New Economics Papers
on Financial Markets
Issue of 2006‒02‒05
sixty-five papers chosen by
Carolina Valiente

  1. Cousin risks: the extent and the causes of positive correlation between country and currency risks By Marcio Gomes Pinto Garcia; Alexandre Lowenkron
  2. O Mercado interbancário de câmbio no Brasil,Creation-Date: 2005-07 By Marcio Gomes Pinto Garcia; Fábio Urban
  3. Changes in the Dynamic Behavior of Emerging Market Volatility: Revisiting the Effects of Financial Liberalization By Juncal Cuñado; Javier Gómez Biscarri; Fernando Perez de Gracia
  4. Asset Return Correlation in Basel II: Implications for Credit Risk Management. By Marie-Paule Laurent
  5. A case study of Electronic Bill Presentment and Payment (EBPP) integration using the COIN mediation technology By Jayasena, Sajindra; Bressan, Stéphane; Madnick, Stuart
  7. Correlated Trading and Returns By Daniel Dorn; Gur Huberman; Paul Sengmueller
  9. Trade Credit and Credit Rationing in Canadian Firms By Cunningham, Rose
  10. Access to financial services in Colombia : the " unbanked " in Bogota By Manroth, Astrid; Solo, Tova Maria
  11. Is a Word to the Wise Indeed Enough? ECB Statements and the Predictibility of Interest Rate Decisions By David-Jan Jansen; Jakob de Haan
  13. Potential competitive effects on U.S. bank credit card lending from the proposed bifurcated application of Basel II By William W. Lang; Loretta J. Mester; Todd A. Vermilyea
  14. TOURIST ENTERPRISES FINANCING IN GREECE By Chryssanthi Balomenou; Panagyiotis Arsenos; Dimitris Lagos
  16. Financing the New Economy: Are ICT Firms Really That Different? By Allard Bruinshoofd; Leo de Haan
  17. Bond Market and Stock Market Integration in Europe By Robert-Paul Berben; W. Jos Jansen
  18. Lifecycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth By James Poterba; Joshua Rauh; Steven Venti; David Wise
  19. Diagnosing Discrimination: Stock Returns and CEO Gender By Justin Wolfers
  20. Internet banking: an exploration in technology diffusion and impact By Richard J. Sullivan; Zhu Wang
  21. Macroeconomic volatility and the equity premium By Keith Sill
  24. Trade and Foreign Exchange Liberalization, Investment Climate and FDI in the MENA Countries. By Khalid Sekkat; Marie-Ange Veganzones-Varoudakis
  25. Defined Benefit Pension Plans and Regulation By Peter Vlaar
  27. Molling Inter- and Intraday Payment Flows By Arco van Oord; Howie Lin
  28. L'identité de Fisher et l'interaction entre l'inflation et la rentabilité des actions: l'importance des régimes sous-jacents aux marchés boursiers By Abdelaziz Rouabah
  29. Who Funds Technology-Based Small Firms? Evidence from Belgium By Ant Bozkaya; Bruno Van Pottelsberghe
  31. Offer-price discount of bank seasoned equity offers: do voluntary and involuntary offers convey different information? By O. Emre Ergungor; C.N.V. Krishnan; Ajai K. Singh; Allan A. Zebedee
  32. The urban unbanked in Mexico and the United States By Solo, Tova Maria; Duran, Clemente Ruiz; John P.; Caskey
  33. Hope springs eternal…French bondholders and the Soviet Repudiation (1915-1919). By John Landon-Lane; Kim Oosterlinck
  34. Macroeconomic derivatives: an initial analysis of market-based macro forecasts, uncertainty, and risk By Refet S. Gürkaynak; Justin Wolfers
  35. One Asset, Two Prices: The case of the Tsarist Repudiated Bonds By Kim Oosterlinck; Ariane Szafarz
  36. Non-Maturity Deposits with a Fidelity Premium By Marie-Paule Laurent
  37. Expectations formation and the effectiveness of strategies for limiting the consequences of the zero bound on interest rates By David L. Reifschneider; John M. Roberts
  38. Financial Literacy and Planning: Implications for Retirement Wellbeing By Annamaria Lusardi; Olivia S. Mitchell
  39. Lessons From the Debt-Deflation Theory of Sudden Stops By Enrique G. Mendoza
  40. The Gregory Thesis Visits the Tropics By Peter Warr
  41. Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model By Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
  42. Approximating equity volatility. By Ahmed Loulit
  43. Retail deposit fees and multimarket banking By Timothy H. Hannan
  44. Some Issues at the Forefront of Public Policy for Environmental Risk By Macauley, Molly
  47. Cheap versus Expensive Trades: Assessing the Determinants of Market Impact Costs By Jacob A. Bikker; Laura Spierdijk; Pieter Jelle van der Sluis
  48. Crédit commercial et limitation du crédit des entreprises canadiennes By Cunningham, Rose
  49. Valuation of pension liabilities in incomplete markets By Frank de Jong
  50. Corporate financial leverage in Canadian manufacturing: consequences for employment and inventories By Heisz, Andrew; Larochelle-Côté, Sébastien
  51. Dry Markets and Statistical Arbitrage Bounds for European Derivatives By Matos, Joao Amaro de; Lacerda, Ana
  52. The Capitalism of financial market and the control of cognitive (In French) By François MORIN (LEREPS-GRES)
  53. Predatory lending in a rational world By Philip Bond; David K. Musto; Bilge Yilmaz
  54. On finite dimensional realizations for the term structure of futures prices By Björk, Tomas; Blix, Magnus; Landen, Camilla
  55. Financial Contagion between Economies - an Exploratory Spatial Analysis By Oscar Villar; Esther Vayá
  56. Trade liberalization, profitability, and financial leverage By Baggs, Jennifer; Brander, James A.
  57. The Determinants of Merger Waves By Klaus Gugler; Dennis C. Mueller; B. Burçin Yurtoglu
  58. Equilibrium Bid-Ask Spread of European Derivatives in Dry Markets By Matos, Joao Amaro de; Lacerda, Ana
  60. Libéralisation des échanges, rentabilité et levier financier By Baggs, Jennifer; Brander, James A.
  61. U.S. corporate and bank insolvency regimes: an economic comparison and evaluation By Robert R. Bliss; George C. Kaufman
  62. Experimentando Microcrédito: Uma Análise do Impacto do CrediAMIGO sobre Acesso a Crédito By Marcelo Côrtes Neri; André Luiz Medrado
  63. Subsidies and financial performances of the microfinance institutions: Does management matter? By Marek Hudon
  64. Microfinance and Female Empowerment By Sylvain Dessy; Jacques Ewoudou

  1. By: Marcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Alexandre Lowenkron (Department of Economics PUC-Rio)
    Keywords: Country risk, currency risk, financial crisis, interest rate, cousin risk
    JEL: E43 G15 F34
    Date: 2005–09
  2. By: Marcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Fábio Urban (Bolsa de Mercadorias e Futuros - BM&F)
    Abstract: We thoroughly describe the workings of the Brazilian interbank exchange rate market: agents, products, regulation, operation and risks. We analyse the recent evolution of the exchange rate market and came to a negative evaluation of the current exchange rate trading system, thereby suggesting an alternative centralized system, more liquid and transparent. We show econometrically that the exchange rate is firstly formed in the exchange rate futures market at the Commodities and Futures Exchange (BM&F), being then transmitted through arbitrage to the spot market.
    Keywords: Câmbio, Microestrutura do Mercado de Câmbio no Brasil, Regulação, Mercado de câmbio à vista e futuro
    JEL: F31 F33 G13 G15 G18
    Date: 2005–03
  3. By: Juncal Cuñado (School of Economics and Business Administration, University of Navarra); Javier Gómez Biscarri (School of Economics and Business Administration, University of Navarra); Fernando Perez de Gracia (School of Economics and Business Administration, University of Navarra)
    Abstract: In this paper we test whether the dynamic behavior of stock market volatility in six emerging economies has changed over the period 1976:01-2004:12. This period corresponds to years of profound development of both the financial and the productive sides in these emerging countries, but also to the years of the major financial crises. Our analysis suggests that changes in volatility behavior, while indeed present, may have been overstated in the past: simple specifications account for most of the dynamics of stock market volatility and therefore become powerful tools for volatility analysis. Additionally, we show that financial liberalization of emerging markets has generally reduced the level of market volatility and its sensititivity to news.
