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on Financial Markets |
| By: | Hernando Vargas; Rocío Betnacourt |
| Abstract: | The effects of the Pension Fund Managers (PFMs) behavior on the foreign exchange market may be important, given the increasing size of their portfolio and their possible market power. Some authors argue that when big investors like PFMs trade large volumes in the foreign exchange market, they may influence other agents’ decisions, increasing the impact of the PFMs’ actions on the exchange rate. However, when PFMs have market power, they will take into account their influence on the exchange rate and will moderate their trading volume. Hence, there might be a mitigating effect that reduces the pressure on the exchange rate. This paper seeks to demonstrate the existence of this effect under different theoretical foreign exchange market structures. |
| Keywords: | pension funds, foreign exchange market, market power. |
| JEL: | G23 F31 D43 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:391&r=fmk |
| By: | Meenagh, David; Minford, Patrick; Peel, David |
| Abstract: | A model of profits switches between four regimes with fixed probabilities; the rationally expected profits stream implies the stock market value. This efficient market model is not rejected by UK post-war time-series behaviour of either profits or the FTSE index. |
| Keywords: | efficient markets; rational expectations; regime switching; stock returns |
| JEL: | C15 C5 G14 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5614&r=fmk |
| 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. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002453&r=fmk |
| By: | Michael Bleaney; R. Todd Smith |
| Abstract: | The CAPM can explain closed-end fund (CEF) discounts as a consequence of the higher betas on CEF shares than on their underlying portfolios. The difference in betas is much greater for international funds and for bond funds than for domestic equity funds. CEF shares carry both more idiosyncratic risk (usually) and more systematic risk than their portfolios, and also exhibit excess volatility. The difference in betas reflects the sensitivity of CEF price returns to market returns, after controlling for portfolio returns. The influence of home market returns on international fund prices is particularly marked in UK funds. |
| URL: | http://d.repec.org/n?u=RePEc:not:notecp:06/04&r=fmk |
| By: | Cars Hommes (Faculty of Economics and Econometrics, Universiteit van Amsterdam) |
| Abstract: | Interacting agents in finance represent a behavioral, agent-based approach in which financial markets are viewed as complex adaptive systems consisting of many boundedly rational agents interacting through simple heterogeneous investment strategies, constantly adapting their behavior in response to new information, strategy performance and through social interactions. An interacting agent system acts as a noise filter, transforming and amplifying purely random news about economic fundamentals into an aggregate market outcome exhibiting important stylized facts such as unpredictable asset prices and returns, excess volatility, temporary bubbles and sudden crashes, large and persistent trading volume, clustered volatility and long memory. |
| Keywords: | heterogeneous agents; behavioral finance; bounded rationality; complexity |
| JEL: | G1 E3 D84 |
| Date: | 2006–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060029&r=fmk |
| By: | Hernando Vargas H.; Rocío Betancourt |
| Abstract: | The effects of the Pension Fund Managers (PFMs) behavior on the foreign exchange market may be important, given the increasing size of their portfolio and their possible market power. Some authors argue that when big investors like PFMs trade large volumes in the foreign exchange market, they may influence other agents’ decisions, increasing the impact of the PFMs’ actions on the exchange rate. However, when PFMs have market power, they will take into account their influence on the exchange rate and will moderate their trading volume. Hence, there might be a mitigating effect that reduces the pressure on the exchange rate. This paper seeks to demonstrate the existence of this effect under different theoretical foreign exchange market structures. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002462&r=fmk |
| By: | Dirk Baur; Brian M. Lucey |
| Abstract: | This paper analyzes the existence of flight-to-quality from stocks to bonds and contagion between the two asset classes. Flight-to-quality is present if correlations between stocks and bonds strongly decrease in falling stock markets since this constitutes a movement of the asset classes in opposite directions. A movement in the same direction characterized by strongly increasing correlations in falling stock markets implies contagion across asset classes. We estimate dynamic conditional correlations and analyze normal and extreme changes of these correlations through time without an a priori specification of any crisis period. Daily MSCI stock and government bond returns are analyzed for a selection of European countries and the US. Our findings show that the correlation between the asset classes is characterized by large fluctuations and negative on average for the whole sample period. Extreme negative and positive correlation changes explained with flight-to-quality and contagion are relatively frequent phenomena. Examples of flight-to-quality are in the Asian and Russian crisis 1997 and 1998 and contagion is found after September 11. Controlling for the regime of correlations further shows that stock market volatility contributes to flight-to-quality and bond volatility to contagion. |
| Keywords: | flight-to-quality, contagion, multivariate GARCH |
| JEL: | F36 G11 G14 G15 |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp122&r=fmk |
| By: | Thomas Lagoarde-Segot; Brian Lucey |
| Abstract: | The purpose of this paper is to investigate vulnerability to financial contagion in a set of expanding emerging markets of the Middle East and North Africa, during seven episodes of international financial crisis. Using Fry & Baur (2005) fixed-effect panel approach, we significantly reject the hypothesis of a joint regional contagion. However, using a battery of bivariate contagion tests based on Forbes and Rigobon (2002), Corsetti (2002), and Favero and Giavazzi (2002), we find evidence that each of the investigated markets suffered from contagion at least once out of the seven investigated crises. In conformity with the literature, our results suggest that the probability of being affected by contagion seems to increase as the MENA markets develop in size and liquidity, and become more integrated to the world’s markets. |
| Keywords: | Note: Length: |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp114&r=fmk |
| By: | Seppo Pynnönen; Warren P. Hogan; Jonathan A. Batten |
| Abstract: | Understanding the long term relationship between the yields of risky and riskless bonds is a critical task for portfolio managers and policy makers. This study specifies an equilibrium correction model of the credit spreads between Japanese Government bonds (JGBs) and Japanese yen Eurobonds with high quality credit ratings. The empirical results indicate that the corporate bond yields are cointegrated with the otherwise equivalent JGB yields, with the spread defining the cointegration relation. In addition the results indicate that the equilibrium correction term is highly statistically significant in modelling credit spread changes. Another important factor is the risk-free interest rate with the negative sign, while there is little evidence of the contribution of the asset return to the behaviour of spreads. |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp127&r=fmk |
| By: | Philipp Paulus |
| Abstract: | This paper shows that in addition to fiscal rules in the European Monetary Union (EMU), some support can be found from financial markets to keep rising public debt in check. EMU likely has an overall positive impact on the ability of both markets and market participants for EMU government bonds to price such securities correctly, which would in turn discipline profligate EMU governments. However, apart from fiscal rules like the Stability and Growth Pact, some regulatory issues will still have to be addressed to ascertain the functioning of markets for EMU government bonds. It is concluded that regulatory efforts should concentrate on competition policy by the EU Commission in Brussels for EMU financial markets and banks, as well as on an EMU-wide authority for the ECB in Frankfurt to monitor and combat systemic risk. However, the Basel accords on capital requirements for banks should not be made legally binding, since leaving risk-taking and risk measurement to banks individually likely helps overcome competitive distortions in a larger EMU capital market. |
| Keywords: | monetary union, fiscal stability, banking system, banking regulation |
| JEL: | F33 G28 H63 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:kln:owiwdp:dp_01_2006&r=fmk |
| By: | Robert Paul Berben; Kerstin Bernoth; Mauro Mastrogiacomo |
| Abstract: | We estimate the excess impact of financial asset capital losses relative to gains on household active savings and durable goods consumption in the Netherlands. The sample period covers both the stock-market boom during the 90's, and the bear period afterwards. The results suggest that households react more to capital losses than to capital gains. Failing to take into account this asymmetry may seriously bias the estimates of the marginal propensity to consume out of wealth. |
