by pension funds in emerging markets are. |
| Keywords: | Pensions , Emerging markets , Financial assets , Pension regulations , |
| Date: | 2004–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:04/181&r=cfn |