New Economics Papers
on Financial Markets
Issue of 2006‒04‒01
68 papers chosen by
Carolina Valiente

  1. Regulatory harmonization and the development of private equity markets By Cumming,Douglas; Johan,Sofia
  2. Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises By Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
  3. The transition to electronic trading in the secondary treasury market By Bruce Mizrach; Christopher J. Neely
  4. Risks in U.S. bank international exposures By Nicola Cetorelli; Linda Goldberg
  5. SOVEREIGN RISK IN THE CLASSICAL GOLD STANDARD ERA By Gavin Cameron; Prasanna Gai; Kang Yong Tan
  6. Does central bank transparancy reduce interes rates? By Geraats,Petra M.; Eijffinger,Sylvester C.W.; Cruijsen,Carin A.B. van der
  7. Do Banks Reduce Lending Preemptively in Response to Capital Losses? By Shinichi Nishiyama; Tae Okada; Wako Watanabe
  8. Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets By Matthieu Wyart; Jean-Philippe Bouchaud; Julien Kockelkoren; Marc Potters; Michele Vettorazzo
  9. Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?- By Kenya Fujiwara
  10. Sequencing of Capital Account Liberalization - Japan's experiences and their implications to China By Kenji Aramaki
  11. Time-varying risk, interest rates, and exchange rates in general equilibrium By Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe
  12. Modelling Security Market Events in Continuous Time: Intensity Based, Multivariate Point Process Models By Clive G. Bowsher
  13. Determinants of Capital Flows: A Cross-Country Analysis By Mukesh Ralhan
  14. Testing for Purchasing Power Parity Under a Target Zone Exchange Rate Regime By J. Isaac Miller
  15. C-CAPM Refinements and the Cross-Section of Returns By Paul Söderlind
  16. Random walks, liquidity molasses and critical response in financial markets By Jean-Philippe Bouchaud; Julien Kockelkoren; Marc Potters
  17. Public Debt Maturity and Currency Crises By Paul Levine; Alexandros Mandilaras; Jun Wang
  18. Imperfect Common Knowledge in First Generation Models of Currency Crises By Gara Minguez-Afonso
  19. Testing Portfolio Efficiency with Conditioning Information By Wayne E. Ferson; Andrew F. Siegel
  20. Tariff retaliation versus financial compensation in the enforcement of international trade agreements By Saggi, Kamal; Limao, Nuno
  21. Household Heterogeneity and Real Exchange Rates By Narayana R. Kocherlakota; Luigi Pistaferri
  22. The Return to Capital in Ghana By Christopher Udry; Santosh Anagol
  23. Illiquidity in the interbank payment system following wide-scale disruptions By Morten L. Bech; Rod Garratt
  24. A Roadmap for the Asian Exchange Rate Mechanism By Gongpil Choi; Deok Ryong Yoon
  25. Stochastic Volatility By Neil Shephard
  26. Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom By Chang-Tai Hsieh; Jonathan A. Parker
  27. Sticky Borders By Gita Gopinath; Roberto Rigobon
  28. Taux d'intérêt effectif, viabilité financière et réduction de la pauvreté par les institutions de microfinance au Bénin By Denis H. Acclassato
  29. The Government and the Financial System: an Overview By Kazuhito Ikeo; Yasuo Goto
  30. The Commons with Capital Markets By Colin Rowat and Jayasri Dutta
  31. The Characteristics of Business Cycles in Selected European Emerging Market Economies By Fabrizio Carmignani
  32. On a multi-timescale statistical feedback model for volatility fluctuations By Lisa Borland; Jean-Philippe Bouchaud
  33. Productivity-Enhancing Reforms, Private Capital Inflows, and Real Interest Rates in Africa By Manoj Atolia
  34. Discounting The Global Climate When Technological Change is Endogenous By Gunter Stephan; Georg Mueller-Fuerstenberger
  35. The Irrelevance of Market Incompleteness for the Price of Aggregate Risk (joint with Dirk Krueger, University of Frankfurt) By Hanno Lustig
  36. New York City’s Role as a Global Hub in the Contemporary Art Market - A Qualitative Analysis on Driving Forces and Success Factors By Valentin Kenndler
  37. "Exchange Rate Changes and Inflation in Post-Crisis Asian Economies: VAR Analysis of the Exchange Rate Pass-Through" By Takatoshi Ito; Kiyotaka Sato
  38. Experts' earning forecasts: bias, herding and gossamer information By Olivier Guedj; Jean-Philippe Bouchaud
  39. Precondition for a successful implementation of supervisors' Primpt Corrective Action: Is there a case for a banking standard in the EU? By Larry Wall; Maria Nieto
  40. Exchane-Rate-Based Stabilization, Durables Consumption, and the Stylized Facts By Edward F. Buffie; Manoj Atolia
  41. The Dynamics of Financial Markets -- Mandelbrot's multifractal cascades, and beyond By Lisa Borland; Jean-Philippe Bouchaud; Jean-Francois Muzy; Gilles Zumbach
  42. Rational Expectations Equilibrium in Economies with Uncertain Delivery By Joao Correia-da-Silva; Carlos Hervés-Beloso
  43. Levels of voluntary disclosure in IPO prospectuses : an empirical analysis By Jeanjean, Thomas; Cazavan-Jeny, Anne
  44. Variation, jumps, market frictions and high frequency data in financial econometrics By Ole E. Barndorff-Nielsen; Neil Shephard
  45. Reference-Dependent Risk Attitudes By Botond Koszegi; Matthew Rabin
  46. Pay for Short-Term Performance: Executive Compensation in Speculative Markets By Patrick Bolton; Jose Scheinkman; Wei Xiong
  47. Is Ethical Money Financially Smart? By Renneboog,Luc; Horst,Jenke ter; Zhang,Chendi
  48. Performance Pay and Risk Aversion By Christian Grund; Dirk Sliwka
  49. Exchange Rates, Shocks and Inter-Dependency in East Asia - Lessons from a Multinational Model By Sophie Saglio; Yonghyup Oh; Jacques Mazier
  50. Financial Applications of Random Matrix Theory: Old Laces and New Pieces By Marc Potters; Jean-Philippe Bouchaud; Laurent Laloux
  51. Interest alignment and firm performance By Gottschalg, Oliver; Meier, Degenhard
  52. Corporate social responsibility: domestic and international private equity institutional investment By Cumming,Douglas; Johan,Sofia
  53. Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden By Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson
  54. Central Bank Independence and the `Free Lunch Puzzle': A New Perspective By Ali al-Nowaihi; Paul Levine; Alex Mandilaras
  55. Conditional Probabilty of Default Methodolgy By Miguel Segoviano
  56. Paper or plastic? the effect of time on the use of check and debit cards at grocery stores By Elizabeth Klee
  57. Small-firm credit markets, SBA-guaranteed lending, and economic performance in low-income areas By Ben R. Craig; William E. Jackson, III; James B. Thomson
  58. Consumer behavior and payment choice: a conference summary By Marianne Crowe; Scott Schuh; Joanna Stavins
  59. Exchange-rate pass-through in the G-7 countries By Jane E. Ihrig; Mario Marazzi; Alexander D. Rothenberg
  60. Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation By Thomas A. Garrett; Nalinaksha Bhattacharyya
  61. Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic By Jan Hanousek; Jan Bena
  62. Differences between domestic accounting standards and IAS: measurement, determinants and implications By Ding, Yuan; Hervé, Stolowy; Hope, Ole-Kristian; Jeanjean, Thomas
  63. Openness, exchange rate regimes and the Phillips curve By Christopher Bowdler
  64. Shake Hands or Shake Apart? Pre-war Global Trade and Currency Blocs--the role of the Japanese Empire By Toshihiro Okubo
  65. Understanding value generation in buyouts By Gottschalg, Oliver; Berg, Achim
  66. Mergers and Acquisitions in Europe By Martynova,Marina; Renneboog,Luc
  67. Dynamic Scoring: Alternative Financing Schemes By Eric M. Leeper; Shu-Chun Susan Yang
  68. The Changes of Accounting Standards and Structural Reform in Japanese companies By Yasuhiro Asami

  1. By: Cumming,Douglas; Johan,Sofia (TILEC (Tilburg Law and Economics Center))
