nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒04‒08
87 papers chosen by
Carolina Valiente
London South Bank University

  1. Credit Risk Transfer and Contagion By Franklin Allen; Elena Carletti
  2. A Market Risk Approach to Liquidity Risk and Financial Contagion By Dairo Estrada; Daniel Osorio
  3. Stock Returns and Expected Business Conditions: Half a Century of Direct Evidence By Sean D. Campbell; Francis X. Diebold
  4. Prediction Markets in Theory and Practice By Wolfers, Justin; Zitzewitz, Eric
  5. Five Open Questions About Prediction Markets By Wolfers, Justin; Zitzewitz, Eric
  6. Asymmetric Information in the Stock Market: Economic News and Co-movement By Albuquerque, Rui; Vega, Clara
  7. Awareness and Stock Market Participation By Luigi Guiso; Tullio Jappelli
  8. Competition for Order Flow and Smart Order Routing Systems By Foucault, Thierry; Menkveld, Albert J.
  9. Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections By Snowberg, Erik; Wolfers, Justin; Zitzewitz, Eric
  10. Bloodshed or Reforms? The Determinants of Sovereign Bond Spreads in 1870-1913 and Today By Mauro, Paolo; Sussman, Nathan; Yafeh, Yishay
  11. Do Consumers Choose the Right Credit Contracts? By Sumit Agarwal; Souphala Chomsisengphet; Chunlin Liu; Nicholas S. Souleles
  12. Trusting the Stock Market By Luigi Guiso; Paola Sapienza; Luigi Zingales
  13. Credit Card Debt Puzzles By Michael Halisassos; Michael Reiter
  14. Does Central Bank Transparency Reduce Interest Rates? By Eijffinger, Sylvester C W; Geraats, Petra M; van der Cruijsen, Carin A B
  15. Hedging, Speculation, and Investment in Balance-Sheet Triggered Currency Crises By Andreas Röthig; Willi Semmler; Peter Flaschel
  17. The Volatility of Realized Volatility By Fulvio Corsi; Uta Kretschmer; Stefan Mittnik; Christian Pigorsch
  18. On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets By Minford, Patrick; Peel, David
  19. Valuation in Over-the-Counter Markets By Duffie, Darrell; Garleanu, Nicolae B.; Pedersen, Lasse Heje
  20. Marketwide Private Information in Stocks: Forecasting Currency Returns By Albuquerque, Rui; de Francisco, Eva; Marques, Luis
  21. Competition and Entry in Banking: Implications for Stability and Capital Regulation By Boot, Arnoud W A; Marinc, Matej
  22. Hedge Funds: Performance, Risk and Capital Formation By Fung, William; Hsieh, David A; Naik, Narayan; Ramadorai, Tarun
  23. Institutional Weakness and Stock Price Volatility By Galina Hale; Assaf Razin; Hui Tong
  24. Consumption and Real Exchange Rates with Incomplete Markets and Non-Traded Goods By Benigno, Gianluca; Thoenissen, Christoph
  25. Emotions, Bayesian Inference, and Financial Decision Making By Diego Salzman; Emanuel Trifan
  26. Credit Market Competition and Capital Regulation By Franklin Allen; Elena Carletti; Robert Marquez
  29. Sovereign Risk in the Classical Gold Standard Era By Gavin Cameron; Kang Yong Tan; Prasanna Gai
  30. Multi Factor SUR in Event Study Analysis: Evidence from M&A in Singapore’s Financial Industry By Enrico Tanuwidjaja
  31. Exchange Rate Volatility and Productivity Growth: The Role of Financial Development By Philippe Aghion; Philippe Bacchetta; Romain Ranciere; Kenneth Rogoff
  32. Investigating nonlinear speculation in cattle, corn, and hog futures markets using logistic smooth transition regression models By Andreas Röthig; Carl Chiarella
  33. Follow-on financing of venture capital backed companies: the choice between debt, equity, existing and new investors By Baeyens,K.; Manigart,S.;
  34. Credible Ratings By Ettore Damiano; Hao Li; Wing Suen;
  35. Monetary Policy and Exchange Rate Dynamics: New Evidence from the Narrative Approach to Shock Identification By John C. Bluedorn; Christopher Bowdler
  36. Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle By Leon, Hyginus; Sarno, Lucio; Valente, Giorgio
  37. Measuring the Volatility in U.S. Treasury Benchmarks and Debt Instruments By Suhejla Hoiti; Esfandiar Maasoumi; Michael McAleer; Daniel Slottje
  38. Time Dependent Relative Risk Aversion By Enzo Giacomini; Michael Handel; Wolfgang K. Härdle
  39. Optimal Asset Allocation and Risk Shifting in Money Management By Basak, Suleyman; Pavlova, Anna; Shapiro, Alex
  40. Relating Output and Volatility in a Model of International Risk-Sharing with Limited Commitment By Reichlin, Pietro
  41. "Intra-day Seasonality in Activities of the Foreign Exchange Markets: Evidence from the Electronic Broking System" By Takatoshi Ito; Yuko Hashimoto
  42. Optimal Central Bank Design: Benchmarks for the ECB By Helge Berger
  43. Measuring Expectations By Kjellberg, David
  44. Competition and performance in the Hungarian second pillar By Rocha, Roberto; Impavido, Gregorio
  45. Does Financial Integration Spur Economic Growth? New Evidence from the First Era of Financial Globalization By Moritz Schularick; Thomas Steger
  46. Pricing Risk in Economies with Heterogenous Agents and Incomplete Markets By Pijoan-Mas, Josep
  47. Household Credit in the New Europe: Lending Boom or Sustainable Growth? By Coricelli, Fabrizio; Mucci, Fabio; Revoltella, Debora
  48. Energia nuclear: Accounting for Financial Instruments: An Analysis of the Determinants of Disclosure in the Portuguese Stock Exchange By Patrícia Teixeira Lopes; Lúcia Lima Rodrigues
  49. Does Money Matter in the ECB Strategy? New Evidence Based on ECB Communication By Helge Berger; Jakob de Haan; Jan-Egbert Sturm
  50. International Portfolio Equilibrium and the Current Account By Kollmann, Robert
  51. An Equilibrium Model of 'Global Imbalances' and Low Interest Rates By Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
  52. Tariff Retaliation versus Financial Compensation in the Enforcement of International Trade Agreements By Limão, Nuno; Saggi, Kamal
  53. International Migration with Heterogeneous Agents: Theory and Evidence By Herbert Brücker; Philipp J. H. Schröder
  54. ART Versus Reinsurance: The Disciplining Effect of Information Insensitivity By Silke Brandts; Christian Laux
  55. The Declining Equity Premium: What Role Does Macroeconomic Risk Play? By Lettau, Martin; Ludvigson, Sydney; Wachter, Jessica
  56. Optimal Monetary Policy in a Small Open Economy with Home Bias By Faia, Ester; Monacelli, Tommaso
  57. Price-Level Determination Under Dispersed Information and Monetary Policy By Aoki, Kosuke
  58. Una Aproximación a La Dinámica de las Tasas de Interés de Corto Plazo en Colombia a través de Modelos GARCH Multivariados By Luis Fernando Melo Velandia; Oscar Reinaldo Becerra Camargo
  59. What Explains Household Stock Holdings? By Miquel Faig; Pauline Shum
  60. On the Evolution of Market Institutions: The Platform Design Paradox By Alos-Ferrer, Carlos; Kirchsteiger, Georg; Walzl, Markus
  61. Conditional Allocation of Control Rights in Venture Capital Finance By Gebhardt, Georg; Schmidt, Klaus M.
  62. "A New Approach to Modeling Early Warning Systems for Currency Crises : can a machine-learning fuzzy expert system predict the currency crises effectively?" By Chin-Shien Lin; Haider A. Khan; Ying-Chieh Wang; Ruei-Yuan Chang
  63. El Riesgo de Mercado de la Deuda Pública: ¿Una Restricción a la Política Monetaria? El Caso Colombiano By Hernando Vargas Herrera; Dpto de Estabilidad Financiera
  64. Innovation Performance and Government Intervention By Svensson, Roger
  65. The Interaction Between Capital Controls and Exchange Rate Regimes: Evidence from Developing Countries By von Hagen, Jürgen; Zhou, Jizhong
  66. Distribution Margins, Imported Inputs, and the Sensitivity of the CPI to Exchange Rates By Linda S. Goldberg; José Manuel Campa
  67. The Road to Extinction: commons with capital markets By Jayasri Dutta, Colin Rowat
  68. An Empirical Model of Daily Highs and Lows By Yin-Wong Cheung
  69. Financing Government Expenditures Optimally By Pinar Ayse Yesin
  70. Barrier Option Hedging under Constraints: A Viscosity Approach By Imen Bentahar; Bruno Bouchard
  72. Takeovers By Burkart, Mike; Panunzi, Fausto
  73. Equity Culture and the Distribution of Wealth By Yannis Bilias; Dimitris Georgarakos; Michael Haliassos
  74. Evaluación de Reglas de Tasa de Interés en un Modelo de Economía Pequeña y Abierta By Julian Pérez Amaya
  75. Risk Aversion When Gains Are Likely and Unlikely: Evidence from a Natural Experiment with Large Stakes By Pavlo Blavatskyy; Ganna Pogrebna
  76. PRATIQUES FINANCIERES DECENTRALISEES ET<br />RECOMPOSITION DES SYSTEMES FINANCIERS AFRICAINS<br /><br />L'évolution de la finance informelle et ses conséquences sur l'évolution des systèmes financiers By Michel Lelart
  77. Determinantes de la estructura de capital de las empresas colombianas (1996-2002) By Fernando Tenjo G.; Enrique López E.; Nancy Zamudio
  78. Insuring the Uninsurable: Brokers and Incomplete Insurance Contracts By Neil A. Doherty; Alexander Muermann
  79. De la finance informelle à la microfinance By Michel Lelart
  80. The Empirics of International Currencies: Historical Evidence By Flandreau, Marc; Jobst, Clemens
  81. Learning, Structural Instability and Present Value Calculations By M. Hashem Pesaran; Davide Pettenuzzo; Allan Timmermann
  82. La gouvernance financière mondiale : Où en est le Fonds Monétaire International ? By Michel Lelart
  83. Testing for Adverse Selection with %u201CUnused Observables%u201D By Amy Finkelstein; James Poterba
  84. Hurricanes: Intertemporal Trade and Capital Shocks By John C. Bluedorn
  85. Fear of Floating and Fear of Pegging: An Empirical Analysis of De Facto Exchange Rate Regimes in Developing Countries By von Hagen, Jürgen; Zhou, Jizhong
  86. Cross-Border Merger Waves By Fumagalli, Eileen; Vasconcelos, Helder
  87. Excjange Rate Targeting in a Small Open Economy By Mette Ersbak Bang Nielsen

  1. By: Franklin Allen (The Wharton School, University of Pennsylvania); Elena Carletti (Center for Financial Studies)
    Abstract: Some have argued that recent increases in credit risk transfer are desirable because they improve the diversification of risk. Others have suggested that they may be undesirable if they increase the risk of financial crises. Using a model with banking and insurance sectors, we show that credit risk transfer can be beneficial when banks face uniform demand for liquidity. However, when they face idiosyncratic liquidity risk and hedge this risk in an interbank market, credit risk transfer can be detrimental to welfare. It can lead to contagion between the two sectors and increase the risk of crises.