| Keywords: | household savings; wealth effect; capital gains |
| JEL: | D12 E21 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:63&r=fmk |
| By: | Bertrand BLANCHETON (CMHE-IFReDE-GRES); Samuel MAVEYRAUD-TRICOIRE (Université Bordeaux IV) |
| Abstract: | In this article, we propose to evaluate the robustness of the main indicators of international financial integration by indicating their principal results as well as their limits. Empirical studies, whatever the indicator of integration which is chosen, conclude that the recent period is characterized by a very deep integration of capital markets, without any historical equivalence. |
| Keywords: | Integration, capital market, financial history |
| JEL: | F02 F21 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:grs:wpegrs:2006-13&r=fmk |
| By: | Arnoud W.A. Boot (Faculty of Economics & Econometrics, Universiteit van Amsterdam); Matej Marinc (University of Ljubljana) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060015&r=fmk |
| By: | Guonan Ma |
| Abstract: | This paper addresses the questions related to the cost of China’s bank restructuring and how it has been financed. We first propose a framework for recognising losses. Then, we examine the recent major moves by the Chinese government to repair the country’s bank balance sheets. Finally, we explore the implications of the Chinese ways of funding the bank restructuring. We find that the Chinese government has been decisive in confronting the costly task of bank restructuring. Looking through the elaborate funding arrangements adopted so far, the Chinese taxpayers have paid most of the bill. |
| Keywords: | Bank restructuring; recapitalisation; non-performing loans; China |
| JEL: | G21 G28 O53 P34 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2006-04&r=fmk |
| By: | Renneboog,Luc; Szilagy,Peter G. (TILEC (Tilburg Law and Economics Center)) |
| Abstract: | This paper provides an overview of existing research on how corporate restructuring affects the wealth of creditors. Restructuring is defined as any transaction that affects the firm's underlying capital structure. Thus, it reaches well beyond asset restructuring and includes transactions such as leveraged buyouts, security issues and exchanges, and the issuance of stock options. The analysis identifies significant gaps in the literature, emphasizes the potential differences between creditor wealth changes in market- and network-oriented governance systems, and provides valuable insights into methodological advances. Many issues obviously remain, as empirical evidence is still incomplete and focuses exclusively on the US. In network-oriented regimes, the potential for research remains constrained by the lesser development of bond markets that disclose information on creditor wealth shocks. Still, on-going debt securitization should now allow for the investigation of at least some critical issues. This is imperative, as the position of creditors in the firm differs substantially across governance systems despite the gradual convergence of these regimes across the world. |
| Keywords: | Bondholder wealth;corporate restructuring;mergers and acquisitions;event studies;bond returns |
| JEL: | G12 G14 G34 G35 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubtil:20067&r=fmk |
| By: | Patrick Behr; André Güttler |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:fra:franaf:163&r=fmk |
| By: | Jacob Bikker; Laura Spierdijk; Roy Hoevenaars; Pieter Jelle van der Sluis |
| Abstract: | Often, a relatively small group of trades causes the major part of the trading costs on an investment portfolio. For the equity trades studied in this paper, executed by the world’s second largest pension fund, we find that only 10% of the trades determines 75% of total market impact costs. Consequently, reducing the trading costs of comparatively few expensive trades would already result in substantial savings on total trading costs. Since trading costs depend to some extent on controllable variables, investors can try to lower trading costs by carefully controlling these factors. As a first step in this direction, this paper focuses on the identification of expensive trades before actual trading takes place. However, forecasting market impact costs appears notoriously difficult and traditional methods fail. Therefore, we propose two alternative methods to form expectations about future trading costs. The first method uses five ‘buckets’ to classify trades, where the buckets represent increasing levels of market impact costs. Each trade is assigned to a bucket depending on the probability that the trade will incur high market impact costs. The second method identifies expensive trades by considering the probability that market impact costs will exceed a critical level. When this probability is high, a trade is classified as potentially expensive. Applied to the pension fund data, both methods succeed in filtering out a considerable number of trades with high trading costs and substantially outperform no-skill prediction methods. The results underline the productive role that model-based forecasts can play in trading cost management. |
| Keywords: | market impact costs; forecasting; institutional trading; trading cost management. |
| JEL: | G11 G23 C53 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:095&r=fmk |
| By: | Peter Wilson (Department of Economics, National University of Singapore 1 Arts Link, Singapore); Henry Ng Shang Ren |
| Abstract: | The objective of this paper is see how well Singapore’s exchange rate regime has coped with exchange rate volatility before and after the Asian financial crisis by comparing the performance of Singapore’s actual regime in minimising the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US$ against some counterfactual regimes and the corresponding performance of eight other East Asian countries. In contrast to previous counterfactual exercises, such as Williamson (1998a) and Ohno (1999) which compute the weights for effective exchange rates on the basis of simple bloc aggregates, we apply a more disaggregated methodology using a larger number of trade partners. We also utilize ARCH/GARCH techniques to obtain estimates of heteroskedastic variances to better capture the time-varying characteristics of volatility for the actual and simulated exchange rate regimes. Our findings confirm that Singapore’s managed floating exchange rate system has delivered relatively low currency volatility. Although there are gains in volatility reduction for all countries in the sample from the adoption of either a unilateral or common basket peg, particularly post-crisis, these gains are relatively low for Singapore, largely because low actual volatility. Finally, there are additional gains for nondollar peggers from stabilizing intra-EA exchange rates against the dollar if they were to adopt a basket peg, especially post-crisis, but the gains for Singapore are again relatively modest. |
| Keywords: | East Asia, exchange rates, counterfactuals. |
| JEL: | F31 F33 F36 |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0608&r=fmk |
| By: | Michael B. Devereux; Makoto Saito |
| Abstract: | This paper constructs a model in which the currency composition of national portfolios is an essential element in facilitating capital ‡ows between countries. In a two country environment, each country chooses optimal nominal bond portfolios in face of real and nominal risk.Current account deficits are financed by increases in domestic currency debt, but balanced by increases in foreign currency credit. This is combined with an evolution of risk-premiums such that the rate of return on the debtor country’s gross liabilities is lower than the return on its gross assets. This ensures stability of the world wealth distribution. |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp124&r=fmk |
| By: | Pierre-Cyrille Hautcoeur |
| Abstract: | Stock market indices are today a vital and daily tool for both economists and actors in the financial world. The multiplication and the very importance given to these indices raise the question of their accuracy and of the reliability of the methods that are used to construct them. We begin an investigation on these questions by studying the early history of these indices. We show that stock market indices appeared in the daily press in the United States at the end of the 19th century; that around World War One, they became the focus of the interest of very different groups of people, so that their construction became a more complex and specialized task. The scientific study of indices did not result initially from the stock market's importance in finance (for firms financing, for savers' portfolio choices or for investment banks' decisions), since most of the initial interest came from economists that looked at the stock market only as a measure or an index of the macroeconomic situation. The development of indices dedicated to financial studies came only in the late 1920s, and accelerated only with the birth of modern finance. This article describes the origins of stock-market indices in the interwar period, with an emphasis on France and the United States. It links this evolution with contemporary economic theories, index number theory, financial practices, and the other motivations of their authors. It examines the consequences of the methodological choices that were made and suggests that they had a surprisingly large impact on the results. In particular, we analyse in detail the motivations and technical characteristics of the most important indices that were produced during the interwar period by the French government statistical office (the Statistique générale de la France or SGF). We suggest that these indices cannot be easily compared to most usually discussed indices for other countries and that new calculations are required before international comparisons. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pse:psecon:2006-10&r=fmk |
