nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒01‒01
87 papers chosen by
Carolina Valiente
London South Bank University

  1. The New Basel Capital Framework and its implementation in the European Union By Frank Dierick; Fatima Pires; Martin Scheicher; Kai Gereon Spitzer
  2. The Market of Foreign Exchange Hedge in Brazil: Reactions of Financial Institutions to Interventions of the Central Bank By Fernando N. de Oliveira; Walter Novaes
  3. Explaining credit default swap spreads with the equity volatility and jump risks of individual firms By Benjamin Yibin Zhang; Hao Zhou; Haibin Zhu
  4. A more complete conceptual framework for financing of small and medium enterprises By Udell, Gregory F.; Berger, Allen N.
  5. Macroeconomic factors’ influence on “new” European countries stock returns: the case of four transition economies By Aristeidis Samitas; Dimitris Kenourgios
  6. Global Factors and Emerging Market Spreads By Eduardo Levy Yeyati; Martín González Rozada
  7. Estimating a Risky Term Structure of Uruguayan Sovereign Bonds. By Serafín Frache; Gabriel Katz
  8. Financial integration and the wealth effect of exchange rate fluctuations By Cedric Tille
  9. Managing financial integration By Fernando Broner; Jaume Ventura
  10. Banks’ participation in the Eurosystem auctions and money market integration By Giuseppe Bruno; Ernesto Maurizio Ordine; Antonio Scalia
  11. FINANCIAL MARKETS AND INSTITUTIONS: IMPORTANT FUNCTIONS By Fadil Govori
  12. Endogenous Credit Cycles and Financial Dampening in an Adverse Selection Economy By Alberto Martin
  13. International remittances: information for New England financial institutions By Mamie Marcuss
  14. Banking Sector Fragility and Turkey’s 2000–01 Financial Crisis By Fatih Ozatay; Guven Sak
  15. Establishing credibility: evolving perceptions of the European Central Bank By Linda S. Goldberg; Michael W. Klein
  16. Electronic Money Free Banking and Some Implications for Central Banking By Yuksel Gormez; Christopher Houghton Budd
  17. Can foreign portfolio investment bridge the small firm financing gap around the world ? By Knill, April M.
  18. SECURITIES MARKETS AND SOCIAL CAPITAL INTEGRATION IN AFRICA: RISKS AND POLICY OPTIONS By GODWIN NWAOBI
  19. International Stock Return Comovements By Geert Bekaert; Robert J. Hodrick; Xiaoyan Zhang
  20. Are there asymmetries in the response of bank interest rates monetary shocks? By Leonardo Gambacorta; Simonetta Iannotti
  21. Risk Aversion, Sovereign Bonds and Risk Premium By Ferhan Salman
  22. Money market integration By Leonardo Bartolini; Spence Hilton; Alessandro Prati
  23. Order Submission: The Choice between Limit and Market Orders By Ingrid Lo; Stephen G. Sapp
  24. A no-arbitrage analysis of economic determinants of the credit spread term structure By Liuren Wu; Frank Xiaoling Zhang
  25. Internationalization and Stock Market Liquidity By Ross Levine; Sergio Schmukler
  26. Technological Revolutions and Stock Prices By Lubos Pastor; Pietro Veronesi
  27. A Reason for Sophisticated Investors not to seize Arbitrage Opportunities in Markets without Frictions By Rohde,Kirsten I.M.
  28. The return to retail and the performance of U.S. banks By Beverly J. Hirtle; Kevin J. Stiroh
  29. Hedge ratio estimation and hedging effectiveness: the case of the S&P 500 stock index futures contract By Dimitris Kenourgios; Aristeidis Samitas; Panagiotis Drosos
  30. South Korea's Experience with International Capital Flows By Marcus Noland
  31. Small caps in international equity portfolios: the effects of variance risk By Massimo Guidolin; Giovanna Nicodano
  32. Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy. By Luca Casolaro; Leonardo Gambacorta; Luigi Guiso
  33. CAPM Over the Long Run: 1926-2001 By Andrew Ang; Joseph chen
  34. Neither a borrower nor a lender : does China ' s zero net foreign asset position make economic sense? By Kraay, Aart; Dollar, David
  35. How do Currency Markets Interact? Evidence from the Yen-Dollar Exchange Rates in Tokyo, London, and New York By Ingyu Chiou; James Jordan- Wagner; Hai-Chin Yu
  36. Measuring counterparty credit exposure to a margined counterparty By Michael S. Gibson
  37. Commitment to Overinvest and Price Informativeness By James Dow; Itay Goldstein; Alexander Guembel
  38. Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options By Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
  39. Investor Sentiment and Corporate Finance: Micro and Macro By Owen A. Lamont; Jeremy C. Stein
  40. The Role of Foreign Currency Debt in Financial Crises: 1880-1913 vs. 1972-1997 By Michael D. Bordo; Christopher M. Meissner
  41. Information, Capital Gains Taxes & New York Stock Exchange By Ferhan Salman
  42. Sovereign Debt Without Default Penalties By Alexander Guembel; Oren Sussman
  43. Market timing with aggregate and idiosyncratic stock volatilities By Hui Guo; Jason Higbee
  44. The Russian Currency Basket: The Rising Role of the Euro for Russia’s Exchange Rate Policies By Gunther Schnabl
  45. The Price Puzzle in Emerging Markets : Evidence from the Turkish Economy Using Model Based Risk Premium Derived from Domestic Fundamentals By Zelal Aktas; Neslihan Kaya; Umit Ozlale
  46. Initial Performance of Greek IPOs, Underwriter’s Reputation and Oversubscription By Dimitris Kenourgios; Spyros Papathanasiou; Emmanouil Rafail Melas
  47. Is Financial Globalization Beneficial? By Frederic Mishkin
  48. Market Information and Price Instability : An Insight into Vegetable Markets in Senegal By Hélène David-Benz; Idrissa Wade; Johny Egg
  49. Confronting Deivergent Interests in Cross-Country Regulatory Arrangements By Edward J. Kane
  50. DO EXTERNAL FUNDS YIELD LOWER RETURNS? RECENT EVIDENCE FROM EAST ASIAN ECONOMIES By Sarmistha Pal
  51. The Capital Inflows Problem in Selected Asian Economies in the 1990s Revisited: The Role of Monetary Sterilization By Tony Cavoli; Ramkishen S. Rajan
  52. Information Quality and Stock Returns Revisited By Frode Brevik; Stefano d'Addona
  53. Swedish intervention and the krona float, 1993–2002 By Guillaume Rocheteau; Peter Rupert; Karl Shell; Randall Wright
  54. TOWARDS A NEW SET OF LEADING INDICATORS OF CURRENCY CRISIS FOR DEVELOPING COUNTRIES: AN APPLICATION TO ARGENTINA By Federico Marongiu
  55. Corporate Sector Debt Composition and Exchange Rate Balance Sheet Effect in Turkey By Mehtap Kesriyeli; Erdal Ozmen; Serkan Yigit
  56. El Mercado Secundario de Deuda en Chile By Vicente Lazen
  57. Taking the bad with the good : volatility of foreign portfolio investment and financial constraints of small firms By Knill, April M.
  58. Alternative measures of the Federal Reserve banks’ cost of equity capital By Michelle L. Barnes; Jose A. Lopez
  59. A model of banknote discounts By Laurence Ales; Francesca Carapella; Pricila Maziero; Warren E. Weber
  60. What%u2019s Psychology Worth? A Field Experiment in the Consumer Credit Market By Marianne Bertrand; Dean Karlin; Sendhil Mullainathan; Eldar Shafir; Jonathan Zinman
  61. A Dynamic Model of Central Bank Intervention By Ana Maria Herrera; Pinar Ozbay
  62. Why do firms go public? evidence from the banking industry By Richard J. Rosen; Scott B. Smart; Chad J. Zutter
  63. What determines financial development? By Yongfu Huang
  64. Demanda de Derivativos de Câmbio no Brasil: Hedge ou Especulação By Walter Novaes; Fernando N. de Oliveira
  65. Can financial innovation help to explain the reduced volatility of economic activity? By Karen E. Dynan; Douglas W. Elmendorf; Daniel E. Sichel
  66. Industry Specific Effects in Investment Performance and Valuation of Firms - Marginal q in a Stock Market Bubble By Bjuggren, Per-Olof; Wiberg, Daniel
  67. Question de causalité entre développement réel et développement financier : Une notion encore embarrassée By Hamdi KHALFAOUI
  68. Distribution Risk and Equity Returns By Jean-Pierre Danthine; John B. Donaldson; Paolo Siconolfi
  69. Sri Lanka ' s migrant labor remittances : enhancing the quality and outreach of the rural remittance infrastructure By Hulugalle, Sriyani; Maimbo, Samuel Munzele; Lasagabaster, Esperanza
  70. Macroeconomic Derivatives: An Initial Analysis of Market-Based Macro Forecasts, Uncertainty and Risk By Refet S. Gürkaynak; Justin Wolfers
  71. Debt and corporate governance in emerging economies: Evidence from India By Jayati Sarkar; Subrata Sarkar
  72. Cash breeds Success: The Role of Financing Constraints in Patent Races By Enrique Schroth; Dezsö Szalay
  73. Dollarization Persistence and Individual Heterogeneity By Paul Castillo; Diego Winkelried
  74. Financing of Competing Projects with Venture Capital By Ekaterina Goldfain; Eugen Kovac
  75. The Effectiveness of Foreign Exchange Interventions for the Turkish Economy : A Post-Crisis Period Analysis By Ozge Akinci; Olcay Yucel Culha; Umit Ozlale; Gulbin Sahinbeyoglu
  76. Libéralisation financière : Impacts et conditions de réussite Un essai d'application pour les pays du Maghreb By Hamdi KHALFAOUI
  77. Hedging Strategies and the Financing of the 1992 International Oil Pollution Compensation Fund. By André SCHMITT; Sandrine SPAETER
