New Economics Papers
on Financial Markets
Issue of 2005‒09‒29
83 papers chosen by

  1. German Bank Lending During Financial Crises: A Bank Level Analysis By Heid, Frank; Nestmann, Thorsten; Von Westernhagen, Natalja; Weder, Beatrice
  2. Insider Trading in Creit Derivatives By Acharya, Viral V; Johnson, Tim
  3. An Infinite Period Model of Momentum Trading Agents with a Single Period Investment Horizon By Kirby Faciane
  4. Estimating Bank Trading Risk: A Factor Model Approach By James O'Brien; Jeremy Berkowitz
  5. Economic Growth with Bubbles By Jaume Ventura
  6. Banks, markets, and efficiency By Falko Fecht; Antoine Martin
  7. Determining Underlying Macroeconomic Fundamentals during Emerging Market Crises: Are Conditions as Bad as they Seem? By Mark Aguiar; Fernando Broner
  8. Financial Integration and Systemic Risk By Fecht, Falko; Grüner, Hans Peter
  9. International Equity Flows and Returns: A Quantitative Equilibrium Approach By Albuquerque, Rui; Bauer, Gregory; Schneider, Martin
  10. Time-varying Beta Risk of Pan-European Sectors: A Comparison of Alternative Modeling Techniques By Sascha Mergner
  11. Decomposing European bond and equity volatility By Christiansen, Charlotte
  12. Public-to-private transactions : LBOs, MBOs, MBIs and IBOs By Renneboog,Luc; Simons,Thomas
  13. Realized Volatility and Correlation in Grain Futures Markets: Testing for Spill-Over Effects By Jae H. Kim; Hristos Doucouliagos
  14. Noise-trading, Costly Arbitrage, and Asset Prices: Evidence from US Closed-end Funds By Flynn, Sean M.
  15. The Dot-Com Bubble, the Bush Deficits and the US Current Account By Jaume Ventura; Aart Kraay
  16. U.S. public and private venture capital markets, 1998-2001: A fundamental information analysis By Armstrong, Chris; Davila, Toni; Foster, George; Hand, John R.M.
  17. Bubbles and Capital Flow Volatility: Causes and Risk Management By Ricardo J. Caballero; Arvind Krishnamurthy
  18. The (Bad?) Timing of Mutual Fund Investors By Braverman, Oded; Kandel, Shmuel; Wohl, Avi
  19. Banking Consolidation and Small Business Lending:A Review of Recent Research By Charles Ou
  20. Risk overhang and loan portfolio decisions By Robert DeYoung; Anne Gron; Andrew Winton
  21. Monetary policy predictability in the euro area: An international comparison By Bjørn-Roger Wilhelmsen; Andrea Zaghini
  22. Financial Repression in a Natural Experiment: Loan Allocation and the Change in the Usury Laws in 1714 By Peter Tenim; Joachim Voth
  23. Pension Plan Funding and Stock Market Efficiency By Francesco Franzoni; José M. Marín
  24. Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence By Sean D. Campbell; Francis X. Diebold
  25. The Success Of Stock Selection Strategies In Emerging Markets: Is It Risk Or Behavioral Bias? By Hart, J. van der; Zwart, G. de; Dijk, D.J.C. van
  26. Idiosyncratic volatility, stock market volatility, and expected stock returns By Hui Guo; Robert Savickas
  27. Bubbles and Capital Flows By Jaume Ventura
  28. Danish Mutual Fund Performance - Selectivity, Market Timing and Persistence. By Christensen, Michael
  29. Bank Finance versus Bond Finance: What Explains the Differences Between the US and Europe? By De Fiore, Fiorella; Uhlig, Harald
  30. Russian International Corporate Investment in the Banking Sector By Kirby Faciane
  31. Real Equilibrium Exchange Rate Estimates: To What Extent Applicable for Setting the Central Parity? By Roman Hotvath
  32. Bond underwriting fees and keiretsu affiliation in Japan By Jong, A. de; Roosenboom, P.; Schramade, W.
  33. Mean-coherent risk and mean-variance approaches in portfolio selection : an empirical comparison By Polbennikov,Simon; Melenberg,Bertrand
  34. Regional Versus Global Integration of Euro Zone Retail Banking Markets: Understanding the Recent Evidence from Price-Based Integration Measures By Kleimeier,Stefanie; Sander,Harald
  35. Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns By Ekaterini Panopoulou; Koubouros, M.; Malliaropulos, D.
  36. Disability Risk and the Value of Disability Insurance By Amitabh Chandra; Andrew A. Samwick
  37. Globalization and Emerging Markets: With or Without Crash? By Martin, Philippe; Rey, Hélène
  38. International Conditional Asset Allocation under Real Time Uncertrainty By Laruent Barras
  39. Flexible Exchange Rates as Shock Absorbers By Sebastian Edwards; Eduardo Levy Yeyati
  40. Modeling Exchange Rate Passthrough After Large Devaluations By Burstein, Ariel Thomas; Eichenbaum, Martin; Rebelo, Sérgio
  41. Monitoring a Common Agent: Implications for Financial Contracting By Fahad Khalil; David Martimort; Bruno Maria Parigi
  42. From World Banker to World Venture Capitalist: US External Adjustment and The Exorbitant Privilege By Gourinchas, Pierre-Olivier; Rey, Hélène
  43. Basel II and Bank Lending to Emerging Markets: Micro Evidence from German Banks By Liebig, Thilo; Porath, Daniel; Weder, Beatrice; Wedow, Michael
  44. Credit Rationing and Crowding Out During the Industrial Revolution: Evidence from Hoare's Bank, 1702-1862 By Peter Tenim; Joachim Voth
  45. Efficient Rank Reduction of Correlation Matrices By Grubišić, I.; Pietersz, R.
  46. Financial Development, Financial Fragility, and Growth By Norman Loayza; Romain Rancière
  47. Interbank Comptetition with Costly Screening By Xavier Freixas; Sjaak Hurkens; Alan D. Morrison; Nir Vulkan
  48. Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets By Ingolf Schwarz; Jinhui H. Bai
  49. Banking Sector Strength and the Transmission of Currency Crises By Bruinshoofd,Allard; Candelon,Bertrand; Raabe,Katharina
  50. Evidences of Interdependence and Contagion using a Frequency Domain Framework By Bodart,Vincent; Candelon,Bertrand
  51. Risk Management with Benchmarking By Basak, Suleyman; Shapiro, Alex; Teplá, Lucie
  52. Why are Capital Flows so much more Volatile in Emerging than in Developed Countries? By Fernando Broner; Roberto Rigobon
  53. Bundling in Exchange Markets with Indivisible Goods By Dimitrov,Dinko; Haake,Claus-Jochen; Klaus,Bettina
  54. Capital Flows and Controls in Brazil: What Have We Learned? By Ilan Goldfajn; André Minella
  55. Banks in the security business: market-based risk implications of section 20 subsidiaries By Victoria Geyfman
  56. The Role of Regulatory Capital in International Bank Mergers and Acquisitions By Valkanov,Emil; Kleimeier,Stefanie
  57. Exchange-Rate Pass-Through to Import Prices in the Euro Area By José Manuel Campa; Linda S. Goldberg; José M. González-Mínguez
  58. Regulating Financial Conglomerates By Xavier Freixas; Gyöngyi Lóránth; Alan D. Morrison
  59. Near-Rational Exuberance By James Bullard; George W. Evans; Seppo Honkapohja
  60. When does ‘All Eggs in One Risky Basket’ Make Sense? By G. Boyle; D. Conniffe
  61. Resolving the puzzle of the underissuance of national bank notes By Charles W. Calomiris; Joseph R. Mason
  62. What determines banks’ market power? Akerlof versus Herfindahl By Moshe Kim; Eirik Gaard Kristiansen; Bent Vale
  63. Informed Lending and Security Design By Inderst, Roman; Müller, Holger M
  64. The impact of the 1988 Basel Accord on banks' capital ratios and credit risk-taking: an international study By Patrick Van Roy
