nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒07‒18
seventy papers chosen by
Erik Schloegl
School of Mathematical Sciences University of Technology

  1. From Team Spirit to Jealousy: The Pitfalls of Too Much Transparency By Alexander K. Koch; Albrecht Morgenstern
  2. Supersanctions and Sovereign Debt Repayment By Kris James Mitchener; Marc D. Weidenmier
  3. Forecasting the Term Structure of Government Bond Yields By Francis X. Diebold; Canlin Li
  4. Analysis on Major Issues in International Investment Agreements and Future Options By Anthony Ho
  5. Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting? By Joreg Bibow
  6. Exploring the relationship between tourism and offshore finance in small island economies: lessons from Jersey By John Christensen; Mark Hampton
  7. Medidas de Riesgo, Características y Técnicas de Medición: Una Aplicación del VAR y el ES a la Tasa Interbancaria de Colombia By Luis Fernando Melo Velandia; Oscar reinaldo Becerra Camargo
  9. The Performance of Real Estate Portfolios: A Simulation Approach By WILLIAM N. GOETZMANN; JEFFREY D. FISHER
  10. Weather Forecasting for Weather Derivatives By Sean D. Campbell; Francis X. Diebold
  11. The Basel II Accord: Internal Ratings and Bank Differentiation By Eberhard Feess; Ulrich Hege
  12. Do Asymmetric and Nonlinear Adjustments Explain the Forward Premium Anomaly? By Richard T. Baillie; Rehim Kilic
  13. Simulation-Based Pricing of Convertible Bonds By Manuel Ammann; Axel Kind; Christian Wilde
  14. International Capital Market Imperfections: Evidence from Geographical Features of International Consumption Risk Sharing By Yonghyup Oh
  15. Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics By Peter F. Christoffersen; Francis X. Diebold
  16. Critical Levels of Debt? By Lenno Uusküla; Peeter Luikmel; Jana Kask
  17. National Key FDI Policies and International Investment Agreements Development By Anthony Ho
  18. Modelling Households' Savings and Dwellings Investment - A Portfolio Choice Approach By Gabor Vadas
  19. The Empirical Risk-Return Relation: A Factor Analysis Approach By Sydney C. Ludvigson; Serena Ng
  20. The Basle Securitisation Framework Explained: The Regulatory Treatment of Asset Securitisation By Andreas Jobst
  21. The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest By Patric H. Hendershott; Gwilym Pryce
  22. Short-Term Effects of Foreign Bank Entry on Bank Performance in Selected CEE Countries By Janek Uiboupin
  23. Private equity-, stock- and mixed asset-portfolios: A bootstrap approach to determine performance characteristics, diversification benefits and optimal portfolio allocations By Daniel Schmidt
  24. The (Much Understated) Quantitative Role of Capital Accumulation and Saving By Genevieve Verdier
  25. Accelerating ASEAN Economic Integration: Moving Beyond AFTA By Hadi Soesastro
  26. Endogenous Central Bank Credibility in a Small Forward-Looking Model of the U.S. Economy By René Lalonde
  27. Lines of Credit and Consumption Smoothing: The Choice between Credit Cards and Home Equity Lines of Credit By Shubhasis Dey
  28. Modeling Bond Yields in Finance and Macroeconomics By Francis X. Diebold; Monika Piazzesi; Glenn D. Rudebusch
  29. Banks Lending and Macroeconomic Uncertainty: the Case of Canada By Alejandro Garcia; Christian Calmès
  30. R&D investment, Credit Rationing and Sample Selection By Gianfranco Atzeni; Claudio Piga
  31. A No-Arbitrage Approach to Range-Based Estimation of Return Covariances and Correlations By Michael W. Brandt; Francis X. Diebold
  32. The Shock- Absorber Role of the Internal Public Debt in Colombia, 1923-2003. By Mauricio Avella Gómez
  33. Multiple-bank lending: diversification and free-riding in monitoring By Elena Carletti; Vittoria Cerasi; Sonja Daltung
  34. Estimating the natural interest rate for the euro area and Luxembourg By Ladislav Wintr; Paolo Guarda; Abdelaziz Rouabah
  35. Extreme Value Theory: the bivariate case and an application for assesing risks By Federico Agustín Alcalde Bessia; María Teresa Casparri
  37. Default Risk Sharing Between Banks and Markets: The Contribution of Collateralized Debt Obligations By Günter Franke; Jan Pieter Krahnen
  38. Assessing Central Bank Credibility During the ERM Crises: Comparing Option and Spot Market-Based Forecasts By Markus Haas; Stefan Mittnik; Bruce Mizrach
  39. Explaining the Trend and the Diversity in the Evolution of the Stock Market By Niloy Bose; Rebecca Neumann
  40. Institutional Perspectives on Real Estate Investing: The Role of Risk and Uncertainty By William N. Goetzmann; Ravi Dhar
  41. Banking System Efficiency and the Dualistic Development of the Italian Economy in the Nineties By Cesare Imbriani – Antonio Lopes
  42. Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments By Michael Greenstone; Paul Oyer; Annette Vissing-Jorgensen
  43. Bank Failures and Bank Fundamentals: A Comparative Analysis of Latin America and East Asia during the Nineties using Bank-Level Data By Marco Arena
  44. Consumption Strikes Back?: Measuring Long-Run Risk By Lars Peter Hansen; John Heaton; Nan Li
  45. Competitive Risk Sharing Contracts with One-Sided Commitment By Dirk Krueger; Harald Uhlig
  46. CASO SOROS By Fernando Rubio
  47. "The Impacts of "Shock Therapy" under a Banking Crisis : Experiences from Three Large Bank Failures in Japan" By Shin-ichi Fukuda; Satoshi Koibuchi
  48. Gains from Coordination in a Multi-Sector Open Economy: Does it Pay to be Different? By Zheng Liu; Evi Pappa
  49. Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Clara Vega
  50. The comovement of credit default swap, bond and stock markets: an empirical analysis By Lars Norden; Martin Weber
  51. Momentum Profits and Macroeconomic Risk By Laura X.L. Liu; Jerold B. Warner; Lu Zhang
  52. Practical Volatility and Correlation Modeling for Financial Market Risk Management By Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold
  53. Volatility Forecasting By Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold
  54. Global Business Cycles and Credit Risk By M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler
  55. The Effect of Labor Market Institutions on FDI Inflows By Chang-Soo Lee
  56. Beat The Market By Fan Wang
  57. Randomized Sign Test for Dependent Observations on Discrete Choice under Risk By Anat Bracha; Jeremy Gray; Rustam Ibragimov; Boaz Nadler; Dmitry Shapiro; Glena Ames; Donald J. Brown
  58. Exchange-Rate Policy and the Zero Bound on Nominal Interest By Günter Coenen; Volker Wieland
  59. Finance and Economic Development in East Asia By Yung Chul Park; Wonho Song; Yunjong Wang
  60. A Framework for Exploring the Macroeconomic Determinants of Systematic Risk By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Jin (Ginger) Wu
  61. Finance and Economic Development in Korea By Yung Chul Park; Wonho Song; Yunjong Wang
  62. The Effectiveness of Bank Recapitalization in Japan By Heather Montgomery; Satoshi Shimizutani
  63. "Seasonality and Seasonal Switching Time Series Models"(in Japanese) By Naoto Kunitomo; Makoto Takaoka
  64. Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from Two Financial Service Organizations in Vermont By Jessica Holmes; Jonathan Isham; Ryan Petersen; Paul Sommers
  65. Business Models and Stock Exchange Performance - Empirical Evidence By Baris Serifsoy
  66. Realized Beta: Persistence and Predictability By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Jin Wu
  67. Calibrage économétrique de processus stochastiques avec applications aux données boursières, bancaires et cambiales canadiennes By Francois-Éric Racicot; Raymond Théoret
  68. Financial Instability and Life Insurance Demand By Mahito Okura; Norihiro Kasuga
  69. Risk Management for the Poor and Vulnerable By Ari A. Perdana
  70. Understanding Why Universal Service Obligations May Be Unnecessary: The Private Development of Local Internet Access Markets By Tom Downes; Shane Greenstein

  1. By: Alexander K. Koch (Royal Holloway, University of London and IZA Bonn); Albrecht Morgenstern (Federal Ministry of Finance and IZA Bonn)
    Abstract: Free riding in team production arises because individual effort is not perfectly observable. It seems natural to suppose that greater transparency would enhance incentives. Therefore, it is puzzling that team production often lacks transparency about individual contributions despite negligible costs for providing such information. We offer a rationale for this by demonstrating that transparency can actually hurt incentives. In the presence of career concerns information on the quality of task execution improves incentives while sustaining a cooperative team spirit. In contrast, making the identity of individual contributors observable induces sabotage behavior that looks like jealousy but arises purely from signal jamming by less successful team members. Our results rationalize the conspicuous lack of transparency in team settings with strong career concerns (e.g., co-authorship, architecture, and patent applications) and contribute to explaining the popularity of group incentive schemes in firms.