    JEL: C32 G15 F36
  4. By: Marie-Paule Laurent (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: The Basel Committee is currently reviewing the Accord on capital adequacy. It should provide new approaches that are more sensitive to risks. This paper focuses on the Internal Rating Based Advanced approach for retail exposures, which is compared to a one systematic factor model in order to highlight the underlying hypotheses of Basel II. The Basel framework assumes that the asset return correlation is solely determined by the probability of default (PD). However, the one-factor model highlights the influence of the volatility of PD on the asset return correlation, especially for low PDs. The assumption of the Basel framework implies first that there may be opportunities for regulatory arbitrage. Second, as the regulatory capital curve is concave in PD, it gives an incentive to decompose the portfolio into segments only for reducing the capital requirement. Finally, the inaccurate measure of asset return correlation might be misleading for credit risk management. The Basel framework is applied to a large portfolio of retail contracts (35,787 individual automotive lease contracts) provided from a major European financial institution. We show that the outcomes of Basel II are empirically relevant.
    Keywords: credit risk, Basle II, asset correlation
    JEL: G11 G18
    Date: 2004–04
  5. By: Jayasena, Sajindra; Bressan, Stéphane; Madnick, Stuart
    Abstract: There is no such monopoly as The World Wide Bank that manages the databases of all possible financial activities. Such a concept makes neither technical nor business sense. Each player in the financial industry, each bank, stock exchange, government agency, or insurance company, operates its own internal financial information systems. By its very nature, financial information, like the money that it represents, changes hands. Therefore the interoperation of financial information systems is the cornerstone of the financial services they support. Naturally the critical economic role and the complexity of financial information led to the development of standards for its management and interchange. Yet standards are not the panacea: different groups of players use different standards or versions of a standard's implementation. In this paper we illustrate the nature of the problem in the Electronic Bill Presentment and Payment industry. In particular, we describe and analyze the difficulty of the integration of services using four different formats: IFX, OFX and SWIFT standards, and an example proprietary format. We then propose an improved way to accomplish this integration using the COntext INterchange (COIN) framework.
    Keywords: COntext INterchange (COIN) framework, financial information databases,
    Date: 2006–01–13
  6. By: Iris Claus; Kunhong Kim
    Abstract: This paper assesses the effects of asymmetric information and agency costs in credit markets in an open economy with a floating exchange rate and sticky prices. A decline in agency costs lowers the cost of external finance and increases the long-run level of steady state investment, capital and output. Agency costs also affect the business cycle and the central bank's response to shocks in the economy. Following a supply (demond) shock to the economy agency costs dampen (magnify) output fluctuations. The results thus underline the importance of incorporating credit markets into macroeconomic models.
    JEL: E32 E44 E50 F41
    Date: 2006–01
  7. By: Daniel Dorn; Gur Huberman; Paul Sengmueller
    Abstract: Retail clients at a major German discount broker trade in tandem – they tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Neither aggregate liquidity effects nor short sale constraints fully explain this behavior. The systematic execution of limit orders, coordinated through price movements or the correlated trading of other investors who pick retail limit orders, do not fully explain the observed comovement either. Rather, tandem trading appears to be mostly due to investors placing similar speculative bets. Correlated speculative trades perturb markets enough to make returns predictable over a short horizon. Correlated limit orders also predict subsequent returns, but for a different reason: limit order traders are compensated for accommodating other traders’ temporary liquidity demands. KEYWORDS: Retail investor trading, speculative trading, limit orders.
    JEL: G11 G12
    Date: 2005–12
  8. By: Amparo Nagore (Universitat de València); Joaquín Maudos Villarroya (Instituto Valenciano de Investigaciones Económicas)
    Abstract: This paper presents evidence on the impact of bank-specific, regulatory, institutional, macro and financial development variables on competition in banking, using information at both national and bank level. With this aim, Lerner indices of market power are estimated using a sample of 10,479 annual observations over the period 1995-99 across 58 countries. Results show that although bank-specific characteristics explain a substantial proportion of market power, market structure variables and, above all, the level of financial development also help to explain the differences observed in the levels of banking competition. Regulatory impediments to competition are not significant when controlling for financial development. Este artículo presenta evidencia del impacto que las variables específicas de cada banco, las regulatorias, institucionales, macroeconómicas y de desarrollo financiero ejercen sobre la competencia bancaria, utilizando información tanto a escala nacional como a nivel de empresa. Con este objetivo, se estiman índices de Lerner de poder de mercado utilizando 10.479 observaciones durante el periodo de 1995-99 para una muestra de 58 países. Los resultados muestran que, aunque las características específicas de cada banco explican una parte sustancial del poder de mercado (especialmente el tamaño y la eficiencia), las variables de estructura del mercado, y, sobretodo, el nivel de desarrollo financiero también ayudan a explicar las diferencias observadas en los niveles de competencia bancaria. Las barreras regulatorias a la competencia no son significativas cuando se controla por desarrollo financiero.
    Keywords: banking, market power Banca, poder de mercado
    JEL: G21 D43 L13
    Date: 2005–04
  9. By: Cunningham, Rose
    Abstract: Burkart and Ellingsen (2004) develop a model of trade credit and bank credit rationing which predicts that trade credit will be used by medium-wealth and low-wealth firms to help ease bank credit rationing. This paper tests this and other predictions of the Burkart and Ellingsen model using a large sample of more than 28,000 Canadian firms. The author uses an endogenous method to divide the firms into the appropriate wealth categories rather than arbitrarily selecting firms likely to be credit-rationed. The data support the main predictions of the model quite well. The author finds that medium-wealth firms substitute trade credit for bank credit consistent with using it to alleviate bank credit rationing. The low-wealth firms use trade credit but it is positively linked to bank credit, suggesting those firms are constrained in both bank credit and trade credit markets, and so cannot use trade credit to adjust as much to negative shocks. The findings also suggest that there are very few unconstrained, high-wealth Canadian firms. The author also finds low-wealth, declining and distressed firms supply proportionally more trade credit than firms with healthier balance sheets.
    Keywords: Business enterprises, Business finance, Business conditions
    Date: 2005–11–04
  10. By: Manroth, Astrid; Solo, Tova Maria
    Abstract: The authors look at the depth of the financial sector in Bogota in terms of the " financial exclusion " of those, particularly poorer citizens, who operate without accounts in formal financial institutions-the unbanked. They begin with a review of the overall decline in financial intermediation from 1998 to 2003, which explains, in part, the high percentage of unbanked-61 percent in a recent household survey in Bogota. The authors next look at the banking system today, concluding that the present challenge is to increase financial intermediation overall, especially with the poor. Their analysis shows that Colombia ' s banks provide costly services mainly catered toward high-income clients. Existing fees and costs of checking, savings, and loan services average 5-10 percent of a monthly minimum wage, making them hard to afford for low-income clients. The authors also explore the characteristics and impacts of financial exclusion associated with lower and more uncertain incomes, lower education, and closer links to the informal sector. They cite the household survey conducted in Bogota, showing that 70 percent of the unbanked earn less than one minimum wage per month, are three times more likely to be unemployed than the banked, and have lower education levels. The unbanked save and borrow largely in the informal sector, at greater risk and greater cost. At the same time, however, high home ownership rates show that the unbanked have the capacity to build assets, demonstrating that they have " bankable " characteristics. The authors conclude with recommendations for government and for the financial sector to broaden access for the benefit of public and private sectors, and for the unbanked.
    Keywords: Banks & Banking Reform,Public Sector Economics & Finance,Economic Theory & Research,Financial Intermediation,Settlement of Investment Disputes
    Date: 2006–02–01
  11. By: David-Jan Jansen; Jakob de Haan
    Abstract: We show that comments by euro area central bankers contain information on future ECB interest rate decisions, but that the comments mainly reflect recent developments in macroeconomic variables. Furthermore, models using only communication variables are outperformed by straightforward Taylor rule models. During the first years of the European Economic and Monetary Union, comments by ECB Executive Board members and high-level Bundesbank policy-makers were more informative than comments by national central bank presidents. We also find that differences of opinion were informative when they concerned the outlook for economic growth. Finally, our results suggest that the ECB used communication especially to signal interest rate increases.
