|
on Financial Markets |
| By: | Kenneth Kletzer |
| Abstract: | External debt increases the vulnerability of indebted emerging market economies to macroeconomic volatility and financial crises. Capital account reversals often lead sovereign debt repayment crises that are only resolved after prolonged and difficult debt restructuring. Foreign indebtedness exacerbates domestic financial distress in crisis, increasing both the incidence and severity of emerging market crises. These outcomes contrast with the presumption that access to international capital markets should help countries to smooth domestic consumption and investment against macroeconomic shocks. This paper uses models of sovereign to reconsider the role of sovereign debt renegotiation for international risk sharing and presents an approach for analyzing contractual innovations for implementing contingent debt repayments. The financial innovations that might allow risk-sharing rather than risk-inducing capital flows go beyond contractual changes that ease debt renegotiation by separating contingent payments from bonds. |
| Keywords: | Debts, External ; Financial crises ; Insurance |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-05&r=fmk |
| By: | Maciej Firla-Cuchra |
| Abstract: | We investigate determinants of launch spreads in European securitization transactions over the last decade. First, we develop a simple, reduced-form pricing model for all issues across different transaction types and test it. We document the critical importance of credit ratings without refinements as the key pricing factors for structured finance securities at launch. Next, we show that other price determinants, such as placement characteristics, are consistently significant in their impact on spreads and delineate the opposing effects of liquidity and market segmentation. Finally, we show that other factors that might directly affect investors` payoffs, such as creditors` rights, exhibit consistent relationships to launch spreads beyond the credit rating. Hence, we conjecture that credit rating agencies systematically differ from investors in their assessment of certain issues` and markets` characteristics. |
| Keywords: | Securitisations, Credit Ratings, Structured Finance, Bond Markets, Asset Pricing, Liquidity |
| JEL: | G14 G15 G32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:230&r=fmk |
| By: | Marta Gómez-Puig (Universitat de Barcelona) |
| Abstract: | With European Monetary Union (EMU), there was an increase in the adjusted spreads (corrected from the foreign exchange risk) of euro participating countries' sovereign securities over Germany and a decrease in those of non-euro countries. The objective of this paper is to study the reasons for this result, and in particular, whether the change in the price assigned by markets was due to domestic factors such as credit risk and/or market liquidity, or to international risk factors. The empirical evidence suggests that market size scale economies have increased since EMU for all European markets, so the effect of the various risk factors, even though it differs between euro and non-euro countries, is always dependent on the size of the market. |
| Keywords: | Monetary integration, sovereign securities markets, international and domestic credit risk, and market liquidity. |
| JEL: | E44 F36 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2006147&r=fmk |
| By: | Kazuhiko NISHINA (Graduate School of Economics, Osaka University); Tatsuro Nabil MAGHREBI (Faculty of Economics, Wakayama University); Moo-Sung KIM (College of Business Administration, Pusan National University) |
| Abstract: | This study develops a new model-free benchmark of implied volatility for the Japanese stock market similar in construction to the new VIX based on the S&P 500 index. It also examines the stochastic dynamics of the implied volatility index and its relationship with realized volatility in both markets. There is evidence that implied volatility is governed by a long-memory process. Despite its upward bias, implied volatility is more reflective of changes in realized volatility than alternative GARCH models, which account for volatility persistence and the asymmetric impact of news. The implied volatility index is also found to be inclusive of some but not all information on future volatility contained in historical returns. However, its higher out-of sample performance provides further support to the rationale behind drawing inference about future stock market volatility based on the incremental information contained in options prices. |
| Keywords: | Licensing; Implied volatility index, Out-of-sample forecasting, GARCH modelling |
| JEL: | C52 C53 G14 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0609&r=fmk |
| By: | Adrien Verdelhan (Department of Economics, Boston University); Hanno Lustig (UCLA/ NBER) |
| Abstract: | Aggregate consumption growth risk explains why low interest rate currencies do not appreciate as much as the interest rate di®erential and why high interest rate currencies do not depreciate as much as the interest rate di®erential. We sort foreign currency returns into portfolios based on foreign interest rates, and we test the Euler equation of a domestic investor who invests in these currency portfolios. We ¯nd that domestic investors earn negative excess returns on low interest rate currency portfolios and positive excess returns on high interest rate currency portfolios. Because high interest rate currencies depreciate on average when domestic consumption growth is low and low interest rate currencies do not under the same conditions, low interest rate currencies provide domestic investors with a hedge against domestic aggregate consumption growth risk. |
| Keywords: | Exchange Rates, Asset Pricing. |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-019&r=fmk |
| By: | Annamaria Lusardi (Department of Economic, Dartmouth College); Olivia S. Mitchell (Department of Insurance & Risk Management, The Wharton School, Univ. of Pennsylvania) |
| 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: | Pensions, Retirement Saving |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:46&r=fmk |
