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on Financial Markets |
| By: | Martin Menner; Hugo Rodriguez Mendizabal |
| Abstract: | The purpose of this paper is twofold. First, we construct a DSGE model which spells out explicitly the instrumentation of monetary policy. The interest rate is determined every period depending on the supply and demand for reserves which in turn are affected by fundamental shocks: unforeseeable changes in cash withdrawal, autonomous factors, technology and government spending. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks. We show that these monetary shocks have the usual effects on economic activity without the need of imposing additional frictions as limited participation in asset markets or sticky prices. Second, we show that this view of monetary policy may have important consequences for empirical research. In the model, the contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule. In addition, we use the sign of the impact responses of all shocks on output, prices and interest rates derived from the model to identify the sources of shocks in the data. |
| Keywords: | Monetary Policy, Shocks, Identification, Taylor Rules |
| JEL: | E32 E52 E58 |
| Date: | 2005–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:650.05&r=fmk |
| By: | Stephen Satchell; Wei Xia (School of Economics, Mathematics & Statistics, Birkbeck College) |
| Abstract: | The purpose of this paper is to use UK pension funds asset allocation information to model the risk attitude of the representative UK pension fund investor. Unlike the previous literature on loss aversion, we find that UK pension funds display risk aversion with respect to gains and to losses. Such a finding suggests a greater degree of responsibility by UK pension funds that they are usually credited with. |
| Keywords: | LA Utility Function, Non-linear Regression, LAD, UK pension fund |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0509&r=fmk |
| By: | Q. Farooq Akram (Norges Bank); Øyvind Eitrheim (Norges Bank); Lucio Sarno (Norges Bank) |
| Abstract: | We characterise the behaviour of Norwegian output, the real exchange rate and real money balances over a period of almost two centuries. The empirical analysis is based on a new annual data set that has recently been compiled and covers the period 1830{2003. We apply multivariate linear and smooth transition regression models proposed by Terasvirta (1998) to capture broad trends, and take into account non-linear features of the time series. We particularly investigate and characterise the form of the relationship between output and monetary policy variables. It appears that allowance for statedependent behaviour and response to shocks increases the explanatory powers of the models and helps bring forward new aspects of the dynamic behaviour of output, the real exchange rate and real money balances. |
| Keywords: | Business cycles, real exchange rates, money demand, non-linear modelling, smooth transition regressions. |
| JEL: | C51 E32 E41 F31 |
| Date: | 2005–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_02&r=fmk |
| By: | Rodolfo Apreda |
| Abstract: | This paper sets forth the foundations for a transactional approach for the performance of arbitrage in foreign exchange markets. Firstly, we review both the standard model of financial arbitrage and the so-called covered-interest arbitrage environment, and we also lay bare striking shortcomings in these points of view, mainly grounded on a wide- ranging empirical evidence. Next, we move on to what we have labeled in previous research working papers a transactional algebra, from which we expand on its main tools of analysis, namely differential rates, residual information sets, arbitrage gaps and transaction costs functions. Afterwards, we establish and prove the minimal conditions under which a successful arbitrage can be carried out within a transactional algebra. |
| Keywords: | transactional algebras, arbitrage, covered-interest arbitrage, differential rates, residual information sets, arbitrage gaps. |
| JEL: | F30 F31 G15 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:290&r=fmk |
| By: | Delia M. Ferreira Rubio |
| Abstract: | En el presente documento analizamos los alcances, limitaciones y consecuencias de la nueva ley de financiamiento de los partidos políticos y las campañas electorales (Ley 25.600). Para ello, nos preguntamos cuáles son las características principales del sistema legal vigente en Argentina en materia de financiamiento de partidos y campañas. Luego formulamos un balance provisorio de la experiencia de aplicación de estas nuevas normas con motivo de la elección presidencial del 2003. Por último, partiendo del supuesto de que la transparencia opera como principio rector e informador de la tarea de control y supervisión del financiamiento de la política formulamos algunas sugerencias sobre reformas a introducir en el sistema de control y supervisión. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:292&r=fmk |
| By: | Zuzana Fungacova |
| Abstract: | In this paper we study the relationship between mass privatization and capital market development in the transition economies. The link is investigated empirically using a panel of data which includes most of the transition countries. Our results confirm the hypothesis that mass privatization exerted a negative influence on capital market functioning in the short and medium term. Results further indicate that in countries with mass privatization, the capital market was established and perceived only as a byproduct of the privatization process and did not serve as a source of capital for the corporate sector. This non-transparent market of thousands of securities caused negative investor sentiment and thus did not contribute to initiating economic growth. |
| Keywords: | Privatization, mass privatization, emerging capital markets, capital market. |
| JEL: | G15 G28 P34 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp256&r=fmk |
| By: | Massa, Massimo |
| Abstract: | We study how competition in the mutual fund industry affects stock market liquidity. We argue that mutual fund families operate as multi-product firms, jointly choosing fees, performance and number of funds and sharing common research facilities. The family-based organization generates economies of scale in information that induce a trade off between performance and number of funds. The presence of more and relatively less-informed funds impacts the market, increasing stock liquidity. This intuition allows us to use ‘observable’ equilibrium conditions in the mutual fund market that are related to fund informativeness (i.e., fees, size and performance of the funds and number of funds per family), to explain stock market liquidity. We test our theory using the universe of the US actively managed mutual funds in the past 20 years. We identify fund characteristics and relate them to stock liquidity. We show that the fund characteristics affect stocks in the way suggested by our theory: higher fees or better performance reduce stock liquidity, while a higher number of funds per family or bigger fund size increase stock liquidity. Proper identification allows us to pin down the direct impact of funds on stock liquidity, controlling for potential issues of reverse causality. |
| Keywords: | financial intermediation; mutual funds; stock liquidity |
| JEL: | G11 G12 G14 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4787&r=fmk |
| By: | Massa, Massimo; Simonov, Andrei |
| Abstract: | We exploit the restrictions of intertemporal portfolio choice in the presence of non-financial income risk to design and implement tests of hedging that use the information contained in the actual portfolio of the investor. We use a unique dataset of Swedish investors with information broken down at the investor level and into various components of wealth, investor income, tax positions and investor demographic characteristics. Portfolio holdings are identified at the stock level. We show that investors do not engage in hedging, but invest in stocks closely related to their non-financial income. We explain this with familiarity, that is, the tendency to concentrate holdings in stocks to which the investor is geographically or professionally close or that he has held for a long period. We show that familiarity is not a behavioural bias, but is information-driven. Familiarity-based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged. |
| Keywords: | asset pricing; hedging; portfolio decision |
| JEL: | G11 G14 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4789&r=fmk |
| By: | Bofinger, Peter; Mayer, Eric |
| Abstract: | In this Paper we carry over a static version of a New Keynesian Macromodel a la Clarida Gali Gertler (1999) to a monetary union. We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are vulnerable and therefore in need of fiscal policy as an independent stabilization agent with room to breath. |
| Keywords: | fiscal policy; inflation targeting; monetary policy; policy coordination |
| JEL: | E50 E60 H70 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4790&r=fmk |
| By: | Bottazzi, Laura; Da Rin, Marco; Hellmann, Thomas F |
| Abstract: | Financial intermediaries can choose the extent to which they want to be active investors, providing valuable services like advice, support and corporate governance. We examine the determinants of the decision to become an active financial intermediary using a hand-collected dataset on European venture capital deals. We find organizational specialization to be a key driver. Venture firms which are independent and focused on venture capital alone get more involved with their companies. The human capital of venture partners is another key driver of active financial intermediation. Venture firms whose partners have prior business experience or a scientific education provide more support and governance. These results have implications for prevailing views of financial intermediation, which largely abstract from issues of specialization and human capital. |
| Keywords: | financial intermediation; human capital; specialization |
| JEL: | G20 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4794&r=fmk |
| By: | Gerlach, Stefan; Wensheng, Peng |
| Abstract: | This Paper studies the relationship between residential property prices and lending in Hong Kong. This is an interesting topic for three reasons. First, swings in property prices have been extremely large and frequent in Hong Kong. Second, under the currency board regime, monetary policy cannot be used to guard against asset price swings. Third, despite the collapse in property prices since 1998, the banking sector remains sound. While the contemporaneous correlation between lending and property prices is large, our results suggest that the direction of influence goes from property prices to bank credit rather than conversely. |
| Keywords: | bank lending; Hong Kong; property prices |
| JEL: | E32 E42 G21 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4797&r=fmk |
| By: | Belke, Ansgar; Kaas, Leo; Setzer, Ralph |
| Abstract: | According to the traditional 'optimum currency area' approach, the case for adopting a common currency is stronger if the countries are subject to relatively similar output shocks. This Paper takes a different approach and highlights the fact that high exchange rate volatility may as well signal high costs for labour markets. The impact of exchange rate volatility on labour markets in the CEECs is analysed, finding that volatility vis-à-vis the euro significantly lowers employment growth and raises the unemployment rate. Hence, the elimination of exchange rate volatility can be considered equally important for labour markets as a removal of employment protection legislation. |
| Keywords: | Central and Eastern Europe; currency union; euroization; exchange rate variability; job creation |
| JEL: | E42 F36 F42 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4802&r=fmk |
| By: | Dunne, Peter; Hau, Harald; Moore, Michael |
| Abstract: | Macroeconomic models of equity returns perform poorly. The proportion of daily index returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, our model includes a concept from microstructure order flow. Order flow is the proximate determinant of price in all microstructure models. We explain aggregate equity returns as well as exchange rates in a model with heterogenous beliefs. Belief changes are shown to be observable through order flow. To test the model we construct daily aggregate order flow data from all equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and macroeconomic order flows. |
| Keywords: | equities; exchange rates; international macroeconomics; microstructure |
| JEL: | F30 F31 G10 G15 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4806&r=fmk |
| By: | Meh, Césaire A.; Quadrini, Vincenzo |
| Abstract: | This Paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology. The investment risk cannot be fully insured with optimal contracts because shocks are private information. We show that the presence of investment risks leads to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We also show that the availability of state-contingent (optimal) contracts – compared to simple debt contracts – brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make possible the use of these contracts have important welfare consequences. |
| Keywords: | Aggregate Capital; Asymmetric Information; optimal contracts |
| JEL: | D58 D82 E20 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4807&r=fmk |
| By: | Égert, Balázs; Halpern, László; MacDonald, Ronald |
| Abstract: | In this Paper we present an overview of a number of issues relating to the equilibrium exchange rates of the new EU member states from Central and Eastern Europe. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the new member states. We then consider some methodological issues, relating to the implementation of an equilibrium exchange rate model for new member states, such as the speed with which equilibrium exchange rates change and issues of implementation. Finally, we present an overview of the various extant measures of equilibrium that have been calculated for the new member states. |
| Keywords: | Balassa-Samuelson effect; equilibrium exchange rate; Purchasing Power Parity; tradable prices; transition economies |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4809&r=fmk |
| By: | Beyer, Andreas; Farmer, Roger E A |
| Abstract: | We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Benhabib and Farmer [1] is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models have different implications for the design of an optimal policy rule. |
| Keywords: | Benhabib-Farmer model; Identification; indeterminacy; new-Keynesian model |
| JEL: | C39 C62 D51 E52 E58 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4811&r=fmk |
| By: | Goetzmann, William; Massa, Massimo |
| Abstract: | We test the market impact of the disposition effect. We rely on the Grinblatt and Han (2002) model and derive testable implications about the expected relationship between the preponderance of disposition investors in the market and stock volatility, return and trading volume. We use a large sample of individual accounts over a six-year period to construct a variable that acts as proxy for the representation in the market of disposition investors. We show that, at a daily frequency, when the fraction of ‘irrational’ investor trades in a stock increases, stock volatility, return and trading volume decrease. We further show that such a stock-specific disposition acts as proxy to aggregates at the market level, generating a common factor. Statistical exposure to such a disposition-related factor explains cross-sectional differences in daily returns, after controlling for a host of other factors and characteristics. |
| Keywords: | asset prices; disposition effect; volatility |
| JEL: | D10 G10 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4814&r=fmk |
| By: | Massa, Massimo; Simonov, Andrei |
