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on Financial Markets |
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Issue of 2005‒10‒15
forty-one papers chosen by |
| By: | Lorenzo Cappiello (European Central Bank); Nikolaos Panigirtzoglou (Queen Mary, University of London) |
| Abstract: | The goal of this study is to measure market prices of risk and the associated foreign exchange risk premia extending the approach proposed by Balduzzi and Robotti (2001) to an international framework. Estimations of minimum variance stochastic discount factors permits the determination of market prices of risk, which, in turn, in an international framework, allow to compute foreign exchange risk premia. Market prices of risk are time-varying and surge during financial turmoil. This may be interpreted as an increase of the investors’ coefficient of risk aversion during turbulent financial markets. Foreign exchange risk premia are also time-varying and they exhibit most variation from the early ‘70s onwards, when the Bretton Wood exchange rate system collapsed. |
| Keywords: | Foreign exchange, Risk premia, Pricing kernel |
| JEL: | G12 G15 F31 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp547&r=fmk |
| By: | Prasad Bidarkota (Department of Economics, Florida International University); J. Huston McCulloch (Department of Economics, Ohio State University) |
| Abstract: | We develop a framework in which information about firm value is noisily observed. Investors are then faced with a signal extraction problem. Solving this would enable them to probabilistically infer the fundamental value of the firm and, hence, price its stocks. If the innovations driving the fundamental value of the firm and the noise that obscures this fundamental value in observed data come from non-Gaussian thick-tailed probability distributions, then the implied stock returns could exhibit volatility clustering. We demonstrate the validity of this effect with a simulation study. |
| Keywords: | stock returns, volatility clusters, GARCH processes, signal extraction, thick-tailed distributions, simulations |
| JEL: | C22 E31 C53 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0304&r=fmk |
| By: | Chinn,M.D.; Ito,H. (University of Wisconsin-Madison, Social Systems Research Institute) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:att:wimass:20054&r=fmk |
| By: | Sue Mialon |
| Abstract: | This paper provides a theoretical ratification of efficiency of internal capital markets. The efficiency of internal capital market is examined in the context of horizontal mergers. In Cournot oligopoly, merged firms often optimally select the multidivisional structure in which competition among the merging partners remains in production while the headquarters establishes strong central control over resource allocation to the divisions. Under this structure, mergers not only combine the merging partners’ capital, but also provide the merged firm with a new opportunity to reallocate that capital in an efficient way. Horizontal mergers are profitable due to the efficiency of internal capital markets. Such horizontal mergers also enhance market competition. I discuss the conditions under which the multidivisional structure (the M-form) is optimal for the merged firm while complete fusion of all the merging partners under a single authority is also feasible. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0522&r=fmk |
| By: | Prasad Bidarkota (Department of Economics, Florida International University) |
| Abstract: | We investigate the economic importance of modeling non-linearities in the dynamics of exogenous processes on the implied moments of endogenous variables in the context of the consumption-based asset pricing model. For this purpose, we model the endowment process alternatively as a linear autoregression and as a non-linear threshold autoregression. The asset pricing model with non-linear endowment is solved using quadrature techniques. A comparison of the moments of the model-implied rates of return in the two cases suggests that the economic impact of modeling non-linearities is less than 0.01 percent per annum. |
| Keywords: | asset pricing, rates of return, non-linearities, threshold autoregressions, numerical solutions |
| JEL: | G12 C22 C52 C63 |
| Date: | 2003–11 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:0305&r=fmk |
| By: | LaFond, Ryan |
| Abstract: | This paper investigates the subsequent return implications of accruals within a sample of large, developed, international equity markets and assesses whether similar institutional features account for the accrual anomaly across countries. I investigate the returns implications of accruals in 17 countries over the 1989 to 2003 time period. In general, the results of country-specific analysis indicate that the accrual anomaly is a global phenomenon. After decomposing total accruals, I find, in general, that accrual mispricing is largest for working capital accruals, specifically current asset accruals. However, the results of further analysis suggest that there is no dominant factor that explains the accrual anomaly internationally. Overall, the results indicate that the accrual anomaly is present in international markets yet the factor(s) driving the accrual anomaly appear to vary across markets. |