  65. Systemic Crises and Growth By Romain Rancière; Aaron Tornell; Frank Westermann
  66. Why Do Emerging Economies Borrow Short Term? By Fernando Broner; Guido Lorenzoni; Sergio L. Schmukler
  67. Monetary policy and asset prices: To respond or not? By Gunnar Bårdsen; Q. Farooq Akram; Øyvind Eitrheim
  68. Wealth, Financial Intermediation and Growth By Alejandro Gaytan; Romain Rancière
  69. Long Term Debt with Hidden Borrowing By Heski Bar-Isaac; Vicente Cuñat
  70. Credit ratings and the standardised approach to credit risk in Basel II By Patrick Van Roy
  71. Latin American Central Bank Reform: Progress and Challenges By Agustin Carstens; Luis I. Jacome H.
  72. Sovereign Risk, Anonymous Markets, and the Effects of Globalization By Fernando Broner; Jaume Ventura
  73. Riding the South Sea Bubble By Peter Tenim; Joachim Voth
  74. The Speed of the Financial Revolution: Evidence from Hoare’s Bank By Peter Tenim; Joachim Voth
  75. Bank failures in mature economies By Westernhagen,N. van; Harada,E.; Nagata,T.; ...
  76. The equity premium puzzle and decreasing relative risk aversion By M. J. Roche
  77. The Exchange Rate Forecasting Puzzle By Francis Vitek
  78. The effectiveness of monetary policy By Robert H. Rasche; Marcela M. Williams
  79. Performance Measurement with Loss Aversion By Gemmill, Gordon T; Hwang, Soosung; Salmon, Mark
  80. Level Playing Fields in International Financial Regulation By Morrison, Alan; White, Lucy
  81. Financial De-Dollarization: Is It for Real? By Alain Ize; Eduardo Levy Yeyati
  82. Performance Evaluation of Mutual Funds, using Sharpe, Treynor and Jensen By Hewad Wolasmal
  83. Risk-Sharing Networks By Yann Bramoullé; Rachel Kranon

  1. By: Heid, Frank; Nestmann, Thorsten; Von Westernhagen, Natalja; Weder, Beatrice
    Abstract: This paper studies German bank lending during the Asian and Russian crises, using a bank level data set from the Deutsche Bundesbank. Our aim is to gain more insight into the pattern of German bank lending during financial crises in emerging markets. We find that German banks reacted to the Asian crisis mainly by reallocating their portfolios among emerging markets. By contrast, the banks' behaviour during the Russian crisis is characterised by a general withdrawal from emerging markets. We find that the lending of large commercial banks was less stable than the lending of public sector banks during the Asian crisis. Differences were not as pronounced during the Russian crisis.
    Keywords: bank lending; banking; contagion; currency crises; emerging markets crises; financial stability
    JEL: F30 F32 F34
    Date: 2005–08
  2. By: Acharya, Viral V; Johnson, Tim
    Abstract: Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we report evidence of significant incremental information revelation in the credit default swap (CDS) market, consistent with the occurrence of insider trading. We show that the degree of this activity increases with the number of banks that have lending/monitoring relations with a given firm, and that this effect is robust to controls for non-informational trade. Furthermore, consistent with hedging activity by informed banks with loan exposure, information revelation in the CDS market is asymmetric, consisting exclusively of bad news. We find no evidence, however, that the degree of insider activity adversely affects prices or liquidity in either the equity or credit markets. If anything, with regard to liquidity, the reverse appears to be true.
    Keywords: adverse selection; asset pricing; bank relationship; credit default swaps; default
    JEL: D8 G12 G13 G14 G20
    Date: 2005–08
  3. By: Kirby Faciane
    Abstract: The following paper presents an infinite period model of irrational momentum trading agents with a single period investment horizon.
    Keywords: market reaction; financial markets; positive feedback traders; momentum traders; market expenditures; irrational traders; uninformed traders; information asymmetry; kirby faciane; investment model; investment horizon
    JEL: G G0 G1 G00 G10 G12 G11 G15 G19 G20 G29 G24 G3 G30 G39 G31 G32
    Date: 2005–09–21
  4. By: James O'Brien; Jeremy Berkowitz
    Abstract: Risk in bank trading portfolios and its management are potentially important to the banks’ soundness and to the functioning of securities and derivatives markets. In this paper, proprietary daily trading revenues of 6 large dealer banks are used to study the bank dealers’ market risks using a market factor model approach. Dealers’ exposures to exchange rate, interest rate, equity, and credit market factors are estimated. A factor model framework for variable exposures is presented and two modeling approaches are used: a random coefficient model and rolling factor regressions. The results indicate small average market exposures with significant but relatively moderate variation in exposures over time. Except for interest rates, there is heterogeneity in market exposures across the dealers. For interest rates, the dealers have small average long exposures and exposures vary inversely with the level of rates. Implications for aggregate bank dealer risk and market stability issues are discussed.
    JEL: G21
    Date: 2005–09
  5. By: Jaume Ventura
    Abstract: This paper presents a stylized model of economic growth with bubbles. This model views asset price bubbles as a market-generated device to moderate the effects of frictions in financial markets, improving the allocation of investments and raising the capital stock and welfare. The model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms, and therefore, the rate of economic growth. The model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth.
    Keywords: Asset price bubbles, economic growth, financial frictions, innovations and reforms
    JEL: E32 O40 G10
    Date: 2003–11
  6. By: Falko Fecht; Antoine Martin
    Abstract: In this paper, we address the question whether increasing households' financial market access improves welfare in a financial system in which there is intense competition among banks for private households' funds. Following earlier work by Diamond and by Fecht, we use a model in which the degree of liquidity insurance offered to households through banks' deposit contracts is restrained by households' financial market access. However, we also assume spatial monopolistic competition among banks. Because monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect; however, this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. ; Thus, our results suggest that in Germany's bank-dominated financial system, which is characterized by intense competition for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the U.S. banking system, where there is less competition for households' deposits, a high level of household financial market participation might be beneficial.
    Keywords: Households ; Bank competition ; Bank deposits
    Date: 2005
  7. By: Mark Aguiar; Fernando Broner
    Abstract: Emerging market crises are characterized by large swings in both macroeconomic fundamentals and asset prices. The economic significance of observed movements in macroeconomic variables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of “effective” fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).
    Keywords: Currency crises; emerging markets; stock prices; overshooting; credit markets
    JEL: E44 F31 F32 F41 G12 G14 G15
    Date: 2004–08
  8. By: Fecht, Falko; Grüner, Hans Peter
    Abstract: Recent empirical studies criticize the sluggish financial integration in the euro area and find that only interbank money markets are fully integrated so far. This paper studies the optimal regional and/or sectoral integration of financial systems given that integration is restricted to the interbank market. Based on Allen and Gale’s (2000) seminal analysis of financial contagion we derive the interbank market structure that maximizes consumers’ ex ante expected utility, taking into account the trade-off between the contagion and the diversification effect of financial integration. We analyse the impact of various structural parameters including the underlying stochastic structure on this trade-off. In addition we derive the efficient design of the interbank market that allows for a cross-regional risk sharing between banks. We also provide a measure for the efficiency losses that result if financial integration is limited to an integration of the interbank market.
    Keywords: financial contagion; financial integration; interbank market; risk sharing
    JEL: D61 E44 G10 G21
    Date: 2005–09
  9. By: Albuquerque, Rui; Bauer, Gregory; Schneider, Martin
    Abstract: This paper reconsiders the role of foreign investors in developed country equity markets. It presents a quantitative model of trading that is built around two new assumptions about investor sophistication: (i) both the foreign and domestic populations contain investors with superior information sets; and (ii) these knowledgeable investors have access to both public equity markets and private investment opportunities. The model delivers a unified explanation for three stylized facts about US investors’ international equity trades: (i) trading by US investors occurs in waves of simultaneous buying and selling; (ii) US investors build and unwind foreign equity positions gradually; and (iii) US investors increase their market share in a country when stock prices there have recently been rising. The results suggest that heterogeneity within the foreign investor population is much more important than heterogeneity of investors across countries.
    Keywords: asset pricing; asymmetric information; heterogenous investors; international equity flows; international equity returns
    JEL: F30 G12 G14 G15
    Date: 2005–08
  10. By: Sascha Mergner (AMB Generali Asset Managers)
    Abstract: This paper investigates the time-varying behavior of systematic risk for eighteen pan-European industry portfolios. Using weekly data over the period 1987-2005, three different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t- GARCH(1,1) model, two Kalman filter based approaches as well as a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique. A comparison of the different models' ex- ante forecast performances indicates that the random-walk process in connection with the Kalman filter is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context.
    Keywords: Time-varying beta risk; Kalman filter; bivariate t-GARCH; stochastic volatility; efficient Monte Carlo likelihood; European industry portfolios
    JEL: C22 C32 G10 G12 G15
    Date: 2005–09–21
  11. By: Christiansen, Charlotte (Department of Accounting, Aarhus School of Business)
    Abstract: No abstract
    Keywords: European Asset Markets; GARCH; International Finance; Volatility Spillover
    Date: 2005–09–20
  12. By: Renneboog,Luc; Simons,Thomas (Tilburg University, Center for Economic Research)
    Abstract: This paper shows that a vibrant and economically important public-to-private market has reemerged in the US, UK and Continental Europe, since the second half of the 1990s. The paper shows recent trends and investigates the motives for public-to-private and LBO transactions. The reasons for the potential sources of shareholder wealth effects during the transaction period are examined: a distinction is made between tax benefits, incentive realignment, transaction costs savings, stakeholder expropriation, takeover defenses and corporate undervaluation. The paper also attempts to relate these value drivers to the post-transaction value and to the duration of the private status. Finally, the paper draws some conclusions about whether or not public-to-private transactions are useful devices for corporate restructuring.
