nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒12‒09
fifty-five papers chosen by
Carolina Valiente
London South Bank University

  1. Non-synchronous Trading and Testing for Market Integration in Central European Emerging Markets By Schotman, Peter C; Zalewska, Anna
  2. How should central banks communicate? By Michael Ehrmann; Marcel Fratzscher
  3. The Importance of Nontradeable Goods' Prices in Cyclical Real Exchange Rate Fluctuations By Burstein, Ariel Thomas; Eichenbaum, Martin; Rebelo, Sérgio
  4. The Number of Bank Relationships of SMEs: A Disaggregated Analysis for the Swiss Loan Market By Prof. Dr. Doris Neuberger; Christoph Schacht
  5. The Industrial Organization of Financial Market Information Production By Chen, Zhaohui; Wilhelm Jr, William J
  6. Do the technical indicators reward chartists? A study on the stock markets of China, Hong Kong and Taiwan By Wing-Keung Wong; Jun Du; Terence Tai-Leung Chong
  7. Equilibrium and inefficiency in fixed rate tenders By Christian Ewerhart; Nuno Cassola; Natacha Valla
  8. Quadratic Portfolio Credit Risk models with Shot-noise Effects By Gaspar, Raquel M.; Schmidt, Thorsten
  9. Do Options Contain Information About Excess Bond Returns? By Caio Almeida; Jeremy J. Graveline; Scott Joslin
  10. Non-Linearities in the Relation between the Exchange Rate and its Fundamentals By Carlo Altavilla; Paul De Grauwe
  11. Trusting the Stock Market By Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
  12. Valuing defaultable bonds: an excursion time approach By Martina Nardon
  13. The Effects on Firm Borrowing Costs of Bank M&As By Fabián Duarte; Andrea Repetto; Rodrigo O. Valdés
  14. The Political Economy of Financial Fragility By Feijen, Erik; Perotti, Enrico C
  15. Default Risk in Corporate Yield Spreads By Georges Dionne; Geneviève Gauthier; Khemais Hammami; Mathieu Maurice; Jean-Guy Simonato
  16. Governance of securities clearing and settlement systems By Daniela Russo; Terry L. Hart; M. C. Malaguti; Chryssa Papathanassiou
  17. What Determines Differences in Foreign Bank Efficiency? Australian Evidence By Jan-Egbert Sturm; Barry Williams
  18. Downside Risk By Andrew Ang; Joseph Chen; Yuhang Xing
  19. BAD Taxation: Disintermediation and Illiquidity in a Bank Account Debits Tax Model By Pedro H. Albuquerque
  20. The Warsaw Stock Exchange Index WIG: Modelling and Forecasting By Piotr Wdowinski; Aneta Zglinska-Pietrzak
  21. Risk-Free Bond Prices in Incomplete Markets with Recursive Utility Functions and Multiple Beliefs By Chaiki Hara; Atsushi Kajii
  22. Near-rational exuberance By James Bullard; George W. Evans; Seppo Honkapohja
  23. Relationship Finance by Banks and Non-Bank Institutional Investors: A Review within the Theory of the Firm By Ettore Andreani; Prof. Dr. Doris Neuberger
  24. Do Capital Adequacy Requirements Matter for Monetary Policy? By Stephen G. Cecchetti; Lianfi Li
  25. The Effects of Market Linkages and the Natural Rate of Discoveries on Market Structure By Nuno Palma
  26. The EU Deposit Insurance Directive: Does One Size Fit All? By Huizinga, Harry
  27. microeconomics of achieving and sustaining supernormal returns- Information Theoretic Approach Revised Nov 28, 2005 By michael george
  28. Rational Inattention: A Solution to the Forward Discount Puzzle By Bacchetta, Philippe; van Wincoop, Eric
  29. Model Averaging and Value-at-Risk Based Evaluation of Large Multi-Asset Volatility Models for Risk Management By Pesaran, M Hashem; Zaffaroni, Paolo
  30. How Big a Problem is Too Big to Fail? By Frederic S. Mishkin
  31. Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms By Koji Sakai; Iichiro Uesugi; Tsutomu Watanabe
  32. How Are Loans by Their Main Bank Priced? Bank Effects, Information and Non-price Terms of Contract By Wako WATANABE
  33. Bank Control and the Number of Bank Relations of Japanese Firms By Kazuo Ogawa; Elmer Sterken; Ichiro Tokutsu
  34. L'assurance de portefeuille: Simulations en Visual Basic de portefeuilles visant à reproduire les flux monétaires de stratégies d'options By Francois-Éric Racicot; Raymond Théoret
  35. Financial Markets and Economic Growth in Poland: Simulations with an Econometric Model By Piotr Wdowinski
  36. Tasa de Cambio Real de Colombia: Un Enfoque E´mpírico No Lineal By Carlos A.Huertas Campos
  37. La dinámica industrial y el financiamiento de las pyme By José Miguel Benavente; Alexander Galetovic; Ricardo Sanhueza
  38. Financial Distress and Reputational Concerns By Hind Sami
  39. Banking Crises, Deposit Insurance, and Market Discipline: Lessons from the Asian Crises By Kaoru Hosono; Hiroko Iwaki; Kotaro Tsuru
  40. A Portrait of Hedge Fund Investors: Flows, Performance and Smart Money By Baquero, G.; Verbeek, M.
  41. The measurement of financial intermediation in Japan. By Gunther Capelle-Blancard; Jézabel Couppey-Soubeyran; Laurent Soulat
  42. Financial literature about discounted cash flow valuation By Fernandez, Pablo
  43. Exchange Rate Volatility and Central Bank Interventions By Freyan Panthaki
  45. Shareholder lock-in contracts : share price and trading volume effects at the lock-in expiry By Angenendt,P-P; Goergen,M.; Renneboog
  46. On the Financial Repression in Japan During the High Growth Period (1953-73) By Murat A. Yülek
  47. Duality and Derivative Pricing with Lévy Processes By José Fajardo; Ernesto Mordecki
  48. The Role of Collateral and Personal Guarantees in Relationship Lending: Evidence from Japan's Small Business Loan Market By Arito Ono; Iichiro Uesugi
  49. Current Account Deficits in Industrial Countries: The Bigger They are, the Harder They Fall? By Caroline Freund; Frank Warnock
  50. Resurrection of Rural Credit Delivery System in Maharashtra, India By Deepak Shah
  51. Static Hedging of Barrier Options under General Asset Dynamics: Unification and Application By Morten Nalholm
  52. Cash-Flow Risk, Discount Risk, and the Value Premium By Tano Santos; Pietro Veronesi
  53. Speculative Attacks on Nordic Exchange-Rates, 1971-1992 By Forsman, Mats-Ola
  54. Is There an Optimum Level of Financial Activity? By Michael Graff
  55. Options Pricing with Arithmetic Brownian Motion and its Implication for Risk-Neutral Valuation By Qiang Liu

  1. By: Schotman, Peter C; Zalewska, Anna
    Abstract: The paper contributes to the literature on integration of stock markets by addressing the issue of non-synchronous trading. We argue that controlling for time differences in trading hours of stock markets is important and show that time-adjustment improves estimates of market integration. We also show that using weekly frequency does not sidestep the consequences of the time-match problem but leads to significant loss of information. We show that the nature of integration of stock exchanges operating in the Czech Republic, Hungary, and Poland with the stock markets of Germany, UK and US in the period 1994-2004 is very dynamic. Finally, the study shows that the autocorrelation of returns on the main market indexes of the emerging markets have declined over time.