| By: | Régis Breton (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | This paper analyzes a stylized (two period) credit market where investors care about the appropriability of the information they produce when they engage in costly ex ante evaluation of borrowers quality. We show that diversified intermediation arises as a dissimulation mechanism allowing investors to extract informational rents in the second period, thereby mitigating the underlying appropriability problem. |
| Keywords: | Financial intermediation ; informational rent ; asymmetric information ; free riding ; diversification |
| Date: | 2006–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009595_v1&r=fmk |
| By: | Long Chen; Hui Guo; Lu Zhang |
| Abstract: | This paper revisits the time-series relation between the conditional risk premium and variance of the equity market portfolio. The main innovation is that we construct a measure of the ex ante equity market risk premium using corporate bond yield spread data. This measure is forward-looking and does not rely critically on either realized equity returns or instrumental variables. We find strong support for a positive risk-return tradeoff, and this result is not sensitive to a number of robustness checks, including alternative proxies of the conditional stock variance and controls for hedging demands. |
| Keywords: | Stock exchanges ; Securities |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-007&r=fmk |
| By: | Gary Gorton; Ping He; Lixin Huang |
| Abstract: | "Risk management" in securities markets refers to the oversight of portfolio managers and professional traders when they trade on behalf of investors in security markets. Monitoring of their trading performance, profit and loss, and risk-taking behavior, is measured by principals using security market prices. We study the optimality of the practice of marking-to-market and provide conditions under which investing principals should optimally monitor their agent traders using market prices to measure traders' performance. Asset prices, however, can be affected by mark-to-market contracts. We show that such contracts introduce an externality when there are many traders. Traders may rationally herd, trading on irrelevant information. Ironically, this causes asset prices to be less informative than they would be without the mark-to-market feature. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12075&r=fmk |
| By: | Boer-Sorban, K.; Kaymak, U.; Spiering, J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Most agent-based simulation models of financial markets are discrete-time in nature. In this paper, we investigate to what degree such models are extensible to continuous-time, asynchronous modelling of financial markets. We study the behaviour of a learning market maker in a market with information asymmetry, and investigate the difference caused in the market dynamics between the discrete-time simulation and continuous-time, asynchronous simulation. We show that the characteristics of the market prices are different in the two cases, and observe that additional information is being revealed in the continuous-time, asynchronous models, which can be acted upon by the agents in such models. Since most financial markets are continuous and asynchronous in nature, our results indicate that explicit consideration of this fundamental characteristic of financial markets cannot be ignored in their agent-based modelling. |
| Keywords: | Agent-Based Computational Finance;Artificial Stock Markets;Market Microstructure;Glosten and Milgrom Model;Informational Asymmetry;Continuous Trading;Autonomous Behaviour; |
| Date: | 2006–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008041&r=fmk |
| By: | Refet S. Gürkaynak; Brian Sack; Eric Swanson |
| Abstract: | A number of recent papers have used different financial market instruments to measure near-term expectations of the federal funds rate and the high-frequency changes in these instruments around FOMC announcements to measure monetary policy shocks. This paper evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy. All of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered. Among financial market instruments, we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months. For longer horizons, the predictive power of many of the instruments we consider is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions that do not influence the expected course of policy beyond a horizon of about six weeks. We propose an alternative shock measure that captures changes in market expectations of policy over slightly longer horizons. |
| Keywords: | Monetary policy ; Federal funds rate ; Financial markets |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-04&r=fmk |
| By: | Fourçans, André (ESSEC Business School); Vranceanu, Radu (ESSEC Business School) |
| Abstract: | This paper analyses the European Central Bank (ECB) monetary policy over the period 1999-2005, both from a qualitative and a quantitative perspective, and compares it with the Federal Reserve Bank. The qualitative approach builds on information conveyed by various speeches of the central bank officers, mainly the President of the ECB, Jean-Claude Trichet. The quantitative analysis provides several estimates of what could have been the ECB and Fed interest rate rules. It also develops a VAR model of both the Euro zone and the US economy so as to analyze dynamic effects of an interest rate shock. Both the qualitative and quantitative analyses point to the difficult task of the ECB, which must build credibility while managing monetary policy under major uncertainty about the structure of the new Euro area. They also suggest that, apart from the ECB’s credibility building, differences between the observed behaviour of the ECB and the Fed over the time period under investigation should be accounted for by differences in the economic outlook of the two areas, rather than in the goals of the central bankers. |
| Keywords: | ECB and Fed; Euro area; Monetary policy; Taylor rule; VAR |
| JEL: | E52 E58 F01 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:essewp:dr-06004&r=fmk |
| By: | Massimo Guidolin (Federal Reserve Bank of St. Louis); Giovanna Nicodano (Department of Economics, University of Turin and Center for Research on Pensions and Welfare Policies, Turin) |