    Keywords: Financial Innovation, Pareto Inferior, Banking, Insurance
    JEL: G21 G22
    Date: 2005–10–09
  2. By: Dairo Estrada; Daniel Osorio
    Abstract: According to traditional literature, liquidity risk in individual banks can turn into a system-wide ¯nancial crisis when either interbank credit exposures or bank runs are present. This paper shows that this phenomenon can also arise when individual liquidity risk trans- forms into system-wide market risk (even in the absence of bank runs and interbank credit networks). This happens when banks try to sell some portion of its assets in order to overcome a liquidity shortage (individual liquidity risk). These sales depress the market price of assets if demand is not perfectly elastic. Given the fact that banks mark to market the asset book, the fall of market price reduces the value of assets of every bank in the system (system-wide market risk), leaving them less suited for future liquidity shortages and therefore more prone to bankruptcies. The paper rationalizes this idea through the simulation of a model that tries to capture the behavior of a liq- uidity manager that faces shocks on bank deposits and loans. The main results suggest that the extent of ¯nancial contagion depends crucially on the size of the market for assets.
    Keywords: liquidity manager, liquidity risk, market risk, systemic risk, financial contagion, mark-to-market
    JEL: G21 G33 L14
  3. By: Sean D. Campbell (Federal Reserve Board); Francis X. Diebold (University of Pennsylvania)
    Abstract: We explore the macro/finance interface in the context of equity markets. In particular, using half a century of Livingston expected business conditions data we characterize directly the impact of expected business conditions on expected excess stock returns. Expected business conditions consistently affect expected excess returns in a statistically and economically significant counter-cyclical fashion: depressed expected business conditions are associated with high expected excess returns. Moreover, inclusion of expected business conditions in otherwise standard predictive return regressions substantially reduces the explanatory power of the conventional financial predictors, including the dividend yield, default premium, and term premium, while simultaneously increasing R2. Expected business conditions retain predictive power even after controlling for an important and recently introduced non-financial predictor, the generalized consumption/wealth ratio, which accords with the view that expected business conditions play a role in asset pricing different from and complementary to that of the consumption/wealth ratio. We argue that time-varying expected business conditions likely capture time-varying risk, while time-varying consumption/wealth may capture time-varying risk aversion.
    Keywords: Business Cycle, Expected Equity Returns, Prediction, Livingston Survey, Risk Aversion, Equity Premium, Risk Premium
    JEL: G12
    Date: 2005–01–22
  4. By: Wolfers, Justin; Zitzewitz, Eric
    Abstract: Prediction Markets, sometimes referred to as 'information markets', 'idea futures' or 'event futures', are markets where participants trade contracts whose payoffs are tied to a future event, thereby yielding prices that can be interpreted as market-aggregated forecasts. This article summarizes the recent literature on prediction markets, highlighting both theoretical contributions that emphasize the possibility that these markets efficiently aggregate disperse information, and the lessons from empirical applications which show that market-generated forecasts typically outperform most moderately sophisticated benchmarks. Along the way, we highlight areas ripe for future research.
    Keywords: event futures; forecasting; futures; information aggregation; information markets; prediction markets
    JEL: C53 D8 G14
    Date: 2006–03
  5. By: Wolfers, Justin; Zitzewitz, Eric
    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, decision-making 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: event futures; information markets; instrumental variables; market manipulation; prediction IV; prediction markets
    JEL: C9 D7 D8 G1 M2
    Date: 2006–03
  6. By: Albuquerque, Rui; Vega, Clara
    Abstract: We analyze the effect that real-time domestic and foreign news about fundamentals have on the correlation of stock returns of a small open economy, Portugal, and a large open economy, the U.S. We also study the role of public and private information in the price formation process in the U.S. and Portuguese stock markets. First, and consistent with our theoretical model, we find that U.S. macroeconomic news and Portuguese earnings news do not affect the cross-country stock market correlation, whereas Portuguese macroeconomic news lowers the cross-country stock market correlation. Second, we find that U.S. public information affects Portuguese stock market returns, but this effect is diminished when U.S. stock market returns are included in the regression; we provide evidence in the paper that this effect does not derive from contagion as commonly accepted. Finally, public information news in the U.S. is associated with increased liquidity, while the effect in Portugal depends on the type of news releases.
    Keywords: contagion; information spillovers; international equity returns; private information; public news announcements
    JEL: F3 G12 G14 G15
    Date: 2006–03
  7. By: Luigi Guiso (University of Sassari, University of Chicago & CEPR); Tullio Jappelli (University of Salerno, CSEF, and CEPR)
    Abstract: The paper documents lack of awareness of financial assets in the 1995 and 1998 Bank of Italy Surveys of Household Income and Wealth. It then explores the determinants of awareness, and finds that the probability that survey respondents are aware of stocks, mutual funds and investment accounts is positively correlated with education, household resources, long-term bank relations and proxies for social interaction. Lack of financial awareness has important implications for understanding the stockholding puzzle and for estimating stock market participation costs.
    Keywords: Financial Information, Portfolio Choice
    JEL: E2 D8 G1
    Date: 2005–09–06
  8. By: Foucault, Thierry; Menkveld, Albert J.
    Abstract: We study changes in liquidity following the introduction of a new electronic limit order market when, prior to its introduction, trading is centralized in a single limit order market. We also study how automation of routing decisions and trading fees affect the relative liquidity of rival markets. The theoretical analysis yields three main predictions: (i) consolidated depth is larger in the multiple limit order markets environment, (ii) consolidated bid-ask spread is smaller in the multiple limit order markets environment and (iii) the liquidity of the entrant market relative to that of the incumbent market increases with the level of automation for routing decisions (the proportion of 'smart routers'). We test these predictions by studying the rivalry between the London Stock Exchange (entrant) and Euronext (incumbent) in the Dutch stock market. The main predictions of the model are supported.
    Keywords: centralized limit order book; market fragmentation; smart routers; trade-throughs; trading fees
    JEL: G10 G18 G24 L13
    Date: 2006–03
  9. By: Snowberg, Erik; Wolfers, Justin; Zitzewitz, Eric
    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: elections; event study; partisan effects; political economy
    JEL: D72 E3 E6 G13 G14 H6
    Date: 2006–04
  10. By: Mauro, Paolo; Sussman, Nathan; Yafeh, Yishay
    Abstract: Drawing on a newly-collected data set on bond yields, macroeconomic variables, and news of various categories for a panel of emerging markets, we provide the first comparative analysis of the determinants of sovereign bond spreads in the first era of financial globalization and bond finance (1870-1913) and today (1994-2002). We find that news about wars or episodes of politically-motivated violence are a significant and robust determinant of spreads; fiscal variables also play a role; in contrast, news about institutional reforms seldom have a rapid and significant impact. There are also important differences between the two eras: country-specific fundamentals account for a greater share of variation in spreads during the pre-WWI period than today.
    Keywords: bond yields; emerging markets; financial globalization
    JEL: F34 G15 N20
    Date: 2006–03
  11. By: Sumit Agarwal (Bank of America); Souphala Chomsisengphet (Office of the Comptroller of the Currency); Chunlin Liu (University of Nevada - Reno, Finance Department); Nicholas S. Souleles (University of Pennsylvania)
    Abstract: A number of studies have pointed to various mistakes that consumers might make in their consumption-saving and financial decisions. We utilize a unique market experiment conducted by a large U.S. bank to assess how systematic and costly such mistakes are in practice. The bank offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. To minimize their total interest costs net of the fee, consumers expecting to borrow a sufficiently large amount should choose the contract with the fee, and vice-versa. We find that on average consumers chose the contract that ex post minimized their net costs. A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs. Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract. Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub-optimal contracts without switching.
    Keywords: Consumption-Saving, Borrowing, Consumer Finance, Consumer Credit, Credit Cards, Banking
    JEL: G11 G21 E21 E51
    Date: 2005–11–07
  12. By: Luigi Guiso (University of Sassari, University of Chicago & CEPR); Paola Sapienza (Northwestern University, NBER, & CEPR); Luigi Zingales (University of Chicago Graduate School of Business)
    Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.
    Keywords: Stock Market Participation, Trust, Portfolio Choice
    JEL: D1 D8
    Date: 2005–09–19
  13. By: Michael Halisassos (School of Economics and Business, Goethe University Frankfurt); Michael Reiter (Dept. of Economics and Business, Universitat Pompeu Fabra)
    Abstract: Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an ‘accountant-shopper’ framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework can actually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.
    Keywords: Credit Cards, Debt, Self Control, Household Portfolios
    JEL: E21 G11
    Date: 2005–10–09
  14. By: Eijffinger, Sylvester C W; Geraats, Petra M; van der Cruijsen, Carin A B
    Abstract: Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoretical models is that it enhances the credibility, reputation, and flexibility 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 affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects 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 effect on interest rates.