| By: | Bartosz Mackowiak |
| Abstract: | Using structural VARs, I find that external shocks are an important source of macroeconomic fluctuations in emerging markets. Furthermore, U.S. monetary policy shocks affect quickly and strongly interest rates and the exchange rate in a typical emerging market. The price level and real output in a typical emerging market respond to U.S. monetary policy shocks by more than the price level and real output in the U.S. itself. These findings are consistent with the idea that “when the U.S. sneezes, emerging markets catch a cold.” At the same time, U.S. monetary policy shocks are not important for emerging markets relative to other kinds of external shocks. |
| Keywords: | Structural vector autoregression, monetary policy shocks, international spillover effects of monetary policy, external shocks, emerging markets |
| JEL: | F41 E3 O11 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-026&r=fmk |
| By: | Jan Willem van den End |
| Abstract: | This paper presents an information variable for financial stability consisting of a composite index and its related critical boundaries. It is an extension of a Financial Conditions Index with information on financial institutions. The indicator is bounded, on one side, by the instability boundary which depends on the solvency buffers of the institutions and the stress level on financial markets. On the other side, the imbalances boundary signals when extreme imbalances accumulate. This concept is applied to the Netherlands and six OECD countries which experienced a financial crisis. |
| Keywords: | financial stability; indicator; crisis |
| JEL: | E44 G10 G12 G20 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:097&r=fmk |
| By: | Ricardo J. Caballero; Takeo Hoshi; Anil K. Kashyap |
| Abstract: | In this paper, we propose a bank-based explanation for the decade-long Japanese slowdown following the asset price collapse in the early 1990s. We start with the well known observation that most large Japanese banks were only able to comply with capital standards because regulators were lax in their inspections. To facilitate this forbearance the banks often engaged in sham loan restructurings that kept credit flowing to otherwise insolvent borrowers (that we call zombies). Thus, the normal competitive outcome whereby the zombies would shed workers and lose market share was thwarted. Our model highlights the restructuring implications of the zombie problem. The counterpart of the congestion created by the zombies is a reduction of the profits for healthy firms, which discourages their entry and investment. In this context, even solvent banks will not find good lending opportunities. We confirm our story’s key predictions that zombie dominated industries exhibit more depressed job creation and destruction, and lower productivity. We present firm-level regressions showing that the increase in zombies depressed the investment and employment growth of non-zombies and widened the productivity gap between zombies and non-zombies. |
| JEL: | E44 G34 L16 O53 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12129&r=fmk |
| By: | Ilias Lekkos (EFG Eurobank); Costas Milas (Keele University); Theodore Panagiotidis (Loughborough University) |
| Abstract: | This paper explores the ability of factor models to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models. We find some evidence that the non-linear models predict better than the linear ones. At short horizons, the nearest-neighbours (NN) model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. At long horizons, the STVAR model increases its forecasting ability over the linear models, whereas the NN model does not outperform the rest of the models. |
| Keywords: | Interest rate swap spreads, term structure of interest rates, factor models, regime switching, smooth transition models, nearest-neighbours, forecasting. |
| JEL: | C51 C52 C53 E43 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_6&r=fmk |
| By: | Raj Aggarwal; Brian M. Lucey; Sunil K. Mohanty |
| Abstract: | An important puzzle in international finance is the failure of the forward exchange rate to be a rational forecast of the future spot rate. It has often been suggested that this puzzle may be resolved by using better statistical procedures that correct for both non-stationarity and nonnormality in the data. We document that even after accounting for non-stationarity, nonnormality, and heteroscedasticity using parametric and non-parametric tests on data for over a quarter century, US dollar forward rates for horizons ranging from one to twelve months for the major currencies, the British pound, Japanese yen, Swiss franc, and the German mark, are generally not rational forecasts of future spot rates. These findings of non-rationality in forward exchange rates for the major currencies continue to be puzzling especially as these foreign exchange markets are some of the most liquid asset markets with very low trading costs. |
| Keywords: | flight-to-quality, contagion, multivariate GARCH |
| JEL: | F31 G14 F47 G15 |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp123&r=fmk |
| By: | Peter G. Szilagyi; Jonathan A. Batten |
| Abstract: | Using a daily time series from 1983 to 2005 of currency prices in spot and forward USD/Yen markets and matching equivalent maturity short term US and Japanese interest rates, we investigate the sensitivity over the sample period of the difference between actual prices in forward markets to those calculated from short term interest rates. According to a fundamental theorem in financial economics termed covered interest parity (CIP) the actual and estimated prices should be identical once transaction and other costs are accommodated. The paper presents four important findings: First, we find evidence of considerable variation in CIP deviations from equilibrium that tends to be one way and favours those market participants with the ability to borrow US dollars (and subsequently lend yen). Second, these deviations have diminished significantly and by 2000 have been almost eliminated. We attribute this to the effects of electronic trading and pricing systems. Third, regression analysis reveals that interday negative changes in spot exchange rates, positive changes in US interest rates and negative changes in yen interest rates generally affect the deviation from CIP more than changes in interday volatility. Finally, the presence of long-term dependence in the CIP deviations over time is investigated to provide an insight into the equilibrium dynamics. Using a local Hurst exponent – a statistic used in fractal geometry - we find episodes of both positive and negative dependence over the various sample periods, which appear to be linked to episodes of dollar decline/yen appreciation, or vice versa. The presence of negative dependence is consistent with the actions of arbitrageurs successfully maintaining the long-term CIP equilibrium. Given the time varying nature of the deviations from equilibrium the sample period under investigation remains a critical issue when investigating the presence of longterm dependence. |
| Keywords: | Hurst exponent; Efficient market hypothesis; covered interest parity, arbitrage |
| JEL: | C22 C32 E31 F31 |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp128&r=fmk |
| By: | Corsetti, Giancarlo |
| Abstract: | Models of stabilization in open economy traditionally emphasize the role of exchange rates as a substitute for nominal price flexibility in fostering relative price adjustment. This view has been recently criticized on the ground that, to the extent that prices are sticky in local currency, the exchange rate does not play the stabilizing role envisioned by the received wisdom. An important question is whether, for this very reason, stabilization policies should limit exchange rate movements, or even eliminate them altogether. In this paper, I re-assess this issue by extending the Corsetti and Pesenti (2001) model to allow for home bias in consumption | so that I can exploit the advantages of closed-form solutions. While this extension leaves most properties of the model unaffected, home bias implies that the real exchange rate in an efficient equilibrium is not constant, but fluctuates with the terms of trade. The weight that monetary authorities optimally place on stabilizing domestic marginal costs is increasing in Home bias: with asymmetric shocks, fixed exchange rates are incompatible with efficient monetary rules. Yet, the adverse welfare consequences of exchange rate movements constrain the optimal intensity of monetary responses to domestic shocks. Openness matters: in our specification each country produces an equal share of the world value added; the lower the import content of consumption, the higher the exchange rate volatility implied by optimal stabilization rules. In relatively closed economy, optimal monetary rules tend to converge, regardless of the nature of nominal rigidities in the exports market. |