    Keywords: emerging markets; Kalman filter; market efficiency; market integration; non-synchronous trading
    JEL: G14 G15
    Date: 2005–11
  2. By: Michael Ehrmann (Correspondence to: European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany); Marcel Fratzscher (European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany)
    Abstract: The paper shows that central bank communication is a key determinant of the market’s ability to anticipate monetary policy decisions and the future path of interest rates. Comparing communication policies by the Federal Reserve, the Bank of England and the ECB since 1999, we find that communicating the diversity of views among committee members about monetary policy lowers the market’s ability to anticipate policy decisions as well as the future path of interest rates. This effect is sizeable, accounting for instance for one third to half of the prediction errors of FOMC policy decisions. By contrast, individualistic communication regarding the economic outlook is found to be beneficial for the Federal Reserve, enabling market participants to better anticipate the future path of interest rates. Thus, it is the collegiality of views on monetary policy but the diversity of views on the economic outlook that enhance the effectiveness of central bank communication.
    Keywords: Communication; monetary policy; committee; effectiveness; economic outlook; Federal Reserve; Bank of England; European Central Bank.
    JEL: E43 E52 E58 G12
    Date: 2005–11
  3. By: Burstein, Ariel Thomas; Eichenbaum, Martin; Rebelo, Sérgio
    Abstract: Changes in the price of nontradable goods relative to tradable goods account for roughly 50% of the cyclical movements in real exchange rates.
    Keywords: nominal exchange rates; nontradeable goods; prices; tradeable goods
    JEL: F31
    Date: 2005–10
  4. By: Prof. Dr. Doris Neuberger; Christoph Schacht (University of Rostock)
    Abstract: The present paper investigates the number of bank relationships of small and medium-sized enterprises in Switzerland using survey data from 1996 and 2002. We differentiate between overall bank relationships and lending relationships and disaggregate the loan market with respect to firm sizes, industries and banking groups. On average, bank lending declined, while the role of housebank relationships increased in 1996-2002. The development of the number of bank relationships seems to have been demand-driven as well as supply-driven for medium-sized firms, but only supply-driven for very small and small firms. Supply-side reductions resulted from the merger between two big banks and changes in credit risk management at major banks
    Keywords: relationship lending, housebank, loan market structure, multiple banks
    JEL: G21 G32
    Date: 2005
  5. By: Chen, Zhaohui; Wilhelm Jr, William J
    Abstract: In our model, information-producing agents can opt to produce from the sell-side, in which case they can only sell their information to other market participants, or produce from the buy-side, in which case they agent can trade in the financial market. If sell-side information substitutes for that produced on the buy-side, some form of subsidy is necessary to sustain sell-side production in equilibrium because sell-side agents cannot commit to narrow dissemination of their information among buy-side agents. Competition among buy-side agents leaves buy-side (private) information as the primary source of trading profits. Subsidizing sell-side research promotes welfare because such information enters financial market prices and thereby improves real investment decisions. But subsidies compromise welfare through conflicts of interest facing the sell-side analyst. We derive conditions under which the net welfare effect is positive and shed light on means of managing the tradeoff.
    Keywords: conflicts of interest; financial analysts; industrial organization; investment banking; securities regulation
    JEL: D82 G14 G24 L22
    Date: 2005–10
  6. By: Wing-Keung Wong (Department of Economics, National University of Singapore); Jun Du (Department of Economics, National University of Singapore); Terence Tai-Leung Chong (Department of Economics, The Chinese University of Hong Kong, Hong Kong)
    Abstract: This paper studies the profitability of applying technical analysis that signals the entry and exit from the stock market in three Chinese stock markets - the Shanghai, Hong Kong and Taiwan Stock Exchanges. The Simple Moving Average (MA) and its extensions, Exponential MA, Dual MA, Triple MA, MACD and TRIX for both long and short strategies are examined. Applying the trading signals generated by the MA family to the Greater China markets, significantly positive returns are generated, which outperform the buy-and-hold strategy. The cumulative wealth obtained also surpasses that of the buy-and-hold strategy regardless of transaction costs. In addition, we study the performance of the MA family before and after the 1997 Asian Financial Crisis and find that the MA family works well in both sub-periods and in different market conditions of bull runs, bear markets and mixed markets. That technical analysis can forecast the directions of these markets implies that the three China stock markets are not efficient.
    Keywords: Technical analysis, Moving Average, buy-and-hold strategy
    JEL: G1 C0
  7. By: Christian Ewerhart (Correspondence: Institute for Empirical Research in Economics (IEW), University of Zurich, Winterthurerstrasse 30, 8006 Zurich, Switzerland); Nuno Cassola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Natacha Valla (Banque de France, B.P. 140-01, 75049 Paris Cedex 01, France)
    Abstract: The fixed rate tender is one of the main procedural formats relied upon by central banks in their implementation of monetary policy. This fact stands in a somewhat puzzling contrast to the prevalent view in the theoretical literature that the procedure, by fixing interest rate and quantity at the same time, does not allow a strategic equilibrium. We show that an equilibrium exists under general conditions even if bidders expect true demand to exceed supply on average. The outcome is typically inefficient. It is argued that the fixed rate tender, in comparison to other tender formats, may be an appropriate instrument for central bank liquidity management when market conditions are sufficiently calm.
    Keywords: Fixed rate tenders; rationing; equilibrium; inefficiency.