| Abstract: | Small capitalization stocks are known to have asymmetric risk across bull and bear markets. This paper investigates how variance risk affects international equity diversification by examining the portfolio choice of a power utility investor confronted with an asset menu that includes (but is not limited to) European and North American small equity portfolios. Stock returns are 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 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. These findings are robust to a number of modifications concerning the coefficient of relative risk aversion, the investment horizon, short-sale possibilities, and the exact structure of the asset menu. |
| Keywords: | strategic asset allocation, markov-switching, size effects, liquidity (variance) risk |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:41&r=fmk |
| By: | Hui Guo; Christopher J. Neely |
| Abstract: | We revisit the risk-return relation using the component GARCH model and international daily MSCI stock market data. In contrast with the previous evidence obtained from weekly and monthly data, daily data show that the relation is positive in almost all markets and often statistically significant. Likelihood ratio tests reject the standard GARCH model in favor of the component GARCH model, which strengthens the evidence for a positive risk-return tradeoff. Consistent with U.S. evidence, the long-run component of volatility is a more important determinant of the conditional equity premium than the short-run component for most international markets. |
| Keywords: | Stock exchanges ; Securities |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-006&r=fmk |
| By: | Adrien Verdelhan (Department of Economics, Boston University) |
| Abstract: | This paper presents a fully rational general equilibrium model that produces a time- varying exchange rate risk premium and solves the uncovered interest rate parity (U.I.P) puzzle. In this two-country model, agents are characterized by slow-moving external habit preferences derived from Campbell & Cochrane (1999). Endowment shocks are i.i.d and real risk-free rates are time-varying. Agents can trade across countries, but when a unit is shipped, only a fraction of the good arrives to the foreign shore. The model gives a rationale for the U.I.P puzzle: the domestic investor receives a positive exchange rate risk premium when she is more risk-averse than her foreign counterpart. Times of high risk- aversion correspond to low interest rates. Thus, the domestic investor receives a positive risk premium when interest rates are lower at home than abroad. The model is both simulated and estimated. The simulation recovers the usual negative coefficient between exchange rate variations and interest rate differentials. When the iceberg-like trade cost is taken into account, the exchange rate variance produced is in line with its empirical counterpart. A nonlinear estimation of the model using consumption data leads to reasonable parameters when pricing the foreign excess returns of an American investor. |
| Keywords: | Exchange rate, Time-varying risk premium, Habits |
| JEL: | F31 G12 G15 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-031&r=fmk |
| By: | Henrik Cronqvist (The Ohio State University, Fisher College of Business, Department of Finance) |
| Abstract: | Using a unique large-scale event, the year 2000 launch of a privatized social security system involving individual savings accounts in Sweden, I report empirical evidence on the link between fund advertising and people’s fund and portfolio choices. First, content analysis reveals that a very small portion of ads can be construed as directly informative about characteristics relevant for rational mutual fund investors, such as funds’ expense ratios. Second, higher levels of advertising expenditures do not appear to signal ex ante higher unobservable fund manager quality or talent. Third, fund advertising affects people’s portfolio choices, even when advertising does not appear to contain any information. Finally, fund advertising steers people to portfolios with lower returns and higher risk. My results have important implications for a welfare analysis of fund advertising and portfolio choices, asset pricing models, and mutual fund industry policy making, and may serve as a starting point for wider and more formal analysis of the effects of advertising, marketing, and persuasion in financial markets. |
| Keywords: | Portfolio choice, Individual investor behavior, Mutual funds, Advertising |
| JEL: | G11 G18 G23 M37 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:44&r=fmk |
| By: | Carolina Fugazza (Center for Research on Pensions and Welfare Policies); Massimo Guidolin (Federal Reserve Bank of St. Louis); Giovanna Nicodano (Department of Economics, University of Turin and Center for Research on Pensions and Welfare Policies, Turin) |
| Abstract: | We calculate optimal portfolio choices for a long-horizon, risk-averse European investor who diversifies among stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations are performed for scenarios involving different risk aversion levels, horizons, and statistical models capturing predictability in risk premia. Importantly, under one of the scenarios, the investor takes into account the parameter uncertainty implied by the use of estimated coefficients to characterize predictability. We find that real estate ought to play a significant role in optimal portfolio choices, with weights between 10 and 30% in most cases. Under plausible assumptions, the welfare costs of either ignoring predictability or restricting portfolio choices to financial assets only are found to be in the order of at least 100 basis points per year. These results are robust to changes in the benchmarks and in the statistical framework. |
| Keywords: | Optimal asset allocation, real estate, predictability, parameter uncertainty |
| JEL: | G11 L85 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:40&r=fmk |
| By: | Peter N. Ireland |
| Abstract: | The monetary transmission mechanism describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real variables such as aggregate output and employment. Specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets. Recent research on the transmission mechanism seeks to understand how these channels work in the context of dynamic, stochastic, general equilibrium models. |
| Keywords: | Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:06-1&r=fmk |