    Keywords: central bank communication; interest rate decisions; ECB; Taylor rule; ordered probit models
    JEL: E43 E52 E58
    Date: 2005–12
  12. By: Juan Carlos Gómez Sala (Universidad de Alicante); Germán López Espinosa (Universidad de Navarra)
    Abstract: In this paper we examine the value of analysts’ stock recommendations in the Spanish capital market in the period 1994-2003, using data from JCF Quant. In every month of the sample period the assets have been classified into five portfolios first attending its consensus recommendations level and second by changes of consensus level. The portfolio recommendations returns have been estimated using different models in the context of the portfolio calendar-time methodology. The results obtained show that sell-side analysts are able to detect profitable investment opportunities. Investors could obtain significant positive risk adjusted abnormal returns buying the best recommended assets and selling simultaneously the worst consensus stocks. However a portion of these returns could be attributed to their tendency to recommend the acquisition of big “value” stocks and the sell of small shares with negative prices momentum. Finally, the value of analyst’s recommendations is independent of the firm information level approached by the company size and the number of analysts following it. En este trabajo se analiza el valor de las recomendaciones de inversión de los analistas financieros en el mercado de capitales español en el periodo 1994-2003, con datos procedentes de JCF Quant. Los activos se han clasificado cada mes del periodo muestral en cinco carteras en función del nivel de consenso de las recomendaciones y de sus variaciones. La rentabilidad de las carteras de recomendaciones (cambios) se ha estimado utilizando modelizaciones alternativas con una metodología de tiempo de calendario. Los resultados obtenidos muestran que los analistas identifican oportunidades de inversión rentables, dado que con una estrategia de inversión autofinanciada, consistente en comprar la cartera con recomendaciones más favorables y vender la cesta de activos con peores recomendaciones, se pueden obtener rentabilidades significativamente positivas incluso después de ajustar por riesgo. Parte de esta rentabilidad no es atribuible a su propia capacidad sino a la tendencia a recomendar la compra de activos grandes de valor y la venta de activos pequeños con momentum de precios negativo. Finalmente, el valor de las recomendaciones no parece depender del nivel de información existente sobre las empresas aproximado por el tamaño de las empresas o el número de analistas.
    Keywords: Analistas del lado de la venta; Valor de las recomendaciones, Evaluación resultados de carteras Sell-side research; Value of analysts’ recommendations, Performance evaluation, calendar time-portfolios
    JEL: G10 G14 G20 G24
    Date: 2005–04
  13. By: William W. Lang; Loretta J. Mester; Todd A. Vermilyea
    Abstract: This paper analyzes the potential competitive effects of the proposed bifurcated application of Basel II capital regulations in the United States on bank credit card lending activities. For this purpose, the authors consider the Basel II regulations as stated in the June 2004 Basel Committee Framework Agreement.
    Date: 2005
  14. By: Chryssanthi Balomenou; Panagyiotis Arsenos; Dimitris Lagos
    Abstract: The main purpose of our paper is to examine the financing framework of the Greek tourist enterprises. More specifically, in the first part of this paper we analyze the sector of the Greek tourism market in order to be able to define its operational framework. Then, we examine the structural problems of the sector and analyze the relevant Institutional financing framework. In the second part we work out a critical assessment of the tourist enterprises existing financial framework, focussing on the financial difficulties that they face. In the last part of our paper, we set out our proposals concerning the adoption of the appropriate tourism policy that will contribute to the supporting of the aforementioned firms and especially to their access to finance (through Developmental Laws, E.U’s programs, financial Institutions like Credit Guarantee Fund for Small and Very Small Enterprises, etc). The most important conclusions that come out of the whole analysis of our paper, show that the majority of Greek Tourist Industry are small enterprises that they have the same structural characteristics (e.g: seasonal bussiness, mainly situated in insular regions, stayed behind large companies in terms of productivity, technological experience, financial and other areas. Particularly, they often lack creditworthiness and have trouble securing funds needed for their business activities). Furthermore, tourist enterprises, like most small companies have only limited capital resources. So, they have to rely on banks and other financial institutions for their funds. Banks require sufficient collateral or a well-established surety for their debtors to secure a loan. The lack of such assets or appropriate surety makes it difficult for many small tourist business to obtain loans from financial houses. Thus, it is obvious that the pin pointing of the financial problems that the tourist enterprises face, facilitates the planing of the appropriate mix of tourism policy measures, that can lead to a more effective running of tourist enterprises and also contribute to the reinforcement of local entrepreneurship.
    Date: 2005–08
  15. By: David Abad (Universidad de Alicante); José Yagüe (Universidad de Murcia); Sonia Sanabria (Universidad de Alicante)
    Abstract: This paper analyses the intraday reaction of the Spanish market to annual earnings announcements. Specifically, we examine the levels of stock liquidity, trading activity, volatility, and asymmetric information, as well as the order placement strategy around earnings disclosures. We also analyse the differences in the market reaction to announcements made during trading and non-trading hours. We find that stock liquidity and trading activity significantly improves after the announcement, although we do not find a significant reduction in the level of asymmetric information. Our results indicate that the stock market reaction differs according to the timing of the announcement. For overnight announcements, where investors have time to evaluate the earnings news before the market opens, the improvement in liquidity is immediate, caused by higher trading activity and less asymmetric information. On the contrary, for earnings announcements released when the market is open, the significant improvement in stock liquidity is observed after about one and a half hours of trading. The latter possibly occurs once informational advantages of investors who have superior information-processing abilities disappear, and therefore the level of asymmetric information decreases. The different reaction of the market to overnight and to daytime disclosures could explain the fact that Spanish firms prefer to release the announcement in trading (non-trading) hours when actual earnings are lower (higher) than forecast earnings. En este trabajo analizamos la reacción intradía del mercado español ante el anuncio del beneficio anual. En concreto, se examinan los niveles de liquidez, actividad negociadora, volatilidad, asimetría informativa y las estrategias de introducción de órdenes en un breve intervalo de tiempo alrededor del anuncio. También se analiza la respuesta del mercado en función del momento en que se produce el anuncio: fuera o dentro de la sesión. Nuestros resultados muestran una mejora generalizada de la liquidez y la actividad después del anuncio, aunque no se observa una reducción significativa del nivel de asimetría informativa. Sin embargo, la reacción del mercado difiere atendiendo al momento del anuncio. En los anuncios que se realizan con el mercado cerrado, donde los agentes disponen de más tiempo para procesar la información antes de que el mercado abra, la mejora en la liquidez es inmediata, no sólo impulsada por la mayor actividad, sino también por un menor nivel de asimetría informativa. Por su parte, en los anuncios que tienen lugar con el mercado abierto, la mejora en liquidez se produce con retraso, aproximadamente hora y media después del anuncio, posiblemente una vez que desaparecen las ventajas informativas de aquellos agentes más diestros en la interpretación de la nueva información y, por tanto, cuando disminuye el nivel de asimetría informativa. Esta diferente respuesta del mercado ante los anuncios con el mercado abierto y cerrado podría justificar el hecho de que las empresas prefieran anunciar sus beneficios dentro (fuera) de la sesión cuando estos son peores (mejores) de lo esperado.
    Keywords: Anuncios de resultados, liquidez, actividad negociadora, volatilidad, asimetría informativa Earnings announcements, liquidity, trading activity, volatility, information asymmetry
    JEL: G14 G19 M49
    Date: 2005–09
  16. By: Allard Bruinshoofd; Leo de Haan
    Abstract: Did ICT firms behave very differently from non-ICT firms during the global ICT boom-bust cycle on the stock markets? To answer this question we analyze the financial behavior of a sample of North-American and Western European firms during 1991-2002. We document that ICT firms are indeed what they are always said to be: relatively information intensive and risky firms. We show that they therefore hold more precautionary cash and have lower leverage targets. Though ICT firms issued more equity and debt during the boom, this was broadly unrelated to stock market conditions, in contrast to the prediction of the market timing view. ICT firms did not build up excessive cash reserves that lead to overinvestment. All in all, the financial management of ICT firms has not been all that different from non-ICT firms.
    Keywords: Cash Management; Market Timing; Capital Structure; ICT
    JEL: C33 C43 E41 G3
    Date: 2005–12
  17. By: Robert-Paul Berben; W. Jos Jansen
    Abstract: This paper investigates whether there has been a structural increase in financial market integration in nine European countries and the US in the period 1980-2003. We employ a GARCH model with a smoothly time-varying correlation to estimate the date of change and the speed of the transition between the low and high correlation regimes. Our test produces strong evidence of greater comovement across the board for both stock markets and government bond markets. Dates of change and speeds of adjustment vary widely across country linkages. Stock market integration is a more gradual process than bond market integration. The impact of European monetary union (EMU) is rather limited, as it has mainly affected the timing of bond market correlation gains (but hardly their size) and has had little discernible effect on stock market integration.
    JEL: G21 L13
    Date: 2005–12
  18. By: James Poterba; Joshua Rauh; Steven Venti; David Wise
    Abstract: This paper examines how different asset allocation strategies over the course of a worker's career affect the distribution of retirement wealth and the expected utility of wealth at retirement. It considers both rules that allocate a constant portfolio fraction to various assets at all ages, as well as "lifecycle" rules that vary the mix of portfolio assets as the worker ages. The analysis simulates retirement wealth using asset returns that are drawn from the historical return distribution. The results suggest that the distribution of retirement wealth associated with typical lifecycle investment strategies is similar to that from age-invariant asset allocation strategies that set the equity share of the portfolio equal to the average equity share in the lifecycle strategies. There is substantial variation across workers with different characteristics in the expected utility from following different asset allocation strategies. The expected utility associated with different 401(k) asset allocation strategies, and the ranking of these strategies, is very sensitive to three parameters: the expected return on corporate stock, the worker's relative risk aversion, and the amount of non-401(k) wealth that the worker will have available at retirement. At modest levels of risk aversion, or in the presence of substantial non-401(k) wealth at retirement, the historical pattern of stock and bond returns implies that the expected utility of an all-stock investment allocation rule is greater than that from any of the more conservative strategies. Higher risk aversion or lower expected returns on stocks raise the expected utility of following lifecycle strategies or other strategies that reduce equity exposure throughout the lifetime.
