New Economics Papers
on Financial Markets
Issue of 2006‒05‒06
53 papers chosen by
Carolina Valiente

  1. Risk Transfer with CDOs and Systemic Risk in Banking By Krahnen, Jan Pieter; Wilde, Christian
  2. The impact of the euro on financial markets By Lorenzo Cappiello; Peter Hördahl; Arjan Kadareja; Simone Manganelli
  3. Banking Crises, Financial Dependence and Growth By Klingebiel, Daniela; Kroszner, Randall S; Laeven, Luc
  4. The microstructure approach to exchange rates: a survey from a central bank’s viewpoint By Áron Gereben; György Gyomai; Norbert Kiss M.
  5. The accumulation of foreign reserves By Georges Pineau; Ettore Dorrucci
  6. Determinants of Convertible Bond Structure By Krishnaswami, Sudha; Yaman, Devrim
  7. International Financial Integration through the Law of One Price By Eduardo Levy Yeyati; Sergio Luis Schmukler; Neeltje Van Horen
  8. Global financial transmission of monetary policy shocks By Michael Ehrmann; Marcel Fratzscher
  9. Policy Impacts on Vietnam Stock Market: A Case of Anomalies and Disequilibria 2000-2006. By André Farber; Nguyen Van Nam; Quan Hoang Vuong
  10. Asset Price Dynamics in a Financial Market with Heterogeneous Trading Strategies and Time Delays By Giuseppe Garofalo; Alessandro Sansone
  11. Basel Capital Requirements and Bank Credit Risk Taking In Developing Countries By Hussain, M. Ershad; Hassan, M. Kabir
  12. How does information affect the comovement between interest rates and exchange rates? By Marcelo Sánchez
  13. Chicken or egg: financial development and economic growth in China, 1992-2004 By Fan, Xuejun; Jacobs, Jan; Lensink, Robert
  14. Learning about Beta: time-varying factor loadings, expected returns and the conditional CAPM By Franzoni, Francesco; Adrian, Tobias
  15. Volatility Clustering, Leverage Effects, and Jump Dynamics in the US and Emerging Asian Equity Markets By Daal, Elton; Naka, Atsuyuki; Yu, Jung-Suk
  16. Do Bank-Based Financial Systems Reduce Macroeconomic Volatility by Smoothing Interest Rates? By Johann Scharler
  17. Expenditure switching versus real exchange rate stabilization - competing objectives for exchange rate policy By Michael B. Devereux; Charles Engel
  18. Distribution Margins, Imported Inputs and the Insensitivity of the CPI to Exchange Rates By Campa, José Manuel; Goldberg, Linda S
  19. Optimal Taxation of Entrepreneurial Capital with Private Information By Albanesi, Stefania
  20. What effects is EMU having on the euro area and its member countries? An overview By Francesco Paolo Mongelli; Juan Luis Vega
  21. Sir George Caswall vs. the Duke of Portland: Financial Contracts and Litigation in the wake of the South Sea Bubble By Gary S. Shea
  22. Contracting Costs and the Window of Opportunity for Straight Debt Issues By Krishnaswami, Sudha; Yaman, Devrim
  23. The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004 By Lane, Philip R.; Milesi-Ferretti, Gian Maria
  24. Interest Rate Pass-Through, Monetary Policy Rules and Macroeconomic Stability By Claudia Kwapil; Johann Scharler
  25. Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India By Sujata Visaria;
  26. Why Do Companies Choose to Go IPOs? New Results Using Data from Taiwan By Shen, Yang-Pin; Wei, Peihwang P.
  27. Is Central Bank Transparency Desirable? By Sibert, Anne
  28. The Threat of Capital Drain: A Rationale for Public Banks? By Hendrik Hakenes; Isabel Schnabel
  29. A Note on the Foreign Exchange Market Efficiency Hypothesis: Does Small Sample Bias affect Inference? By Al-Zoubi, Haitham A.; Daal, Elton
  30. Managerial Career Concerns and Risk Management By Nam, Jouahn; Wang, Jun; Zhang, Ge
  31. SME Financing in Europe: Cross-Country Determinants of Debt Maturity By Hernandez-Canovas, Gines; Koeter-Kant, Johanna
  32. A Search Model of Centralzied and Decentralized Trade By Jianjun Miao;
  33. How Norwegian Managers View Dividend Policy By Baker, H. Kent; Mukherjee, Tarun K.; Paskelian, Ohannes George
  34. A dynamic model of settlement By Thorsten Koeppl; Cyril Monnet; Ted Temzelides
  35. The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s System is Unsustainable and Suggestions for a Replacement By Thomas I. Palley
  36. Deflationary Bubbles By Buiter, Willem H; Sibert, Anne
  37. Selecting Copulas for Risk Management By Koedijk, Kees; Kole, Erik; Verbeek, Marno
  38. Monetary policy, determinacy, and learnability in the open economy By James Bullard; Eric Schaling
  39. Central Banking by Committee By Sibert, Anne
  40. Risk, Uncertainty, and Option Exercise By Jianjun Miao; Neng Wang
  41. An Analysis of the Corporate Cash Holding Decision By D'Mello, Ranjan; Krishnaswami, Sudha; Larkin, Patrick J.
  42. Does Propitious Selection Explain Why Riskier People Buy Less Insurance? By De Donder, Philippe; Hindriks, Jean J.G.
  43. International Diversification with American Depository Receipts (ADRs) By Kabir, M. Humayun; Hassan, M. Kabir; Maroney, Neal C.