| Date: | 2005–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:mit:sloanp:27856&r=fmk |
| By: | Dimitrios Tsomocos; Lea Zicchino |
| Abstract: | Not only in the classic Arrow-Debreu model, but also in many mainstream macro models, an implicit assumption is that all agents honour their obligations, and thus there is no possibility of default. That leads to well-known problems in providing an essential role for either money or for financial intermediaries. So, in more realistic models, the introduction of minimal financial institutions, for example default and banks, becomes a logical necessity. But if default involved no penalties, everyone would do so. Hence there must be default penalties to allow for an equilibrium with partial default. What we show here is that there is an equivalence between a general equilibrium model with incomplete markets (GEI) and endogeneous default, and a model with exogenous probabilities of default (PD). The practical, policy implications are that a key function of regulators (via bankruptcy codes and default legislation), or the markets (through default premia) are broadly substitutable. The balance between these alternatives depends, however, on many institutional details, which are not modelled here, but should be a subject for future research. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp548&r=fmk |
| By: | Stefano DellaVigna; Joshua Pollet |
| Abstract: | Do firms release news strategically in response to investor inattention? We consider news about earnings and analyze the response of returns to announcements on Friday and other weekdays. Friday announcements have less immediate and more delayed stock return response. The delayed response as a percentage of the total response is 60 percent on Friday and 40 percent on other weekdays. In addition, abnormal trading volume around announcement day is 10 percent lower for Friday announcements. These findings suggest that weekends distract investor attention temporarily. They support explanations of post-earning announcement drift based on underreaction to information caused by limited attention. We also document that firms release worse announcements on Friday. Friday announcements are associated with a 45 percent higher probability of a negative earnings surprise and a 50 basis points lower abnormal return. The firm-based evidence of strategic news release corroborates the investor-based evidence of inattention on Friday. The results for stock returns, volume, and strategic behavior support the hypothesis of limited attention. |
| JEL: | G1 G3 J0 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11683&r=fmk |
| By: | Shin-ichi Fukuda (Faculty of Economics, University of Tokyo); Munehisa Kasuya (Research and Statistics Department, The Bank of Japan); Jouchi Nakajima (Graduate School of Economics, University of Tokyo) |
| Abstract: | When a borrower faces an informational hold-up problem, deteriorating bank health might reduce a borrower's credit availability. However, a bank with an impaired balance sheet might attempt to "gamble for resurrection" and hence increase risky lending to "zombie" firms. The purpose of this paper is to investigate what impacts the weakened financial conditions of banks had on loans outstanding to medium-size firms in Japan. Estimating lending functions, we examine the determinants of lending to unlisted Japanese companies in the late 1990s and early 2000s. We find that two alternative measures of bank health -regulatory capital adequacy ratios and ratios of non-performing loans (NPLs)- had opposite impacts on lending. In the case of regulatory capital adequacy ratios, its deterioration had a perverse impact on lending. The deteriorating NPL ratios, however, increased lending to troubled firms to keep otherwise economically bankrupt firms alive. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf364&r=fmk |
| By: | Joe Chen (Faculty of Economics, University of Tokyo) |
| Abstract: | The well-publicized Christie-Schultz collusion hypothesis provides an experiment for studying the determinants of market structure in Nasdaq markets. Some markets experienced substantial compression in the profit margins for market makers due to the change of quoting convention from odd-eighth avoidance to the use of the full spectrum of eighths. Contrary to what competitive theory predicts, the empirical results suggest that this change led to net entry of market makers, after controlling for a time fixed effect, trading activity, information aspects of trading, market size, volatility, and unobserved individual market effects. Moreover, the robustness and significance of this finding do not change as different estimation methods are employed to correct for possible self-selection bias of the estimated average treatment effect. Surprisingly, dealer firms entered these markets despite the compression of profit margins. An explanation is provided based on collusion and investment in entry deterrence related to the practice of ``preferencing". (JEL L11 G20 C33) |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf357&r=fmk |