| Keywords: | exchange rate pass-through; exchange rate regimes; international policy cooperation; nominal rigidities; optimal monetary policy |
| JEL: | E31 E52 F42 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5612&r=fmk |
| By: | J.H. Dreze; E. Minelli; M. Tirelli |
| Abstract: | We propose an extension of the standard general equilibrium model with production and incomplete markets to situationsin which (i) private investors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into ‘sectorial’ funds. In our model the financial policy of the firm is not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of asymmetric information. We also illustrate the properties of the model in three simple examples. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0608&r=fmk |
| By: | Eduardo Borensztein (InterAmerican Development Bank); Barry Eichengreen (University of California, Berkeley); Ugo Panizza (InterAmerican Development Bank) |
| Abstract: | Spreads on sovereign bonds are at an all-time low, at least since the current era of emerging economy bond markets began in the 1990s. This paper examines the current state of the international and domestic bond markets and asks whether the current favorable trends will constitute a durable change or a temporary fad and discusses what the IDB and other international financial institutions can do to help consolidate the positive trends and prevent new sudden stop episodes in Latin America. |
| Keywords: | debt; finance |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:1020&r=fmk |
| By: | R. Anton Braun (Faculty of Economics, University of Tokyo); Max Gillman (Department of Economics, Boston University) |
| Abstract: | Japan has now experienced over a decade of slow growth and deflation. This period has also been associated with protracted problems in the banking sector. A wide range of measures have been tried in to restore health in the banking sector including recapitalization, the extension of 100% guarantees to all deposits, and central bank purchases of shares held by banks. It has also argued that ending deflation is an important ingredient in restoring banking sector health. This paper develops a general equilibrium of the banking sector. In our model the banking sector produces an intermediate good that is used to produce investment goods and a variable fraction of consumption goods. We then assess the implications of alternative policies designed to assist the banking sector in terms of their implications for welfare and the size and profitability of the banking sector. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf412&r=fmk |
| By: | Arnoud W.A. Boot (Faculty of Economics and Econometrics, Universiteit van Amsterdam); Radhakrishnan Gopaian; Anjan V. Thakor |
| Abstract: | We analyze a publicly-traded firm's decision to stay public or go private when managerial autonomy from shareholder intervention affects the supply of productive inputs by management. We show that both the advantage and the disadvantage of public ownership relative to private ownership lie in the liquidity of public ownership. While the liquidity of public ownership lets shareholders trade easily and supply capital at a lower cost, the liquidity-engendered trading also results in stochastic shocks to a firm's shareholder base. This exposes management to uncertainty regarding the identity of future shareholders and their extent of intervention in management decisions and in turn curtails managerial incentives. By contrast, because of its illiquidity, private ownership provides a stable shareholder base and improves these inputprovision incentives but results in a higher cost of capital. Thus, capital market liquidity, while being a principal advantage of public ownership, also has a surprising 'dark side' that discourages public ownership. Our model takes seriously a key difference between private and public equity markets in that, unlike the private market, the firm's shareholder base, namely the extent of investor participation, is stochastic in the public market. This allows us to extract predictions about the effects of investor participation on the stock price level and volatility and on the public firm's incentives to go private, thereby providing a link between investor participation and firm participation in public markets. Lesser investor participation induces lower and more volatile stock prices, encouraging public firms to go private, whereas greater investor participation encourages younger firms to go public. Moreover, IPO underpricing is optimal because it is shown to lead to a higher and less volatile post-IPO stock price, greater autonomy for the manager and a higher supply of privately-costly managerial inputs. |
| Keywords: | Corporate Finance |
| JEL: | G24 G10 G32 |
| Date: | 2006–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060011&r=fmk |
| By: | Philippe Bacchetta (University of Lausanne, Studienzentrum Gerzensee and CEPR); Eric van Wincoop (University of Virginia) |
| Abstract: | The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate dierential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international nance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benet from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:0503&r=fmk |
| By: | Clemens Sialm |
| Abstract: | This paper investigates whether investors are compensated for the tax burden of equity securities. Effective tax rates on equity securities vary due to frequent tax reforms and due to persistent differences in propensities to pay dividends. The paper finds an economically and statistically significant relationship between risk-adjusted stock returns and effective personal tax rates using a new data set covering tax burdens on a cross-section of equity securities between 1927 and 2004. Consistent with tax capitalization, stocks facing higher effective tax rates tend to compensate taxable investors by generating higher before-tax returns. |
| JEL: | G12 H20 E44 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12146&r=fmk |
| By: | Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow) |
| Abstract: | We present an empirical investigation of a recently suggested but untested proposition that exchange rate volatility can have an impact on both the volume and variability of trade flows, considering a broad set of countries' bilateral real trade flows over the period 1980-1998. We generate proxies for the volatility of real trade flows and real exchange rates after carefully scrutinizing these variables' time series properties. Similar to the findings of earlier theoretical and empirical research, our first set of results show that the impact of exchange rate uncertainty on trade flows is indeterminate. Our second set of results provide new and novel findings that exchange rate volatility has a consistent positive and significant effect on the volatility of bilateral trade flows. |
| Keywords: | exchange rates, volatility, fractional integration, trade flows |
| JEL: | F17 F31 C22 |
| Date: | 2006–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:641&r=fmk |
| By: | John Y. Campbell |
| Abstract: | The welfare benefits of financial markets depend in large part on how effectively households use these markets. The study of household finance is challenging because household behavior is difficult to measure accurately, and because households face constraints that are not captured by textbook models, including fixed costs, uninsurable income risk, borrowing constraints, and contracts that are non-neutral with respect to inflation. Evidence on participation, diversification, and the exercise of mortgage refinancing options suggests that many households are reasonably effective investors, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations, and try to avoid financial strategies that require them to make decisions they do not feel qualified to make. Some financial products involve a cross-subsidy from naive households to sophisticated households, and this can inhibit the emergence of products that would promote effective financial decision making by households. |
| JEL: | G12 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12149&r=fmk |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper evaluates whether an estimated, structural, small open economy model of the Canadian economy can account for the substantial influence of foreign-sourced disturbances indentified in numerous reduced-form studies. The analysis shows that the benchmark model - and a number of variants which include a range of market imperfections - imply cross-equation restrictions and therefore capture certain properties of the data - for instance, the volatility and persistence of the real exchange rate - and yield plausible parameter estimates, this success is qualified by the model's inability to account for the transmission of foreign disturbances to the domestic economy: less than one percent of the variance of output is explained by foreign shocks. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-12&r=fmk |