  78. Alternative central bank credit policies for liquidity provision in a model of payments By David C. Mills, Jr.
  79. Competition and credit and debit card interchange fees: a cross-country analysis By Fumiko Hayashi; Stuart E. Weiner
  80. Managing New-Style Currency Crises: The Swan Diagram Approach Revisited By Ramkishen S. Rajan
  81. Dolarizasyon Endeksleri : Turkiye’deki Dolarizasyon Surecine Ýliskin Gostergeler By Ozge Akinci; Yasemin Barlas Ozer; Bulent Usta
  82. Recent Experiences With Capital Controls : Is There A Lesson for Turkey? By Melike Altinkemer
  83. Financial Constraints, the User Cost of Capital and Corporate Investment in Australia By Gianni La Cava
  84. Uruguay Capital Market: Law-in-the-books or Law-in-action? By Eduardo Siandra
  85. Assessing the impact of electronic benefits transfer on America's communities and the U.S. payment system By anonymous
  86. Disclosure of environmental violations and the stock market in the Republic of Korea By Mamingi, Nlandu; Laplante, Benoit; Jong Ho Hong; Dasgupta, Susmita
  87. Access to External Finance : Theory and Evidence on the Impact of Firm-Specific Characteristics By Spiros Bougheas; Paul Mizen; Cihan Yalcin

  1. By: Frank Dierick (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Fatima Pires (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Martin Scheicher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Kai Gereon Spitzer (Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany)
    Abstract: Following the adoption by the Basel Committee of new capital rules for banks, a process is now taking place in the EU to transpose the rules into Community law and, ultimately, into national legislation. This paper gives an overview of the main issues that relate to the EU implementation, mainly from the perspectives of financial stability and financial integration. Although the EU rules are to a large extent based on the texts of the Basel Committee, modifications have been introduced to account for the specific legal and institutional setting, as well as for some features of the European financial system. The paper gives an overview of these modifications and deals in greater detail with a number of selected topics: the monitoring of procyclicality, the role of the consolidating supervisor and the treatment of real estate lending and covered bonds. The paper concludes with an outlook for the future.
    Keywords: Banks, Basel II, capital requirements, financial regulation, financial stability, financial supervision, risk management.
    JEL: G21 G28
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:ecb:ecbops:20050042&r=fmk
  2. By: Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil); Walter Novaes (PUC/RJ)
    Abstract: Between 1999 and 2002, Brazil's Central Bank sold expressive amounts of dollar indexed debt and foreign exchange swaps. This paper shows that in periods of high volatility of the exchange rate, first semester of 1999 and second semester of 2002, the Central Bank of Brazil increased the foreign exchange hedge, but the financial institutions used this to reduce their foreign exchange exposure. In contrast, increases in foreign hedge during periods of low volatility of the exchange rate were transferred to the productive sector.
    Keywords: foreign exchange swaps, central bank interventions, foreign exchange risk
    JEL: E58 E52 F31
    Date: 2005–12–15
    URL: http://d.repec.org/n?u=RePEc:ibr:dpaper:2005-13&r=fmk
  3. By: Benjamin Yibin Zhang; Hao Zhou; Haibin Zhu
    Abstract: A structural model with stochastic volatility and jumps implies specific relationships between observed equity returns and credit spreads. This paper explores such effects in the credit default swap (CDS) market. We use a novel approach to identify the realized jumps of individual equities from high frequency data. Our empirical results suggest that volatility risk alone predicts 50 percent of the variation in CDS spreads, while jump risk alone forecasts 19 percent. After controlling for credit ratings, macroeconomic conditions, and firms' balance sheet information, we can explain 77 percent of the total variation. Moreover, the pricing effects of volatility and jump measures vary consistently across investment-grade and high-yield entities. The estimated nonlinear effects of volatility and jumps are in line with the model-implied relationships between equity returns and credit spreads.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-63&r=fmk
  4. By: Udell, Gregory F.; Berger, Allen N.
    Abstract: The authors propose a more complete conceptual framework for analysis of credit availability for small and medium enterprises (SMEs). In this framework, lending technologies are the key conduit through which government policies and national financial structures affect credit availability. They emphasize a causal chain from policy to financial structures which affect the feasibility and profitability of different lending technologies. These technologies, in turn, have important effects on SME credit availability. Financial structures include the presence of different financial institution types and the conditions under which they operate. Lending technologies include several transactions technologies, plus relationship lending. The authors argue that the framework implicit in most of the literature is oversimplified, neglects key elements of the chain, and often yields misleading conclusions. A common oversimplification is the treatment of transactions technologies as a homogeneous group, unsuitable for serving informationally opaque SMEs, and a frequent misleading conclusion is that large institutions are disadv antaged in lending to opaque SMEs.
    Keywords: Banks & Banking Reform,Financial Intermediation,Investment and Investment Climate,Economic Theory & Research,Financial Crisis Management & Restructuring
    Date: 2005–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3795&r=fmk
  5. By: Aristeidis Samitas (University of Aegean); Dimitris Kenourgios (University of Athens)
    Abstract: This paper investigates whether current and future domestic and international macroeconomic variables can explain long and short run stock returns in four “new” European countries (Poland, Czech Republic, Slovakia and Hungary). “Old” western European countries (U.K., France, Italy and Germany) are included in the empirical analysis, whilst USA is considered as a “foreign global influence”. Using the present value model of stock prices and a complete range of cointegration and causality tests, it is found that “new” European stock markets are not perfectly integrated with foreign financial markets, while domestic economic activity and the German factor are more influential on these stock markets than the American global factor.
    Keywords: Stock returns; macroeconomic factors; present value model; Central-Eastern (“New”) stock markets; “Old” European stock markets; USA.
    JEL: G15
    Date: 2005–12–20
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512022&r=fmk
  6. By: Eduardo Levy Yeyati; Martín González Rozada
    Abstract: This paper shows that a large fraction of the variability of emerging market bond spreads is explained by the evolution of global factors such as risk appetite (as reflected in the spread of high yield corporate bonds in developed markets), global liquidity (measured by the international interest rates) and contagion (from systemic events like the Russian default). This link has remained relatively stable over the history of the emerging market class, is robust to the inclusion of country-specific factors, and helps provide accurate long-run predictions. Overall, the results highlight the critical role played by exogenous factors in the evolution of the borrowing cost faced by emerging economies.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:udt:wpbsdt:globalfactorsspreads&r=fmk
  7. By: Serafín Frache (Facultad de Ciencias Económicas y de Administración, Universidad de la República); Gabriel Katz (Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: Based on a joint three - factor affine model, we estimate the term structure of interest rates and default spreads for Uruguay using the reduced - form approach developed by Du¢ e and Singleton. We ?nd that Uruguayan average term structure was negatively sloped between 1997 and 2003, as indicated by previous empirical evidence for low ?quality debtors. Surprisingly, Uruguayan average yield curve was also negatively sloped between 1997 and 2001, when the country?s foreign ?currency denominated debt was considered investment grade by the leading rating agencies. We also ?nd that the estimated Uruguayan default spread is able to capture the behavior and dynamics of a more traditional country risk benchmark such as the ?Uruguayan Bond Index? (UBI), with observations on a single Uruguayan bond. Finally, we ?nd that regional, international and local ?nancial crises cause parallel shifts in the Uruguayan yield curve, with higher increases in short ?term rates, and that the banking and debt crises experie
    Keywords: default risk; term structure; reduced-form model; default spread
    JEL: C1 C51 F34 G12 G15
    Date: 2004–05
    URL: http://d.repec.org/n?u=RePEc:ude:wpaper:0304&r=fmk
  8. By: Cedric Tille
    Abstract: A growing body of research emphasizes the direct impact of exchange rate movements on the value of U.S. foreign assets. Because a substantial amount of U.S. assets are denominated in foreign currencies, a depreciation of the dollar leads to large capital gains. First, we present a detailed decomposition of the U.S. balance sheet, which exhibits substantial leverage in terms of currencies and across asset categories. The United States holds 50 percent of GDP in foreign-currency assets and is long in FDI (foreign direct investment) and equity positions and short in debt and banking positions. Then, we incorporate these features of international financial integration in a simple general equilibrium model and analyze how they affect the international transmission of monetary shocks. We find that financial integration is a central component of the model, with the valuation gains from an exchange rate depreciation leading to a welfare effect that is at least as large as that stemming from nominal rigidities alone but possibly much larger. We characterize how interdependence is affected by the composition of the portfolio across asset categories and how structural features of the model interact with financial integration.
    Keywords: Foreign exchange ; Macroeconomics ; International finance
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fednsr:226&r=fmk
  9. By: Fernando Broner; Jaume Ventura
    Abstract: The goal of this paper is to study the e¤ects of globalization on the workings of asset markets and welfare. To do this, we adopt a "technological" view of the globalization process. That is, we model this process as consisting of a gradual (and exogenous) reduction in the costs of shipping goods across different regions of the world. In the absence of market frictions, globalization creates foreign trade opportunities without affecting domestic ones and, as a result, unambiguously raises welfare. In the presence of sovereign risk, however, globalization can either create or destroy both domestic and foreign trade opportunities. The net e¤ect on welfare of this process of creation and destruction of trade opportunities might be either positive or negative. We also find that asset bubbles moderate this welfare effect. When globalization is welfare reducing, asset bubbles grow creating a positive wealth effect, and vice versa. This might come at a cost though. Asset bubbles reduce the incentives to implement reforms aimed at reducing sovereign risk.
    Keywords: Financial integration, sovereign risk, globalization
    JEL: F32 F34
    Date: 2005–03
    URL: http://d.repec.org/n?u=RePEc:upf:upfgen:913&r=fmk
  10. By: Giuseppe Bruno (Bank of Italy, Economic Research Department); Ernesto Maurizio Ordine (Bank of Italy, Isernia Branch); Antonio Scalia (Bank of Italy, Monetary and Exchange Rate Policy Department)
    Keywords: Bidding Behaviour, auctions, open market operations, money market, liquidity management Abstract: We perform a panel analysis of bidding in the Eurosystem auctions, using individual data that include the bidder code, size, nationality and membership in a banking group. We find that an increase in interest rate volatility lowers the probability of bidding, but induces bidders to shade rates less. Large bidders participate more regularly, while group bidders demand larger amounts, showing an aptitude to act as liquidity brokers. Our findings support the transnational bank hypothesis (Freixas- Holthausen, 2005): banks with a multinational profile use their informational advantage to arbitrage out the differences in interest rates across countries, thus fostering money market integration.