    Keywords: teams, reputation, transparency, group incentives, sabotage
    JEL: D82 J30 L14
    Date: 2005–07
  2. By: Kris James Mitchener; Marc D. Weidenmier
    Abstract: Theoretical models have suggested that sanctions may be important for enforcing sovereign debt contracts (Bulow and Rogoff, 1989a, 1989b). This paper examines the role of sanctions in promoting debt repayment during the classical gold standard period. We analyze a wide range of sanctions including gunboat diplomacy, external fiscal control over a country's finances, asset seizures by private creditors, and trade sanctions. We find that "supersanctions," instances where military pressure or political control were applied in response to default, were an important and commonly used enforcement mechanism from 1870-1913. Following the implementation of supersanctions, on average, ex ante default probabilities on new debt issues fell by more than 60 percent, yield spreads declined approximately 800 basis points, and defaulting countries experienced almost a 100 percent reduction of time spent in default. We also find that debt defaulters that surrendered their fiscal sovereignty for an extended period of time were able to issue large amounts of new debt on international capital markets. Consistent with policies advocated by Caballero and Dornbusch (2002) for Argentina, our results suggest that third-party enforcement mechanisms, with the authority to enact financial and fiscal reforms, may be beneficial for resuscitating the capital market reputation of sovereign defaulters.
    JEL: F10 F34 G15 N10 N20 N40
    Date: 2005–07
  3. By: Francis X. Diebold (University of Pennsylvania, and NBER); Canlin Li (University of California)
    Abstract: Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield curve. In this paper we do so. We use neither the no-arbitrage approach, which focuses on accurately fitting the cross section of interest rates at any given time but neglects time-series dynamics, nor the equilibrium approach, which focuses on time-series dynamics (primarily those of the instantaneous rate) but pays comparatively little attention to fitting the entire cross section at any given time and has been shown to forecast poorly. Instead, we use variations on the Nelson-Siegel exponential components framework to model the entire yield curve, period-by-period, as a three-dimensional parameter evolving dynamically. We show that the three time-varying parameters may be interpreted as factors corresponding to level, slope and curvature, and that they may be estimated with high efficiency. We propose and estimate autoregressive models for the factors, and we show that our models are consistent with a variety of stylized facts regarding the yield curve. We use our models to produce term-structure forecasts at both short and long horizons, with encouraging results. In particular, our forecasts appear much more accurate at long horizons than various standard benchmark forecasts.
    Keywords: Term structure, yield curve, factor model, Nelson-Siegel curve
    JEL: G1 E4 C5
    Date: 2004–01–09
  4. By: Anthony Ho (Department of Economics, Shanghai University)
    Abstract: Since World War II, international investment agreements experienced a rapid development. However, some differences exist greatly in different agreements in the following aspects: Definition of Investment, FDI Entry and Treatment, Nationalization and Expropriations, Investment Dispute Settlement, Performance Requirements, Incentive Measures, Technology Transfer, and Competition Policies. All eight areas reviewed here are key sensitive issues that arise in the interface between national and international rule-making. When entering to international investment agreements, governments should take into consideration its development level and needs to opt provisions beneficial to it.
    Keywords: International Investment Agreements, Issues in Negotiation, Provision Options
    JEL: F1 F2
    Date: 2004–07
  5. By: Joreg Bibow (The Levy Economics Institute)
    Abstract: Challenging the conventional wisdom that structural problems are to blame for the euro area’s protracted domestic demand stagnation, this paper sets out to shed some fresh light on the role of the ECB in the ongoing EMU crisis. Contrary to the widely held interpretation of the ECB as an inflation targeter—and a rather soft one, too—it is argued that the key characteristic of the ECB is the pronounced asymmetry in its policy approach and mindset. Curiously, this asymmetry has not only given rise to an antigrowth bias, but to upward price pressures and distortions as well. There is a link between stagnation and inflation persistence that owes to the ECB’s failure to internalize the euro area’s fiscal regime. This raises the question as to whether inflation targeting would have led to better results, or could do so in future.
    Keywords: Monetary policy, European Central Bank, inflation targeting, inflation persistence, tax-push inflation, antigrowth bias.
    JEL: E31 E42 E58 E61
    Date: 2005–07–15
  6. By: John Christensen (Tax Justice Network); Mark Hampton (University of Kent)
    Abstract: Many islands host tourism and offshore finance but research tends to focus on either industry without examining the nature of the relationship(s) between these two where they co-exist. This paper examines the nature of the relationships using a case study of the British Channel Island of Jersey. Both industries demand labour, land and capital that are frequently scarce in small islands. Given their common characteristics and, drawing lessons from Jersey, the paper then considers the nature and the dynamics of their relationship, and the issue of resource competition between the two sectors. In light of the unusual context of small polities and the political power of external actors, the paper also analyses the dynamics of the central relationship between tourism, offshore finance and the state in islands. Finally, the paper considers the overall impact of the relationship between tourism and offshore finance and how it affects the economic development trajectory of small islands.
    Keywords: tax havens, island tourism, island development
    JEL: F N O
    Date: 2005–07–11
  7. By: Luis Fernando Melo Velandia; Oscar reinaldo Becerra Camargo
    Abstract: En este documento se describen en detalle diversas metodologías que permiten calcular dos medidas utilizadas para cuantificar el riesgo de mercado asociado a un activo financiero: el valor en riesgo, VaR y el Expected Shortfall, ES. Los métodos analizados se dividen en dos grupos. En el primer grupo, compuesto por las metodologías de normalidad, simulación histórica y teoría del valor extremo (EVT), no se modelan las dependencias existentes en el primer y segundo momento condicional de la serie. En el segundo grupo, las metodologías ARMA-GARCH y ARMA-GARCH-EVT modelan los dos tipos de dependencias, mientras RiskMetrics® modela solo la segunda. Estas metodologías son aplicadas a las variaciones diarias de la tasa interbancaria para el periodo comprendido entre el 16 de abril de 1995 y el 30 de diciembre de 2004. El desempeño o backtesting del VaR calculado para diferentes metodologías en los años 2003 y 2004 muestra que las mejores son aquellas que modelan la dependencia de la varianza condicional, tales como los modelos RiskMetrics®, ARMA-GARCH y ARMA-GARCH-EVT. Las técnicas con el peor desempeño son la de simulación histórica, la EVT sin modelar dependencia y la basada en el supuesto de normalidad.
    Keywords: Riesgo de Mercado, valor en riesgo,Expected shortfall, teoría del valor extremo, modelos GARCH, backtesting
    JEL: C32 C52 G10
  8. By: Luis Fernando Melo Velandia; Oscar Reinaldo Becerra Camargo
    Abstract: En este documento se describen en detalle diversas metodologías que permiten calcular dos medidas utilizadas para cuantificar el riesgo de mercado asociado a un activo financiero: el valor en riesgo, VaR y el Expected Shortfall, ES. Los métodos analizados se dividen en dos grupos. En el primer grupo, compuesto por las metodologías de normalidad, simulación histórica y teoría del valor extremo (EVT), no se modelan las dependencias existentes en el primer y segundo momento condicional de la serie. En el segundo grupo, las metodologías ARMA-GARCH y ARMA-GARCH-EVT modelan los dos tipos de dependencias, mientras RiskMetrics® modela solo la segunda. Estas metodologías son aplicadas a las variaciones diarias de la tasa interbancaria para el periodo comprendido entre el 16 de abril de 1995 y el 30 de diciembre de 2004. El desempeño o backtesting del VaR calculado para diferentes metodologías en los años 2003 y 2004 muestra que las mejores son aquellas que modelan la dependencia de la varianza condicional, tales como los modelos RiskMetrics®, ARMA-GARCH y ARMA-GARCH-EVT. Las técnicas con el peor desempeño son la de simulación histórica, la EVT sin modelar dependencia y la basada en el supuesto de normalidad.