  44. Shareholders Should Welcome Knowledge Workers as Directors By Margit Osterloh; Bruno S. Frey
  45. Complementarities in Information Acquisition with Short-Term Trades By Christophe Chamley;
  46. Who is “Behavioral”? Cognitive Ability and Anomalous Preferences By Daniel J. Benjamin; Sebastian A. Brown; Jesse M. Shapiro
  47. Dynamic Speculative Attacks By Christophe Chamley;
  48. Revisiting Games of Incomplete Information with Analogy-Based Expectations By Philippe Jehiel; Frederic Koessler
  49. Survey Research in Finance: Views from Journal Editors By Baker, H. Kent; Mukherjee, Tarun K.
  50. Bankruptcy Law, Bonded Labor and Inequality By Dilip Mookherjee; Ulf von Lilienfeld-Toal
  51. Asset Restructuring and the Cost of Capital By D'Mello, Ranjan; Krishnaswami, Sudha; Larkin, Patrick J.
  52. Rational destabilising speculation and the riding of bubbles. By R. Andergassen
  53. Financial Systems and the Cost Channel Transmission of Monetary Policy Shocks By Sylvia Kaufmann; Johann Scharler

  1. By: Krahnen, Jan Pieter; Wilde, Christian
    Abstract: Large banks often sell part of their loan portfolio in the form of collateralized debt obligations (CDO) to investors. In this paper we raise the question whether credit asset securitization affects the cyclicality (or commonality) of bank equity values. The commonality of bank equity values reflects a major component of systemic risks in the banking market, caused by correlated defaults of loans in the banks' loan books. Our simulations take into account the major stylized fact of CDO\ transactions, the non-proportional nature of risk sharing that goes along with tranching. We provide a theoretical framework for the risk transfer through securitization that builds on a macro risk factor and an idiosyncratic risk factor, allowing an identification of the types of risk that the individual tranche holders bear. This allows conclusions about the risk positions of issuing banks after risk transfer. Building on the strict subordination of tranches, we first evaluate the correlation properties both within and across risk classes. We then determine the effect of securitization on the systematic risk of all tranches, and derive its effect on the issuing bank's equity beta. The simulation results show that under plausible assumptions concerning bank reinvestment behavior and capital structure choice, the issuing intermediary's systematic risk tends to rise. We discuss the implications of our findings for financial stability supervision.
    Keywords: risk transfer; systematic risk; systemic risk
    JEL: G28
    Date: 2006–04
  2. By: Lorenzo Cappiello (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Peter Hördahl (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Arjan Kadareja (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Simone Manganelli (European Central Bank, DG Research, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We assess whether the euro had an impact first on the degree of integration of European financial markets, and, second, on the euro area term structure. We propose two methodologies to measure integration - one relies on time-varying GARCH correlations, and the other one on a regression quantile-based codependence measure. We document an overall increase in co-movements in both equity and bond euro area markets, suggesting that integration has progressed since the introduction of the euro. However, while the correlations in bond markets reaches almost one for all euro area countries, co-movements in equity markets are much lower and the increase is limited to large euro area economies only. In the second part of the paper, we focus on the asset pricing implications of the euro. Specifically, we use a dynamic no-arbitrage term structure model to examine the risk ? return trade-off in the term structure of interest rates before and after the introduction of the euro. The analysis shows that while the average level of term premia seems little changed following the euro introduction, the variability of premia has been reduced as a result of smaller macro shocks during the euro period. Moreover, the macro factors that were found to be important in explaining the dynamics of premia before the introduction of the euro continue to play a key role in this respect also thereafter.
    Keywords: Financial markets, euro, financial integration, volatility, conditional correlation, term structure, fundamentals, risk premia.
    JEL: F36 G12 E43 E44 C22
    Date: 2006–03
  3. By: Klingebiel, Daniela; Kroszner, Randall S; Laeven, Luc
    Abstract: This paper investigates the growth impact of banking crises on industries with different levels of dependence on external sources of finance to analyze the mechanisms linking financial shocks and real activity. If the banking system is the key element allowing credit constraints to be relaxed, then a sudden loss of these intermediaries in a system where such intermediaries are important should have a disproportionately contractionary impact on the sectors that flourished due to their reliance on banks. Using data from 38 developed and developing countries that experienced financial crises during the last quarter century, we find that sectors highly dependent on external finance tend to experience a substantially greater contraction of value added during a banking crisis in deeper financial systems than in countries with shallower financial systems. On average, in a country experiencing a banking crisis, a sector at the 75th percentile of external dependence and located in a country at the 75th percentile of private credit to GDP would experience a 1.6 percent greater contraction in growth in value added between the crisis and pre-crisis period than a sector at the 25th percentile of external dependence and private credit to GDP. This effect is sizeable compared with an overall mean decline in growth of 3.5 percent between these two periods. Our results, however, do not suggest that on net the externally dependent firms fare worse in deep financial systems.
    Keywords: banking and financial crises; credit channel; financial development; financing constraints
    JEL: G21 O16
    Date: 2006–04
  4. By: Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing this study)); Norbert Kiss M. (Magyar Nemzeti Bank)
    Abstract: The application of the market microstructure theory to foreign exchange markets in the last few years has introduced a new approach to the analysis of exchange rates. The most important variable of the microstructure analysis, the so-called order flow has proven to be suitable for explaining a significant part of exchange rate changes, not only for high frequency data, but also at longer time horizons that are relevant for macro-economic analysis. Microstructure theory is thus extremely successful from an empirical point of view, especially when compared to traditional exchange rate models. The aim of our study is to provide an introduction to the microstructure-based analysis of exchange rates, emphasising those aspects which may be the most relevant for central banks. In addition to an introduction to the theoretical background of the microstructure approach and the presentation of the key empirical results, we also intend to cast light upon the questions which are important for central banks and which can be tackled successfully using this framework. On the basis of the literature's findings, we present the answers given by the microstructure approach to, among others, questions concerning the efficiency of central bank intervention, the effects of economic news on exchange rates, and the role of different currency market participants in exchange rate developments.