| By: | Takatoshi Ito; Kiyotaka Sato |
| Abstract: | The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large and statistically significant. Thus, Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06018&r=fmk |
| By: | Ricardo J. Caballero; Arvind Krishnamurthy |
| Abstract: | We present a model of flight to quality episodes that emphasizes systemic risk and the Knightian uncertainty surrounding these episodes. Agents make risk management decisions with incomplete knowledge. They understand their own shocks, but are uncertain of how correlated their shocks are with systemwide shocks. Aversion to this uncertainty leads them to question whether their private risk management decisions are robust to aggregate events, generating conservatism and excessive demand for safety. We show that agents’ actions lock-up the capital of the financial system in a manner that is wasteful in the aggregate and can trigger and amplify a financial accelerator. The scenario that the collective of conservative agents are guarding against is impossible, and known to be so even given agents’ incomplete knowledge. A lender of last resort, even if less knowledgeable than private agents about individual shocks, does not suffer from this collective bias and finds that pledging intervention in extreme events is valuable. The benefit of such intervention exceeds its direct value because it unlocks private capital markets. |
| JEL: | E30 E44 E5 F34 G |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12136&r=fmk |
| By: | Paolo Panteghini |
| Abstract: | This article studies the relationship between debt policies of multinational companies (MNCs) and governments' tax strategies. In the first part, it is shown that the ability to shift income from high to low-tax countries affects MNCs' financial choices. In the second part we show how MNCs' financial decisions can affect the tax strategies of two governments competing to attract income. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0606&r=fmk |
| By: | Philip R. Lane; Gian Maria Milesi-Ferretti |
| Abstract: | We construct estimates of external assets and liabilities for over 140 countries over the period 1970-2004. We describe our estimation methods and present some key features of the data, both at the country and at the global level. We focus in particular on trends in net and gross external positions, as well as on the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, foreign exchange reserves, and external debt. We also document the existence of a “world net foreign asset discrepancy” (the stock counterpart to the world current account discrepancy) and identify the asset categories that account for this discrepancy. |
| Keywords: | International financial integration; net foreign assets |
| JEL: | F32 |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp126&r=fmk |
| By: | Li Gan; Qinghua Zhang |
| Abstract: | This paper provides a search model for housing market where the number of buyers and/or sellers plays very important role. The model makes three testable predictions: (1) the unemployment rate has a negative impact on the trading volume and the sale prices of the housing market; (2) a larger housing market has a lower average sale price, shorter time-to-sale and smaller price dispersion, in addition to a lower vacancy rate. (3) In a larger housing market, when the unemployment rate goes up (or down), the sale price decreases (or increases) by a smaller percentage than in a smaller market. All three predictions are supported by a panel dataset of the Texas city-level housing markets. |
| JEL: | R0 R3 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12134&r=fmk |
| By: | Alessandro Bucciol (University of Padua); Raffaele Miniaci (University of Brescia) |
| Abstract: | We develop a model of optimal asset allocation based on a utility framework. This applies to a more general context than the classical mean-variance paradigm since it can also account for the presence of constraints in the portfolio composition. Using this approach, we study the distribution of a measure of wealth compensative variation, we propose a benchmark and portfolio efficiency test and a procedure to estimate the implicit risk aversion parameter of a power utility function. Our empirical analysis makes use of the S&P 500 and industry portfolios time series to show that although the market index cannot be considered an efficient investment in the mean-variance metric, the wealth loss associated with such an investment is statistically different from zero but rather small (lower than 0.5%). The wealth loss is at its minimum for a representative agent with a constant risk aversion index not higher than 5. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior. |
| JEL: | C15 D14 G11 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0012&r=fmk |
| By: | Jules H. van Binsbergen; Michael W. Brandt; Ralph S.J. Koijen |
| Abstract: | We study a decentralized investment problem in which a CIO employs multiple asset managers to implement and execute investment strategies in separate asset classes. The CIO allocates capital to the managers who, in turn, allocate these funds to the assets in their asset class. This two-step investment process causes several misalignments of objectives between the CIO and his managers and can lead to large utility costs on the part of the CIO. We focus on i) loss of diversification ii) different appetites for risk, iii) different investment horizons, and iv) the presence of liabilities. We derive an optimal unconditional linear performance benchmark and show that this benchmark can be used to better align incentives within the firm. The optimal benchmark substantially mitigates the utility costs of decentralized investment management. These costs can be further reduced when the CIO can screen asset managers on the basis of their risk appetites. Each manager’s optimal level of risk aversion depends on the asset class he manages and can differ substantially from the CIO’s level of risk aversion. |
| JEL: | G10 G11 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12144&r=fmk |
| By: | Alessandro Bucciol; Raffaele Miniaci |
| Abstract: | We develop a model of optimal asset allocation based on a utility framework. This applies to a more general context than the classical mean-variance paradigm since it can also account for the presence of constraints in the portfolio composition. Using this approach, we study the distribution of a measure of wealth compensative variation, we propose a benchmark and portfolio efficiency test and a procedure to estimate the implicit risk aversion parameter of a power utility function. Our empirical analysis makes use of the S&P 500 and industry portfolios time series to show that although the market index cannot be considered an efficient investment in the mean-variance metric, the wealth loss associated with such an investment is statistically different from zero but rather small (lower than 0.5%). The wealth loss is at its minimum for a representative agent with a constant risk aversion index not higher than 5. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0605&r=fmk |
| By: | Yoshiyasu Ono (Institute of Social and Economic Research, Osaka University); Akihisa Shibata (Institute of Economic Research, Kyoto University) |
| Abstract: | Unless free international lending/borrowing is allowed, domestic saving equals domestic investment and hence saving and investment taxes have the identical effect, as is the case in a closed-economy context. However, if it is allowed, households can accumulate foreign assets besides domestic capital and hence saving and investment are separated, causing the two taxes to have different effects. Using a two-sector growth model, we show that the two taxes generate completely different effects on industrial structure. The investment tax always shrinks the capital-intensive sector whereas the saving tax may well expand it. |
| Keywords: | saving tax, investment tax, two-sector growth model, industrial structure, financial asset trade |
| JEL: | F41 E62 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:613&r=fmk |
| By: | Larry Epstein (University of Rochester); Martin Schneider (New York University) |
| Abstract: | This paper considers learning when the distinction between risk and ambiguity matters. It first describes thought experiments, dynamic variants of those provided by Ellsberg, that highlight a sense in which the Bayesian learning model is extreme - it models agents who are implausibly ambitious about what they can learn in complicated environments. The paper then provides a generalization of the Bayesian model that accommodates the intuitive choices in the thought experiments. In particular, the model allows decision-makers’ confidence about the environment to change — along with beliefs — as they learn. A calibrated portfolio choice application shows how this property induces a trend towards more stock market participation and investment. |
| Keywords: | ambiguity, learning, noisy signals, ambiguous signals, quality information, portfolio choice, portfolio diversification, Ellsberg Paradox |
| JEL: | D81 D83 D9 G11 G12 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:527&r=fmk |
| By: | Enrico Minelli; Salvatore Modica |