    Keywords: public-to-private transactions;going-private deals;leveraged buyouts; management buyins; management buyouts
    JEL: G3 G32 G34 G38
    Date: 2005
  13. By: Jae H. Kim; Hristos Doucouliagos
    Abstract: Fluctuations in commodity prices are a major concern to many market participants. This paper uses realized volatility methods to calculate daily volatility and correlation estimates for three grain futures prices (corn, soybean and wheat). The realized volatility estimates exhibit the properties consistent with the stylized facts observed in earlier studies. According to the realized correlations and regression coefficients, the spot returns from the three grain futures are positively related. The realized estimates are then used to evaluate the degree of volatility transmissions across grain future prices. The impulse response analysis is conducted by fitting the vector autoregressive model to realized volatility and correlation estimates, using the bootstrap method for statistical inference. The results indicate that there exist rich dynamic interactions among the volatilities and correlations across the grain futures markets.
    Keywords: Volatility Transmission, Vector Autoregressive Model, Impulse Response Analysis, Bootstrap
    JEL: G13 C32
    Date: 2005–09
  14. By: Flynn, Sean M. (Vassar College Department of Economics)
    Abstract: The behavior of US closed-end funds is very different from that of the UK funds studied by Gemmill and Thomas (2002). There is no evidence that their discounts are constrained by arbitrage barriers, no evidence that higher expenses increase discounts and no evidence that replication risk increases discounts—but strong evidence that noise-trader risk is priced. The differences between US and UK funds may be due to the fact that small investors dominate US funds while institutional investors dominate UK funds, or because the sample selection method for the UK funds chooses only funds that are relatively easy to arbitrage.
    Date: 2005–09
  15. By: Jaume Ventura; Aart Kraay
    Abstract: Over the past decade the US has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming US stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing US government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. We challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble (the “dot-com” bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the “Bush” deficits). The “benevolent” view holds that a change in investor sentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The “cynical” view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. We discuss the implications of each of these views for the future evolution of the US economy and, in particular, its net foreign asset position.
    Keywords: Current account, net foreign assets, stock market bubbles, budget deficits
    JEL: F21 F32 F36
    Date: 2005–06
  16. By: Armstrong, Chris (Stanford University); Davila, Toni (IESE Business School); Foster, George (Stanford University); Hand, John R.M. (University of North Carolina)
    Abstract: Systematic analysis of U.S. capital markets reveals important empirical facts that analytical modeling or empirical research seeking to explain the 1998-2001 movements needs to recognize. There is no single "bubble point" at which U.S. capital markets had an epiphany that valuations required a sharp downward re-evaluation. Rather, different sectors had different points after which ex post sustained declines occurred. For the NASDAQ/NYSE/AMEX public capital markets, the sustained ex post declines occurred starting in March 2000 for the computer software industry and in September 2000 for the computer hardware industry. Private venture capital investment in new ventures peaked in the March 2000 quarter for software and in the September 2000 quarter for hardware and communications. Four sectors exhibiting extreme price movements are identified - computer hardware, computer software, telecommunications, and biotech/pharmaceuticals. These sectors had observable characteristics prior to 1998 that implied higher risk - they had higher relative risk (CAPM beta), higher standard deviation of security returns, more extreme revenue growth increases (decreases) in the upper (lower) tails, and a higher propensity for negative net income. During the 1998-2001 period, companies in these sectors had abnormally high revenue growth rates. An Internet sample of companies exhibits even higher abnormal revenue growth rates relative to either prior periods or other companies in the 1998-2001 period. The large relative increases and decreases in the market capitalization of U.S. capital markets in 1998-2001 may well have more grounding in risk-reward asset pricing theory than many commentators have recognized.
    Keywords: capital markets; stock prices; Internet stocks; stock market bubble;
    Date: 2005–07–21
  17. By: Ricardo J. Caballero; Arvind Krishnamurthy
    Abstract: Emerging market economies are fertile ground for the development of real estate and other financial bubbles. Despite these economies' significant growth potential, their corporate and government sectors do not generate the financial instruments to provide residents with adequate stores of value. Capital often flows out of these economies seeking these stores of value in the developed world. Bubbles are beneficial because they provide domestic stores of value and thereby reduce capital outflows while increasing investment. But they come at a cost, as they expose the country to bubble-crashes and capital flow reversals. We show that domestic financial underdevelopment not only facilitates the emergence of bubbles, but also leads agents to undervalue the aggregate risk embodied in financial bubbles. In this context, even rational bubbles can be welfare reducing. We study a set of aggregate risk management policies to alleviate the bubble-risk. We show that liquidity requirements, sterilization of capital inflows and structural policies aimed at developing public debt markets "collateralized" by future revenues, all have a high payoff in this environment.
    JEL: E32 E44 F32 F34 F41 G10
    Date: 2005–09
  18. By: Braverman, Oded; Kandel, Shmuel; Wohl, Avi
    Abstract: This paper provides a new look at the timing of mutual fund investors. We re-examine the relationship between investors' aggregate net flows into and out of the funds and the returns of the funds in subsequent periods. The negative relationship that we find (using monthly data of aggregate US equity mutual funds in the years 1984-2003 and a statistical test based on bootstrapping of returns) causes mutual fund investors, as a group, to realize a lower long-term accumulated return than the long-term accumulated return on a 'buy and hold' position in these funds. The 'bad' performance of mutual fund investors can be explained either by 'behavioural explanations' such as investor sentiment or by 'rational market explanations' that are based on time-varying risk premiums. We present a simple overlapping-generation model which predicts a negative relationship between flows and subsequent returns. It is assumed that flows into and out of funds are not related to information about future cash flows (dividends), but are caused by changes in other factors affecting the demand for stocks. Hence, a positive (negative) net flow in a given month implies a positive (negative) price change in the same month, but also lower (higher) expected future returns. We show that in each month the change in the expected future returns may be small (relative to the return variance), but the accumulated effect of these changes may be significant. This result may explain why previous studies, using monthly data of flows and returns in either simple regression models or VAR, could not have significantly detected the monthly change in the expected future returns even in a 15-year sample.
    Keywords: market timing; mutual funds; time-varying expected returns
    JEL: G1 G11 G12
    Date: 2005–09
  19. By: Charles Ou
    Abstract: Banking consolidation has continued to accelerate over the past several years, assisted by technological innovations in information management and statistical modeling, and by the large merger and acquisition (M&A) deals of the late 1990s. Total domestic assets held by the largest 50 bank holding companies (BHC) rose from around 52 percent in June 1997 to nearly 70 percent in June 2002, and the number of small banks with assets under $500 million declined from 8,647 in June 1997 to 7,208 in June 2002. The perennial question about the impact of banking consolidation on the availability of financing to small business remains a major concern to small business researchers and policymakers. This paper provides a review of recent major studies conducted over the past several years.
    Date: 2005
  20. By: Robert DeYoung; Anne Gron; Andrew Winton
    Abstract: Despite operating under substantial regulatory constraints, we find that commercial banks manage their investments largely consistent with the predictions of portfolio choice models with capital market imperfections. Based on 1990-2002 data for small (assets less than $1 billion) U.S. commercial banks, net new lending to the business, real estate, and consumer sectors increased with expected sector profitability, tended to decrease with the illiquidity of existing (overhanging) loan stocks, and was responsive to correlations in cross-sector returns. Small banks are most appropriate for this study, because they make illiquid loans and manage risk via on-balance sheet (non-hedged) diversification strategies.
    Date: 2005
  21. By: Bjørn-Roger Wilhelmsen (Norges Bank); Andrea Zaghini (Banca d’Italia)
    Abstract: The paper evaluates the ability of market participants to anticipate monetary policy decisions in the euro area and in 13 other countries. First, by looking at the magnitude and the volatility of the changes in the money market rates we show that the days of policy meetings are special days for financial markets. Second, we find that the predictability of the ECB’s monetary policy is fully comparable (and sometimes slightly better) to that of the FED and the Bank of England. Finally, an econometric analysis of the ability of market participants to incorporate in the current money rates the expected changes in the key policy rate shows that in the euro area policy decisions are anticipated well in advance.
    Keywords: Monetary policy, Predictability, Money market rates
    JEL: E4 E5 G1
    Date: 2005–09–02
  22. By: Peter Tenim; Joachim Voth
    Abstract: If financial deepening aids economic growth, then financial repression should be harmful. We use a natural experiment – the change in the English usury laws in 1714 – to analyze the effects of interest rate restrictions. We use a sample of individual loan transactions to demonstrate how the reduction of the legal maximum rate of interest affected the supply and demand for credit. Average loan size and minimum loan size increased strongly, and access to credit worsened for those with little ‘social capital.’ While we have no direct evidence that loans were misallocated, the discontinuity in loan receipts makes this highly likely. We conclude that financial repression can undermine the positive effects of financial deepening.
    Keywords: Economic development, banking, financial repression, usury laws, credit rationing, natural experiments, lending decisions
    JEL: O16 G21 N23
    Date: 2005–05
  23. By: Francesco Franzoni; José M. Marín
    Abstract: The paper argues that the market signifficantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least five years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies.