| Abstract: | We study the link between portfolio choice and different college-based interaction – defined as the one that relates the portfolio choice of an investor to that of the other investors who went to the same college. We explain it in terms of a common cultural imprinting and the development of long-term friendship and alumni network and we directly quantify this bonding effect. We use a new dataset with information on portfolio choice – broken down at the stock level – wealth, income and demographic characteristics of a big panel of investors as well as information on the college they attended and their family situation at the time. We compare college-based interaction to other forms of social interaction, such as educational, professional and geographical interaction, properly controlling for all the standard motivations of portfolio theory, such as hedging of non-financial income risk, familiarity and information effects, wealth and income effect, a host of demographic, geographic and professional dummies, trend-chasing and momentum behaviour. All the different sources of social interaction significantly affect stock-picking as well as the choice between direct and delegated investment, both statistically and economically. College-based interaction is, however, the most important of them and the third single most important factor affecting stock picking. The impact of college-based interaction aggregates at the market level and affects stock prices. For each company, we construct measures of the degree of strength of college-based interaction among shareholders. We show that an increase in the strength of interaction reduces stock return and volatility. This can be rationalized in terms of recent theories on the impact of dispersion of beliefs in the presence of short-sale constraints. |
| Keywords: | asset pricing; education; portfolio choice; social interaction |
| JEL: | G11 G14 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4815&r=fmk |
| By: | Massa, Massimo; Phalippou, Ludovic |
| Abstract: | We study how actively managed equity mutual funds select the liquidity level of their equity portfolio and the effects of this selection on performance. We provide evidence of five key determinants of portfolio liquidity: portfolio size, portfolio concentration, the manager’s trading frequency, investment style, and fee structure. We also show that liquidity is a persistent characteristic, but it is nevertheless dynamically managed so as to offset both exogenous liquidity shocks and changes in portfolio characteristics. Liquid funds are seen to strongly overperform (underperform) during illiquid (liquid) times but, on average, net performance is unaffected by liquidity. |
| Keywords: | liquidity; mutual funds |
| JEL: | G11 G12 G14 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4818&r=fmk |
| By: | Goetzmann, William; Massa, Massimo |
| Abstract: | We use a panel of more than 100,000 investor accounts in US stocks over the period 1991-95 to construct an investor-based measure of dispersion of opinion, unlike the analyst based measure used in the literature. We use this measure to test two competing hypotheses: the sidelined investors hypothesis and the uncertainty/asymmetric information hypothesis. We find evidence that supports the sidelined-investors hypothesis. We show that the dispersion of opinion of the investors in a stock is positively related to the contemporaneous returns and trading volume of the stock and negatively related to its future returns. Moreover, dispersion of opinion aggregates across many stocks and generates factors that have a market-wide effect, affecting the stock equilibrium rate of return and providing additional explanatory power in a standard asset-pricing model. This supports the interpretation of dispersion of opinion as a risk factor. We also show that dispersion of opinion among retail investors Granger causes dispersion of opinion among analysts. |
| Keywords: | asset prices; dispersion of opinion; volatility |
| JEL: | D10 G10 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4819&r=fmk |
| By: | Bodnaruk, Andrij; Kandel, Eugene; Massa, Massimo; Simonov, Andrei |
| Abstract: | We study IPOs by focusing on the degree of portfolio diversification of the shareholders taking the company public. We argue that a less diversified shareholder has more to gain from taking the company public and would be more willing to accept a lower price for the sale of its shares, i.e. tolerate higher underpricing. We test these hypotheses by considering all the IPOs that took place in Sweden in the period 1995-2001. We have obtained detailed information on the portfolio composition of all the investors in the companies being taken public, both before and after the IPO, as well as the portfolio composition of investors in similar (in terms of size, book-to-market and industry) companies not taken public. The information is detailed at the stock level, for both private and public companies. We construct several proxies for portfolio diversification of the shareholders and relate them to both the probability of the IPO and the underpricing. We show that companies held by less diversified shareholders are more likely to go public and suffer a higher underpricing. We show that, as predicted, the degree of diversification explains a significant (economically and statistically) part of the probability of going public, and may account for between one third and one half of the reported underpricing. This suggests that the degree of diversification of controlling shareholders should play a prominent role in the discussion of the process of going public. |
| Keywords: | diversification; IPO; underpricing |
| JEL: | G12 G14 G24 G32 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4820&r=fmk |
| By: | Schoors, Koen; Sonin, Konstantin |
| Abstract: | Creditors are often passive because they are reluctant to show bad debts on their own balance sheets. We propose a simple general equilibrium model to study the externality effect of creditor passivity. The model yields rich insights into the phenomenon of creditor passivity, both in transition and developed market economies. Policy implications are deduced. The model also explains in what respect banks differ from enterprises and what this implies for policy. Commonly observed phenomena in the banking sector, such as deposit insurance, lender of last resort facilities, government coordination to work out bad loans and special bank closure provisions, are interpreted in our framework. |
| Keywords: | arrears; bad loans; bank closure; bankruptcy; creditor passivity |
| JEL: | G21 G28 G33 P50 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4821&r=fmk |
| By: | Burkart, Mike; Ellingsen, Tore; Giannetti, Mariassunta |
| Abstract: | We use a broad range of contractual information to assess the empirical relevance of different financial theories of trade credit. The common feature of all financial theories is that suppliers have an advantage over other lenders in financing credit-constrained firms. While the reasons for the financing advantage differ across theories, they are usually related either to product characteristics or to market structure. We propose a novel identifying strategy that exploits this insight to analyse the trade credit volume and the contract terms. Our analysis suggests that the most important product characteristic for explaining trade credit volume and contract terms is the ease with which the seller’s product can be diverted. Market power in input and output markets also contributes to explain trade credit patterns. |
| Keywords: | collateral; contract theory; moral hazard; trade credits |
| JEL: | G32 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4823&r=fmk |
| By: | Locarno, Alberto; Massa, Massimo |
| Abstract: | We study the relationship between inflation and stock returns focusing on the signalling content of inflation. Investors use inflation to learn about the stance of the monetary policy. Depending on investors’ beliefs, a change in consumption prices has different effects on the risk premium. A change in consumption prices that confirms investors' beliefs reduces stock risk premia, while a change that contradicts them increases risk premia. This may generate a negative correlation between returns and inflation that explains the Fisher puzzle. We model this intuition and test its implication on US data. We construct a market-based proxy of monetary policy uncertainty, we show that it is priced and that, by conditioning on it, the Fisher puzzle disappears. |
| Keywords: | asset pricing; learning risk; monetary policy uncertainty; risk factors |
| JEL: | G11 G12 G14 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4828&r=fmk |
| By: | Massa, Massimo; Peyer, Urs; Tong, Zhenxu |
| Abstract: | We focus on an exogenous event that changes the cost of capital of a company – the addition of its stock to the S&P 500 index – and investigate how companies react to it by modifying their corporate financial and investment policies. This allows us to test capital structure theories in an ideal controlled experiment, where the effect of the index addition on the stock price is exogenous from a manager’s point of view. Consistent with both traditional theories and Stein’s (1996) market timing theory, we find more equity issues and increases in investment in response to higher index addition announcement returns. However, in the 24 months after the index addition, firms that issue equity and increase investment display negative abnormal returns and they perform worse than firms that issue but do not increase investment. This finding is consistent only with the market timing theory of Stein (1996) and supports a ‘limits of arbitrage’ story in which the stocks display a downward sloping demand curve and companies themselves act as ‘arbitrageurs’ taking advantage of the window of opportunity. |
| Keywords: | corporate financial policies; limits of arbitrage; market timing |
| JEL: | G30 G31 G32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4829&r=fmk |
| By: | Banal - Estanol, Albert; Ottaviani, Marco |
| Abstract: | This Paper studies the private incentives and the social effects of horizontal mergers among risk-averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behaviour in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty. |
| Keywords: | market imperfection; mergers and acquisitions; monopolization and horizontal anticompetitive practices; oligopoly |
| JEL: | D43 G34 L41 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4831&r=fmk |
| By: | Eckbo, B Espen; Norli, Øyvind |
| Abstract: | We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as ‘longshots’, as five-year buy-and-hold returns of 1000% or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed ‘low minus high’ (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leverage-related macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio’s risk exposures, as defined here. |
| Keywords: | asset pricing; capital structure; Initial Public Offering (IPO); liquidity; market efficiency; risk and return |
| JEL: | G10 G11 G12 G20 G24 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4832&r=fmk |
| By: | Eckbo, B Espen; Norli, Øyvind |
| Abstract: | Extending the Myers and Majluf (1984) framework, we present a model for the choice of seasoned-equity selling mechanism. A sequential pooling equilibrium exists which implies a positive market reaction to certain flotation strategies. We examine the model implications using the market reaction to issues on the Oslo Stock Exchange using the full range of flotation methods. The average market reaction is non-negative across all methods, and significantly positive for both rights offerings and private placements, as predicted. We also show that average long-run abnormal stock returns to OSE issuers are indistinguishable from zero, supporting the market rationality assumption underpinning the flotation game. |
| Keywords: | adverse selection; equity offering; flotation method; rights offer; sequential equilibrium; underwriting |
| JEL: | G20 G24 G30 G32 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4833&r=fmk |
| By: | Clarida, Richard; Sarno, Lucio; Taylor, Mark P; Valente, Giorgio |
| Abstract: | We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties. |
| Keywords: | forecasting; markov switching; term structure of interest rates |
| JEL: | E43 E47 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4835&r=fmk |
| By: | Demyanyk, Yuliya; Volosovych, Vadym |
| Abstract: | We study the degree of output and consumption asymmetry for the ten new and fifteen original European Union members during the period 1994–2001. We establish basic stylized facts about macroeconomic asymmetry from correlations of GDP and consumption growth rates with corresponding aggregates. In addition, we determine which countries would potentially gain the most from international risk sharing within the European Union employing a utility-based measure suggested by Kalemli-Ozcan, Sørensen and Yosha (2001). We find much higher potential gains for the new members compared to those for original EU-15 countries. In particular, economies with the most volatile and counter-cyclical output growth – Czech Republic, Slovak Republic, and the three Baltic states – might benefit the most. We show that EU enlargement would not reduce the welfare of EU-15 members. If these countries move towards full risk sharing their potential welfare gains after enlargement would be virtually unchanged. |
| Keywords: | asymmetry of GDP; consumption insurance; EU enlargement; risk sharing |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4847&r=fmk |
| By: | Eijffinger, Sylvester C W; Tesfaselassie, Mewael F. |
| Abstract: | In a simple macromodel with forward-looking expectations, this Paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases is not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank’s preference is common knowledge. When there is uncertainty about the central bank’s preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts. |
| Keywords: | central bank disclosure; central bank forecasts; central bank transparency; forward-looking expectations; private information |
| JEL: | E42 E43 E52 E58 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4854&r=fmk |
| By: | Miller, Marcus; Zhang, Lei |
| Abstract: | The promising prospect of a ‘New Economy’ in the US attracted substantial equity inflows in the late 1990s, helping to finance the country’s burgeoning current account deficit. After peaking in 2000, however, US stocks fell by some 8 trillion dollars in value. To assess the welfare effects of international financial markets in this context, we use an analytically tractable (two-country, two-period, two-state) model of the global economy which allows the country experiencing the favourable supply side ‘shock’ to consume more against expected future output and to spread risk by selling shares. Since irrational exuberance and distorted corporate incentives can cause serious asset overvaluation, however, an asset price ‘bubble’ is also included, where market participants assign unwarranted likelihood to high pay offs. Relative to autarky, internationalizing financial markets does offer welfare gains. But these are small relative to the international wealth transfer that can arise from selling shares globally at inflated prices. Parameter variations suggest that this conclusion is quite robust. A calibrated exercise shows how capital inflows to finance the ‘New Economy’ can be twice the consumption-smoothing deficit on current account; and how market losses – due to ‘misfortune’ or ‘excess upside probability’ – can have global effects on consumption when the bubble bursts. The analysis complements recent econometric studies of the transmission mechanism which find that financial factors are needed to explain why the European economy was so strongly affected by the US downturn starting in 2002. |
| Keywords: | capital flows; international transmission of shocks; moral hazard |
| JEL: | F32 F41 G15 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4855&r=fmk |
| By: | Hau, Harald; Massa, Massimo; Peress, Joël |