    JEL: D44 E52
    Date: 2005–11
  8. By: Gaspar, Raquel M. (Dept. of Finance, Stockholm School of Economics); Schmidt, Thorsten (Department of Mathematics, University of Leipzig)
    Abstract: We propose a reduced form model for default that allows us to derive closed-form solutions to all the key ingredients in credit risk modeling: risk-free bond prices, defaultable bond prices (with and without stochastic recovery) and probabilities of survival. We show that all these quantities can be represented in general exponential quadratic forms, despite the fact that the intensity is allowed to jump producing shot-noise effects. In addition, we show how to price defaultable digital puts, CDSs and options on defaultable bonds. Further on, we study a model for portfolio credit risk where we consider both firm specific and systematic risks. The model generalizes the attempt from Duffie and Garleanu (2001). We find that the model produces realistic default correlation and clustering of defaults. Then, we show how to price first-to-default swaps, CDOs, and draw the link to currently proposed credit indices.
    Keywords: Credit risk; reduced-form models; CDS; CDO; quadratic term structures; shot-noise
    JEL: G12 G13 G33
    Date: 2005–12–02
  9. By: Caio Almeida (IBMEC Business School - Rio de Janeiro); Jeremy J. Graveline (Stanford Graduate School of Business); Scott Joslin (Stanford Graduate School of Business)
    Abstract: There is strong empirical evidence that risk premia in long-term interest rates are time-varying. These risk premia critically depend on interest rate volatility, yet existing research has not examined the impact of time-varying volatility on excess returns for long-term bonds. To address this issue, we incorporate interest rate option prices, which are very sensitive to interest rate volatility, into a dynamic model for the term structure of interest rates. We estimate three-factor affine term structure models using both swap rates and interest rate cap prices. When we incorporate option prices, the model better captures interest rate volatility and is better able to predict excess returns for long-term swaps over short-term swaps, both in- and out-of-sample. Our results indicate that interest rate options contain valuable information about risk premia and interest rate dynamics that cannot be extracted from interest rates alone.
    Date: 2005–11–30
  10. By: Carlo Altavilla; Paul De Grauwe
    Abstract: This paper investigates the relationship between the euro-dollar exchange rate and its underlying fundamentals. First, we develop a simple theoretical model in which chartists and fundamentalists interact. This model predicts the existence of different regimes, and thus non-linearities in the link between the exchange rate and its fundamentals. Second, we account for non-linearity in the exchange rate process by adopting a Markov-switching vector error correction model (MSVECM). Finally, the paper investigates the out-of-sample forecast performance of three competing models of exchange rate determination. The results suggest the presence of nonlinear mean reversion in the nominal exchange rate process. The implications are that different sets of macroeconomic fundamentals act as driving forces of the exchange rates during different time periods. More interestingly, the nonlinear specification significantly improves the forecast accuracy during periods when the deviation between exchange rate and fundamentals is large. Conversely, when the exchange rate is close to its equilibrium value it tends to be better approximated by a naïve random walk.
    Keywords: non-linearity, Markov-switching model, fundamentals
    JEL: C32 F31
    Date: 2005
  11. By: Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
    Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross-country data.
    Keywords: portfolio choice; stock market participation; trust
    JEL: D1 D8
    Date: 2005–10
  12. By: Martina Nardon (Università Ca' Foscari di Venezia, Dipartimento di Matematica Applicata)
    Abstract: Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical threshold. In the excursion approach the duration of default, the time period from the financial distress announcement through its resolution, is explicitly modeled. In this contribution, we provide a review of the literature on excursion time models of credit risk. Moreover, we examine the effects on credit spreads structure of different specifications of the event that triggers default.
    Keywords: Credit risk, structural models, excursion approach, default threshold, default probability.
    JEL: C15 C63 G12 G13
    Date: 2005–11–28
  13. By: Fabián Duarte; Andrea Repetto; Rodrigo O. Valdés
    Abstract: Over the past few decades, banking systems in both mature and emerging markets have experienced a wave of consolidations, and mergers and acquisitions (M&A). These developments have raised a number of questions among researchers and policy makers. A key concern refers to whether bank mergers benefit or harm borrowers. The goal of this paper is to study the effects on bank clients of these M&A deals, by analyzing their effects on the loan rates paid by a sample of Chilean manufacturing firms over the 1990-98 period. Using a unique data set on credit transactions between banks and their clients, we study whether borrowers’ terms of lending improve or worsen after the merger. Our methodology allows for a heterogeneous response of firms, depending upon the number of alternative funding sources available to them. We also allow for differences in the short- and long-term response of lending rates. Our results show that M&As do affect firms’ borrowing costs, that these effects are long-lasting, and that they critically depend on whether firms have alternative lending sources that guard them from the adverse effects that mergers may convey. These results are consistent with the hypotheses that bank lending is characterized by informational monopolies and other sources of switching costs, and that valuable client-bank relationship information may be lost over the M&A process.
    Date: 2005
  14. By: Feijen, Erik; Perotti, Enrico C
    Abstract: While financial liberalization has in general favourable effects, reforms in countries with poor regulation is often followed by financial crises. We explain this variation as the outcome of lobbying interests capturing the reform process. Even after liberalization, market investors must rely on enforcement of investor protection, which may be structured so as to block funding for new entrants, or limit their access to refinance after a shock. This forces inefficient default and exit by more leveraged entrepreneurs, protecting more established producers. As a result, lobbying may deliberately worsen financial fragility. After large external shocks, borrowers from the political elite in very corrupt countries may successfully lobby for weak enforcement, and retain control of collateral. We provide evidence that industry exit rates and profit margins after banking crises are higher in the most corrupt countries.
    Keywords: entry; exit; financial crises; inequality; political economy; refinancing; strategic default
    Date: 2005–10
  15. By: Georges Dionne; Geneviève Gauthier; Khemais Hammami; Mathieu Maurice; Jean-Guy Simonato
    Abstract: An important research question examined in the recent credit risk literature focuses on the proportion of corporate yield spreads which can be attributed to default risk. Past studies have verified that only a small fraction of the spreads can be explained by default risk. In this paper, we reexamine this topic in the light of the different issues associated with the computation of transition and default probabilities obained with historical rating transition data. One significant finding of our research is that the estimated default-risk proportion of corporate yield spreads in highly sensitive to the term structure of the default probabilities estimated for each rating class. Moreover, this proportion can become a large fraction of the yield spread when sensitivity analyses are made with respect to recovery rates, default cycles in the economy, and information considered in the historical rating transition data.