    Keywords: Pricing anomalies, DB plans, market efficiency
    JEL: G12 G14 G23 J26 M41
    Date: 2005–06
  24. By: Sean D. Campbell (Risk Analysis Section, Division of Research and Statistics, Federal Reserve Board); Francis X. Diebold (Department of Economics, University of Pennsylvania)
    Abstract: We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwise standard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion.
    Keywords: Business cycle, expected equity returns, prediction, Livingston survey, risk aversion, equity premium, risk premium
    JEL: G12
    Date: 2005–05–01
  25. By: Hart, J. van der; Zwart, G. de; Dijk, D.J.C. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We examine competing explanations, based on risk and behavioral models, for the profitability of stock selection strategies in emerging markets. We document that both emerging market risk and global risk factors cannot account for the significant excess returns of selection strategies based on value, momentum and earnings revisions indicators. The findings for value and momentum strategies are consistent with the evidence from developed markets supporting behavioral explanations. In addition, for value stocks, the most important behavioral bias appears to be related to underestimation of long-term growth prospects, as indicated by overly pessimistic analysts' earnings forecasts and above average earnings revisions for longer postformation horizons and by quite rapidly improving earnings growth expectations. Furthermore, we find that overreaction effects play a limited role for the earnings revisions strategy, as there is no clear return reversal up until five years after portfolio formation, setting this strategy apart from momentum strategies.
    Keywords: value;momentum;earnings revisions;risk;behavioral models;overreaction;underreaction;
    Date: 2005–03–29
  26. By: Hui Guo; Robert Savickas
    Abstract: We find that the value-weighted idiosyncratic stock volatility and aggregate stock market volatility jointly exhibit strong predictive power for excess stock market returns. The stock market risk-return relation is found to be positive, as stipulated by the CAPM; however, idiosyncratic volatility is negatively related to future stock market returns. Also, idiosyncratic volatility appears to be a pervasive macrovariable, and its forecasting abilities are very similar to those of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001).
    Keywords: Stock market ; Assets (Accounting) - Prices
    Date: 2005
  27. By: Jaume Ventura
    Abstract: This paper presents a stylized model of international trade and asset price bubbles. Its central insight is that bubbles tend to appear and expand in countries where productivity is low relative to the rest of the world. These bubbles absorb local savings, eliminating inefficient investments and liberating resources that are in part used to invest in high productivity countries. Through this channel, bubbles act as a substitute for international capital flows, improving the international allocation of investment and reducing rate-of-return differentials across countries. This view of asset price bubbles has unexpected implications for the way we think about economic growth and fluctuations, and could eventually provide a simple account of some real world phenomenae that have been difficult to model before, such as the recurrence and depth of financial crises or their puzzling tendency to propagate across countries.
    Keywords: Asset price bubbles, international capital flows
    JEL: F21 F36 F43
    Date: 2004–01
  28. By: Christensen, Michael (Department of Accounting, Aarhus School of Business)
    Abstract: No abstract
    Keywords: Mutual funds; Performance evaluation; Market timing; Performance persistence
    Date: 2005–09–23
  29. By: De Fiore, Fiorella; Uhlig, Harald
    Abstract: We present a dynamic general equilibrium model with agency costs, where heterogeneous firms choose between two alternative instruments of external finance - corporate bonds and bank loans. We characterize the financing choice of firms and the endogenous financial structure of the economy. The calibrated model is used to address questions such as: What explains differences in the financial structure of the US and the euro area? What are the implications of these differences for allocations? We find that a higher share of bank finance in the euro area relative to the US is due to lower availability of public information about firms' credit worthiness and to higher efficiency of banks in acquiring this information. We also quantify the effect of differences in the financial structure on per-capita GDP.
    Keywords: agency costs; financial structure; heterogeneity
    JEL: C68 E20
    Date: 2005–09
  30. By: Kirby Faciane
    Abstract: This paper focuses on the multinational operations of the largest Russian business units within major economic sectors and analyzes the following: the driving forces behind the Russian companies’ internationalization; international locations of Russian capital outflow; dominant industries within Russian international corporate activities; and the main operational modes.
    Keywords: russia; russian investment; foreign direct investment; international corporate investment; international investment; capital budgeting; capital spending; market expenditures; kirby faciane; investment model; investment horizon; banking sector; banking investments
    JEL: G G0 G1 G00 G10 G12 G11 G15 G19 G20 G29 G24 G3 G30 G39 G31 G32 E E0 E1
    Date: 2005–09–22
  31. By: Roman Hotvath (Czech National Bank & Charles University)
    Abstract: The objective of this paper is twofold. First, we provide an introduction on estimation and methodology of the real equilibrium exchange rate. Second, we discuss to what extent are these estimates applicable for setting the central parity. Given the uncertainty surrounding the estimates, they are informative in the sign rather than the size of the misalignment of exchange rate, but may serve as useful consistency checks for the decision about setting the central parity. We argue that policy makers shall consider the estimates in their decision- making only if the real exchange rate is substantially misaligned (i.e. more than 10% as a rule of thumb).
    JEL: F3 F4
    Date: 2005–09–20
  32. By: Jong, A. de; Roosenboom, P.; Schramade, W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We examine fees on bonds issued by Japanese corporations during the 1994-2002 period. We relate fees to firms’ membership of bank-led (financial) keiretsu. For the full sample of firms, we establish a positive relation between fees and risk factors. Over time, we find that fees have increased for those firms that are related to financial keiretsu, even after controlling for risk factors. But during the same period, fees have fallen for firms not belonging to keiretsu. It seems that, against the background of bond market deregulation and weaker banks, keiretsu membership has become a burden rather than an advantage.
    Keywords: Fees;Bonds;Keiretsu;Corporate Groups;Banks;
    Date: 2005–06–28
  33. By: Polbennikov,Simon; Melenberg,Bertrand (Tilburg University, Center for Economic Research)
    Abstract: We empirically analyze the implementation of coherent risk measures in portfolio selection. First, we compare optimal portfolios obtained through mean-coherent risk optimization with corresponding mean-variance portfolios. We find that, even for a typical portfolio of equities, the outcomes can be statistically and economically different. Furthermore, we apply spanning tests for the mean-coherent risk efficient frontiers, which we compare to their equivalents in the meanvariance framework. For portfolios of common stocks the outcomes of the spanning tests seem to be statistically the same.
    Keywords: portfolio choice;mean variance;mean coherent risk;comparison
    JEL: G11
    Date: 2005
  34. By: Kleimeier,Stefanie; Sander,Harald (METEOR)
    Abstract: This study investigates the current state of euro zone banking market integration by applying convergence and cointegration measures to mortgage and short-term corporate loan markets. These two measures of integration often lead to contradicting conclusions and are therefore comparatively analyzed. As an innovation to the literature, convergence measures are exposed to a difference-in-differences methodology which allows separating euro zone-specific from global integration effects. Our results show that euro zone-specific convergence exists mainly in the pre-EMU period whereas cointegration is especially prominent before 1993 and after 1998 but hardly present in between. Overall, we conclude that (1) in the presence of exchange rate uncertainty, cross-country convergence should focus on margins rather than rates, (2) convergence of retail banking interest rates is largely a result of integrating money and bonds markets in anticipation of the single currency and (3) a monetary union can produce (co)integration when retail rates react similarly to a single monetary policy rate. Thus, for the euro zone it appears that convergence measures provide the most information for the period leading up to the EMU whereas cointegration is more useful during the EMU period as well as prior to the ERM crisis in 1992.
    Keywords: monetary economics ;
    Date: 2005
  35. By: Ekaterini Panopoulou (Department of Economics, National University of Ireland, Maynooth); Koubouros, M. (University of Peloponnese, Department of Economics, Greece); Malliaropulos, D. (Department of Banking and Financial Management, University of Piraeus, and National Bank of)
    Abstract: This paper decomposes the overall market (CAPM) risk into parts re.ecting uncertainty related to the long-run dynamics of portfolio-speci.c and market cash .ows and discount rates. We decompose market betas into four sub-betas (as- sociated with assets.and market.s cash .ows and discount rates) and we employ a discrete time version of the I-CAPM to derive a four-beta model. The model performs well in pricing average returns on single- and double-sorted portfolios ac- cording to size, book-to-market, dividend-price ratios and past risk, by producing high estimates for the explained cross-sectional variation in average returns and economically and statistically acceptable estimates for the coe¢ cient of relative risk aversion.
    Keywords: CAPM, cash-.ow risk,discount-rate risk, VAR-GARCH,BEKK, asset pricing
    JEL: G11 G12 G14
    Date: 2005–05
  36. By: Amitabh Chandra; Andrew A. Samwick
    Abstract: We estimate consumers’ valuation of disability insurance using a stochastic lifecycle framework in which disability is modeled as permanent, involuntary retirement. We base our probabilities of worklimiting disability on 25 years of data from the Current Population Survey and examine the changes in the disability gradient for different demographic groups over their lifecycle. Our estimates show that a typical consumer would be willing to pay about 5 percent of expected consumption to eliminate the average disability risk faced by current workers. Only about 2 percentage points reflect the impact of disability on expected lifetime earnings; the larger part is attributable to the uncertainty associated with the threat of disablement. We estimate that no more than 20 percent of mean assets accumulated before voluntary retirement are attributable to disability risks measured for any demographic group in our data. Compared to other reductions in expected utility of comparable amounts, such as a reduction in the replacement rate at voluntary retirement or increases in annual income fluctuations, disability risk generates substantially less pre-retirement saving. Because the probability of disablement is small and the average size of the loss — conditional on becoming disabled — is large, disability risk is not effectively insured through precautionary saving.