    Keywords: exchange rate, order flow, microstructure.
    JEL: F31 G15
    Date: 2005
  5. By: Georges Pineau (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Ettore Dorrucci (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
    Abstract: In a number of countries, especially emerging market economies, the public sector has in recent years been accumulating sizeable cross-border financial assets, mainly in the form of official foreign exchange reserves. World reserves have risen from USD 1.2 trillion in January 1995 to above USD 4 trillion in September 2005, growing particularly rapidly since 2002. This paper investigates the features, drivers, risks and costs of such recent reserve accumulation, as well as the other uses that certain countries have been making of their accumulated foreign assets. The main trends in central bank reserve management are also reviewed. Finally, the paper provides some evidence for the impact of reserve accumulation on yields and asset prices.
    Keywords: Foreign exchange reserves, exchange rates, emerging market economies.
    Date: 2006–03
  6. By: Krishnaswami, Sudha (University of New Orleans); Yaman, Devrim (Western Michigan University)
    Abstract: Theoretical research argues that convertible bonds mitigate the contracting costs of moral hazard, adverse selection, and financial distress. Using firm-specific and macroeconomic factors of the contracting costs, we examine the extent to which they impact the likelihood of issuance and the structure of convertible bonds. Our evidence indicates that moral hazard, adverse selection, and expected financial distress costs are all important determinants of the likelihood of issuing convertible bonds over straight bonds. We also analyze the structure of convertible bonds issued by studying whether these bonds are more debt-like or equity-like. The evidence indicates that moral hazard costs do not influence bond structure, while adverse selection costs are somewhat important in determining the structure. Expected financial distress costs have the strongest statistical and economic impact on convertible bond structure.
    Keywords: Convertible bonds, Moral hazard, Adverse selection, Financial Distress
    JEL: G32 G30
    Date: 2005
  7. By: Eduardo Levy Yeyati; Sergio Luis Schmukler; Neeltje Van Horen
    Abstract: This paper argues that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity (PPP) literature, we show that non-linear Threshold Autoregressive (TAR) models properly capture the behavior of the crossmarket premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, we find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Crisis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price.
    Keywords: capital market integration, market segmentation, TAR, PPP, capital controls, crisis
    JEL: F30 F36 G15
    Date: 2006–04
  8. By: Michael Ehrmann (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The paper shows that US monetary policy has been an important determinant of global equity markets. Analysing 50 equity markets worldwide, we find that returns fall on average around 3.8% in response to a 100 basis point tightening of US monetary policy, ranging from a zero response in some to a reaction of 10% or more in other countries, as well as significant cross-sector heterogeneity. Distinguishing different transmission channels, we find that in particular the transmission via US and foreign short-term interest rates and the exchange rate play an important role. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the degree of real and financial integration, thus linking the strength of asset price transmission to underlying trade and asset holdings, and find that in particular the degree of global integration of countries – and not a country’s bilateral integration with the United States – is a key determinant for the transmission process.
    Keywords: Global financial markets, monetary policy, transmission, financial integration, United States, advanced economies, emerging market economies.
    JEL: F36 F30 G15
    Date: 2006–04
  9. By: André Farber (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Nguyen Van Nam (National Economics University, Hanoi, Vietnam.); Quan Hoang Vuong (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: Vietnam launched its first-ever stock market, named as Ho Chi Minh City Securities Trading Center (HSTC) on July 20, 2000. This is one of pioneering works on HSTC, which finds empirical evidences for the following: Anomalies of the HSTC stock returns through clusters of limit-hits, limit-hit sequences; Strong herd effect toward extreme positive returns of the market portfolio;The specification of ARMA-GARCH helps capture fairly well issues such as serial correlations and fat-tailed for the stabilized period. By using further information and policy dummy variables, it is justifiable that policy decisions on technicalities of trading can have influential impacts on the move of risk level, through conditional variance behaviors of HSTC stock returns. Policies on trading and disclosure practices have had profound impacts on Vietnam Stock Market (VSM). The over-using of policy tools can harm the market and investing mentality. Price limits become increasingly irrelevant and prevent the market from self-adjusting to equilibrium. These results on VSM have not been reported before in the literature on Vietnam’s financial markets. Given the policy implications, we suggest that the Vietnamese authorities re-think the use of price limit and give more freedom to market participants.
    Keywords: GARCH, Vietnam, Emerging stock market, Policy Impacts.
    JEL: C12 C22
    Date: 2006–04
  10. By: Giuseppe Garofalo; Alessandro Sansone
    Abstract: In this paper we present a continuous time dynamical model of heterogeneous agents interacting in a financial market where transactions are cleared by a market maker. The market is composed of fundamentalist, trend following and contrarian agents who process information from the market with different time delays. Each class of investor is characterized by path dependent risk aversion. We also allow for the possibility of evolutionary switching between trend following and contrarian strategies. We find that the system shows periodic, quasi-periodic and chaotic dynamics as well as synchronization between technical traders. Furthermore, the model is able to generate time series of returns that exhibit statistical properties similar to those of the S&P500 index, which is characterized by excess kurtosis, volatility clustering and long memory.