    Abstract: This paper introduces a new dataset from 100 Dutch institutional investors domestic and international asset private equity allocations. The data indicate that the comparative dearth of regulations of private equity funds impedes institutional investor participation in private equity funds, particularly in relation to the lack of transparency. The data further indicate that regulatory harmonization of institutional investors has increased Dutch institutional investor allocations to domestic and international private equity funds, particularly via the harmonization from the International Financial Reporting Standards (regulation of reporting standards and transparency), the Financieel Toetsingkader (regulation of portfolio management standards such as of matching assets and liabilities), and Basel II (regulation of risk management and disclosure standards)
    Keywords: Private Equity;Law and Finance
    JEL: G23 G24 G28 K22 K34
    Date: 2006
  2. By: Guillermo A. Calvo; Alejandro Izquierdo; Ernesto Talvi
    Abstract: Using a sample of emerging markets that are integrated into global bond markets, we analyze the collapse and recovery phase of output collapses that coincide with systemic sudden stops, defined as periods of skyrocketing aggregate bond spreads and large capital flow reversals. Our findings indicate the presence of a very similar pattern across different episodes: output recovers with virtually no recovery in either domestic or foreign credit, a phenomenon that we call Phoenix Miracle, where output “rises from its ashes”, suggesting that firms go through a process of financial engineering to restore liquidity outside the formal credit markets. Moreover, we show that the US Great Depression could be catalogued as a Phoenix Miracle. However, in contrast to the US Great Depression, EM output collapses occur in a context of accelerating price inflation and falling real wages, casting doubts on price deflation and nominal wage rigidity as key elements in explaining output collapse, and suggesting that financial factors are prominent for understanding these collapses.
    JEL: F31 F32 F34 F41
    Date: 2006–03
  3. By: Bruce Mizrach; Christopher J. Neely
    Abstract: This article reviews the history of the recent shift to electronic trading in equity, foreign exchange and fixed-income markets. We analyze a new data set: the eSpeed (Cantor Fitzgerald) electronic Treasury network. We contrast the market microstructure of eSpeed with the traditional voice assisted networks that report through GovPX. The electronic market (eSpeed) has greater volume, smaller spreads and a lower estimated impact of a trade than the voice market (GovPX).
    Keywords: Government securities ; Electronic trading of securities
    Date: 2006
  4. By: Nicola Cetorelli; Linda Goldberg
    Abstract: U.S. banks have substantial exposure to foreign markets such as Europe and Latin America. In this paper, we show how the amounts and forms of these exposures have evolved over time and note the changes in embodied risks taken through banks' cross-border activity, local claims, and derivative positions. Our findings vary with the type of U.S. bank. Compared with other banks, money-center banks tend to have a greater share of their assets in foreign exposures. Some of money-center banks' exposure to riskier countries, particularly Latin American countries, is achieved through the activities of local branches and subsidiaries that take on liabilities as well as assets, a strategy that reduces their bank transfer risk accordingly. As a share of total international exposures, the transfer risk assumed by money-center banks tends to be significantly lower than that of other banks.
    Keywords: Banks and banking, International ; International finance ; Bank investments ; Branch banks
    Date: 2006
  5. By: Gavin Cameron; Prasanna Gai; Kang Yong Tan
    Abstract: This paper explores the determinants of sovereign bond yields during the classical gold standard period (1872-1913). Using the Pooled Mean Group methodology, we find that the main benefit of the gold standard was as a short-sighted device that enhanced a country's reputation in international capital markets. By conveying important information to investots and enhancing the speed of adjustment of sovereign bond spreads to long-run equilibrium levels, the gold standard allowed country risk to be priced more effectively. In contrast to other studies, our results suggest that fundamental factors were more important in determining a country's creditworthiness in the long-run than the exchange rate regime per se.
    JEL: F33 F34 F41 N10 N20
    Date: 2006–03
  6. By: Geraats,Petra M.; Eijffinger,Sylvester C.W.; Cruijsen,Carin A.B. van der (Tilburg University, Center for Economic Research)
    Abstract: Central banks have become increasingly transparent during the last decade. One of the main bene ts of transparency predicted by theoreticalmodels is that it enhances the credibility, reputation, and exibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is a¤ected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with signi cant e¤ects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental e¤ect on interest rates
    Keywords: central bank transparency;monetary policy;interest rates
    JEL: E52 E58
    Date: 2006
  7. By: Shinichi Nishiyama; Tae Okada; Wako Watanabe
    Abstract: We empirically examined whether declining bank loans in Japan in the late 1990s are the result of banks' downward adjustments of lending supply (a "credit crunch") in response to capital losses (a "capital crunch"). Estimating the new lending supply function as a non-linear function of the capital to asset ratio, we found that the (new lending supply) function is not only increasing in bank capital but also concave in bank capital, which supports the view that a "credit crunch" occurs since forward-looking banks have an incentive to avoid failing to meet regulatory requirements in the future.
    Date: 2006–03
  8. By: Matthieu Wyart (CEA Saclay;); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Julien Kockelkoren (Capital Fund Management); Marc Potters (Science & Finance, Capital Fund Management); Michele Vettorazzo
    Abstract: We argue that on electronic markets, limit and market orders should have equal effective costs on average. This symmetry implies a linear relation between the bid-ask spread and the average impact of market orders. Our empirical observations on different markets are consistent with this hypothesis. We then use this relation to justify a simple, and hitherto unnoticed, proportionality relation between the spread and the volatility_per trade_. We provide convincing empirical evidence for this relation. This suggests that the main determinant of the bid-ask spread is adverse selection, if one considers that the volatility per trade is a measure of the amount of `information' included in prices at each transaction. Symmetry between market and limit orders stems from the self-organization of liquidity in electronic markets. Our results appear to hold approximately on liquid specialist markets as well, although the spread is significantly larger.
    Date: 2006–03
  9. By: Kenya Fujiwara (Kobe University)
    Abstract: There are two different views on the effects of public financial institutions on corporate debt restructuring: the soft budget view and the hard budget view. The former view, which is held by Kornai (1979, 1983), Dewatripont and Maskin (1995), and others insists that because centralized public financial institutions have difficulty committing themselves to refrain from providing additional funds to distressed firms, corporate reorganizations often result in overinvestment. On the other hand, the latter view argues that public financial institutions should prefer corporate liquidation rather than the continuation of business because public financial institutions are secured by mortgages to a greater extent and are more reluctant to forgive the debts than private financial institutions.