    JEL: H0 I1 J1
    Date: 2005–09
  37. By: Martin, Philippe; Rey, Hélène
    Abstract: This paper develops a theory of financial crisis based on the demand side of the economy. We analyze the impact of financial and trade globalizations on asset prices, investment and the possibility of self-fulfilling financial crashes. In a two-country model, we show that financial and trade globalizations have different effects on asset prices, investment and income in the emerging market and in the industrialized country. Whereas trade globalization always has a positive effect on the emerging market, financial globalization may not, especially when trade costs are high. For intermediate levels of financial transaction costs and high levels of trade costs, pessimistic expectations can be self-fulfilling and may lead to a collapse in demand for goods and assets of the emerging market. Such a crash in asset prices is accompanied by a current account reversal, a drop in income and investment and more market incompleteness. We show that countries with lower income are more prone to such demand-based financial crashes. Our model can replicate the main stylized facts of financial crashes in emerging markets. Our results strongly suggest that emerging markets should liberalize trade in goods before trade in assets.
    Date: 2005–08
  38. By: Laruent Barras (HEC, University of Geneva and FAME)
    Abstract: This paper examines the impact of real time uncertainty on the performance of international mean-variance conditional asset allocation. This notion can be defined as the uncertainty faced by an investor regarding specification choices necessary to implement a conditional strategy. To assess the impact of this phenomenon, we investigate a comprehensive set of strategies based on several countries that an investor could reasonably consider. We find that real time uncertainty significantly reduces the performance of international conditional asset allocation. Our findings provide an explanation to the apparent paradox between the statistical and economic significance of predictability that has been previously documented. These results are consistent with the semi-strong form of market efficiency
    Keywords: Conditional asset allocation, predictability, real time uncertainty, performance measurement
    JEL: G11
    Date: 2005–07
  39. By: Sebastian Edwards; Eduardo Levy Yeyati
    Abstract: This paper studies how institutional factors and systemic risks (driven by macroeconomic conditions) prevalent in emerging economies may impact market discipline among banks (traditionally understood as market responses to bank fundamentals). First, we discuss how certain institutional features of emerging economies (underdeveloped capital markets, pervasive government ownership of banks, greater guarantees, inadequate disclosure and transparency) may affect market responses to bank risk. Second, using the recent Argentine crisis as an illustration, we argue that systemic risks may exert an overwhelming impact on market behavior, overshadowing the link between the latter and bank fundamentals. Thus, market discipline, while missing in the traditional sense, may be indeed quite robust once systemic risks are factored in. We conclude that in emerging economies the analysis of market discipline should take into account the importance of institutional and systemic factors.
    Date: 2004
  40. By: Burstein, Ariel Thomas; Eichenbaum, Martin; Rebelo, Sérgio
    Abstract: Large devaluations are generally associated with large declines in real exchange rates. We develop a model which embodies two complementary forces that account for the large declines in the real exchange rate that occur in the aftermath of large devaluations. The first force is sticky nontradable goods prices. The second force is the impact of real shocks that often accompany large devaluations. We argue that sticky nontradable goods prices generally play an important role in explaining post-devaluation movements in real exchange rates. However, real shocks can sometimes be primary drivers of real exchange rate movements.
    Keywords: devaluations; exchange rate; passthrough; sticky prices
    JEL: F31
    Date: 2005–09
  41. By: Fahad Khalil; David Martimort; Bruno Maria Parigi
    Abstract: We study the problem of multiple principals who want to obtain income from a privately informed agent and design their contracts non-cooperatively. Our analysis reveals that the degree of coordination between principals has strong implications for the shapes of contracts and the amount of monitoring. Equity-like contracts and excessive monitoring emerge when principals are able to coordinate monitoring or verify each others’ monitoring efforts. When this is not possible, free riding in monitoring weakens the incentive to monitor, so that flat payments, debt-like contracts and very low levels of monitoring appear. Free riding may be so strong that there may even be less monitoring than if the principals cooperated with each other, which shows that non-cooperative monitoring does not necessarily lead to excessive monitoring.
    Keywords: monitoring, common agency, costly state verification
    JEL: D20 D80 G20 G30
    Date: 2005
  42. By: Gourinchas, Pierre-Olivier; Rey, Hélène
    Abstract: Does the centre country of the International Monetary System enjoy an 'exorbitant privilege' that significantly weakens its external constraint as has been asserted in some European quarters? Using a newly constructed dataset, we perform a detailed analysis of the historical evolution of US external assets and liabilities at market value since 1952. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. Interestingly, this excess return increased after the collapse of the Bretton Woods fixed exchange rate system. It is mainly due to a return discount: within each class of assets, the total return (yields and capital gains) that the US has to pay to foreigners is smaller than the total return the US gets on its foreign assets. We also find evidence of a composition effect: the US tends to borrow short and lend long. As financial globalization accelerated its pace, the US transformed itself from a World Banker into a World Venture Capitalist, investing greater amounts in high yield assets such as equity and FDI. We use these findings to cast some light on the sustainability of the current global imbalances.
    Keywords: dollar exchange rate; financial adjustment channel; gross positions; net foreign assets; sustainability; trade adjustment channel
    JEL: F3 N1
    Date: 2005–09
  43. By: Liebig, Thilo; Porath, Daniel; Weder, Beatrice; Wedow, Michael
    Abstract: This paper investigates whether the new Basel Accord will induce a change in bank lending to emerging markets using a new loan level data set on German banks' foreign exposure. We test two interlinked hypotheses on the conditions under which the change in the regulatory capital would leave lending flows unaffected. This would be the case if (i) the new regulatory capital requirement remains below the economic capital, and (ii) banks' economic capital to emerging markets already adequately reflects risk. On both accounts the evidence indicates that the new Basel Accord should have a limited effect on lending to emerging markets.
    Keywords: banking regulation; Basel accord; international lending
    JEL: F33 F34 G28
    Date: 2005–08
  44. By: Peter Tenim; Joachim Voth
    Abstract: Crowding-out during the British Industrial Revolution has long been one of the leading explanations for slow growth during the Industrial Revolution, but little empirical evidence exists to support it. We argue that examinations of interest rates are fundamentally misguided, and that the eighteenth- and early nineteenth-century private loan market balanced through quantity rationing. Using a unique set of observations on lending volume at a London goldsmith bank, Hoare’s, we document the impact of wartime financing on private credit markets. We conclude that there is considerable evidence that government borrowing, especially during wartime, crowded out private credit.
    Keywords: Credit rationing, Napoleonic wars, Industrial Revolution, technological change, crowding out
    JEL: E22 E43 E51 E65 N23 N13
    Date: 2004–02
  45. By: Grubišić, I.; Pietersz, R. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Geometric optimisation algorithms are developed that efficiently find the nearest low-rank correlation matrix. We show, in numerical tests, that our methods compare favourably to the existing methods in the literature. The connection with the Lagrange multiplier method is established, along with an identification of whether a local minimum is a global minimum. An additional benefit of the geometric approach is that any weighted norm can be applied. The problem of finding the nearest low-rank correlation matrix occurs as part of the calibration of multi-factor interest rate market models to correlation.
    Keywords: Geometric optimisation;Correlation matrix;Rank;LIBOR market model;
    Date: 2005–04–03
  46. By: Norman Loayza; Romain Rancière
    Abstract: This paper studies the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities (e.g., Levine, Loayza, and Beck 2000). On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns (e.g., Kaminski and Reinhart 1999). The paper accounts for these contrasting effects based on the distinction between the short- and long-run impacts of financial intermediation. Working with a panel of cross-country and time-series observations, the paper estimates an encompassing model of short- and long-run effects using the Pooled Mean Group estimator developed by Pesaran, Shin, and Smith (1999). The conclusion from this analysis is that a positive long-run relationship between financial intermediation and output growth co-exists with a, mostly, negative short-run relationship. The paper further develops an explanation for these contrasting effects by relating them to recent theoretical models, by linking the estimated short-run effects to measures of financial fragility (namely, banking crises and financial volatility), and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions.
    Keywords: Financial development
    JEL: G21 C33
    Date: 2004–09
  47. By: Xavier Freixas; Sjaak Hurkens; Alan D. Morrison; Nir Vulkan
    Abstract: We analyse credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker’s (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loans are largely independent of marginal costs, a feature consistent with the extant empirical evidence. In equilibrium, banks make positive profits in our model in spite of the threat of entry by inactive banks. Moreover, an increase in the number of active banks increases credit risk and so does not improve credit market effciency: this point has important regulatory implications. Finally, we extend our analysis to the case where banks have differing screening abilities.