    Keywords: Dynamic asset pricing; Heterogeneous agents; Complex dynamics; Strange attractors; Chaos; Intermittency; Stock market dynamics; Synchronization
    JEL: G11 G12 G14
    Date: 2005–10
  11. By: Hussain, M. Ershad (University of New Orleans); Hassan, M. Kabir (University of New Orleans; Drexel University)
    Abstract: Existing literature has focused attention on the impact of Basle I and similar capital requirement regulations on developed countries where such regulations were found to be effective in increasing capital ratios and reducing portfolio credit risk of commercial banks. In the present study, we study the impact of such capital requirement regulations on commercial banks in 11 developing countries around the world within a cross-section framework with the widely popular simultaneous equations model of Shrieves and Dahl (1992). Surprisingly, we find that such regulations did not increase the capital ratios of banks in the developing countries. This implies that particular attention should be given to the business, environmental, legal, cultural realities of such countries while designing and implementing such policies for developing countries. However, we find evidence that such regulations did reduce portfolio risk of banks. We also find that capital ratios and portfolio risk are inversel.
    Keywords: Capital requirement, Commercial banks, Credit risk
    JEL: G21 G28 C12
    Date: 2005
  12. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper compares the link between exchange rates and interest rates under full information and two alternative asymmetric information approaches. It also distinguishes between cases of expansionary and contractionary depreciations. Full information results are not robust to the presence of informational frictions. For economies exhibiting expansionary or strongly contractionary depreciations, such frictions lead to two optimal deviations from full information outcomes: i) under asymmetric information with signal extraction, the realisation of a relatively less frequent shock leads the central bank to behave as if a more likely disturbance had instead taken place; and ii) under asymmetric information without signal extraction, the monetary authority does not react on impact to shocks. Finally, in the case of mildly contractionary depreciations, both asymmetric information models predict a lack of response of the central bank to aggregate demand shocks, as opposed to an offsetting movement in interest rates under full information.
    Keywords: Transmission mechanism, Emerging market economies, Exchange rate, Monetary policy, Imperfect information.
    JEL: E52 E58 F31 F41
    Date: 2006–04
  13. By: Fan, Xuejun; Jacobs, Jan; Lensink, Robert (Groningen University)
    Abstract: This paper contributes to the empirical finance-growth literature by examining the relationship between financial depth, banking sector development, stock market development and economic growth in China. After an extensive survey on recent financial reforms in China, we apply Granger (non-)causality tests for non-stationary variables to examine long-run and short-run causality between economic growth and financial development. We find positive relationships between financial depth, banking sector development and growth. However, stock market development does not seem to have a positive effect on long-run economic growth.
    Date: 2005
  14. By: Franzoni, Francesco; Adrian, Tobias
    Abstract: This paper explores the theoretical and empirical implications of time-varying and unobservable beta. Investors infer factor loadings from the history of returns via the Kalman filter. Due to learning, the history of beta matters. Even though the conditional CAPM holds, standard OLS tests can reject the model if the evolution of investor's expectations is not properly modelled. The authors use their methodology to explain returns on the twenty-five size and book-to-market sorted portfolios. Their learning version of the conditional CAPM produces pricing errors that are significantly smaller than standard conditional or unconditional CAPM and the model is not rejected by the data.
    Keywords: Capital Asset Pricing Model; CAPM; investments
    JEL: C12 C33 G12
    Date: 2005–09–20
  15. By: Daal, Elton (University of New Orleans); Naka, Atsuyuki (University of New Orleans); Yu, Jung-Suk (University of New Orleans)
    Abstract: This paper proposes asymmetric GARCH-Jump models that synthesize autoregressive jump intensities and volatility feedback in the jump component. Our results indicate that these models provide a better fit for the dynamics of the equity returns in the US and emerging Asian markets, irrespective whether the volatility feedback is generated through a common GARCH multiplier or a separate measure of volatility in the jump intensity function. We also find that they can capture several distinguishing features of the return dynamics in emerging markets, such as, more volatility persistence, less leverage effects, fatter tails, and greater contribution and variability of the jump component.
    Keywords: Volatility feedback, Time-varying jump intensity, Volatility clustering, Leverage effect, Leptokurtosis
    JEL: C22 F31 G15
    Date: 2006–01–20
  16. By: Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: This paper investigates the business cycle implications of limited pass-through to retail interest rates based on a calibrated sticky price model. Although limited interest rate pass-through can in principle reduce output and inflation volatility at the same time, large reductions in output volatility are likely to be accompanied by a more volatile inflation rate. Limited pass-through gives rise to two counteracting effects: It partially insulates the economy from adverse liquidity shocks and thereby leads to lower output volatility. However, it also reduces the stabilizing effect of monetary policy which implies higher inflation volatility.
    Keywords: Financial Systems, Interest Rate Pass-Through, Business Cycle
    JEL: E32 E44 E52
    Date: 2006–03–17
  17. By: Michael B. Devereux (Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, BC V6T 1Z1, Canada.); Charles Engel (University of Wisconsin, 1180 Observatory Drive, Madison, WI 53706-1393, USA.)
    Abstract: This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment. We show that optimal nominal exchange rate volatility will reflect these competing objectives. The key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness, as well as the elasticity of substitution between home and foreign goods. Quantitatively, we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal exchange rate volatility may be non-monotonic.
    Keywords: Exchange rates, monetary policy, expenditure switching.
    JEL: F41 E52
    Date: 2006–04
  18. By: Campa, José Manuel; Goldberg, Linda S
    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.