    Date: 2005–09
    URL: http://d.repec.org/n?u=RePEc:bdi:wptemi:td_562_05&r=fmk
  11. By: Fadil Govori (Institute of Finance & Management)
    Abstract: Economic system relies heavily on financial resources and transactions, and economic efficiency rests in part on efficient financial markets. Financial markets consist of agents, brokers, institutions, and intermediaries transacting purchases and sales of securities. The many persons and institutions operating in the financial markets are linked by contracts, communications networks which form an externally visible financial structure, laws, and friendships. The financial market is divided between investors and financial institutions.
    Keywords: Markets and Institutions
    JEL: G
    Date: 2005–12–22
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512025&r=fmk
  12. By: Alberto Martin
    Abstract: We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection.
    Date: 2005–01
    URL: http://d.repec.org/n?u=RePEc:upf:upfgen:916&r=fmk
  13. By: Mamie Marcuss
    Abstract: Each year, individuals in the United States send billions of dollars abroad. Most of these remittances are sent by immigrants to their home countries, and the majority of them flow through a handful of service providers who dominate this highly profitable business. As the immigrant population in the United States continues to grow, the volume of remittances climbs each year, reaching nearly $35 billion in 2004. Bankers and other financial professionals are taking notice, and financial institutions around the country are investigating ways to enter the market and capture a share of this growing source of revenue. To aid New England's financial institutions in their exploration of the remittance market, the Federal Reserve Bank of Boston has developed this report, intended to enhance the overall understanding of remittances and to highlight the potential costs and benefits of establishing a remittance program.
    Keywords: Emigrant remittances ; Banks and banking - New England
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedbpc:2005-1&r=fmk
  14. By: Fatih Ozatay; Guven Sak
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0308&r=fmk
  15. By: Linda S. Goldberg; Michael W. Klein
    Abstract: The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high-frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro area and on the euro-dollar exchange rate suggest that the market's perception of the policy stance of the ECB evolved significantly during the first six years of the Bank's operation, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the U.S. yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve.
    Keywords: Banks and banking, Central ; Inflation (Finance) ; Monetary policy ; European Central Bank
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fednsr:231&r=fmk
  16. By: Yuksel Gormez; Christopher Houghton Budd
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0303&r=fmk
  17. By: Knill, April M.
    Abstract: The author examines the impact of foreign portfolio investment on the financial constraints of small firms. Using a dataset of over 195,000 firm-year observations across 53 countries, she examines the impact of foreign portfolio investment on capital issuance and firm growth across countries and firm characteristics, in particular size. After controlling fo r firm-, industry-, and country-level characteristics such as change in foreign exchange rate, share of market capitalization, relative interest rates, and investment climate, she finds that foreign portfolio investment helps to bridge the gap between the amounts of financing small firms require and that which they can access through the capital markets. Specifically, the author finds that foreign portfolio investment is associated with an increased ability to issue publicly traded securities for small firms in all nations, regardless of property rights development. Since small firms often rely heavily on bank lending, she also tests for potential increases in credit for small firms using the bank lending theory of monetary transmission. Results show significantly decreased short-term debt and increased long-term debt, supporting the contention that bank debt maturity to these firms has increased. This transition to longer-term debt could also be a result of the increased public debt securities these firms are more able to access. The overall increased access to capital only leads to value-enhancing growth at the firm level in nations with more developed property rights, underscoring the significance of a good financial system that minimizes information asymmetry as well as corruption, and enhances liquidity as well as property rights.
    Keywords: Investment and Investment Climate,Economic Theory & Research,Banks & Banking Reform,Financial Intermediation,Capital Flows
    Date: 2005–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3796&r=fmk
  18. By: GODWIN NWAOBI (QUANTITATIVE ECONOMIC RESEARCH BUREAU,NIGERIA)
    Abstract: The need to develop securities market has, following the recent international financial crises, increasingly attracted the attention of national and international policy makers. Never before have developed and developing countries shared such a strong interest in ensuring the stable growth of the international capital flows. And yet, the question for policymakers is how to channel these gains into investments that promote development, sustainable poverty reduction and social equity. Using the African scenario, this paper argued that although many of the institutions needed for strong income growth and asset accumulation are equally important in fostering social assets, the institutional underpinnings of sustainable development are somewhat broader. They rest on greater access to information and knowledge and the ability to form broader partnerships. Without these additional institutional elements, society risks fragmentation that imperil both income growth and wellbeing. Nothing that market exchange plays a larger role in africa, we also argued that the presence of transactions costs naturally leads market participants to enter in long-term trading relationships(and these relationships form business networks that shape market outcomes) with minimum risks. However,when societies become more equitable in ways that lead to greater opportunites for all,the poor stand to benefit from a 'double dividend'.
    Keywords: SECURITIES,SOCIAL CAPITAL, MARKETS, PORTFOLIO, AFRICAN ECONOMY, INSTITUTIONS, RISKS, BONDS, TREASURY BILLS, STOCKS, DEBENTURES, STOCKEXHANGE, AUCTIONS INVESTMENTS, DEBT, MICROFINANCE, SOCIALSECURITY
    JEL: G10 G11 G12 G24 G30 F21 F32 E44 H55 D81
    Date: 2005–12–19
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512019&r=fmk
  19. By: Geert Bekaert; Robert J. Hodrick; Xiaoyan Zhang
    Abstract: We examine international stock return comovements using country-industry and country-style portfolios. We first establish that parsimonious risk-based factor models capture the covariance structure of the data better than the popular Heston-Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, we do not find evidence for an upward trend in return correlations, excpet for the European stock markets. Second, the increasing imporatnce of industry factors relative to country factors was a short-lived, temporary phenomenon. Third, we find no evidence for a trend in idiosyncratic risk in any of the countries we examine.
    JEL: G12 G11
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11906&r=fmk
  20. By: Leonardo Gambacorta (Bank of Italy, Economic Research Department); Simonetta Iannotti (Bank of Italy, Supervision and Regulation Department)
    Abstract: This paper examines the velocity and asymmetry in the response of bank interest rates to monetary policy shocks. Using an Asymmetric Vector Error Correction Model (AVECM), it analyses the pass-through of changes in the money market rates to retail bank interest rates in Italy in the period 1985-2002. The main results of the paper are: 1) the speed in adjustment of bank interest rates to monetary policy changes have significantly increased after the introduction of the 1993 Consolidated Law on Banking; 2) interest rate adjustment, in response to positive and negative shocks, are asymmetric in the short run, but not in the long run; 3) banks adjust their loan (deposit) rate at a faster rate during period of monetary tightening (easing); 4) this asymmetry has almost vanished since the nineties.
    Keywords: monetary policy transmission, interest rates, asymmetries, liberalization
    JEL: E43 E44 E52
    Date: 2005–11
    URL: http://d.repec.org/n?u=RePEc:bdi:wptemi:td_566_05&r=fmk
  21. By: Ferhan Salman
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0514&r=fmk
  22. By: Leonardo Bartolini; Spence Hilton; Alessandro Prati
    Abstract: We use transaction-level data and detailed modeling of the high-frequency behavior of federal funds-Eurodollar yield spreads to provide evidence of strong integration between the federal funds and Eurodollar markets, the two core components of the dollar money market. Our results contrast with previous research indicating that these two markets are segmented, showing them to be well integrated even at high (intraday) frequency. We document several patterns in the behavior of federal funds-Eurodollar spreads, including liquidity effects from trading volume on yield spreads' volatility. Our analysis supports the view that targeting federal funds rates alone is sufficient to stabilize rates in the (much larger) dollar money market as a whole.
    Keywords: Federal funds market (United States) ; Euro-dollar market ; Liquidity (Economics)
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fednsr:227&r=fmk
  23. By: Ingrid Lo; Stephen G. Sapp
    Abstract: Most financial markets allow investors to submit both limit and market orders, but it is not always clear what affects the choice of order type. The authors empirically investigate how the time between order submissions, changes in the state of the order book, and price uncertainty influence the rate of submission of limit and market orders. The authors measure the expected time (duration) between the submissions of orders of each type using an asymmetric autoregressive conditional duration model. They find that the execution of market orders, as well as changes in the level of price uncertainty and market depth, impact the submissions of both best limit orders and market orders. After correcting for these factors, the authors also find differences in behaviour around market openings, closings, and unexpected events that may be related to changes in information flows at these times. In general, traders use more market (limit) orders at times when execution risk for limit orders is highest or the risk of unexpected price movements is highest.
    Keywords: Exchange rate; Financial institution; Market structure and pricing
    JEL: D4 G1
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:05-42&r=fmk
  24. By: Liuren Wu; Frank Xiaoling Zhang
    Abstract: This paper presents an internally consistent analysis of the economic determinants of the term structure of credit spreads across different credit rating classes and industry sectors. Our analysis proceeds in two steps. First, we extract three economic factors from 13 time series that capture three major dimensions of the economy: inflation pressure, real output growth, and financial market volatility. In the second step, we build a no-arbitrage model that links the dynamics and market prices of these fundamental sources of economic risks to the term structure of Treasury yields and corporate bond credit spreads. Via model estimation, we infer the market pricing of these economic factors and their impacts on the whole term structure of Treasury yields and credit spreads. ; Estimation shows that positive inflation shocks increase both Treasury yields and credit spreads across all maturities and credit rating classes. Positive shocks on the real output growth also increase the Treasury yields, more so at short maturities than at long maturities. The impacts on the credit spreads are positive for high credit rating classes, but become negative and increasingly so at lower credit rating classes. The financial market volatility factor has small positive impacts on the Treasury yield curve, but the impacts are strongly positive on the credit spreads, and increasingly so at longer maturities and lower credit rating classes. ; Finally, when we divide each rating class into two industry sectors: financial and corporate, we find that with in each rating class, the credit spreads in the financial sector are on average wider and more volatile than the spreads in the corporate sector. Estimation further shows that the term structure of credit spreads in the financial sector is more responsive to shocks in the economic factors.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-59&r=fmk
  25. By: Ross Levine; Sergio Schmukler
    Abstract: What is the impact of internationalization (firms raising capital and trading in international markets) on the liquidity of the remaining firms in domestic markets? To address this question, we assemble a panel database of nearly 2,900 firms from 45 emerging economies over the period 1989-2000, constructed from annual and daily data. First, we find evidence of migration. The domestic trading of firms that cross-list or issue depositary receipts in foreign public exchanges tends to decrease, while a significant proportion of their trading activity concentrates in international markets. Second, this migration is negatively related to the liquidity of the remaining firms in their home market through two separate channels. There are liquidity spillovers within markets, with aggregate domestic trading activity being positively associated with the liquidity of individual firms in the same market. Moreover, the proportion of trading abroad is negatively related to the liquidity of firms in the domestic market.