    Keywords: Interbank Competition, Screening, Credit Risk, Adverse Selection
    JEL: D43 D82 G21 G24
    Date: 2004–11
  48. By: Ingolf Schwarz (Max-Planck-Institute for Research on Collective Goods); Jinhui H. Bai (Yale University, Department of Economics)
    Abstract: The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate.
    Keywords: Money, Incomplete Markets, Fiscal Policy, Indeterminacy
    JEL: D52 E40 E50
    Date: 2005–09
  49. By: Bruinshoofd,Allard; Candelon,Bertrand; Raabe,Katharina (METEOR)
    Abstract: We show that, complementary to trade and financial linkages, the strength of the bankingsector helps explain the transmission of currency crises. Specifically, we demonstrate thatthe Mexican, Thai, and Russian crises predominantly spread to countries with weaknesses intheir banking sectors. At the same time, the role of banking sector strength varies per crisis;where the Mexican crisis spread to countries with a strong presence of foreign banks indomestic credit provision, the Thai crisis disproportionately contaminated countries wherethe banking sector was most sensitive to currency realignments, wh ile the Russian crisisspread to countries with inefficiencies in the banking sector.
    Keywords: macroeconomics ;
    Date: 2005
  50. By: Bodart,Vincent; Candelon,Bertrand (METEOR)
    Abstract: The purpose of this paper is to propose a new measure of contagion. Our approach to testing contagion is based on the frequency analysis of causality developed recently by Breitung and Candelon (2004). This approach handles, in a unified framework, several of the statistical problems identified in the literature. It also permits clear differentiation between temporary and permanent shifts in cross-market linkages: the first case is contagion while the second one is simply a measure of interdependence among markets. In examining the ”Tequila” and Asian crises, we find evidence for contagion during both. It also turns out that during the Asian crisis both contagion and higher interdependence have contributed simultaneously to the diffusion of the crisis in Asia. The spillover effects of these crises have been geographically limited to the region where the shock originated.
    Keywords: macroeconomics ;
    Date: 2005
  51. By: Basak, Suleyman; Shapiro, Alex; Teplá, Lucie
    Abstract: Portfolio theory must address the fact that, in reality, portfolio managers are evaluated relative to a benchmark, and therefore adopt risk management practices to account for the benchmark performance. We capture this risk management consideration by allowing a prespecified shortfall from a target benchmark-linked return, consistent with growing interest in such practice. In a dynamic setting, we demonstrate how a risk averse portfolio manager optimally under- or overperforms a target benchmark under different economic conditions, depending on his attitude towards risk and choice of the benchmark. The analysis therefore illustrates how investors can achieve their desired performance profile for funds under management through an appropriate combined choice of the benchmark and money manager. We consider a variety of extensions, and also highlight the ability of our setting to shed some light on documented return patterns across segments of the money management industry.
    Keywords: benchmarking; investments; shortfall risk; tracking error; value-at-risk
    JEL: D81 G11 G23
    Date: 2005–08
  52. By: Fernando Broner; Roberto Rigobon
    Abstract: The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks (“crises”) than those to developed countries, (ii) shocks are subject to contagion, and (iii) – the most important one – shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility.
    Keywords: Capital flows, emerging countries, volatility, crises, contagion, persistence
    JEL: F21 F32 G15
    Date: 2004–10
  53. By: Dimitrov,Dinko; Haake,Claus-Jochen; Klaus,Bettina (METEOR)
    Abstract: We study efficient and individually rational exchange rules for markets with heterogeneous indivisible goods that exclude the possibility that an agent benefits by bundling goods in her endowment. Even if agents'' preferences are additive, no such rule exists.
    Keywords: microeconomics ;
    Date: 2005
  54. By: Ilan Goldfajn; André Minella
    Abstract: This paper analyzes the relationship between capital account liberalization and macroeconomic volatility using Brazil as a case study. The paper provides several stylized facts regarding the evolution of capital flows and controls in Brazil in the last three decades. We conclude that, notwithstanding the financial crises and macroeconomic volatility of the recent past, capital account liberalization and the floating exchange regime have led to a more resilient economy. Further liberalization of the capital account is warranted and should be accompanied by a broad range of reforms to improve and foster stronger institutions.
    JEL: F21 F32 F40
    Date: 2005–09
  55. By: Victoria Geyfman
    Abstract: This paper explores whether there was an economically significant differential in market-based risk between bank holding companies (BHCs) with Section 20 subsidiaries – subsidiaries that were authorized by the Federal Reserve to conduct bank-ineligible securities activities – and BHCs without such subsidiaries. Using market returns over a period of time in which BHCs expanded into securities activities, from 1985 through 1999, this study finds evidence that BHCs that participated in investment banking exhibited significantly lower total and unsystematic risk, suggesting that banks’ participation in the securities business resulted in diversification gains. However, BHCs with Section 20 subsidiaries exhibited higher systematic risk.
    Keywords: Securities ; Risk ; Bank holding companies
    Date: 2005
  56. By: Valkanov,Emil; Kleimeier,Stefanie (METEOR)
    Abstract: When investigating the role of regulatory capital in bank mergers and acquisitions (M&As) we finds that i.e. US targets are better capitalized than their acquirers and non-acquired peers and that US banks maintain higher capital than European banks. Thus, US banks strategically raise their capital levels to avoid regulatory scrutiny. Furthermore, more value is created for targets with higher excess capital and in M&As involving targets with considerably higher excess capital ratios than their acquirers. Thus, the excess regulatory capital hypothesis is supported. The market prices the influence that capital has on the probability of the merger’s regulatory approval.
    Keywords: financial economics and financial management ;
    Date: 2005
  57. By: José Manuel Campa; Linda S. Goldberg; José M. González-Mínguez
    Abstract: This paper presents an empirical analysis of transmission rates from exchange rate movements to import prices, across countries and product categories, in the euro area over the last fifteen years. Our results show that the transmission of exchange rate changes to import prices in the short run is high, although incomplete, and that it differs across industries and countries; in the long run, exchange rate pass-through is higher and close to one. We find no strong statistical evidence that the introduction of the euro caused a structural change in this transmission. Although estimated point elasticities seem to have declined since the introduction of the euro, we find little evidence of a structural break in the transmission of exchange rate movements except in the case of some manufacturing industries. And since the euro was introduced, industries producing differentiated goods have been more likely to experience reduced rates of exchange rate pass-through to import prices. Exchange rate changes continue to lead to large changes in import prices across euro-area countries.
    JEL: F3 F4
    Date: 2005–09
  58. By: Xavier Freixas; Gyöngyi Lóránth; Alan D. Morrison
    Abstract: We investigate the optimal regulation of financial conglomerates which combine a bank and a non-bank financial institution. The conglomerate’s risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerate’s liability strucure. We examine optimal capital requirements for standalone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their standalone or decentralised equivalent. However, when risk profiles are endogenously selected conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralised conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of “regulatory arbitrage”, or of transfering assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation.
    Keywords: Financial conglomerate, capital regulation, regulatory arbitrage
    JEL: G21 G22 G28
    Date: 2005–03
  59. By: James Bullard (Federal Reserve Bank of St. Louis); George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge)
    Abstract: We study how the use of judgement or "add-factors" in macroeconomic forecasting may disturb the set of equilibrium outcomes when agents learn using recursive methods. We isolate conditions under which new phenomena, which we call exuberance equilibria, can exist in standard macroeconomic environments. Examples include a simple asset pricing model and the New Keynesian monetary policy framework. Inclusion of judgement in forecasts can lead to self-fulfilling fluctuations, but without the requirement that the underlying rational expectations equilibrium is locally indeterminate. We suggest ways in which policymakers might avoid unintended outcomes by adjusting policy to minimize the risk of exuberance equilibria.
    Keywords: Learning, expectations, excess volatility, bounded rationality, monetary policy
    JEL: E52 E61
    Date: 2005–09–17
  60. By: G. Boyle (Department of Economics, NUI, Maynooth); D. Conniffe (Department of Economics, NUI, Maynooth)
    Abstract: In an important paper comparing expected utility and mean-variance analysis, Feldstein (1969) examined a simple portfolio problem involving just two assets, one riskless and one risky. He concluded there could easily be ‘plunging’, that is, investment in the risky asset alone. His background assumptions were that the risky asset’s yield was log normally distributed and that the investor’s attitude to risk was expressible by a logarithmic utility. We look at how conclusions are affected by choice of distribution and utility function. While conclusions can depend on choice of distribution, they are remarkably robust to choice within the range of plausible positive distributions. In contrast, conclusions are sensitive to choice of utility function and we find the key determinant to be how much the investor’s relative risk aversion differs from unity and in what direction. Based on historical stock market returns, our analysis implies that the prevalence of diversification that is observed is consistent with a relative risk aversion coefficient of about 2.5.