    Keywords: Riesgo de Mercado,
    JEL: C32
    Date: 2005–06–30
  9. By: WILLIAM N. GOETZMANN (Yale School of Management, International Center for Finance); JEFFREY D. FISHER (Indiana University)
    Abstract: In this paper we simulate the performance of real estate portfolios using cash flows from commercial properties over the period 1977 Q4 through 2004 Q2. Our methodology differs from analyses that rely upon historical time-weighted rates of return on property. We relax implicit rebalancing and mark to market assumptions inherent in time-series analysis. We use the distribution of internal rates of return to analyze the performance distribution of commercial property investment. We examine the performance of real estate in the context of portfolios of stocks and bonds over the same period.
    Keywords: Asset Allocation, Real Estate
    JEL: G11 R33
    Date: 2005–07–15
  10. By: Sean D. Campbell (Brown University); Francis X. Diebold (University of Pennsylvania, and NBER)
    Abstract: We take a simple time-series approach to modeling and forecasting daily average temperature in U.S. cities, and we inquire systematically as to whether it may prove useful from the vantage point of participants in the weather derivatives market. The answer is, perhaps surprisingly, yes. Time-series modeling reveals conditional mean dynamics, and crucially, strong conditional variance dynamics, in daily average temperature, and it reveals sharp differences between the distribution of temperature and the distribution of temperature surprises. As we argue, it also holds promise for producing the long-horizon predictive densities crucial for pricing weather derivatives, so that additional inquiry into time-series weather forecasting methods will likely prove useful in weather derivatives contexts.
    Keywords: Risk management; hedging; insurance; seasonality; temperature; financial derivatives
    Date: 2004–01–10
  11. By: Eberhard Feess (Aachen University (RWTH), Dept. of Economics, Templergraben 64, D-52056 Aachen); Ulrich Hege (HEC School of Management, Department of Finance and Economics, F-78351 Jouy-en-Josas Cedex, France)
    Abstract: The Basel Committee plans to differentiate risk-adjusted capital requirements between banks regulated under the internal ratings based (IRB) approach and banks under the standard approach. We investigate the consequences for the lending capacity and the failure risk of banks in a model with endogenous interest rates. The optimal regulatory response depends on the banks’ inclination to increase their portfolio risk. If IRB-banks are well-capitalized or gain little from taking risks, then they will increase their market share and hold safe portfolios. As risk-taking incentives become more important, the optimal portfolio size of banks adopting intern rating systems will be increasingly constrained, and ultimately they may lose market share relative to banks using the standard approach. The regulator has only limited options to avoid the excessive adoption of internal rating systems.
    Keywords: Basel II Accord, risk-based capital, internal ratings based approach, bank capital, bank competition, risk-taking
    JEL: K13 H41
    Date: 2004–01–25
  12. By: Richard T. Baillie (Queen Mary, University of London); Rehim Kilic (Georgia Institute of Technology)
    Abstract: The forward premium anomaly refers to the situation where the slope coefficient in a regression of spot returns on the lagged interest rate differential is negative and significantly different to unity. This paper explores some of the asymmetries and non linearities present in the anomaly and the apparent rejection of Uncovered Interest Parity (UIP). The methodology is motivated by some recent economic theory literature on transactions costs, the limits to speculation and hysteresis. The paper estimates Logistic Smooth Transition Dynamic Regression (LSTR) models with the transition variable being the lagged forward premium for a range of currencies. An inner regime with foreign interest rates exceeding US rates is found to be consistent with the anomaly. While a third and outer regime with US interest rates exceeding foreign rates indicates convergence towards UIP. Detailed Monte Carlo experiments support the finding that an LSTR data generating process can indeed induce the forward premium anomaly. While the methodology appears promising in terms of uncovering important non linear and asymmetric behavior in the relationship, it should be noted that parameter estimation uncertainty indicates quite wide confidence intervals on the estimated transition functions. Hence, the accurate prediction of states, or regimes where UIP has a high probability of holding, is quite hard.
    Keywords: Forward premium anomaly, Uncovered Interest Parity, Non-linearity, LSTR models.
    JEL: C22 F31 F41
    Date: 2005–07
  13. By: Manuel Ammann (University of St. Gallen); Axel Kind (University of St. Gallen); Christian Wilde (Johann Wolfgang Goethe University Frankfurt)
    Abstract: We propose and empirically study a pricing model for convertible bonds based on Monte Carlo simulation. The method uses parametric representations of the early exercise decisions and consists of two stages. Pricing convertible bonds with the proposed Monte Carlo approach allows us to better capture both the dynamics of the underlying state variables and the rich set of real-world convertible bond specifications. Furthermore, using the simulation model proposed, we present an empirical pricing study of the US market, using 32 convertible bonds and 69 months of daily market prices. Our results do not confirm the evidence of previous studies that market prices of convertible bonds are on average lower than prices generated by a theoretical model. Similarly, our study is not supportive of a strong positive relationship between moneyness and mean pricing error, as argued in the literature.
    Keywords: Convertible bonds, Pricing, American Options, Monte Carlo simulation
    JEL: G13 G14
    Date: 2005–07–16
  14. By: Yonghyup Oh (Korea Institute for Internation Economic Policy)
    Abstract: This paper tests the validity of gravity variables to explain the degree of international consumption risk sharing. Our data show that consumption and output cycles for selected economies in the EU, NAFTA, East Asia and English-speaking countries have synchronized during the four decades since 1950s, but the lack of consumption risk sharing is evident. For the panel of 27 countries our results first show that the gravity variables such as distance, economic size, richness, sharing the same border and sharing the same language are valid in explaining consumption correlations, but among these variables sharing the same border is not significant in explaining correlation. Only richness, sharing the same border and sharing the same language turn out to be significant in explaining consumption risk sharing. When used for each of the four economic blocks in our sample, gravity variables have even less explanatory power with one notable exception that richness matters for the English speaking countries. Richer English speaking countries seem to share consumption risk better than any other group in our sample.
    Keywords: Capital market imperfection, consumption risk sharing, gravity model, real business cycle
    JEL: E32 F36 G15
    Date: 2004–11
  15. By: Peter F. Christoffersen (McGill University and CIRANO); Francis X. Diebold (University of Pennsylvania and NBER)
    Abstract: We consider three sets of phenomena that feature prominently – and separately – in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that: (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis.
    Date: 2004–01–08
  16. By: Lenno Uusküla (Bank of Estonia); Peeter Luikmel (Bank of Estonia); Jana Kask
    Abstract: High credit growth in Central and Eastern European countries (CEEC) over recent years has sparked interest among many market analysts. Although banking supervision has improved, the continuation of such growth may cause concern about the threat of financial crisis. This paper is written with the aim of analysing the importance of debt factors as a potential cause of financial crises. First, a comparison is conducted of various debt indicators from episodes of crisis in banking across European countries since the 1970s. Second, a probit analysis is used to measure the probability of a crisis. Based on this analysis, it can be claimed that any direct link between debt indicators and financial crises is weak. However, there is some evidence that once the crisis occurs, greater indebtedness lengthens the crisis and raises costs in terms of GDP.
    Keywords: financial crisis, indebtedness indicators
    JEL: C23 E44 F34 G20
  17. By: Anthony Ho (Department of Economics, Shanghai University)
    Abstract: National FDI policies play an important part in attracting FDI, which covering attracting FDI, gaining from FDI, and addressing TNCs. Recent years have seen great changes and developments in national FDI policies, and IIAs with respect to the form and amount as well. IIAs at different levels have their own advantages and disadvantages, therefore, when entering into IIAs, countries have to balance their own benefits and development needs with costs. To a great extend, IIAs supplement national FDI policies, making those of different countries tend to be the same. IIAs provide investors with a more transparent, more stable, more predictable, and safer environment, and an opener environment as well.
    Keywords: FDI Policies, International Investment, National Policies and International Agreements
    JEL: F1 F2
    Date: 2004–07
  18. By: Gabor Vadas (Magyar Nemzeti Bank)
    Abstract: A house is generally considered as a 'roof over one's head', however, housing can be regarded as an investment or asset. Our paper focuses on this function of dwellings and develops a stochastic portfolio choice model for the housing market, which is easy to incorporate into medium and large-scale macro models. Theoretical results suggest that house prices move in line with households' income, although house prices have a higher variance than income does. On the other hand the positive correlation between the return on housing investment and consumption not only implies positive relationship between the portfolio share of housing investment and excess return but also renders the housing wealth inappropriate in consumption smoothing. We use UK data to test these theoretical implications of the model. In this case, empirical results strengthen the model framework.