    Keywords: distribution margins; exchange rate; import prices; pass through
    JEL: F3 F4
    Date: 2006–04
  19. By: Albanesi, Stefania
    Abstract: This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs’ effort, which is not observed. The presence of idiosyncratic risk in capital returns implies that constrained-efficient allocations display an intertemporal wedge on entrepreneurial capital that can be positive or negative. The properties of optimal marginal taxes on entrepreneurial capital depend on the sign of this wedge. If the wedge is positive, the marginal capital tax should be decreasing in capital returns, while the opposite is true when the wedge is negative. The optimal tax system equalizes after tax returns on all assets, thus reducing the variance of capital returns after tax relative to other assets. If entrepreneurs are allowed to sell shares of their capital to outside investors, returns to externally owned capital are subject to double taxation at the level of the entrepreneur and at the level of the outside investors. Even if entrepreneurs can purchase private insurance against their idiosyncratic risk, optimal asset taxes are essential to implement the constrained-efficient allocation if entrepreneurial portfolios are private information.
    Keywords: entrepreneurial capital; optimal taxation; private information
    JEL: E6 H2
    Date: 2006–04
  20. By: Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Juan Luis Vega (Banco de España, Alcalá, 48, 28014 Madrid, Spain.)
    Abstract: This paper addresses the effects of the European Economic and Monetary Union (EMU) since the introduction of the euro - on economic and financial structures, institutions and performance. What type of changes is the euro fostering? What forces is it setting in motion that were not there before? Six years after the launch of the euro, was an appropriate time to start taking stock of these effects. For this purpose, in June 2005, the ECB held a workshop on “What effects is EMU having on the euro area and its member countries?” The workshop was organised in five areas: 1. trade integration, 2. business cycles synchronisation, economic specialisation and risk sharing, 3. financial integration, 4. structural reforms in product and labour markets, and 5. inflation persistence. This paper sets the workshop in the context of the current debate on the effects of EMU and brings together several of the issues raised by the leading presentations: i.e., this paper serves as an overview. Overall, the effects of the euro observed are beneficial. However, progress has been uneven in the above areas. Many potential concerns preceding the launch of the euro have been dispelled. Moreover, it will take more time for the full effects of the euro to unravel.
    Keywords: Optimum Currency Area, Economic and Monetary Integration, EMU.
    JEL: E42 F13 F33 F42
    Date: 2006–03
  21. By: Gary S. Shea
    Abstract: An investigation into the legal wrangles between the first Duke of Portland and his financial antagonists, in particular Sir George Caswall, helps illustrate the nature of private financial contracting during the South Sea Bubble. It also illustrates the special costs of enforcing such contracting after the Bubble. This paper is but a beginning to a wider study of the legal aftermath of the Bubble and the contribution of early modern financial contracting to the general law of contract.
    Keywords: South Sea Company, Bentinck family, Financial Revolution, Bubble Act, legal history.
    JEL: G13 N23
    Date: 2006–04
  22. By: Krishnaswami, Sudha (University of New Orleans); Yaman, Devrim (Western Michigan University)
    Abstract: We analyze whether fluctuation in economy-wide factors cause time-series variation in the contracting costs of moral hazard, adverse selection, and financial distress, and so create windows of opportunity for firms to issue debt. Using the announcement period abnormal returns as one measure of the overall contracting costs of debt issues, we specifically study whether economy-wide factors affect the impact of firm-specific measures of contracting costs on the abnormal returns. We find that debt issues are more costly in periods of higher interest rates and in industry downturns. When we partition the impact of each issue- and firm-specific measure of contracting costs across high and low levels of each economy-wide variable, we find that only the measures of agency cost become significant in general, but issue-specific measures of financial distress also become relevant in subsamples.
    Keywords: Straight debt, Contracting costs, Moral hazard, Financial distress, Adverse selection
    JEL: G32 G30
    Date: 2005
  23. By: Lane, Philip R.; Milesi-Ferretti, Gian Maria
    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
  24. By: Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area.
    Keywords: Interest Rate Pass-Through, Interest Rate Rules, Equilibrium Determinacy, Stability
    JEL: E32 E52 E58
    Date: 2006–03–20
  25. By: Sujata Visaria (Institute for Economic Development, Boston University);
    Abstract: This paper investigates the micro-level link between judicial quality and eco- nomic outcomes. It uses a loan-level data set from a large Indian bank to es- timate the impact of a new quasi-legal institution, Debt Recovery Tribunals, which are aimed at accelerating banks' recovery of non-performing loans. I use a dfferences-in-dfferences strategy based on two sources of variation: the mon- etary threshold for claims to be eligible for these tribunals, and the staggered introduction of tribunals across Indian states. I find that the establishment of tribunals reduces delinquency in loan repayment by between 3 and 11 percent. The ffect is statistically significant within loans as well: for the same loan, in- stallments that become due after the loan becomes treated are more likely to be paid up on time than those that become due before. Furthermore, interest rates on loans sanctioned after the reform are lower by 1.4-2 percentage points. These results suggest that legal reform and the improved enforcement of loan contracts can reduce borrower delinquency, and can lead banks to provide cheaper credit. Thus the paper illustrates a microeconomic mechanism through which improve- ments in legal institutions might affect credit market outcomes.
  26. By: Shen, Yang-Pin (Yuan Ze University); Wei, Peihwang P. (University of New Orleans)
    Abstract: In this study, we examine the determinants of firms’ IPO decisions in Taiwan, for the sample period of 1989 to 2000. The regulations in Taiwan permit us to identify firms that met IPO requirements but chose not to go public. The unique regulatory environment allows a clear comparison of firms that choose IPOs and those that do not. With the exception of Pagano, Panetta and Zingales (1998), we are not aware of any similar study. Their paper examines the IPO market in Italy, and there seem to be considerable differences between that market and Taiwan market. Indeed, we find strong evidence that IPOs are not motivated by financing needs or constraints while they do. Some of our results are nevertheless consistent with theirs -- in particular, we find that larger and profitable firms are more likely to list equity. Our other findings also provide support for, though not overwhelmingly, information asymmetry, listing costs, liquidity, owners’ diversification desire, and market timing as factors influencing IPO decisions. Finally, we present evidence strongly consistent with venture capital providing certification to firm credibility.