| Abstract: | Do exchange rates react to exogenous capital movements? We explore this issue based on the redefinition of the MSCI international equity indices announced on 10 December 2000 and implemented in two steps on 30 November 2001 and 31 May 2002. The index changes implied major changes in the representation of different countries in the MSCI world index. Our event study shows a strong announcement effect in which countries with a decreasing equity representation vis-a-vis the US depreciated against the dollar. Around the two implementation dates, we find further systematic, but opposite, exchange rate effects, which can be interpreted as a result of excessive speculation on the first implementation date and insufficient speculation on the second date. |
| Keywords: | event study; exchange rates; Global Equity Index Funds; Limits of Arbitrage |
| JEL: | F31 G12 G24 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4862&r=fmk |
| By: | Michelacci, Claudio; Quadrini, Vincenzo |
| Abstract: | We study a labour market equilibrium model in which firms sign optimal long-term contracts with workers. Firms that are financially constrained offer an increasing wage profile: they pay lower wages today in exchange of higher wages once they become unconstrained and operate at a larger scale. In equilibrium, constrained firms are on average smaller and pay lower wages. In this way the model generates a positive relation between firm size and wages. Using data from the National Longitudinal Survey of Youth (NLSY) we show that the key dynamic properties of the model are supported by the data. |
| Keywords: | investment financing; long-term contracts; wages |
| JEL: | E24 G31 J31 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4867&r=fmk |
| By: | Sabirianova Peter, Klara Z; Svejnar, Jan; Terrell, Katherine |
| Abstract: | Economic development implies that the efficiency of firms in developing countries is approaching that of firms in advanced economies. We examine the extent of this convergence in the Czech Republic and Russia, economies that represent alternative models of implementing development policies, often referred to as the Washington Consensus, that have promoted privatization, competition and foreign investment. We also test hypotheses positing that only firms near the efficiency frontier benefit from these policies and catch up. Using 1992-2000 panel data on virtually all industrial firms in each country, we find that privatization to domestic owners did not markedly improve the efficiency of firms; domestic firms are not catching up to the (world) efficiency standard given by foreign-owned firms; and the distance of the Russian firms to the efficiency frontier is much larger than that of the Czech firms and continued to grow for most firms beyond 1997 while remaining constant in the Czech Republic. Domestic firms closer to the frontier are not more likely to catch up than firms further from the frontier although foreign firms do exhibit this behaviour. Foreign-owned firms are increasingly displacing domestic firms in the top deciles of the overall distribution of efficiency, due in part to slower ‘learning’ by domestic firms, higher efficiency of foreign startups, and foreigners’ acquisitions of more efficient domestic firms. The two alternative implementations of the Washington Consensus policies have thus not enabled domestic firms to start catching up to the world standard although the Central European model. |
| Keywords: | convergence; Czech Republic; economic development; efficiency; foreign direct investment; frontier; ownership; productivity; Russia; Washington Consensus |
| JEL: | C33 D20 G32 L20 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4868&r=fmk |
| By: | Égert, Balázs; Halpern, László |
| Abstract: | This Paper sets out to analyse the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. We study the extent to which the estimated real misalignments reported in the literature depend on the underlying theoretical approach (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and on other characteristics of the individual studies. We also seek to explore whether we can gain more insight from the literature regarding what determines the size and, perhaps more importantly, the sign of the estimated coefficient of the productivity variable and of two other variables commonly included in real exchange rate determination equations, notably net foreign assets and openness. |
| Keywords: | Balassa-Samuelson effect; equilibrium exchange rate; meta-analysis |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4869&r=fmk |
| By: | Ginsburgh, Victor; Legros, Patrick; Sahuguet, Nicolas |
| Abstract: | We analyse the welfare consequences of an increase in the commissions charged by intermediaries in auction markets. We argue that while commissions are similar to taxes imposed on buyers and sellers the question of incidence deserves a new treatment in auction markets. We show that an increase in commissions makes sellers worse off, but buyers may strictly gain. The results are therefore strikingly different from the standard result that all consumers weakly lose after a tax or a commission increase. Our results are useful for evaluating compensation in price fixing conspiracies; in particular they suggest that the method used to distribute compensations in the class action against auction houses Christie’s and Sotheby’s was misguided. |
| Keywords: | auctions; commissions; intermediation; welfare |
| JEL: | D44 L12 L40 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4876&r=fmk |
| By: | Faia, Ester; Monacelli, Tommaso |
| Abstract: | We study optimal monetary policy in two prototype economies with sticky prices and credit market frictions. In the first economy, credit frictions apply to the financing of the capital stock, generate acceleration in response to shocks and the ‘financial markup’ (i.e., the premium on external funds) is countercyclical and negatively correlated with the asset price. In the second economy, credit frictions apply to the flow of investment, generate persistence, and the financial markup is procyclical and positively correlated with the asset price. We model monetary policy in terms of welfare-maximizing interest rate rules. The main finding of our analysis is that strict inflation stabilization is a robust optimal monetary policy prescription. The intuition is that, in both models, credit frictions work in the direction of dampening the cyclical behaviour of inflation relative to its credit-frictionless level. Thus neither economy, despite yielding different inflation and investment dynamics, generates a trade-off between price and financial markup stabilization. A corollary of this result is that reacting to asset prices does not bear any independent welfare role in the conduct of monetary policy. |
| Keywords: | asset prices; financial distortions; optimal monetary policy rules; price stability |
| JEL: | E52 F41 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4880&r=fmk |
| By: | Bottazzi, Renata; Jappelli, Tullio; Padula, Mario |
| Abstract: | We estimate the effect of pension reforms on households’ expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of Italian pension reforms as a source of exogenous variation in expected pension wealth. Two parameters are crucial to estimate pension wealth: the age at which workers expect to retire and the expected ratio of pension benefits to pre-retirement income. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits these expectations during a period of intense pension reforms between 1989 and 2002. These reforms had different consequences for different cohorts and employment groups, providing a quasi-experimental framework to study the effect of social security arrangements on expectations of retirement outcomes and household saving decisions. Our main findings are that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth. |
| Keywords: | expectations; pension reform |
| JEL: | E21 H55 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4882&r=fmk |
| By: | Acharya, Viral V; Almeida, Heitor; Campello, Murillo |
| Abstract: | We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows constrained firms to hedge against future cash flow shortfalls, reducing current debt – ‘saving borrowing capacity’ – is a more effective way of securing investment in high cash flow states. This trade-off implies that constrained firms will allocate cash flows into cash holdings if their hedging needs are high (i.e., if the correlation between operating cash flows and investment opportunities is low). Those same firms, however, will use free cash flows to reduce current debt if their hedging needs are low. The empirical examination of debt and cash policies of a large sample of firms reveals evidence that is consistent with our theory. In particular, our evidence shows that financially constrained firms with high hedging needs have a strong propensity to save cash out of cash flows while leaving their debt positions unchanged. In contrast, constrained firms with low hedging needs direct most of their free cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt. |
| Keywords: | cash holdings; debt policies; financing constraints; hedging; risk management |
| JEL: | G31 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4886&r=fmk |
| By: | Blanchard, Olivier; Giavazzi, Francesco; Sa, Filipa |
| Abstract: | There are two main forces behind the large US current account deficits. First, an increase in the US demand for foreign goods. Second, an increase in the foreign demand for US assets. Both forces have contributed to steadily increasing current account deficits since the mid-1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro. |
| Keywords: | current account; dollar exchange rate; portfolio models |
| JEL: | E30 F21 F32 F41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4888&r=fmk |
| By: | Fronti, Javier Garcia; Miller, Marcus; Zhang, Lei |
| Abstract: | The Argentine convertibility regime, where the peso was fixed at parity with the US dollar, ended with a ‘twin crisis’ – a tripling in the price of a dollar and a protracted closure of the entire banking system – accompanied by an economic contraction so severe that it is often referred to as ‘Nuestra gran depresión’. But the government's attempt to imitate President Roosevelt by pesifying dollar loan contracts (while simultaneously protecting dollar depositors) had the effect of destroying bank net worth in the absence of credible compensation. To analyse the macroeconomic effects of credit crunch and currency collapse (and of policies to mitigate them), we turn to a model of crisis, specifically that of Aghion, Bacchetta & Banerjee (2000). Our account, however, combines the supply contraction cause by balance sheet effect with a Keynesian demand contraction due to a domestic credit crunch, exacerbated by unsuccessful resolution of the banking crisis. The latter is analysed as a game of political economy played between government and banks about who pays for the banking crisis induced by default and asymmetric pesification. |
| Keywords: | Argentina debt crisis; asymmetric pesification; conflicting beliefs; keynesian recession; twin crisis |
| JEL: | E12 E51 F34 G18 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4889&r=fmk |
| By: | Bolton, Patrick; Jeanne, Olivier |
| Abstract: | In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts. |
| Keywords: | collective action clause; debt dilution; seniority; sovereign debt; sovereign default |
| JEL: | F34 G15 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4901&r=fmk |
| By: | Fumagalli, Chiara; Motta, Massimo; Persson, Lars |
| Abstract: | We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent’s bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer’s acceptance than in the case where entry can occur only by installing new capacity. Third, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas de novo entry would be socially optimal, and (ii) it may deter entry altogether. Finally, we show that when exclusive deals include a commitment on future prices they will increase welfare. |
| Keywords: | antitrust; entry deterrence; exclusive dealing; mergers |
| JEL: | K21 L10 L40 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4902&r=fmk |
| By: | Sembenelli, Alessandro; Siotis, Georges |
| Abstract: | A short review of the theoretical and empirical evidence indicates that foreign direct investment (FDI) has the potential to increase the intensity of competition as well as to act as a channel for technology transfers. One would expect, all else equal, an increase in average firm performance following a wave of FDI, as multinational corporations (MNCs) enjoy higher levels of efficiency and have the potential to generate positive spillovers. At the same time, the entry of foreign firms has also been associated with an increase in competitive pressure on the domestic market. Using a large firm level dataset covering all sectors of Spanish manufacturing during the period 1983-96, we disentangle these three effects by estimating a dynamic model of firm level performance, which we proxy by profitability. We find that FDI has a positive long-run effect on the profitability of target firms, but this is limited to firms belonging to R&D intensive sectors. In addition, the results indicate that foreign presence dampens margins. However, this effect appears to be more than compensated by positive spillovers in the case of knowledge intensive industries. |
| Keywords: | competition; efficiency; foreign direct investment; GMM; panel data; technology transfer |
| JEL: | F23 L40 L60 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4903&r=fmk |
| By: | Favero, Carlo A; Kaminska, Iryna; Söderström, Ulf |
| Abstract: | This paper brings together two strands of the empirical macro literature: the reduced-form evidence that the yield spread helps in forecasting output and the structural evidence on the difficulties of estimating the effect of monetary policy on output in an intertemporal Euler equation. We show that including a short-term interest rate and inflation in the forecasting equation improves the forecasting performance of the spread for future output but the coefficients on the short rate and inflation are difficult to interpret using a standard macroeconomic framework. A decomposition of the yield spread into an expectations-related component and a term premium allows a better understanding of the forecasting model. In fact, the best forecasting model for output is obtained by considering the term premium, the short-term interest rate and inflation as predictors. We provide a possible structural interpretation of these results by allowing for time-varying risk aversion, linearly related to our estimate of the term premium, in an intertemporal Euler equation for output. |
| Keywords: | estimated Euler equation; forecasting; GDP growth; predictability; term structure of interest rates; yield curve |
| JEL: | E27 E37 E43 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4910&r=fmk |
| By: | Campbell, John Y; Viceira, Luis M |
| Abstract: | Recent research in empirical finance has documented that expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways. Furthermore, these shifts tend to persist over long periods of time. In this paper we propose an empirical model that is able to capture these complex dynamics, yet is simple to apply in practice, and we explore its implications for asset allocation. Changes in investment opportunities can alter the risk-return tradeoff of bonds, stocks, and cash across investment horizons, thus creating a ‘term structure of the risk-return tradeoff’. We show how to extract this term structure from our parsimonious model of return dynamics, and illustrate our approach using data from the US stock and bond markets. We find that asset return predictability has important effects on the variance and correlation structure of returns on stocks, bonds and T-bills across investment horizons. |
| Keywords: | long-horizon investing; mean-variance analysis; risk-return tradeoff; vector autoregression |
| JEL: | G12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4914&r=fmk |
| By: | Acharya, Viral V; John, Kose; Sundaram, Rangarajan K |