    Keywords: households’ behaviour, housing investment, saving, portfolio decision, house price
    JEL: E
    Date: 2005–07–13
  19. By: Sydney C. Ludvigson; Serena Ng
    Abstract: A key criticism of the existing empirical literature on the risk-return relation relates to the relatively small amount of conditioning information used to model the conditional mean and conditional volatility of excess stock market returns. To the extent that financial market participants have information not reflected in the chosen conditioning variables, measures of conditional mean and conditional volatility--and ultimately the risk-return relation itself--will be misspecified and possibly highly misleading. We consider one remedy to these problems using the methodology of dynamic factor analysis for large datasets, whereby a large amount of economic information can be summarized by a few estimated factors. We find that three new factors, a "volatility," "risk premium," and "real" factor, contain important information about one-quarter ahead excess returns and volatility that is not contained in commonly used predictor variables. Moreover, the factor-augmented specifications we examine predict an unusual 16-20 percent of the one-quarter ahead variation in excess stock market returns, and exhibit remarkably stable and strongly statistically significant out-of-sample forecasting power. Finally, in contrast to several pre-existing studies that rely on a small number of conditioning variables, we find a positive conditional correlation between risk and return that is strongly statistically significant, whereas the unconditional correlation is weakly negative and statistically insignificant.
    JEL: G12 G10
    Date: 2005–07
  20. By: Andreas Jobst (Federal Deposit Insurance Corporation (FDIC), Center for Financial Research (CFR), 550 17th Street NW, Washington, DC 20429, USA; London School of Economics and Political Science (LSE), Dept. of Finance and Accounting and Financial Markets Group (FMG); J.W. Goethe-Universität Frankfurt am Main, Dept. of Finance)
    Abstract: The paper provides a comprehensive overview of the gradual evolution of the supervisory policy adopted by the Basle Committee for the regulatory treatment of asset securitisation. We carefully highlight the pathology of the new “securitisation framework” to facilitate a general understanding of what constitutes the current state of computing adequate capital requirements for securitised credit exposures. Although we incorporate a simplified sensitivity analysis of the varying levels of capital charges depending on the security design of asset securitisation transactions, we do not engage in a profound analysis of the benefits and drawbacks implicated in the new securitisation framework.
    Keywords: Banking Regulation, Asset Securitisation, Basle Committee, Basle 2
    JEL: E58 G21 G24 K23 L51
    Date: 2004–01–21
  21. By: Patric H. Hendershott; Gwilym Pryce
    Abstract: Mortgage interest tax deductibility is needed to treat debt and equity financing of homes equally. Countries that limit deductibility create a debt tax penalty that presumably leads households to shift from debt toward equity financing. The greater the shift, the less is the tax revenue raised by the limitation and smaller is its negative impact on housing demand. Measuring the financing response to a legislative change is complicated by the fact that lenders restrict mortgage debt to the value of the house (or slightly less) being financed. Taking this restriction into account reduces the estimated financing response by 20 percent (a 32 percent decline in debt vs a 40 percent decline). The estimation is based on 86,000 newly originated UK loans from the late 1990s.
    JEL: H2 H3
    Date: 2005–07
  22. By: Janek Uiboupin
    Abstract: This paper analyses the short-term impact of foreign bank entry on bank performance in ten Central and Eastern European countries. A panel of 319 banks was analysed over the period 1995–2001. The Arellano-Bond dynamic panel estimation technique was used. The results indicate that foreign bank entry is associated with lower beforetax profits, non-interest income, interest income on interest earning assets and loan loss provisions. Foreign bank entry tends to increase the overhead costs of local banks in the short-run. The results generally indicate that foreign bank entry enhances competition on the market. The role the development of the banking sector plays in regard to the effects of foreign bank entry was analysed. Research results show that in more developed banking markets, foreign bank entry is associated less with decreasing incomes and loan loss provisions than in less developed banking markets. In more developed markets, the overhead costs of banks are less likely to increase. The results show that banks with a higher market share react less to foreign banks entering the market.
    Keywords: foreign bank entry, financial development, domestic banking
    JEL: E44 G21
  23. By: Daniel Schmidt (CEPRES Center of Private Equity Research, VCM Venture Capital Management GmbH)
    Abstract: In this article, we investigate risk return characteristics and diversification benefits when private equity is used as a portfolio component. We use a unique dataset describing 642 US-American portfolio companies with 3620 private equity investments. Information about precisely dated cash flows at the company level enables for the first time a cash flow equivalent and simultaneous investment simulation in stocks, as well as the construction of stock portfolios for benchmarking purposes. With respect to the methodology involved, we construct private equity, stock-benchmark and mixed-asset portfolios using bootstrap simulations. For the late 1990s we find a dramatic increase in the extent to which private equity outperforms stock investment. In earlier years private equity was underperforming its stock benchmarks. Within the overall class of private equity, returns on earlier private equity investment categories, like venture capital, show on average higher variations and even higher rates of failure. It is in this category in particular that high average portfolio returns are generated solely by the ability to select a few extremely well performing companies, thus compensating for lost investments. There is a high marginal diversifiable risk reduction of about 80% when the portfolio size is increased to include 15 investments. When the portfolio size is increased from 15 to 200 there are few marginal risk diversification effects on the one hand, but a large increase in managing expenditure on the other, so that an actual average portfolio size between 20 and 28 investments seems to be well balanced. We provide empirical evidence that the non-diversifiable risk that a constrained investor, who is exclusively investing in private equity, has to hold exceeds that of constrained stock investors and also the market risk. From the viewpoint of unconstrained investors with complete investment freedom, risk can be optimally reduced by constructing mixed asset portfolios. According to the various private equity subcategories analyzed, there are big differences in optimal allocations to this asset class for minimizing mixed-asset portfolio variance or maximizing performance ratios. We observe optimal portfolio weightings to be between 3% and 65%.
    Keywords: Venture Capital, Private Equity, Performance, Return, Risk, Portfolio, Fund, Diversification, Efficient Frontier, Allocation
    JEL: G11
    Date: 2004–01–12
  24. By: Genevieve Verdier (Texas A&M University)
    Abstract: Can factor accumulation still help us understand differences in capital inflows and income across countries? This paper offers a quantitative evaluation of neoclassical models of growth with collateral constraints. Previous work has found evidence that supports the qualitative predictions of this class of models for the direction of capital flows - -- they are driven by domestic scarcity --- and the role of domestic savings --- they act as complements rather than substitutes to capital inflows. In this paper, I estimate the factor shares implied by the long-term dynamics of external debt observed in the data. I find that a model with constant-elasticity-of substitution technology and a collateral constraint can generate plausible capital shares and cross- country distributions of debt-to-GDP ratios. This suggests that capital accumulation may play a more important role than suggested by the recent literature on growth, even in a world with limited financial integration.
    Keywords: Credit constraints, net external debt, capital flows, savings, convergence, capital shares.
    JEL: F41 F43 O41 C63
    Date: 2005–07–14
  25. By: Hadi Soesastro (Centre for Strategic and International Studies)
    Abstract: Progress and realisation of the ASEAN Economic Community (AEC) can only be achieved if there is a clear blueprint, which identifies the end goal, the process to reach the end goal and a framework for proper assessment of the costs and benefits of an ASEAN Economic Community. AEC should not be based on the AFTA in which an agreement was reached first and the details negotiated afterwards earning it the nickname of "Agree First Talk After". A "new ASEAN way" will have to be developed and accepted as the rule of the game before the AEC has any serious chance of fulfilling the role of making ASEAN more competitive and attractive for world business.
    Keywords: ASEAN Economic Community (AEC), regional integration, economic cooperation
    JEL: E61 F33 F41
    Date: 2005–03
  26. By: René Lalonde
    Abstract: The linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities. The author complements existing research by estimating a small forward-looking model of the U.S. economy with endogenous central bank credibility. His work differs from the existing literature in several ways. First, he endogenizes and estimates credibility parameters, allowing inflation expectations to be a mix of backward- and forward-looking agents. Second, his models include both outcome- and action-based credibility. Third, he estimates a non-linear relation between policy credibility and divergences of inflation from target, which is also assumed to change over history. Finally, the author's non-linear time-varying credibility indexes do not rely on a two-regime definition, but on a continuum of credibility regimes. The author finds strong, stable, and statistically significant outcome- and action-credibility effects that generate important inflation inertia. According to his results, the value of the endogenous credibility indexes has risen steadily across the different monetary policy regimes.