| Abstract: | In a simplified version of the Stiglitz–Weiss (1981) model of the credit market we characterize optimal policies to correct market failures. Widely applied policies, notably interest–rate subsidies and investment subsidies, are compared to the theoretical optimum. Some comments on the trade-off between credit subsidy and infrastructural investment are added in the conclusions.two governments competing to attract income. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0607&r=fmk |
| By: | Robert Engle; Robert Ferstenberg |
| Abstract: | Transaction costs in trading involve both risk and return. The return is associated with the cost of immediate execution and the risk is a result of price movements during a more gradual trading. The paper shows that the trade-off between risk and return in optimal execution should reflect the same risk preferences as in ordinary investment. The paper develops models of the joint optimization of positions and trades, and shows conditions under which optimal execution does not depend upon the other holdings in the portfolio. Optimal execution however may involve trades in assets other than those listed in the order; these can hedge the trading risks. The implications of the model for trading with reversals and continuations are developed. The model implies a natural measure of liquidity risk |
| JEL: | G2 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12165&r=fmk |
| By: | Michel Lelart (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | La finance recouvre beaucoup de produits et de services qui, entre des pays voisins, sont comparables et souvent assez proches. Il n'en est pas de même entre les pays développés et les pays en voie de développement où les pratiques financières reposent sur des relations personnelles souvent très étroites. Il en est ainsi aussi bien pour les pratiques individuelles (usuriers, banquiers ambulants...) que pour les pratiques collectives (les tontines...) |
| Keywords: | finance informelle ; secteur informel ; microfinance |
| Date: | 2006–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009840_v1&r=fmk |
| By: | Jay C. Shambaugh; Julian di Giovanni |
| Abstract: | It is often argued that small economies are affected by conditions in large countries. This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high large-country interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which large-country interest rates affect small economies. The direct monetary policy channel is the most likely channel when compared with other possibilities, such as a general capital market effect or a trade effect. |
| JEL: | F3 F4 |
| Date: | 2006–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp116&r=fmk |
| By: | Quoreshi, Shahiduzzaman (Department of Economics, Umeå University) |
| Abstract: | A vector integer-valued moving average (VINMA) model is introduced. <p> The VINMA model allows for both positive and negative correlations <p> between the counts. The conditional and unconditional first and second <p> order moments are obtained. The CLS and FGLS estimators are discussed. <p> The model is capable of capturing the covariance between and <p> within intra-day time series of transaction frequency data due to macroeconomic <p> news and news related to a specific stock. Empirically, it is <p> found that the spillover effect from Ericsson B to AstraZeneca is larger <p> than that from AstraZeneca to Ericsson B |
| Keywords: | Count data; Intra-day; Time series; Estimation; Reaction |
| JEL: | C13 C22 C25 C51 G12 G14 |
| Date: | 2006–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0674&r=fmk |
| By: | Bartosz Mackowiak |
| Abstract: | This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogenous and changes over time together with the state of the economy. The regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate. The model predicts that currency composition of public debt affects dynamics of macroeconomic variables. Furthermore, the model is consistent with evidence from recent currency crises, in particular small seigniorage revenues. |
| Keywords: | Coordination of monetary policy and fiscal policy, policy regime switch, currency crisis, speculative attack, fiscal theory of the price level |
| JEL: | E52 E61 F33 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-025&r=fmk |
| By: | Cameron, Gavin; Muellbauer, John; Murphy, Anthony |
| Abstract: | This paper investigates the bubbles hypothesis with a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment, and interaction effects between an index of credit availability and real and nominal interest rates. No evidence for a recent bubble is found. |
| Keywords: | bubble; house prices; ripple effect |
| JEL: | C51 E39 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5619&r=fmk |
| By: | Maican, Florin G. (Department of Economics, School of Business, Economics and Law, Göteborg University); Sweeney, Richard J. (McDonough School of Business, Georgetown University) |
| Abstract: | This paper presents unit-root test results for real exchange rates in ten Central and Eastern European transition countries during 1993:01-2003:12. Because of the shift from controlled to market economies and the accompanying crises, failed policy regimes and changes in exchange rate regimes, appropriate tests in transition countries require allowing for both structural changes and outliers. In both single-equation tests and panel tests with SUR techniques, the data reject the unit-root null for the CEE countries. Accounting for structural breaks and outliers gives much faster mean-reversion speeds than otherwise. <p> |
| Keywords: | Purchasing power parity; real exchange rate; Monte Carlo; unit root; transition countries; panel data |
| JEL: | C15 C22 C32 C33 E31 F31 |
| Date: | 2006–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0202&r=fmk |
| By: | Roberto Casarin; Carmine Trecroci |
| Abstract: | The recent observed decline of business cycle variability suggests that broad macroeconomic risk may have fallen as well. This may in turn have some impact on equity risk premia. We investigate the latent structures in the volatilities of the business cycle and stock market valuations by estimating a Markov switching stochastic volatility model. We propose a sequential Monte Carlo technique for the Bayesian inference on both the unknown parameters and the latent variables of the hidden Markov model. Sequential importance sampling is used for filtering the latent variables and kernel estimator with a multiple-bandwidth is employed to reconstruct the parameter posterior distribution. We find that the switch to lower variability has occurred in both business cycle and stock market variables along similar patterns. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0603&r=fmk |
| By: | Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais) et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal)) |
| Abstract: | Monte Carlo simulation has an advantage upon the binomial tree as it can take into account the multidimensions of a problem. However it convergence speed is slower. In this article, we show how this method may be improved by various means: antithetic variables, control variates and low discrepancy sequences: Faure, Sobol and Halton sequences. We show how to compute the standard deviation of a Monte Carlo simulation when the payoffs of a claim, like a contingent claim, are nonlinear. In this case, we must compute this standard deviation by doing a great number of repeated simulations such that we arrive at a normal distribution of the results. The mean of the means of these simulations is then a good estimator of the wanted price. We also show how to combine Halton numbers with antithetic variables to improve the convergence of a QMC. That is our new version of QMC which is then well named because the result varies from one simulation to the other in our version of the QMC while the result is fixed (not random) in a classical QMC, like in the binomial tree. |
| Keywords: | Financial engineering, derivatives, Monte Carlo simulation, low discrepancy sequences. |
| JEL: | G12 G13 G33 |
| Date: | 2006–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:052006&r=fmk |
| By: | Quoreshi, Shahiduzzaman (Department of Economics, Umeå University) |