| Abstract: | We conduct a theoretical and empirical investigation of the impact of bankruptcy codes on firms’ capital-structure choices. In our theoretical framework, costs of financial distress are endogenously determined as a function of the bankruptcy code. Anticipated liquidation values emerge as the key variable in the capital structure-bankruptcy code link: among other things, the theory predicts that the difference in leverage between a debt-friendly bankruptcy code (such as the UK’s) and a more equity-friendly code (such as the US’s) should be a monotone function of liquidation values. We examine empirical support for the theory by comparing leverages in the US and the UK for the period 1990 to 2002. Our tests use two (inverse) proxies of liquidation values: asset-specificity of the firm, and the fraction of the firm’s assets that are intangibles. We find the theory is strongly backed by the data. The results are robust to considerations such as employing net leverage (debt net of cash holdings) and controlling for other firm characteristics that affect leverage. |
| Keywords: | asset-specificity; bankruptcy costs; financial distress; intangibles; leverage |
| JEL: | F30 G32 G33 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4916&r=fmk |
| By: | Corsetti, Giancarlo; Konstantinou, Panagiotis T |
| Abstract: | This paper provides empirical evidence on the adjustment dynamics of the US net foreign liabilities, net output and consumption. We use empirical techniques that allow us to quantify the relative importance of permanent and transitory innovations. We find that transitory shocks contribute considerably to the variation in all three variables for a horizon up to a year, and their contribution remains significant for a horizon up to five years. A permanent shock – that we interpret as a technological shock – dominates the variation of all variables at longer horizons. In response to this shock, net foreign liabilities, net output and consumption all increase – consistent with the effect of productivity gains raising domestic return to capital and thus generating an inflow of foreign capital. Conversely, shocks that cause net output and consumption to increase temporarily are accompanied by short-run accumulation of net foreign assets – in contrast with traditional model predicting procyclical current account deficits in response to temporary output fluctuations. Instead, our results are qualitatively consistent with predictions of the intertemporal approach to the current account. |
| Keywords: | consumption smoothing; current account; international adjustment mechanism; intertemporal approach to the current account; net foreign wealth; permanent-transitory decomposition |
| JEL: | C32 E21 F32 F41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4920&r=fmk |
| By: | Lettau, Martin; Wachter, Jessica |
| Abstract: | This paper proposes a dynamic risk-based model that captures the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. To model the difference between value and growth stocks, we introduce a cross-section of long-lived firms distinguished by the timing of their cash flows. Firms with cash flows weighted more to the future have high price ratios, while firms with cash flows weighted more to the present have low price ratios. We model how investors perceive the risks of these cash flows by specifying a stochastic discount factor for the economy. The stochastic discount factor implies that shocks to aggregate dividends are priced, but that shocks to the time-varying price of risk are not. As long-horizon equity, growth stocks co-vary more with this time-varying price of risk than value stocks, which co-vary more with shocks to cash flows. When the model is calibrated to explain aggregate stock market behaviour, we find that it can also account for the observed value premium, the high Sharpe ratios on value stocks relative to growth stocks, and the out-performance of value (and underperformance of growth) relative to the CAPM. |
| Keywords: | duration; growth; habit formation; value |
| JEL: | G10 G12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4921&r=fmk |
| By: | Gourinchas, Pierre-Olivier; Rey, Hélène |
| Abstract: | The Paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country’s net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset-pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter. |
| Keywords: | exchange rates; external adjustment; MeeseRogoff; net foreign assets; valuation |
| JEL: | F31 F32 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4923&r=fmk |
| By: | Kocherlakota, Narayana; Pistaferri, Luigi |
| Abstract: | In this paper, we consider a dynamic economy in which the agents are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the x-th moment of the consumption distribution, where x is the coefficient of relative risk aversion. We use data from the Consumer Expenditure Survey (CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors. |
| Keywords: | asset pricing; consumer expenditure survey |
| JEL: | E21 G12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4930&r=fmk |
| By: | Gersbach, Hans; Wenzelburger, Jan |
| Abstract: | This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully incorporate macroeconomic risks in their pricing of loans, a banking system may enter bankruptcy with probability one. A major cause for this default is that risk premia of a competitive banking system may become too small if the capital base is low. |
| Keywords: | banking crises; banking regulation; financial intermediation; macroeconomic risks; risk premia |
| JEL: | D41 E40 G20 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4935&r=fmk |
| By: | Llobet, Gerard; Suárez, Javier |
| Abstract: | The protection that innovators obtain through intellectual property rights crucially depends on their incentives and ability to litigate infringers. Taking patents as a notable example, we study how the financing of legal costs can alter the incentives to litigate in defence of a patent and, thus, the prospects of infringement and the effective protection of the innovator. We compare the resort to a financier once the infringement has occurred (ex-post financing) with patent litigation insurance (PLI) as well as other ex-ante arrangements based on leverage. We show that the ex-ante arrangements can be designed (for instance, in the case of PLI, by including an appropriate deductible) so as to implement the innovator’s second-best outcome: a situation in which patent predation is deterred without inducing excessive litigation. |
| Keywords: | financial strategy; intellectual property; litigation; predation |
| JEL: | G32 O34 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4944&r=fmk |
| By: | Audretsch, David B; Lehmann, Erik E |
| Abstract: | This study examines the impact locational spillovers have on firm performance. Based on a uniquely created dataset consisting of high-technology start-ups publicly listed in Germany, this paper tests the proposition of locational spillovers positively affecting firm performance, as measured by abnormally high profits on the stock market. The results provide evidence that geographic proximity and university spillovers are complementary determinants of firm performance. While neither geographic proximity nor academic research spillovers alone can explain firm performance, a combination of both factors results in significant higher stock market performance. The results also show academic spillovers are heterogeneous in their impact depending on the type. In particular, spillovers from social sciences have a different impact on firm performance than do spillovers from natural science. |
| Keywords: | firm performance; university spillover; university-firm collaboration |
| JEL: | L20 M13 R30 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4949&r=fmk |
| By: | Angelini, Paolo; Lippi, Francesco |
| Abstract: | The introduction of the euro notes and coins during the first months of 2002 was followed by a lively debate on the alleged inflationary effects of the new currency. In Italy, as in the rest of the euro area, survey-based measures signaled a much sharper rise in inflation than measured by the official price indices, whose quality was called into question. In this paper we gather indirect evidence on the behaviour of prices from the analysis of cash withdrawals from ATM and their determinants. Since these data do not rely on official inflation statistics, they provide an independent check for the latter. We present a simple theoretical model in which the relationship between aggregate ATM withdrawals and aggregate expenditure is not homogenous of degree one in the price level, a prediction which is strongly supported by the data. This feature allows us to test the hypothesis that, after the introduction of the euro notes and coins, consumer prices underwent an increase not recorded by official inflation statistics. We do not find evidence in support of this hypothesis. |
| Keywords: | currency; euro changeover; inflation |
| JEL: | E31 E41 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4950&r=fmk |
| By: | Cohen, Chen; Sela, Aner |
| Abstract: | We study asymmetric all-pay auctions with multiple objects where players’ values for the objects are common knowledge. The players have different values for the objects but they have the same ranking. The contest designer may award one prize including all the objects to the player with the highest bid, or, alternatively, they may allocate several prizes, each prize including one object such that the first prize is awarded to the player with the highest bid, the second prize to the player with the second-highest bid, and so on until all the objects are allocated. We analyse the distribution of effort in one-prize and multiple-prize contests and show that allocation of several prizes may be optimal for a contest designer who maximizes the total effort. |
| Keywords: | auctions; contests |
| JEL: | D44 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4951&r=fmk |
| By: | Albuquerque, Rui; Wang, Neng |
| Abstract: | Corporations in most countries are run by controlling shareholders whose cash flow rights are substantially smaller than their control rights in the firm. This separation of ownership and control allows the controlling shareholders to pursue private benefits at the cost of outside minority investors by diverting resources away from the firm and distorting corporate investment and payout policies. We develop a dynamic stochastic general equilibrium asset-pricing model that acknowledges the implications of agency conflicts through imperfect investor protection on security prices. We show that countries with weaker investor protection have more overinvestment, lower market-to-book equity values, larger expected equity returns and return volatility, higher dividend yields, and higher interest rates. These predictions are consistent with empirical findings. We develop new predictions: countries with high investment-capital ratios have both higher variance of GDP growth and higher variance of stock returns. We provide evidence consistent with these hypotheses. Finally, we show that weak investor protection causes significant wealth redistribution from outside shareholders to controlling shareholders. |
| Keywords: | agency; asset prices; corporate governance; heterogeneous agents; investor protection; overinvestment; volatility |
| JEL: | G12 G31 G32 G34 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4955&r=fmk |
| By: | van Tol, Michel R; Wolff, Christian C |
| Abstract: | In this paper we develop a multivariate threshold vector error correction model of spot and forward exchange rates that allows for different forms of equilibrium reversion in each of the cointegrating residual series. By introducing the notion of an indicator matrix to differentiate between the various regimes in the set of nonlinear processes we provide a convenient framework for estimation by OLS. Empirically, out-of sample forecasting exercises demonstrate its superiority over a linear VECM, while being unable to out-predict a (driftless) random walk model. As such we provide empirical evidence against the findings of Clarida and Taylor (1997). |
| Keywords: | foreign exchange; multivariate threshold cointegration; TAR models |
| JEL: | C51 C53 F31 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4958&r=fmk |
| By: | Bams, Dennis; Lehnert, Thorsten; Wolff, Christian C |
| Abstract: | In this paper, we investigate the importance of different loss functions when estimating and evaluating option pricing models. Our analysis shows that it is important to take into account parameter uncertainty, since this leads to uncertainty in the predicted option price. We illustrate the effect on the out-of-sample pricing errors in an application of the ad hoc Black-Scholes model to DAX index options. Our empirical results suggest that different loss functions lead to uncertainty about the pricing error itself. At the same time, it provides a first yardstick to evaluate the adequacy of the loss function. This is accomplished through a data-driven method to deliver not just a point estimate of the pricing error, but a confidence interval. |
| Keywords: | estimation risk; GARCH; implied volatility; loss functions; option pricing |
| JEL: | G12 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4960&r=fmk |
| By: | Panetta, Fabio; Schivardi, Fabiano; Shum, Matthew |
| Abstract: | We examine the informational effects of M&As by investigating whether bank mergers improve banks’ ability to screen borrowers. By exploiting a dataset in which we observe a measure of a borrower’s default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while non-risky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using ‘hard’ information more intensively. |
| Keywords: | asymmetric information; banking; mergers |
| JEL: | G21 L15 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4961&r=fmk |
| By: | Repullo, Rafael |
| Abstract: | This paper studies the strategic interaction between a bank whose deposits are randomly withdrawn, and a lender of last resort (LLR) that bases its decision on supervisory information on the quality of the bank’s assets. The bank is subject to a capital requirement and chooses the liquidity buffer that it wants to hold and the risk of its loan portfolio. The equilibrium choice of risk is shown to be decreasing in the capital requirement, and increasing in the interest rate charged by the LLR. Moreover, when the LLR does not charge penalty rates, the bank chooses the same level of risk and a smaller liquidity buffer than in the absence of a LLR. Thus, in contrast with the general view, the existence of a LLR does not increase the incentives to take risk, while penalty rates do. |
| Keywords: | bank supervision; capital requirements; central bank; deposit insurance; lender of last resort; moral hazard; penalty rates |
| JEL: | E58 G21 G28 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4967&r=fmk |
| By: | Claessens, Stijn; Underhill, Geoffrey R D |
| Abstract: | The international financial system has been the subject of much debate following the financial crises of the 1990s. While many reforms have been proposed for and implemented by mostly developing countries, few changes have been made to the international financial system itself. Fundamentally, the design, institutions, and governance of the international system remain very similar to those of two decades ago. The major changes in global financial markets, financial services industries and economies during this period, however, have rendered the international financial system and its governance of out date. In this paper, we analyse the causes and consequences of the failure to reform. We highlight the forces driving the need for changes in the governance of the international financial system, in particular the combination of the global integration processes and the increased role of the private sector. We then provide insights into the desirable institutional structure for international financial decision-making, also as it relates to the legitimacy of the international system in the eyes of the public worldwide. We also discuss the (political economy) factors inhibiting reform. We conclude with suggestions for future research. |
| Keywords: | international financial arrangements; international financial institutions; international governance; legitimacy; political economy |
| JEL: | F33 F34 K33 N20 O19 P50 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4970&r=fmk |
| By: | Schabert, Andreas; Stoltenberg, Christian |