    Keywords: public financial institutions, debt restructuring, soft budget view, hard budget view, Kornai, Dewatripont, Maskin, corporate reorganizations, corporate liquidation, private financial institutions, debt
    JEL: G28 G33 G34
    Date: 2006–12
  10. By: Kenji Aramaki (University of Tokyo)
    Abstract: This paper reviews Japan's experiences with the liberalization of capital accounts, and tries to identify their implications to China. Liberalization of capital accounts proceeded very gradually in Japan from the adoption of a system of general prohibition of foreign exchange and capital transactions in 1949 through the shift to a generally liberalized system in 1979. Meantime, Japan was exposed to the turbulent international financial markets due to the move from a peg to a float system of its currency and two oil crises. In response to the massive short-term capital flow in and out of the country caused by these shocks, Japan, which was generally headed for the liberalization of the capital accounts, was frequently forced to resort to foreign exchange and capital control measures to stabilize the market. These experiences by Japan seems to give valuable implications to China, for which significant enhancement of the flexibility of its exchange rate movement under the recently revised formal exchange rate regime and the liberalization of capital accounts continue to be important policy agenda in the years to come.
    Keywords: trade liberialiazation, China, Japan, capital accounts, China, peg system, float system, foreign exchange,
    JEL: F13 F14 F31
    Date: 2006–12
  11. By: Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe
    Abstract: Under mild assumptions, the data indicate that time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. A general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation—can produce key features of actual interest rates and exchange rates. In this model, the endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, so does the benefit of asset market participation, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. This model produces variation in the risk premium even though the fundamental shocks have constant conditional variances.
    Date: 2006
  12. By: Clive G. Bowsher (Nuffield College, Oxford University)
    Abstract: A continuous time econometric modelling framework for multivariate financial market event (or 'transactions') data is developed in which the model is specified via the vector conditional intensity. This has the advantage that the conditioning information set is updated continuously in time as new information arrives. Generalised Hawkes (g-Hawkes) models are introduced that are sufficiently flexible to incorporate `inhibitory' events and dependence between trading days. Novel omnibus specification tests for parametric models based on a multivariate random time change theorem are proposed. A computationally efficient thinning algorithm for simulation of g-Hawkes processes is also developed. A continuous time, bivariate point process model of the timing of trades and mid-quote changes is presented for a New York Stock Exchange stock and the empirical findings are related to the market microstructure literature. The two-way interaction of trades and quote changes is found to be important empirically. Furthermore, the model delivers a continuous record of instantaneous volatility that is conditional on the timing of trades and quote changes.
    Keywords: Point process, conditional intensity, Hawkes process, specification test, random time change, transactions data, market microstructure.
    JEL: C32 C51 C52 G10
    Date: 2005–10–01
  13. By: Mukesh Ralhan (Department of Economics, University of Victoria)
    Abstract: There are two basic approaches to identifying the determinants of capital flows, viz. the traditional and the portfolio (or modern) approach. Although most econometric models have by now forsaken the traditional capital flow equations in favour of modelling financial linkages via arbitrage type interest rate parity relations, the importance of fundamentals in explaining particular capital flow developments cannot be denied (International Monetary Fund, 1992). This paper identifies the determinants of capital flows using the conventional approach, and is based on a cross-sectional study of eight countries, viz. Australia, India, Indonesia, Argentina, Brazil, Chile, Columbia and Mexico. Non-linear Seemingly Unrelated Regression estimation has been used to allow for cross-country effects in the error structure.
    Keywords: Capital Flows, Seemingly Unrelated Regressions (SUR) Model
    JEL: C3 F21
    Date: 2006–03–22
  14. By: J. Isaac Miller (Department of Economics, University of Missouri-Columbia)
    Abstract: We show that typical tests for purchasing power parity (PPP) using exchange rates governed by a target zone regime are inherently misspecified. Regardless of whether or not long-run PPP holds, the real exchange rate cannot be mean-reverting in the usual sense, since the nominal exchange rate is generated by a nonlinear transformation of a nonstationary economic fundamental. As an alternative, we propose basing the real exchange rate (and thus a PPP test) on conditional expectations of this unobservable fundamental. As an illustration, we test for long-run PPP between Denmark and the Euro area.
    Keywords: Target Zone Exchange Rates, Purchasing Power Parity, Nonlinear Transformations, Extended Kalman Filter
    JEL: C13 C22 C32
    Date: 2006–03–02
  15. By: Paul Söderlind
    Abstract: This paper studies if the consumption-based asset pricing model can explain the cross-section of expected returns. The CRRA model and several refinements (habit persistence and idiosyncratic shocks) all imply that the conditional expected return is linearly increasing in the asset's conditional covariance with consumption growth. Results from quarterly data on the 25 Fama-French portfolios suggest that the model has serious problems: there are large and systematic pricing errors. In addition, the estimated time-varying effective risk aversion coefficients appear implausible and are unrelated with most candidates for habit persistence and idiosyncratic risk.
    JEL: G12 E13 E32
    Date: 2006–03
  16. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Julien Kockelkoren (Capital Fund Management); Marc Potters (Science & Finance, Capital Fund Management)
    Abstract: Stock prices are observed to be random walks in time despite a strong, long term memory in the signs of trades (buys or sells). Lillo and Farmer have recently suggested that these correlations are compensated by opposite long ranged fluctuations in liquidity, with an otherwise permanent market impact, challenging the scenario proposed in Quantitative Finance 4, 176 (2004), where the impact is *transient*, with a power-law decay in time. The exponent of this decay is precisely tuned to a critical value, ensuring simultaneously that prices are diffusive on long time scales and that the response function is nearly constant. We provide new analysis of empirical data that confirm and make more precise our previous claims. We show that the power-law decay of the bare impact function comes both from an excess flow of limit order opposite to the market order flow, and to a systematic anti-correlation of the bid-ask motion between trades, two effects that create a `liquidity molasses' which dampens market volatility.
    JEL: G10
    Date: 2004–06
  17. By: Paul Levine (University of Surrey); Alexandros Mandilaras (University of Surrey); Jun Wang (University of Surrey)
    Abstract: This paper provides a theoretical and empirical examination of the e®ect of debt structure on the probability of a currency crisis and the slope of the yield curve. We employ an open-economy version of the Barro-Gordon model with public debt, as in Benigno and Missale (2004) and generalize the analysis to allow for the case where the monetary authority can fully commit itself to an escape clause monetary rule. Comparing the latter with the discretionary outcomes motivates the asymmetric information game where the signalling e®ect of defending the parity competes with the fundamentals of the debt burden. Two key predictions of the model are tested with positive results.
    Keywords: Currency crisis, debt management
    JEL: F31
    Date: 2006–03
  18. By: Gara Minguez-Afonso
    Abstract: First generation models assume that the level of reserves of a Central Bank in a fixed exchange rate regime is common knowledge among consummers, and therefore the timing of the attack on the currency, in an economy with persistent deficit, can be correctly anticipated. In these models, the collapse of the peg leads to no discrete change in the exchange rate. We relax the assumption of perfect information and introduce uncertainty about the willingness of a Central Bank to defend the peg. In this new setting, there is a unique equilibrium at which the fixed exchange is abandoned. In our model, the lack of common knowledge will lead to a discrete devaluation of the local currency once the peg finally collapses.