    JEL: G15 F36 F20
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11894&r=fmk
  26. By: Lubos Pastor; Pietro Veronesi
    Abstract: During technological revolutions, stock prices of innovative firms tend to exhibit high volatility and bubble-like patterns, which are often attributed to investor irrationality. We develop a general equilibrium model that rationalizes the observed price patterns. The high volatility results from high uncertainty about the average productivity of a new technology. Investors learn about this productivity before deciding whether to adopt the technology on a large scale. For technologies that are ultimately adopted, the nature of uncertainty changes from idiosyncratic to systematic as the adoption becomes more likely; as a result, stock prices fall after an initial run-up. This “bubble” in stock prices is observable ex post but unpredictable ex ante, and it is most pronounced for technologies characterized by high uncertainty and fast adoption. We examine stock prices in the early days of American railroads, and find evidence consistent with a large-scale adoption of the railroad technology by the late 1850s.
    JEL: G1
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11876&r=fmk
  27. By: Rohde,Kirsten I.M. (METEOR)
    Abstract: An example shows that for sophisticated consumers with changing preferences it can be perfectly rational not to seize arbitrage opportunities in markets without frictions.
    Keywords: financial economics and financial management ;
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:dgr:umamet:2005053&r=fmk
  28. By: Beverly J. Hirtle; Kevin J. Stiroh
    Abstract: The U.S. banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks' retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across U.S. banks is linked to significantly lower equity market and accounting returns for all banks but lower volatility for only the largest banking companies. We conclude that retail banking may be a relatively stable activity, but it is also a low-return one.
    Keywords: Banks and banking ; Retail trade ; Bank profits
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fednsr:233&r=fmk
  29. By: Dimitris Kenourgios (University of Athens); Aristeidis Samitas (University of Aegean); Panagiotis Drosos (University of Sheffield)
    Abstract: This paper investigates the hedging effectiveness of the Standard & Poor’s (S&P) 500 stock index futures contract using weekly settlement prices for the period July 3rd, 1992 to June 30th, 2002. Particularly, it focuses on three areas of interest: the determination of the appropriate model for estimating a hedge ratio that minimizes the variance of returns; the hedging effectiveness and the stability of optimal hedge ratios through time; an in-sample forecasting analysis in order to examine the hedging performance of different econometric methods. The hedging performance of this contract is examined considering alternative methods, both constant and time-varying, for computing more effective hedge ratios. The results suggest the optimal hedge ratio that incorporates nonstationarity, long run equilibrium relationship and short run dynamics is reliable and useful for hedgers. Comparisons of the hedging effectiveness and in-sample hedging performance of each model imply that the error correction model (ECM) is superior to the other models employed in terms of risk reduction. Finally, the results for testing the stability of the optimal hedge ratio obtained from the ECM suggest that it remains stable over time.
    Keywords: Hedging effectiveness; minimum variance hedge ratio (MVHR); hedging models; Standard & Poor’s 500 stock index futures
    JEL: G13 G15
    Date: 2005–12–19
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512018&r=fmk
  30. By: Marcus Noland (Institute for International Economics)
    Abstract: South Korea's experience is unparalleled in its combination of sustained prosperity, capital controls, and financial crisis. Over several decades, South Korea experienced rapid sustained growth in the presence of capital controls. These controls and the de-linking of domestic and international financial markets were an essential component of the country's state-led development strategy. As the country developed, opportunities for easy technological catch-up eroded, requiring more sophisticated corporate and financial sector decision-making, but decades of financial repression had bequeathed a bureaucratized financial system and a formidable constellation of incumbent stakeholders opposed to transition to a more market-oriented development model. Liberalization undertaken in the 1990s was less a product of textbook economic analysis than of parochial politicking. Capital account liberalization program affected the timing, magnitude, and particulars of the 1997-98 crisis. Despite considerable reforms undertaken since the crisis, concerns remain about both South Korea's lending culture and its authorities' capacity to successfully regulate the more complex financial system. The main lesson of the South Korean case appear to be that while the state-led model may deliver impressive initial gains, transitioning out of this approach presents an exceedingly complex challenge of political-economy.
    Keywords: Korea, capital controls, financial crises, financial liberalization
    JEL: F3 G15 O53
    Date: 2005–06
    URL: http://d.repec.org/n?u=RePEc:iie:wpaper:wp05-4&r=fmk
  31. By: Massimo Guidolin; Giovanna Nicodano
    Abstract: This paper investigates how variance risk affects the portfolio choice of an investor faced with an international asset menu that includes European and North American small equity portfolios. Small capitalization stocks are known to display asymmetric risk across bull and bear markets. Therefore we model stock returns as generated by a multivariate regime switching process that is able to account for both non-normality and predictability of stock returns. Non-normality matters for portfolio choice because the investor has a power utility function, implying a preference for positively skewed returns and aversion to kurtosis. We find that small cap portfolios, that are shown to display negative co-skewness with other assets, command large optimal weights only when regime switching, and hence variance risk, is ignored. Otherwise a rational investor ought to hold a well-diversified portfolio. However, the availability of small caps substantially increases expected utility, in the order of riskless annualized gains of 3 percent and higher.
    Keywords: Investments, Foreign
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-075&r=fmk
  32. By: Luca Casolaro (Bank of Italy, Economic Research Department); Leonardo Gambacorta (Bank of Italy, Economic Research Department); Luigi Guiso (Università di Sassari, Ente Einaudi e Cepr)
    Abstract: Regulation and contract enforcement may be important determinants of the development of the household loan market, as much as they are of the supply of corporate loans on which the literature has focused. This paper draws on the Italian experience to provide evidence that formal and informal institutions and banking regulation are crucial determinants of availability and cost of the household credit. Historically the Italian household credit market has been very small by international standards and its degree of development differs considerably across local markets. It has grown very fast over the last decade. This paper argues that the traditional small size reflects the joint operation of more limited legal and informal enforcement and tight financial regulation. Differences within Italy in the efficiency of the courts, in social trust and in exposure to regulation explain the geographical differences, while massive deregulation of market entry during the 1990s spurred supply and led to fast lending growth. This evidence, together with marked differences in the quality of legal enforcement, endowment of social capital and tightness of financial regulation across countries, implies that the forces found in Italy are likely to be a major explanation for the international differences in the size of the household loan market.
    Keywords: consumer loans, financial liberalization, financial contracts enforcement
    JEL: D12 E21 G21
    Date: 2005–09
    URL: http://d.repec.org/n?u=RePEc:bdi:wptemi:td_560_05&r=fmk
  33. By: Andrew Ang; Joseph chen
    Abstract: A conditional one-factor model can account for the spread in the average returns of portfolios sorted by book-to-market ratios over the long run from 1926-2001. In contrast, earlier studies document strong evidence of a book-to-market effect using OLS regressions in the post-1963 sample. However, the betas of portfolios sorted by book-to-market ratios vary over time and in the presence of time-varying factor loadings, OLS inference produces inconsistent estimates of conditional alphas and betas. We show that under a conditional CAPM with time-varying betas, predictable market risk premia, and stochastic systematic volatility, there is little evidence that the conditional alpha for a book-to-market trading strategy is statistically different from zero.
    JEL: C51 G12
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11903&r=fmk
  34. By: Kraay, Aart; Dollar, David
    Abstract: China in the past few years has emerged as a net foreign creditor on the international scene with net foreign assets slightly greater than zero percent of wealth. This is surprising given that China is a relatively poor country with a capital-labor ratio about one-fifth the world average and one-tenth the U.S. level. The main questions that the authors address are whether it makes economic sense for China to be a net creditor and how they see China ' s net foreign asset position evolving over the next 20 years. They calibrate a theoretical model of international capital flows featuring diminishing returns, production risk, and sovereign risk. The calibrations for China yield a predicted net foreign asset position of -17 percent of China ' s wealth. The authors also estimate nonstructural cross-country regressions of determinants of net foreign assets in which China is always a significant outlier with 5 to 7 percentage points more of net foreign assets relative to wealth than is predicted by its characteristics. China ' s extensive capital controls can explain why its current net foreign asset position is far away from what is predicted by open-economy models and cross-country empirics. It seems reasonable to assume that China ' s international financial integration will increase over time. The authors calibrate and predict different scenarios out to 2025. These scenarios are necessarily speculative, but it is interesting that they typically imply negative net foreign asset positions between 3 and 9 percent of wealth. What may be counter-intuitive for many policymakers is that successful institutional ref orm and productivity growth are likely to lead to more negative net foreign asset positions than occurs with stagnation. Starting from China ' s zero net foreign assets position, it would take current account deficits in the range of 2-5 percent of GDP to reach any of these net foreign assets positions. These are not unreasonable deficits, but they require a large adjustment from the present 6 percent of GDP current account surplus.
    Keywords: Economic Theory & Research,Investment and Investment Climate,Capital Flows,Economic Growth,Banking Law
    Date: 2005–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3801&r=fmk
  35. By: Ingyu Chiou (Eastern Illinois University); James Jordan- Wagner (Eastern Illinois University); Hai-Chin Yu (Chung Yuan University, Taiwan)
    Abstract: This paper studies how one currency market affects another currency market in a different time zone, using various contracts of the opening and closing yen-dollar exchange rates traded in Tokyo, London, and New York. We find strong and consistent evidence that the three major currency markets interact significantly. For each of five contracts we examine, Tokyo leads London and New York, London leads New York and Tokyo, and New York leads Tokyo and London. In particular, the causality relationship is much stronger when one market trades right after another. Although our results show violations of market efficiency, these findings cannot be interpreted as the existence of easy arbitrage opportunities among three markets. Instead, these strong causality relationships may be due to some unique characteristics of each of three currency markets, which cannot be observed directly.