| Abstract: | This paper examines how money demand induced real balance effects contribute to the determination of the price level, as suggested by Patinkin (1949,1965), and if they affect conditions for local equilibrium uniqueness and stability. There exists a unique price level sequence that is consistent with an equilibrium under interest rate policy, only if beginning-of-period money enters the utility function. Real money can then serve as a state variable, implying that interest rate setting must be passive for unique, stable, and non-oscillatory equilibrium sequences. When end-of-period money provides utility, an equilibrium is consistent with infinitely many price level sequences, and equilibrium uniqueness requires an active interest rate setting. The stability results are, in general, independent of the magnitude of real balance effects, and apply also when prices are sticky. In contrast, under a constant money growth policy, equilibrium sequences are (likely to be) locally stable and unique for all model variants. |
| Keywords: | monetary policy rules; predetermined money; price level determination; real balance effects; real determinacy |
| JEL: | E32 E41 E52 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4974&r=fmk |
| By: | Halling, Michael; Pagano, Marco; Randl, Otto; Zechner, Josef |
| Abstract: | We investigate the distribution of trading volume across different venues after a company lists abroad. In most cases, after an initial blip, foreign trading declines rapidly to extremely low levels. However, there is considerable cross-sectional variation in the persistence and magnitude of foreign trading. The ratio between foreign and domestic trading volume is higher for smaller, more export and high-tech oriented companies. It is also higher for companies that cross-list on markets with lower trading costs and better insider trading protection. Foreign trading is high close to the cross-listing date but decreases dramatically in the subsequent six months. This accords with the ‘flow-back hypothesis’ that declining foreign trading is associated with the gravitational pull of the home market. |
| Keywords: | cross-listing; flow-back; trading volume |
| JEL: | G15 G30 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4987&r=fmk |
| By: | Holthausen, Cornelia; Roende, Thomas |
| Abstract: | This paper analyses cooperation among national supervisors in the decision to close a multinational bank. The supervisors are asymmetrically informed and exchange information through ’cheap talk’. It is assumed that they consider domestic welfare only. We show that: (1) the supervisors will commit mistakes both of ’type I’ and ’type II’ in the closure decision; (2) the more aligned national interests are, the higher is welfare resulting from the closure decision; (3) the bank can allocate its investments strategically to escape closure; (4) allocating the decision right to an uninformed supranational supervisor can improve closure regulation, especially when interests are very disaligned. |
| Keywords: | cheap talk; closure; multinational banks; supervision |
| JEL: | F36 G21 G28 L51 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4990&r=fmk |
| By: | Ljungqvist, Alexander P; Marston, Felicia; Starks, Laura T; Wei, Kelsey D.; Yan, Hong |
| Abstract: | Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts’ recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls. |
| Keywords: | analyst forecast accuracy; analyst recommendations; banking relationships; conflicts of interest; institutional investors; investment banking |
| JEL: | G20 G21 G23 G24 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5001&r=fmk |
| By: | Basak, Suleyman; Pavlova, Anna; Shapiro, Alex |
| Abstract: | Money managers are rewarded for increasing the value of assets under management, and predominantly so in the mutual fund industry. This gives the manager an implicit incentive to exploit the well-documented positive fund-flows to relative-performance relationship by manipulating her risk exposure. In a dynamic portfolio choice framework, we show that as the year-end approaches, the ensuing convexities in the manager's objective induce her to closely mimic the index, relative to which her performance is evaluated, when the fund's year-to-date return is sufficiently high. As her relative performance falls behind, she chooses to deviate from the index by either increasing or decreasing the volatility of her portfolio. The maximum deviation is achieved at a critical level of underperformance. It may be optimal for the manager to reach such deviation via selling the risky asset despite its positive risk premium. Under multiple sources of risk, with both systematic and idiosyncratic risks present, we show that optimal managerial risk shifting may not necessarily involve taking on any idiosyncratic risk. Costs of misaligned incentives to investors resulting from the manager's policy are economically significant. We then demonstrate how a simple risk management practice that accounts for benchmarking can ameliorate the adverse effects of managerial incentives. |
| Keywords: | benchmarking; fund flows; implicit incentives; portfolio choice; risk management; risk taking |
| JEL: | D60 D81 G11 G20 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5006&r=fmk |
| By: | Zeira, Joseph |
| Abstract: | Consumers make transactions of different sizes over time. This paper shows that this fact, together with transaction costs of various assets, can help in developing a theory of liquidity. Assets with different cost structures are used to purchase different sizes of transactions. This can explain the demand for money itself, the precautionary demand for money, and the demand for cash and demand deposits. Thus consumers use cash for small transactions, demand deposits for larger transactions, and use savings for the largest transactions. Finally, the paper shows that modeling banks as suppliers of liquidity leads to a better understanding of their success as financial intermediaries. |
| Keywords: | banks; demand deposits; demand for money; transactions |
| JEL: | E40 E41 E51 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5010&r=fmk |
| By: | Lungu, Laurian; Minford, Patrick |
| Abstract: | We develop a simple overlapping generations model in which the young have a choice in investing in equities and index-linked bonds. Projections of share price uncertainty over a 30-year period show that the risk associated with such a long-term investment predicts an equity premium that matches historical values. |
| Keywords: | equity premium puzzle; risk premium |
| JEL: | G12 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5017&r=fmk |
| By: | Norden, Lars; Weber, Martin |
| Abstract: | This paper examines funding modes of German banks and its implications for lending and profitability over the period 1992-2002. Analysing individual bank data from the Deutsche Bundesbank, we first find that deposits from customers lose ground in relative terms while interbank liabilities increase as a source of funding. Second, we cannot detect a negative impact of the relative decline in deposits on the lending business. In contrast, loans to customers become even slightly more important. Third, the decreasing ability of banks to mobilize deposits from customers and the substitution of deposits by interbank liabilities unfavourably affects the net interest results of savings banks. |
| Keywords: | banks; deposit taking; disintermediation; panel analysis |
| JEL: | G21 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5027&r=fmk |
| By: | Meenagh, David; Minford, Patrick; Nowell, Eric; Sofat, Prakriti |
| Abstract: | This paper establishes the ability of a Real Business Cycle model to account for real exchange rate (RXR) behaviour, using UK experience as empirical focus. We show that a productivity burst simulation is capable of explaining the appreciation of RXR and its cyclical pattern observed in the data. We then test if our model is consistent with the facts. We bootstrap our model to generate pseudo RXR series and check if the ARIMA parameters estimated for the data lie within 95% confidence limits implied by our model. We find that RXR behaviour is explicable within an RBC framework. |
| Keywords: | productivity; real business cycle; real exchange rate |
| JEL: | E32 F31 F41 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5029&r=fmk |
| By: | Freixas, Xavier; Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | We investigate the optimal regulation of financial conglomerates that combine a bank and a non-bank financial institution. The conglomerate’s risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerate’s liability structure. We examine optimal capital requirements for standalone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their standalone or decentralized equivalent. However, when risk profiles are endogenously selected conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralized conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of ‘regulatory arbitrage’, or of transferring assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation. |
| Keywords: | capital regulation; financial conglomerate; regulatory arbitrage |
| JEL: | G21 G22 G28 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5036&r=fmk |
| By: | Mody, Ashoka; Sarno, Lucio; Taylor, Mark P |
| Abstract: | A growing literature has examined the importance of credit market imperfections for macroeconomic fluctuations, the so-called financial accelerator. A related literature has provided evidence of international and regional co-movements in macroeconomic fluctuations. We tie together these strands of the literature in that we investigate the importance of both cross-country and country-specific credit cycles in explaining output fluctuations. Using data for four major economies and two world regions from 1973 to 2001, we find that both regional and country-specific components of indicators of credit availability are powerful in explaining output movements. This research provides the first empirical evidence of a cross-country financial accelerator. |
| Keywords: | credit cycle; financial accelerator; international business cycles; Kalman filter |
| JEL: | E32 E51 F36 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5037&r=fmk |
| By: | Krueger, Dirk; Kubler, Felix |
| Abstract: | This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labour income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically efficient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains. |
| Keywords: | aggregate fluctuations; incomplete markets; intergenerational risk sharing; social security reform |
| JEL: | D58 D91 E62 H31 H55 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5039&r=fmk |
| By: | Garlappi, Lorenzo; Uppal, Raman; Wang, Tan |
| Abstract: | In this paper, we show how an investor can incorporate uncertainty about expected returns when choosing a mean-variance optimal portfolio. In contrast to the Bayesian approach to estimation error, where there is only a single prior and the investor is neutral to uncertainty, we consider the case where the investor has multiple priors and is averse to uncertainty. We characterize the multiple priors with a confidence interval around the estimated value of expected returns and we model aversion to uncertainty via a minimization over the set of priors. The multi-prior model has several attractive features: One, just like the Bayesian model, it is firmly grounded in decision theory. Two, it is flexible enough to allow for different degrees of uncertainty about expected returns for different subsets of assets, and also about the underlying asset-pricing model generating returns. Three, for several formulations of the multi-prior model we obtain closed-form expressions for the optimal portfolio, and in one special case we prove that the portfolio from the multi-prior model is equivalent to a ‘shrinkage’ portfolio based on the mean-variance and minimum-variance portfolios, which allows for a transparent comparison with Bayesian portfolios. Finally, we illustrate how to implement the multi-prior model for a fund manager allocating wealth across eight international equity indices; our empirical analysis suggests that allowing for parameter and model uncertainty reduces the fluctuation of portfolio weights over time and improves the out-of sample performance relative to the mean-variance and Bayesian models. |
| Keywords: | ambiguity; asset allocation; estimation error; portfolio choice; robustness; uncertainty |
| JEL: | D81 G11 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5041&r=fmk |
| By: | Aoki, Kosuke; Nikolov, Kalin |
| Abstract: | The paper evaluates the performance of three popular monetary policy rules when the central bank is learning about the parameter values of a simple New Keynesian model. The three policies are: (1) the optimal non-inertial rule; (2) the optimal history-dependent rule; (3) the optimal price-level targeting rule. Under rational expectations rules (2) and (3) both implement the fully optimal equilibrium by improving the output-inflation trade off. When imperfect information about the model parameters is introduced, it is found that the central bank makes monetary policy mistakes, which affect welfare to a different degree under the three rules. The optimal history-dependent rule is worst affected and delivers the lowest welfare. Price level targeting performs best under learning and maintains the advantages of conducting policy under commitment. These findings are related to the literatures on feedback control and robustness. The paper argues that adopting integral representations of rules designed under full information is desirable because they deliver the beneficial output-inflation trade-off of commitment policy while being robust to implementation errors. |
| Keywords: | learning; monetary policy rules |
| JEL: | E31 E50 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5056&r=fmk |
| By: | Degryse, Hans; Masschelein, Nancy; Mitchell, Janet |
| Abstract: | This paper studies the impact of bank mergers on firm-bank lending relationships using information from individual loan contracts in Belgium. We analyse the effects of bank mergers on the probability of borrowers maintaining their lending relationships and on their ability to continue tapping bank credit. The Belgian financial environment reflects a number of interesting features: high banking sector concentration; ‘in-market’ mergers with large target banks; importance of large banks in providing external finance to SMEs; and low numbers of bank lending relationships maintained by SMEs. We find that bank mergers generate short-term and longer-term effects on borrowers' probability of losing a lending relationship and on credit availability. Mergers also have heterogeneous impacts across borrower types, including borrowers of acquiring and target banks, borrowers of differing size, borrowers with single versus multiple relationships, and borrowers with differing relationship intensities. Firms borrowing from acquiring banks are less likely to lose their lending relationship, while target bank borrowers are more likely to lose their relationship or see their credit availability harmed. Overlap borrowers – borrowing from two of the merging banks – are less likely to lose their relationship than firms borrowing from only one of the merging banks or firms borrowing from non-merging banks. |
| Keywords: | bank lending relationships; bank mergers; SME loans |
| JEL: | G21 G32 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5061&r=fmk |
| By: | Rose, Andrew K; Spiegel, Mark |
| Abstract: | This paper analyses the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behaviour in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbours, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth. |
| Keywords: | asset; competitive; cross-section; data; empirical; haven; money; tax; theory |
| JEL: | F23 F36 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5081&r=fmk |
| By: | Dell'Ariccia, Giovanni; Detragiache, Enrica; Rajan, Raghuram G |