    Keywords: central bank transparency; interest rates; monetary policy
    JEL: E52 E58
    Date: 2006–03
  15. By: Andreas Röthig (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Willi Semmler (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld)); Peter Flaschel (Institut für Volkswirtschaftslehre (Department of Economics), Universität Bielefeld (University of Bielefeld))
    Abstract: This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure - caused by balance sheet effects as in Krugman (2000) - and therefore their investments' sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.
    Keywords: Mundell-Fleming-Tobin model, foreign-debt financed investment, currency crises, real crises, currency futures, hedging, speculation.
    JEL: E32 E44 F31 F41
    Date: 2006–02
  16. By: Michael Bleaney
    Abstract: This paper considers the currency composition of sovereign debt in the context of risk-sharing through excusable defaults. It is shown that monetary credibility is not a sufficient condition for borrowing in domestic currency. With real exchange rate risk, debt denominated in a borrowing country’s currency can be too state-contingent to support international lending on purely reputational considerations, even when debt denominated in the lending country’s currency is viable. The model can explain the geographical pattern of bond issuance, the phenomenon of “original sin”, and the concentration of defaults on foreign-currency debt.
  17. By: Fulvio Corsi (University of Lugano); Uta Kretschmer (University of Bonn, Germany); Stefan Mittnik (University of Munich); Christian Pigorsch (University of Munich)
    Abstract: Using unobservable conditional variance as measure, latent–variable approaches, such as GARCH and stochastic–volatility models, have traditionally been dominating the empirical finance literature. In recent years, with the availability of high–frequency financial market data modeling realized volatility has become a new and innovative research direction. By constructing “observable” or realized volatility series from intraday transaction data, the use of standard time series models, such as ARFIMA models, have become a promising strategy for modeling and predicting (daily) volatility. In this paper, we show that the residuals of the commonly used time–series models for realized volatility exhibit non–Gaussianity and volatility clustering. We propose extensions to explicitly account for these properties and assess their relevance when modeling and forecasting realized volatility. In an empirical application for S&P500 index futures we show that allowing for time–varying volatility of realized volatility leads to a substantial improvement of the model’s fit as well as predictive performance. Furthermore, the distributional assumption for residuals plays a crucial role in density forecasting.
    Keywords: Finance, Realized Volatility, Realized Quarticity, GARCH, Normal Inverse Gaussian Distribution, Density Forecasting
    JEL: C22 C51 C52 C53
    Date: 2005–11–28
  18. By: Minford, Patrick; Peel, David
    Abstract: The purpose in this letter is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim is to discuss the theoretical conditions that have to be met for his hypothesis to hold.
    Keywords: real exchange rates; real interest rates; roll
    JEL: C22 C51 F31
    Date: 2006–04
  19. By: Duffie, Darrell; Garleanu, Nicolae B.; Pedersen, Lasse Heje
    Abstract: We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then 'recover' over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.
    Keywords: asset pricing; bargaining; liquidity; risk; search
    JEL: G12
    Date: 2006–02
  20. By: Albuquerque, Rui; de Francisco, Eva; Marques, Luis
    Abstract: We present a model of equity trading with informed and uninformed investors where informed investors act upon firm-specific private information and marketwide private information. The model is used to structurally identify the component of order flow that is due to marketwide private information. Trades driven by marketwide private information display very little or no correlation with the first principal component of order flow. This finding implies that a simple statistical factor is a poor measure of marketwide private information. Moreover, the model suggests that the previously documented comovement in order flow captures mostly common variation in liquidity trades. We find that marketwide private information obtained from equity market data forecasts industry stock returns and foreign exchange returns consistent with Evans and Lyons' (2004a) model of exchange rate determination.
    Keywords: currency returns; equity returns; firm-specific private information; marketwide private information; order flow; principal components
    JEL: F31 G11 G14
    Date: 2006–03
  21. By: Boot, Arnoud W A; Marinc, Matej
    Abstract: We assess the influence of competition and capital regulation on the stability of the banking system. We particularly ask two questions: i) how does capital regulation affect (endogenous) entry; and ii) how do (exogenous) changes in the competitive environment affect bank monitoring choices and the effectiveness of capital regulation? Our approach deviates from the extant literature in that it recognizes the fixed costs associated with banks’ monitoring technologies. These costs make market share and scale important for the banks’ cost structures. Our most striking result is that increasing (costly) capital requirements can lead to more entry into banking, essentially by reducing the competitive strength of lower quality banks. We also show that competition improves the monitoring incentives of better quality banks and deteriorates the incentives of lower quality banks; and that precisely for those lower quality banks competition typically compromises the effectiveness of capital requirements. We generalize the analysis along a few dimensions, including an analysis of the effects of asymmetric competition, e.g. one country that opens up its banking system for competitors but not vice versa.
    Keywords: banking; capital regulation; competition
    JEL: G21 L13 L50
    Date: 2006–02
  22. By: Fung, William; Hsieh, David A; Naik, Narayan; Ramadorai, Tarun
    Abstract: We use a comprehensive dataset of Funds-of-Hedge-Funds (FoFs) to investigate performance, risk and capital formation in the hedge fund industry over the past ten years. We confirm the finding of high systematic risk exposures in FoF returns. We divide up the past ten years into three distinct subperiods and demonstrate that the average FoF has only delivered alpha in the short second period from October 1998 to March 2000. In the cross section of FoFs, however, we are able to identify FoFs capable of delivering persistent alpha. We find that these more successful hedge funds experience far greater (and steadier) capital inflows than their less fortunate counterparts. Berk and Green's (2004) rational model of active portfolio management implies that diminishing returns to scale combined with the inflow of new capital leads to the erosion of superior performance over time. In keeping with this implication, we provide evidence that even successful hedge funds have experienced a recent, dramatic decline in risk-adjusted performance.
    Keywords: alpha; factor models; flow; funds-of-hedge funds; hedge funds; performance
    JEL: G11 G12 G23
    Date: 2006–03
  23. By: Galina Hale; Assaf Razin; Hui Tong
    Abstract: We find an empirical regularity that stronger creditor protection reduces the volatility of stock market prices. We analyze two distinct mechanisms that characterize equity price volatility: government guarantees and creditor protection. Using a Tobin q model, we demonstrate that weak creditor protection that gives rise to government guarantees and tightens credit constraints, increases stock price volatility. Empirically, accounting for the probability of financial crises, we find that government guarantees and weak institutions that tighten credit constraints increase aggregated stock price volatility.
    JEL: F3 G3
    Date: 2006–03
  24. By: Benigno, Gianluca; Thoenissen, Christoph
    Abstract: This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector.
    Keywords: consumption-real exchange rate anomaly; incomplete financial markets; non-traded goods
    JEL: F31 F41
    Date: 2006–03
  25. By: Diego Salzman (CORE, Université catholique de Louvain.); Emanuel Trifan (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: This paper presents a model in which rational and emotional investors are compelled to make decisions under uncertainty in order to ensure their survival. Using a neurofinancial setting, we show that, when different investor types fight for market capital, emotional traders tend not only to influence prices but also to have a much more developed adaptive mechanism than their rational peers, in spite of their apparently simplistic demand strategy and distorted revision of beliefs. Our results imply that prices in financial markets could be seen more accurately as a thermometer of the market mood and emotions rather than as simple informative signals as stated in traditional financial theory.
    Keywords: Judgement under uncertainty, Bayesian Inference, Behavioral Finance, Decision Making, Emotions
    JEL: G1
    Date: 2005–10
  26. By: Franklin Allen (The Wharton School, University of Pennsylvania); Elena Carletti (Center for Financial Studies); Robert Marquez (Robert h. Smith School of Business, University of Maryland)
    Abstract: Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending, thus creating an asset market-based incentive for banks to hold capital. Borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans, which accrue only if the loans are in fact paid o.. Since borrowers do not fully internalize the cost of raising capital to the banks, the level of capital demanded by market participants may be above the one chosen by a regulator, even when capital is a relatively costly source of funds. This implies that capital requirements may not be binding, as recent evidence seems to indicate.
    Keywords: Banking, Costly Capital, Asset Side Market Discipline
    JEL: G21 G38
    Date: 2005–01–23
  27. By: Miquel Faig
    Abstract: This paper provides a tractable search model with divisible money that encompasses the two frameworks currently used in the literature. Individuals belong to many villages. Inside a village, individuals know each other so financial contracts are feasible. Money is essential to facilitate trade across villages. When financial markets inside a village are complete, the model generalizes the framework advanced by Lagos and Wright (2005) without having to assume quasi-linear preferences. Likewise, complete financial markets in each village substitutes for the representative household in the framework advanced by Shi (1997). The paper describes sets of financial arrangements that complete the markets inside the villages. In general, these financial arrangements include a combination of credit and insurance. However, if individuals choose period by period the trading role they play outside their village, then under some parametric restrictions either a lottery or a risk-free bond market are sufficient.
    Keywords: monetary search, divisible money
    JEL: E40
  28. By: Michael Bleaney
    Abstract: Fundamentals may determine the range of real exchange rate fluctuation, through signals of misalignment, even if they are not a major influence on the level within that range. This can explain the puzzle that more open economies experience lower real exchange rate volatility. Adjustment of domestic prices to nominal exchange rate movements can account for only a small proportion of this effect. Sustainability analysis focuses on the ratio of the current account to GDP (rather than to total trade flows) as a misalignment signal, which implies narrower bounds for real exchange rates in more open economies.
  29. By: Gavin Cameron; Kang Yong Tan; Prasanna Gai
    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 can be seen as a short-hand device that enhanced a country`s reputation in international capital markets. By conveying important information to investors 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 indicate that fundamental factors appear to be more important in determining a country`s creditworthiness in the long-run than the exchange rate regime per se.