    Keywords: price transmission, causality, VAR
    JEL: G15
    Date: 2005–12–22
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512024&r=fmk
  36. By: Michael S. Gibson
    Abstract: Firms active in OTC derivative markets increasingly use margin agreements to reduce counterparty credit risk. Making several simplifying assumptions, I use both a quasi- analytic approach and a simulation approach to quantify how margining reduces counterparty credit exposure. Margining reduces counterparty credit exposure by over 80 percent, using baseline parameter assumptions. I show how expected positive exposure (EPE) depends on key terms of the margin agreement and the current mark-to-market value of the portfolio of contracts with the counterparty. I also discuss a possible shortcut that could be used by firms that can model EPE without margin but cannot achieve the higher level of sophistication needed to model EPE with margin.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-50&r=fmk
  37. By: James Dow; Itay Goldstein; Alexander Guembel
    Abstract: A fundamental role of financial markets is to gather information on firms’ investment opportunities, and so help guide investment decisions in the real sector. We argue in this paper that firms’ overinvestment is sometimes necessary to induce speculators in financial markets to produce information. If firms always cancel planned investments following poor stock market response, the value of their shares will become insensitive to information on investment opportunities, so that speculators will be deterred from producing information. We discuss several commitment devices firms can use to facilitate information production. We show that the mechanism studied in the paper amplifies shocks to fundamentals across stages of the business cycle.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:sbs:wpsefe:2005fe18&r=fmk
  38. By: Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
    Abstract: Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S&P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S&P 500 put options have become ‘expensive’ relative to the Black-Scholes benchmark. Many researchers (e.g., Liu, Pan and Wang (2005)) have argued that such prices cannot be justified in a general equilibrium setting if the representative agent has ‘standard preferences’ and the endowment is an i.i.d. process. Below, however, we use the insight of Bansal and Yaron (2004) to demonstrate that the ‘volatility smirk’ can be rationalized if the agent is endowed with Epstein-Zin preferences and if the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. We identify a realistic calibration of the model that simultaneously matches the empirical properties of dividends, the equity premium, the prices of both at-the-money and deep out-of-the-money puts, and the level of the risk-free rate. A more challenging question (that to our knowledge has not been previously investigated) is whether one can explain within a standard preference framework the stark regime change in the volatility smirk that has maintained since the 1987 market crash. To this end, we extend the model to a Bayesian setting in which the agent updates her beliefs about the average jump size in the event of a jump. Note that such beliefs only update at crash dates, and hence can explain why the volatility smirk has not diminished over the last eighteen years. We find that the model can capture the shape of the implied volatility curve both pre- and post-crash while maintaining reasonable estimates for expected returns, price-dividend ratios, and risk-free rates.
    JEL: G21 G28 P51
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11861&r=fmk
  39. By: Owen A. Lamont; Jeremy C. Stein
    Abstract: We document that net equity issuance is considerably more sensitive to aggregate stock returns and Q's than to firm-level stock returns and Q's. Very similar patterns also emerge when we look at merger activity. In light of earlier work (Campbell 1991, Vuolteenaho 2002) which finds that aggregate stock returns are less informative about future cashflows than are firm-level stock returns--and thus, potentially more strongly influenced by investor sentiment--these results suggest that both equity issuance and mergers are to a significant extent driven by market-timing considerations, as opposed to by purely fundamental factors.
    JEL: G14 G32 G34
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11882&r=fmk
  40. By: Michael D. Bordo; Christopher M. Meissner
    Abstract: What is the role of foreign currency debt in precipitating financial crises? In this paper we compare the 1880 to 1913 period to recent experience. We examine debt crises, currency crises, banking crises and the interrelation between these varieties of crises. We pay special attention to the role of hard currency debt, currency mismatches and debt intolerance. We find fairly robust evidence that high exposure to foreign currency debt does not necessarily lead to a high chance of having a debt crisis, currency crisis, or a banking crisis. A key finding is some countries do not suffer from great financial fragility despite high exposure to original sin. In the nineteenth century, the British offshoots and Scandinavia generally avoided severe financial meltdowns while today many advanced countries have high original sin but have had few financial crises. The common denominator in both periods is that currency mismatches matter. A strong reserve position or high exports relative to hard currency liabilities helps decrease the likelihood of a debt crisis, currency crisis or a banking crisis. This strengthens the evidence for the hypothesis that foreign currency debt is dangerous when mis-managed. We discuss the robustness of these results and make some general comparisons based on this evidence from over 60 years of intense international capital market integration.
    JEL: N1 N2 E5 F3
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11897&r=fmk
  41. By: Ferhan Salman
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0513&r=fmk
  42. By: Alexander Guembel; Oren Sussman
    Abstract: The basic question regarding sovereign debt is why sovereign borrowers ever repay, provided that creditors have no power to foreclose on any of their assets. In this paper we suggest an answer: sovereign debt will be served as long as the median voter is a net loser from default. Default generates a reallocation of wealth from locals to foreigners, but also from local debtholders to local tax payers. Sovereign debt is stable as long as the median voter’s interests are more aligned with the foreign lenders than with the local taxpayers. We further augment the model with elements of market microstructure theory to address the question how markets rationally use capital flows so as to infer the stability of debt structure. We show that foreign demand shocks can destabilise debt even though they are not fundamental. We also show that more volatile foreign demand reduces a country’s debt capacity. Our work thus integrates elements of market microstructure theory into politicaleconomy modeling.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:sbs:wpsefe:2005fe17&r=fmk
  43. By: Hui Guo; Jason Higbee
    Abstract: Guo and Savickas [2005] show that aggregate stock market volatility and average idiosyncratic stock volatility jointly forecast stock returns. In this paper, we quantify the economic significance of their results from the perspective of a portfolio manager. That is, we evaluate the performance, e.g., the Sharpe ratio and Jensen*s alpha, of a mean-variance manager who tries to time the market based on those variables. We find that, over the period 1968-2004, the associated market-timing strategy outperforms the buy-and-hold strategy, and the difference is statistically and economically significant.
    Keywords: Stock exchanges
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2005-073&r=fmk
  44. By: Gunther Schnabl (Tübingen University)
    Abstract: In 2005, the Bank of Russia has made three announcements that indicate an increasing role for the euro in the Russian exchange rate strategy. On February 4 2005 the Bank of Russia announced that it has started to stabilize the daily volatilities of the Russian ruble against a dollar- euro currency basket. While the announced weight of the euro was 10% (90% dollar) by then, the Bank of Russia increased this weight to currently 40% within ten months. Bank of Russia representatives have stressed the intention to increase the weight of the euro the Russian currency basket further up to 50% but without indicating a specific time horizon. Other statements of Bank of Russia representatives have stressed the rising role of euro as intervention and reserve currency. This paper reviews the recent trends in Russian exchange rate strategy with a focus on the role of the euro.
    Keywords: Words: Russia, Currency Basket, International Role of the Euro.
    JEL: F31
    Date: 2005–12–20
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0512005&r=fmk
  45. By: Zelal Aktas; Neslihan Kaya; Umit Ozlale
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0502&r=fmk
  46. By: Dimitris Kenourgios (University of Athens); Spyros Papathanasiou (Hellenic Open University); Emmanouil Rafail Melas (London School of Economics)
    Abstract: This paper provides additional international evidence on the IPOs by examining the initial performance and two main determinants of short-run underpricing of 169 IPOs listed on the Athens Stock Exchange (ASE) over the period 1997-2002. The initial performance of the IPOs is measured by calculated two formulas: the raw returns and the excess or adjusted returns of the first, fifth and twenty first day respectively. Furthermore, we use a proxy to rank the underwriters’ prestige along with the times of oversubscription, which are introduced as explanatory variables in our model. The results of the analysis provide evidence of significant underpricing. Furthermore, the cross sectional analysis on the determinants of the IPOs shows that both the underwriters’ prestige and the times of oversubscription significantly affect the underpricing level of the IPOs over the most important and “hot” period for the Greek emerging stock market since its establishment, in terms of growth rates, acceleration of the going public process and volatility of market and stock returns.
    Keywords: IPOs, underpricing, oversubscription, underwriters’ prestige, Athens Stock Exchange.
    JEL: G24 G32
    Date: 2005–12–22
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512023&r=fmk
  47. By: Frederic Mishkin
    Abstract: This lecture examines whether financial globalization is beneficial to developing countries by first examining the evidence on financial development and economic growth and concludes that financial development is indeed a key element in promoting economic growth. It then asks why if financial development is so beneficial, it often doesn't occur. It then goes on to examine whether globalization, particularly of the financial kind, can help encourage financial and economic development and argues that it can. However, financial globalization does not always work to encourage economic development because it often leads to devastating financial crises. The issue is thus not whether financial globalization is inherently good or bad, but whether it can be done right.
    JEL: F02 O10 O16 G20
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11891&r=fmk
  48. By: Hélène David-Benz (CIRAD ; CA ; Montpellier, France); Idrissa Wade (INRA ; UMR MOISA ; Montpellier, France); Johny Egg (INRA ; UMR MOISA ; Montpellier, France)
    Abstract: Market gardening has been increasing fast in Senegal. But farmers face high marketing risks: daily price fluctuations exceed an average 20% for some products, seasonality is strong, anticipation based on prices leads to cyclic movements. Farmers and market operators have found various forms of coordination to manage uncertainty. “Coxers” are specifically dedicated to information gathering, either in rural or wholesale urban markets or to transport negotiation. Paid per unit handled, they limit their own risk, whereas they reduce uncertainty for their partners. In other cases, interlinked transactions permit to provide inputs to producers despite the deficient credit market; meanwhile, it secures merchants access to product. As it is the case in many other countries, information provided by MIS is of little help to Senegalese market gardeners. The updated and more targeted access to information through MANOBI services allows producers to improve their negotiation capacity. But it does not modify the existing coordination features, given that they are not only determined by needs in information (but also by social links, access to credit, payment modalities, transport facilities…).