| Abstract: | This thesis comprises four papers concerning modelling of financial count data. Paper [1], [2] <p> and [3] advance the integer-valued moving average model (INMA), a special case of integer-valued <p> autoregressive moving average (INARMA) model class, and apply the models to the number of <p> stock transactions in intra-day data. Paper [4] focuses on modelling the long memory property of <p> time series of count data and on applying the model in a financial setting. <p> Paper [1] advances the INMA model to model the number of transactions in stocks in intraday <p> data. The conditional mean and variance properties are discussed and model extensions to <p> include, e.g., explanatory variables are offered. Least squares and generalized method of moment <p> estimators are presented. In a small Monte Carlo study a feasible least squares estimator comes out <p> as the best choice. Empirically we find support for the use of long-lag moving average models in a <p> Swedish stock series. There is evidence of asymmetric effects of news about prices on the number <p> of transactions. <p> Paper [2] introduces a bivariate integer-valued moving average (BINMA) model and applies the <p> BINMA model to the number of stock transactions in intra-day data. The BINMA model allows <p> for both positive and negative correlations between the count data series. The study shows that <p> the correlation between series in the BINMA model is always smaller than one in an absolute sense. <p> The conditional mean, variance and covariance are given. Model extensions to include explanatory <p> variables are suggested. Using the BINMA model for AstraZeneca and Ericsson B it is found that <p> there is positive correlation between the stock transactions series. Empirically, we find support for <p> the use of long-lag bivariate moving average models for the two series. <p> Paper [3] introduces a vector integer-valued moving average (VINMA) model. The VINMA <p> model allows for both positive and negative correlations between the counts. The conditional and <p> unconditional first and second order moments are obtained. The CLS and FGLS estimators are <p> discussed. The model is capable of capturing the covariance between and within intra-day time <p> series of transaction frequency data due to macroeconomic news and news related to a specific <p> stock. Empirically, it is found that the spillover effect from Ericsson B to AstraZeneca is larger <p> than that from AstraZeneca to Ericsson B. <p> Paper [4] develops models to account for the long memory property in a count data framework <p> and applies the models to high frequency stock transactions data. The unconditional and conditional <p> first and second order moments are given. The CLS and FGLS estimators are discussed. <p> In its empirical application to two stock series for AstraZeneca and Ericsson B, we find that both <p> series have a fractional integration property. |
| Keywords: | Count data; Intra-day; High frequency; Time series; Estimation; Long memory; Finance |
| JEL: | C13 C22 C25 C51 G12 G14 |
| Date: | 2006–04–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0675&r=fmk |
| By: | Hernando Vargas H.; 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. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002451&r=fmk |
| By: | Michel Lelart (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | Ce Forum organisé par l'Assistance au Développement des Echanges en Technologie Economique et Financière (ADETEF) près du Ministère des Finances a abordé plusieurs aspects du financement de l'économie vietnamienne. Le micro-crédit est aussi très développé dans ce pays où une loi vient d'être votée à son sujet. Ma contribution fait le point des différentes expériences menées actuellement au Vietnam et fait apparaître quelques-uns des problèmes qu'elles soulèvent. |
| Keywords: | micro-crédit ; micro-finance ; institution de micro-finance ; Vietnam |
| Date: | 2006–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009839_v1&r=fmk |
| By: | Eugene N. White |
| Abstract: | This paper surveys the twentieth century booms and crashes in the American stock market, focusing on a comparison of the two most similar events in the 1920s and 1990s. In both booms, claims were made that they were the consequence a “new economy” or “irrational exuberance.” Neither boom can be readily explained by fundamentals, represented by expected dividend growth or changes in the equity premium. The difficulty of identifying the fundamentals implies that central banks would not be successful in preventing pre-emptive policies, although they still would have a critical role to play in preventing crashes from disrupting the payments system or sparking an intermediation crisis. |
| JEL: | E5 G1 N1 N2 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12138&r=fmk |
| 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. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002457&r=fmk |
| By: | Fernando Tenjo; Enrique López; Nancy Samudio |
| 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. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002449&r=fmk |
| By: | Eiji Ogawa; Michiru Sakane |
| Abstract: | In this paper, we investigate the actual exchange rate policy conducted by the Chinese government after the Chinese exchange rate system reform on July 21 2005. Also, we investigate long-run effect (Balassa-Samuelson effect) on the Chinese yuan. We found that the Chinese government had a statistically significant but small change in exchange rate policy during our sample period to January 25, 2006. It is not identified that the Chinese monetary authority is adopting the currency basket system because the change is too small in the economic sense. On one hand, higher growth rate of productivity will appreciate the Chinese yuan in terms of the US dollar and the Japanese yen while higher growth rates of productivity in Chinese tradable good sector tend to give the Balassa-Samuleson effect, that is undervaluation bias, to the Chinese yuan. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:06019&r=fmk |
| By: | Sebastian Edwards |
| Abstract: | This paper deals with the relationship between inflation targeting and exchange rates. I address three specific issues: first, I analyze the effectiveness of nominal exchange rates as shock absorbers in countries with inflation targeting. This issue is closely related to the magnitude of the "pass-through" coefficient. Second, I investigate whether exchange rate volatility is different in countries with an inflation targeting regime than in countries with alternative monetary policy arrangements. And third, I discuss whether the exchange rate should play a role in determining the monetary policy stance under inflation targeting. An alternative way of posing this question is whether the exchange rate should have an independent role in an open economy Taylor rule. |
| JEL: | F02 F43 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12163&r=fmk |
| By: | Ravi Jagannathan; Ann E. Sherman |
| Abstract: | We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the U.S., viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner’s curse hamper price discovery and discourage investors from participating in auctions. That may explain the inaccurate pricing and poor aftermarket performance of IPOs using auctions. |
| JEL: | G24 G28 G32 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12151&r=fmk |
| By: | Michel Lelart (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | Cet ouvrage constitue les Actes du Colloque organisé par la Commission pour l'étude des Communautés européennes (CEDECE) à Besançon les 17-18 octobre 2002. <br />L'élargissement en cours est le cinquième, mais il est très différent des précédents, non seulement par le nombre (douze) et la nature des pays concernés (la plupart ont été des pays communistes), mais parce qu'il est le premier depuis que l'euro existe en tant que monnaie unique des pays membres de l'Union européenne. Ma contribution analyse les conséquences de cet élargissement sur l'euro, dès avant la phase d'accession, pendant cette phase - la phase intermédiaire, sans doute la plus difficile à gérer - enfin après l'adhésion. <br /><br />Cette communication a également été présentée à un colloque organisé par la Chaire Jean Monnet de l'Université de Montréal en mai 2003. Elle est reproduite dans les Actes qui ont suivi :<br />- The Euro Zone and the Single Currency in an Enlarging European Union, <br />in N. NEUWAHL (éd.), European Union Enlargement - Law and Socio-Economic Changes, Editions Thémis, Montréal 2004, pp. 133.-162. |
| Keywords: | Euro ; Union européenne ; Traité de Maastricht ; élargissement |
| Date: | 2006–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009842_v1&r=fmk |
| By: | Michel Lelart (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | La session a été consacrée cette année-là aux Etats-Unis et l'Europe élargie dans le système international de sécurité. L'élargissement ne sera pas sans conséquences sur la concurrence entre les deux grandes monnaies internationales que sont le dollar, principalement, mais aussi l'euro. |
| Keywords: | Euro ; dollar ; élargissement ; union européenne |
| Date: | 2006–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009841_v1&r=fmk |
| By: | Michel Lelart (LEO - Laboratoire d'économie d'Orleans - http://www.univ-orleans.fr/DEG/LEO - [CNRS : UMR6221] - [Université d'Orléans] - []) |
| Abstract: | Le micro-crédit est salué comme un moyen de réduire la pauvreté dans le monde que la communauté internationale viendrait de découvrir. La réalité est un peu différente. |
| Keywords: | Micro-crédit ; micro-finance |
| Date: | 2006–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00009930_v1&r=fmk |
| By: | Guillaume Gaulier; Amina Lahreche-Revil; Isabelle Mejean |
| Abstract: | This paper uses a detailed database to investigate exchange-rate pass-through at the product level, for a large number of countries. Since the database provides harmonized trade flows, pass-through in both export and import prices can be investigated consistently. The empirical analysis suggests that pricing behaviors are dichotomic: while pass-through is complete in 30 to 40% of sectors, there is significant pricing-to-market in the remaining ones. The average long-run pass-through coefficient is nevertheless quite high, close to 80% on average. This result however hides a strong heterogeneity of pass-through behaviors across sectors and exporting countries, and to a lesser extent across importers. Trying to disentangle composition effects from structural factors, the analysis suggests that a large part of cross-country differences is attributable to composition effects. Still, the pass-through is on average higher i) in volatile environments, ii) in less developed countries, iii) in little integrated markets. |