    Date: 2006–02
  19. By: Wayne E. Ferson; Andrew F. Siegel
    Abstract: We develop asset pricing models' implications for portfolio efficiency when there is conditioning information in the form of a set of lagged instruments. A model of expected returns identifies a portfolio that should be minimum variance efficient with respect to the conditioning information. Our tests refine previous tests of portfolio efficiency, using the conditioning information optimally. We reject the efficiency of all static or time-varying combinations of the three Fama-French (1996) factors with respect to the conditioning information and also the conditional efficiency of time-varying combinations of the factors, given standard lagged instruments.
    JEL: C12 C51 C52 G12
    Date: 2006–03
  20. By: Saggi, Kamal; Limao, Nuno
    Abstract: The authors analyze whether financial compensation is preferable to the current system of dispute settlement in the World Trade Organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members. They show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium. However, fines suffer from an enforcement problem since they must be paid by the violating country. If fines must ultimately be supported by the threat of retaliatory tariffs, they fail to yield a more cooperative outcome than the current system. The authors also consider the use of bonds as a means of settling disputes. If bonds can be posted with a third party, they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation.
    Keywords: Free Trade,International Trade and Trade Rules,Contract Law,Tax Law,Economic Theory & Research
    Date: 2006–04–01
  21. By: Narayana R. Kocherlakota; Luigi Pistaferri
    Date: 2006–03–27
  22. By: Christopher Udry (Economic Growth Center, Yale University); Santosh Anagol (Yale University)
    Abstract: We show that the real return to capital in Ghana's informal sector is high. For farmers, we find annual returns ranging from 205-350% in the new technology of pineapple cultivation, and 30-50% in well-established food crop cultivation. We also examine the relative prices of durable goods of varying durability, and estimate a lower bound to the opportunity cost of capital of 60%.
    Keywords: Capital, durable goods, credit markets
    JEL: O12 O16 D24
  23. By: Morten L. Bech; Rod Garratt
    Abstract: We show how the interbank payment system can become illiquid following wide-scale disruptions. Two forces are at play in such disruptions-operational problems and changes in participants' behavior. We model the interbank payment system as an n-player game and utilize the concept of a potential function to describe the process by which one of multiple equilibria emerges after a wide-scale disruption. If the disruption is large enough, hits a key geographic area, or hits a "too-big-to-fail" participant, then the coordination of payment processing can break down, and central bank intervention might be required to reestablish the socially efficient equilibrium. We also explore how the network topology of the underlying payment flow among banks affects the resiliency of coordination. The paper provides a theoretical framework to analyze the effects of events such as the September 11 attacks.
    Keywords: Payment systems ; Banks and banking ; Game theory ; Banks and banking, Central
    Date: 2006
  24. By: Gongpil Choi (Korea Institute of Finance); Deok Ryong Yoon (Korea Institute for Internation Economic Policy)
    Abstract: Given the increasing importance of capital market development for financial stability and multilateral cooperation for sustained growth, a country's choice of exchange rate regime is hardly trivial. Instead of relying on a series of individually managed floats, it would be better for each country to target its currency against a basket of other currencies. A still much better alternative would be to form a regional block, which would tie Asian currencies together and create a regional currency while allowing them to float against major currencies. Whether the type is an individual peg to a tailored basket or a multilateral peg to a common basket remains to be determined. Under any plausible scenario, some type of regional currency needs to be developed to promote an environment suitable for financial and monetary cooperation that is, in turn, conducive to capital market development. Since conditions in the region are increasingly favourable for an OCA (Optimal Currency Area), such cooperation would be mutually beneficial as well as globally desirable.
    Keywords: ACU, Asian Exchange rate,
    JEL: F33 F36
    Date: 2005–12
  25. By: Neil Shephard (Nuffield College, Oxford University)
    Date: 2005–07–01
  26. By: Chang-Tai Hsieh; Jonathan A. Parker
    Abstract: This paper argues that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets because it primarily reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, taxes on distributed profits or capital gains primarily reduce the investment of financially unconstrained firms. Chile experienced a banking crisis over the period from 1982 to 1986 and in 1984 reduced its tax rate on retained profits from 50 percent to 10 percent. We show that, consistent with our theory, there was a large increase in aggregate investment after the reform which was entirely funded by an increase in retained profits. Further, we show that investment grew by more in industries that depend more on external financing, according to the Rajan and Zingales (1998) measure. Finally, we present some weak evidence from comparisons of investment rates across firms for several different measures of their likelihood of being financially constrained.
    JEL: H32 E22 D92 O54 O16
    Date: 2006–03
  27. By: Gita Gopinath; Roberto Rigobon
    Abstract: The stickiness of traded goods prices and the currency in which prices are sticky play a central role in international macroeconomics. Despite the existence of a rich theoretical literature, there is very little empirical evidence that directly measures the extent of price stickiness in traded goods prices. To address these questions, we use unpublished micro data on import and export prices at-the-dock for the United States for the period 1994-2005. We present three main results: First, the trade weighted average price duration in dollars is 12.26 months for imports and 13.77 months for exports. This level of stickiness is about twice as high as recent evidence on retail goods prices. The fact that both imports and exports are sticky in dollars suggests that contrary to standard modeling assumptions there is producer currency pricing in U.S. exports and local currency pricing in U.S. imports. Second, there is tremendous heterogeneity in price duration across goods, with differentiated goods adjusting prices far less frequently than homogenous goods. Further, the degree of stickiness does not change dramatically with exchange rate volatility. Third, we document that the degree of stickiness in import prices has been increasing throughout the last 10 years, with very little of this increase explained by a compositional shift from homogenous to differentiated goods.
    JEL: F30
    Date: 2006–03
  28. By: Denis H. Acclassato (LEO - Laboratoire d'économie d'Orleans - - [CNRS : UMR6221] - [Université d'Orléans] - [])
    Abstract: L'importance des Institutions de Microfinance (IMF) dans les pays en développement n'est plus à démontrer. Elles ont accompli un miracle en permettant à des milliers d'exclus du système bancaire classique d'accéder à des services financiers. Mais une polémique naît quant aux coûts élevés associés à ces services. Cette étude a évalué, à partir d'une base de données financée par l'Association ‘‘Consortium Alafia'' des praticiens de la microfinance au Bénin, le niveau de taux d'intérêt viable pour la microfinance en termes d'offre de services financiers. Les résultats montrent que les micro-projets dont le taux de rentabilité interne ne dépasse pas 36 % ne pourraient être financés par les Institutions de Microfinance (IMF) au Bénin. La réglementation sur l'usure pourrait donc être suicidaire pour les IMF si elle se borne simplement à obliger les IMF à se conformer à la loi qui fixe le seuil d'usure à 27 %. Quasiment aucune IMF n'assurerait son autosuffisance opérationnelle, donc sa pérennité, en respectant ce seuil.