    Keywords: Credit risk, default risk, corporate yield spread, transition matrix, default probability, Moody's, Standard and Poor's, recovery rate, data filtration, default cycle
    JEL: G11 G12 G13 G21 G23
    Date: 2005
  16. By: Daniela Russo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Terry L. Hart; M. C. Malaguti; Chryssa Papathanassiou (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In the context of securities clearing and settlement systems, the nature of governance arrangements acquires a dimension that goes beyond their traditional function in corporate law. They constitute a tool for regulators and central banks to achieve their respective policy goals relating to market operation, market integrity, and systemic stability. In the light of the analysis of this paper, and pending a further evolution in the regulation of securities clearing and settlement in the Community, the following conclusions can be drawn. Whatever the model of corporate governance used in a jurisdiction, securities clearing and settlement systems should adopt and ensure effective implementation of the highest corporate governance standards or best practices adopted or recommended for companies in the jurisdiction in which it operates as such standards or practices evolve over time. Generally, this would imply that securities clearing and settlement systems at minimum should adopt and implement the best practices recommended for listed companies. Additionally, a securities clearing or settlement system should adopt corporate governance mechanisms adequate to address the interests of users and the public in the operation of the system. Such mechanisms should be organized so that the criteria followed to select participants on the board or on specialized committees are established ex ante. Board members should also take into account the interests of users and the public in board decisions, in particular, those relating to qualifications for system access, fair pricing, the integrity of the risk management system, innovation and efficiency, and the achievement of the policy objectives of competent authorities. Securities clearing and settlement systems should make adequate disclosures regarding their corporate governance arrangements so that users and the public can ascertain the manner in which conflicts of interest among owners, the board, users and the public interest are prevented, resolved or mitigated. Corporate governance arrangements of securities clearing and settlement systems should be the subject of adequate regulation and oversight to ensure that services are provided at fair prices to users under fair and equitable conditions of access; that the risk management programs of system operators are effective; that risk management decisions are not affected by considerations extraneous to the risk management function; and that, to the maximum extent possible, functional service providers compete in equivalent conditions of competition. Looking forward, the adoption of a harmonized regulatory regime for securities clearing and settlement systems should be considered to complete the internal market within the Community and to better achieve the policy goals identified in this paper relating to the governance of those systems.
    Keywords: clearing, settlement, governance, risk management, oversight.
    JEL: G29 G34 L49 K2
    Date: 2004–10
  17. By: Jan-Egbert Sturm; Barry Williams
    Abstract: This study applies parametric distance functions to estimate the efficiency of foreign banks in Australia, and subsequently employs extreme bounds analysis to establish the determinants of foreign bank efficiency that are robust to model specification. The limited global advantage hypothesis of Berger et al (2000) is supported. Following clients is found to reduce the efficiency of the profit-creation process. The market share of the incumbent banks acts as a barrier to entry to efficiency in the retail market, with acquisition of a domestic bank reducing this effect. Internet-based bank product delivery reduces the efficiency of profit creation in the initial phases of operation, and parent profits do not improve efficiency in the host market.
    Keywords: foreign bank efficiency, distance functions, extreme bounds analysis, barriers to entry, following clients
    JEL: C15 C52 G15 G21
    Date: 2005
  18. By: Andrew Ang; Joseph Chen; Yuhang Xing
    Abstract: Economists have long recognized that investors care differently about downside losses versus upside gains. Agents who place greater weight on downside risk demand additional compensation for holding stocks with high sensitivities to downside market movements. We show that the cross-section of stock returns reflects a premium for downside risk. Specifically, stocks that covary strongly with the market when the market declines have high average returns. We estimate that the downside risk premium is approximately 6% per annum. The reward for bearing downside risk is not simply compensation for regular market beta, nor is it explained by coskewness or liquidity risk, or size, book-to-market, and momentum characteristics.
    JEL: C12 C15 C32 G12
    Date: 2005–12
  19. By: Pedro H. Albuquerque (Texas A&M International University)
    Abstract: This paper uses a dynamic general equilibrium model to study the economic effects of bank account debits (BAD) taxation. Australia and various Latin American countries have levied or levy BAD taxes. Aspects such as financial disintermediation, market illiquidity, and impacts on dividend and interest rates are considered. Part of the BAD tax revenue may be fictitious, due to increased interest payments on government debt. The Brazilian BAD tax (CPMF) experience is evaluated. The empirical analysis confirms some theoretical predictions. Incidence base over GDP appears to be sensitive to the tax rate, possibly engendering a Laffer curve. The tax may also cause real interest rates to increase. Furthermore, the deadweight losses are relatively large, even if revenues are small. The theoretical and empirical results suggest that the BAD tax is not adequate for revenue collection.
    Keywords: Bank Account Debits Tax, BAD Tax, Financial Transactions Tax, FTT, Currency Transaction Tax, CTT, Automated Payment Transaction Tax, APT Tax, CPMF, Disintermediation, Illiquidity
    JEL: H20 E62
    Date: 2005–11–26
  20. By: Piotr Wdowinski; Aneta Zglinska-Pietrzak
    Abstract: In this paper we have assessed an influence of the NYSE Stock Exchange indexes (DJIA and NASDAQ) and European Stock indexes (DAX and FTSE) on the Warsaw Stock Exchange index WIG within a framework of a GARCH model. By applying a procedure of checking predictive quality of econometric models as proposed by Fair and Shiller (1990), we have found that the NYSE market has relatively more power than European markets in explaining the WSE index WIG.
    Keywords: Warsaw Stock Exchange, stock index, GARCH model, forecasting
    JEL: C20 C50 C60 G10
    Date: 2005
  21. By: Chaiki Hara (Faculty of Economics and Politics, University of Cambridge); Atsushi Kajii (Institute of Economic Research, Kyoto University)
    Abstract: We consider an exchange economy under uncertainty, in which agentsf utility functions exhibit constant absolute risk aversion, but they may be recursive and the expected utility calculation may be based on multiple subjective beliefs. The risk aversion coefficients, subjective beliefs, subjective time discount factors, initial endowments, and tradeable assets may differ across agents. We prove that the risk-free bond price goes down (and the interest rate goes up) monotonically as the markets become more complete. We find the range of equilibrium bond prices that depends on the primitives of the economy but not on the structures of financial markets.