    Keywords: Initial public offering (IPO), Venture capital, Taiwan stock market
    JEL: G32 G15 G24
    Date: 2006–01
  27. By: Sibert, Anne
    Abstract: I analyse central bank transparency when the central bank's objective function is its private information. Non-transparency exists when the public does not observe the action of the central bank and an unobservable component of the inflation-control error keeps the public from using its observation of inflation to infer perfectly the central bank's action, and hence, the central bank's objective. The degree of transparency is defined as the fraction of the inflation-control error that is observable. This notion is similar to that of Cukierman and Meltzer [9], Faust and Svensson [15], [16] and others. I find a number of results; some are different than what previous authors have found and others are novel. I demonstrate that non-transparent central banks with private information inflate less than central banks in a regime with perfect information. Moreover, in contrast to transparent central banks with private information, non-transparent banks with private information respond optimally to shocks; lower inflation is not at the expense of flexibility. Increased transparency lowers planned inflation, but surprisingly, it can worsen the public's ability to infer the central bank's objective function. I find that, no matter what their preferences, central banks and societies are made better off by more transparency. I further demonstrate that the transparent regime is not the same as the non-transparent regime when non-transparency goes to zero. I show that planned inflation is not necessarily lower in the transparent regime than in the non-transparent regime. However, numerical results suggest that all central banks and societies are better off in the transparent regime.
    Keywords: monetary policy; signalling; transparency
    JEL: E58
    Date: 2006–04
  28. By: Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany,; Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany,
    Abstract: This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.
    Keywords: Public banks, cooperative banks, capital drain, credit rationing, financial integration, privatization.
    JEL: G21 F36 H11 L33
    Date: 2006–04
  29. By: Al-Zoubi, Haitham A. (Hashemite University); Daal, Elton (University of New Orleans)
    Abstract: This study examines whether small sample bias affects the standard inference about the foreign exchange market efficiency hypothesis. Our findings indicate that the bias is large enough to result in rejection of the efficient market hypothesis even when it is true. We use bootstrapping to adjust for the bias and find that the hypothesis cannot be rejected for the Swiss franc and French franc. We also find that the bias plays a significant role in the inference that expectation error causes inefficiency in the foreign exchange markets. After bias adjustment, the rational expectation hypothesis holds even at one month-horizon.
    Keywords: Market Efficiency Hypothesis, Rational Expectation Hypothesis, Risk Premium, Small Sample Bias, Bootstrapping
    JEL: G14 C12 C22
    Date: 2005–08–27
  30. By: Nam, Jouahn (Pace University); Wang, Jun (Baruch College); Zhang, Ge (University of New Orleans)
    Abstract: We present a dynamic model of corporate risk management and managerial career concerns. We show that managers with high (low) career concerns are more likely to speculate (hedge) early in their careers. In the later stage of their careers when managers have less career concerns, there is no speculative motive for self interested managers. On the other hand, managers with minimal career concerns engage in neither hedging nor speculation early in their careers, but they may choose to hedge after poor early performance.
    Keywords: Risk management, Dynamic model, Hedging, Speculation
    JEL: G34 C73
    Date: 2005
  31. By: Hernandez-Canovas, Gines (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Koeter-Kant, Johanna
    Abstract: We examine the influence of cross country differences on debt maturity for small and medium size enterprises (SMEs) using a sample of 3366 SMEs from 19 European countries. We analyze a country's legal environment, institutional environment, banking structure and economic situation while controlling for firm specific characteristic. We find that SMEs in countries with high property rights that protect their creditors or enforce existing laws are more likely to obtain long-term debt. We also show evidence that banks seem to rely more on the legal, economic, and institutional determinants when determining the length of a loan agreement for micro firms than when granting loans to medium size firms.
    Keywords: Debt maturity; Small business lending; Banks; Legal system
    JEL: G21 G30 G32
    Date: 2006
  32. By: Jianjun Miao (Institute for Economic Development, Boston University);
    Keywords: searching, matching and bargaining, bid-ask spread, liquidity, welfare, Walrasian equilibrium
  33. By: Baker, H. Kent (American University); Mukherjee, Tarun K. (University of New Orleans); Paskelian, Ohannes George (University of New Orleans)
    Abstract: We report the results of a 2004 survey from managers of dividend-paying Norwegian firms listed on the Oslo Stock Exchange about their views on dividend policy. Specifically, we identify the most important factors in making dividend policy decisions and managers’ views about various dividend-related issues. The most important determinants of a firm’s dividend policy are the level of current and expected future earnings, stability of earnings, current degree of financial leverage, and liquidity constraints. No significant correlation exists between the overall rankings of factors influencing dividend policy between Norwegian and U.S. managers. Norwegian managers express mixed views about whether a firm’s dividend policy affects firm value. Respondents point to the possible role of dividend policy as a signaling mechanism. No support exists for the tax-preference explanation for paying dividends.
    Keywords: Dividend policy, Cash dividends
    JEL: G35
    Date: 2005–12–07
  34. By: Thorsten Koeppl (Department of Economics, Queen‘s University, Kingston, Ontario K7L 3N6, Canada.); Cyril Monnet (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ted Temzelides (Department of Economics, University of Pittsburgh, 4715 WWPH, 230 S Bouquet Street, Pittsburgh, PA 15260, USA.)