    Keywords: Taux d'intérêt effectif ; Viabilité financière ; Pauvreté ; Institution de Microfinance
    Date: 2006–03–27
  29. By: Kazuhito Ikeo (Keio University); Yasuo Goto (Mitsubishi Research Institute)
    Abstract: This paper surveys the relationship between the government and the financial system in Japan, mainly from the viewpoint of financial stocks, to gain an overall perspective and identify where any problems lie. During this decade, it seems that the relationship between the government and the financial system in Japan has changed significantly. The government has generally become more deeply involved in the financial system. As a result it is no exaggeration to say that current Japanese financial system has become “a financial system of the government, by the government, for the government.” This was for the most part, promoted by the fact that there occurred a huge redistribution of wealth during the realignment process after the bursting of the bubble economy. Considering such circumstances, the aspects of “of the government,” “by the government,” and “for the government” will be surveyed in turn. Furthermore, postal system privatization will be discussed in terms of public debt management. Lastly, reference will be made to the possible problems accompanying the change in trend of investment-savings balances.
    Keywords: financial system, Japan, financial stocks, financial system, government, postal system, privatization, investment-savings balances
    JEL: E61 E62 F16
    Date: 2006–12
  30. By: Colin Rowat and Jayasri Dutta
    Abstract: We explore a dynamic commons problem and assess the welfare consequences of access to capital markets. The commons has a high intrinsic rate of return but its fruits cannot be secured by individual agents. Capital market access allows resources to be held securely and intertemporally transferred, but at a lower rate of return. In a two period model, we completely characterise symmetric consumption and extraction behaviour in four environments: un- der a strategic and a competitive equilibrium concept, and with and without market access. Strategic equilibria dominate competitive ones: while agents disagree over how to divide the resource, all would prefer it to be larger; the strategic concept allows them to anticipate returns to their conservation. As the number of agents becomes infinite, the strategic outcome converges to the competitive; as the number of agents falls to one, it converges to the planner's. Market access has a positive effect on welfare owing to its con- sumption and extraction smoothing properties and a negative effect owing to its creation of an outside option to the commons, encouraging its depletion. A sufficient condition for autarky to dominate market access for some levels of communal endowment is that the world market discount factor exceed the subjective discount factor. Multiple equilibria may arise: these result from market access, not the equilibrium concept. Key words: commons, capital markets, Washington Consensus, property rights
    Keywords: commons, capital markets, Washington Consensus, property rights
    JEL: C73 D91 O17 Q21
    Date: 2005–12
  31. By: Fabrizio Carmignani (United Nations Economic Commission for Europe)
    Abstract: This paper analyses the business cycles of selected European emerging market economies (EME) in terms of their statistical properties and degree of synchronization with the euro area, and discusses the associated policy implications. The evidence suggests that in these economies cyclical fluctuations are wider and more frequent than in the euro area, that there is moderate consumption smoothing, and that technological shocks and labour hoarding are driving labour-market dynamics. The macroeconomic policy stance is not significantly countercyclical. Furthermore, the degree of synchronization of domestic business cycles with the business cycle of the euro area is weak in all the EME except Hungary and Poland.
    Keywords: business cycles, European macroeconomics, emerging market economies
    JEL: E32 E60 P24
    Date: 2005–12
  32. By: Lisa Borland (Evnine-Vaughan Associates, Inc.); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: We study, both analytically and numerically, an ARCH-like, multiscale model of volatility, which assumes that the volatility is governed by the observed past price changes on different time scales. With a power-law distribution of time horizons, we obtain a model that captures most stylized facts of financial time series: Student-like distribution of returns with a power-law tail, long-memory of the volatility, slow convergence of the distribution of returns towards the Gaussian distribution, multifractality and anomalous volatility relaxation after shocks. At variance with recent multifractal models that are strictly time reversal invariant, the model also reproduces the time assymmetry of financial time series: past large scale volatility influence future small scale volatility. In order to quantitatively reproduce all empirical observations, the parameters must be chosen such that our model is close to an instability, meaning that (a) the feedback effect is important and substantially increases the volatility, and (b) that the model is intrinsically difficult to calibrate because of the very long range nature of the correlations. By imposing the consistency of the model predictions with a large set of different empirical observations, a reasonable range of the parameters value can be determined. The model can easily be generalized to account for jumps, skewness and multiasset correlations.
    JEL: G10
    Date: 2005–07
  33. By: Manoj Atolia (Department of Economics, Florida State University)
    Abstract: The paper uses a currency substitution model to explain the stylized macroeconomic facts associated with productivity-enhancing reforms in countries of Africa. The model, when calibrated to Ghana and Uganda results in current account deficit and private capital inflows as well as changes in real interest rate, real exchange rate, and inflation comparable to those in data. Thus, currency substitution is important to understand macroeconomic dynamics in countries of Africa as many of them are currently undertaking such reforms. The paper also implements a new technique to solve for global nonlinear saddlepath for perfect foresight models with two state variables. The technique combines reverse shooting with the bisection method in two dimensions to systematically shoot for the trajectory in the state space that corresponds to the desired saddlepath.
    Keywords: Africa, Currency Substitution, Real Interest Rates, Capital Inflows, Nonlinear dynamics
    JEL: C63 F32 F41 O55
    Date: 2003–10
  34. By: Gunter Stephan; Georg Mueller-Fuerstenberger
    Abstract: There are two polar views on the issue of discounting. One is to focus on intergenerational equity which means discounting utilities at low rates. Alternatively, the focus is on efficiency where the choice of the discount rate should imply rates of return that are similar to those that prevail in the capital markets. This paper analyses how different discount rates affect greenhouse gas abatement and endogenous technological change. Starting point is a simple analytical model where we show that higher discount rates cannot result in smaller stocks of atmospheric carbon. However, we cannot rule out the paradoxical result that a higher discount rate may lead to a higher knowledge stock. Therefore an Integrated Assessment Model is set up to take a closer look into the time pattern of emissions. Surprisingly, low discount rates lead to a sharp increase in emissions during the beginning of the time horizon, which, however, is overcompensated through higher efforts in greenhouse gas mitigation during the rest of the time horizon. Furthermore, at low discount rates, the potential to save energy through technological innovation is utilized faster and more pronounced than with higher discount rates.
    Keywords: Integrated Assessment; discount rate; endogenous technological change; climate change
    JEL: Q40 O13
    Date: 2006–03
  35. By: Hanno Lustig
  36. By: Valentin Kenndler
    Date: 2006–03–23
  37. By: Takatoshi Ito (Faculty of Economics, University of Tokyo); Kiyotaka Sato (Faculty of Economics, Yokohama National University)
    Abstract: The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large and statistically significant. Thus, Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period.
    Date: 2006–03
  38. By: Olivier Guedj (Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: We study the statistics of earning forecasts of US, EU, UK and JP stocks during the period 1987-2004. We confirm, on this large data set, that financial analysts are on average over-optimistic and show a pronounced herding behavior. These effects are time dependent, and were particularly strong in the early nineties and during the Internet bubble. We furthermore find that their forecast ability is, in relative terms, quite poor and comparable in quality, a year ahead, to the simplest `no change' forecast. As a result of herding, analysts agree with each other five to ten times more than with the actual result. We have shown that significant differences exist between US stocks and EU stocks, that may partly be explained as a company size effect. Interestingly, herding effects appear to be stronger in the US than in the Eurozone. Finally, we study the correlation of errors across stocks and show that significant sectorization occurs, some sectors being easier to predict than others. These results add to the list of arguments suggesting that the tenets of Efficient Market Theory are untenable.