    Keywords: multiple priors; no trade; dynamic consistency; interim efficiency; rectangularityi
    JEL: D52 D91 E21 E44 G12
    Date: 2004–05
  22. By: James Bullard (Federal Reserve Bank of St. Louis, USA); George W. Evans (University of Oregon, USA); Seppo Honkapohja (University of Cambridge, United Kingdom)
    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: 2005–11
  23. By: Ettore Andreani; Prof. Dr. Doris Neuberger (University of Rostock)
    Abstract: In continental Europe, banks are more and more replaced by non-bank institutional investors in the financing and control of firms. This must not imply a shift to arm’s length finance, if these institutional investors develop relationships with firms similar to the traditional longterm bank-firm relationship. The present paper differentiates between relationship banking and relationship investing within the theory of the firm and compares the financial and corporate control services provided by both arrangements
    Keywords: relationship banking, relationship investing, banks, institutional investors, corporate governance, theory of the firm
    JEL: G20 G30 L14 L22
    Date: 2004
  24. By: Stephen G. Cecchetti; Lianfi Li
    Abstract: Central bankers and financial supervisors often have different goals. While monetary policymakers want to ensure that there are always sufficient lending activities to maintain high and stable economic growth, supervisors work to limit banks. lending capacities in order to prevent excessive risk-taking. To avoid working at cross-purposes, central bankers need to adopt a policy strategy that accounts for the impact of capital adequacy requirements. In this paper we derive an optimal monetary policy that reinforces prudential capital requirements at the same time that it stabilizes aggregate economic activity. We go on to show that policymakers at the Federal Reserve adjust interest rate policy in a way that would neutralize the procyclical impact of bank capital requirements. By contrast, central bankers in Germany and Japan clearly do not act as the theory suggests they should.
    JEL: E52 E58 G21
    Date: 2005–12
  25. By: Nuno Palma
    Abstract: The traditional approach makes investment in innovation constrained by market structure. This paper explores the causality from innovation to market structure. Omitting this causality direction on empirical models may explain empirical problems and contradictions on these models.
    Keywords: R&D; Market Structure.
    JEL: L11 O31
  26. By: Huizinga, Harry
    Abstract: The EU deposit insurance directive requires member states to maintain deposit insurance with a minimum insured amount of 20,000 euros. This paper reviews the rationale for international coordination of deposit insurance policies. For international externalities of deposit insurance policies to exist, there has to be international ownership of either bank deposits or bank shares. On both counts, EU banking markets are currently highly integrated. The minimum coverage of 20,000 euros imposes costs if it forces some countries to 'overinsure' deposits. From a national perspective, the deposit insurance directive does not appear to result in overinsurance in the EU-15, but there may be overinsurance in several of the new member states.
    Keywords: deposit insurance; international coordination
    JEL: F36 G28
    Date: 2005–10
  27. By: michael george (george group)
    Abstract: This paper develops a set of management and production criteria needed to be used in order to maximize profits and shareholder values. If these criteria are achieved, the firm may achieve and sustain “supernormal” profits and revenue growth. The criteria developed here are all related to the stream of information value from the market, and the velocity of the resulting flow of information through the marketing, development, production and distribution processes. These streams are constructed in terms of their “Shannon information velocity” which provides a new way to derive the set of variables that effect (and maximize) the shareholder value. Rather than equating demand and supply at each point in time, the decision criteria is based on the Information Theoretic rate of market observations, and comparing it to the thermodynamic-analogue rate at which the firm reduces its costs per product manufactured, and the rate at which the products and services it offers respond to market changes. In addition, the paper derives the requisite valuation procedures for product and offering creation and destruction. To fulfill their role in maximizing shareholder value, management’s decision rule is based on analyzing the possible reduction of the internal process Boltzmann entropy and increase of external Shannon entropy of each potential investment and process at a certain time interval. The rule of maximizing Information Velocity leads to the most cost-effective investment in time and money and market responsiveness. With the above derivation, it is shown that the shareholder value of all business processes are driven by the rate at which the information is generated by the market is matched by the responsive acceleration of information within the business processes. Empirical examples are provided which confirm that superior Information Velocity in all processes achieves and sustains supernormal returns.
    Keywords: Supernormal returns, Entropy, Information Velocity,, Work in Progress,Thermodynamics,Shannon, Boltzmann,Carnot, Dell, Compaq, IBM,GM,Toyota,,Henry Ford, Alfred Sloan
    JEL: D1 D2 D3 D4
    Date: 2005–11–26
  28. By: Bacchetta, Philippe; van Wincoop, Eric
    Abstract: The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks.
    Keywords: excess return predictability; forward discount puzzle; rational inattention
    JEL: E44 F31 G1
    Date: 2005–10
  29. By: Pesaran, M Hashem; Zaffaroni, Paolo
    Abstract: This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as a way of dealing with the risk of inadvertently using false models in portfolio management. Evaluation of volatility models is then considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as ‘average’ models. The asymptotic as well as the exact finite-sample distribution of the test statistic, dealing with the possibility of parameter uncertainty, are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns based on 22 of Standard & Poor’s 500 industry group indices over the period 1995-2003. We find strong evidence in support of ‘thick’ modelling proposed in the forecasting literature by Granger and Jeon (2004).
    Keywords: decision-based evaluations; model averaging; value-at-risk
    JEL: C32 C52 C53 G11
    Date: 2005–10
  30. By: Frederic S. Mishkin
    Abstract: This review essay examines whether too-big-to-fail is as serious a problem as Gary Stern and Ron Feldman contend. This essay argues that Stern and Feldman overstate the importance of the too-big-to-fail problem and do not give enough credit to the FDICIA legislation of 1991 for improving bank regulation and supervision. However, this criticism of the Stern and Feldman book does not detract from many of its messages. Even if the too-big-to-fail problem is not as serious as they contend, the policies they outline can make it less likely that a banking crisis will occur even if driven by other factors.
    JEL: G21 G28
    Date: 2005–12
  31. By: Koji Sakai; Iichiro Uesugi; Tsutomu Watanabe
    Abstract: This paper investigates how a firm's borrowing cost evolves as it ages. Using a new data set of more than 200,000 bank-dependent small firms in 1997-2002, we find the following. First, the distribution of borrowing cost tends to become less skewed to the right over time. Second, this shift of the distribution can be partially attributable to "selection" (i.e., firms with lower quality and higher borrowing costs exit from markets), but mainly explained by "adaptation" (i.e., surviving firms' borrowing costs decline as they age). Third, we find an age dependence of a firm's borrowing costs even if we control for firm size, but fails to find an age dependence of its profits volatility once we control for firm size. Empirical results suggest that age dependence of borrowing costs comes not from the Diamond's reputation-acquisition mechanism, but from bank's learning about borrower's true quality over the duration of bank-borrower relationship.
    Date: 2005–11
  32. By: Wako WATANABE
    Abstract: We analyze how loans to Japanese small and medium entities by their main banks are priced using the matched data of firms and their main banks. The data on firms include informational characteristics of firms collected in the survey. Our findings are: 1. The borrower's transparency (to its main bank) does not affect the borrowing rate. 2. The firm's solvency reduces the borrowing rate. These are consistent with predictions of finance theories based on information economics. We also found that treating non-price terms of a loan contract as endogenous is crucial in consistently estimating the firm's borrowing rate.