    Abstract: We investigate the role of settlement in a dynamic model of a payment system where the ability of participants to perform certain welfare-improving transactions is subject to random and unobservable shocks. In the absence of settlement, the full information first-best allocation cannot be supported due to incentive constraints. In contrast, this allocation is supportable if settlement is introduced. This, however, requires that settlement takes place with a sufficiently high frequency.
    Keywords: Payments, Settlement, Intertemporal Incentives.
    JEL: E4 E5
    Date: 2006–04
  35. By: Thomas I. Palley
    Abstract: Dooley et al. (2003) have argued that today’s international financial system has structural similarities with the earlier Bretton Woods (1946 – 71) arrangements and is stable. This paper argues that the comparison is misplaced and ignores fundamental microeconomic differences, and that today’s system is also vulnerable to a crash. Eichengreen (2004) and Goldstein and Lardy (2005) have also argued that the system is unsustainable. However, their focus is the sustainability of financing to cover the U.S. trade deficit, whereas the current paper focuses on inadequacies on the system’s demand side. The paper concludes with suggestions for a global system of managed exchange rates that should replace the current system – hopefully, before it crashes.
    Keywords: Revised Bretton Woods, export-led growth, aggregate demand
    JEL: F02 F32 F33
    Date: 2006
  36. By: Buiter, Willem H; Sibert, Anne
    Abstract: In an attempt to clean up an unruly literature, we specify the necessary and sufficient conditions for household optimality in a model where money is the only financial asset and provide the relevant proofs. We use our results to analyse when deflationary bubbles can and cannot exist. Our findings are in contrast to the results in several prominent contributions to the literature. We argue for particular specifications of the no-Ponzi-game restrictions on the household's and government's intertemporal budget constraints in a model with money and bonds. Using the restriction on the household we derive the necessary and sufficient conditions for household optimality. The resulting equilibrium terminal conditions are then used to demonstrate that the existence of bonds does not affect when deflationary bubbles can and cannot occur. This result differs from that in other recent works.
    Keywords: deflationary bubbles; transversatility conditions
    JEL: D91 E31 E40
    Date: 2006–04
  37. By: Koedijk, Kees; Kole, Erik; Verbeek, Marno
    Abstract: Copulas offer financial risk managers a powerful tool to model the dependence between the different elements of a portfolio and are preferable to the traditional, correlation-based approach. In this paper we show the importance of selecting an accurate copula for risk management. We extend standard goodness-of-fit tests to copulas. Contrary to existing, indirect tests, these tests can be applied to any copula of any dimension and are based on a direct comparison of a given copula with observed data. For a portfolio consisting of stocks, bonds and real estate, these tests provide clear evidence in favour of the Student’s t copula, and reject both the correlation-based Gaussian copula and the extreme value-based Gumbel copula. In comparison with the Student’s t copula, we find that the Gaussian copula underestimates the probability of joint extreme downward movements, while the Gumbel copula overestimates this risk. Similarly we establish that the Gaussian copula is too optimistic on diversification benefits, while the Gumbel copula is too pessimistic. Moreover, these differences are significant.
    Keywords: copulas; distributional tests; financial dependence; risk management; tail dependence
    JEL: C12 C14 G11
    Date: 2006–04
  38. By: James Bullard (Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166-0442, United States.); Eric Schaling (Department of Economics University of Johannesburg, and CentER for Economic Research, Tilburg University. Address: P.O. Box 524, 2006, Auckland Park, Johannesburg, Republic of South Africa.)
    Abstract: We study how determinacy and learnability of global rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework. The two blocks may be viewed as the U.S. and Europe, or as regions within the euro zone. We seek to understand how monetary policy choices may interact across borders to help or hinder the creation of a unique rational expectations equilibrium worldwide which can be learned by market participants. We study cases in which optimal policies are being pursued country by country as well as some forms of cooperation. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation.
    Keywords: Indeterminacy, monetary policy rules, new open economy macroeconomics, international policy coordination.
    JEL: E52 F33
    Date: 2006–04
  39. By: Sibert, Anne
    Abstract: There is a small, but growing, economics literature on the importance and effects of having monetary policy made by a committee, rather than by an individual. Complimenting this is an older and larger body of literature on groups in the other social sciences, particular in social psychology. This paper provides a review of some of this work, focussing on two important features of committees: the effect of their size on performance and whether or not they are more moderate than the members who make them up. The results of the literature on committee size and committee polarization suggest that the ideal monetary policy committee may not have many more than five members. It should have a well-defined objective and it should publish the votes of its members. It should be structured so that members do not act as part of a group, perhaps by having short terms in office and members from outside the central bank. External scrutiny of the decision-making process should be encouraged.
    Keywords: committee size; groupthink; social loafing
    JEL: E50 E58
    Date: 2006–04
  40. By: Jianjun Miao (Institute for Economic Development, Boston University); Neng Wang (University of Rochester)
    Keywords: Knightian undertainty, multiple-priors utility, real options, optimal stopping problem
    JEL: D81
  41. By: D'Mello, Ranjan (Wayne State University); Krishnaswami, Sudha (University of New Orleans); Larkin, Patrick J. (Fayetteville State University)
    Abstract: We investigate the tradeoff theory as an explanation for how managers allocate cash to post-spin-off parent and subsidiary firms. Spin-offs provide an opportunity to examine the determinants of cash holdings free from the confounding effects of the pecking order theory. Our results indicate that difference in asset size, sales growth, research and development expenses, net working capital, and leverage significantly affect the difference in cash holdings of post-spin-off entities. These results suggest that cash holdings are decreasing in the ease of raising cash and availability of cash from internal sources, and are increasing in growth opportunities, asymmetric information levels, and financial distress costs.