| By: | Tetsuji Okazaki (Faculty of Economics, University of Tokyo); Michiru Sawada (Faculty of Economics, Nagoya Gakuin University); Ke Wang (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper examines how the close ties between banks and non-banking firms-the so-called "organ bank" relationship in Japanese banking literature-declined through bank failures and banking consolidations in pre-war Japan. With a unique dataset compiled from 1,007 Japanese banks that were doing business between 1926 and 1936, we measure the degree of the "organ bank" relationship by the number of people who worked as directors or auditors for both a bank and a non-banking firm at the same time. We found that the number of "interlocking directors" declined in our sample period, when there were many bank failures and bank mergers and acquisitions. Furthermore, the remaining interlocked directors, after the wave of bank failures and consolidations, no longer demonstrated negative effects on the performance of the banks, as measured by their profitability. Our findings suggest, based on experience in Japan, that banking consolidations and selection through failure may help eliminate the detrimental connections between banks and non-banking firms. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf379&r=fmk |
| By: | Tetsuji Okazaki (Faculty of Economics, University of Tokyo); Michiru Sawada (Nagoya Gakuin University); Kazuki Yokoyama (Faculty of Economics, Nagoya City University) |
| Abstract: | In pre-war Japan, many banks were controlled by industrial companies through capital and personal relationships. Those banks are known as "organ banks" (kikan ginko). Organ banks engaged in unsound lending to their related companies, which resulted in damage to the banks' financial positions and consequently destabilized the financial system. This is a popularly held view of the financial history of pre-war Japan (organ bank hypothesis). However, this view has been based largely on case studies and casual observations. In this paper we examine the organ bank hypothesis using quantitative data and econometric methodology. To measure the extent of connections between banks and non-banking companies, we compiled a comprehensive database of directors and auditors of banks and non-banking companies in 1926. It was found that interlocking of directors and auditors between banks and non-banking companies was very pervasive. More than 80% of ordinary banks had at least one director or auditor who was at the same time a director or auditor of at least one non-banking company. Also, regression analyses confirmed that director interlocking had a negative effect on bank performance, especially for smaller banks. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf355&r=fmk |
| By: | Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais)); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal)) |
| Abstract: | En recourant de plus en plus aux modèles à forme réduite, la théorie de l'évaluation du risque de crédit se distance de plus en plus de l'ingénierie financière traditionnelle qui donne la part belle aux modèles structurels. Bien qu'ils postulent l'absence d'arbitrage, les modèles à forme réduite reposent sur la distribution des pertes d'une entreprise dans un monde risque-neutre plutôt que sur un processus de diffusion. Il s'ensuit que la faillite n'est pas un processus prévisible comme dans le modèle original de Merton mais survient de façon subite. L'avenir de l'évaluation du risque de crédit semble être du côté des modèles hybrides qui combinent les modèles structurels et les modèles à forme réduite. |
| Keywords: | évaluation des actifs, risque de crédit, ingénierie financière. |
| JEL: | G12 G13 G33 |
| Date: | 2005–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:0322005&r=fmk |
| By: | Michael Thorpe |
| Abstract: | China currently maintains an exchange rate fixed against the US dollar and a (relatively) closed capital account, while exercising an independent, controlled interest rate environment. Domestic and international pressures have been mounting for the Chinese government to re-adjust the currency peg or allow more flexibility in the exchange rate and to free up the capital account to foster greater integration with global markets. Given the need for developing a more mature financial system to meet the needs of a growing market economy and with unrestricted foreign bank entry in 2007, there is also a need for less regulated and more market driven interest rates. To the extent that authorities seek to maintain exchange rate stability while easing capital controls, they must forsake monetary independence. This is the so-called macroeconomic policy "trilemma" constraining macroeconomic policy makers generally. The need for continuing reform of China's currently fragile domestic banking system further influences the nature and timing of policy options. This paper reviews recent macroeconomic management performance in China and assesses the options facing policy makers for reform of the financial system given the current environment and subject to the constraint of existing institutional arrangements. |