| Abstract: | Banking crises are usually followed by a decline in credit and growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative effects on the economy? To answer this question we examine industrial sectors with differing needs for financing. If banking crises have an exogenous detrimental effect on real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. Additional support comes from the fact that sectors that predominantly have small firms, and thus are typically bank dependent, also perform relatively worse during banking crises. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises were more severe. |
| Keywords: | bank lending channel; banking crises |
| JEL: | E44 G21 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5088&r=fmk |
| By: | Borja Larrain |
| Abstract: | This paper studies the impact of stock market development on cross country relative prices (the real exchange rate). A nonlinear relationship is uncovered in the cross section: prices and the stock market increase together in the beginning; then prices fall as the stock market continues to develop. In fact, among rich countries the relationship between prices and the stock market is negative. This result obtains after controlling for per capita income and for endogeneity issues by using legal origins. A small open economy model is presented to explain the connection between stock market development and relative prices: better investment opportunities increase consumption levels and the price of nontradable goods (income effect); but if stock market assets are less labor intensive than previous entrepreneurial technologies, prices can fall as the stock market grows because more labor is available for producing nontradables (substitution effect). This paper illustrates the connection of the stock market with goods and labor markets; it also has potential implications for the political economy of financial development. In a sideline contribution, it provides prices for entrepreneurial assets. |
| Keywords: | Stock market ; Stock - Prices |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-6&r=fmk |
| By: | Steven J. Davis; Felix Kubler; Paul Willen |
| Abstract: | We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity — which we show roughly matches the data — minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings. |
| Keywords: | Households - Economic aspects ; Investments |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:05-7&r=fmk |
| By: | Michele Cavallo; Kate Kisselev; Fabrizio Perri; Nouriel Roubini |
| Abstract: | Currency crises are usually associated with large nominal and real depreciations. In some countries depreciations are perceived to be very costly (“fear of floating”). In this paper we try to understand the reasons behind this fear. We first look at episodes of currency crises in the 1990s and establish that countries entering a crisis with high levels of foreign debt tend to experience large real exchange rate overshooting (devaluation in excess of the long-run equilibrium level) and large output contractions. We then develop a model of a small open economy that helps to explain this evidence. The key element of the model is the presence of a margin constraint on the domestic country. Real devaluations, by reducing the value of domestic assets relative to international liabilities, make countries with high foreign debt more likely to hit the constraint. When countries hit the constraint they are forced to sell domestic assets, and this causes a further devaluation of the currency (overshooting) and a reduction of their stock prices (overreaction). This fire sale can have a significant negative wealth effect. The model highlights a key tradeoff when considering fixed versus flexible exchange rate regimes; a fixed exchange regime can, by avoiding exchange rate overshooting, mitigate the negative wealth effect but at the cost of additional distortions and output drops in the short run. There are plausible parameter values under which fixed exchange rates dominate flexible exchange rates from a welfare perspective. |
| Keywords: | Foreign exchange rates ; Financial crises |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfam:2005-07&r=fmk |
| By: | Mark Carlson; Kris James Mitchener |
| Abstract: | It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s. |
| Keywords: | Branch banks ; Competition |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-20&r=fmk |
| By: | Jonathan N. Millar |
| Abstract: | Investment models typically assume that capital becomes productive almost immediately after purchase and that there is no lead time needed to plan. In the case, marginal q is usually sufficient for investment. This paper develops a model of aggregate investment where competitive firms face no adjustment costs other than building and planning delays. In this context, both Tobin's Q and cash flow can be noisy indicators of investment because some shocks fail to outlast the combined gestation lag. The paper demonstrates some empirical facts that challenge prevailing theories of investment but are consistent with gestation requirements. Regressions using aggregate data suggest that it takes at least four quarters for investment to respond to technology shocks and as many as eight additional quarters before productive capacity is affected. Estimates from structural VARs show that only permanent shocks affect investment, but that cash flow and Q react to both permanent and transitory shocks. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-24&r=fmk |
| By: | Gene Amromin; Steven A. Sharpe |
| Abstract: | We use data obtained from a series of Michigan Surveys of Consumer Attitudes to study stock market beliefs and portfolio choices of individual investors. We find that expected returns over the medium- and long-term horizon appear to be extrapolated from past realized returns. The findings also indicate that a more optimistic assessment of macroeconomic conditions coincides with higher expected returns and lower expected volatility, implying strongly procyclical Sharpe ratios. These results are given added credence by the empirical finding that reported portfolio concentrations in equities tend to be higher for respondents who anticipate higher returns and lower uncertainty. Overall, our empirical results lend support to the hypothesis that equity valuations are lower during recessions--and--subsequent returns are higher--because of undue pessimism about future returns, rather than high risk aversion. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-26&r=fmk |
| By: | Hui Guo; Robert Savickas |
| Abstract: | The paper documents a new empirical result that a high level of aggregate U.S. idiosyncratic stock return volatility is usually associated with a future appreciation in U.S. dollars. The relation is highly significant for most foreign currencies. For example, idiosyncratic volatility accounts for over 20 percent variations of the subsequent change in the Deutsche mark/U.S. dollar rate in the non-overlapping semi-annual data and its improvements over the random walk model in the out-of-sample forecast are statistically significant. We find the similar result*a positive and significant relation between a country*s aggregate idiosyncratic volatility and the future U.S. dollar price of its currency*in France, Germany, and Japan. Moreover, the U.S. default premium provides additional information about future exchange rates. Given that idiosyncratic volatility and the default premium are strong predictors of fundamentals, our results are consistent with monetary models of foreign exchange rates. |
| Keywords: | Foreign exchange ; International finance |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-025&r=fmk |
| By: | Hui Guo; Robert Savickas; Zijun Wang; Jian Yang |
| Abstract: | Campbell and Vuolteenaho (2004) and Brennan, Wang, and Xia (2004) recently argue that the value premium co-moves with investment opportunities and thus reflects rational pricing. This paper extends their analysis by showing that the ICAPM interpretation of the value premium also sheds light on the puzzling empirical relation between the stock market risk and return across time. That is, in contrast with many early authors, it is found to be positive and highly significant after controlling for the covariance between the stock market return and the value premium. Moreover, we also document a positive and significant relation between the value premium and its conditional variance over the post-1963 period. Our results, which appear to be robust using both the realized volatility model and the GARCH model, confirm that the value premium cannot be completely attributed to data mining and irrational pricing. |
| Keywords: | Time-series analysis ; Stocks |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-026&r=fmk |
| By: | David C. Wheelock; Paul Wilson |
| Abstract: | This paper examines the technical efficiency of U.S. Federal reserve check processing offices over 1980-2003. We use new unconditional quantile estimator of efficiency that avoids some drawbacks of other recently proposed estimators. The new estimator is fully non-parametric, robust with respect to outliers, super-consistent, and converges at rate root-n this avoiding the curse of dimensionality that plagues data envelopment analysis (DEA) estimators. Our methods could be used by policymakers to compare inefficiency levels across offices or by managers of individual offices to identify peer offices. |
| Keywords: | Check collection systems ; Payment systems |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-027&r=fmk |
| By: | Tarun Chordia; Asani Sarkar; Avanidhar Subrahmanyam |
| Abstract: | This paper explores liquidity spillovers in market-capitalization-based portfolios of NYSE stocks. Return, volatility, and liquidity dynamics across the small- and large-cap sectors are modeled by way of a vector autoregression model, using data that spans more than 3,000 trading days. We find that volatility and liquidity innovations in one sector are informative in predicting liquidity shifts in the other. Impulse responses indicate the existence of persistent liquidity, return, and volatility spillovers across the small- and large-cap sectors. Lead and lag patterns across small- and large-cap stocks are stronger when spreads in the large-cap sector are wider. Consistent with the notion that private informational trading in large-cap stocks is transmitted to other stocks with a lag, order flows in the large-cap-stock decile predict both transaction-price-based and mid-quote returns of small-cap deciles when large-cap spreads are high. |
| Keywords: | Liquidity (Economics) ; Rate of return ; Securities ; Stocks |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:207&r=fmk |
| By: | André Güttler; Mark Wahrenburg |
| Abstract: | We provide insights into determinants of the rating level of 371 issuers which defaulted in the years 1999 to 2003, and into the leader-follower relationship between Moody’s and S&P. The evidence for the rating level suggests that Moody’s assigns lower ratings than S&P for all observed periods before the default event. Furthermore, we observe two-way Granger causal-ity, which signifies information flow between the two rating agencies. Since lagged rating changes influence the magnitude of the agencies’ own rating changes it would appear that the two rating agencies apply a policy of taking a severe downgrade through several mild down-grades. Further, our analysis of rating changes shows that issuers with headquarters in the US are less sharply downgraded than non-US issuers. For rating changes by Moody’s we also find that larger issuers seem to be downgraded less severely than smaller issuers. |
| JEL: | G15 G23 G33 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:fra:franaf:155&r=fmk |
| By: | Martin Desrochers; Klaus P. Fischer |
| Abstract: | The purpose of this paper is to perform a cross-country survey of the level of integration of systems of financial cooperatives (FC) and its effect on measures of performance. We develop a classification scheme based on a theoretical framework that builds on published work using transaction cost economics (TCE) to explain integration of large numbers of financial cooperatives into networks. We identify three critical level of increasing integration we call respectively atomized systems, consensual networks and strategic networks. Further, we test some of the propositions that result from the theoretical framework on an international sample of financial cooperative systems. Based on this analysis we can conclude that: i) Integration is less (more) important is developing (more developed) countries and for very small (large) financial cooperatives as a determinant of efficiency. However, integration tends to reduce volatility of efficiency and performance regardless of development. ii) Integration appears to help control measure of managers' expense preferences that tend to affect performance of FC. iii) Despite high costs of running hub-like organizations in highly integrated system, these systems economize in bounded rationality and operate at lower costs that less integrated systems. |
| Keywords: | Transaction cost economics, financial cooperatives, credit unions, networks, corporate governance, technical efficiency, x-efficiency |
| JEL: | G2 G3 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0514&r=fmk |
| By: | Georges Dionne; Thouraya Triki |
| Abstract: | The new NYSE rules for corporate governance require the audit committee to discuss and review the firm's risk assessment and hedging strategies. They also put additional requirements for the composition and the financial knowledge of the directors sitting on the board and on the audit committee. In this paper, we investigate whether these new rules as well as those set by the Sarbanes Oxley act lead to hedging decisions that are of more benefit to shareholders. We construct a novel hand collected dataset that allows us to explore multiple definitions for the financially knowledgeable term present in this new regulation. We find that the requirements on the audit committee size and independence are beneficial to shareholders, although maintaining a majority of unrelated directors in the board and a director with an accounting background on the audit committee may not be necessary. Interestingly, financially educated directors seem to encourage corporate hedging while financially active directors and those with an accounting background play no active role in such policy. This evidence combined with the positive relation we report between hedging and the firm's performance suggests that shareholders are better off with financially educated directors on their boards and audit committees. Our empirical findings also show that having directors with a university education on the board is an important determinant of the hedging level. Indeed, our measure of risk management is found to be an increasing function of the percentage of directors holding a diploma superior to a bachelor degree. This result is the first direct evidence concerning the importance of university education for the board of directors. |
| Keywords: | Corporate governance, risk management, corporate hedging, financial knowledge, board independence, audit committee independence, board of directors, university education, empirical test, unrelated directors, NYSE rules, Sarbanes Oxley act, audit committee size, financially educated directors, financially active directors, firm performance |
| JEL: | G18 G30 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0515&r=fmk |
| By: | Lin Peng; Wei Xiong |
| Abstract: | Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors' attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to ``category-learning" behavior, i.e., investors tend to process more market and sector-wide information than firm-specific information. This endogenous structure of information, when combined with investor overconfidence, generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models. Our model also demonstrates new cross-sectional implications for return predictability. |
| JEL: | G0 G1 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11400&r=fmk |
| By: | Gavin C. Reid; Julia A. Smith |