    Keywords: Horticulture, Price analysis, Market instability, Information, Transaction costs
    JEL: D23 D82 O17 Q13
    Date: 2005–12–19
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpmi:0512005&r=fmk
  49. By: Edward J. Kane
    Abstract: Although nation-based systems of financial regulation constitute a second-best approach to global welfare maximization, treacherous accountability problems must be acknowledged and resolved before regulatory cooperation can deal fairly and efficiently with cross-border issues. To track and control insolvency risk within and across any set of countries, officials must construct a partnership that allows regulators in every participating country to monitor and to influence counterpart regulators in partnering nations. Using efforts to harmonize the Australian and New Zealand regulatory systems as an example, this paper identifies characteristics by which regulatory systems differ and underscores particular features that make regulatory harmonization difficult to achieve.
    JEL: G21 G28 P51
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11865&r=fmk
  50. By: Sarmistha Pal (Brunel University)
    Abstract: One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long- term debt in the sample countries in the pre-crisis period.
    Keywords: Asian Crisis, Efficiency of internal and external funds, Moral hazard of bad loans, Financial constraint, Random effects model with selection
    JEL: G32 O16
    Date: 2005–12–21
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0512021&r=fmk
  51. By: Tony Cavoli (School of Economics, University of Adelaide); Ramkishen S. Rajan (School of Public Policy, George Mason University)
    Abstract: This paper develops a simple model to examine the reasons behind the capital inflow surges into selected Asian economies in the 1990s prior to the financial crisis of 1997-98. The simple analytical model reveals that persistent uncovered interest differentials and consequent capital inflows may be a consequence of complete sterilization, perfect capital mobility, sluggish response of interest rates to domestic monetary disequilibrium, or some combination of all three. Using the model as an organizing framework, the paper undertakes a series of related simple empirical tests of the dynamic links between international capital flows and the extent to which they are sterilized and uncovered interest rate differentials (UIDs) in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1 to 1997:5.
    Keywords: Capital flows, East Asia, interest rates, monetary sterilization, reserves
    JEL: F30 F32 F41
    URL: http://d.repec.org/n?u=RePEc:sca:scaewp:0518&r=fmk
  52. By: Frode Brevik; Stefano d'Addona
    Abstract: Building on Veronesi (2000), we investigate the relationship between the quality of information on the state of the economy and the equity risk premium. We analyze the driving forces of the premium in a regime-switching setup where agents have Epstein-Zin preferences, finding a remarkably rich relation between the required risk premium and the quality of information available to investors. In particular, relaxing the strict relationship between investors' elasticity of intertemporal substitution (EIS) and their degree of risk aversion (RA) embedded in a power utility function enables us to demonstrate how the required equity premium is determined by their interplay. As conjectured in the existing literature, we demonstrate that investors with a high EIS will require less excess returns for holding stocks if they are provided with better information on the state of the economy. More interestingly, and not predicted in the literature, we find that this will also hold for investors with a moderate EIS if they are sufficiently risk averse.
    JEL: E32 E37 G10 G12
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:usg:dp2005:2005-24&r=fmk
  53. By: Guillaume Rocheteau; Peter Rupert; Karl Shell; Randall Wright
    Abstract: Using a set of standard success criteria, we show that Riksbank foreign-exchange interventions between 1993 and 2002 lacked forecast value; that is, the observed number of successes was not significantly greater--and usually substantially smaller--than the number one would anticipate given the martingale nature of exchange-rate movements. Under some success criteria, the Riksbank exhibited negative forecast value, implying that the market could have profited by taking a position opposite that of the bank. Moreover, the likelihood of success was independent of such conditioning factors as the amount of a transaction, the time lapses between interventions, or the number of foreign currencies involved. As such, Riksbank intervention could not operate through an expectations or signaling channel.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0514&r=fmk
  54. By: Federico Marongiu (Universidad de Buenos Aires)
    Abstract: Currency and financial crises are determinants of growth and development, mainly in developing countries subject to shocks, contagion and volatility. A relevant issue when trying to do the implementation of development policies is to anticipate or forecast the occurrence of currency crises that could turn good ideas into failure. This type of crises have strong negative economic, social and political consequences. This paper takes a look in the leading indicators literature and shows that this approach failed in predicting the Argentinean collapse of 2001-2002. We also show that particular features of the Argentinean economy needed of different indicators to forecast the collapse of the currency board system. The paper also developes some new indicators to include in an Early Warning System that can take on account specific features of Argentina´s economy. This indicators can be integrated into a wider set in order to be a useful tool for policymakers and authorities in Argentina and in other developing countries in the planification and implementation of development policies and programs.
    Keywords: currency crisis - exchange rate - leading indicators - Argentina
    JEL: D6 D7 H
    Date: 2005–12–23
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwppe:0512011&r=fmk
  55. By: Mehtap Kesriyeli; Erdal Ozmen; Serkan Yigit
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0516&r=fmk
  56. By: Vicente Lazen (Superintendencia de Valores y Seguros)
    Abstract: This paper characterizes the secondary debt market in Chile. It asses the efficiency of the Chilean debt market in terms of transparency, liquidity, safety, cost efficiency and integrity. A special emphasis is made on the Chilean government debt market in Chile, which is dominated by banks and trading is carried out mainly over OTC platforms, in contraposition to corporate and short term debt which is mainly traded on exchange.
    Keywords: Secondary debt market Chile corporate debt government debt
    JEL: G
    Date: 2005–12–19
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512020&r=fmk
  57. By: Knill, April M.
    Abstract: The author examines the impact of the volatility of foreign portfolio investment on the financial constraints of small firms. Using a dataset of over 195,000 firm-year observations across 53 countries, she examines the impact of foreign portfolio investment instability on capital issuance and firm growth across countries and firm characteristics, in particular size. After controlling for the endogeneity of foreign portfolio investment instability, as well as for firm-, industry-, and country-level characteristics such as GDP growth, as well as the levels of foreign portfolio and direct investment, the author finds that the volatility of foreign portfolio investment is only significantly associated with a decreased ability to issue publicly-traded securities for small firms in years when nations are considered less " creditworthy. " The volatility of foreign portfolio investment only hinders the growth of small firms significantly in periods when nations are deemed less " creditworthy. " These results underscore both the significance of a good financial system that minimizes ca pital flow volatility, as well as the influence of property rights and country creditworthiness to instill confidence in foreign investors.
    Keywords: Investment and Investment Climate,Economic Theory & Research,Capital Flows,Financial Intermediation,Markets and Market Access
    Date: 2005–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3797&r=fmk
  58. By: Michelle L. Barnes; Jose A. Lopez
    Abstract: The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the Capital Asset Pricing Model (CAPM) and compare them using econometric and materiality criteria. Our results suggest that the benchmark CAPM applied to a large peer group of competing firms provides a COE estimate that is not clearly improved upon by using a narrow peer group, introducing additional factors into the model, or taking account of additional firm-level data, such as leverage and line-of-business concentration. Thus, a standard implementation of the benchmark CAPM provides a reasonable COE estimate, which is needed to impute costs and set prices for the Reserve Banks’ payments business.
    Keywords: Capital assets pricing model ; Payment systems
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedbpp:05-2&r=fmk
  59. By: Laurence Ales; Francesca Carapella; Pricila Maziero; Warren E. Weber
    Abstract: Prior to 1863, state chartered banks in the United States issued notes—dollar-denominated promises to pay specie to the bearer on demand. Although these notes circulated at par locally, they usually were quoted at the discount outside the local area. These discounts varied by both the location of the bank and the location where the discount was being quoted. Further, these discounts were asymmetric across locations in the sense that the discounts quoted in location A on the notes of banks in location B generally differed from the discounts quoted in location B on the notes of banks in location A. Also, discounts generally increased when banks suspended payments on their notes. In this paper we construct a random matching model to qualitatively match these facts about banknote discounts. To attempt to account for locational differences the model has agents that come from two distinct locations. Each locations also has bankers that can issue notes. Banknotes are accepted in exchange because banks are required to produce when a banknote is presented for redemption and their past actions are public information. Overall the model delivers predictions consistent with the behavior of discounts.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedmwp:641&r=fmk
  60. By: Marianne Bertrand; Dean Karlin; Sendhil Mullainathan; Eldar Shafir; Jonathan Zinman
    Abstract: Numerous laboratory studies find that minor nuances of presentation and description change behavior in ways that are inconsistent with standard economic models. How much do these context effect matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experience? We report on a field experiment designed to address this question. A South African lender sent letters offering incumbent clients large, short-term loans at randomly chosen interest rates. The letters also contained independently randomized psychological "features" that were motivated by specific types of frames and cues shown to be powerful in the lab, but which, from a normative perspective, ought to have no impact. Consistent with standard economics, the interest rate significantly affected loan take-up. Inconsistent with standard economics, some of the psychological features also significantly affected take-up. The average effect of a psychological manipulation was equivalent to a one half percentage point change in the monthly interest rate. Interestingly, the psychological features appear to have greater impact in the context of less advantageous offers and persist across different income and education levels. In short, even in a market setting with large stakes and experienced customers, subtle psychological features appear to be powerful drivers of behavior. The findings pose a challenge for the social sciences: they suggest that psychological nuance matters but may be inherently difficult to predict given the impact of context. Successful incorporation of psychological features into field studies is likely to prove a vital, but nontrivial, addition to the formation of more general theories on when, why, and how frames and cues influence important decisions.
    JEL: C93 D12 D14 D21 D81
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:11892&r=fmk
  61. By: Ana Maria Herrera; Pinar Ozbay
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0501&r=fmk
  62. By: Richard J. Rosen; Scott B. Smart; Chad J. Zutter
    Abstract: The lack of data on private firms has made it difficult to empirically examine theories of why firms go public. However, both public and private banks must disclose financial information to regulators. We exploit this requirement to explore the going-public decision. Our results indicate that banks that convert to public ownership are more likely to become targets than control banks that remain private. Banks that go public are also more likely to become acquirers than control banks. IPO banks grow faster than control banks after going public, although there is some evidence that their performance deteriorates.
    Keywords: Financial institutions
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-05-17&r=fmk
  63. By: Yongfu Huang
    Abstract: This paper studies the fundamental determinants of cross-country differences in finnancial development. Two prominent tools for addressing model uncertainty, Bayesian Model Averaging and Automatic Model Selection using PcGets, are jointly applied to investigate the financial development effects of a wide range of variables taken from various sources. The analysis suggests that the level of financial development in a country is determined by its institutional quality, macroeconomic policies, and geographic characteristics, as well as the level of income and cultural characteristics.