| By: | Justin Wolfers; Eric Zitzewitz |
| Abstract: | Interest in prediction markets has increased in the last decade, driven in part by the hope that these markets will prove to be valuable tools in forecasting, decisionmaking and risk management--in both the public and private sectors. This paper outlines five open questions in the literature, and we argue that resolving these questions is crucial to determining whether current optimism about prediction markets will be realized. |
| Keywords: | Forecasting ; Financial markets ; Econometric models |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-06&r=fmk |
| By: | Michele Cavallo; Cedric Tille |
| Abstract: | A narrowing of the U.S. current account deficit through exchange rate movements is likely to entail a substantial depreciation of the dollar, as stressed in research by Obstfeld and Rogoff. We assess how the adjustment is affected by the high degree of financial integration in the world economy. A growing body of research emphasizes the increasing leverage in international financial positions, with industrialized economies holding substantial and growing financial claims on each other. Exchange rate movements then lead to valuation effects as the currency composition of a country's assets and liabilities are not matched. In particular, a dollar depreciation generates valuation gains for the United States by boosting the dollar value of much of its foreign-currency-denominated assets. We consider an adjustment scenario in which the U.S. net external debt is held constant. The key finding is that as the current account moves into balance, the pace of adjustment is smooth. Intuitively, the valuation gains from the depreciation of the dollar allow the United States to finance ongoing, albeit shrinking, current account deficits. We find that the smooth pattern of adjustment is robust to alternative scenarios, although the ultimate movements in exchange rates will vary under different conditions. |
| Keywords: | International finance ; Foreign exchange ; Dollar, American |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:237&r=fmk |
| By: | Samuel Malone |
| Abstract: | Macroeconomic volatility, in particular from exposure to volatile terms of trade in the form of volatile commodity prices, is an important source of risk for emerging market countries. As a consequence of this exposure, it has been argued, their probability of facing solvency problems on payments of their foreign currency debt is high, as are the country risk premia they must pay in order to borrow from international capital markets. While the availability of derivative contracts on many major commodity prices makes it possible to hedge commodity price exposure, many emerging market sovereigns either do not hedge a significant amount of their fiscal exposure to their major exports and import commodities or do not clearly report their hedging activities. In light of this phenomenon, and with the goal of crisis prevention in mind, we illustrate how a country exposed to shocks can execute its own insurance strategy against fluctuations in the prices of its major export commodities using futures and options markets. In the context of a model of sovereign default with endogeous sovereign spread and debt choice (Catao and Kapure (2004)), we demonstrate the resulting benefits of this insurance in terms of increased welfare for the country, a reduced soverign spread, and a higher debt ceiling. Additionally, we highlight some political economy problems leaders might face that hinder them from hedging in practice, and describe a hedging strategy to overcome these problems. |
| Keywords: | Sovereign Default, Hedging, Macroeconomic Volatility |
| JEL: | E44 F34 H63 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:246&r=fmk |
| By: | Margus Kõomägi; Priit Sander |
| Abstract: | The aim of the article is to describe how Estonian venture capitalists make financing and investment decisions, and compare these results with theoretical recommendations found in corporate finance and venture capital literature. The focus is on the methodological procedures in venture capital investment and financing. A case study approach is used to collect information about the current practice of venture capital investments and financing in Estonia. Five of the largest Estonian venture capital funds were analyzed in this article, and different problems have been presented in the article. Some of them require an academic and some a practical solution. The problems are divided into four parts: venture capital deal structuring, corporate governance and investor protection, the cost of venture capital and valuation. Venture capital deal structuring is discussed first, and we look at of the following topics: syndication, staged investment, use of financial instruments, ownership share and dilution problems. Syndication of investments, staged investments and convertible financial instruments are used quite rarely by Estonian venture capitalists. Most Estonian venture capitalists take a minority holding in their portfolio companies and the ownership share changes mainly due to the use of convertible instruments and financial options. Estonian venture capitalists do not consider this kind of dilution a big problem. Most Estonian venture capitalists do not have a measure of the required rate of return as considered in financial theory. The determination of the rate of return among Estonian venture capitalists is more intuitive: they use an internal rate of return instead. The required rates of return used by Estonian venture capitalists have about the same interval as in the rest of the world. Corporate control and investor protection are important issues in the venture capital process. These are closely linked to deal structuring. The Estonian Commercial code has average investor protection, but it restricts the use of preferred shares, which are often used in venture capital deal structuring abroad. Some corporate control problems have arisen at the board level in Estonia. Although venture capitalists do not use complicated models to find the cost of capital, they pay much more attention to complicated valuation models. Multiples, book value, and DCF methods are used. Numerical analysis is not as important as the authors expected. Much attention is paid to the linkages between these themes. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mtk:febawb:44&r=fmk |