    Date: 2005–03
  61. By: Charles W. Calomiris; Joseph R. Mason
    Abstract: The puzzle of underissuance of national bank notes disappears when one disaggregates data, takes account of regulatory limits, and considers differences in opportunity costs. Banks with poor lending opportunities maximized their issuance. Other banks chose to limit issuance. Redemption costs do not explain cross-sectional variation in issuance, and the observed relationship between note issuance and excess reserves is inconsistent with the redemption risk hypothesis of underissuance. National banks did not enter primarily to issue national bank notes, and a “pure arbitrage” strategy of chartering a national bank only to issue national bank notes would not have been profitable. Indeed, new entrants issued less while banks exiting were often maximum issuers. Economies of scope between note issuing and deposit banking included shared overhead costs and the ability to reduce costs of mandatory minimum reserve and capital requirements.
    Keywords: Bank notes ; National banks (United States)
    Date: 2005
  62. By: Moshe Kim (University of Haifa); Eirik Gaard Kristiansen (Norwegian School of Economics and Business Administration); Bent Vale (Norges Bank)
    Abstract: We introduce a model analyzing how asymmetric information problems in a bank-loan market may evolve over the age of a borrowing firm. The model predicts a life-cycle pattern for banks’interest rate markup. Young firms pay a low or negative markup, thereafter the markup increases until it falls for old firms. Furthermore, the pattern of the life-cycle depends on the informational advantage of the inside bank and when more dispersed borrower information yields fiercer bank competition. By applying a new measure of the informational advantage of inside banks and a large sample of small Nor-wegian firms, we find empirical support for the predicted markup pattern. We disentangle effects of asymmetric information (Akerlof effect)from effects of a concentrated banking market(Herfindahl effect). Our results indicate that the interest rate markups are not influenced by bank market concentration.
    Keywords: Banking, risk-pricing, lock-in
    JEL: G21 L15
    Date: 2005–09–12
  63. By: Inderst, Roman; Müller, Holger M
    Abstract: We examine the role of security design when lenders make inefficient accept-or-reject decisions after screening projects. Lenders may be either 'too conservative', in which case they reject positive-NPV projects. Or they may be 'too aggressive', in which case they accept negative-NPV projects. In the first case, the uniquely optimal security is debt. In the second case, it is levered equity. Debt maximizes lenders’ payoffs from financing low-NPV projects, i.e., projects that have a high probability mass on low cashflows, thus minimizing their conservatism. Conversely, levered equity minimizes lenders’ payoffs from financing low-NPV projects, thus minimizing their aggressiveness. In equilibrium, profitable projects that are relatively likely to break even are financed with debt, while less profitable projects are financed with equity. Highly profitable projects are financed by uninformed arm’s-length lenders. Finally, loan terms are insensitive with respect to the screening outcome: borrowers are either accepted, in which case they all obtain the same loan terms, or rejected.
    Keywords: debt; equity; screening; security design
    JEL: G20 G31 G32
    Date: 2005–08
  64. By: Patrick Van Roy (National Bank of Belgium, Brussels)
    Abstract: The purpose of this paper is to see whether and how G-10 banks have complied with the 1988 Basel Accord. The interest of this study lies in the fact that the standardized approach to credit risk in the New Basel Accord is conceptually similar to the 1988 agreement. However, very little is known about the reaction of non-US banks to the imposition of minimum capital requirements that make use of risk-weight categories. Building on previous studies, this paper uses a simultaneous equations model to analyze adjustments in capital and credit risk at banks from G- 10 countries over the 1988-95 period. The results show that regulatory pressure was successful in raising the capital to assets ratios of undercapitalized banks in Canada, Japan, the UK and the US but not in France and Italy. In addition, there is no evidence that undercapitalized G-10 banks increased or decreased their credit risk over the period studied. Interestingly, these findings are robust to the inclusion of a variable measuring the role of market discipline in influencing bank capital and risk choices. All in all, the results suggest that the 1988 Basel standards were effective in that, subsequent to their adoption, undercapitalized G-10 banks generally increased their capital but not their credit risk.
    Keywords: 1988 Basel Accord, capital requirements, credit risk
    JEL: G21 G28
    Date: 2005–09–11
  65. By: Romain Rancière; Aaron Tornell; Frank Westermann
    Abstract: In this paper, we document the fact that countries that have experienced occasional financial crises have on average grown faster than countries with stable financial conditions. We measure the incidence of crisis with the skewness of credit growth, and find that it has a robust negative effect on GDP growth. This link coexists with the negative link between variance and growth typically found in the literature. To explain the link between crises and growth we present a model where weak institutions lead to severe financial constraints and low growth. Financial liberalization policies that facilitate risk-taking increase leverage and investment. This leads to higher growth, but also to a greater incidence of crises. Conditions are established under which the costs of crises are outweighed by the benefits of higher growth.
    Keywords: Financial constraints, growth and institutions, bailout guarantees, volatility, emerging markets
    JEL: F34 F36 F43 O41
    Date: 2002–05
  66. By: Fernando Broner; Guido Lorenzoni; Sergio L. Schmukler
    Abstract: We argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long-term debt. First, we present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders. By issuing long-term debt, the government lowers the probability of a liquidity crisis, transferring risk to bondholders. In equilibrium, this risk is reflected in a higher risk premium and borrowing cost. Therefore, the government faces a trade-off between safer long-term borrowing and cheaper short-term debt. Second, we construct a new database of sovereign bond prices and issuance. We show that emerging economies pay a positive term premium (a higher risk premium on long-term bonds than on short-term bonds). During crises, the term premium increases, with issuance shifting toward shorter maturities. This suggests that changes in bondholders’ risk aversion are important to understand emerging market crises.
    Keywords: Emerging market debt; maturity structure; sovereign spreads; risk premium; term premium; financial crises
    JEL: E43 F30 F32 F34 F36 G15
    Date: 2004–08
  67. By: Gunnar Bårdsen (Bank of Norway and Department of Economics, Norwegian University of Science and Technology); Q. Farooq Akram (Bank of Norway); Øyvind Eitrheim (Bank of Norway)
    Abstract: We investigate whether there is a case for asset prices in interest rates rules within a small econometric model of the Norwegian economy, modeling the interdependence of the real economy, credit and three classes of assets prices: housing prices, equity prices and the nominal exchange rate. We compare the performance of simple and efficient interest rate rules that allow for response to movements in asset prices to the performance of more standard monetary policy rules. We find that including housing prices and equity prices in the policy rules can improve macroeconomic performance in terms of both nominal and real economic stability. In contrast, a response to nominal exchange rate fluctuations can induce excess volatility in general and prove detrimental to macroeconomic stability.
    Keywords: Monetary policy; asset prices; simple interest rate rules; econometric model
    JEL: C51 C52 C53 E47 E52
    Date: 2005–09–15
  68. By: Alejandro Gaytan; Romain Rancière
    Abstract: This paper presents empirical support for the existence of wealth effects in the contribution of financial intermediation to economic growth, and offers a theoretical explanation for these effects. Using GMM dynamic panel data techniques applied to study the growth-promoting effects of financial intermediation, we show that the exogenous contribution of financial development on economic growth has different effects for different levels of income per capita. We find that this contribution is generally increasing with the level of income per capita of the economy, up to a relatively high level of income. This contribution is consistently lower for poor countries; and for some low levels of income per capita it can be negative. We provide a model to account for these wealth effects. The model is a overlapping generations growth model where financial intermediaries implement liquidity risk sharing among depositors. We show that at early stages of economic development, a bank can increase welfare of its depositors only at the cost of lowering investment and growth. However, once the economy has crossed certain wealth threshold, the liquidity role of banks becomes unambiguously growth enhancing. As wealth increases, banks offer improving liquidity insurance, and higher growth; however, for high levels of wealth, growth generated by financial intermediation declines as the economy attains the optimal level of consumption risk sharing.
    Keywords: Financial development, economic growth, OLG growth models, liquidity, financial intermediation
    JEL: E44 G21 O16 O40
    Date: 2004–01
  69. By: Heski Bar-Isaac; Vicente Cuñat
    Abstract: We consider borrowers with the opportunity to raise funds from a competitive baking sector, that shares information about borrowers, and an alternative hidden lender. We highlight that the presence of the hidden lender restricts the contracts that can be obtained from the banking sector and that in equilibrium some borrowers obtain funds from both the banking sector and the (inefficient) hidden lender simultaneously. We further show that as the inefficiency of the hidden lender increases, total welfare decreases. By extending the model to examine a partially hidden lender, we further highlight the key role of information.
    Keywords: Hidden Borrowing, Informal Lenders, Borrower Screening, Long Term Debt
    JEL: G21 G33 D14
    Date: 2005–01
  70. By: Patrick Van Roy (National Bank of Belgium, Brussels)
    Abstract: This paper focuses on the standardised approach to credit risk in Basel II. The minimum capital requirements for the corporate, interbank and sovereign loan portfolios of a representative bank in each EMU country are evaluated by means of Monte-Carlo simulations depending on the credit rating agencies chosen by the bank to risk-weight its exposures. Three main results emerge from the analysis. First, although the use of different combinations of credit rating agencies leads to significant differences in minimum capital requirements, these differences never exceed 10% of banks’ regulatory capital for loans to corporates, banks and sovereigns on average in the EMU. Second, the standardised approach provides a small regulatory capital incentive for banks to use several credit rating agencies to risk-weight their exposures. Third, the minimum capital requirements for the corporate, interbank and sovereign loan portfolios of EMU banks will be higher in Basel II than in Basel I. I also show that the incentive for banks to engage in regulatory arbitrage in the standardised approach to credit risk is limited.