    Keywords: Gold Standard, Sovereign Risk, Heterogeneous Dynamic Panels, Pooled Mean Group Estimator
    JEL: F33 F34 F41 N10 N20
    Date: 2006
  30. By: Enrico Tanuwidjaja (Singapore Centre for Applied and Policy Economics Department of Economics, National University of Singapore)
    Abstract: This paper proposes a use of multi-factor seemingly unrelated regression (SUR) in event study analysis to study mergers and acquisitions in Singapore’s financial industry. We also study the cross-sector (banking and insurance)domestic acquisition in Singapore’s financial industry. By contrasting to the use of ordinary least squares (OLS) method, it is found that OLS method seems to underestimate the value of the sample cumulative abnormal returns as compared to SUR. The study also found that post mergers and takeovers in banking and insurance industries tend to have high possibility of negative returns.
    Keywords: Event study; Seemingly unrelated regression (SUR); Merger and Acquisition (M&A); Singapore; Financial Industry; Cross-sector
    JEL: C50 G14 G21 G22 G34 O53
  31. By: Philippe Aghion; Philippe Bacchetta; Romain Ranciere; Kenneth Rogoff
    Abstract: This paper offers empirical evidence that real exchange rate volatility can have a significant impact on long-term rate of productivity growth, but the effect depends critically on a country’s level of financial development. For countries with relatively low levels of financial development, exchange rate volatility generally reduces growth, whereas for financially advanced countries, there is no significant effect. Our empirical analysis is based on an 83country data set spanning the years 1960-2000; our results appear robust to time window, alternative measures of financial development and exchange rate volatility, and outliers. We also offer a simple monetary growth model in which real exchange rate uncertainty exacerbates the negative investment effects of domestic credit market constraints. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.
    Date: 2006–03
  32. By: Andreas Röthig (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney, Australia)
    Abstract: This article explores nonlinearities in the response of speculators' trading activity to price changes in live cattle, corn, and lean hog futures markets. Analyzing weekly data from March 4, 1997 to December 27, 2005, we reject linearity in all of these markets. Using smooth transition regression models, we find a similar structure of nonlinearities with regard to the number of different regimes, the choice of the transition variable, and the value at which the transition occurs.
    Keywords: Futures markets, speculation, nonlinear dynamics, smooth transition regression model.
    JEL: G10 G11 C22 C53
    Date: 2006–02
  33. By: Baeyens,K.; Manigart,S.;
    Abstract: We study the financing strategies of 191 start-ups after they have received venture capital (VC) and thereby contribute to the staging literature. The VC backed start-ups have raised financing on 345 occasions over a five-year period after the initial VC investment. Surprisingly, bank debt is the most important source of funding for these young and growth-oriented companies, supporting the view that VC investors have a certifying role in their portfolio companies. Bank debt is available to firms with a lower demand for money, lower levels of risk and of information asymmetries, implying that staging of equity funding is less important for these firms. A firm only raises equity when it’s debt capacity is exhausted, hinting that equity investors are investors of last resort. New equity is provided by the existing shareholders in 70% of the equity issues, supporting earlier findings that staged financing is important in venture capital financing. New shareholders invest when large amounts of funding are required and when risk and information asymmetries are high. We interpret these findings as support for the extended pecking order theory. In line with syndication arguments, new investors thus provide risk sharing opportunities and skills to screen and monitor and thereby reduce information asymmetries. New equity investors face adverse selection problems, however, in that only the most risky investments are syndicated.
    Keywords: financing strategy, venture capital, bank debt, external shareholders
    JEL: G32
    Date: 2006–03–27
  34. By: Ettore Damiano; Hao Li; Wing Suen;
    Abstract: This paper considers a model of a rating agency with multiple clients. ach client has a separate market (end-user of the rating); the only connection among them is that the underlying qualities of the clients are correlated. In the benchmark case of individual rating, the market for each client does not know the ratings for other clients. In centralized rating, the agency rates all clients together and shares the rating information among all markets. In decentralized rating, the ratings are again shared among all markets, but each client is rated by a self-interested rater of the agency with no access to the quality information of other clients. Both centralized rating and decentralized rating weakly dominate individual rating for the agency. When the underlying qualities are weakly correlated, centralized rating can dominate decentralized rating, but the reverse holds when the qualities are strongly correlated.
  35. By: John C. Bluedorn (Nuffield College, Oxford University); Christopher Bowdler (Nuffield College, Oxford University)
    Abstract: We argue that endogenous and anticipated movements in interest rates lead to underestimates of the speed and magnitude of the exchange rate response to monetary policy. Employing the Romer and Romer (2004) exogenous monetary policy shock measure, we find that the effect of a one percentage point increase in the U.S. interest rate is up to twice as large and 3 times as fast as that obtained using the actual federal funds rate to identify monetary shocks. Moreover, new evidence from open economy VARs emphasises the adjustment role of the exchange rate. U.S. prices and output respond almost twice as quickly as they do in a closed economy VAR using the Romer and Romber shock measure. There is also evidence of stronger international transmission of U.S. monetary shocks. Overall, the estimated response speeds and magnitudes are more easily reconciled with existing models than previous empirical work.
    Keywords: monetary policy shocks, exchange rate dynamics, open economy VARs
    JEL: E52 F31 F41
    Date: 2005–08–01
  36. By: Leon, Hyginus; Sarno, Lucio; Valente, Giorgio
    Abstract: We provide empirical evidence that deviations from the uncovered interest rate parity (UIP) condition display significant nonlinearities, consistent with theories based on transactions costs or limits to speculation. This evidence suggests that the forward bias documented in the literature may be less indicative of major market inefficiencies than previously thought. Monte Carlo experiments allow us to reconcile these results with the large empirical literature on the forward bias puzzle since we show that, if the true process of UIP deviations were of the nonlinear form we consider, estimation of conventional spot-forward regressions would generate the anomalies documented in previous research.
    Keywords: foreign exchange; forward bias; nonlinearity; uncovered interest parity
    JEL: F31
    Date: 2006–03
  37. By: Suhejla Hoiti; Esfandiar Maasoumi; Michael McAleer; Daniel Slottje
    Abstract: As U.S. Treasury securities carry the full faith and credit of the U.S. government, they are free of default risk. Thus, their yields are risk-free rates of return, which allows the most recently issued U.S. Treasury securities to be used as a benchmark to price other fixedincome instruments. This paper analyzes the time series properties of interest rates on U.S. Treasury benchmarks and related debt instruments by modelling the conditional mean and conditional volatility for weekly yields on 12 Treasury Bills and other debt instruments for the period 8 January 1982 to 20 August 2004. The conditional correlations between all pairs of debt instruments are also calculated. These estimates are of interest as they enable an assessment of the implications of modelling conditional volatility on forecasting performance. The estimated conditional correlation coefficients indicate whether there is specialization, diversification or independence in the debt instrument shocks. Constant conditional correlation estimates of the standardized shocks indicate that the shocks to the first differences in the debt instrument yields are generally high and always positively correlated. In general, the primary purpose in holding a portfolio of Treasury Bills and other debt instruments should be to specialize on instruments that provide the largest returns. Tests for Stochastic Dominance are consistent with these findings, but find somewhat surprising rankings between debt instruments with implications for portfolio composition. 30 year treasuries, Aaa bonds and mortgages tend to dominate other instruments, at least to the second order.
    Keywords: Treasury bills, debt instruments, risk, conditional volatility, conditional correlation, asymmetry, specialization, diversification, independence, forecasting.
    Date: 2005–10
  38. By: Enzo Giacomini; Michael Handel; Wolfgang K. Härdle
    Abstract: Risk management and the thorough understanding of the relations between financial markets and the standard theory of macroeconomics have always been among the topics most addressed by researchers, both financial mathematicians and economists. This work aims at explaining investors’ behavior from a macroeconomic aspect (modeled by the investors’ pricing kernel and their relative risk aversion) using stocks and options data. Daily estimates of investors’ pricing kernel and relative risk aversion are obtained and used to construct and analyze a three-year long time-series. The first four moments of these time-series as well as their values at the money are the starting point of a principal component analysis. The relation between changes in a major index level and implied volatility at the money and between the principal components of the changes in relative risk aversion is found to be linear. The relation of the same explanatory variables to the principal components of the changes in pricing kernels is found to be log-linear, although this relation is not significant for all of the examined maturities.
    Keywords: risk aversion, pricing kernels, time dependent preferences
    JEL: C13 C22 G12
    Date: 2006–03
  39. By: Basak, Suleyman; Pavlova, Anna; Shapiro, Alex
    Abstract: Money managers are rewarded for increasing the value of assets under management, and predominantly so in the mutual fund industry. This gives the manager an implicit incentive to exploit the well-documented positive fund-flows to relative-performance relationship by manipulating her risk exposure. In a dynamic portfolio choice framework, we show that the ensuing convexities in the manager's objective give rise to a finite risk-shifting range over which she gambles to finish ahead of her benchmark. Such gambling entails either an increase or a decrease in the volatility of the manager's portfolio, depending on her risk tolerance. In the latter case, the manager reduces her holdings of the risky asset despite its positive risk premium. Our empirical analysis lends support to the novel predictions of the model. Under multiple sources of risk, with both systematic and idiosyncratic risks present, we show that optimal managerial risk shifting may not necessarily involve taking on any idiosyncratic risk. Costs of misaligned incentives to investors resulting from the manager's policy are demonstrated to be economically significant.
    Keywords: fund flows; implicit incentives; portfolio choice; relative performance; risk management; risk taking
    JEL: D60 D81 G11 G20
    Date: 2006–03
  40. By: Reichlin, Pietro
    Abstract: I study the constrained efficient allocations of a simple model of risk sharing and capital flows across countries assuming that each country cannot commit to fully repay its contract obligations. In the model, the degree of risk sharing and the amount of investment are interdependent. It is shown that, when individual rationality constraints are binding, the variance of consumption in any given country across states of nature (iid across countries) may be a non monotonic function of income: low in the early stage of development, high in an intermediate range and converging to zero as income converges to a high income level. A monotonically decreasing consumption variance can only obtain if the social welfare function assigns equal weights to all countries (equal treatment). The model also shows that a structure of competitive financial markets with appropriate borrowing constraints may not be sufficient to decentralize the constrained efficient allocation. A supernational authority forcing a specific redistribution of income within poorly capitalized countries may be necessary for decentralization.