    JEL: J14 J32 G11 G23
    Date: 2006–01
  19. By: Justin Wolfers (Wharton School, University of Pennsylvania, CEPR, NBER and IZA Bonn)
    Abstract: A vast labor literature has found evidence of a "glass ceiling", whereby women are underrepresented among senior management. A key question remains the extent to which this reflects unobserved differences in productivity, preferences, prejudice, or systematically biased beliefs about the ability of female managers. Disentangling these theories would require data on productivity, on the preferences of those who interact with managers, and on perceptions of productivity. Financial markets provide continuous measures of the market’s perception of the value of firms, taking account of the beliefs of market participants about the ability of the men and women in senior management. As such, financial data hold the promise of potentially providing insight into the presence of mistake-based discrimination. Specifically if female-headed firms were systematically under-estimated, this would suggest that female-headed firms would outperform expectations, yielding excess returns. Examining data on S&P 1500 firms over the period 1992-2004 I find no systematic differences in returns to holding stock in female-headed firms, although this result reflects the weak statistical power of our test, rather than a strong inference that financial markets either do or do not under-estimate female CEOs.
    Keywords: discrimination, CEOs, chief executive officer, event study, statistical discrimination, excess returns, female CEOs
    JEL: G14 G3 J16 J4 J7 K31 M5
    Date: 2006–01
  20. By: Richard J. Sullivan; Zhu Wang
    Abstract: This paper studies endogenous diffusion and impact of a cost-saving technological innovation -- Internet Banking. When the innovation is initially introduced, large banks have an advantage to adopt it first and enjoy further growth of size. Over time, as the innovation diffuses into smaller banks, the aggregate bank size distribution increases stochastically towards a new steady state. Applying the theory to a panel study of Internet Banking diffusion across 50 US states, we examine the technological, economic and institutional factors governing the process. The empirical findings allow us to disentangle the interrelationship between Internet Banking adoption and growth of average bank size, and explain the variation of diffusion rates across geographic regions.
    Date: 2005
  21. By: Keith Sill
    Abstract: Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. The author investigates the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.
    Date: 2006
  22. By: Yadira González de Lara (Universidad de Alicante)
    Abstract: The commercial success of Venice hinged on her merchants¿ ability to do business with borrowed money. However, to raise other people¿s capital, merchants needed to commit not to embezzle the capital received. Despite this commitment problem, the evidence indicates an active financial market through which the Venetians, by and large, mobilized their savings to investments. What were the institutional foundations of this market? This paper claims that neither reputation-based institutions that did not rely on the state nor a coercive legal system provided such foundations. Instead, the state generated the rents and information required to induce merchants to refrain from acting opportunistically.
    Keywords: Institutions for Contract Enforcement; State Formation; Financial Markets; Late Medieval Venice
    Date: 2005–09
  23. By: David Abad (Universidad de Alicante); Antonio Rubia (Universidad de Alicante)
    Abstract: Determining the degree of informational asymmetry is a major topic in the literature of modern microstructure. In this paper, we review and analyze the suitability of the models for estimating the probability of informed trading [Easley et al., 1996; Nyholm, 2002, 2003]. The empirical analysis is carried out on the Spanish market. We find evidence suggesting that the regime-switching model by Nyholm (2002, 2003) does not provide estimates consistent with the effects of asymmetry. The specific analysis on the Spanish market reveals a higher likelihood of informed trading for the less-frequently traded assets as a consequence of the dramatic fall in the number of liquidity traders. This issue suggests a strong degree of aversion to the risk of adverse selection. Caracterizar el grado de asimetría informativa ocupa un papel predominante en la literatura de microestructura moderna. En este trabajo, se revisa y analiza la idoneidad de los métodos existentes para calibrar la probabilidad de negociación informada [Easley et al., 1996; Nyholm, 2002, 2003]. El análisis empírico toma como referencia el mercado español. La evidencia obtenida señala que el modelo de régimen cambiante de Nyholm (2002, 2003) no ofrece medidas consistentes con los efectos de asimetría informativa. El análisis sobre el mercado español revela una mayor probabilidad de negociación informada en los activos menos líquidos como consecuencia de una reducción drástica en el número de agentes que negocia por motivos de liquidez. Esta evidencia sugiere un fuerte comportamiento de aversión al riesgo de selección adversa.
    Keywords: Información asimétrica, selección adversa, probabilidad de negociación informada, PIN Asymmetric information, adverse selection, probability of informed trading, PIN
    JEL: C21 C52 D82
    Date: 2005–04
  24. By: Khalid Sekkat (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels); Marie-Ange Veganzones-Varoudakis (CERDI, Centre National de la Recherche Scientifique, Clermont Ferrand)
    Abstract: The paper assess the relative importance of trade and foreign exchange liberalization, infrastructure availability and economic and political stability in increasing Middle East and North African (MENA) countries attractiveness with respect to FDI. The analysis is conducted for total FDI and for FDI in manufacturing. The results show that trade and foreign exchange liberalization, infrastructure availability and sound economic and political conditions increase FDI inflows. Their effects are much higher for FDI in the manufacturing sector than for total FDI. This result is robust to alternative indicators of trade and foreign exchange liberalization, and to change in the specification. The message to MENA’s policy makers is twofold. First, efforts toward trade and foreign exchange liberalization should be initiated or further increased in order to make the region attractive to foreign investors. Second improvements in other aspects of the investment climate are important complements to liberalization and result in additional and sensitive increase of FDI inflows.
    Keywords: Reforms, MENA, FDI.
    JEL: F21 F15 K42
    Date: 2004–05
  25. By: Peter Vlaar
    Abstract: In this paper, it is investigated to what extent optimal investment policy by Dutch pension funds is affected by changes in regulation. It turns out that a complete market valuation method increases the cost of the defined benefit pension relative to a fixed discount rate method, as high pension premiums are to be payed exactly when expected future returns are the lowest. In practice, this timing problem does not seem to be severe for Dutch pension funds as solvency requirements are only applied to guaranteed pension rights, whereas a major part of pension benefits (indexation) is conditional. Moreover, a fixed interest rate may still be used to calculate pension premiums. Regarding the asset mix, the optimal duration of bonds in portfolio seems higher than currently observed, both under market valuation and under a fixed discount rate method. The new regulatory rules only slightly reduce the attractiveness of equity investment.
    Keywords: pension valuation; equity investment; optimal duration. J.E.L. Code: C15; G11; G23; G28
    JEL: H55 J26
    Date: 2005–12
  26. By: María Jesús Pastor (Universidad de Alicante); Francisco Poveda (Universidad de Alicante)
    Abstract: The poor stock price performance of firms that raise capital through seasoned equity offerings is one of the recent puzzles in financial literature. In this study we investigate whether pre-issue earnings management can explain these results for rights issues in Spain. Consistent with this explanation, we notice that firms¿ issuing rights make use of discretionary accruals to report higher earnings prior to the offering. Most interestingly, the decrease in discretionary accruals the years following the offering explains the underperformance in stock returns.
    Keywords: Corporate Finance, Seasoned Equity Offerings, Earnings Management, Accounting Accruals
    JEL: G14 G32 M41
    Date: 2005–02
  27. By: Arco van Oord; Howie Lin
    Abstract: In this paper we examine the interday and intraday time pattern of Dutch banks’ payments and which events, institutional and financial variables influence these payment flows. The payment patterns are analyzed using data from the Dutch TOP system. In this paper it is shown that announcements of the ECB concerning interest rates have no effect on the inter- and intraday pattern of the payments. On the last day of the reserve maintenance period we find an increase in the value of payments. The settlement’s days of the interest rate tenders have a positive effect on the value of payments, while the announcement and allotment of interest rate tenders have no effect on the interday pattern. During US banking holidays there is a sharp decrease in the total value, number and average value of the payments. The day before and after a US banking holiday there is an increase in the value and number of payments. These effects of a US banking holiday are especially measurable in the mornings. During holidays in the Netherlands the number and value of transactions decrease. The main result for our intraday data is that banks tend to settle their payments more and more in the same time interval.