| By: | Alvaro Cartea (School of Economics, Mathematics & Statistics, Birkbeck College); Diego del-Castillo-Negrete |
| Abstract: | Most of the recent literature dealing with the modeling of financial assets assumes that the underlying dynamics of equity prices follow a jump process or a Levy process. This is done to incorporate rare or extreme events not captured by Gaussian models. Of those financial models proposed, the most interesting include the CGMY, KoBoL and FMLS. All of these capture some of the most important characteristics of the dynamics of stock prices. In this article we show that for these particular Levy processes, the prices of financial derivatives, such as European-style options, satisfy a fractional partial differential equation (FPDE). As an application, we use numerical techniques to price exotic options, in particular barrier options, by solving the corresponding FPDEs derived. |
| Keywords: | Fractional-Black-Scholes, Levy-Stable processes, FMLS, KoBoL, CGMY, fractional calculus, Riemann-Liouville fractional derivative, barrier options, down-and-out, up-and-out, double knock-out. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0604&r=fmk |
| By: | anonymous |
| Abstract: | Banks are looking at new approaches to serving the unbanked, but many barriers exist. KeyBank is a pioneer in offering banking services to the unbanked. |
| Keywords: | Unbanked |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedccf:12&r=fmk |
| By: | Patrick Van Roy (National Bank of Belgium, Department of International Cooperation and Financial Stability) |
| Abstract: | This paper analyses the effect of soliciting a rating on the rating outcome of banks. Using a sample of Asian banks rated by Fitch Ratings ("Fitch"), I find evidence that unsolicited ratings tend to be lower than solicited ones, after accounting for differences in observed bank characteristics. This downward bias does not seem to be explained by the fact that betterquality banks selfselect into the solicited group. Rather, unsolicited ratings appear to be lower because they are based on public information. As a result, they tend to be more conservative than solicited ratings, which incorporate both public and nonpublic information. |
| Keywords: | Credit rating agencies, Unsolicited ratings, Selfselection, Public disclosure, Accounting transparency |
| JEL: | G15 G18 G21 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:200603-1&r=fmk |
| By: | Matías Braun; Borja Larrain |
| Abstract: | We show that the introduction of a new asset affects the prices of previously existing assets in a market. Using data from 254 IPOs in emerging markets, we find that stocks in industries that covary highly with the industry of the IPO experience a larger decline in prices relative to other stocks during the month of the IPO. The effects are stronger when the IPO is issued in a market that is less integrated internationally, and when the IPO is big. The evidence supports the idea that the composition of asset supply affects the cross-section of stock prices. |
| Keywords: | Assets (Accounting) - Prices ; Going public (Securities) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:06-4&r=fmk |
| By: | Claudio Campanale (Departamento de Fundamentos del Analisis Economico, 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 ?rst use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of 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 di?erence 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 and all but the top 1 percentiles of the U.S. distribution of wealth. |
| Keywords: | Wealth inequality, self-insurance, portfolio composition,increasing returns |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:45&r=fmk |
| By: | Philip Bond; David K. Musto; Bilge Yilmaz |
| Abstract: | Regulators express growing concern over “predatory lending,” which we take to mean lending that reduces the expected utility of borrowers. We 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. |
| Keywords: | Predatory lending |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-2&r=fmk |
| By: | Maciej Firla-Cuchra; Tim Jenkinson |
| Abstract: | Securitisations usually involve creating multiple tranches of a single issue with different characteristics, placed on the market as separate securities. Various theoretical explanations have been advanced to explain such tranching. This paper provides the first systematic testing of such theories using a proprietary database of over 5000 separate tranches in European securitisations raising a total of $1 trillion. We find support for asymmetric information and market segmentation explanations for tranching and present evidence on how such different rationales influence the structuring process in practice. We also investigate the impact of tranching on the price of securities issued. For those issues where our model predicts a higher optimal number of tranches, we find that additional uniquely-rated tranches are associated with higher prices for the issue as a whole. |
| Keywords: | Securitisations, Structured Finance, Bond Markets, Asymmetric Information, Liquidity, Segmentation |
| JEL: | G14 G15 G32 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:225&r=fmk |
| By: | Hanno Lustig; Adrien Verdelhan (Department of Economics, Boston University) |
| Abstract: | Investors earn positive excess returns on high interest rate foreign discount bonds, because these currencies appreciate on average. Lustig and Verdelhan (2005) show that investing in high interest rate foreign discount bonds exposes them to more aggregate consumption risk, while low interest rate foreign bonds provide a hedge. This paper provides a simple model that replicates these facts. Investing in foreign currency is like betting on the di®erence between your own intertemporal; marginal rate of substitution (IMRS) and your neighbor's IMRS. These bets are very risky if your neighbor's IMRS is not correlated with yours, but they provide a hedge when his IMRS is highly correlated and more volatile. If the foreign neighbors that face low interest rates also have more volatile and correlated IMRS, that accounts for the spread in excess returns in the data. |