    Keywords: Transmission of monetary policy; Econometric and statistical methods; Inflation and prices
    JEL: E52 C32
    Date: 2005
  27. By: Shubhasis Dey
    Abstract: The author models the choice between credit cards and home equity lines of credit (HELOCs) within a framework where consumers hold lines of credit as instruments of consumption smoothing across state and time. Flexible repayment schemes for lines of credit induce risk-averse consumers with sufficiently high discount rates to underinsure and hold lines of credit instead as a buffer, even when they have access to full and fair insurance markets. Weighing the fixed upfront fees and higher default costs of HELOCs against the advantages of low and income-tax-deductible interest payments, the author finds a threshold level of potential borrowing belowwhich consumers prefer to use credit cards exclusively. Above that threshold, consumers decide touse HELOCs and consolidate all outstanding credit card debt into them; however, a rising probability of default and the resulting loss of equity in the home will put an upper bound on the potential HELOC borrowing that will prevent full debt consolidation.
    Keywords: Credit and credit aggregates
    JEL: D1 D81
    Date: 2005
  28. By: Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104); Monika Piazzesi (Graduate School of Business, University of Chicago, Chicago IL 60637); Glenn D. Rudebusch (Economic Research, Federal Reserve Bank of San Francisco, 101 Market Street, San Francisco CA 94105)
    Abstract: From a macroeconomic perspective, the short-term interest rate is a policy instrument under the direct control of the central bank. From a finance perspective, long rates are risk-adjusted averages of expected future short rates. Thus, as illustrated by much recent research, a joint macro-finance modeling strategy will provide the most comprehensive understanding of the term structure of interest rates. We discuss various questions that arise in this research, and we also present a new examination of the relationship between two prominent dynamic, latent factor models in this literature: the Nelson-Siegel and affine no-arbitrage term structure models.
    Keywords: Term structure, yield curve, Nelson-Siegel model, affine equilibrium model
    JEL: G1 E4 E5
    Date: 2005–01–03
  29. By: Alejandro Garcia (Department of Monetary and Financial Analysis, Bank of Canada); Christian Calmès (Département des sciences administratives, Université du Québec en Outaouais and LRSP)
    Abstract: This paper studies the changes in the portfolio allocation of Canadian banks resulting from macroeconomic uncertainty. Statistical evidence suggest that banks reduce the composition of loans as a percentage of their total assets when macroeconomic uncertainty increases. This behaviour has been previously studied for the U.S by Baum et al. (2002). In their paper, the authors find that the cross-sectional variance of banks allocation of loans with respect to other assets (loan-to-asset-ratio) decreases during episodes of greater macroeconomic uncertainty. According to this result, banks allocate their portfolio in an homogenous manner where there is greater uncertainty, and chose more heterogeneous allocations under normal economic conditions. The contribution of this paper is to confirm their findings in the context of Canadian banking. Based on the conditional variance of monthly industrial production, we find that Canadian banks displays a herding behaviour when uncertainty is more pronounced.
    Keywords: Banks portfolio, Macroeconomic uncertainty, herding
    JEL: G11 C22
    Date: 2005–03–09
  30. By: Gianfranco Atzeni (University of Sassari); Claudio Piga (Dept of Economics univ. of Loughborough)
    Abstract: We study whether R&D-intensive firms are liquidity-constrained, by also modeling their antecedent decision to apply for credit. This sample selection issue is relevant when studying a borrower-lender relationship, as the same factors can influence the decisions of both parties. We find firms with no or low R&D intensity to be less likely to request extra funds. When they do, we observe a higher probability of being denied credit. Such a relationship is not supported by evidence from the R&D-intensive firms. Thus, our findings lend support to the notion of credit constraints being severe only for a sub-sample of innovative firms. Furthermore, the results suggest that the way in which the R&D activity is organized may differentially affect a firms’ probability of being credit-constrained.
    Keywords: Bivariate Probit; Innovation; selectivity; in-house R&D.
    JEL: D45 G21 G32 E51
    Date: 2005–06
  31. By: Michael W. Brandt (Department of Finance, University of Pennsylvania, and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER)
    Abstract: We extend the important idea of range-based volatility estimation to the multivariate case. In particular, we propose a range-based covariance estimator that is motivated by financial economic considerations (the absence of arbitrage), in addition to statistical considerations. We show that, unlike other univariate and multivariate volatility estimators, the range-based estimator is highly efficient yet robust to market microstructure noise arising from bid-ask bounce and asynchronous trading. Finally, we provide an empirical example illustrating the value of the high-frequency sample path information contained in the range-based estimates in a multivariate GARCH framework.
    Keywords: Range-based estimation, volatility, covariance, correlation, absence of arbitrage, exchange rates, stock returns, bond returns, bid-ask bounce, asynchronous trading
    Date: 2004–01–07
  32. By: Mauricio Avella Gómez
    Abstract: The hypothesis that the internal public debt has played the role of shock absorber in Colombia since 1923 is modelled. 1923 was an important landmark in the history of fiscal and monetary reforms in Colombia during the twentieth century. The econometric results offer a strong support for the hypothesized shock-absorber role of the internal debt.
    Keywords: Deficit, surplus, Debt, Latin America
    JEL: H62 H63 N16
  33. By: Elena Carletti (Center for Financial Studies, Taunusanlage 6, D-60329 Frankfurt, Germany); Vittoria Cerasi (Università degli Studi di Milano Bicocca, Statistics Department, Via Bicocca degli Arcimboldi 8, 20126 Milano, Italy); Sonja Daltung (Sveriges Riksbank, Research Department, 103 37 Stockholm, Sweden)
    Abstract: This paper analyzes banks’ choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication.
    Keywords: individual-bank lending, multiple-bank lending, monitoring, diversification, free-riding problem
    JEL: D82 G21 G32
    Date: 2004–01–18
  34. By: Ladislav Wintr; Paolo Guarda; Abdelaziz Rouabah
    Abstract: Le taux d?intérêt naturel est le taux d?intérêt réel compatible à la fois avec l?absence d?écart de production (le PIB est à son niveau potentiel) et avec la stabilité des prix. Cette étude fournit des estimations du taux d?intérêt naturel pour la zone euro et pour le Luxembourg. Théoriquement, le taux d?intérêt naturel est susceptible de servir de référence pour la politique monétaire. Quand le taux d?intérêt réel est plus élevé que le taux d?intérêt naturel, la politique monétaire est restrictive. A l?opposé, la politique monétaire est expansive quand le taux d?intérêt réel est inférieur au taux d?intérêt naturel. Ainsi, la banque centrale pourrait fixer le taux d?intérêt nominal de manière à faire évoluer les taux d?intérêt réels à court terme vers un niveau inférieur ou supérieur au taux d?intérêt naturel selon la nature des chocs déstabilisateurs. En pratique, le taux d?intérêt naturel est estimé avec un degré d?incertitude important et il est sujet à de multiples révisions dues à la publication de nouvelles données. Ces limitations réduisent l?utilité du taux d?intérêt naturel dans la conduite de la politique monétaire. Cependant, le taux d?intérêt naturel peut fournir une indication sur l?orientation de la politique monétaire relative aux périodes antérieures. De plus, le taux d?intérêt naturel estimé pour un pays à l?intérieur de la zone euro peut fournir des renseignements sur l?impact de la politique monétaire commune sur l?économie nationale en question. Dans notre contribution, l?estimation du niveau du taux d?intérêt naturel pour la zone euro et pour le Luxembourg est basée sur l?approche semi-structurelle proposée par Laubach et Williams (2003). Cette approche s?appuie sur un petit modèle macroéconomique combinant une équation d?offre agrégée (courbe de Phillips) et une équation de demande agrégée (courbe IS). Le filtre de Kalman sert à estimer les variables inobservables, tels que le taux d?intérêt naturel, l?écart de production, et la croissance potentielle, en tenant compte de l?évolution des variables observées, en l?occurrence la production, l?inflation, et le taux d?intérêt réel. Ainsi, le taux d?intérêt naturel et la croissance potentielle sont estimés de manière simultanée. Pour la zone euro, les résultants suggèrent une certaine stabilité du taux d?intérêt naturel depuis 1970 et confirment qu?il a baissé au cours de la dernière décennie. Pour le Luxembourg, le taux d?intérêt naturel estimé est beaucoup plus élevé, signe d?une croissance potentielle plus importante. Les résultats laissent présager que la politique monétaire commune a eu un impact expansif sur les périodes récentes, particulièrement au Luxembourg.