    Keywords: large value payment system
    JEL: E58 G21
    Date: 2005–12
  28. By: Abdelaziz Rouabah
    Abstract: This paper sheds a new light on the puzzling negative relationship between nominal stock returns and expected inflation. The assertion that stocks offer a hedge against inflation is theoretically founded on the Fisher identity. Contrary to this fundamental view, recent empirical tests reject both the Fisher hypothesis and the Fama proxy hypothesis even when accommodating expected economic growth in the estimates. This article proposes to consider different regimes underlying stock market returns in the analysis of the relationship between inflation expectations and nominal stock returns. Using monthly data for the euro area and for Luxembourg over the past two decades, our results show that the Fisher hypothesis cannot be rejected when stock market regimes are accommodated in the estimates of the Geske & Roll inverse causality relation. In this context, shares allow for hedging against inflation and their prices can be used by central banks as a leading indicator for inflation.
    Date: 2006–01
  29. By: Ant Bozkaya (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels); Bruno Van Pottelsberghe (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: Using an original survey sample of 103 unquoted Belgian technology-based small firms (TBSFs), we examine the capital structure of start-up companies during their consecutive development stages. We find that internal funds, either alone as personal savings or in combination with family and friends, to be the primary source of financing. Personal funds of the founders are used to finance the start of 82 percent of TBSFs. Commercial bank and government funds are the most important sources of external finance for TBSFs subsequent to start-up. Most founders agreed that business angels and venture capitalists play a greater role at later stages. However, once granted, more substantial amounts of funding come from venture capitalists. There is also evidence that suggests an evolution in the mix of internal and external sources of finance. Finally, our findings based on founders’ scores in raising external funds suggest a call for urgent policy action to improve access to and availability of early-stage entrepreneurial finance in Belgium. We discuss our findings in light of the capital structure of small firms relating to TBSFs.
    Keywords: capital and ownership structure; entrepreneurial finance; technology-based firms; seed capital; survey.
    JEL: G32 M13 M21
    Date: 2004–09
  30. By: P.N. Smith; S. Sorensen; M.R. Wickens
    Abstract: We examine the relation between US stock market returns and the US business cycle for the period 1960-2003 using a new methodology that allows us to estimate a time-varying equity premium. We identify two channels in the transmission mechanism. One is through the mean of stock returns via the equity risk premium, and the other is through the volatility of returns. We provide support for previous findings based on simple correlation analysis that the relation is asymmetric with downturns in the business cycle having a greater negative impact on stock returns than the positive effect of upturns. We also obtain a new result, that demand and supply shocks affect stock returns differently. Our model of the relation between returns and their volatility encompasses CAPM, consumption CAPM and Merton's (1973) inter-temporal CAPM. It is implemented using a multi-variate GARCH-in-mean model with an asymmetric time-varying conditional heteroskedasticity and correlation structure.
    JEL: G12 C32 C51 E44
    Date: 2006–01
  31. By: O. Emre Ergungor; C.N.V. Krishnan; Ajai K. Singh; Allan A. Zebedee
    Abstract: Seasoned equity offers made by undercapitalized banks (labeled involuntary offers) could be different from other seasoned equity offers because the issuer is presumably under regulatory duress to make up the shortfall in required capital. For this reason, involuntary offers may exhibit limited managerial opportunism. When a firm issues seasoned equity, investment bankers gather information about the issuer in the period between the registration of the offer and its issue date. The information gathered during the book-building process gets reflected in the offer price discount on the issue date. We find that the offer price discount appears to convey more information to investors on the issue date for the voluntary issuers. However, we find that both types of issues show signs of market timing, and that investors react negatively to both types of issuance announcements. Our results are robust to several checks.
    Keywords: Bank stocks
    Date: 2005
  32. By: Solo, Tova Maria; Duran, Clemente Ruiz; John P.; Caskey
    Abstract: This paper examines the ways in which lower-income households obtain basic financial services in urban communities in Mexico and the United States. And it discusses the efforts that private sector and government organizations are making to lower the cost or improve the quality of those services. The paper summarizes available information on these issues and assesses the rationale and challenges facing the strategies that both countries are using to improve the financial services available to lower-income households, giving particular attention to " unbanked " households, meaning households that do not have deposit accounts with any regulated deposit-taking institution, and also to lower-income households in large urban areas. In comparing the experiences of the two countries, the paper reviews the extent to which lower-income households are unbanked, their use of non-bank financial services, and strategies for improving financial services to the unbanked. The underlying differences between the countries ' typical household incomes-national income per capita in Mexico in 2002 was US$8,540, compared with $35,060 in the United States (World Bank 2003)-may also influence the difference in percentage of unbanked-9.1 percent of families in the United States compared with 76.4 percent found in a recent study in Mexico City.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Financial Intermediation,Remittances,Housing & Human Habitats
    Date: 2006–02–01
  33. By: John Landon-Lane (Rutgers University, The State University of New-Jersey, Department of Economics); Kim Oosterlinck (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: By their extreme nature, repudiations rarely occur. History is therefore crucial to analyze their impact on bond prices. This paper provides an empirical study based on an original database: prices of a Tsarist bond traded in Paris before and after its repudiation by the Soviets. A structural vector autoregression is used to identify shocks to this bond that are orthogonal to shocks hitting a proxy for the Paris bond market, the French 3% rente. French market shocks are thus disentangled from repudiation specific shocks hitting the Russian bond. Consistent with expectations no major Russian shocks appears before the 1917 revolution. For 1918, shocks are mainly related with bailouts or hopes of partial bailouts. In 1919, however, the nature of shocks changes as they can be explained either by the negotiations with the Soviets or by the fate of the White Armies. In view of these elements, we argue that the bonds’ value were subject to a “Peso problem”. Their prices essentially reflected expected extreme events that never took place.
    Keywords: repudiation, sovereign debt, secession, Russia, Soviet, war, country break-up.
    JEL: F34 G1 N24
    Date: 2005–11
  34. By: Refet S. Gürkaynak; Justin Wolfers
    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: Derivative securities ; Macroeconomics ; Forecasting
    Date: 2005
  35. By: Kim Oosterlinck (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Université Libre de Bruxelles)
    Abstract: Prices of repudiated bonds are insightful but scarcely observed. Based on an original daily database, this paper compares the price evolution from January 6, 1916 to August 31, 1919 of a cross-listed (Paris and London) Tsarist bond repudiated by the Soviets on February 8, 1918. After its repudiation, the bond exhibits an important geographic price differential. This phenomenon is attributed to the conjunction of war conditions excluding arbitrage and specific investors' expectations regarding bailouts by the French and British governments. Furthermore, data from the pre-repudiation period show that the impossibility for arbitrage is not sufficient for driving the pricing differences.
    Keywords: Bonds, repudiation, sovereign debt, Russia.
    JEL: F34 G1 N24
    Date: 2004–08
  36. By: Marie-Paule Laurent (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: Non-maturity deposits are a major source of funds for traditional banks. The deposit valuation model described by Jarrow and van Deventer (1998) assumes a short-term liquidity option and a single remuneration rate. We extend the traditional valuation model to the case where, as in the Benelux, the deposits are remunerated first on the current balance (at the base rate) and where an additional premium rewards the deposits that have remained on the account for a certain period (at the fidelity premium rate). We show the existence of an additional term in the valuation formula, the premium complement, allowing the total remuneration rate to be higher than the short-term interest rate and still yield positive net present value. The premium complement depends positively on the base deposit spread during the holding period and negatively on the proportion of stable deposits. Hence, the model explains why a rational bank may offer a fidelity premium higher than the deposit spread. The 11-year data provided by a European regional bank are used to empirically compare the valuation models. The results show that the proportion of stable deposits plays an important role in the valuation and must be taken into account accurately. The effect of changes in the remuneration policy on the optimal proportion of stable deposits is also analysed.
    Keywords: Non-maturity deposit, fidelity premium, bankink.
    Date: 2004–04
  37. By: David L. Reifschneider; John M. Roberts
    Abstract: We use simulations of the Federal Reserve's FRB/US model to examine the efficacy of a number of proposals for reducing the consequences of the zero bound on nominal interest rates. Among the proposals are: a more aggressive monetary policy; promises to make up any shortfall in monetary ease during the zero-bound period by keeping interest rates lower in the future; and the adoption of a price-level target. We consider two assumptions about expectations formation. One assumption is fully model-consistent expectations (MCE)--a reasonable assumption when a policy has been in place for some time, but perhaps less so for a newly announced policy. We therefore also consider the possibility that only financial markets have MCE, and that other agents form their expectations using a small-scale VAR model estimated using historical data. All of the policies noted above are highly effective at reducing the adverse effects of the zero bound under MCE, but their efficacy drops considerably when households and firms base their expectations on the historical average behavior of the economy, and only investors fully recognize the economic implications of the various proposals.