| Abstract: | This paper presents new empirical evidence, obtained by fieldwork methods, on investor risk-handling practice in the UK venture capital industry. Its focus is on high-technology firms and the techniques their venture capital backers use for risk management. The active areas of risk management are explored under the headings of risk premia, investment time horizons, and sensitivity analysis. As an organising framework, risk is divided into ‘agency risk’, ‘business risk’ and ‘innovation risk’. Data were gathered by working through a semi-structured interview agenda in face-to-face meetings with the top venture capital deal-makers in the UK. They were questioned specifically on how they handled risks in high-technology ventures. The interview agenda covered: risk premia, investment time horizon, sensitivity analysis, expected values, cash flow prediction, financial objectives, decision making, and qualitative appraisal. The paper draws on evidence from all eight agenda items, but focuses on the first three. This paper finds that the three categories of risk identified as important, innovation, agency and business risk, have pervasive influences on investor conduct in the UK. Their form of influence was traced under the agenda headings of risk premia, investment time horizon, and sensitivity analysis. It was found that the riskiness of investment types (e.g. seed, MBO etc) could be clearly ranked by investors. These rankings were found to be generally consistent with principles of financial economics. Investors were also asked what factors were most important to their risk appraisals, for given high technology investments. Of a wide range of factors, it was found that the most important to risk appraisal could be directly related to our categories of ‘agency risk’ and ‘business risk’. It was found too that the time profiles of investments and their sensitivity to changed assumptions could be approached using our three risk categories. Of these, ‘innovation risk’ was thought to be particularly high, implying various forms of adaptation by investors, including setting very high hurdle rates of return and deploying radical stress tests of investment models. |
| Keywords: | Venture Capital, Risk Management, High-Technology, Fieldwork |
| JEL: | G24 D81 L84 M21 L21 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0107&r=fmk |
| By: | Gavin C. Reid; Julia A. Smith |
| Abstract: | This paper examines, in a high technology context, how investor and investee behave, and interact, in the face of risk. The evidence on which it is based was obtained by fieldwork methods, over the period 2000-2, examining a sample of UK investors and investees active in high technology areas. The paper focuses on four questions: how risky are investments; what affects risk most; what aspects of innovation affect risk; what non-financial factors affect risk most? It finds that there was general agreement between investors and investees about which investments were relatively more or less risky. However, investees were shown to be relatively more risk averse than investors, right across the spectrum of investee types. When it came to factors affecting risk most, there was a clear difference between investors and investees. Agency risk was largely the concern of the investor. Business risk was the investee’s first priority, and agency risk did not figure large in the investee’s mind. This suggests that this component of risk had successfully been shifted on to the investor. Business risk was also a clear concern of investors, but they placed more emphasis on matters like market opportunities and sales, than did investees. The paper concludes that investors and investees generally see risk in the same light, but, that when views differ, this is explicable either by function (producer/ funder) or by relative risk aversion. |
| Keywords: | Venture Capital, Risk Management, High-Technology, Fieldwork |
| JEL: | G24 D81 L84 M21 L21 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0205&r=fmk |
| By: | Gavin C. Reid |
| Abstract: | This paper uses statistical analysis to characterise ‘industry practice’, in terms of concordance of investors concerning appropriate practice. The evidence was gathered by field work methods in 2000-01, and refers to the practices of twenty UK venture capital investors, who accounted for the bulk of funds allocated to high technology investments in the UK. This paper has two parts: general and detailed statistical analysis. 1) In the first part, the main finding is of a coherent (and generally statistically significant picture) of investor conduct towards high-technology companies. Thus it is found that investors assign risk premia and expected values, and use risk classes. They adopt relatively short time horizons, but follow quite sophisticated procedures in investment appraisal. For example, they use sensitivity analysis, cash flow prediction, financial modelling, and decision trees. However, they miss out in some sophisticated areas of technical analysis, including Value at Risk (VaR), and simulation methods (including Monte Carlo methods). 2) The second part of the paper focuses on risk, factors influencing it, and innovation. Its aim is to discover if there is a kind of ‘industry standard’ or consensus about what is most important to investors in the high technology area. Largely, that turned out to be the case. The UK venture capitalists are agreed on what are high-risk and low-risk investments. They also agree on what are the key commercial factors affecting risk. However, when it comes to non-commercial factors, this consensus starts to crumble. Finally, so far as features of innovation are concerned, industry consensus starts to break down entirely. Thus, there do remain important areas in which investor practice is opaque. Therefore, there remains a need for further research into investor practice in the UK. |
| Keywords: | Venture Capital, Risk Management, High-Technology, Fieldwork |
| JEL: | G24 D81 L84 M21 L21 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0206&r=fmk |
| By: | Moavia Alghalith |
| Abstract: | Paroush and Wolf (1992) investigated a perfectly competitive firm which faces input price uncertainty in one input of its two-input production function. The main purpose of their study was to determine the impact of the technological relationship on the derived demand when the input is hedged in a forward or futures market. They found that the partial cross derivatives of the production function and the market structure of the futures price (upward or downward bias) affect the derived demand. This note provides two extensions. First, it generalises Paroush and Wolf's theorem by using general utility function (Theorem 1). Second, it adds a new theorem (Theorem 2) that shows the impact of adding basis risk on the optimal hedging. This theorem is equally important since hedging is a decision variable. Below is a description of Paroush and Wolf's model. |
| Keywords: | Cost uncertainty, forward market, futures market, hedging, input price uncertainty |
| JEL: | D8 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0210&r=fmk |
| By: | Gerald Pech |
| Abstract: | This paper extends the currency crisis model of Morris and Shin to the case where players not only hold heterogenous beliefs but also differ in a characteristic feature such as individual transaction costs. It shows that there is a unique aggregate cut off point where the government abandons the peg which is supported by a continuum of individual switching points in the signals. The range of individual intervention levels is wide unless the noise vanishes. |
| Keywords: | global games, currency crisis |
| JEL: | D82 F31 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0214&r=fmk |
| By: | Moavia Alghalith |
| Abstract: | Paroush and Wolf (1989) modeled output hedging in the presence of basis risk. They showed that (in the absence of scale shift) the optimal hedging and output fall in response to basis risk. However, they used a second-order Taylor's approximation of the utility function. Also, they did not show the impact of basis risk on the ratio of hedging to output (hedging as a fraction of output), which is a more relevant variable than the absolute change in either of the decision variables. The absence of such results constitutes a major gap in the hedging literature. Consequently, this note provides two extensions. First, it generalizes Paroush and Wolf's results (Propositions 1 and 2) by using a general utility function and general distributions. Second, it shows the impact of basis risk on the ratio of hedging to output. |
| Keywords: | Cost uncertainty, forward market, futures market, hedging, input price uncertainty |
| JEL: | D8 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0303&r=fmk |
| By: | Gary S. Shea (University of St. Andrews) |
| Abstract: | We present evidence of rational pricing South Sea Company liabilities and call options written on South Sea shares. A previously unstudied dataset on South Sea share options is presented. The Company's capital structure of the firm is redefined so that the application of modern financial economic theories can be applied to its valuation. We present evidence that a significant portion of South Sea equity liabilities was in the form of share warrants and conversion (from bonds to shares) privileges and should be so valued. Finally we present a model of the cross-sectional behaviour of share prices, South Sea Company debt and call option values. The model is calibrated and simulated in order to produce estimates of the required return on the Company’s debt and the volatility of the firm’s asset values. We conclude that the jointly estimated value of the firm, its constituent liabilities, third-party call option values and implied volatilities are consonant with rational pricing behaviour during the Bubble, although the model requires extension in several directions in order to present a more complete picture of the South Sea Bubble. |
| Keywords: | financial revolution in England, South Sea Company, call options, warrants, convertible bonds |
| JEL: | N23 G13 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0410&r=fmk |
| By: | Gary S. Shea (University of St. Andrews) |
| Abstract: | The values of the famous Subscription Shares issued by the South Sea Company in 1720 have to be split into two components before they can be understood. One component was a fractional claim upon one original share in the firm. The other component, however, was a bundle of share warrants. The information contained in share warrant values is potentially helpful in understanding the South Sea Bubble. Warrant values might also be especially sensitive to "events" and "news" and could provide new ways of marking the turning points in the South Sea Bubble and testing for efficiency of markets. The level and volatility of subscription share prices are both consistent with the hypothesis that the subscription shares were essentially share warrants. |
| Keywords: | South Sea Bubble, Royal African Company, arbitrage, market efficiency, call options |
| JEL: | N23 G13 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0411&r=fmk |
| By: | Arnab Bhattacharjee |
| Abstract: | This Paper considers empirical work relating to models of firm dynamics. It is shown that a hazard regression model for firm exits, with a modification to accommodate age-varying covariate effects, provides an adequate framework accommodating many of the features of interest in empirical studies on firm dynamics. Modelling implications of some of the popular theoretical models are considered and a set of empirical procedures for verifying theoretical implications of the models are proposed.The proposed hazard regression models can accommodate negative effects of initial size that increase to zero with age (active learning model), negative initial size effects that may increase with age, but stay permanently negative (passive learning model), conditional and unconditional hazard rates that decrease with age at higher ages, and adverse effects of macroeconomic shocks that decrease with age of the firm.The methods are illustrated using data on quoted UK firms. Consistent with the active learning model, the effect of initial size is significantly negative for a young firm and falls to zero with age.The hazard function conditional on size, other firm and industry-level characteristics, and macroeconomic conditions decreases with age only at higher ages, but shows the weaker property of Increasing Mean Residual Life over its entire life-duration. Instability in exchange rates affects survival of very young firms strongly, and the effect decreases to insignificant levels for older firms. |
| Keywords: | Firm exit, Learning, Firm Dynamics, Non-proportional hazards, Hazard regression models |
| JEL: | C14 C34 C41 C52 D83 L16 L25 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0502&r=fmk |
| By: | Dennis Fredriksen, Kim Massey Heide, Erling Holmøy and Ingeborg Foldøy Solli (Statistics Norway) |
| Abstract: | Ageing combined with generous welfare state schemes makes the present fiscal policy in Norway unsustainable, despite large government petroleum revenues. We estimate to what extent two suggested reforms of the public pension system improve fiscal sustainability and stimulate employment, two main objectives of the reforms. To this end we apply two large models iteratively: 1) a detailed dynamic micro simulation model to estimate government pension expenditures; 2) a large CGE-model to estimate general equilibrium effects on all tax bases and employment, i.e. macroeconomic effects. We find that the reform proposals have much larger effects than typically found for reforms of the tax and trade policy. Whereas maintaining the present system implies that the payroll tax rate must be increased from about 13 percent today to 25 percent in 2050, both proposals imply that taxes can be reduced from the present level in all years up to 2050. Most of this reduction can be attributed to higher employment. |
| Keywords: | Population ageing; Fiscal sustainability; Pension reforms; Computable general equilibrium model; Dynamic micro simulation |
| JEL: | H30 H55 H62 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:417&r=fmk |
| By: | James Crotty; Kang-Kook Lee |
| Abstract: | As late as October 1997 the IMF declared that the Korean economy was experiencing a temporary liquidity squeeze, not a solvency problem. Yet in December 1997 Deputy Managing Director Stanley Fischer declared that Korea suffered from a systemic “breakdown of economic relations” so complete that only radical economic restructuring could restore prosperity. The IMF attached what it called “extreme structural conditionality” to its loan agreements with Korea, demanding a complete and rapid transition from Korea’s traditional East Asian economic model to a globally integrated neoliberal model. We subject the IMF’s assertion that the allocative efficiency of the Korean economy had collapsed by 1997 to a number of empirical tests, including time series and cross-section analyses of capital productivity and corporate profitability, and firm and industry level econometric tests of the proposition that investment spending was excessive and misallocated in the pre-crisis period. This evidence does not support the IMF’s systemic breakdown claim. We conclude that the IMF’s imposition of “extreme structural conditionality” on Korea is best understood as an illegitimate and antidemocratic exercise of power designed to meet the needs of the IMF’s key constituents rather than those of the majority of Korea’s people. |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:uma:periwp:wp77&r=fmk |
| By: | Kenneth P. Jameson |
| Abstract: | The early twentieth century role of U.S. “money doctors” in establishing Latin American exchange rate regimes and monetary institutions is relatively well known. For example, the work of Edwin Kemmerer in the Andes has been extensively documented. Not so well-known is the work of Latin American economists on these same issues. This paper examines a number of cases where the Latin American analysts were active players and participants in analyzing the exchange rate and monetary issues and in formulating domestic policy to address them. The role of Latin American economists in a variety of international monetary conferences and commissions from 1903-1922 is investigated. In addition, the paper describes how Alberto Pani guided the formulation of Mexican economic policy after the Mexican Revolution and his ability to chart an independent course for Mexico. The conclusion is that there is evidence of “intense discussions of economic issues” based on Latin Americans’ economic analysis. The role of foreign advisors was often to break the political impasse and to recommend the policy the inviting government wanted to implement. |