    Keywords: New Basel Accord, capital requirements, credit rating agencies
    JEL: G
    Date: 2005–09–11
  71. By: Agustin Carstens (International Monetary Fund); Luis I. Jacome H. (International Monetary Fund)
    Abstract: This study takes stock of the institutional reform of monetary policy in Latin America since the early 1990s. It argues that strengthening the legal independence of central banks, together with macroeconomic policies, was instrumental in reducing inflation from three-digit annual rates in the 1990s to single-digit territory in 2004. The paper also discusses the main challenges of monetary policy today, namely, achieving price stability, restoring market confidence in domestic currencies, and sticking to policy consistency despite adverse effects of the volatility of capital flows. Finally, recurrent banking crises and lack of fiscal discipline are identified as the main risks for the success of monetary policy in Latin America.
    Keywords: Central banks independence, monetary policy, inflation, Latin America
    JEL: E42 E52 E58
    Date: 2005–09–15
  72. By: Fernando Broner; Jaume Ventura
    Abstract: The goal of this paper is to study the e¤ects of globalization on the workings of financial markets. We adopt a "technological" view of globalization, which consists of an exogenous reduction in the cost of shipping goods across di¤erent regions of the world. We model financial markets where agents anonymously trade securities issued by every other agent in the world. In the absence of frictions, we show how globalization creates trade opportunities among residents of different regions of the world, thereby raising welfare. In the presence of sovereign risk, however, there emerge two crucial interactions between trade among residents within a region and trade among residents of di¤erent regions. First, the more residents within a region trade with each other, the more they can trade with residents of other regions. Second, the possibility of trade with residents of other regions sometimes leads a government to not enforce payments by its residents, destroying trade opportunities among residents within the region. The net effect on welfare of this process of creation and destruction of trade opportunities is ambiguous. We argue that there are no policies governments can take to avoid the negative effects of globalization on trade among domestic residents. In a dynamic extension, we analyze how our results are a¤ected by reputational considerations.
    Keywords: Financial integration, anonymous markets, sovereign risk, domestic markets, international markets
    JEL: F34 F36 G15
    Date: 2005–03
  73. By: Peter Tenim; Joachim Voth
    Abstract: This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare's Bank, a fledgling West End London banker, knew that a bubble was in progress and nonetheless invested in the stock; it was profitable to "ride the bubble." Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by institutional factors such as restrictions on short sales or agency problems. Instead, this study demonstrates that predictable investor sentiment can prevent attacks on a bubble; rational investors may only attack when some coordinating event promotes joint action.
    Keywords: Efficient Market Hypothesis, Bubbles, Crashes, Synchronization Risk, Investor Sentiment, South Sea Bubble, Market Timing, Limits to Arbitrage
    JEL: G14 E44 N23
    Date: 2004–12
  74. By: Peter Tenim; Joachim Voth
    Abstract: Finance is important for development, yet the onset of modern economic growth in Britain lagged the British financial revolution by over a century. We present evidence from a new West-End London private bank to explain this delay. Hoare’s Bank loaned primarily to a highly select and well-born clientele, although it did not discriminate against “unknown” borrowers in the early 18th century. It could not extend credit more generally because of government restrictions (usury limits) and policies (frequent wars). Britain’s financial development could have aided growth substantially, had it not been for the rigidities and turmoil introduced by government interference.
    Keywords: Financial Revolution, growth, finance, rationing, usury laws, institutional evelopment, eighteenth-century England
    JEL: E44 N23 N13 G21 G18 G28
    Date: 2005–05
  75. By: Westernhagen,N. van; Harada,E.; Nagata,T.; ... (Bank for international settlements, Basel committee on banking supervision)
    Date: 2004
  76. By: M. J. Roche (Economics, NUI Maynooth, Ireland)
    Abstract: Agents are assumed to have a power risk aversion utility function in an otherwise standard asset pricing model. These preferences are shown to be capable of eliminating one version of the equity premium and risk free rate puzzles when they display decreasing relative risk aversion.
    Keywords: asset pricing,equity premium,risk aversion
    JEL: G10 G12
    Date: 2005–02
  77. By: Francis Vitek (University of British Columbia)
    Abstract: We survey and update the empirical literature concerning the predictability of nominal exchange rates using structural macroeconomic models over the recent floating exchange rate period. In particular, we consider both flexible and sticky price versions of the monetary model of nominal exchange rate determination. In agreement with the existing empirical literature, we find that nominal exchange rate movements are difficult to forecast, with a random walk generally dominating the monetary model in terms of predictive accuracy conditional on observed monetary fundamentals at all horizons.
    Keywords: Exchange rate forecasting; Monetary model
    JEL: F31
    Date: 2005–09–14
  78. By: Robert H. Rasche; Marcela M. Williams
    Abstract: The analysis addresses changing views of the role and effectiveness of monetary policy, inflation targeting as an "effective monetary policy," monetary policy and short-run (output) stabilization, and problems in implementing a short-run stabilization policy.
    Keywords: Monetary policy
    Date: 2005
  79. By: Gemmill, Gordon T; Hwang, Soosung; Salmon, Mark
    Abstract: We examine a simple measure of portfolio performance based on prospect theory, which captures not only risk and return but also reflects differential aversion to upside and downside risk. The measure we propose is a ratio of gains to losses, with the gains and losses weighted (if desired) to reflect risk-aversion for gains and risk-seeking for losses. It can also be interpreted as the weighted ratio of the value of a call option to a put option, with the benchmark as the exercise price. When applying the loss-aversion performance measure to closed-end funds, we find that it gives significantly different rankings from those of conventional measures (such as the Sharpe ratio, Jensen's alpha, the Sortino ratio, and the Higher Moment measure), and gives the expected signs for the odd and even moments of tracking errors. However, loss-aversion performance is not more closely related to discounts on funds than are the conventional performance measures, so we have not found evidence that loss-aversion attracts investors to particular funds in the short-term.
    Keywords: closed-end-fund puzzle; loss aversion; performance measurement; prospect theory
    JEL: G11 G23
    Date: 2005–08
  80. By: Morrison, Alan; White, Lucy
    Abstract: We model the interaction between two economies where banks exhibit both adverse selection and moral hazard and bank regulators try to resolve these problems. We find that liberalizing bank capital flows between economies reduces total welfare by reducing the average size and efficiency of the banking sector. This effect can be countered by a adopting a 'level playing field' forcing international harmonization of capital requirements and deposit rates across economies. Such a policy is good for weaker regulators whereas a laissez-faire policy under which each country chooses its own capital requirement is better for the higher quality regulator. We find that imposing a level playing field among countries is globally optimal provided regulators’ abilities are not too different, and comment on how shocks will be transmitted differently across the two policy regimes. We extend the model to allow for multinational banks, licensed by both regulators, showing that the same considerations arise in this context. Allowing multinationals improves welfare when bank capital can flow across borders, despite the negative impact on local banks.
    Keywords: bank regulation; capital; international financial regulation; level playing field; multinational banks
    JEL: F36 G21 G28
    Date: 2005–09
  81. By: Alain Ize; Eduardo Levy Yeyati
    Abstract: De facto (unofficial) dollarization, defined as the holding by residents of assets and liabilities denominated in a foreign currency, is a policy concern in an increasing number of developing economies. This paper addresses the dollarization debate from this perspective, with the goal of setting the stage for a more detailed and focused discussion of whether de-dollarization should be a policy objective and, if so, how best to pursue this objective. We review existing theories of de facto dollarization and the extent to which they are supported by the available evidence, presents the main strategies for reform, and proposes a list of policy recommendations.
    Date: 2005
  82. By: Hewad Wolasmal (American University in Dubai, Nordic Consultancy Services)
    Keywords: Sharpe, Treynor, Jensen
    JEL: G
    Date: 2005–09–21
  83. By: Yann Bramoullé; Rachel Kranon
    Abstract: This paper considers the formation of risk-sharing networks. Following empirical findings, we build a model where risk-sharing takes place between pairs of individuals. We ask what structures emerge when pairs can agree to form links, but people cannot coordinate links across a population. We consider a benchmark model where identical individuals commit to share their monetary holdings equally with linked partners. We compare efficient networks to equilibrium networks. Efficient networks can (indirectly) connect all individuals and involve full insurance. However, equilibrium networks connect fewer individuals. There is an externality: when breaking a link individuals do not take into account the negative effect on others distant in the network. The network formation process can lead identical individuals to be in different positions and thus have different risk-sharing outcomes. These results may help explain empirical findings that risk-sharing is often not symmetric or complete.
    Keywords: Informal insurance, social networks
    JEL: O17 D85 Z13
    Date: 2005

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.