    Date: 2005
  38. By: Annamaria Lusardi; Olivia S. Mitchell
    Abstract: Evidence suggests only a minority of American households feels "confident" about retirement saving adequacy. Little is known about why people fail to plan for retirement, and whether planning and information costs might affect retirement saving patterns. To better understand these issues, we devised and fielded a purpose-built module on planning and financial literacy for the 2004 Health and Retirement Study (HRS). This module measures how workers make their saving decisions, how they collect the information for making these decisions, and whether they possess the financial literacy needed to make these decisions. Our analysis shows that financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third understood these as well as stock market risk. Women, minorities, and those without a college degree were particularly at risk of displaying low financial knowledge. We also evaluate whether people tried to figure out how much they need to save for retirement, whether they devised a plan, and whether they succeeded at the plan. In fact, these calculations prove to be difficult: fewer than one-third of our age 50+ respondents ever tried to devise a retirement plan, and only two-thirds of those who tried, actually claim to have succeeded. Overall, fewer than one - fifth of the respondents believed that they engaged in successful retirement planning. We also find that financial knowledge and planning are clearly interrelated: those who displayed financial knowledge were more likely to plan and to succeed in their planning. Moreover, those who did plan were more likely to rely on formal planning methods such as retirement calculators, retirement seminars, and financial experts, and less likely to rely on family/relatives or co-workers.
    Keywords: interest compounding; inflation; risk diversification; retirement planning.
    JEL: D91
    Date: 2006–01
  39. By: Enrique G. Mendoza
    Abstract: This paper reports results for a class of dynamic, stochastic general equilibrium models with credit constraints that can account for some of the empirical regularities of the Sudden Stop phenomenon of recent emerging markets crises. In these models, credit constraints set in motion Irving Fisher's debt-deflation mechanism and they bind as an endogenous equilibrium outcome when agents are highly indebted. The quantitative predictions of these models yield three key lessons: (1) Sudden Stops can occur as an endogenous response to typical realizations of adverse shocks to fundamentals, in environments in which agents plan their actions taking credit constraints and expectations of Sudden Stops into account. (2) Credit constraints cause output declines during Sudden Stops when collateral constraints limit debt to a fraction of the market value of capital, when there are limits on access to working capital, or when debt-deflation lowers the value of the marginal product of factors of production. (3) The debt-deflation mechanism has significant quantitative effects in terms of the amplification, asymmetry and persistence of the responses of macroeconomic aggregates to standard shocks, and in the occurrence of Sudden Stops as infrequent events nested within regular business cycles. Precautionary saving rules out the largest Sudden Stops from the stochastic stationary state, but Sudden Stops remain a positive-probability event in the long run.
    JEL: F41 F32 E44 D52
    Date: 2006–01
  40. By: Peter Warr
    Abstract: A concern about large, export-oriented projects relates to the flows of foreign exchange into the domestic economy that they produce. These flows occur both during the investment phase of the project and subsequently during its operational phase, through export earnings. Foreign exchange inflows produce direct benefits for some groups, but may also indirectly harm others, through an appreciation of the real exchange rate. These indirect outcomes, known as the 'Gregory effect' in Australia and as the 'Dutch disease' or 'booming sector' effect elsewhere, are studied in this paper in the context of a large infrastructure project in Laos.
    Keywords: F32, O11, O53
    Date: 2006
  41. By: Axel Börsch-Supan; Alexander Ludwig; Joachim Winter
    Abstract: Population aging and pension reform will have profound effects on international capital markets. First, demographic change alters the time path of aggregate savings within each country. Second, this process may be amplified when a pension reform shifts old-age provision towards more pre-funding. Third, while the patterns of population aging are similar in most countries, timing and initial conditions differ substantially. Hence, to the extent that capital is internationally mobile, population aging will induce capital flows between countries. All three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply. In order to quantify these effects, we develop a computational general equilibrium model. We feed this multi-country overlapping generations model with detailed long-term demographic projections for seven world regions. Our simulations indicate that capital flows from fastaging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings. We also conclude that closed-economy models of pension reform miss quantitatively important effects of international capital mobility.
    Keywords: aging; pension reform; capital mobility.
    JEL: E27 F21 G15 H55 J11
    Date: 2005–12
  42. By: Ahmed Loulit (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: The volatility estimation is a crucial problem for pricing derivatives. The traditional implied volatility approach induces the undesired smile effect and is therefore inconsistent with the market reality. A second more realistic approach is due to Bensoussan, Crouhy and Galai (1995) who derive an extension of the Black-Scholes model where the stochastic volatility ? is endogenous and depends on the change in the firm’s financial leverage. These authors give an analytic approximation for ? when the firm is financed by external funds such as debts, under the assumptions that the risk-free rate and the volatility of the return on the firm’s asset are constant. In this work, we will generalize this result by allowing these parameters to be variable.
    Keywords: Black-Scholes model; derivative pricing; volatility.
    JEL: G13 G12
    Date: 2004–10
  43. By: Timothy H. Hannan
    Abstract: This paper reports a systematic examination of the determinants of deposit-related retail banking fees using a set of survey data that is unusual for its size, specificity, and sampling properties. The analysis focuses explicitly on six different fees associated with checking accounts and automated teller machine (ATM) usage. A preliminary analysis documents that, on average, multimarket banks charge substantially higher fees than do typically smaller, single-market banks. A more detailed econometric analysis yields results consistent with predictions of recent models. In particular, it finds that the greater the presence of multimarket banks in the local market, the higher are the retail deposit fees of single-market banks (except in highly concentrated markets) and the weaker is the positive relationship between those fees and market concentration.
    Date: 2005
  44. By: Macauley, Molly (Resources For the Future)
    Abstract: The lay of the policy land for addressing and managing environmental risk includes the hillock of the precautionary principle, the mountain of the practice and ethics of monetary valuation, and the tectonic plates of real-world innovations in markets and trading exchanges for nonmarketed environmental goods. This paper offers an overview of these contemporary and as yet unresolved issues and asks how each might be addressed in disparate environmental risks such as lightning, climate change, and severe weather. The overview focuses on issues that may be of interest to the American Meteorological Society’s annual policy colloquium.
    Keywords: risk, environment, public policy, economics
    JEL: Q00 D89
  45. By: Ivan Paya (Universidad de Alicante); David A. Peel (University Management School)
    Abstract: Nonlinear models of deviations from PPP have recently provided an important, theoretically well motivated, contribution to the PPP puzzle. In recent work the equilibrium level has been modeled either as constant or as time varying with very similar statistical fits and very different economic implications. The high persistence of both PPP deviations and the proxy variables for the equilibrium real rate might create a problem of spurious coefficient significance. This paper investigates the possibility of spurious regression within nonlinear models of PPP. Monte Carlo experiments show that standard critical values are not appropriate in such a context. To illustrate we consider the real Dollar-Sterling exchange rate over the period 1871-1994. Due to many exchange rate regime changes over the sample period we employ a Bootstrap methodology that preserves the original structure of the estimated residuals and obtain new critical values of the coefficient estimates. A nonlinear (ESTAR) process with a time varying equilibrium proxied by relative wealth and relative income per capita seems to parsimoniously fit the data. Our results provide further evidence for the nonlinear model with a shifting equilibrium and the implied speed of adjustment is found to be substantially faster than previously reported in the literature.
    Keywords: ESTAR, Purchasing Power Parity, Bootstrapping
    JEL: F31 C22 C51
    Date: 2005–04
  46. By: Claudio Campanale (Universidad de Alicante)
    Abstract: In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index of the U.S. Distribution of wealth.
    Keywords: Wealth inequality, self-insurance, portfolio composition, increasing returns
    Date: 2005–05
  47. By: Jacob A. Bikker; Laura Spierdijk; Pieter Jelle van der Sluis
    Abstract: This paper assesses the determinants of market impact costs of institutional equity trades, using unique data from the world’s second largest pension fund. We allow the impact of trade characteristics and market conditions on trading costs to depend on the level of trading costs itself and establish significant differences in the responses of cheaper and more expensive trades. We explain the distinct responses from differences in information content and demand for liquidity between trades with high and low trading costs. Finally, to illustrate the practical relevance of the approach, we use our method to forecast future trading costs.