| Keywords: | China, banking, financial repression, exchange rate, capital |
| JEL: | G2 O16 E44 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0502&r=fmk |
| By: | Andreoni,J.; Che,Y.-K.; Kim,J. (University of Wisconsin-Madison, Social Systems Research Institute) |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:att:wimass:20066&r=fmk |
| By: | Lee,J.; Chinn,M.D. (University of Wisconsin-Madison, Social Systems Research Institute) |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:att:wimass:200411&r=fmk |
| By: | Naohiko Baba (Financial Markets Department and Institute for Monetary and Economics Studies, Bank of Japan); Motoharu Nakashima (Financial Markets Department, Bank of Japan); Yousuke Shigemi (Secretariat of the Policy Board); Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | Using the interest rates on Negotiable Certificate of Deposit issued by individual banks, we first show that under the Bank of Japan's Zero Interest Rate Policy and Quantitative Monetary Easing Policy, not just the levels of money market rates but also the dispersion of rates across banks have fallen to near zero. We next show that the fall in the dispersion of the rates is not fully explained by a fall in the dispersion of credit ratings of the banks. We also present some evidence on the role of the Bank of Japan's monetary policy in reducing risk premiums. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf374&r=fmk |
| By: | David Stark |
| Abstract: | Our task in this paper is to analyze the organization of trading in the era of quantitative finance. To do so, we conduct an ethnography of arbitrage, the trading strategy that best exemplifies finance in the wake of the quantitative revolution. In contrast to value and momentum investing, we argue, arbitrage involves an art of association - the construction of equivalence (comparability) of properties across different assets. In place of essential or relationa l characteristics, the peculiar valuation that takes place in arbitrage is based on an operation that makes something the measure of something else - associating securities to each other. The process of recognizing opportunities and the practices of making novel associations are shaped by the specific socio-spatial and socio-technical configurations of the trading room. Calculation is distributed across persons and instruments as the trading room organizes interaction among diverse principles of valuation. |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:894&r=fmk |
| By: | Arturo C. Porzecanski (American University) |
| Keywords: | International finance, sovereign debt, sovereign default |
| JEL: | F3 F4 |
| Date: | 2005–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0510011&r=fmk |
| By: | Arief Ramayandi (AJRC - Australia-Japan Research Centre) |
| Abstract: | Among other things, the 1997–98 East Asian financial crisis has led to questioning within the Association of Southeast Asian Nations (ASEAN) about whether the region needs a common currency. This paper aims to discuss the underlying economic issues and prospects, from both a theoretical and a practical point view. The analysis focuses only on the five largest ASEAN nations. Standard criteria suggested by the theory of Optimal Currency Areas are reviewed and applied to the region. The paper then provides a discussion on possible steps that can be pursued to realise currency union. |
| Keywords: | East Asian Financial crisis, monetary cooperation, ASEAN, Optimal Currency Areas, currency union |
| JEL: | E42 E52 E61 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:636&r=fmk |
| By: | James Laurenceson (EAERG - School of Economics, The University of Queensland) |
| Abstract: | This paper critically comments on the policy literature surrounding China’s exchange rate regime. It first seeks to expose as myths several popularly raised contentions regarding the dollar peg employed by China, including the belief that the RMB is clearly undervalued and that its value is a prominent cause of the U.S trade deficit. The paper then describes a consensus position that has emerged which argues that in the interests of better promoting its own macroeconomic stability, China should abandon the peg in favor of a more flexible exchange rate regime. We see numerous weaknesses in this position but a few stand out. Available data do not suggest that flexible regimes outperform fixed regimes in terms of inflationary outcomes. Moving to a flexible regime is also far from proximate policy response to the problems that are in evidence in China’s economy. Institutional realities that make moving to a flexible regime difficult also appear to have been seriously overlooked. The paper concludes by noting that in the longer term moving to a more flexible regime may be in China’s best interests. But for now, the focus needs to be firmly in the area of domestic financial reform. |
| URL: | http://d.repec.org/n?u=RePEc:qld:uqeaer:01&r=fmk |
| By: | Arturo C. Porzecanski (American University) |
| Keywords: | International finance, sovereign debt, sovereign default |