    Date: 2005–06
  35. By: Federico Agustín Alcalde Bessia (Facultad de Ciencias Económicas de la Universidad de Buenos Aires); María Teresa Casparri (Facultad de Ciencias Económicas de la Universidad de Buenos Aires)
    Abstract: Históricamente, la teoría en valores extremos se remonta a los comienzos de 1709 cuando Nicolás Bernoulli planteó el problema de la distancia media máxima desde el origen de “n” puntos distribuidos aleatoriamente en un línea recta de distancia fija t. Mientras que Fréchet en 1927 identificó una distribución límite posible para valores máximos, Fisher y Tippett en 1928 demostraron que las distribuciones de valores extremos pueden ser sólo de tres tipos. Pero recién en 1943, Gnedenko, da los fundamentos rigurosos para esta teoría y presenta las condiciones necesarias y suficientes para la convergencia débil. En 1958, Gumbel fue el primero en llamar la atención sobre las posibles aplicaciones de la teoría formal de los valores extremos para algunas distribuciones. El primer problema que se trató tiene que ver con fenómenos meteorológicos. Esto ocurrió en 1941. En la actualidad, el marco de aplicación de la teoría de valores extremos es extenso. En particular, en el campo que nos interesa, economía, finanzas y seguros tiene su auge a fines de la década del noventa. En el presente trabajo, a partir del caso univariado de la Teoría de los Valores Extremos, se llega al bivariado presentando, luego, una aplicación a modo de ejemplo.
    Keywords: Extreme Value Theory, Biavariate Extreme Distributions, Univariate Extreme Distributions, Asses Risk, Multivariate Pareto Distribution
    Date: 2005–07–12
  36. By: Mauricio Avella Gómez
    Abstract: The hypothesis that the internal public debt has played the role of shock absorber in Colombia since 1923 is modelled. 1923 was an important landmark in the history of fiscal and monetary reforms in Colombia during the twentieth century. The econometric results offer a strong support for the hypothesized shock-absorber role of the internal debt.
    Keywords: Deficit, Surplus
    JEL: H62
    Date: 2005–06–30
  37. By: Günter Franke (Center for Finance and Econometrics at the University of Konstanz, and CFS Center for Financial Studies, Frankfurt); Jan Pieter Krahnen (Goethe-University Frankfurt and CFS Center for Financial Studies, Frankfurt, and CEPR. Correspondence: CFS, Taunusanlage 6, D-60329 Frankfurt(Main))
    Abstract: This paper contributes to the economics of financial institutions risk management by exploring how loan securitization a.ects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the expected default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to to expand its loan business, thereby incurring more systematic risk. We find an increase of the banks’ betas, but no significant stock price e.ect around the announcement of a CDO issue. Our results suggest a role for supervisory requirements in stabilizing the financial system, related to transparency of tranche allocation, and to regulatory treatment of senior tranches.
    JEL: D82 G21 D74
    Date: 2005–01–06
  38. By: Markus Haas (University of Munich); Stefan Mittnik (University of Munich); Bruce Mizrach (Rutgers University)
    Abstract: Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulatedmoments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers.
    Keywords: Options; Implied Probability Densities; GARCH; Fat-tails; Exchange Rate Mechanism
    JEL: G12 G14 F31
    Date: 2005–01–09
  39. By: Niloy Bose; Rebecca Neumann
    Abstract: In an overlapping generations economy, lenders fund risky investment projects of firms by drawing up loan contracts in the presence of an informational asymmetry. An optimal contract entails the issue of only debt, only equity, or a mix of the two. The equilibrium choice of contract depends on the state of the economy, which in turn depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development. The paper is able to explain both the endogenous emergence of the stock market along the path of economic development and the diversity in the mode of financing that is commonly observed in the intermediate stage of development.
    JEL: E13 E44 E50 O16
    Date: 2005–07–11
  40. By: William N. Goetzmann (Yale School of Management - International Center for Finance); Ravi Dhar (International Center for Finance at Yale School of Management)
    Abstract: In this paper we address the factors influencing the institutional decision to allocate resources to real estate. We survey a sample of major institutional investors via a web questionnaire. They were willing to answer questions about their target real estate allocation, their plans to increase or decrease their allocation, the major reasons for investing in real estate, and views on the major risks and relative expense of doing so. We find that the endowments in our sample typically had a relatively short history of real estate investment, but planned to increase their allocation to the asset class - more so than pension funds. We also find uncertainty about use of historical data to be a significant factor in the allocation choice.
    Keywords: Behavioral Finance, real estate, investing, risk, uncertainty
    JEL: R33 G0 G23
    Date: 2005–07–15
  41. By: Cesare Imbriani – Antonio Lopes (Università di Roma “La Sapienza” – Università di Foggia)
    Abstract: The article provides an analysis of some features of the Italian Credit System in the Nineties. In particular, it focuses on a comparison of Banks efficiency – in terms of costs, revenues and profits – in Northern and Southern Italy taking into account the dualistic structure, which characterizes the Italian economic system.
    Date: 2005–03
  42. By: Michael Greenstone; Paul Oyer; Annette Vissing-Jorgensen
    Abstract: The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). We find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. First, a firm-level event study reveals that OTC firms most impacted by the 1964 Amendments had abnormal excess returns of about 3.5 percent in the weeks immediately surrounding the announcement that they had begun to comply with the new requirements. Second, we estimate that the most affected OTC firms had abnormal excess returns ranging between 11.5 and 22.1 percent in the period between when the legislation was initially proposed and when it went it went into force, relative to unaffected listed firms and after adjustment for the standard four-factor model. While we cannot determine how much of shareholders' gains were a transfer from insiders of these same companies, our results suggest that mandatory disclosure causes managers to more narrowly focus on the maximization of shareholder value.
    JEL: G28 G38 K22 L51 M41 M49 N22
    Date: 2005–07
  43. By: Marco Arena
    Abstract: The author develops the first comparative empirical study of bank failures during the nineties between East Asia and Latin America using bank-level data, in order to address the following two questions: (i) To what extent did individual bank conditions explain bank failures? (ii) Did mainly the weakest banks, in terms of their fundamentals, fail in the crisis countries? The main results for East Asia and Latin America show that bank-level fundamentals not only significantly affect the likelihood of bank failure, but also account for a significant proportion of the likelihood of failure for failed banks. Systemic shocks (macroeconomic and liquidity shocks) that triggered the banking crises mainly destabilized the weakest banks ex ante, particularly in East Asia. This finding raises questions about regional asymmetries in the degree of banking sector resilience to systemic shocks.
    Keywords: Financial institutions
    JEL: G2 N2
    Date: 2005
  44. By: Lars Peter Hansen; John Heaton; Nan Li
    Abstract: We characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth. This tradeoff features components of financial cash flows that are only realized far into the future but are still reflected in current asset values. We use the recursive utility model with empirical inputs from vector autoregressions to quantify this relationship; and we study the long-run risk differences in aggregate securities and in portfolios constructed based on the ratio of book equity to market equity. Finally, we explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth.
    JEL: G1 E2
    Date: 2005–07
  45. By: Dirk Krueger (Goethe University Frankfurt, Mertonstr. 17, PF 81, 60054 Frankfurt); Harald Uhlig (Humboldt University, Wirtschaftswissenschaftliche Fakultät, Spandauer Str. 1, 10178 Berlin)
    Abstract: This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment e.ectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo. (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved.
    Keywords: Long-term Contracts, Risk Sharing, Limited Commitment, Competition
    JEL: G22 E21 D11 D91
    Date: 2005–01–07
  46. By: Fernando Rubio (FERNCAPITAL S.A.)
    Abstract: El caso analiza al inversor internacional George Soros y su entorno. Se pretende mostrar una serie de operaciones financieras que reflejen sus estrategias de inversión. Adicionalmente, se pretende que los alumnos asuman la figura del Administrador de un HEDGE FUND, especializado en inversiones internacionales y arbitraje financiero, de manera que resuelvan problemas relacionados con el ámbito del rol del director financiero, del análisis financiero, de las estrategias de inversión y la valuación de empresas.
    Keywords: George Soros, Quantum Fund, arbitraje financiero, estrategias de inversión, acciones, bonos, monedas.
    JEL: G10 G15 G21 G32
    Date: 2005–07–10
  47. By: Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Satoshi Koibuchi (University of Tokyo)
    Abstract: A bank failure can have various adverse consequences for the clients. The adverse impacts might, however, differ depending on who takes over the operation of the failed banks. In this paper, we show that how to manage the new banks is important in mitigating the short-run and long-run consequences of bank failures. In the analysis, we focus on clients of three large failed Japanese banks - Hokkaido Takushoku Bank, the Long-term Credit Bank of Japan (LTCB), and the Nippon Credit Bank. We examine when the number of bankruptcies increased and how the market valuation changed for the client firms after the banks' operations were taken over by new banks. As for the clients of LTCB, there were dramatic increases of bankruptcies in the short-run but the surviving clients showed significant recovery of their stock prices. In contrast, as for the clients of the other two banks, there was neither dramatic increase of bankruptcies nor significant recovery of their stock prices. The result implies that "shock therapy" or "soft budget constraints" had dramatically different consequences in solving bad loan problems in Japan.