    JEL: G10
    Date: 2004–10
  39. By: Larry Wall; Maria Nieto
    Abstract: Over the past years, several countries around the world have adopted a system of prudential prompt corrective action (PCA). the European Union countries are being encouraged to adopt PCA by policy analysts who explicitly call for its adoption. To date, most of the discussion on PCA has focussed on its overall merits. This paper focuses on the preconditions needed for the adoption of an effective PCA. These precondtions include conceptual elements such as a prudential supervisory focus on minimizing deposit insurance losses and mandating supervisory action as capital declines. These preconditions also include institutional aspects such as greater supervisory independence and authority, more effective resolution mechanisms and better methods of meauring capital.
    Date: 2006–03
  40. By: Edward F. Buffie (Department of Economics, Indiana University); Manoj Atolia (Department of Economics, Florida State University)
    Abstract: In this paper we show that a model featuring durables consumption, weak credibility, and sticky prices can explain many of the stylized facts associated with exchange-rate-based stabilization, including the quantitative variation exhibited by key macroeconomic variables. In standard models, the boom phase of ERBS is nothing more than a tepid expansion – changes in spending, real output, and the real exchange rate are unexceptional. But when durables are part of the choice set, the boom is truly a boom: following a temporary reduction in the crawl, total consumption spending rises 12-20%, the real exchange rate appreciates 40-55%, and the current account deficit swells to 5-7% of GDP. None of these results requires easy intertemporal substitution in consumption.
    Keywords: Reverse Shooting, Global Nonlinear Saddlepath Solution
    JEL: C63 C61
    Date: 2005–12
  41. By: Lisa Borland (Evnine-Vaughan Associates, Inc.); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Jean-Francois Muzy (Centre de Recherche Paul Pascal, Pessac, FRANCE); Gilles Zumbach (Consulting in Financial Research)
    Abstract: This is a short review in honor of B. Mandelbrot's 80st birthday, to appear in W ilmott magazine. We discuss how multiplicative cascades and related multifractal ideas might be relevant to model the main statistical features of financial time series, in particular the intermittent, long-memory nature of the volatility. We describe in details the Bacry-Muzy-Delour multifractal random walk. We point out some inadequacies of the current models, in particular concerning time reversal symmetry, and propose an alternative family of multi-timescale models, intermediate between GARCH models and multifractal models, that seem quite promising.
    JEL: G10
    Date: 2005–01
  42. By: Joao Correia-da-Silva (CEMPRE, Faculdade de Economia, Universidade do Porto); Carlos Hervés-Beloso (RGEA. Facultad de Económicas. Universidade de Vigo.)
    Abstract: In economies with uncertain delivery, objects of choice are lists of bundles instead of bundles. Agents trade their endowments for lists, and it is the market that selects one of the bundles in the list for actual delivery. Knowledge of the selection mechanism allows agents to predict the bundle that is to be selected in each state of nature. A small but informed agent is introduced in the economy in order to guarantee existence of a rational expectations equilibrium.
    Keywords: General equilibrium, Private information, Uncertain delivery, Rationalexpectations, Options, Default.
    JEL: C62 D51 D82
    Date: 2006–03
  43. By: Jeanjean, Thomas; Cazavan-Jeny, Anne
    Abstract: This paper focuses on how forecasts information is disclosed in IPO prospectuses. In France, managers report either detailed forecasts or only a brief summary. We investigate the determinants and consequences of the varying levels of detail provided in these forecasts. Based on a sample of 82 IPOs on the Euronext Paris market (2000-2002), we show that only two variables are associated with highly detailed forecast disclosures: forecast horizon and firm age. We also find that the forecast error decreases as the level of detail in the forecast disclosures increases. This finding is robust to our reverse causality test (Heckman two-stage self-selection procedure) and suggests that the level of detail in forecast disclosures enhances the reliability of earnings forecasts.
    Keywords: IPO; forecast disclosure; forecast error
    JEL: G14 G34 M41
    Date: 2005–12–21
  44. By: Ole E. Barndorff-Nielsen (University of Aarhus); Neil Shephard (Nuffield College, Oxford University)
    Abstract: We will review the econometrics of non-parametric estimation of the components of the variation of asset prices. This very active literature has been stimulated by the recent advent of complete records of transaction prices, quote data and order books. In our view the interaction of the new data sources with new econometric methodology is leading to a paradigm shift in one of the most important areas in econometrics: volatility measurement, modelling and forecasting. We will describe this new paradigm which draws together econometrics with arbitrage free financial economics theory. Perhaps the two most influential papers in this area have been Andersen, Bollerslev, Diebold and Labys(2001) and Barndorff-Nielsen and Shephard(2002), but many other papers have made important contributions. This work is likely to have deep impacts on the econometrics of asset allocation and risk management. One of our observations will be that inferences based on these methods, computed from observed market prices and so under the physical measure, are also valid as inferences under all equivalent measures. This puts this subject also at the heart of the econometrics of derivative pricing. One of the most challenging problems in this context is dealing with various forms of market frictions, which obscure the efficient price from the econometrician. Here we will characterise four types of statistical models of frictions and discuss how econometricians have been attempting to overcome them.
    Date: 2005–07–14
  45. By: Botond Koszegi; Matthew Rabin
    Date: 2006–03–27
  46. By: Patrick Bolton; Jose Scheinkman; Wei Xiong
    Abstract: We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets.
    JEL: G1 G3
    Date: 2006–03
  47. By: Renneboog,Luc; Horst,Jenke ter; Zhang,Chendi (TILEC (Tilburg Law and Economics Center))
    Abstract: Little is known about how investors select socially responsible investment (SRI) funds. Investors in SRI funds may care more about social or ethical issues in their investment decisions than about fund performance. This paper studies the money-flows into and out of the SRI funds around the world. We find that ethical money chases past returns. In contrast to conventional funds investors, SRI investors care less about the funds riskiness and fees. Funds characterized by shareholder activism and by in-house SRI research attract more stable investors. Membership of a large SRI fund family creates higher flow volatility due to the lower fees to reallocate money within the fund family. SRI funds receiving most of the money-inflows perform worse in the future, which is consistent with theories of decreasing returns to scale in the mutual fund industry. Finally, funds employing a higher number of SRI screens to model their investment universe receive larger money-inflows and perform better in the future than focused funds
    Keywords: money-flows;ethical funds;socially responsible investing;persistence in performance;investment screens;corporate governance screens;SRI
    JEL: G10 G19
    Date: 2006
  48. By: Christian Grund (RWTH Aachen University, Templergraben 59, 52056 Aachen, Germany, tel: +49 241 8096381.; Dirk Sliwka (University of Cologne, Herbert-Lewin-Str. 2, 50931 Köln, Germany, tel: +49 221 470-5888, fax: +49 221 470-5078.
    Abstract: A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee's pay is performance contingent.
    Keywords: Agency theory, GSOEP, Incentives, Pay for performance, Performance appraisal, Risk, Risk aversion
    JEL: J33 M52 D80
    Date: 2006–03
  49. By: Sophie Saglio (University of Paris 13); Yonghyup Oh (Department of International Economics and Finance of Korea Institute for International Economic Policy); Jacques Mazier (University of Paris 13)
    Abstract: This paper presents a simple macroeconomic model of international interdependency describing Korea, Japan, China, and the rest of East Asia in their relations with the United States and the rest of the world. The model includes both a foreign trade block and an internal demand block analysing demand formation and the price-wage-employment adjustment process. Exchange rates are fixed, but can be manipulated exogenously. The main features of the East Asian trade structure are integrated into the model, and foreign trade price elasticises are higher for Korea and China and smaller for Japan.