| JEL: | F3 F4 |
| Date: | 2005–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0510014&r=fmk |
| By: | Nora Dihel; Blanka Kalinova |
| Abstract: | La présente étude s’appuie sur les méthodologies de mesure les plus avancées pour évaluer la restrictivité et les effets des obstacles aux échanges de services dans un certain nombre d’économies en transition, à savoir les États baltes, huit pays d’Europe du Sud-Est (pour les télécommunications et les services bancaires) et la Russie (pour les télécommunications). Parmi les pays considérés, les États baltes arrivent en tête du point de vue de la libéralisation des services de télécommunications et des services bancaires, ce qui les place dans une situation comparable à celle de la plupart des pays développés. Par comparaison, les pays d’Europe du Sud-Est disposent d’une marge plus importante d’amélioration des performances et des prix dans les télécommunications, qu’il s’agisse des services à réseau fixe ou cellulaire, puisqu’ils peuvent encore abolir les restrictions générales à la concurrence et ne plus limiter les prises de participation étrangères. En ce qui concerne les services bancaires, les résultats indiquent que les marchés des pays d’Europe du Sud-Est sont relativement contestables ; leurs décideurs seraient donc fondés à s’intéresser en priorité à la stabilité macroéconomique et à la réforme structurelle. Selon nos estimations pour les télécommunications, la Russie se situe généralement à mi-chemin entre les États baltes et les pays d’Europe du Sud-Est. Le fait d’adhérer à... |
| Keywords: | télécommunications, économies de transition, libéralisation, services, secteur bancaire, avantage, obstacle, OMC |
| Date: | 2004–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:oec:traaab:7-fr&r=fmk |
| By: | Petra M. Geraats |
| Abstract: | Despite the recent trend towards greater transparency of monetary policy, in many respects central bankers still prefer to speak with mystique. This paper shows that the resulting perception of ambiguity could be desirable. Under the plausible assumption that there is imperfect common knowledge about the degree of central bank transparency, economic outcomes are affected by both the actual and perceived degree of transparency. It is shown that actual transparency is beneficial but that it may be useful to create the perception of opacity. The optimal communication strategy for the central bank is to provide clarity about the inflation target and to communicate information about the output target and supply shocks with perceived ambiguity. In this respect, the central bank benefits from sustaining transparency misperceptions, which helps to explain the mystique of central bank speak. |
| Keywords: | Transparency, monetary policy, communication, transparency misperceptions. |
| JEL: | E52 E58 D82 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0543&r=fmk |
| By: | Néstor Adrián Amado (UNSTA); Ana María Cerro (UNSTA & Universidad Nacional de Tucumán, Argentina); Osvaldo Meloni (Universidad Nacional de Tucumán, Argentina) |
| Abstract: | Crises, like “explosive cocktails” are made by mixing powerful ingredients. Argentina has made 26 “explosive cocktails” since 1823. How many ingredients are needed to make an “explosive cocktail”? Which are these ingredients? Which is the most expensive mix? This paper attempts to identify the different recipes that ended up in economic crisis throughout argentine economic history by means of the regression tree analysis technique. The paper also measures Argentina’s crises costs in terms output losses. We follow the methodology used by the IMF (1998), that is, computing cumulative output lost relative to trend. It is found that there are four explosive mixes, having Fiscal Deficit, Real Exchange Rate Overvaluation, Bank Deposit growth rate decline and the ratio of External Debt to Exports as the key ingredients. The most frequent crises are those having high fiscal deficit; though average cost is higher for crises mixing moderate fiscal with strong decline in Real Bank Deposits, presumably entailing banking crises. |
| Keywords: | Currency Crises, Regression Tree Analysis, Crises Costs |
| JEL: | F1 F2 |
| Date: | 2005–10–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpeh:0510001&r=fmk |
| By: | Arturo C. Porzecanski (American University) |
| Keywords: | International finance, sovereign debt, sovereign default |
| JEL: | F3 F4 |
| Date: | 2005–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0510013&r=fmk |
| By: | Sule Alan (Department of Economics, York University) |
| Abstract: | Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising one is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies strongly point to a significant structural (state) dependence in the the stock market entry decision, which is consistent with costs of these types. However, the magnitude of these costs are not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of (annual) permanent income. My estimated model matches the zero median holding as well as the hump-shaped age-participation profile observed in the data. |
| Keywords: | Entry costs, Stock market, Structural estimation |