    Date: 2005–07
  48. By: Zheng Liu; Evi Pappa
    Abstract: Do countries gain by coordinating their monetary policies if they have different economic structures? We address this issue in the context of a new open-economy macro model with a traded and a non-traded sector and more importantly, with a across-country asymmetry in the size of the traded sector. We study optimal monetary policy under independent and cooperating central banks, based on analytical expressions for welfare objectives derived from quadratic approximations to individual preferences. In the presence of asymmetric structures, a new source of gains from coordination emerges due to a terms-of-trade externality. This externality affects unfavorably the country that is more exposed to trade and its effects tend to be overlooked when national central banks act independently. The welfare gains from coordination are sizable and increase with the degree of asymmetry across countries and the degree of openness, and decrease with the within-country correlation of sectoral shocks.
  49. By: Torben G. Andersen (Department of Finance, Northwestern University and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania and NBER); Clara Vega (Department of Economics, University of Rochester)
    Abstract: We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.
    Keywords: Asset Pricing; Macroeconomic News Announcements; Financial Market Linkages; Market Microstructure; High-Frequency Data; Survey Data; Asset Return Volatility; Forecasting.
    JEL: F3 F4 G1 C5
    Date: 2004–01–19
  50. By: Lars Norden (Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany); Martin Weber (Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany and Centre for Economic Policy Research (CEPR), London, United Kingdom)
    Abstract: This paper analyzes the empirical relationship between credit default swap, bond and stock markets during the period 2000-2002. Focusing on the intertemporal comovement, we examine weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market.
    Keywords: Credit risk; Credit spreads; Credit derivatives; Lead-lag relationship
    JEL: G10 G14 C32
    Date: 2004–01–20
  51. By: Laura X.L. Liu; Jerold B. Warner; Lu Zhang
    Abstract: Previous work shows that the growth rate of industrial production is a common macroeconomic risk factor in the cross-section of expected returns. We demonstrate the connection between momentum profits and shifts in factor loadings on this macroeconomic variable. Winners have temporarily higher loadings on the growth rate of industrial production than losers. The loading dispersion derives mostly from the high, positive loadings of winners. Depending on model specification, this loading dispersion can explain up to 40% of momentum profits.
    JEL: G12 E44
    Date: 2005–07
  52. By: Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Peter F. Christoffersen (Faculty of Management, McGill University, Montreal, Quebec, H3A 1G5, and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER)
    Abstract: What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions – in particular, real-time risk tracking in very high-dimensional situations – impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.
    JEL: G10
    Date: 2005–01–02
  53. By: Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Peter F. Christoffersen (Faculty of Management, McGill University, Montreal, Quebec, H3A 1G5, and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER)
    Abstract: Volatility has been one of the most active and successful areas of research in time series econometrics and economic forecasting in recent decades. This chapter provides a selective survey of the most important theoretical developments and empirical insights to emerge from this burgeoning literature, with a distinct focus on forecasting applications. Volatility is inherently latent, and Section 1 begins with a brief intuitive account of various key volatility concepts. Section 2 then discusses a series of different economic situations in which volatility plays a crucial role, ranging from the use of volatility forecasts in portfolio allocation to density forecasting in risk management. Sections 3, 4 and 5 present a variety of alternative procedures for univariate volatility modeling and forecasting based on the GARCH, stochastic volatility and realized volatility paradigms, respectively. Section 6 extends the discussion to the multivariate problem of forecasting conditional covariances and correlations, and Section 7 discusses volatility forecast evaluation methods in both univariate and multivariate cases. Section 8 concludes briefly.
    JEL: C10 C53 G1
    Date: 2005–01–08
  54. By: M. Hashem Pesaran; Til Schuermann; Björn-Jakob Treutler
    Abstract: The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconomic model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogenous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.
    JEL: C32 E17 G20
    Date: 2005–07
  55. By: Chang-Soo Lee (Korea Institute for International Economic Policy)
    Abstract: This study examines the impact of strengthening employment protection legislation, the structure of collective bargaining (centralization and coordination) and the labor market variables (national levels of unionization, strike levels and tax wedges on labor income) on a country's FDI inflows. Examining 29 OECD nations, our statistical analysis shows that strict EPL, which increases labor market rigidity, is usually associated with lower levels of FDI shares. Japanese investors are more sensitive to employment protection measures in choosing destinations for FDI than others. A 1-percentage-point increase in EPL causes a decrease of about 4.2 percent to Japan’s FDI share, compared to the decrease of 2.2 percent that results in the worldwide share. Finally, we discuss the implications of the recent employment protection policies in Korea that focus only on the interests of inside labor, reducing FDI inflows as well as neglecting the interests of outside labor (unemployed and future labor). Thus, policies for spending on outside labor and promoting entrepreneurship are necessary for national welfare to increase.
    Keywords: Labor Market , FDI Inflows, entrepreneurship
    JEL: E24 J23 J31 J51
    Date: 2003–10
  56. By: Fan Wang (Stony Brook University, JP Morgan Chase & Co.)
    Abstract: Speculation in asset market is modelled as a stochastic betting game played by finite number of players and repeated infinite times. With stochastic asset return and unkown quality of public signal, a generic adaptive learning rule is proposed and the corresponding evolutionary dynamics is analyzed. The impact of historical events on players' belief decays over time. It is proved to be a robust approach to adapt to stochastic regime shifts in the market. The market dynamics has characteristics, i.e. endogenous boom-bust cycle, positive correlation in return and volume, and negative first order autocorrelation in return series, commonly observed in financial market but inexplicable by conventional rational expectations theory.
    Keywords: Evolutionary Dynamics, Adaptive Learning, Behavioral Finance
    JEL: C7 D8
    Date: 2005–07–12
  57. By: Anat Bracha; Jeremy Gray (Dept. of Psychology, Yale University); Rustam Ibragimov; Boaz Nadler (Dept. of Mathematics, Yale University); Dmitry Shapiro; Glena Ames (Cowles Foundation, Yale University); Donald J. Brown (Cowles Foundation, Yale University)
    Abstract: This paper proposes nonparametric statistical procedures for analyzing discrete choice models of affective decision making. We make two contributions to the literature on behavioral economics. Namely, we propose a procedure for eliciting the existence of a Nash equilibrium in an intrapersonal, potential game as well as randomized sign tests for dependent observations on game-theoretic models of affective decision making. This methodology is illustrated in the context of a hypothetical experiment -- the Casino Game.
    Keywords: Behavioral economics, Affective decision making, Intrapersonal potential games, Randomized sign tests, Dependent observations, Adapted sequences, Martingale-difference sequences
    JEL: C12 C32 C35 C72 C91 D11 D81
    Date: 2005–06
  58. By: Günter Coenen (Directorate General Research, European Central Bank); Volker Wieland (Professur für Geldtheorie und -politik, Johann-Wolfgang-Goethe Universität)
    Abstract: In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylized micro-founded two-country model to check our qualitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target path is not directly observable.
    Keywords: monetary policy rules, zero-interest-rate bound, liquidity trap, rational expectations, nominal rigidities, exchange rates
    JEL: E31 E52 E58 E61
    Date: 2004–01–14
  59. By: Yung Chul Park (Korea University); Wonho Song (Korea Institute for Internation Economic Policy); Yunjong Wang (Korea Institute for Internation Economic Policy)
    Abstract: Despite the increasing trend toward market-based finance systems, most East Asian countries still have bank-based systems. The purpose of this paper is to examine the extent to which bank-based financial development in East Asia has contributed to economic growth. To do this, a series of empirical analyses are conducted to gauge the effects of changes in the exogenous component of financial development on economic growth by using data on East Asian and Latin American countries for the 1960-97 period. Out empirical results show that the exogenous changes to financial development in East Asia have a strong, positive impact on growth rates. However, we find that there is weak evidence of a negative relationship between finance and growth for Latin American countries, a finding consistent with that of de Gregario and Guidotti (1995).
    Keywords: Economic development, East Asia, finance, financial develoment, GMM
    JEL: G10 G20 O12 O16
    Date: 2003–10
  60. By: Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER); Jin (Ginger) Wu (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104)
    Abstract: We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals.