    Date: 2005–11
  33. By: Kazuo Ogawa; Elmer Sterken; Ichiro Tokutsu
    Abstract: We explore the determinants of the number of long-term bank relations of listed Japanese firms using a unique data set covering the period 1982-1999. Japanese listed firms have about seven long-term bank loan relations on average, but show a large variation around the average. We analyze the determinants of the choice for the number of bank relations. We use data on loan and equity ownership to address the impact of the Japan-specific bank-firm relations and bank control on the number of loans decision. Having a relation with a top-equity holding bank reduces the number of bank relations, while debt-rich and cash-poor firms have more bank relations.
    Keywords: firm-bank relations, single versus multiple borrowing, bank control, discrete choice models
    JEL: G21 G32
    Date: 2005
  34. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais) et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal))
    Abstract: In this paper, we simulate portfolios which aim to insure the invested capital. The object of our simulations is the duplication of the cashflows of strategies based on options. We initially show how to duplicate the cash-flows of a call by using a leveraged portfolio of stocks. After, we simulate another portfolio which aims to replicate a protective put. Finally, we simulate the cushion technique of Black and analyse the sensitivity of the insured portfolio to some parameters like the degree of risk aversion of the investor. We consider the limits of each of the studied strategies.
    Keywords: Financial Engineering; Portfolio Insurance; Monte Carlo simulation.
    JEL: G12 G13 G33
    Date: 2005–11–23
  35. By: Piotr Wdowinski
    Abstract: In this paper we present simulations of economic performance of the Polish economy based on a quarterly econometric model. The model consists of 22 stochastic equations, which link the financial market with the real economy. The purpose of the research is to present effects of changes to domestic and foreign interest rates and the EUR/USD exchange rate on economic growth in Poland over the period Q2, 1993 - Q2, 2003.
    Keywords: financial market, economic growth, econometric model, simulation, Poland
    JEL: C30 C50 E60 F10 G10
    Date: 2005
  36. By: Carlos A.Huertas Campos
    Abstract: Este documento muestra evidencia de una relación no lineal entre la Tasa de Cambio Real (TCR) de Colombia y sus fundamentales. Utilizando un modelo exponencial auto-regresivo de transición suave (ESTAR), se encontró que la TCR bilateral de Colombia frente a México y a Estados Unidos, responde inealmente a ciertos fundamentales, y no linealmente a sus desalineamientos.
    Keywords: Tasa de cambio real, equilibrio de la tasa de cambio real.
    JEL: C32 F31
  37. By: José Miguel Benavente; Alexander Galetovic; Ricardo Sanhueza
    Abstract: Las pyme pagan más que las empresas grandes por su financiamiento, se les exigen garantías, se las financia a plazos cortos y muchas no se pueden endeudar. Se piensa que estas prácticas son fallas de mercado que deberían corregirse con intervenciones regulatorias. Sin embargo, nosotros argumentamos que son respuestas apropiadas a (i) el mayor costo medio de los préstamos pequeños; (ii) el problema de la selección originado por la salida y reemplazo de firmas que ocurre en todas las industrias, que es más intenso cuando se trata de pymes; (iii) la necesidad de alinear los incentivos de deudores y acreedores cuando la información es asimétrica. Mostramos que estas prácticas también son comunes en países con mercados de capitales desarrollados. Finalmente, proponemos medidas para mejorar el financiamiento de las pyme. SMEs pay more for credits than large firms, their loans tend to be granted against collateral and on short repayment terms, and many are redlined. These practices have usually been interpreted as financial-market imperfections that discriminate against SMEs. We argue that they are responses to (i) the higher average cost of smaller loans; (ii) the selection problems due to the natural replacement of business in all industries, which is much more acute among SMEs; (iii) the need to align the incentives of financiers and entrepreneurs when information is asymmetric. We show that these practices are widspread in countries where capital markets are developed. We also make several proposals to increase access to financing by SMEs
    Date: 2005
  38. By: Hind Sami (GATE CNRS)
    Abstract: This article examines the interaction between the restructuring process of a financially distressed firm and the behavior of its manager. We analyze a situation in which a bank decides to offer a renegotiation to a distressed firm, yet the manager is reluctant to implement a restructuring even when this would be efficient. We show that a combination of factors, including the bank's monitoring activity and managers' reputational concerns, can explain the reluctance of managers to accept a renegotiation. We analyze the optimal renegotiation o¤er in such a setting and derive some implications about the design of firms. Our model predictions about managers' behavior under reputational concerns are able to match important stylized empirical facts. In particular, Hotchkiss (1995) documents the failure to get distressed firms to provide disclosure statement and to efficiently restructure. While her explanation relates to the US bankruptcy design that allows management to make inefficient self-serving decisions, ours emphasizes managers' reputational concerns.
    Keywords: Asymmetric information, Financial distress, Renegotiation
    JEL: D82 G21 G32 G33 G34
    Date: 2005–11
  39. By: Kaoru Hosono; Hiroko Iwaki; Kotaro Tsuru
    Abstract: We investigate the effectiveness of market discipline by depositors during the period of 1992-2002 in the four crisis-hit Asian countries: Indonesia, Korea, Malaysia and Thailand. In Indonesia, the crises first weakened and then strengthened market, which is consistent with the wake-up-call effect found for the Latin American crisis-hit countries (Martinez Peria and Schmukler, 2001). Unlike Indonesia, we could not find an increase in depositors' responsiveness to bank risk after the crisis in the other three countries. In Korea and Thailand, depositors' risk sensitivity rather decreased after the crisis. In these countries, market discipline was at play before the crisis and the deposit protection schemes were constructed to ensure its credibility under stable political conditions.
    Date: 2005–12
  40. By: Baquero, G.; Verbeek, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We explore the flow-performance interrelation by explicitly separating the investment and divestment decisions of hedge fund investors. The results show that different determinants and evaluation horizons underlie both decisions. While money inflows are sensitive to past long-run performance, outflows exhibit an immediate and sustained response to past performance in the short run. As a consequence, the shape of the flow-performance relation differs depending on the time horizon being analyzed. We find a weaker flow-performance relation for winning funds at quarterly horizons compared to annual horizons, which may explain why quarterly persistence in hedge fund performance is not competed away. Indeed, we also find evidence that most investors are unable to exploit the persistence of the winners. Conversely, investors are fast and successful in deallocating from the persistent losers, ensuring a disciplining mechanism for lowquality funds. Further, our findings do not support the existence of smart money.