    Keywords: Multinational model, East Asian interdependency, exchange rates, asymmetric shocks
    JEL: C52 F15 F17 F42
    Date: 2005–12
  50. By: Marc Potters (Science & Finance, Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Laurent Laloux (Science & Finance, Capital Fund Management)
    Abstract: This contribution to the proceedings of the Cracow meeting on `Applications of Random Matrix Theory' summarizes a series of studies, some old and others more recent on financial applications of Random Matrix Theory (RMT). We first review some early results in that field, with particular emphasis on the applications of correlation cleaning to portfolio optimisation, and discuss the extension of the Marcenko-Pastur (MP) distribution to a non trivial `true' underlying correlation matrix. We then present new results concerning different problems that arise in a financial context: (a) the generalisation of the MP result to the case of an empirical correlation matrix (ECM) constructed using exponential moving averages, for which we give a new elegant derivation (b) the specific dynamics of the `market' eigenvalue and its associated eigenvector, which defines an interesting Ornstein-Uhlenbeck process on the unit sphere and (c) the problem of the dependence of ECM's on the observation frequency of the returns and its interpretation in terms of lagged cross-influences.
    Date: 2005–07
  51. By: Gottschalg, Oliver; Meier, Degenhard
    Abstract: This study derives testable hypotheses from their framework and thus provides an empirical test of interest alignment theory based on a sample of 69 management buyouts in the UK. The results of the multivariate regression model suggest that in this setting, interest alignment does have a significant influence on firm performance.
    Keywords: competitive advantage; interest alignment; motivation; buyouts
    JEL: M10
    Date: 2005–01–01
  52. By: Cumming,Douglas; Johan,Sofia (TILEC (Tilburg Law and Economics Center))
    Abstract: This paper studies institutional investor allocations in socially responsible private equity. The data show that socially responsible investment (SRI) is more common among institutional investors with a greater international investment focus, and among institutions that place greater importance on the International Financial Reporting Standards. The data further indicate SRI is more common when the decision to implement such an investment plan is centralised with a single Chief Investment Officer, and less common among fund-of-fund investments
    Keywords: corporate social responsibility;international institutional investment; private equity
    JEL: G20 G30
    Date: 2006
  53. By: Refet S. Gürkaynak; Andrew T. Levin; Eric T. Swanson
    Abstract: We investigate the extent to which inflation targeting helps anchor long-run inflation expectations by comparing the behavior of daily bond yield data in the United Kingdom and Sweden--both inflation targeters--to that in the United States, a non-inflation-targeter. Using the difference between far-ahead forward rates on nominal and inflation-indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons, we examine how much, if at all, far-ahead forward inflation compensation moves in response to macroeconomic data releases and monetary policy announcements. In the U.S., we find that forward inflation compensation exhibits highly significant responses to economic news. In the U.K., we find a level of sensitivity similar to that in the U.S. prior to the Bank of England gaining independence in 1997, but a striking absence of such sensitivity since the central bank became independent. In Sweden, we find that forward inflation compensation has been insensitive to economic news over the whole period for which we have data. Our findings support the view that a well-known and credible inflation target helps to anchor the private sector's perceptions of the distribution of long-run inflation outcomes.
    Keywords: Inflation (Finance) ; Prices ; Monetary policy
    Date: 2006
  54. By: Ali al-Nowaihi (University of Leicester); Paul Levine (University of Surrey); Alex Mandilaras (University of Surrey)
    Abstract: A new perspective is provided on a puzzle that has emerged from the empirical lit- erature suggesting that government-independent central banks provide a `free lunch': lower in°ation is apparently achieved at no cost in terms of greater output variance. We assess the various explanations provided by the theoretical literature. After revis- iting the free lunch puzzle and con¯rming the empirical importance of open-economy effects, we develop a Rogoff-style delegation model that combines the latter with po- litical monetary cycle e®ects. We show that if all countries delegate monetary policy to government independent banks, as economies become more integrated then a low inflation, higher output variance trade-off re-emerges.
    Keywords: central bank independence, open economy, political uncertainty
    JEL: C72 E61
    Date: 2006–03
  55. By: Miguel Segoviano
    Abstract: This paper presents the Conditional Probability of Default (CoPoD) methodology for modelling the probabilites of loan defaults (PoD) by small and medium enterprises (SMEs) and unlisted firms as functions of identifiable macroeconomic and financial variables. The process of modelling PoDs represents a challenging task, since the time series of PoDs usually contain few observations, thus making ordinary least squares (OLS) estimation imprecise or unfeasible. CoPoD improves the measurement of the impact of macroeconomic variables on PoDs and consequently the measurement of loans' credit risk through time, thereby making a twofold contribution. First, econometrically, it recovers estimators that show greater robustness than OLS estimators in finite sample settings under the Mean Square Error criterion. Second, economically, on the basis of economic theory and empirical evidence, CoPoD can incorporate a procedure to select a relevant set of macroeconomic explanatory variables that have an impact on the PoDs. We implement CoPoD with information from Norway and Mexico.
    Date: 2006–03
  56. By: Elizabeth Klee
    Abstract: Time is a significant cost of conducting transactions, and theoretical models predict that transactions costs significantly affect the type of media of exchange buyers use. However, there is little empirical work documenting the magnitude of this effect. This paper uses grocery store scanner data to examine how time affects consumer choices of checks and debit cards. On average, check transactions take thirty percent longer than debit card transactions. This time difference is a significant factor in the choice to use a debit card over a check and offers empirical evidence for transactions costs affecting the use of media of exchange.
    Keywords: Consumer behavior ; Checks
    Date: 2006
  57. By: Ben R. Craig; William E. Jackson, III; James B. Thomson
    Abstract: SBA guaranteed-lending programs are one of many government-sponsored market interventions aimed at promoting small business. The rationale for providing SBA loan guarantees is often based on the argument that they reduce credit rationing in low-income markets for small business loans. In this paper we empirically test whether SBA-guaranteed lending has a greater impact on economic performance in low-income markets. Using local labor market employment rates as our measure of economic> performance, we find evidence consistent with this proposition. In particular, we find a positive and significant correlation between the average annual level of employment in a local market and the level of SBA-guaranteed lending in that local market. And the intensity of this correlation is relatively larger in low-income markets. Indeed, one interpretation of our results is that this correlation is positive and significant only in low-income markets. This result has important implications for public policy in general and SBA-guaranteed lending in particular.
    Keywords: Small business - Finance ; Small Business Administration ; Government-sponsored enterprises
    Date: 2006
  58. By: Marianne Crowe; Scott Schuh; Joanna Stavins
    Abstract: The Emerging Payments Research Group (EPRG) at the Federal Reserve Bank of Boston sponsored a new conference, “Consumer Behavior and Payment Choice: How and Why Do Consumers Choose Their Payment Methods?” on October 27–28, 2005, at the Boston Fed. The conference brought together a diverse set of participants from the academic, private, and public sectors. This paper provides a summary and overview of the conference. Key conclusions are that the consumer’s decision-making process concerning payment choice is quite complex, that standard economic models have difficulty incorporating this complexity, that additional research—especially interdisciplinary research—into consumer choice of payment method is needed, and that this conference was an important step in that direction.