    Keywords: market impact costs; quantile regression; forecasting market impact costs
    JEL: G11 C53
    Date: 2005–12
  48. By: Cunningham, Rose
    Abstract: Burkart et Ellingsen (2004) ont élaboré un modèle de crédit commercial et de limitation du crédit bancaire selon lequel les entreprises à faible ou moyenne rentabilité auraient recours au crédit commercial pour atténuer les effets de limitation du crédit bancaire. Nous testons cette prédiction et plusieurs autres produites par ce modèle à partir d'un vaste échantillon composé de plus de 28 000 entreprises canadiennes. Au lieu de choisir arbitrairement les entreprises susceptibles de voir leur crédit limité, nous faisons appel à une méthode endogène pour classer les entreprises de l'échantillon selon leur rentabilité. Les données confirment assez nettement les principales prédictions du modèle de Burkart et Ellingsen. Nous constatons que les entreprises ayant une rentabilité moyenne substituent le crédit commercial au crédit bancaire, sans doute dans le but d'atténuer l'incidence de la limitation du crédit bancaire. Dans le cas des entreprises peu rentables, le crédit commercial est corrélé positivement avec le crédit bancaire, ce qui tend à indiquer que ce groupe subit des contraintes à la fois sur le marché du crédit bancaire et sur celui du crédit commercial et qu'il ne peut recourir autant à ce dernier pour amortir les chocs négatifs. Autre conclusion : rares seraient les entreprises canadiennes, même parmi les plus rentables, à n'être soumises à aucune contrainte d'emprunt. Enfin, les entreprises peu rentables qui accusent une baisse d'activité et se heurtent à de grosses difficultés accordent proportionnellement plus de crédit commercial que celles en meilleure santé financière.
    Keywords: Entreprises commerciales, Finance d'entreprise, Conjoncture économiques
    Date: 2005–11–04
  49. By: Frank de Jong
    Abstract: This paper discusses the valuation of wage-indexed pension fund liabilities. Valuation by replication with market instruments is typically not possible as there are no wage-indexed assets. This paper discusses several methods to find a value in such incomplete markets and advocates utility-based valuation. This approach implies a simple adjustment on the discount factor that can be used to calculate the value of wage indexed liabilities.
    Keywords: incomplete markets; pension funds.
    JEL: G1 G23
    Date: 2005–12
  50. By: Heisz, Andrew; Larochelle-Côté, Sébastien
    Abstract: This paper investigates the link between financial structure and employment growth, and the link between financial structure and inventory growth, among incorporated Canadian manufacturers from 1988 to 1997. It finds that financially vulnerable firms - smaller firms and those with higher leverage - shed nearly 10% more labour than financially healthier firms for a given drop in product demand. The influence was larger during the recession of 1990 to 1992 indicating that higher financial vulnerability, reflected in high leverage, may have worsened during that period. The influence was also greater in sectors that experienced larger cyclical fluctuations. On average, firms with high leverage also tend to cut inventories 5% more when a shock in demand occurs.
    Keywords: Business enterprises, Labour, Manufacturing, Business finance, Employment, Manufacturing industries, Business conditions
    Date: 2004–02–18
  51. By: Matos, Joao Amaro de; Lacerda, Ana
    Abstract: We derive statistical arbitrage bounds for the buying and selling price of European derivatives under incomplete markets. In this paper, incompleteness is generated due to the fact that the market is dry, i.e., the underlying asset cannot be transacted at certain points in time. In particular, we re¯ne the notion of statistical arbitrage in order to extend the procedure for the case where dryness is random, i.e., at each point in time the asset can be transacted with a given probability. We analytically characterize several properties of the statistical arbitragefree interval, show that it is narrower than the super-replication interval and dominates somehow alternative intervals provided in the literature. Moreover, we show that, for su±ciently incomplete markets, the statistical arbitrage interval contains the reservation price of the derivative.
    Date: 2006
  52. By: François MORIN (LEREPS-GRES)
    Abstract: The aim of this paper is to question the cognitive capitalism hypothesis: are the major transformations of the wage labour nexus and regime of accumulation, created a new capitalism era? A positive answer to this question then relegates to a second rank the thesis of financial capitalism. For this last thesis, the financialisation of accumulation deeply transforms the firms. This paper develops this second point of view. Our conclusion is disappointing for the cognitive capitalism hypothesis. If the production of knowledge is important for the accumulation, nevertheless this production of knowledge is subordinated to the view of global finance. Indeed, it’s this global finance who decides which are new profitable activities.
    Keywords: Cognitive capitalism, Capitalism of financial market, Firm, Production of knowledge, Financialisation
    JEL: B5 D21 F30 G15 G23 G30 L0 P1
    Date: 2006
  53. By: Philip Bond; David K. Musto; Bilge Yilmaz
    Abstract: Regulators express growing concern over “predatory lending,” which the authors take to mean lending that reduces the expected utility of borrowers. The authors present a rational model of consumer credit in which such lending is possible, and identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and poorly informed borrowers. Under most circumstances competition among lenders eliminates predatory lending.
    Date: 2006
  54. By: Björk, Tomas (Dept. of Finance, Stockholm School of Economics); Blix, Magnus (Dept. of Finance, Stockholm School of Economics); Landen, Camilla (Department of Mathematics)
    Abstract: We consider HJM type models for the term structure of futures prices, where the volatility is allowed to be an arbitrary smooth functional of the present futures privce curve. Using a Lie algebraic approach we investigate when the infinite dimensional futures price process can be realized by a finite dimensional Markovian state space model, and we give general necessary and sufficient conditions, in terms of the volatility structure, for the existence of a finite dimensional realization. We study a number of concrefe applications including a recently developed model for gas futures. In particular we provide necessary and sufficient conditions for when the induced spot price is a Markov process. <p> In particular we can prove that the only HJM type futures price models with spot price dependent volatility structures which generically possess a spot price realization are the affine ones. These models are thus the only generic spot price models from a futures price term structure point of view.
    Keywords: futures contract; term structure; Lie algebra; finite dimensional realisation
    JEL: G13
    Date: 2005–10–20
  55. By: Oscar Villar; Esther Vayá
    Abstract: At the present time, controversy still surrounds the importance of the financial integration of markets and its possible consequences. The fact that the economy is more global means that countries are more interdependent on each other. This brings new advantages, but also entails new dangers for countries. In this paper we study one of these dangers: financial contagion in times of crisis. In general terms, this is understood as the transmission or propagation of disturbances between the financial markets of different countries. However, this debate on the benefits and risks of economic interdependence also draws attention to problems that are both very old and very new. The problems are new because of the impact of globalization, but old because they are based on economic and political visions and ideologies that always remain the same. In this paper we present new ideas on the current debate on financial contagion. Specifically, we identify the economic variables that represent the crises in the Thai, Russian and Brazilian cases. We ask whether the cause of contagion between countries is the fact that their main macro economic magnitudes or economic fundamentals are at critical levels (commonly considered as the fundamentals of countries), or if, on the other hand, contagion between countries takes place due to trade and financial links and political or regional effects. Various methodological approaches have been used to explore the existence of contagion and the relative importance of the possible channels of transmission of crises (or channels of contagion). In recent years authors have sought to identify the econometric techniques that are best suited to conducting this kind of analysis. Indeed, one of the innovations of this paper is its implementation of Spatial Econometrics as a mechanism for assessing contagion. Unlike the other methodologies used, Spatial Econometrics allows an expression of international relations under explicit dynamic-spatial assumptions. Surprisingly, this technique has not been used previously for the analysis of contagion, and indeed few authors have used it in the study of financial relations in general. Firstly, in this paper we perform an exploratory spatial analysis which contrasts the existence of contagion or spatial autocorrelation. Secondly, we try to assess different channels of contagion through a model based on spatial econometric which would let us realize a confirmatory analysis. The study of an explicit dependency between the countries using this econometric technique may open up a new field of research in financial interdependence relations.
    Date: 2005–08
  56. By: Baggs, Jennifer; Brander, James A.
    Abstract: We investigate whether trade liberalization affects profitability and financial leverage, using Canadian data from the period following implementation of the Canada-U.S. Free Trade Agreement. We find that falling domestic tariffs are associated with declining profits and increasing leverage for import-competing firms, while falling foreign tariffs are associated with increasing profits and decreasing leverage for firms in export-oriented industries. This pattern is consistent with the "pecking order" theory of capital structure.