    Keywords: Hedge Funds;Flow-Performance Relation;Performance Persistence;Liquidity Restrictions;Fund Monitoring;Searching Costs;Smart Money;
    Date: 2005–11–18
  41. By: Gunther Capelle-Blancard (EconomiX-Université Paris X Nanterre et TEAM); Jézabel Couppey-Soubeyran (TEAM); Laurent Soulat (ESCEM Tours et TEAM)
    Abstract: In this paper, we compute financial intermediation ratios for Japan (1970-2003) on a book value basis. According to our results, the intermediation ratio has remained quite stable, at around 85%. However, this stability is the result of two opposing trends : a decrease in credits and an increase in financial securities owned by financial (mostly, non banking) institutions. These two opposing trends would not have appeared if we had used traditional indicators computed as a fraction on GDP, or that build on a narrow definition of intermediation or use market value data. Fundamentally, our results provide evidence for a very close relation between intermediate financings and market financings and tend to reject the hypothesis of the Japanese financial system's convergence toward a capital market-based system.
    Keywords: Disintermediation, financial system, intermediaries, capital markets.
    JEL: G10 G21 G32 G38
    Date: 2005–06
  42. By: Fernandez, Pablo (IESE Business School)
    Abstract: There is a wealth of literature about discounted cash flow valuation. In this paper, we will discuss the most important papers, highlighting those that propose different expressions for the value of the tax shield (VTS). The discrepancies between the various theories on the valuation of a company's equity using discounted cash flows originate in the calculation of the value of the tax shield (VTS). This paper illustrates and analyzes 7 different theories and presents a new interpretation of the theories.
    Keywords: discounted cash flow valuation; cash flow valuation; value of tax shields; present value of the net increases of debt; required return to equity;
    JEL: G12 G31 G32
    Date: 2005–06–15
  43. By: Freyan Panthaki
    Abstract: This paper studies the impact of Swiss National Bank interventions, and news about these interventions, on the intraday volatility of the Swiss franc -U.S. dollar exchange rate. It extends the existing literature by characterising the the impact of different aspects of central bank interventions, like direction, size, frequency and time of intervention, on exchange rate volatility. Briefly, the paper finds that the effect of intervention on volatility varies depending on how volatility is defined. Interventions decrease volatility contemporaneously but this effect is reversed in the two hours afterwards. This relationship is symmetric with respect to the direction of the intervention, whether they be buy and sell interventions or with-the-wind and against-the-wind interventions.  Analysis of the volatility and intervention size relationship finds that as we move from small to large interventions, the larger interventions tend to increase volatility relative to small interventions. The frequency of interventions has a small but positive impact on volatility, and this is underscored when the analysis is done by splitting the sample into low, average and high frequency interventions. The interaction between intervention size and intervention frequency results in a small positive effect on volatility for the squared return measure and the absolute return measure and a negative effect for both the realised volatility measures this effect is negative. As before the effect of the timing of the intervention varies with the volatility measure.  The relationship is different for interventions at different times of the day.  For the two realised volatility measures 9am interventions reduce volatility while for the other two measures the significant coeffcients have an overall positive effect increasing volatility. 2pm interventions decrease volatility for both the squared return measures but increase volatility for both the absolute return measures. Reuters reports of sell interventions have a significant and lagged negative effect on volatility for the squared return measure and both the absolute return measures.
    Date: 2005–11
  44. By: Fadil Govori (Instituti per Financa dhe Menaxhment)
    Abstract: Kursimet shpërndahen midis investimeve dhe shpenzimeve, përmes tregëtimit të letrave me vlerë në tregjet financiare. Funksionet e institucioneve financiare ndërmjetëse konkretizohen permes kontributit të tyre në lehtësimin dhe përmirësimin e kalimit dhe të distribuimit të fondeve financiare, në shumë forma, dhe në shumë aspekte. Funksionet themelore të ndërmjetësimit financiarë janë: • Mekanizmi i pagesave, • Tregëtimi i letrave me vlerë, • Ekonomizimet e shkallës, • Harmonizimi i maturitetit dhe likuiditetit, • Shpërndarja e riskut; • Menaxhmenti portfolio; dhe • Tatimi i diferencuar mbi të ardhurat. Të gjitha këto funksione janë me rendësi për një sistem financiar eficient. Menaxherët financiar po përmirësojnë aftësitë për performansën e operacioneve dhe transaksioneve financiare, edhe përmes komunikimit të avancuar elektronik, përpunimit kompjuterik të informacionit, dhe strukturimit institucional. Këto funksione janë karakteristike për të gjithë agjentët e sistemit financiar.
    JEL: G
    Date: 2005–11–28
  45. By: Angenendt,P-P; Goergen,M.; Renneboog (TILEC (Tilburg Law and Economics Center))
    Date: 2005
  46. By: Murat A. Yülek
    Abstract: Japanese financial policies during the so called High Growth Period (HGP-roughly 1953-1973) stand at sharp contrast with the presumptions of the financial liberalization literature. Against the Japanese example, McKinnon (1991) and Horiuchi (1984) have argued, based on relatively high interest rates in Japan during this period compared to developed economies, that the Japanese financial market was not repressed. In this paper, Japanese financial policies during the HGP are examined to show the heavy and distortionary but purposeful government intervention in the financial markets. Moreover evidence is provided against those of McKinnon and Horiuchi to show that major interest rates have been repressed during the HGP. Finally, the reasons that forced the Japanese government to implement financial liberalization after 1973 are discussed. These reasons do not include considerations related to growth and the growth performance have declined after 1973.
    Keywords: Japanese financial policies
    JEL: G
    Date: 2005–11–24
  47. By: José Fajardo (IBMEC Business School - Rio de Janeiro); Ernesto Mordecki (Centro de Matemática, Facultad de Ciências, Universidad de la República, Uruguay)
    Abstract: The aim of this work is to use a duality approach to study the pricing of derivatives depending on two stocks driven by a bidimensional Lévy process. The main idea is to apply Girsanov's Theorem for Lévy processes, in order to reduce the posed problem to the pricing of a one Lévy driven stock in an auxiliary market, baptized as "dual market". In this way, we extend the results obtained by Gerber and Shiu (1996) for two dimensional Brownian motion. Also we examine an existing relation between prices of put and call options, of both the European and the American type. This relation, based on a change of numeraire corresponding to a change of the probability measure through Girsanov's Theorem, is called put-call duality. It includes as a particular case, the relation known as put-call symmetry. Necessary and sufficient conditions for put-call symmetry to hold are obtained, in terms of the triplet of predictable characteristic of the Lévy process.