    Keywords: financial intermediation; moral hazard
    JEL: A10 D80 G10 O17
    Date: 2006–03
  41. By: Takatoshi Ito (Faculty of Economics, University of Tokyo); Yuko Hashimoto (Faculty of Economics, Toyo University)
    Abstract: This paper examines intra-day patterns of the exchange rate behavior, using the "firm" bid-ask quotes and transactions of USD-JPY (Alec: The EBS notations define the base currency as the first currency in the name of the currency pair. Note that trading in EBS is done in millions of the base currency) and Euro-USD pairs recorded in the electronic broking system of the spot foreign exchange markets. The U-shape of intra-day activities is confirmed for Tokyo and London participants, but not for New York participants. Activities (deals and price changes) do not increase toward the end of business hours in the New York market, even on Fridays (ahead of weekend hours of non-trading). It is generally observed a negative correlation between the number of deals and the width of bid-ask spread during business hours, but in the first business minutes of Tokyo, bid-ask spread and activities have high correlation. It is also found that the concentration of transaction during overlapping business hours between Tokyo and London markets (London and New York markets) may arise from heterogeneous expectations among participants from different regions, that is waking up of participants of the next region in time line of the day.
    Date: 2006–03
  42. By: Helge Berger
    Abstract: The paper discusses key elements of optimal central bank design and applies its findings to the Eurosystem. A particular focus is on the size of monetary policy committees, the degree of centralization, and the representation of relative economic size in the voting rights of regional (or sectoral) interests. Broad benchmarks for the optimal design of monetary policy committees are derived, combining relevant theoretical arguments with available empirical evidence. A new indicator compares the mismatch of relative regional economic size and voting rights in the monetary policy committees of the US Fed, the pre-1999 German Bundesbank, and the ECB over time. Based on these benchmarks, there seems to be room to improve the organization of the ECB Governing Board and current plans for reform.
    Keywords: central bank design, federal central banks, ECB, Eurosystem, ECB reform
    JEL: D72 E58
    Date: 2006
  43. By: Kjellberg, David (Department of Economics)
    Abstract: To evaluate measures of expectations I examine and compare some of the most common methods for capturing expectations: the futures method which utilizes financial market prices, the VAR forecast method, and the survey method. I study average expectations on the Federal funds rate target, and the main findings can be summarized as follows: i) the survey measure and the futures measure are highly correlated; the correlation coefficient is 0.81 which indicates that the measures capture the same phenomenon, ii) the survey measure consistently overestimates the realized changes in the interest rate, iii) the VAR forecast method shows little resemblance with the other methods.
    Keywords: Interest rates; expectations; futures; VAR forecasts; survey data
    JEL: E43 E44 E47
    Date: 2006–02
  44. By: Rocha, Roberto; Impavido, Gregorio
    Abstract: The performance of the Hungarian second pillar since inception has been mixed. This is partly due to a less than satisfactory support for the 1997 pension reform, conservative fund portfolio distributions, the hybrid nature of the mandatory pension fund system, the segmented nature of the market in terms of costs, and a less than aggressive commitment on the part of the Hungarian Financial Supervisory Authority to a low-cost, transparent, and competitive equilibrium. In the accumulation phase, the authorities would need to further promote transparency and comparability of information on costs and investment performance, facilitate migration to lower cost funds, and more generally promote competition. The reg ulatory framework of the payout phase needs to be overhauled before the first cohort of workers retires.
    Keywords: Investment and Investment Climate,Economic Theory & Research,Economic Stabilization,Financial Intermediation,Settlement of Investment Disputes
    Date: 2006–04–01
  45. By: Moritz Schularick; Thomas Steger
    Abstract: Does international financial integration boost economic growth? The question has been discussed controversially for a long time. As of yet, robust evidence for a positive impact is lacking (Edison et al., 2002). However, there is substantial narrative evidence from economic history that highlights the contribution European capital made to economic growth of peripheral economies before 1914. We have compiled the first comprehensive data set to test this hypothesis. The main finding is that there was indeed a significant and robust growth effect. Our theoretical explanation stresses property rights protection as a prerequisite for the standard neoclassical model to work properly.
    Keywords: international financial integration, economic growth, first era of globalization
    JEL: F15 F21 F30 N10 N20 O11 O16
    Date: 2006
  46. By: Pijoan-Mas, Josep
    Abstract: Habit formation has been proposed as a possible solution to the equity premium puzzle. This paper extends the class of models that support the habits explanation in order to account for heterogeneity in earnings, wealth, habits and consumption. I find that habit formation does indeed increase the equity premium. However, contrary to earlier results, the habit hypothesis does not imply a price for risk as big as the one measured in the data. There are three reasons for this. First, households in a habits economy modify their consumption/savings decision. Second, they modify their portfolio choice. These two changes in behavior diminish the consumption fluctuations faced by households. And third, the composition of the set of agents pricing risk in the economy changes so that relatively better self-insured households end up pricing risk.
    Keywords: equity premium; habit formation; incomplete markets
    JEL: C68 D52 E21 G12
    Date: 2006–03
  47. By: Coricelli, Fabrizio; Mucci, Fabio; Revoltella, Debora
    Abstract: Retail lending grew very fast in the New Europe region in the last years, prompting a debate on whether such a rapid growth can be considered sustainable. This paper investigates the main determinants of retail lending growth throughout the region. It tries to identify episodes of credit boom and analyzes the possible correlation between such booms, consumption booms and a country external account position. Estimating an aggregate consumption function, under the assumption of liquidity-constrained households, the paper finds that current trends in household credit markets largely reflect an equilibrium phenomenon, in which household credit increases rapidly from extremely low initial levels, in the context of a relaxation of liquidity constraints. The rate of growth of credit responds to changing market conditions on the supply side and to good prospects for income growth. In such an environment, loosening credit market conditions can have sizable effects on consumption, which, in some cases may create macroeconomic imbalances, both in terms of current account deficits and inflationary pressures.
    Keywords: credit booms; household credit; new members of the European Union
    JEL: D14 E21 E44
    Date: 2006–03
  48. By: Patrícia Teixeira Lopes (Faculdade de Economia, Universidade do Porto); Lúcia Lima Rodrigues (School of Management and Economics, University of Minho)
    Abstract: This paper analyzes the determinants of disclosure level in the accounting for financial instruments of Portuguese listed companies. We have constructed an index of disclosure based on IAS 32 and 39 disclosure requirements and computed the index score for each company. Consequently, this study also analyzes the characteristics of companies that are closest to IAS before 2005. The analysis includes variables that capture intrinsic features of Portuguese companies and institutional regulatory context, such as capital structure and characteristics of the corporate governance structure, within contingency theory. We could not find significant influence of corporate governance structure and of financing structure. We conclude that disclosure degree is significantly related to size, type of auditor, listing status and to the economic sector. This research reveals areas for improvement of the Portuguese companies’ reporting practices and suggests areas for intervention of the Portuguese capital markets regulator in the context of mandatory IAS after 2005.
    Keywords: Financial instruments accounting, Disclosure indices, Firm-specific characteristics, International Accounting, IAS, Portugal
    JEL: M41
    Date: 2006–04
  49. By: Helge Berger; Jakob de Haan; Jan-Egbert Sturm
    Abstract: We examine the role of money in the policies of the ECB, using introductory statements of the ECB President at the monthly press conferences during 1999-2004. Over time, the relative amount of words devoted to the monetary analysis has decreased. Our analysis of indicators of the monetary policy stance suggests that developments in the monetary sector, while somewhat more important in the later half of the sample, only played a minor role most of the time. Our estimates of ECB interest rate decisions suggest that the ECB’s words (monetary-sector based policy intensions) are not an important determinant of its actions.
    Keywords: ECB, communication, monetary policy
    JEL: E43 E52 E58
    Date: 2006
  50. By: Kollmann, Robert
    Abstract: This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a country's foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions.
    Keywords: consumption and portfolio home bias; current account; international portfolio holdings
    JEL: F2 F3 G1
    Date: 2006–02
  51. By: Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
    Abstract: Three of the most important recent facts in global macroeconomics - the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio - appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) hetero- geneity in these regions’ capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.
    Keywords: capital flows; current account deficits; exchange rates; FDI; global portfolios and equilibrium; growth and financial development asymmetries; interest rates; intermediation rents
    JEL: E0 F3 F4 G1
    Date: 2006–03
  52. By: Limão, Nuno; Saggi, Kamal
    Abstract: We 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. We 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. We 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: bonds; concessions; dispute settlement; monetary fines; reciprocity; tariffs; WTO
    JEL: F12 F23
    Date: 2006–03
  53. By: Herbert Brücker (IAB Nuremberg, ICER Torino and IZA Bonn); Philipp J. H. Schröder (Aarhus School of Business and DIW Berlin)
    Abstract: International migration is characterized by two puzzling facts: First, only a small share of the population tends to migrate although substantial and persisting income differences across countries exist. Second, net migration rates tend to cease over time despite persisting income differences. This paper addresses these issues in a migration model with heterogeneous agents that features temporary migration. In equilibrium a positive relation exists between the stock of migrants and the income differential, while the net migration flow becomes zero. Consequently, existing empirical migration models, estimating net migration flows instead of stocks, may be misspecified. This suspicion appears to be confirmed by our empirical investigation of the cointegration relationships of German migration stocks and flows since 1967. We find that (i) panel-unit root tests reject the hypothesis that migration flows and the explanatory variables are integrated of the same order, while migration stocks and the explanatory variables are all I(1) variables, and (ii) the hypothesis of cointegration cannot be rejected for the stock model.
    Keywords: international migration, temporary migration, panel cointegration
    JEL: F22 C23 C53
    Date: 2006–03
  54. By: Silke Brandts (Goethe University Frankfurt); Christian Laux (Goethe University Frankfurt)
    Abstract: We provide a novel benefit of "Alternative Risk Transfer" (ART) products with parametric or index triggers. When a reinsurer has private information about his client's risk, outside reinsurers will price their reinsurance offer less aggressively. Outsiders are subject to adverse selection as only a high-risk insurer might find it optimal to change reinsurers. This creates a hold-up problem that allows the incumbent to extract an information rent. An information-insensitive ART product with a parametric or index trigger is not subject to adverse selection. It can therefore be used to compete against an informed reinsurer, thereby reducing the premium that a low-risk insurer has to pay for the indemnity contract. However, ART products exhibit an interesting fate in our model as they are useful, but not used in equilibrium because of basis-risk.