| Keywords: | Exchange Rates, Currency Risk. |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-038&r=fmk |
| 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. We investigate 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. |
| Keywords: | Equity ; Macroeconomics |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:06-1&r=fmk |
| By: | John Beshears (Department of Economics, Harvard University); James J. Choi (Yale School of Management); David Laibson (Department of Economics, Harvard University); Brigitte C. Madrian (Department of Business and Public Policy, University of Pennsylvania, Wharton School) |
| Abstract: | This paper summarizes the empirical evidence on how defaults impact retirement savings outcomes. After outlining the salient features of the various sources of retirement income in the U.S., the paper presents the empirical evidence on how defaults impact retirement savings outcomes at all stages of the savings lifecycle, including savings plan participation, savings rates, asset allocation, and post-retirement savings distributions. The paper then discusses why defaults have such a tremendous impact on savings outcomes. The paper concludes with a discussion of the role of public policy towards retirement saving when defaults matter. |
| Keywords: | Retirement saving |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:crp:wpaper:43&r=fmk |
| By: | Dirk Schoenmaker; Charles Goodhart |
| Abstract: | No abstract availableDownload Paper |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgsps:sp164&r=fmk |
| By: | Kathryn Graddy |
| Abstract: | Centralized markets with large numbers of buyers and sellers are generally thought of as being competitive and well-functioning. However, an important role of centralized markets is matching heterogeneous products, such as fish, to buyers of these products. The high level of differentiation in the Fulton fish market and the institutional structure at the Fulton market has led to patterns of behaviour that suggest imperfect competition and market segmentation. At times in the past, the repeated nature of price setting and extensive knowledge of the sellers may have created the basis for tacit collusion and allowed the dealers to gather economic rents by exploiting the different elasticities and buying patterns. Additional economic rents at the market were created by subsidized rents and lax regulation created fertile ground for organized crime to operate. |
| Keywords: | Markets, Pricing, Fish |
| JEL: | L10 D40 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:254&r=fmk |
| By: | Julia S. Cheney; Sherrie L.W. Rhine |
| Abstract: | This paper describes the U.S. financial system’s response to the destruction caused by Hurricane Katrina and examines how financial safety nets helped meet consumers’ needs in the aftermath of the storm. Overall, we find that consumers who hold deposit accounts at financial institutions are less vulnerable to financial disruptions than individuals who do not have either a checking or a savings account (the unbanked). The federal banking regulators’ and financial institutions’ responses to Hurricane Katrina, the financial vulnerability of unbanked families to this unexpected catastrophic event, and how the American Red Cross, FEMA, and the Gulf States’ relief efforts supplied financial assistance to Katrina’s victims are also addressed. Finally, we present several strategies that can be pursued to further safeguard the U.S. population and the financial community against extraordinary events. |
| Keywords: | Hurricane Katrina, 2005 ; Unbanked |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpdp:06-01&r=fmk |
| By: | François Gourio (Department of Economics, Boston University) |
| Abstract: | I use a putty-clay technology to explain several asset market facts. The key mechanism is as follows: a one percent increase in revenues leads to a more-than-one percent increase in profits, since labor costs don’t move one-for-one. This amplification is greater for plants with low productivity for which the average profit margin (revenue minus costs) is small. This “operating leverage” effect implies that low productivity plants benefit disproportionately from business cycle booms. These plants have thus higher systematic risk and higher average returns. This model can help explain the empirical findings of Fama and French (1992), and more generally the sources of differences in market betas across firms. I obtain supporting evidence for the mechanism using firm- and industry-level data. The aggregate effect follows from trend growth: low-productivity plants outnumber high-productivity plants, making the aggregate stock market procyclical. I examine these aggregate implications and find that this model generates a volatile stock market return that predicts the business cycle. |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-002&r=fmk |
| By: | J. Hirschberg; J. Lye; D.J. Slottje |
| Abstract: | We study the relationship between group size and the extent of risk sharing in an insurance game played over a number of periods with random idiosyncratic and aggregate shocks to income in each period. Risk sharing is attained via agents that receive a high endowment in one period making unilateral transfers to agents that receive a low endowment in that period. The complete risk sharing allocation is for all agents to place their endowments in a common pool, which is then shared equally among members of the group in every period. Theoretically, the larger the group size, the smaller the per capita dispersion in consumption and greater is the potential value of insurance. Field evidence however suggests that smaller groups do better than larger groups as far as risk sharing is concerned. Results from our experiments show that the extent of mutual insurance is significantly higher in smaller groups, though contributions to the pool are never close to what complete risk sharing requires. |
| Keywords: | Reciprocity Risk Sharing Group Size Experiments |
| JEL: | O12 C92 D81 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:954&r=fmk |
| By: | Erik Snowberg; Justin Wolfers; Eric Zitzewitz |
| Abstract: | Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates, and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican president raises equity valuations by 2-3 percent, and that since Reagan, Republican presidents have tended to raise bond yields. |