| JEL: | G11 D91 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:yca:wpaper:1&r=fmk |
| By: | Carmen Díaz-Roldán; Oscar Bajo-Rubio |
| Abstract: | In this paper we analyze the nature of the shocks hitting the EMU member countries over the period 1991-2004, as well as for the two subperiods before and after 1999, i.e., the start of EMU. To this end, we first evaluate the relative importance of symmetric vs. asymmetric shocks, and then extract their temporary component. Our final aim would be assessing the vulnerability of the EMU countries to temporary and asymmetric shocks, which would be the most harmful case for the operation of a monetary union. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdadef:05-08&r=fmk |
| By: | Nora Dihel; Blanka Kalinova |
| Abstract: | This paper applies the most advanced methodologies for measuring services barriers to calculate the restrictiveness and the impact of services barriers in selected transition economies, i.e. the Baltic States, and eight South Eastern European (SEE) countries (for telecommunications and banking) and Russia (for telecommunications). Among the selected countries, the Baltic countries record the highest liberalisation scores for both telecommunications and banking services making their situation comparable to that of most developed countries. By contrast, the SEE countries have more room to improve their performance and the price level of their telecommunication services, both in fixed and cellular services by eliminating general restrictions on competition and removing barriers to foreign equity participation. With respect to banking services, the results suggest that the SEE markets are fairly contestable; policy priorities would thus appear to be broad issues of macroeconomic stability and structural reform. The telecommunications estimates put Russia in an intermediate position between the results for the Baltic States and the SEE countries. The WTO... |
| Keywords: | telecommunications, transition economies, services, banking, liberalisation, barriers, benefits, WTO |
| Date: | 2004–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:oec:traaab:7-en&r=fmk |
| By: | Tassos Anastasatos (Dept of Economics Univ. of Loughborough); Ian R. Davidson (Business School Univ. of Loughborough) |
| Abstract: | This paper presents formal evidence that currency episodes display heterogeneity in terms of their evolution, their impact on the inflicted economy and their links with financial, political and macroeconomic fundamentals. Limited-dependent variable models for ordered and unordered outcomes along with their heteroskedastic and random effects extensions are applied on a large panel of data comprising 40 years of monthly observations on 23 developed countries. Heterogeneity, complemented by indications of self-fulfilling expectations and noise, suggest that time and region specific predictive approaches and policy responses are more useful than trying to base analysis and policy decisions on more general patterns. Results are established with formal specification tests. |
| Keywords: | Currency crises; speculative pressure; exchange rate; devaluation; Limited-dependent variable models. |
| JEL: | F31 C23 C25 E44 G15 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2004_12&r=fmk |
| By: | Enrique G. Mendoza |
| Abstract: | The dominant view in the empirical literature on exchange rates is that the high variability of real exchange rates is due to movements in exchange-rate-adjusted prices of tradable goods. This paper shows that this dominant view does not hold in Mexican data for the periods in which the country had managed exchange rate regimes. Variance analysis of a 30-year sample of monthly data shows that movements in the price of nontradables relative to tradables account for up to 70 percent of the variability of the real exchange rate during these periods. The paper proposes a model in which this stylized fact, and the Sudden Stops that accompanied the collapse of Mexico's managed exchange rates, could result from an endogenous amplification mechanism operating via nontradables prices in economies with dollarized liabilities and credit constraints. The key feature of this mechanism is Irving Fisher's debt-deflation process. Numerical evaluation suggests that the Fisherian deflation effects on consumption, the current account, and relative prices dwarf those induced by the standard balance sheet effect typical of the Sudden Stops literature. |
| JEL: | F30 F41 G11 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11691&r=fmk |
| By: | Nymoen, Ragnar (Dept. of Economics, University of Oslo) |
| Abstract: | Failures are not rare in economic forecasting, probably due to the high incidence of shocks and regime shifts in the economy. Thus, there is a premium on adaptation in the forecast process, in order to avoid sequences of forecast failure. This paper evaluates a sequence of inflation forecasts in the Norges Bank Inflation Report, and we present automatized forecasts which are unaffected by forecast failure. One conclusion is that the Norges Bank fan-charts are too narrow, giving an illusion of very precise forecasts. The automatized forecasts show more adaptation once shocks have occurred than is the case for the official forecasts. On the basis of the evidence, the recent inflation forecast failure appears to have been largely avoidable. The central bank’s understanding of the nature of the transmission mechanism and of the strenght and nature of the disinflationly shock that hit the economy appear to have played a major role in the recent forecast failure. |