    Keywords: Cat Bonds, Risk Transfer, Index Trigger, Adverse Selection
    JEL: D82 G22
    Date: 2005–01–21
  55. By: Lettau, Martin; Ludvigson, Sydney; Wachter, Jessica
    Abstract: Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomic risk, or the volatility of the aggregate economy. Empirically, we find a strong correlation between low frequency movements in macroeconomic volatility and low frequency movements in the stock market. To model this phenomenon, we estimate a two-state regime switching model for the volatility and mean of consumption growth, and find evidence of a shift to substantially lower consumption volatility at the beginning of the 1990s. We then use these estimates from post-war data to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption growth. Plausible parameterizations of the model are found to account for a significant portion of the run-up in asset valuation ratios observed in the late 1990s.
    Keywords: equity premium; macroeconomic volatility; regime shifts; stock market boom
    JEL: G12
    Date: 2006–03
  56. By: Faia, Ester; Monacelli, Tommaso
    Abstract: We analyze optimal monetary policy in a small open economy characterized by home bias in consumption. Peculiar to our framework is the application of a Ramsey-type analysis to a model of the recent open economy New Keynesian literature. We show that home bias in consumption is a sufficient condition for inducing monetary policy-makers of an open economy to deviate from a strategy of strict markup stabilization and contemplate some (optimal) degree of exchange rate stabilization. We focus on the optimal setting of policy both in the case in which firms set prices one period in advance as well as in the case in which firms set prices in a dynamic forward-looking fashion. While the first setup allows us to analytically highlight home bias as an independent source of equilibrium markup variability, the second setup allows us to study the effects of future expectations on the optimal policy problem and the effect of home bias on optimal inflation volatility. The latter, in particular, is shown to be related to the degree of trade openness in a U-shaped fashion, whereas exchange rate volatility is monotonically decreasing in openness.
    Keywords: home bias; optimal monetary policy; Ramsey planner; sticky prices
    JEL: E52 F41
    Date: 2006–03
  57. By: Aoki, Kosuke
    Abstract: This paper considers the determination of aggregate price level under dispersed information. Central Bank sets policy in response to its noisy measure of the price level, and each agent makes its decisions by observing a subset of data. Information revealed to the agents and Bank is determined endogenously. It is shown that the aggregate state of the economy is not revealed perfectly to anybody but this economy behaves as if it is a representative-agent economy in which the representative agent has perfect information while the Bank has partial information. The Bank has information set affects fluctuations in the price level through its effect on policy.
    Keywords: monetary policy; uncertainty
    JEL: E52 E58
    Date: 2006–03
  58. By: Luis Fernando Melo Velandia; Oscar Reinaldo Becerra Camargo
    Abstract: Este documento estudia una parte relevante del mecanismo de transmisión de la política monetaria asociado con el crédito bancario. Con tal objeto se estima un modelo VARXGARCH multivariado para establecer la relación, en frecuencia diaria, entre dos tasas de interés de corto plazo, la CDT y la TIB y una de las tasas de intervención del Banco de la República, la tasa de subasta de expansión, SEXP, en el periodo enero de 2001 - septiembre de 2005. Este tipo de modelos tiene la ventaja de que no solo incorpora las interacciones entre los niveles (o variaciones) de estas series, si no que también modela las relaciones entre las volatilidades de las variables endógenas del modelo. Posteriormente, se realizan análisis de impulso respuesta en niveles (IRF y MA) y en volatilidades (VIRF). En niveles, se encuentra que la variable que más responde a choques sobre variables endógenas y exógenas del modelo, es la TIB. La respuesta de la tasa CDT ante un choque de 100 puntos básicos (p.b.) en SEXP oscila alrededor de 7 p.b., mientras que la respuesta de la TIB ante ese mismo choque es inicialmente de 68 p.b. y finalmente se estabiliza en 38 p.b.. Sin embargo, cuando se consideran muestras más recientes el efecto de SEXP sobre la TIB aumenta, lo cual indica una relación más estrecha entre los instrumentos de política y la meta operativa del BR. Para la muestra 2003-2005 la respuesta de la TIB a un choque en SEXP es inicialmente de 82 p.b. y converge a 56 p.b. Analizando los efectos cruzados, se observa que la respuesta de la TIB ante choques en la CDT es casi nula, mientras la CDT responde de manera significativa a choques en la TIB. Es así, como un aumento de 100 p.b. en la TIB incrementa aproximadamente 8.5 p.b. la tasa CDT. Todos estos efectos son permanentes. El análisis VIRF es realizado para diferentes tipos de choques. Sin embargo, los resultados muestran que no existen patrones claramente diferenciables para los distintos tipos de choques analizados. Esto indica que con respecto a otros tipos de choques, los que realiza el Banco Central a través de cambios en la tasa de subasta de expansión no afectan de manera diferente las volatilidades de las series. También se encuentra que en términos de volatilidad la variable que presenta una mayor respuesta ante diferentes choques al igual que en choques en niveles es la TIB, con un efecto aproximado de tres meses. Adicionalmente, al comparar los efectos sobre la volatilidad de la TIB con los de la CDT, se observa que aunque la magnitud de respuesta de la volatilidad de la tasa CDT es menor, su persistencia es más alta.
    Date: 2006–02–28
  59. By: Miquel Faig; Pauline Shum
    Abstract: This is an empirical study of the determinants of stock holdings using data from the U.S. Survey of Consumer Finances from 1992 to 2001. There is a great heterogeneity in the way households form their portfolios. Stock ownership is positively correlated with various measures of wealth, age, retirement savings, and having sought financial advice. It is negatively correlated with holdings of alternative risky investments, such as investments in private businesses, and with the willingness to undertake non-financial investments in the future. While we can predict reasonably well who holds stocks, we have less predictive power about the share of stocks owned by those who hold positive amounts.
    Keywords: Portfolio choice, stock holdings, consumer finances.
    JEL: G11
  60. By: Alos-Ferrer, Carlos; Kirchsteiger, Georg; Walzl, Markus
    Abstract: This paper analyses a situation where market designers create new trading platforms and traders learn to select among them. We ask whether 'Walrasian' platforms, leading to market-clearing trading outcomes, will dominate the market in the long run. If several market designers are competing, we find that traders will learn to select non-market clearing platforms with prices systematically above the market-clearing level, provided at least one such platform is introduced by a market designer. This in turn leads all market designers to introduce such non-market clearing platforms. Hence platform competition induces non-competitive market outcomes.
    Keywords: asymmetric rationality; evolution of trading platforms; learning; market institutions
    JEL: C72 D4 D83 L1
    Date: 2006–03
  61. By: Gebhardt, Georg; Schmidt, Klaus M.
    Abstract: When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.
    JEL: G32 G24 D23
    Date: 2006–03
  62. By: Chin-Shien Lin (National Chung Hsing University); Haider A. Khan (GIGS, University of Denver); Ying-Chieh Wang (Providence University); Ruei-Yuan Chang (Providence University)
    Abstract: This paper presents a hybrid model for predicting the occurrence of currency crises by using the neuro fuzzy modeling approach. The model integrates the learning ability of neural network with the inference mechanism of fuzzy logic. The empirical results show that the proposed neuro fuzzy model leads to a better prediction of crisis. Significantly, the model can also construct a reliable causal relationship among the variables through the obtained knowledge base. Compared to the traditionally used techniques such as logit, the proposed model can thus lead to a somewhat more prescriptive modeling approach towards finding ways to prevent currency crises.
    Date: 2006–04
  63. By: Hernando Vargas Herrera; Dpto de Estabilidad Financiera
    Abstract: El presente trabajo ilustra cómo los altos niveles de deuda pública, a través de los riesgos de mercado, pueden convertirse en una restricción para la ejecución de la política monetaria. Dependiendo de donde se financie el sector público, un nivel grande de deuda pública se refleja en una importante exposición de éste al riesgo cambiario y/o en una exposición sustancial del sistema financiero a los riesgos de mercado. Ante esta situación, un choque a la cuenta de capitales que genere una fuerte depreciación de la moneda y una caída en los precios de los títulos de deuda pública podría restringir las acciones de la autoridad monetaria. Una política restrictiva encaminada a cumplir las metas inflacionarias podría generar pérdidas importantes por valoración en el portafolio de las instituciones financieras, afectando de esta manera la estabilidad del sistema. El documento discute por qué los riesgos de mercado de la deuda pública son un problema latente en Colombia a la vez que se discute cómo podría responder el banco central ante una salida de capitales.
    Keywords: Política monetaria, riesgos de mercado.
    JEL: E44 E52
  64. By: Svensson, Roger (The Research Institute of Industrial Economics)
    Abstract: External financing is important when inventors and small technology-based firms wish to commercialize their inventions. However, it is likely that problems related to adverse selection and moral hazard are present, and market failures occur, since inventors know more about the inventions than do potential external financiers. To overcome these problems, the Swedish Government has intervened in the market by offering loans with different terms to firms and inventors. Using a unique database on Swedish patents owned by individuals and small firms, this paper analyzes how different forms of external financing influence the outcome when patents are commercialized. The estimations show that projects with soft government financing in the R&D-phase have a significantly worse performance than projects without such financing, whereas projects with more market-oriented government loans perform as the average. Distinguishing between governmental financing alternatives with different terms makes it possible to draw the conclusion that government failure primarily depends on bad financing terms, rather than bad choices of projects. A policy implication is therefore that government institutions should make their loans more market-oriented already in the R&D-phase.