    Keywords: Realized volatility, realized beta, conditional CAPM, business cycle
    JEL: G12
    Date: 2005–01–04
  61. By: Yung Chul Park (Korea University); Wonho Song (Korea Institute for Internation Economic Policy); Yunjong Wang (Korea Institute for Internation Economic Policy)
    Abstract: This paper focuses on the following two issues. First, the paper investigates the extent to which financial development has contributed to economic growth in Korea. For this purpose, we introduce four well-know financial development indicators, and seek to find a long-ruin relationship between output growth and financial development. Second, the effects of financial repression on economic growth are examined. A financial index is constructed based on five related measures, and this index is augmented to the growth-finance equation. For the robustness of the results, the model with per capita capital stock is also estimated.
    Keywords: Economic development, finance, financial development, financial repression, Korea
    JEL: G10 G20 O12 O16
    Date: 2005–08
  62. By: Heather Montgomery; Satoshi Shimizutani
    Abstract: This study examines the effectiveness of bank recapitalization policies in Japan. Based on a careful reading of the "business revitalization plan" submitted by banks requesting government funds, we identify four primary goals of the capital injection plan in Japan: 1) to increase the bank capital ratios 2) to increase lending, in particular to small and medium enterprises, and avoid a "credit crunch" 3) to increase write-offs of non-performing loans and 4) to encourage restructuring. Using a panel of individual bank data, we empirically estimate the effectiveness of the Japanese government policy of public fund injection in achieving the first three of these stated goals. Our empirical analysis of international and domestic banks reveals that the capital injections going to the larger international banks were more effective than those used toward regional banks in Japan. The first capital injection in 1997 was effective primarily in helping international banks to clear the 8% capital adequacy ratio (BIS ratio) required under the Basel Accord. The second round capital injections seem to have been even more effective, boosting capital adequacy ratios for the regional as well as international banks, and encouraging other policy objectives such as increased lending to small and medium enterprises.
    Date: 2005–06
  63. By: Naoto Kunitomo (Faculty of Economics, University of Tokyo); Makoto Takaoka (Research Center for Advanced Science and Technology, University of Tokyo)
    Abstract: In the recent X-12-ARIMA program developed by the United States Census Bureau for seasonal adjustments, the RegARIMA modeling has been extensively utilized. We shall discuss some problems in the RegARIMA modeling when the time series are realizations of non-stationary integrated stochastic processes with fixed regressors. We propose to use the seasonal switching autoregressive moving average (SSARMA) model and the regression SSARMA (RegSSARMA) model to cope with seasonality commonly observed in many economic time series. We investigate the basic properties of the SSAR (seasonal switching autoregressive) models. We argue that the phenomenon called "spurious seasonal unit roots" could be an explanation for a good fit of the seasonal ARIMA models to actual data. Some results of economic data analyses are reported.
    Date: 2005–07
  64. By: Jessica Holmes; Jonathan Isham; Ryan Petersen; Paul Sommers
    Abstract: We use actual loan applications submitted to a community development credit union (CDCU) and a traditional community bank to examine the role of relationship lending in the automobile loan market. We first show that the community bank relies upon credit scoring, not relationship lending; low-income households with poor credit histories are very unlikely to receive car loans from this traditional bank. We then show that relationship lending is a critical factor in the loan decision at the CDCU; low-income households with strong ties to the institution are likely to receive loans, despite poor credit histories. We conclude that as consolidation, deregulation and technology move mainstream financial institutions away from relationship lending and toward credit scoring, CDCUs will occupy an increasingly critical niche for low-income households.
    Date: 2005–07
  65. By: Baris Serifsoy
    Abstract: In recent years stock exchanges have been increasingly diversifying their operations into related business areas such as derivatives trading, post-trading services and software sales. This trend can be observed most notably among profit-oriented trading venues. While the pursuit for diversification is likely to be driven by the attractiveness of these investment opportunities, it is yet an open question whether certain integration activities are also efficient, both from a social welfare and from the exchanges' perspective. Academic contributions so far analyzed different business models primarily from the social welfare perspective, whereas there is only little literature considering their impact on the exchange itself. By employing a panel data set of 28 stock exchanges for the years 1999-2003 we seek to shed light on this topic by comparing the factor productivity of exchanges with different business models. Our findings suggest three conclusions: (1) Integration activity comes at the cost of increased operational complexity which in some cases outweigh the potential synergies between related activities and therefore leads to technical inefficiencies and lower productivity growth. (2) We find no evidence that vertical integration is more efficient and productive than other business models. This finding could contribute to the ongoing discussion about the merits of vertical integration from a social welfare perspective. (3) The existence of a strong in-house IT-competence seems to be beneficial to overcome
    JEL: F39 G32 C23 C24 C61
    Date: 2005–07
  66. By: Torben G. Andersen (Department of Finance, Kellogg School, Northwestern University, and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University, and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER); Jin Wu (Department of Economics, University of Pennsylvania)
    Abstract: A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management.
    Keywords: quadratic variation and covariation, realized volatility, asset pricing, CAPM, equity betas, long memory, nonlinear fractional cointegration, continuous-time methods.
    JEL: C1 G1
    Date: 2004–01–16
  67. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais)); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal))
    Abstract: In this paper, we show how to calibrate the most usual stochastic processes: arithmetic and geometric Brownian motions,, mean-reverting processes and jump processes. This paper contains also many applications to Canadian financial data. We observe, among other phenomena, that a mean-reverting process is very appropriate to estimate the return on assets of the six biggest Canadian banks. Finally, we estimate a monofactorial model of interest rate.
    Keywords: Stochastic processes, financial econometrics, banks, derivatives, financial engineering
    JEL: G11 C22
    Date: 2005–07–13
  68. By: Mahito Okura (Faculty of Economics, Nagasaki University); Norihiro Kasuga (Faculty of Economics, Nagasaki University)
    Abstract: This paper estimates private life insurance and Kampo demand functions using household-level data provided by the Postal Services Research Institute. The results show that income, children, pension and knowledge factors have a significant effect on the decision as to whether each household purchases life insurance products. The amount of income and financial assets also appear to have significant effect on the purchase of private life insurance and Kampo. However, pension and bankruptcy experience appear only to have an impact on Kampo, while aged (less than 40) and occupation (civil servant) factors affect only private life insurance. Dummy variables representing comparison, knowledge, and bankruptcy experience did not have any significant effect on decisions concerning private life insurance. Simultaneous estimations are also used to examine why households that already have one type of life insurance product (e.g. private life insurance) purchase the other type of life insurance product (e.g. Kampo). The results indicate that income, children, and bankruptcy experience variables are not significant factors when households with private life insurance product decide to purchase additional Kampo. The results also show that a knowledge dummy has a negative impact on additional purchases.
    Keywords: life insurance demand, financial instability, sample selection model
    Date: 2005–07–10
  69. By: Ari A. Perdana (Centre for Strategic and International Studies)
    Abstract: This paper reviews some literatures on the mechanisms available for the poor in managing risk. Lacking access to formal mechanisms of risk management, the poor rely on informal mechanisms, which are built based on the existing social networks and trust. But when the shocks are big or affecting the entire community, these informal mechanisms may not be adequate. Some policy interventions are then required to help improving the ability of poor people in managing risk. Policy intervention should aim to provide access for the poor on saving, credit and insurance. Microfinance schemes have been applauded as a successful ‘best practice’ in providing access to saving and credit. However, microfinance institutions still have some room for improvement by expanding their role in providing insurance schemes.
    Keywords: poverty, vulnerability, risk management, microfinance
    JEL: E21 E51 E52
    Date: 2005–05
  70. By: Tom Downes; Shane Greenstein
    Abstract: This study analyzes the geographic spread of commercial Internet Service Providers (ISPs), the leading suppliers of Internet access. The geographic spread of ISPs is a key consideration in U.S. policy for universal access. We examine the Fall of 1998, a time of minimal government subsidy, when inexpensive access was synonymous with a local telephone call to an ISP. Population size and location in a metropolitan statistical area were the single most important determinants of entry, but their effects on national, regional and local firms differed, especially on the margin. The thresholds for entry were remarkably low for local firms. Universal service in less densely-populated areas was largely a function of investment decisions by ISPs with local focus. There was little trace of the early imprint of government subsidies for Internet access at major U.S. universities.
    Keywords: Internet; Universal service; Geographic diffusion; Telecommunications
    JEL: D21 L29 L51 L86 L96
    Date: 2005

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