| Keywords: | Pass-through; pricing-to-market; product-level analysis; macroeconomic determinants; prices; sectors |
| JEL: | F12 F31 F41 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2006-02&r=fmk |
| By: | Elke Holst; Mechthild Schrooten |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp566&r=fmk |
| By: | Donald Lien; David A. Hennessy (Center for Agricultural and Rural Development (CARD)) |
| Abstract: | The Saskatchewan short-term hog loan program of 2002 provided a non-market credit line to participating hog producers. The repayment conditions for cash advances committed to by the provincial government depend on later hog prices, and so the program has derivative contract attributes. We model the contracts and use an estimated spot price stochastic process to establish summary statistics for producer benefits from the program. |
| Keywords: | agricultural policy, derivative contract, domestic support, international trade agreements. |
| JEL: | Q1 G3 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ias:cpaper:05-wp385&r=fmk |
| By: | Mauricio Arias; Camilo Hernández; Camilo Zea |
| Abstract: | Se construyen dos medidas de expectativas de inflación a partir de los precios de la deuda pública colombiana y se comparan con la encuesta tradicional de la Subgerencia de Estudios Económicos del Banco de la República. Si bien tanto los indicadores sugeridos como la encuesta presentan algunas desventajas, los primeros tienen la facultad de proveer información diaria y a distintos plazos, por lo cual son de gran importancia para evaluar si la autoridad monetaria está anclando las expectativas de inflación de los agentes en concordancia con su banda objetivo, a mediano y largo plazo. |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002461&r=fmk |
| By: | Dany Jaimovich (InterAmerican Development Bank); Ugo Panizza (InterAmerican Development Bank) |
| Abstract: | Commonly used datasets on the level of public debt provide incomplete country and period coverage. This paper presents a new dataset that includes complete series of central government debt for 89 countries over the 1991-2005 period and for seven other countries for the 1993-2005 period. |
| Keywords: | Public Debt; Debt Management; Fiscal Sustainability |
| JEL: | H63 F34 E63 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:1019&r=fmk |
| By: | Orazio Attanasio (Institute for Fiscal Studies and University College London); Laura Blow (Institute for Fiscal Studies); Robert Hamilton; Andrew Leicester (Institute for Fiscal Studies) |
| Abstract: | Over much of the past 25 years, the cycles of house price and consumption growth have been closely synchronised. Three main hypotheses for this co-movement have been proposed in the literature. First, that an increase in house prices raises households’ wealth, particularly for those in a position to trade down the housing ladder, which increases their desired level of expenditure. Second, that house price growth increases the collateral available to homeowners, reducing credit constraints and thereby facilitating higher consumption. And third, that house prices and consumption have tended to be influenced by common factors. This paper finds that the relationship between house prices and consumption is stronger for younger than older households, which appears to contradict the wealth channel. These findings therefore suggest that common causality has been the most important factor behind the link between house price and consumption. |
| Keywords: | House prices, consumption booms, wealth effects, collateral effects, common causality |
| JEL: | C13 D10 D91 E21 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:05/24&r=fmk |
| By: | Sebastian Edwards |
| Abstract: | In this paper I use a large multi-country data set to analyze the determinants of abrupt and large “current account reversals.” The results from a variance-component probit model indicate that the probability of experiencing a major current account reversal is positively affected by larger current account deficits, lower prices of exports relative to imports, and expansive monetary policies. On the other hand, this probability is lower for more advanced countries, and for countries with flexible exchange rates. An analysis of the marginal effects of current account deficits and of the predicted probability of reversal indicates that both have increased significantly for the U.S. since 1999. However, the level of this probability is still on the low side. I estimate that the predicted probability of a current account reversal in the U.S. has increased from 1.7% in 1999, to 14.9% in 2006. |
| JEL: | F02 F43 O11 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12154&r=fmk |
| By: | Chad E. Hart (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI)); Bruce A. Babcock (Center for Agricultural and Rural Development (CARD); Midwest Agribusiness Trade Research and Information Center (MATRIC)) |
| Abstract: | The federal government currently runs two major price support programs in agriculture, the marketing loan and countercyclical payment (CCP) programs. While these programs are both targeted at providing producer price protection, they have different political and financial costs associated with them. We outline these costs and project the effects of various loan rate changes on these programs for eight crops (barley, corn, cotton, oats, rice, sorghum, soybeans, and wheat) for 2005. Loan rate changes affect the price support programs by changing the payment rate producers receive when payments are triggered. We find that the crop's relative price strength versus its loan rate and the relationship between CCP base production and 2005 expected production have the largest influence on how loan rate changes affect outlays from the price support programs for the various crops. Of these crops, cotton is the only one that would be relatively unaffected by loan rate shifts. Corn and soybeans would see the largest declines in overall expenditures from price support programs if loan rates were decreased. Oats and soybeans would experience the largest percentage losses. However, the results also show that the federal government could maintain an agricultural price support structure at a lower cost than it is currently paying. The reduction in cost often comes in situations where the current array of price support programs overcompensates producers for price shortfalls. This shift would also likely find greater acceptance under the World Trade Organization (WTO) agriculture guidelines than would the current structure. For an administration that is looking to rein in deficit spending while at the same time negotiating new WTO guidelines, moving to lower loan rates could be an answer. |
| Keywords: | agricultural loan rates, agricultural marketing loan program, agricultural price supports, countercyclical payments (CCPs), loan deficiency payments (LDPs). |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ias:fpaper:05-bp44&r=fmk |
| By: | Chad E. Hart (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI)); Bruce A. Babcock (Center for Agricultural and Rural Development (CARD); Midwest Agribusiness Trade Research and Information Center (MATRIC)) |
| Abstract: | The federal government currently runs two major price support programs in agriculture, the marketing loan and countercyclical payment (CCP) programs. While these programs are both targeted at providing producer price protection, they have different political and financial costs associated with them. We outline these costs and project the effects of various loan rate changes on these programs for eight crops (barley, corn, cotton, oats, rice, sorghum, soybeans, and wheat) for 2005. Loan rate changes affect the price support programs by changing the payment rate producers receive when payments are triggered. We find that the crop's relative price strength versus its loan rate and the relationship between CCP base production and 2005 expected production have the largest influence on how loan rate changes affect outlays from the price support programs for the various crops. Of these crops, cotton is the only one that would be relatively unaffected by loan rate shifts. Corn and soybeans would see the largest declines in overall expenditures from price support programs if loan rates were decreased. Oats and soybeans would experience the largest percentage losses. However, the results also show that the federal government could maintain an agricultural price support structure at a lower cost than it is currently paying. The reduction in cost often comes in situations where the current array of price support programs overcompensates producers for price shortfalls. This shift would also likely find greater acceptance under the World Trade Organization (WTO) agriculture guidelines than would the current structure. For an administration that is looking to rein in deficit spending while at the same time negotiating new WTO guidelines, moving to lower loan rates could be an answer. |
| Keywords: | agricultural loan rates, agricultural marketing loan program, agricultural price supports, countercyclical payments (CCPs), loan deficiency payments (LDPs). |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:ias:cpaper:05-bp44&r=fmk |