    Keywords: Lévy processes, Optimal stopping, Girsanov's Theorem, Dual Market Method, Derivative pricing, Symmetry
    JEL: G12 G13
    Date: 2005–11–25
  48. By: Arito Ono; Iichiro Uesugi
    Abstract: This paper investigates the role of collateral and personal guarantees in small business lending using the unique data set of Japan's small business loan market. Consistent with conventional theory, collateral is more likely to be pledged by riskier borrowers, implying they may be useful in mitigating debtor moral hazard. Contrary to conventional theory, we find that banks whose claims are either collateralized or personally guaranteed monitor borrowers more frequently. We also find that borrowers who establish long-term relationships with their main banks are more likely to pledge collateral. Our empirical evidence thus suggests that collateral and personal guarantees are complementary to relationship lending.
    Date: 2005–11
  49. By: Caroline Freund; Frank Warnock
    Abstract: There are a number of worrisome features of the U.S. current account deficit. In particular, its size and persistence, the extent to which it is financing consumption as opposed to investment, and the reliance on debt inflows raise concerns about the likelihood of a sharp adjustment. We examine episodes of current account adjustment in industrial countries to assess the validity of these concerns. Our main findings are (i) larger deficits take longer to adjust and are associated with significantly slower income growth (relative to trend) during the current account recovery than smaller deficits, (ii) consumption-driven current account deficits involve significantly larger depreciations than deficits financing investment, and (iii) there is little evidence that deficits in economies that run persistent deficits, have large net foreign debt positions, experience greater short-term capital flows, or are less open are accommodated by more extensive exchange rate adjustment or slower growth. Our findings are consistent with earlier work showing that, in general, current account adjustment tends to be associated with slow income growth and a real depreciation. Overall, our results support claims that the size of the current account deficit and the extent to which it is financing consumption matter for adjustment.
    JEL: F3 F4
    Date: 2005–12
  50. By: Deepak Shah (Gokhale Institute of Politics & Economics, B.M.C.C. Road, Deccan Gymkhana, Pune 411004, Maharashtra, India)
    Abstract: The RFIs operating in Maharashtra have not only shown slower growth in their loan advances and other operational indicators during the period between 1991 and 2000 but also poor performance thereafter. The credit cooperatives in particular have shown significantly high NPAs in Maharashtra. In Maharashtra, Vidarbha region not only shows very low magnitudes of credit flow through cooperatives but also decline in share of loan for cotton crop vis-à-vis other field crops. One of the adverse effects of slowing down in loan advances for cotton crop is seen on the farming community of this region where a significant number of cotton growers have committed suicide either due to lack of loan advances to them or because of pressure created by various financial institutions in terms of recovery of loan despite crop failure. With a view to revive the agricultural credit delivery system, there is need to tackle twin problems facing the system, viz., growing NPAs with falling CD ratios and poor recovery performance of RFIs, aside from adopting innovative approaches like linking of SHGs and NGOs with mainstream financial institutions. In brief, the focus of rural credit delivery system should be on strategies that are required for tackling issues such as sustainability and viability, operational efficiency, recovery performance, small farmer coverage and balanced sectoral development.
    Keywords: Resurrection of Credit Delivery in India
    JEL: G
    Date: 2005–12–02
  51. By: Morten Nalholm (Department of Applied Mathematics and Statistics, Institute for Mathematical Sciences, University of Copenhagen)
    Abstract: A new method for static hedging of barrier options under general asset dynamics is introduced. The method unifies previous approaches and nests their extensions. Using a finite set of hedge instruments the method is directly implementable and it is shown how to operationalize the hedge in a jump-diffusion model with correlated stochastic volatility. The performance of the hedge is thoroughly studied and generic sources of hedge errors are addressed.
    Date: 2005–11
  52. By: Tano Santos; Pietro Veronesi
    Abstract: A habit persistence, general equilibrium model with multiple assets matches both the time series properties of the market portfolio and the cross-sectional predictability of returns on price sorted portfolios, the value premium. Consistent with empirical evidence, the model shows that (a) value stocks are those with higher cash-flow risk; (b) the size of the value premium is larger in “bad times,” due to time variation in risk preferences; (c) the unconditional CAPM fails, because of general equilibrium restrictions on the market portfolio. The dynamic nature of the value premium rationalizes why the conditional CAPM and a Fama and French (1993) HML factor outperform the unconditional CAPM.
    JEL: G12
    Date: 2005–12
  53. By: Forsman, Mats-Ola (Department of Economics, School of Economics and Commercial Law, Göteborg University)
    Abstract: This paper analyzes the relationship between economic fundamentals and balance-ofpayments crises for the three Nordic countries, Norway, Sweden, and Finland, during 1971-1992. To identify periods of balance-of-payments crisis a method first introduced by Eichengreen, Rose, and Wyplosz (1996) was used. They did not report specific results for the three Nordic countries, but compared a group of ERM countries with a control-group of non- ERM countries (including Norway, Sweden and Finland) during 1967-1992. The results here verify theirs more generally, in that the three Nordic non-ERM countries in particular also followed the so-called first-generation of balance-of-payments-crisis models (Paul Krugman,1979). A second finding was that balance-of-payments crises for the three Nordic countries mainly took place during recessions, typically when governments tried to stimulate their way out by holding government spending constant in spite of decreased tax revenues, which led to budget deficits and speculative attacks. This result is consistent with Krugman’s firstgeneration model, based on constant revenue and increased spending, which led to the same result. <p>
    Keywords: Balance of Payments Crisis; Nordic; Exchange rates; Speculative Attacks
    JEL: F31 F32
    Date: 2005–08–27
  54. By: Michael Graff (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This paper addresses the notion of an "optimum level of financial activity" that is contingent on a country's general level of development. Referring to threshold regressions and a bootstrap test for structural shift of the finance regressor in a growth equation, it is shown that countries gain less from a given level of financial activity, if the latter fails to keep up with or exceeds what would follow from a balanced expansion path. The paper contributes to the literature on the finance-growth nexus in providing empirical support for the notion of "balanced" financial development with a development specific optimum level of financial activity.
    Keywords: Optimum financial activity, Bayesian statistics, bootstrapping
    JEL: O11 P17 C11
    Date: 2005–08
  55. By: Qiang Liu (School of Management, University of Electronic Science & Technology of China)
    Abstract: Risk-neutral valuation is used widely in derivatives pricing. It is shown in this paper, however, that the naïve approach of simply setting the growth rate of the underlying security to risk-free interest rate, which happens to work for a geometric Brownian motion (GBM) process, fails to work when the underlying price follows the arithmetic Brownian motion (ABM). Therefore, the formal approach using a martingale measure should be used instead when the underlying process is not a GBM.
    Keywords: risk-neutral valuation, arithmetic Brownian motion, options price formula
    JEL: G
    Date: 2005–12–01

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