    Keywords: Patents; Commercialization; Innovations; Outcome; External Financing; Government Intervention
    JEL: G30 O31 O38
    Date: 2006–02–28
  65. By: von Hagen, Jürgen; Zhou, Jizhong
    Abstract: The choice of the exchange rate regime and the capital account regime are among the core macro economic policy decisions for developing countries, with important repercussions for a country's macro economic stability, ability to attract foreign capital, and international trade. Existing literature has considered the determinants of these decisions, taking the capital account regime as given when considering the exchange rate regime and vice versa. This paper provides an empirical analysis of the interaction between the two regime choices treating both as simultaneously endogenous. Using a panel data set for developing countries in the 1980s and 1990s, we estimate a simultaneous-equations panel mixed logit model for the joint determination of both choices. We find strong influences from the official, de jure exchange rate regime on capital account policies, but only weak feedback effects. Using de-facto exchange rate regimes, the influences in both directions are similar to each other.
    Keywords: capital controls; exchange rate regimes; panel mixed logit model; simultaneous equations model
    JEL: C33 C35 F20 F33
    Date: 2006–03
  66. By: Linda S. Goldberg; José Manuel Campa
    Abstract: Border prices of traded goods are highly sensitive to exchange rates, but the CPI, and the retail prices of these goods, are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5 percent, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass through into CPIs is expected to be closer to 15 percent.
    JEL: F3 F4
    Date: 2006–03
  67. By: Jayasri Dutta, Colin Rowat
    Abstract: We study extinction in a commons problem in which agents have access to capital markets. When the commons grows more quickly than the interest rate, multiple equilibria are found for intermediate commons endowments. In one of these, welfare decreases as the resource becomes more abundant, a `resource curse'. As marginal extraction costs become constant, market access instantly depletes the commons. Without markets - the classic environment - equilibria are unique; extinction dates and welfare increase with the endowment. When the endowment is either very abundant or very scarce, market access improves welfare. As marginal costs of extraction from the commons become constant, market access can reduce welfare if the subjective discount rate exceeds the world interest rate.
    Keywords: commons, capital markets, perfect foresight, extinction, resource curse, storage
    JEL: C73 D91 O17 Q21
    Date: 2006–03
  68. By: Yin-Wong Cheung
    Abstract: We construct an empirical model for daily highs and daily lows of US stock indexes based on the intuition that highs and lows do not drift apart over time. Our empirical results show that daily highs and lows of three main US stock price indexes are cointegrated. Data on openings, closings, and trading volume are found to offer incremental explanatory power for variations in highs and lows within the VECM framework. With all these variables, the augmented VECM models explain 40% to 50% of variations in daily highs and lows. The generalized impulse response analysis shows that the responses of daily highs and daily lows to the shocks depend on whether data on openings, closings, and trading volume are included in the analysis.
    Keywords: high, low open, close, trading volume, VECM model
    JEL: C32 G10
    Date: 2006
  69. By: Pinar Ayse Yesin (Study Center Gerzensee)
    Abstract: In a simple cash-credit model, I study the effects of the combination of costly tax collection and tax evasion on fiscal and monetary policy for optimal resource allocation. Allowing the informal sector to use cash more intensively than the formal sector, I compute the optimal interest and tax rates for eleven OECD countries to finance their exogeneously given government spending. A comparison of the actual and optimal interest rates reveals that tax collection costs and tax evasion together can partly explain the cross-country differences in monetary policy, also rationalizing deviations from the Friedman Rule in the long-run.
    Date: 2006–01
  70. By: Imen Bentahar; Bruno Bouchard
    Abstract: We study the problem of finding the minimal initial capital needed in order to hedge without risk a barrier option when the vector of proportions of wealth invested in each risky asset is constraint to lie in a closed convex domain. In the context of a Brownian diffusion model, we provide a PDE characterization of the super-hedging price. This extends the result of Broadie, Cvitanic and Soner (1998) and Cvitanic, Pham and Touzi (1999) which was obtained for plain vanilla options, and provides a natural numerical procedure for computing the corresponding super-hedging price. As a by-product, we obtain a comparison theorem for a class of parabolic PDE with relaxed Dirichet conditions involving a constraint on the gradient.
    Keywords: Super-replication, barrier options, portfolio constraints, viscosity solutions
    JEL: C60 G13
    Date: 2006–03
  71. By: Mauricio Avella Gómez
    Abstract: El acceso de Colombia y otros países latinoamericanos al financiamiento externo durante el siglo XX estuvo dominado por fases alternas de auge y receso en los mercados internacionales de capitales. Las relaciones entre los acreedores y los deudores fueron afectadas frecuentemente por el incumplimiento de los compromisos contractuales, incluyendo la cesación de pagos. Pero las renegociaciones, en unos casos, o los acercamientos entre acreedores y deudores, en otros, constituyeron el mecanismo mediante el cual se restableció la relación de largo plazo entre acreedores y deudores.
  72. By: Burkart, Mike; Panunzi, Fausto
    Abstract: This paper reviews the existing literature on takeovers. Takeovers are a means to redeploy corporate assets more efficiently and to discipline incumbent management. However, an active market for corporate control also brings about potential inefficiencies. Takeovers may be undertaken for reasons other than value creation and the threat of a control change can induce inefficient actions on the part of target firm management and employees. The functioning of the market for corporate control is further impaired by incentive and coordination problems inherent in the takeover process. When the target firm is owned by many small shareholders, the free-rider problem prevents bidders firms from earning a profit on the tendered shares. We analyse implications of this problem as well as ways to overcome it. As widely held firms are atypical in many countries, we also discuss the impact that target ownership structure has on the incidence and efficiency of control transfers.
    Keywords: efficiency of control transfers; free-rider problem; takeovers
    JEL: G34
    Date: 2006–03
  73. By: Yannis Bilias (University of Cyprus); Dimitris Georgarakos (Goethe University Frankfurt); Michael Haliassos (Goethe University Frankfurt)
    Abstract: Wider participation in stockholding is often presumed to reduce wealth inequality. We measure and decompose changes in US wealth inequality between 1989 and 2001, a period of considerable spread of equity culture. Inequality in equity wealth is found to be important for net wealth inequality, despite equity's limited share. Our findings show that reduced wealth inequality is not a necessary outcome of the spread of equity culture. We estimate contributions of stockholder characteristics to levels and inequality in equity holdings, and we distinguish changes in configuration of the stockholder pool from changes in the influence of given characteristics. Our estimates imply that both the 1989 and the 2001 stockholder pools would have produced higher equity holdings in 1998 than were actually observed for 1998 stockholders. This arises from differences both in optimal holdings and in financial attitudes and practices, suggesting a dilution effect of the boom followed by a cleansing effect of the downturn. Cumulative gains and losses in stockholding are shown to be significantly influenced by length of household investment horizon and portfolio breadth but, controlling for those, use of professional advice is either insignificant or counterproductive.
    Keywords: Wealth distribution, inequality, stockholding, equity culture
    JEL: E21 G11
    Date: 2005–01–20
  74. By: Julian Pérez Amaya
    Abstract: Empleando un modelo de equilibrio general dinámico y estocástico para una economía pequeña y abierta con imperfecciones y rigideces en el sector no transable calibrado para Colombia, se estudia la conveniencia de que la autoridad monetaria fije como medida de inflación objetivo en su función de reacción la inflación total, la inflación doméstica o la inflación externa, en un contexto en el cual la fuente de las fluctuaciones proviene del sector externo y de choques en la productividad en cada uno de los sectores. Dada la existencia de una curva de Phillips aumentada por expectativas en el sector no transable, la política monetaria implica un trade-off entre la incertidumbre sobre la inflación y la variabilidad del producto. Se encuentra que este trade-off varía de acuerdo a la medida de inflación incluida en la función de reacción de la autoridad monetaria. Además, se encuentran los siguientes resultados: Una regla de tasa de interés que responde a la inflación no transable, es la más efectiva en reducir la variabilidad del producto, al costo de tener una inflación total más volátil que en los otros dos regímenes estudiados. En el caso de tener un régimen que responde a la inflación transable se genera más volatilidad en el producto con un nivel de volatilidad medio en la inflación. La política más efectiva para reducir la variabilidad de la inflación total, es aquella en que el banco central responde a la inflación total. Dado que este régimen genera una volatilidad media en el producto, puede ser considerado como el mejor régimen en términos de minimización de la variabilidad del producto y de la inflación total.
    Keywords: Inflación Objetivo; Economía Pequeña y Abierta; Modelos de Equilibrio General Estocástico y Dinámico; Colombia.
    JEL: E31 E32 E52 F41
  75. By: Pavlo Blavatskyy; Ganna Pogrebna
    Abstract: In the television show Affari Tuoi a contestant is endowed with a sealed box containing a monetary prize between one cent and half a million euros. In the course of the show the contestant learns more information about the distribution of possible monetary prizes inside her box. Consider two groups of contestants, who learned that the chances of their boxes containing a large prize are 20% and 80% correspondingly. Contestants in both groups receive qualitatively similar price offers for selling the content of their boxes. If contestants are less risk averse when facing unlikely gains, the price offer is likely to be more frequently rejected in the first group than in the second group. However, the fraction of rejections is virtually identical across two groups. Thus, contestants appear to have identical risk attitudes over (large) gains of low and high probability.
    Keywords: risk attitude, risk aversion, risk seeking, natural experiment
    JEL: C93 D81
    Date: 2006–03
  76. By: Michel Lelart (LEO - Laboratoire d'économie d'Orleans - - [CNRS : UMR6221] - [Université d'Orléans] - [])
    Abstract: Les années 80 ont été marquées par l'émergence de la finance informelle. Depuis quelques années c'est la microfinance que l'on voit apparaître et progresser dans la plupart des pays en voie de développement, en Afrique, en Asie, en Amérique latine... <br /><br />Cet article s'interroge sur les raisons de cette évolution et de la montée en puissance des institutions de microfinance. Il analyse quelques-uns des problèmes posés par les nouvelles institutions : quelle réglementation leur appliquer, quelles peuvent être leurs relations avec les banques et leur place au sein des systèmes financiers...?