    Keywords: Payment systems ; Electronic funds transfers
    Date: 2006
  59. By: Jane E. Ihrig; Mario Marazzi; Alexander D. Rothenberg
    Abstract: This paper examines the current thinking on exchange-rate pass-through to both import prices and consumer prices and estimates the extent to which they have fallen in the G-7 countries since the late 1970s and 1980s. For import-price pass-through we find that all countries experience a numerical decline in the responsiveness of import prices to exchange-rate movements; for nearly half of these countries the decline between 1975-1989 and 1990-2004 is statistically significant. We estimate that while a 10 percent depreciation in the local currency would have increased import prices by nearly 7 percent on average across these countries in the late 1970s and 1980s, it would have only increased import prices by 4 percent in the last 15 years. The responsiveness of consumer prices to exchange-rate movements declines for nearly every country, with the decline being statistically significant for two countries. Specifically, while a 10 percent depreciation in the local currency would have increased consumer prices by almost 2 percent on average in the late 1970s and 1980s, it would have had a neutral effect on consumer prices in the last 15 years.
    Keywords: Foreign exchange rates ; Pricing ; Group of Seven countries
    Date: 2006
  60. By: Thomas A. Garrett; Nalinaksha Bhattacharyya
    Abstract: Using a theoretical extension of the Friedman and Savage (1948) utility function developed in Bhattacharyya (2003), we predict that for financial assets with negative expected returns, expected return will be a declining and convex function of skewness. Using a sample of U.S. state lottery games, we find that our theoretical conclusions are supported by the data. Our results have external validity as they also hold for an alternative and more aggregated sample of lottery game data.
    Date: 2006
  61. By: Jan Hanousek; Jan Bena
    Abstract: Using cross-sectional analysis of corporate dividend policy we show that large shareholders extract rents from forms and expropiate minority shareholders in the weak corporate governance environment of an emerging economy. By comprising divideneds paid across varying corporate ownership structures- concentration, type, and domicile of ownership - we quantify these effects and reveal that they are substantial. We find that the target payout ratio for firms with majotiry ownership is low but that the prescence of a significant minority shareholder increases the target payout ratio and hence precludes a majority owner from extracting rent. In contrast to other studies from developed markets, our unique dataset from teh Czech Republic for the period 1996-2003 permits us to take account of teh endogencity of ownership.
    Date: 2006–03
  62. By: Ding, Yuan; Hervé, Stolowy; Hope, Ole-Kristian; Jeanjean, Thomas
    Abstract: This study analyzes determinants and effects of differences between Domestic Accounting Standards (DSA) and Internationake Accounting Standards (IAS).
    Keywords: International accounting differences; institutional factors; earnings managements; synchronicity
    JEL: M40 M41
    Date: 2005–03–30
  63. By: Christopher Bowdler (Nuffield College, Oxford University)
    Abstract: A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this finding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and inflation dynamics in open economies, but previous studies have not made a distinction between fixed and floating exchange rate regimes. Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely affected by price and wage controls, inflationary oil price hikes and the role played by fiscal policy in driving output and inflation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining flexible and semi-flexible exchange rate regimes, but is unrelated to openness amongst countries maintaining fixed exchange rate regimes.
    Keywords: Openness, inflation, Phillips curve, sacrifice ratio, exchange rate regime.
    JEL: E31 E32 F41
    Date: 2005–10–01
  64. By: Toshihiro Okubo (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: Despite world-wide bloc economies after the Depression, Japan had a tight relationship with the British Commonwealth and created tight connections with the Sterling and the Gold blocs in the late 1930s. The world-wide bloc economies did not isolate Japan.
    Keywords: International Economics; Exchange Rates; Trade; Whatever Related
    Date: 2006–03–22
  65. By: Gottschalg, Oliver; Berg, Achim
    Abstract: In this paper, the authors develop a three-dimensional conceptual framework for value generation in buyouts that categorizes and links the different levers of buyouts value generation. This framework provides the basis to take a look beyond individual value levers and shed light on the underlying strategic logic of buyouts.
    Keywords: private equity; buyout; value generation
    JEL: G31 M10 M21
    Date: 2005–01–01
  66. By: Martynova,Marina; Renneboog,Luc (TILEC (Tilburg Law and Economics Center))
    Abstract: This paper provides a comprehensive overview of the European takeover market. We characterize the main features of the domestic and cross-border corporate takeovers involving European companies in the period 1993-2001. We provide detailed and comparable information on the size and dynamics of takeover activity in 28 Continental European countries, the UK and Ireland. The data is supplemented with the characteristics of takeover transactions, including the type of takeovers (negotiated acquisition or tender offer), bid attitude (friendly or hostile), payment method (all-cash, all-equity, or mixed deals), legal status of the target firm (public or private), takeover strategy (focus or diversification), amongst other factors. In addition, we investigate the shortterm wealth effects of 2,419 European mergers and acquisitions. We find announcement effects of 9% for target firms compared to a statistically significant announcement effect of only 0.5% for the bidders. Including the price run-up, the share price reaction amounts to 21% for the targets and 0.9% for the bidders. We show that the estimated shareholder wealth effect strongly depends on the different attributes of the takeovers. The type of takeover bid has a large impact on the short-term wealth effects for the target firm shareholders with hostile takeovers triggering substantially larger price reactions than friendly transactions. When a UK target is involved, the abnormal returns are higher than those of bids involving a Continental European target. There is strong evidence that the means of payment has a large impact on the share prices of both bidder and target
    Keywords: takeovers;mergers and acquisitions;diversification;takeover waves;means of payment
    JEL: G34
    Date: 2006
  67. By: Eric M. Leeper; Shu-Chun Susan Yang
    Abstract: Neoclassical growth models predict positive growth effects over the entire transition path following a reduction in capital or labor tax rates when lump-sum taxes (or transfers) are used to balance the government budget. This paper considers the consequences of bond-financed tax reductions that bring forth adjustments in expected future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can lower growth. The paper shows that the stronger the response of distorting fiscal policies to debt, the more favorable the growth effects of a tax cut.
    JEL: E1 H3 H6
    Date: 2006–03
  68. By: Yasuhiro Asami (Japan Science and Technology Agency)
    Abstract: In the business year beginning on April 1 1999 or later our accounting standards have been greatly changed. Concretely (1) the disclosure of consolidated financial statements as audited documents, (2) onsolidated statements of cash flows, and (3) tax consequences accounting have been introduced in the business year beginning on April 1 1999 or later. In addition (4) the standard for fair value accounting of financial instruments and (5) the accounting standard for employees’ retirement benefits (Hereafter this accounting standard will be abbreviated to retirement benefits accounting) have been introduced in the business year beginning on April 1 2000 or later. This has been often called, ‘Big Bang Reforms of Accounting Standards’ in our country. The reforms of accounting standards are still now in progress.
    Keywords: accounting standards, Japan, reform, structural reform
    JEL: D21 D23 D24 H25
    Date: 2006–12

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