| Keywords: | Federal government ; Political science ; Economic policy |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-08&r=fmk |
| By: | A. Chaudhuri; L. Gangadharan; Pushkar Maitra |
| Abstract: | We study the relationship between group size and the extent of risk sharing in an insurance game played over a number of periods with random idiosyncratic and aggregate shocks to income in each period. Risk sharing is attained via agents that receive a high endowment in one period making unilateral transfers to agents that receive a low endowment in that period. The complete risk sharing allocation is for all agents to place their endowments in a common pool, which is then shared equally among members of the group in every period. Theoretically, the larger the group size, the smaller the per capita dispersion in consumption and greater is the potential value of insurance. Field evidence however suggests that smaller groups do better than larger groups as far as risk sharing is concerned. Results from our experiments show that the extent of mutual insurance is significantly higher in smaller groups, though contributions to the pool are never close to what complete risk sharing requires. |
| Keywords: | Reciprocity, Risk Sharing, Group Size, Experiments |
| JEL: | O12 C92 D81 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:955&r=fmk |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper studies the empirical and theoretical association between the duration of a pegged exchange rate and the cost experienced upon exiting the regime. We confirm empirically that exits from pegged exchange rate regimes during the past two decades have often been accompanied by crises, the cost of which increases with the duration of the peg before the crisis. We explain these observations in a framework in which the exchange rate peg is used as a commitment mechanism to achieve inflation stability, but multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative not only in order to mitigate the inflation bias from the well-known time inconsistency problem, but also to steer the economy away from the high inflation equilibria. These gains, however, come at a cost in the form of the monetary authority's lesser responsiveness to output shocks. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a "trap" whereby the regime initially confers gains in anti-inflation credibility, but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy. We also show that the more conservative is the regime in place and the larger is the cost of regime change, the longer will be the average spell of the fixed exchange rate regime, and the greater the output contraction at the time of a regime change. |
| Keywords: | Foreign exchange rates ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2006-07&r=fmk |
| By: | Ai Deng (Department of Economics, Boston University) |
| Abstract: | This paper provides an asymptotic theory for the spurious regression analyzed by Ferson, Sarkissian and Simin (2003). The asymptotic framework developed by Nabeya and Perron (1994) is used to provide approximations for the various estimates and statistics. Also, using a fixed-bandwidth asymptotic framework, a convergent t test is constructed, following Sun (2005). These are shown to be accurate and to explain the simulation findings in Ferson et al. (2003). Monte Carlo studies show that our asymptotic distribution provides a very good finite sample approximation for sample sizes often encountered in finance. Our analysis also reveals an important potential problem in the theoretical hypothesis testing literature on predictability. A possible reconciling interpretation is provided. |
| Keywords: | spurious regression, observational equivalence, Nabeya-Perron asymptotics, fixed-b asymptotics, data mining, nearly integrated, nearly white noise (NINW) |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2005-044&r=fmk |
| By: | Willem THORBECKE |
| Abstract: | East Asia is characterized by intricate production and distribution networks. Higher skilled workers in Japan, South Korea, and Taiwan produce sophisticated technology-intensive intermediate goods and capital goods and ship them to China and ASEAN for assembly by lower skilled workers and reshipment throughout the world. These networks have promoted economic efficiency and functioned as an engine of growth. They have also been accompanied by large trade imbalances with the U.S. that could cause Asian currencies to appreciate against the dollar. This in turn would alter relative exchange rates in Asia, given the variety of exchange rate regimes in the region. This paper investigates how such exchange rate changes would affect trade within Asia and between Asia and the U.S. The results indicate that exchange rate changes can cause significant declines in exports of intermediate and capital goods from developed Asia to developing Asia. This evidence implies that exchange rate appreciations in developed Asia relative to developing Asia would disrupt the complimentary relationship that exists between these countries in the trade of sophisticated technology-intensive goods. The results also indicate that exchange rate elasticities for trade between Asia and the U.S. are not large enough to lend confidence that a depreciation of the dollar would improve the U.S. trade balance with Asia. This evidence implies that policymakers in the U.S. should not expect too much from an appreciation of Asian currencies and should focus instead on shortfalls of saving relative to investment if they are concerned about their trade imbalances. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06009&r=fmk |
| By: | Fernando Espinosa, Klender Cortez and Romà J. Adillon (Universitat de Barcelona) |
| Abstract: | Evidence exists that many natural facts are described better as a fractal. Although fractals are very useful for describing nature, it is also appropiate to review the concept of random fractal in finance. Due to the extraordinary importance of Brownian motion in physics, chemistry or biology, we will consider the generalization that supposes fractional Brownian motion introduced by Mandelbrot. The main goal of this work is to analyse the existence of long range dependence in instantaneous forward rates of different financial markets. Concretelly, we perform an empirical analysis on the Spanish, Mexican and U.S. interbanking interest rate. We work with three time series of daily data corresponding to 1 day operations from 28th March 1996 to 21st May 2002. From among all the existing tests on this matter we apply the methodology proposed in Taqqu, Teverovsky and Willinger (1995). |