    Date: 2005–06–22
  57. By: Klaus Gugler; Dennis C. Mueller; B. Burçin Yurtoglu
    Abstract: One of the most conspicuous features of mergers is that they come in waves, and that these waves are correlated with increases in share prices and price/earnings ratios. We test four hypotheses that have been advanced to explain merger waves: the industry shocks, q-, overvaluation and managerial discretion hypotheses. The first two are neoclassical in that they assume that managers maximize profits, mergers create wealth, and the capital market is efficient. The last two, behavioral hypotheses relax these assumptions in different ways. We test the four hypotheses by estimating models of the amounts of assets acquired by firms, models that identify the characteristics of targets, and estimates of the returns to acquirers’ shareholders. Although some support is found for each of the four hypotheses, most of the evidence favors the two behavioral hypotheses. <br> <br> <i>ZUSAMMENFASSUNG - (Die Determinanten von Fusionswellen) <br> Es ist eines der auffallendsten Merkmale von Unternehmenszusammen-schlüssen, dass sie in Wellen stattfinden und dass diese Wellen mit dem Anstieg der Aktienkurse und des Preis/ Ertragsverhältnisses zusammen hängen. Wir untersuchen vier Hypothesen, die als Erklärung von Unternehmenszusammenschlüssen genannt werden: die der Industrieschocks, die q-Hypothese, die Hypothese der Überbewertung und die Hypothesen des Ermessensspielraums von Managern. Die ersten zwei sind neoklassischer Natur insofern als sie davon ausgehen, dass Manager Gewinne maximieren, Unternehmenszusammenschlüsse Reichtum schaffen und der Kapitalmarkt effizient ist. Die zwei letzteren sind Verhaltenshypothesen, die die neo-klassischen Annahmen (auf unterschiedliche Weise) lockern. Wir untersuchen die vier Hypothesen, indem wir Modellschätzungen der von Unternehmen akquirierten Aktien vornehmen. Dabei werden in den Modellen die Charakteristika der bei Zusammenschlüssen aufgekauften Unternehmen identifiziert und die Rendite für die Aktionäre des aufkaufenden Unternehmens geschätzt. Auch wenn alle vier Hypothesen in gewisser Hinsicht Bestätigung finden, untermauern die meisten Belege die zwei Verhaltenshypothesen.</i>
    Keywords: Mergers waves, managerial discretion, overvaluation
    JEL: G34 L2
    Date: 2006–01
  58. By: Matos, Joao Amaro de; Lacerda, Ana
    Abstract: In the framework of incomplete markets, due to the non-existence of trade at some points in time, and using a partial equilibrium analysis, we show how the bid-ask spread of an European derivative is generated. We also ¯nd conditons for the existence of the spread. These conditions concern the market structure of the maret-makers, which can be a oligolopoly with price competition or a monopoly, as well as the riskaversion of the demand and supply of the market.
    Date: 2006
  59. By: Ezequiel Uriel Jiménez (Instituto Valenciano de Investigaciones Económicas); Javier Ferri (Universitat de València); María Luisa Moltó Carbonell (Universitat de València)
    Abstract: Credit institutions provide financial intermediation services indirectly measured(FISIM). The consideration of those services by national accounts raise many problems.SEC-70 and SEC-95 (chapter 3) decided to include FISIM in a fictitious sector. Thissolution does not seem to be the best one as it implies that the share of the financialsector in the national product will be negative when we consolidate this account withthe fictitious sector. This solution is also problematic when trying to integrate theFISIM in a Social Accounting Matrix. Taking into account the recommendations ofSEC-95 of distributing the FISIM among the users of the FISIM, eliminating theficticious sector this paper proceeds to apply it to the SAM-95. Las instituciones de crédito producen los denominados servicios de intermediación financiera medidos indirectamente (SIFMI). El tratamiento de estos servicios en Contabilidad Nacional plantea numerosos problemas. En el SEC-70, y también en el capítulo 3 del SEC-95, se optó por asignar los SIFMI a un sector ficticio. Esta solución no parece ser la más adecuada, ya que implica que la aportación del sector financiero al PIB sea negativa al realizar su consolidación con el sector ficticio. Además, plantea problemas cuando se diseña una matriz de contabilidad social (MCS). Sin embargo, en un anexo del SEC-95 y en reglamentaciones posteriores se ha adoptado una solución metodológica en la que se procede a la distribución de los SIFMI a sectores usuarios, eliminándose el sector ficticio. En este artículo se procede a la distribución de los SIFMI en el contexto de la MCS-95.
    Keywords: SIFMI, intermediación financiera, matriz de contabilidad social FISIM, financial intermediation, social accounting matrix
    Date: 2005–11
  60. By: Baggs, Jennifer; Brander, James A.
    Abstract: Nous examinons si la libéralisation des échanges influe sur la rentabilité et le levier financier à l'aide de données canadiennes de la période ayant suivi l'entrée en vigueur de l'Accord de libre-échange entre le Canada et les États-Unis. Nous constatons que, en cas de réduction des tarifs nationaux, les bénéfices diminuent et le levier financier augmente dans les entreprises qui soutiennent la concurrence des importateurs et que, en cas de baisse des tarifs étrangers, les premiers augmentent et le second diminue dans les entreprises d'industries à vocation exportatrice. Ce tableau est conforme à la théorie des « préséances » pour la structuration du capital.
    Date: 2005–06–22
  61. By: Robert R. Bliss; George C. Kaufman
    Abstract: In the U.S., the insolvency resolution of most corporations is governed by the federal bankruptcy code and is administered by special bankruptcy courts. Most large corporate bankruptcies are resolved under Chapter 11 reorganization proceedings. However, commercial bank insolvencies are governed by the Federal Deposit Insurance Act and are administered by the FDIC. These two resolution processes corporate bankruptcy and bank receiverships differ in a number of significant ways, including the type of proceeding (judicial versus administrative); the rights of managers, stockholders and creditors in the proceedings; the explicit and implicit goals of the resolution; the prioritization of creditors' claims; the costs of administration; and the timeliness of creditor payments. These differences derive from perceptions that "banks are special." This paper elucidates these differences, explores the effectiveness of the procedural differences in achieving the stated goals, and considers the potential economic onsequences of the different structures.
    Date: 2006
  62. By: Marcelo Côrtes Neri (Fundação Getulio Vargas); André Luiz Medrado
    Date: 2005–12
  63. By: Marek Hudon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: This paper uses a unique database from a leading microfinance rating agency to assess the impact of the management of microfinance institutions (MFIs) on their financial performances and the amount of subsidies they have received. The results show that the main management attributes influencing the return on assets are the technical, organisational and communication competences of the top managers. For-profit and non-profit institutions reach similar performances, but cooperatives exhibit worse results. Finally, while the board members’ personnel involvement and professional competences is correlated to the amount of subsidies received by the institutions, the well-managed MFIs do not seem to have previously received significantly more subsidies than others.
    Keywords: microfinance, subsidies, management, governance, non-profit.
    JEL: L31 M54 O16 Q14
    Date: 2006–01
  64. By: Sylvain Dessy; Jacques Ewoudou
    Abstract: In the informal economy of developing countries, female entrepreneurs face a comparative disadvantage for operating high-productivity activities, owing to the prevalence of patriarchal forms of business regulations. Yet, for microfinance institutions (MFIs) to succeed in enhancing female empowerment, increased access to credit must enable female entrepreneurs to tap into the range of high-productivity activities. So when the costs of legality are too high in developing countries, and the informal economy becomes the only affordable venue for operating a business venture, this paper shows that access to microfinancee services becomes only necessary, but not sufficient for female empowerment. Based upon a game-theoretic model of activity choices by ex ante homogeneous women, we argue that conditioning well-trained women's access to credit to the adoption of high-productivity activities may enable MFIs to induce the emergence of networks of female entrepreneurs large enough to mitigate patriarchal practices that raise the costs of operating such activities in the informal economy.
    Keywords: Microfinance, female entrepreneurship, supermodular games
    JEL: D13 J16
    Date: 2006
  65. By: Javier Sánchez Vidal (Universidad Politécnica de Cartagena); Juan Francisco Martín Ugedo (Universidad de Murcia)
    Abstract: The objective of this work is to analyse the factors motivating firms to follow a conservative (or low-leverage) financial policy over several years. We carry out a study on a sample of 1,396 Spanish firms in the period 1993-2001. Using logit regression and various difference of means analyses, we test the influence of a number of variables associated with the pecking order theory, optimal capital structure theory and information asymmetries. Our findings show that conservative firms have a capital structure determined by the cash flows generated and their investment in tangible and intangible fixed assets, in accordance therefore with the pecking order theory. The findings do not provide support either for the optimal capital structure theory or for the role of information asymmetries, since in the majority of cases the results are not significant and/or contrary to what is predicted. El objetivo de este trabajo es analizar los factores por los cuales una empresa sigue una política financiera conservadora o de bajo endeudamiento durante varios años. Se lleva a cabo el estudio con una muestra de 1.396 empresas para el periodo 1993-2001 y mediante regresión logit y diferentes análisis de diferencias de medias se testa la influencia de varias variables relativas a la teoría de la jerarquía, de la estructura financiera y a asimetrías informativas. Los resultados muestran que las empresas conservadoras tienen una estructura financiera determinada por los cash-flows generados y por las inversiones en inmovilizado material e inmaterial, acorde, por tanto, con la teoría de la jerarquía financiera. Los resultados para la teoría de la estructura financiera óptima y para las asimetrías informativas son poco significativos y, en algunos casos, contrarios a lo que predicen.
    Keywords: Conservadurismo financiero, Estructura de capital Financial conservatism, capital structure.
    JEL: G32
    Date: 2005–09

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