| Keywords: | Inflation forecasts; Monetary policy; Forecast uncertainty; Fan-charts; Structural change; Econometric models. |
| JEL: | C32 C53 E37 E44 E47 E52 E58 |
| Date: | 2005–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:osloec:2005_022&r=fmk |
| By: | Fred Ramb; Markus Reitzig |
| Abstract: | We originally investigate the comparative usefulness of patent data as a source of investor information depending on the market cycle (bull/bear market). Based on comprehensive data for firms listed on German exchanges between 1997 and 2002, we demonstrate that patent data contain complementary explanatory power to accounting data irrespective of the standard used to prepare the financial statement (German GAAP, IAS and US GAAP). Moreover, we provide original evidence that only patent data are able to provide plausible investor information in both bull-market and bear-market periods, whereas accounting information overvalues intangible assets in bull markets and undervalues them in bears. |
| Keywords: | Investor information; market value; patents |
| JEL: | D82 G14 M41 K11 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:aal:abbswp:05-15&r=fmk |
| By: | Arturo C. Porzecanski (American University) |
| Keywords: | International finance, sovereign debt, sovereign default |
| JEL: | F3 F4 |
| Date: | 2005–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0510012&r=fmk |
| By: | Yoshiro Miwa (Faculty of Economics, University of Tokyo); J. Mark Ramseyer (Harvard University) |
| Abstract: | Firms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect. This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf381&r=fmk |
| By: | Heitor Almeida; Thomas Philippon |
| Abstract: | In this paper we argue that risk-adjustment matters for the valuation of financial distress costs, since financial distress is more likely to happen in bad times. Systematic distress risk implies that the risk-adjusted probability of financial distress is larger than the historical probability. Alternatively, the correct valuation of distress costs should use a discount rate that is lower than the risk free rate. We derive a formula for the valuation of distress costs, and propose two strategies to implement it. The first strategy uses corporate bond spreads to derive risk-adjusted probabilities of financial distress. The second strategy estimates the risk adjustment directly from historical data on distress probabilities, using several established asset pricing models. In both cases, we find that exposure to systematic risk increases the NPV of financial distress costs. In addition, the magnitude of the risk-adjustment can be very large, suggesting that a valuation of distress costs that ignores systematic risk significantly underestimates their true present value. Finally, we show that marginal distress costs computed using our new formula can be large enough to balance the marginal tax benefits of debt derived by Graham (2000), and we conclude that systematic distress risk can help explain why firms appear rather conservative in their use of debt. |
| JEL: | G31 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11685&r=fmk |
| By: | Kazuo Ueda (Faculty of Economics, University of Tokyo) |
| Abstract: | This paper reviews and evaluates the Bank of Japan (BOJ)'s monetary policy during the period 1998-2005. In doing so, it pays particular attention to the development of academic thinking on what central banks can do at or near zero interest rates and its relationship with the actual policy measures adopted by the BOJ. The paper argues that the BOJ has done most of the things recommended by academic economists. The most important of these is expectations management as crystallized in the so-called zero interest rate policy. The academic origin of this policy can be found in the seminal work of Krugman. The paper points out, however, that this fact, unfortunately, remained unnoticed by many, and explores reasons behind. The paper then goes on to survey the empirical literature on the effects of the measures adopted by the BOJ. The literature has found that the zero interest rate policy has had significant effects on the term structure of interest rates and supported the economy. Finally, the paper discusses possible reasons for the failure of such measures to stop the deflation of the economy within a short period of time. It points out some difficulties inherent in the expectations management approach and problems created by the impaired financial system. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2005cf375&r=fmk |
| By: | Pål Boug, Ådne Cappelen and Torbjørn Eika (Statistics Norway) |