| Keywords: | Long-memory processes, interest rate analysis, Fractional Brownian Motion. |
| JEL: | C13 C82 E43 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bar:bedcje:2006149&r=fmk |
| By: | David Chambers |
| Abstract: | Allegations of British capital market failure are numerous, range from claims of domestic investor bias before 1914 to charges of short-termism against institutional investors towards the end of the last century, and are frequently contentious. This paper revisits this literature by pointing up the post-1945 IPO market as a clear example of capital market failure. Despite the tender offer method delivering 10% lower underpricing than the dominant IPO method, it was adopted by fewer than 1 in 10 firms going public. This missed opportunity cost issuing firms £1.4 billion in "money left on the table" between 1960 and 1986 at 2004 prices and can be attributed to a lack of competition among issuing houses and brokers pre-Big Bang. |
| Keywords: | IPO, British capital market failure, Tender offer |
| JEL: | N24 G34 G24 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:253&r=fmk |
| By: | Giang Ho; Anthony Pennington-Cross |
| Abstract: | Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. Empirical results show that the typical local predatory lending law tends to reduce rejections, while having little impact on the flow (application and origination) of credit. However, the strength of the law, measured by the extent of market coverage and the extent of prohibitions, can have strong impacts on both the flow of credit and rejections. |
| Keywords: | Mortgages ; Banking law ; Home equity loans |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-009&r=fmk |
| By: | Keith Welkes |
| Abstract: | This paper analyzes an unsuccessful attempt to establish a financing intermediary for the development of environmentally contaminated property (commonly known as brownfields) in Pennsylvania. The proposed intermediary was entitled Financial Resources for the Environment |
| Keywords: | Brownfields |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpcd:05-01&r=fmk |
| By: | Pablo F. Beker; Subir Chattopadhyay |
| Date: | 2005–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levarc:784828000000000422&r=fmk |
| By: | Luis-Felipe Zanna |
| Abstract: | In this paper we show that in the aftermath of a crisis, a government that changes the nominal interest rate in response to currency depreciation can induce aggregate instability in the economy by generating self-fulfilling endogenous cycles. In particular if a government raises the interest rate proportionally more than an increase in currency depreciation then it induces self-fulfilling cyclical equilibria that are able to replicate some of the empirical regularities of emerging market crises. We construct an equilibrium characterized by the self-validation of people's expectations about currency depreciation and by the following stylized facts of the "Sudden Stop" phenomenon: a decline in domestic production and aggregate demand, a significantly larger currency depreciation, a collapse in asset prices, a sharp correction in the price of traded goods relative to non-traded goods, and an improvement in the current account deficit. |
| Keywords: | Interest rates ; Equilibrium (Economics) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:848&r=fmk |
| By: | George Gelauff; Herman Stolwijk; Paul Veenendaal |
| Abstract: | The budget of the European Union raises much commotion. Many member states anxiously guard their net payment positions: don't they pay too much for the EU compared to what they receive from the EU? Yet, from an economic perspective the subsidiarity principle is much more important: should the funds be allocated by the Union or by the individual member states? From that angle, a number of fundamental reforms of European agricultural policy and structural actions (support to lagging regions) suggest themselves. These reform options may roughly halve the EU budget. In addition they happen to bring the net payment positions of member states closer together. |
| Keywords: | EU-budget; economic integration; subsidiarity; common agricultural policy; structural actions; tariff incidence |
| JEL: | F4 H7 C67 Q18 R58 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:docmnt:101&r=fmk |
| By: | Michela Cella |
| Abstract: | We study a model of informed principal with private values where the principal is risk neutral and the agent is risk averse. We show that the principal, regardless of her type, gains by not revealing her type to the agent through the contract offer. The equilibrium allocation transfers some ex-ante risk from one type of agent to the other. Despite the increase in the principal`s surplus, allocative efficiency does not necessarily improve. |
| Keywords: | Contract, Adverse Selection, Informed Principal, Risk Aversion |
| JEL: | C72 D23 D82 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:234&r=fmk |
| By: | Marie Musard-Gies (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | Dans ce papier, nous cherchons à évaluer si il est possible pour une banque centrale de dévoiler ses préférences, et plus précisément le poids qu'elle accorde à la stabilisation de l'inflation et de l'output gap dans sa fonction objectif. Nous considérons que la banque centrale peut dévoiler de l'information sur ses préférences de deux manières : tout d'abord, explicitement, via sa politique de communication, mais aussi, implicitement, via ses décisions de politique monétaire. Nous étudions alors, dans un jeu dynamique, le cas de la transparence sur les prévisions de la banque centrale comme substitut de la transparence sur les préférences lorsque le secteur privé est capable de réviser son estimation initiale des préférences de la banque centrale (apprentissage du secteur privé). |
| Keywords: | Transparence ; préférences de la banque centrale |
| Date: | 2006–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009596_v1&r=fmk |