    Keywords: Finance informelle ; micro-finance ; micro-crédit
    Date: 2006–03–30
  77. By: Fernando Tenjo G.; Enrique López E.; Nancy Zamudio
    Abstract: Este estudio profundiza sobre la forma como las empresas colombianas fueron afectadas y respondieron a la crisis de finales de la década pasada en términos de su estructura de financiamiento. Para ello, se ha adoptado una metodología que se caracteriza por tres elementos: (i) tiene como eje del análisis de las finanzas de las empresas colombianas entre 1996 y 2002 la evolución de su estructura de capital; (ii) estudia esta evolución a la luz de teorías sobre los determinantes de dicha estructura y su relevancia para el país; (iii) se apoya en una estrategia de análisis empírico que permita identificar diferencias de comportamiento tanto entre empresas como en el tiempo.
    Keywords: economía financiera. Finanzas corporativas y gobernabilidad. Política financiera. Estructura de capital y de propiedad.
  78. By: Neil A. Doherty (The Wharton School, University of Pennsylvania); Alexander Muermann (The Wharton School, University of Pennsylvania)
    Abstract: How do markets spread risk when events are unknown or unknowable and where not anticipated in an insurance contract? While the policyholder can "hold up" the insurer for extra contractual payments, the continuing gains from trade on a single contract are often too small to yield useful coverage. By acting as a repository of the reputations of the parties, we show the brokers provide a coordinating mechanism to leverage the collective hold up power of policyholders. This extends both the degree of implicit and explicit coverage. The role is reflected in the terms of broker engagement, specifically in the ownership by the broker of the renewal rights. Finally, we argue that brokers can be motivated to play this role when they receive commissions that are contingent on insurer profits. This last feature questions a recent, well publicized, attack on broker compensation by New York attorney general, Elliot Spitzer.
    Keywords: Incomplete Insurance Contracts, Brokerage, Contingent Commissions, Reputation
    JEL: G22 G24 L14
    Date: 2005–01–24
  79. By: Michel Lelart (LEO - Laboratoire d'économie d'Orleans - - [CNRS : UMR6221] - [Université d'Orléans] - [])
    Abstract: Il s'agit du premier titre d'une nouvelle collection "Savoirs Francophones" ouverte par l'Agence Universitaire de la Francophonie pour accueillir les travaux, individuels ou collectifs, des chercheurs du Nord et du Sud impliqués dans les différents réseaux de l'Agence.<br />La microfinance est au premier plan de l'actualité avec la décision de l'ONU de faire de l'année 2005 l'année du micro-crédit. On ne parlait ni de l'un ni de l'autre il y a vingt ans. Quelques chercheurs s'intéressaient pourtant à la finance dans les pays du Sud. Que s'est-il passé pour que ces nouveaux concepts arrivent aussi rapidement au premier plan de l'actualité ? Que recouvrent-ils exactement, et quels problèmes rencontrent les institutions qui se sont engouffrées dans ce nouveau créneau ?<br />Ce petit ouvrage voudrait être une introduction à la microfinance : D'où vient-elle ? Comment s'est-elle développée jusqu'à ce jour ? Où va-t-elle et comment peut-elle évoluer ?
    Keywords: microfinance
    Date: 2006–03–30
  80. By: Flandreau, Marc; Jobst, Clemens
    Abstract: Using a new database for the late 19th century, when the pound sterling circulated all over the world, this paper provides the first review of critical empirical issues in the economics of international currencies. First, we report evidence in favor of the search-theoretic approach to international currencies. Second, we give empirical support to strategic externalities. Third, we provide strong confirmation of the existence of persistence. Finally, we reject the view that the international monetary system is subject to pure path dependency in that it cannot remain locked into some past equilibrium. Our conclusion is that, for the late 19th century at least, money and trade were complements.
    Keywords: dollar; international currencies; persistence; search theoretic approach to money; sterling; strategic externalities
    JEL: F31 N32
    Date: 2006–03
  81. By: M. Hashem Pesaran; Davide Pettenuzzo; Allan Timmermann
    Abstract: Present value calculations require predictions of cash flows both at near and distant future points in time. Such predictions are generally surrounded by considerable uncertainty and may critically depend on assumptions about parameter values as well as the form and stability of the data generating process underlying the cash flows. This paper presents new theoretical results for the existence of the infinite sum of discounted expected future values under uncertainty about the parameters characterizing the growth rate of the cash flow process. Furthermore, we explore the consequences for present values of relaxing the stability assumption in a way that allows for past and future breaks to the underlying cash flow process. We find that such breaks can lead to considerable changes in present values.
    Keywords: present value, stock prices, structural breaks, Bayesian learning
    JEL: C11 G12 G22
    Date: 2006
  82. By: Michel Lelart (LEO - Laboratoire d'économie d'Orleans - - [CNRS : UMR6221] - [Université d'Orléans] - [])
    Abstract: L'environnement monétaire et financier s'est tellement modifié au niveau international qu'on ne parle plus d'un système comme de celui que gérait autrefois le Fonds Monétaire International. On évoque plutôt une « nouvelle architecture financière mondiale » au sein de laquelle la finance internationale est dominée par les marchés. Le FMI conserve la responsabilité d'en assurer une certaine régulation, c'est-à-dire d'instituer dans ce domaine une « bonne gouvernance ». Mais le Fonds est lui-même une institution qui fonctionne selon ses statuts, et ses statuts n'ont guère changé depuis soixante ans. C'est pourquoi on attend de lui qu'il s'applique à lui-même les principes d'une bonne gouvernance.
    Keywords: système monétaire international ; Fonds Monétaire International ; gouvernance ; régulation
    Date: 2006–03–30
  83. By: Amy Finkelstein; James Poterba
    Abstract: This paper proposes a new test for adverse selection in insurance markets based on observable characteristics of insurance buyers that are not used in setting insurance prices. The test rejects the null hypothesis of symmetric information when it is possible to find one or more such “unused observables” that are correlated both with the claims experience of the insured and with the quantity of insurance purchased. Unlike previous tests for asymmetric information, this test is not confounded by heterogeneity in individual preference parameters, such as risk aversion, that affect insurance demand. Moreover, it can potentially identify the presence of adverse selection, while most alternative tests cannot distinguish adverse selection from moral hazard. We apply this test to a new data set on annuity purchases in the United Kingdom, focusing on the annuitant’s place of residence as an “unused observable.” We show that the socio-economic status of the annuitant’s place of residence is correlated both with annuity purchases and with the annuitant’s prospective mortality. Annuity buyers in different communities therefore face different effective insurance prices, and they make different choices accordingly. This is consistent with the presence of adverse selection. Our findings also raise questions about how insurance companies select the set of buyer attributes that they use in setting policy prices. We suggest that political economy concerns may figure prominently in decisions to forego the use of some information that could improve the risk classification of insurance buyers.
    JEL: D82 G22
    Date: 2006–03
  84. By: John C. Bluedorn (Dept of Economcis, University of Oxford)
    Abstract: Hurricanes in the Caribbean and Central-America represent a natural experiment to test the intertemporal approach to current account determination. The intertemporal approach allows for the possibility of intertemporal trade, via international borrowing. Previous tests of intertemporal current account (ICA) models have typically relied upon the identification of shocks in a VAR framework with which to trace the current account response. Hurricane shocks represent exactly the kind of temporary, country-specific shock required by the theory, allowing for the intertemporal current account response to be estimated without recourse to a VAR shock decomposition. Using data on the economic damages attributable to a hurricane, I estimate the economy's response to a hurricane-induced capital shock within a fixed effects panel model. The current account response qualitatively conforms to the S-shaped response predicted by the theory, indicating that countries are engaging in intertemporal trade. However, the exact timing and magnitude of the response differs from a standard ICA model's smooth behavior. A hurricane which destroys capital valued at one year's GDP pushes the current account over GDP into deficit by 5 percentage points initially. 3-8 years after such a hurricane, the current account over GDP moves into surplus at 2.7 percentage points.
    Keywords: hurricanes, natural experiment, current account dynamics
    JEL: F32 F41
    Date: 2005–05–01
  85. By: von Hagen, Jürgen; Zhou, Jizhong
    Abstract: This paper uses a panel probit model with simultaneous equations to explain the joint determination of de facto and de jure exchange rate regimes in developing countries since 1980. We also derive an ordered-choice panel probit model to explain the causes of discrepancies between the two regime choices. Both models are estimated using simulation-based maximum likelihood methods. The results of the simultaneous equations model suggest that the two regime choices are dependent of each other and exhibit considerable state dependence. The ordered probit model provides evidence that regime discrepancies reflect an error-correction mechanism, and the discrepancies are persistent over time.
    Keywords: de facto exchange rate regimes; developing countries; simulated maximum likelihood; simultaneous equations model
    JEL: C35 F33 F41
    Date: 2006–03
  86. By: Fumagalli, Eileen; Vasconcelos, Helder
    Abstract: This paper proposes a sequential merger formation game with cost synergies to study how trade policy can influence firms' choice between domestic and cross-border mergers in an international Cournot oligopoly. We find that the equilibrium market structure depends heavily on: (i) the level of trade costs; and (ii) whether or not active antitrust authorities are incorporated within the sequential merger game. In addition, it is shown that whenever mergers occur in equilibrium, they occur in waves and the merger wave comprises at least one cross-border merger. We also analyze how the equilibrium market structures are affected by the presence of lobbying efforts.
    Keywords: endogenous mergers; merger waves; tariff-jumping FDI
    JEL: F10 F13 L13 L41
    Date: 2006–03
  87. By: Mette Ersbak Bang Nielsen
    Abstract: The paper develops a New Keynesian Small Open Economy Model charac- terized by external habit formation and Calvo price setting with dynamic in‡ation updating. The model is used to analyze the e¤ect of nominal ex- change rate targeting on optimal policy and impulse responses. It is found that even moderate exchange rate concerns are capable of changing both sign and magnitude of the optimal instrument response to variables, and that whether the concern is with respect to the level or …rst di¤erence has much impact on monetary policy. Also, the cost of exchange rate stabilization in terms of output and in‡ation is evident in the model, and impulse responses under moderate exchange rate targeting are not simple combinations of those under a ‡oat and a regime that cares almost only for meeting the exchange rate target.
    Date: 2006–01–01

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