    Keywords: Financial development, Model uncertainty, Bayesian Model Averaging, PcGets
    JEL: O16 E44
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:bri:uobdis:05/580&r=fmk
  64. By: Walter Novaes (PUC/RJ); Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil)
    Abstract: Este artigo examina empiricamente a demanda de derivativos de câmbio de empresas brasileiras de capital aberto. Para tanto, construimos um banco de dados original com 23.767 contratos de swap cambial entre empresas e instituições financeiras em aberto em 2002. A partir destes contratos, identificamos 42 empresas de capital aberto que fizeram hedge no mercado de derivativos de câmbio e 51 que especularam. Os dados mostram que a existência de dívida externa e o tamanho da empresa afetaram positivamente a probabilidade de hedge, enquanto as receitas de exportação afetaram positivamente a probabilidade de especulação. Estes resultados sugerem que em períodos de grande volatilidade do câmbio - como no ano de 2002 - a demanda das empresas por derivativos de câmbio está fortemente relacionada a motivos especulativos.
    Keywords: demanda de derivativos de câmbio, hedge, especulação, swaps cambiais, firmas de capital aberto
    JEL: G13 G32 G38
    Date: 2005–12–15
    URL: http://d.repec.org/n?u=RePEc:ibr:dpaper:2005-14&r=fmk
  65. By: Karen E. Dynan; Douglas W. Elmendorf; Daniel E. Sichel
    Abstract: The stabilization of economic activity in the mid 1980s has received considerable attention. Research has focused primarily on the role played by milder economic shocks, improved inventory management, and better monetary policy. This paper explores another potential explanation: financial innovation. Examples of such innovation include developments in lending practices and loan markets that have enhanced the ability of households and firms to borrow and changes in government policy such as the demise of Regulation Q. We employ a variety of simple empirical techniques to identify links between the observed moderation in economic activity and the influence of financial innovation on consumer spending, housing investment, and business fixed investment. Our results suggest that financial innovation should be added to the list of likely contributors to the mid-1980s stabilization.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-54&r=fmk
  66. By: Bjuggren, Per-Olof (Jönköping International Business School, JIBS); Wiberg, Daniel (Jönköping International Business School, JIBS)
    Abstract: A necessary criterion for a performance measure in corporate governance is the degree to which it mirrors how well the management succeeds in maximizing firm value. Such a performance measure is marginal q which links changes in firm value to the investments decided by the management. Empirical studies of investment and performance based on marginal q have demonstrated the usefulness of this measure. Most research however, has mainly focused on long-term performance. This paper takes a short-term perspective and, based on the marginal q-theory, considers how market values change in the extreme stock price cycle of a stock market bubble. We find an anomaly in form of a new industry specific effect that, in addition to investment, explains changes in firm value.
    Keywords: Marginal q; Investment; Stock bubbles; Different industries
    JEL: G14 G31 G34 L21
    Date: 2005–12–28
    URL: http://d.repec.org/n?u=RePEc:hhs:cesisp:0045&r=fmk
  67. By: Hamdi KHALFAOUI (Faculté des Sciences Economiques et de Getion de Tunis)
    Abstract: Bien que les études théoriques et empiriques convergent sur la dimension financière dans la croissance économique, elles n’apportent pas une réponse commune à la question de l’interaction entre la libéralisation financière et la croissance économique. D'une part, la libéralisation financière, qui est imposée à certains pays en développement sous l'égide des organisations internationales et l'impulsion de la puissante vague de transactions financières internationales, a contribué à la hausse de l'investissement et par conséquent à l'accélération de la croissance, et d'autre part, elle peut être analysée comme étant le fruit du développement économique. En outre, les interactions croisées entre la sphère réelle et la sphère financière, laisse la question de causalité se pose avec plus d'acuité et devient de plus en plus incertaine, à savoir est-ce que le développement financier entraîne la croissance ou est-ce que le développement réel conduit à un développement financier. Qui à raison Schumpeter qui argue que : 'les institutions financières sont nécessaires à l’innovation technologique qui sous-tend la croissance' ou Robinson qui affirme : 'Là où la croissance conduit, la finance le suit' La problématique posée se trouve alors à l’intersection de deux domaines à savoir la finance et l’économie. Afin de tenir compte des spécificités individuelles et a- temporelles des phénomènes de croissance, nous utiliserons en amont des tests de spécification pour mieux estimer le sens de la causalité par pays et en aval des statistiques descriptives pour mieux appréhender ce sens par club de pays (UMA et PED).
    Keywords: Libéralisation Financière, Croissance, PanelCointégration, Causalité,PMA
    JEL: G20 G28 O16 O40 C12
    Date: 2005–12–21
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0512020&r=fmk
  68. By: Jean-Pierre Danthine; John B. Donaldson; Paolo Siconolfi
    Abstract: In this paper we entertain the hypothesis that observed variations in income shares are the result of changes in the balance of power between workers and capital owners in labor relations. We show that this view implies that income share variations represent a risk factor of ¯rst-order importance for the owners of capital and, consequently, are a crucial determinant of the return to equity. When both risks are calibrated to observations, this distribution risk dominates in importance the usual systematic risk for the pricing of assets. We also show that distribution risks may originate in non-traded idiosyncratic income shocks.
    Keywords: income shares; distribution risk; equity premium; limited market participation
    JEL: E3 G1
    Date: 2005–11
    URL: http://d.repec.org/n?u=RePEc:lau:crdeep:05.10&r=fmk
  69. By: Hulugalle, Sriyani; Maimbo, Samuel Munzele; Lasagabaster, Esperanza
    Abstract: Remittances-money sent home by immigrant workers abroad-are hugely beneficial to Sri Lanka. Migrants ' remittances have grown dramatically in recent years and are now estimated at US$1.5 billion annually. This national phenomenon is consistent with remittance trends in neighboring countries where remittance flows are growing as rapidly. The trend is likely to continue as many workers continue to look abroad for the chance to make a better living. The economic policy implications of these trends are significant. The Sri Lankan Central Bank is now debating the following key issues: the developmental impact of remittances; the high transaction costs associated with remittances; and the level of transparency and accountability in the remittance industry, especially the informal remittance sector. This paper highlights the key policy issues associated with each of these aspects of remittances with the objective of improving the public and private infrastructure for current and future flows. Building on recent World Bank research on remittances that prominently features South Asia, it has been prepared in recognition of the development potential of these flows. It discusses some of the key issues relating to the remittance industry in Sri Lanka. This paper complements the existing literature on migrant labor remittances to Sri Lanka and extends that literature by providing specific policy-relevant guidance on short and long-term policies for enhance enhancing the quality and outreach of rural remittance infrastructure.
    Keywords: Banks & Banking Reform,Technology Industry,Gender and Development,Financial Intermediation,Economic Theory & Research
    Date: 2005–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3789&r=fmk
  70. By: Refet S. Gürkaynak (Bilkent University); Justin Wolfers (University of Pennsylvania CEPR, NBER and IZA Bonn)
    Abstract: In September 2002, a new market in "Economic Derivatives" was launched allowing traders to take positions on future values of several macroeconomic data releases. We provide an initial analysis of the prices of these options. We find that market-based measures of expectations are similar to survey-based forecasts although the market-based measures somewhat more accurately predict financial market responses to surprises in data. These markets also provide implied probabilities of the full range of specific outcomes, allowing us to measure uncertainty, assess its driving forces, and compare this measure of uncertainty with the dispersion of point-estimates among individual forecasters (a measure of disagreement). We also assess the accuracy of market-generated probability density forecasts. A consistent theme is that few of the behavioral anomalies present in surveys of professional forecasts survive in equilibrium, and that these markets are remarkably well calibrated. Finally we assess the role of risk, finding little evidence that risk-aversion drives a wedge between market prices and probabilities in this market.
    Keywords: economic derivatives, macroeconomic forecasting, uncertainty, disagreement, prediction markets, density forecasting
    JEL: C23 D21 J50 L13
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp1899&r=fmk
  71. By: Jayati Sarkar (Indira Gandhi Institute of Development Research); Subrata Sarkar (Indira Gandhi Institute of Development Research)
    Abstract: We analyze the role of debt in corporate governance with respect to a large emerging economy, India, where debt has been an important source of external finance. First, we examine the extent to which debt acts as a disciplining device in those corporations where potential for over investment is present. We undertake a comparative evaluation of group-affiliated and non-affiliated companies to see if the governance role of debt is sensitive to ownership and control structures. Second, we examine the role of institutional change in strengthening the disciplining effect or mitigating the expropriating effect of debt. In doing so, we estimate, simultaneously, the relation between Tobin's Q and leverage using a large cross-section of listed manufacturing firms in India for three years, 1996, 2000, and 2003. Our analyses indicate that while in the early years of institutional change, debt did not have any disciplinary effect on either standalone or group affiliated firms, the disciplinary effect appeared in the later years as institutions become more market oriented. We also find limited evidence of debt being used as an expropriation mechanism in group firms that are more vulnerable to such expropriation. However, the disciplining effect of debt is found to persist even after controlling for such expropriation possibilities. In general, our results highlight the role of ownership structures and institutions in debt governance.
    Keywords: Debt, ownership structure, corporate governance, institutional change
    JEL: G32 G34
    Date: 2005–11
    URL: http://d.repec.org/n?u=RePEc:ind:igiwpp:2005-007&r=fmk
  72. By: Enrique Schroth; Dezsö Szalay
    Abstract: This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of winning the race the less cash-constrained he is and the more cash-constrained the entrant is. We use NBER evidence from pharmaceutical patents awarded between 1975 and 1999 in the US, patent citations, and COMPUSTAT and fit probabilistic regressions of the predicted equilibrium winning probabilities on measures of the incumbent's and potential entrants' financial wealth. The empirical findings support our theoretical predictions.