| Keywords: | exchange rate; Latin America; depression |
| JEL: | B1 E42 F3 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:uta:papers:2005_06&r=fmk |
| By: | David Laidler (University of Western Ontario) |
| Abstract: | It is argued that today's Canadian monetary system has certain important characteristics in common with a free banking regime such as might have evolved had matters been left to market forces, and that the Bank of Canada's recent success probably has more than a little to do with this fact. It is also argued, however, that, in Canada at the current juncture, further progress towards "free banking" as this alternative is nowadays known, would likely involve unilateral adoption of the US dollar as the basis for the monetary system. Hence, on the 70th anniversary of the Bank of Canada's founding, the author's wish that it may enjoy many happy returns of its birthday is a particularly sincere one. |
| Keywords: | Bank of Canada; central banking; free banking; price stability rates; unemployment; multiplier |
| JEL: | B22 E24 E59 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20054&r=fmk |
| By: | Marco LiCalzi (Dept. of Applied Mathematics - University Ca' Foscari Venice); Paolo Pellizzari (Dept. of Applied Mathematics - University Ca' Foscari Venice) |
| Abstract: | This paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value-based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid-ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts. |
| Keywords: | price dynamics, statistical properties of returns, market microstructure, agent-based simulations |
| JEL: | C8 |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpco:0506001&r=fmk |
| By: | Dmitri Vinogradov (Alfred Weber Institute, Heidelberg University, Germany) |
| Abstract: | Asymmetry in views of depositors and bankers can generate failures of financial intermediation in linking creditors and borrowers, and/or result in excessively high interest rates. Instead of considering asymmetry in assessment of the banks' solvency, this paper focuses on asymmetry in views as to whether an insolvent bank will be liquidated or let to continue. Bailout policy has two effects in this respect: first, an insurance effect, which lowers market interest rates, and secondly, an announcement effect, which rules the asymmetry in beliefs out. The paper was presented at the 21st Symposium on Banking and Monetary Economics, Nice, 2004 |
| Keywords: | financial intermediation, limited liability, bailout policy |
| JEL: | D0 |
| Date: | 2005–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506003&r=fmk |
| By: | Dmitri Vinogradov (Alfred Weber Institute, Heidelberg University, Germany) |
| Abstract: | The paper focuses on a comparison of bank-based andmarket-based …nancial systems with respect to their ability to smooth the negative consequences of a macroeconomic shock. The model describes a two-market OLG economy with two types of agents (workers and entrepreneurs) and a financial system represented through either banks or a direct market. The dynamic setting allows for a comparison regarding the speed of economic recovery after the shock. The principal finding is that the market-based system provides better arrangements to speed up the recovery, but concentrates the burden of the shock in one period. In contrast, the bank-based system allows for both quick recovery and postponing and smoothing the negative consequences of the shock over several periods, if proper regulation and interventions are used, otherwise the banking system can collapse. As an example of regulatory interventions, liquidity provisions and a deposit rate ceiling are considered. This allows to give some light on the di¤erence between the roles the Deposit Insurer and the Regulator (LOLR) can play in the evolution of events. In particular, deposit insurance alone can not provide an intertemporal shock smoothing and requires additional regulatory interventions. The Paper is presented at the 22nd Symposium on Banking and Monetary Economics held in June 2005 in Strasbourg |
| Keywords: | Financial intermediation, Bank-based system, Market-based system, Regulation, Lelnder of Last Resort, Deposit Insurance |
| JEL: | D50 G21 G28 E44 E53 O16 |
| Date: | 2005–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506004&r=fmk |
| By: | Mahesh Kumar Tambi (IIMT, Hyderabad India) |
| Abstract: | This paper is an attempt to evaluate the impact of Mergers on the performance of the companies. Theoretically it is assumed that Mergers improves the performance of the company due to increased market power, Synergy impact and various other qualitative and quantitative factors. Although the various studies done in the past showed totally opposite results. These studies were done mostly in the US and other European countries. I evaluate the impact of Mergers on Indian companies through a database of 40 Companies selected from CMIE’s PROWESS, using paired t- test for mean difference for four parameters; Total performance improvement, Economies of scale, Operating Synergy and Financial Synergy. My study shows that Indian companies are no different than the companies in other part of the world and mergers were failed to contribute positively in the performance improvement. |
| Keywords: | Mergers, Amalgamation, Acquisition, Horizontal Mergers, Vertical Mergers, Backward Integration, Foreword Integration, Circular Mergers, Conglomerate Mergers, Congeneric Mergers, |
| JEL: | G |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0506007&r=fmk |
| By: | Manuela Goretti (University of Warwick) |
| Abstract: | This paper investigates the main sources of instability in Brazil during the currency and financial distress episode of 2002. We test for financial contagion from the Argentine crisis and the impact of factors including IMF intervention and political uncertainty in raising the probability of crisis. The empirical investigation employs a Markov switching model with endogenous transition probabilities. |
| Keywords: | Brazil; contagion; financial crises; IMF intervention; Markov switching model; political uncertainty. |
| JEL: | C11 C22 F32 F34 F42 |
| Date: | 2005–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506001&r=fmk |
| By: | Mansoor Dailami (World Bank); Paul Masson (Rotman School of Management, University of Toronto); Jean Jose Padou (University of Toronto) |
| Abstract: | We offer evidence in this paper that US interest rate policy has an important influence in the determination of credit spreads on emerging market bonds over US benchmark treasuries, and therefore on their cost of capital. Our analysis improves upon the existing literature and understanding, by addressing the dynamics of market expectations in shaping views on interest rate and monetary policy changes, and by recognizing non-linearities in the link between US interest rates and emerging market bond spreads, as the level of interest rates affects the market's perceived probability of default and the solvency of emerging market borrowers. For a country with a moderate level of debt, repayment prospects would remain good in the face of an increase in US interest rates, so there would be little increase in spreads. A country close to the borderline of solvency would face a steeper increase in the spreads. Simulations of a 200 basis points (bps) increase in US short-term interest rates (ignoring any change in the US 10 year Treasury rate) show an increase in emerging market spreads ranging from 6 bps to 65 bps, depending on debt/GDP ratios. |
| Keywords: | emerging market spreads, currency crises, global monetary conditions |
| JEL: | F3 F4 |
| Date: | 2005–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506003&r=fmk |
| By: | Mahesh Kumar Tambi (IIMT, Hyderabad- India) |
| Abstract: | This paper makes an attempt to examine the financial integration between emerging countries and developed countries. Stock market data for six countries USA, CANADA, UK, India, Malaysia and Singapore have been used for the purpose of the study. Cointegration was tested on the basis of various alternative techniques. Results contradict existing literatures and suggest that although developments at international level significantly influence national stock markets, but they are driven mainly by the developments at domestic level. Study also indicates that world equity market is segmented; where developed nations and emerging markets have made separate grouping. In case of India we find that it is positively correlated with all the markets, but this relationship is not highly positive. |
| Keywords: | Financial markets Integration, Johansen test, VAR-ECM, Engle- Granger Two stage method, Developed nations, Developing Nations. |
| JEL: | F3 F4 |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506004&r=fmk |
| By: | Mahesh Kumar Tambi (IIMT, Hyderabad-India) |
| Abstract: | In this paper we tried to build univariate model to forecast exchange rate of Indian Rupee in terms of different currencies like SDR, USD, GBP, Euro and JPY. Paper uses Box-Jenkins Methodology of building ARIMA model. Sample data for the paper was taken from March 1992 to June 2004, out of which data till December 2002 were used to build the model while remaining data points were used to do out of sample forecasting and check the forecasting ability of the model. All the data were collected from Indiastat database. Result of the paper shows that ARIMA models provides a better forecasting of exchange rates than simple auto- regressive models or moving average models. We were able to build model for all the currencies, except USD, which shows the relative efficiency of the USD currency market. |
| Keywords: | Exchange rate forecasting, univariate analysis, ARIMA, Box- Jenkins methodology, out of sample approach |
| JEL: | F3 F4 |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0506005&r=fmk |
| By: | Yoshitaka Sakagami |
| Abstract: | In this paper, we consider the effect of First-degree Stochastic Dominance (FSD) changes in background multiplicative risk on the risk- taking attitude of a decision maker. First, we consider contractive FSD changes in background multiplicative risk and analyze the effect of these changes. Then, we consider general FSD changes in background multiplicative risk. Also, in the context of coinsurance, we determine the effect of simple FSD changes and Monotone Likelihood Ratio (MLR) changes in multiplicative background risk. |
| Keywords: | FSD changes, Multiplicative background risk, risk-taking attitude |
| Date: | 2005–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpri:0506001&r=fmk |
| By: | Dean S. Karlan (Economic Growth Center, Yale University) |
| Abstract: | Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default. |
| Keywords: | Microfinance, Group lending, informal savings, social capital |
| JEL: | O12 O16 O17 Z13 |
| URL: | http://d.repec.org/n?u=RePEc:egc:wpaper:913&r=fmk |
| By: | M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith |
| Abstract: | This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry. |
| Keywords: | Global VAR (GVAR), Counterfactual Analysis, UK and Sweden entry to euro |
| JEL: | C32 C35 E17 F15 F42 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-24&r=fmk |
| By: | Manuel Gomez (No affiliation); Michael Melvin (W. P. Carey School of Business Department of Economics) |
| Abstract: | Many observers were surprised by the depreciation of the euro after its launch in 1999. Handicapped by a short sample, explanations tended to appeal to anecdotes and lessons learned from the experiences of other currencies. Now sample sizes are just becoming large enough to permit reasonable empirical analyses. This paper begins with a theoretical model of pre- and post-euro foreign exchange trading that generates three possible causes of euro depreciation: a reduction in hedging opportunities due to the elimination of the legacy currencies, asymmetric information due to some traders having superior information regarding shocks to the euro exchange rate, and policy uncertainty on the part of the ECB. One empirical implication of the model is that higher transaction costs associated with the euro than the German mark may have contributed to euro depreciation. However, empirical evidence on percentage spreads tends to reject the hypothesis that percentage spreads were larger on the euro than the mark for all but the first few months. This seems like an unlikely candidate to explain euro depreciation over the prolonged period observed. Reviewing evidence on market dynamics around ECB, Bundesbank, and Federal Reserve meetings, there is no evidence suggesting that the market is "front running" in a different manner than the other central banks. However, we do find empirical support for the euro exchange rate to be affected by learning. By focusing on euro-area inflation as the key fundamental, the model is structured toward the dynamics of learning about ECB policy with regard to inflation. While a stated target inflation rate of 2 percent existed, it may be that market participants had to be convinced that the ECB would, indeed, generate low and stable inflation. The theory motivates an empirical model of Bayesian updating related to market participants learning about the underlying inflation process under the ECB regime. With a prior distribution drawn from the pre-euro EMS experience and updating based upon the realized experience each month following the introduction of the euro, the evidence suggests that it was not until the fall of 2000 that the market assessed a greater than 50 percent probability that the inflation process had changed to a new regime. From this point on, trend depreciation of the euro ends and further increases in the probability of the new inflation process are associated with euro appreciation. |
| URL: | http://d.repec.org/n?u=RePEc:asu:wpaper:2179608&r=fmk |
| By: | Shizuka Sekita (Graduate School of Economics, Osaka University) |
| Abstract: | This paper calculates effective tax rates on capital income (interest, dividends, and capital gains on equities) in Japan and analyzes the impact of the revision of the Small Saving Tax Exemption for interest income (the so-called Maruyu System) on Japanese household portfolios. My contributions are as follows: (1) I am the first to calculate effective tax rates on interest, dividends, and capital gains on equities from 1973 to 2001 and calculate the effective tax rates on assets to which the exemption applies (Maruyu assets) and those on assets to which the exemption does not apply (non-Maruyu assets). As a result, I found that (2) before the 1988 revision of the exemption, Maruyu assets such as bank and postal savings deposits were given more preferable tax treatment than non-Maruyu assets such as equities, as is the general perception in Japan, but after the 1988 revision, the situation became reversed, with non-Maruyu assets being given more preferable tax treatment than Maruyu assets. Moreover, (3) I use effective tax rates by age group in the empirical analysis, taking into account for the first time the amount of principal that is tax-exempt, and (4) I estimate asset demand equations by three-stage least squares to deal with the endogeneity of rates of return, which is so far not taken into account in analyses of the revision of Maruyu system and household portfolios in Japan. And (5) I calculate the amount of the change in holdings of each asset that is caused by the 1988 and 2006 revisions of the Maruyu system, and it turns out that not only the 1988 revision of the exemption but also the 2006 revision will promote a shift in household portfolios away from Maruyu assets and toward non-Maruyu assets, as expected, but that the magnitude of the impact of the 2006 revision is much less considerable than that of the 1988 revision in the short run as well as the long run. |
| Keywords: | Effective tax rates; Household asset allocation; Taxation |
| JEL: | G11 H31 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0517&r=fmk |