| Abstract: | Several small open economies switched to inflation targeting during the 1990s, thereby giving up various forms of exchange rate targeting in favour of flexible exchange rates. Norway did the same early in 2001, and has thereafter experienced highly varying nominal exchange rates with consumer price inflation dropping far below the target during 2003 and 2004. Knowledge of the degree of exchange rate pass-through to import prices and further to consumer prices is essential for inflation targeting. The literature suggests that pass-through is greater to import prices than to consumer prices, which presumably is related to the role of distributors in the economy. We present empirical evidence on these issues for Norway by estimating import price equations and a dynamic model of the distributors pricing behaviour. Using a large-scale macroeconometric model of the Norwegian economy, we find exchange rate pass-through to import prices to be quite rapid in the short run, while pass-through to consumer prices seems to be modest. We show that, among the numerous channels through which the exchange rate operate, trade margins in the distribution sector act as cushions to exchange rate fluctuations, thereby being one of the main important source for the delay in pass-through. In spite of moderate pass-through to consumer prices, we find inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks. |
| Keywords: | Exchange rate pass-through; pricing behaviour; the distribution sector; econometric modelling and macroeconomic analysis |
| JEL: | C51 C52 E31 F31 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:429&r=fmk |
| By: | Philip Inyeob Ji; Jae H. Kim |
| Abstract: | This paper examines the linkage of real interest rates of a group of Pacific-Basin countries with a focus on East Asia. We consider monthly real interest rates of the US, Japan, Korea, Singapore, and Thailand from 1980 and 2004. The impulse response analysis and half-life estimation are conducted in a multivariate setting, adopting the bias-corrected bootstrap as a means of statistical inference. It is found that the degree of capital market integration has increased after the Asian financial crisis in 1997. The evidence suggests that the crisis has substantially changed the nature of the short run interactions among the real interest rates. Before the crisis, both the US and Japanese capital markets dominated the region. However, after the crisis, the dominance of the Japanese market has completely disappeared, while the US remains as a sole dominant player. |
| Keywords: | Financial crisis, Bias-correction, Bootstrapping, Capital market Integration, Half-life, Impulse response analysis, Vector autoregression. |
| JEL: | F36 E44 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2005-23&r=fmk |
| By: | Jacobs, Jan P.A.M.; Kuper, Gerard H.; Lestano (Groningen University) |
| Abstract: | Indicators of financial crisis generally do not have a good track record. This paper presents an early warning system (EWS) for six countries in Asia in which indicators do work. Our binary choice model, which has been estimated for the period 1970:01–2001.12, has the following features. We extract a full list of currency crisis indicators from the literature, apply factor analysis to combine the indicators, and introduce dynamics. The quality of the EWS is assessed both in-sample and out-of-sample. We find that money growth (M1 and M2), national savings, and import growth correlate with currency crises. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugccs:200506&r=fmk |
| By: | Helena Marques (Loughborough University); Sushanta Mallick (Loughborough University) |
| Abstract: | This paper uses panel data to analyse the extent to which the prices of India’s imports and exports in nine product groups react to exchange rate changes before (1980-90) and after (1991-2001) a change in policy that included the adoption of a flexible exchange rate regime and an acceleration of trade liberalisation. It finds that for all the nine groups of Indian industries the null hypothesis of complete pass-through from exchange rate changes into import prices cannot be rejected. On the contrary, the results suggest that Indian exporters appear to have to some degree passed through exchange rate changes into foreign currency export prices in three industry groups in the 1980s and in six groups of industries in the 1990s. The increase in the number of sectors exhibiting some degree of pass-through in the 1990s, relative to the 1980s, may be partly attributable to the elimination of currency and trade controls. Whilst the pass-through into import prices does not exhibit a structural break around 1991, a Chow test revealed the existence of such structural break in pass-through into export prices. The pass-through to import prices seems to be exogenous (determined by external factors), but the pass-through to export prices appears to be endogenous (driven by internal factors, mostly trade and exchange rate policies). |
| Keywords: | sectoral exchange rate pass-through, pricing-to-market, panel estimation, India |
| JEL: | F13 F14 F31 F41 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2004_06&r=fmk |