    Keywords: patent race; incumbent; entrant; financial constraints; empirical estimation
    JEL: G24 G32 L13
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:lau:crdeep:05.11&r=fmk
  73. By: Paul Castillo (London School of Economics & Central bank of Peru); Diego Winkelried (St John�s College, University of Cambridge)
    Abstract: The most salient feature of financial dollarization, and the one that causes more concern to policymakers, is its persistence: even after successful macroeconomic stabilizations, dollarization ratios often remain high. In this paper we claim that this persistence is connected to the fact that the participants in the dollar deposit market are fairly heterogenous, and so is the way they form their optimal currency portfolio. We develop a simple model when agents differ in their ability to process information, which turns out to be enough to generate persistence upon aggregation. We find empirical support for this claim with data from three Latin American countries and Poland.
    Keywords: Dollarization, individual heterogeneity, persistence, aggregation
    JEL: C43 E50 F30
    Date: 2005–12–21
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpma:0512014&r=fmk
  74. By: Ekaterina Goldfain; Eugen Kovac
    Abstract: We analyze innovation race in a moral hazard setting. We develop a model in which two competing entrepreneurs work independently on the same project. The entrepreneurs do not possess any wealth of their own and their research is financed by a venture capitalist. The project, if successful, generates a prize, which is to be shared between the winning entrepreneur and the venture capitalist. The venture capitalist cannot observe the allocation of funds he provides, which creates a moral hazard problem. We compare a competitive setting with a benchmark case where the venture capitalist finances only one entrepreneur. We show that the venture capitalist can increase the efficiency of research (hence, his own expected profit from investments) and alleviate the moral hazard problem if he finances both entrepreneurs. This conclusion is unambiguous, when the entrepreneurs are at the same (the last) stage of R&D. It holds for a reasonably large range of parameters, when the entrepreneurs are at different stages of R&D.
    Keywords: venture capital, moral hazard, optimal contract, innovation race
    JEL: G32 G34 O31
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:bon:bonedp:bgse37_2005&r=fmk
  75. By: Ozge Akinci; Olcay Yucel Culha; Umit Ozlale; Gulbin Sahinbeyoglu
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0506&r=fmk
  76. By: Hamdi KHALFAOUI (Faculté des Sciences Economiques et de Getion de Tunis)
    Abstract: Résumé : La libéralisation financière qui est imposée à certains pays en développement, sous l'égide des organisations internationales (FMI et Banque Mondiale) et l'impulsion de la puissante vague de transactions financières internationales, est devenue de plus en plus une exigence incontournable, non seulement, pour sortir d'un régime souvent réprimé mais aussi pour combler leur déficit extérieur et amorcer une croissance et un développement durable. En outre, il reste encore difficile d'identifier des conditions financières, institutionnelles et économico- politiques communes et universelles pour mener à bien une politique financière libérale, vu, la particularité et la spécificité des systèmes financiers des pays étudiés. Mais en passant en revue de littérature, on s'aperçoit qu'une procédure de libéralisation ordonnée et enchaînée, avec l'appui de politiques macroéconomiques saines, des systèmes financiers intérieurs solides et une réglementation prudentielle appropriée, la libéralisation financière devient non seulement inévitable mais aussi rentable. Afin de tenir compte des spécificités individuelles et a-temporelles des phénomènes de croissance, nous utiliserons une analyse en données de panel accompagnée par des tests de spécification pour mieux estimer l’impact de la finance sur la croissance et mieux concrétiser les conditions de réussite d'une telle libéralisation.
    Keywords: Libéralisation Financière, Réformes, Croissance économique,PMA.
    JEL: C23 O16 G28
    Date: 2005–12–21
    URL: http://d.repec.org/n?u=RePEc:wpa:wuwpif:0512006&r=fmk
  77. By: André SCHMITT; Sandrine SPAETER
    Abstract: The maritime oil transport is regulated by the 1992 Civil Liability Convention for Oil Damage and the 1992 Oil Pollution Compensation Fund. In this compensation regime, contributions of oil firms are based on the aggregate risk of the Fund and are assessed each time an oil spill is registered. In this paper, we present the main characteristics of such a compensation regime and we explain why oil firms would benefit from a reorga- nization of the financing of the Fund by introducing appropriate hedging mechanisms. As standard insurance is shown to be too limited for the coverage of oil spills, we high- light the arguments that justify the introduction of financial hedging instruments in the management of the compensation system related to oil spills.
    Keywords: Oil spill, IOPC Fund, risk management, insurance, financial hedging.
    JEL: D80 G22 K32 Q25
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:ulp:sbbeta:2005-12&r=fmk
  78. By: David C. Mills, Jr.
    Abstract: I explore alternative central bank policies for liquidity provision in a model of payments. I use a mechanism design approach so that agents' incentives to default are explicit and contingent on the credit policy designed. In the first policy, the central bank invests in costly enforcement and charges an interest rate to recover costs. I show that the second best solution is not distortionary. In the second policy, the central bank requires collateral. If collateral does not bear an opportunity cost, then the solution is first best. Otherwise, the second best is distortionary because collateral serves as a binding credit constraint.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-55&r=fmk
  79. By: Fumiko Hayashi; Stuart E. Weiner
    Abstract: This paper seeks to provide a bridge between the theoretical and empirical literatures on interchange fees. Specifically, the paper confronts theory with practice by asking, to what extent do existing models of interchange fees match up with actual interchange fee practices in various countries? For each of four countries—Australia, the Netherlands, the UK, and the United States—models that “best” fit the competitive and institutional features of that country’s payment card market are identified, and the implications of those model are compared to actual practices. Along what competitive dimensions is there alignment? Along what competitive dimensions is there not alignment? What country-specific factors appear to be important in explaining deviations from theoretical predictions? The results suggest that a theory applicable in one country may not be applicable in another, and that similar interchange fee arrangements and regulations may well have different implications in different countries.
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedkpw:psrwp05-03&r=fmk
  80. By: Ramkishen S. Rajan (School of Public Policy, George Mason University)
    Abstract: The new-style currency crises that have inflicted a number of developing and emerging economies of late are characterized by sudden stops in capital inflows and adverse balance sheet effects. Given the potential high costs of these crises, there remains an ongoing debate on how they might best be managed when they do arise. This paper argues that the age-old Swan diagram, appropriately modified, is able to provide useful insights into how a country might manage a new-style crisis via a combination of adjustment (which involves expenditure switching and reducing polices) and financing.
    Keywords: Adjustment, Expenditure Reducing, Expenditure Switching, Financing, Internal balance, External balance, Swan diagram
    URL: http://d.repec.org/n?u=RePEc:sca:scaewp:0517&r=fmk
  81. By: Ozge Akinci; Yasemin Barlas Ozer; Bulent Usta
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0517&r=fmk
  82. By: Melike Altinkemer
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0305&r=fmk
  83. By: Gianni La Cava (Reserve Bank of Australia)
    Abstract: This paper examines the factors that drive corporate investment in Australia using a panel of listed companies covering the period from 1990 to 2004. Real sales growth is found to be a significant determinant of corporate investment. The user cost of capital, which incorporates both debt and equity financing costs, also appears to be an important determinant. The paper also explores the effects of cash flow on investment, allowing for the possibility that the availability of internal funding could significantly affect the investment of financially constrained firms. Cash flow is found to affect investment, though the effects appear more complicated than previously reported in empirical research using Australian data. One innovation of this study is that it distinguishes financially distressed firms from financially constrained firms. The presence of financially distressed firms appears to bias downwards the sensitivity of investment to cash flow. Once separate account has been taken of firms experiencing financial distress, and in contrast to theory, cash flow is found to matter for the investment of both financially constrained and unconstrained firms. Interestingly, the estimated degree of sensitivity appears to be roughly the same for both groups.
    Keywords: investment; user cost of capital; panel data
    JEL: E22 E44 E52
    Date: 2005–12
    URL: http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2005-12&r=fmk
  84. By: Eduardo Siandra (Departmento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: This paper discusses the process of legal infrastructure reform to build better institutions for capital market development in Uruguay during the 1990s. It contains a description, a brief literature survey, an explanation, and an evaluation. From this we draw lessons and make a prospective analysis of the fate of capital market development under the new political scenario shaped by the first left-wing government in the national history. In particular we find fascinating the conundrum of a legal reform in a country in which the legislator and the politician have played a first order role in the interpretation of the law and regulating the gap between "law-in-the-books" and "law-in-action".
    Keywords: bankruptcy, capital markets, finance, common law tradition, civil law tradition, disclosure, law, legal, reform, trust
    JEL: G K Z13
    Date: 2005–05
    URL: http://d.repec.org/n?u=RePEc:ude:wpaper:0205&r=fmk
  85. By: anonymous
    Abstract: The Center co-sponsored this conference with the Community Affairs Department and the Electronic Funds Transfer Association’s EBT Industry Council. The purpose of the conference was to provide a forum for community, banking, and payment industry leaders on the future of EBT. The sessions provided an understanding of what EBT is, an assessment of its impact on communities, an examination of its legacy as a payment system, and a look ahead to its continuing role in American communities
    Keywords: Payment systems ; Debit cards ; Food stamps
    Date: 2005
    URL: http://d.repec.org/n?u=RePEc:fip:fedpdp:05-02&r=fmk
  86. By: Mamingi, Nlandu; Laplante, Benoit; Jong Ho Hong; Dasgupta, Susmita
    Abstract: For almost 20 years, the Ministry of Environment of the Republic of Korea has published on a monthly basis a list of enterprises that fail to comply with national environmental laws and regulations. In this paper, the authors examine the reaction of investors to the publication of these lists and show that enterprises appearing on these lists have experienced a significant decline in their market valuation. Firms in developing countries are often said to have no incentives to invest in pollution control because they typically face weak monitoring and enforcement of environmental regulations. The findings of the authors, however, indicate that the inability of formal institutions to control pollution through fines and penalties may not be as serious an impediment to pollution control as is generally argued. Environmental regulators in developing countries could harness market forces by introducing structured programs to release firm-specific information about environmental performance.
    Keywords: Pollution Management & Control,Health Economics & Finance,Environmental Economics & Policies,Water and Industry,Decentralization,Environmental Economics & Policies,Energy and Environment,Health Economics & Finance,Access to Markets,Markets and Market Access
    Date: 2004–06–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:3344&r=fmk
  87. By: Spiros Bougheas; Paul Mizen; Cihan Yalcin
    URL: http://d.repec.org/n?u=RePEc:tcb:wpaper:0406&r=fmk

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