    Keywords: Trade-off theory, Spin-off, Cash holding
    JEL: G34 C12 C21
    Date: 2005–11
  42. By: De Donder, Philippe; Hindriks, Jean J.G.
    Abstract: Empirical testing of asymmetric information in the insurance market has uncovered a negative correlation between risk levels and insurance purchases, rather than the positive correlation predicted by the standard insurance theory. Hemenway (1990) proposes an explanation for this negative correlation, called 'propitious selection''. He argues that potential insurance buyers have different tastes for risk and that 'individuals who are highly risk avoiding are more likely both to try to reduce the hazard and to purchase insurance' (p. 1064). Chiappori and Salanié (2000) also suggest that this line of argument, which they call 'cherry picking', may explain the observed negative correlation. In this paper, we show that the propitious selection argument does not imply negative correlation between risk levels and insurance purchases, be-cause it fails to take into account the supply side of the insurance market. To illustrate this claim, we provide a model where, although we assume that individuals differ in risk aversion and that the more risk averse individuals exert more precaution and buy more insurance, we end up with a positive correlation between risk and insurance purchases at equilibrium. The reason is that, in any separating equilibrium, the more risk averse individuals face insurance overprovision which, combined with moral hazard, increases their risk relative to the less risk averse individuals. To obtain the negative correlation between risk and insurance purchases, one further needs the extra condition of decreasing marginal willingness to pay for the less risk averse individuals. Finally, we find that propitious selection has profound policy implications for social insurance.
    Keywords: cherry picking; precaution; preference-based adverse selection; social insurance
    JEL: D82 G22
    Date: 2006–04
  43. By: Kabir, M. Humayun (Massey University); Hassan, M. Kabir (University of New Orleans); Maroney, Neal C. (University of New Orleans)
    Abstract: It is already well known that U.S. investors can achieve higher gains by investing directly in emerging markets (De Santis, 1997). Given the opportunity to invest directly in the shares of stocks in the developed (DCs) and emerging (EM) markets, it is interesting to know whether the U.S. investors can potentially gain any benefits by investing in ADRs. We test both index models, and SDF-based model.Our findings show that U.S. investors needed to invest in both ADRs and country portfolios in developed in the eighties, and in Latin American countries in early nineties. During the early and late nineties, we find substitutability between ADRs and country portfolios in DCs. As more and more ADRs are enlisted in the US market from developed countries over time, the ADRs become substitutes to country. Similarly, countries with higher number of ADRs irrespective of regions show the same pattern of substitutability between ADRs and country indices. However, such substitutability does not exist for countries with the highest number of ADRs by the end of sample period, 2001. On the other hand, U.S. investors can achieve the diversification benefits by investing ADRs along with U.S. market index in Asia. The significant marginal contribution of one-third of developed countries requires investment in ADRs and U.S. market in the developed countries. And investors do not need to hold both ADRs and country as it was the case in the eighties. On the other hand, investors need to hold both ADRs and country portfolios in most of the Asian countries to achieve diversification benefits at margin.
    Keywords: Emerging markets, American Depository Receipts (ADR), Diversification
    JEL: G15 C12 C39
    Date: 2005
  44. By: Margit Osterloh; Bruno S. Frey
    Abstract: The most influential approach of corporate governance, the view of shareholders supremacy does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder interests by making the board more responsible to shareholders, and monitoring of top management by independent outside directors should be strengthened. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firmspecific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this dilemma: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm who are making firm-specific knowledge investments. (3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they provide a step in the direction of a more adequate theory of the firm as a basis for corporate governance.
    Keywords: Corporate governance; shareholders; board directors; insiders; firm-specific knowledge
    JEL: D23 D83 L14 G34 M50
    Date: 2006–04
  45. By: Christophe Chamley (Institute for Economic Development, Boston University);
    Abstract: In a financial market where agents trade for prices in the short-term and where news can increase the uncertainty of the public belief, there are strategic complementarities in the acquisition of private information and a continuum of equilibrium strategies if the cost of information is sufficient small. Imperfect observation of the past prices reduces the continuum of Nash-equilibrium to a unique one which may be a Strongly Rational-Expectations Equilibrium. In that equilibrium, because of the strategic complementarity, there are two sharply different regimes for the evolution of the price, the volume of trade and the information acquisition which is either nil or at its maximum.
    Keywords: financial markets, short-term, endogenous information, multiple equilibria, social learning, trading frenzies.
  46. By: Daniel J. Benjamin; Sebastian A. Brown; Jesse M. Shapiro
    Date: 2006–05–02
  47. By: Christophe Chamley (Institute for Economic Development, Boston University);
    Keywords: speculative attach, currency crisis, coordination, informational externalities, social learning
  48. By: Philippe Jehiel; Frederic Koessler (THEMA, Université de Cergy-Pontoise)
    Date: 2005–01
  49. By: Baker, H. Kent (American University); Mukherjee, Tarun K. (University of New Orleans)
    Abstract: We survey editors from 15 "core" and 35 "non-core" finance journals to learn their views about specific issues involving survey research. Based on responses from 25 editors, none of their journals has an established policy involving the publication of survey research. The evidence shows that survey-based manuscripts typically go through the same review process as other manuscripts. However, editors of "core" versus "non-core" journals have mixed views about the role that survey research should play in the finance literature. The editors provide their views about the strengths and weaknesses of survey research as well as topic areas that would benefit from using this approach. A review of a finance journals shows that the publication of survey-based papers is an infrequent event for most journals.
    Keywords: Survey-based Finance Research, Importance of Finance Survey Research
    JEL: G00
    Date: 2006–02–02
  50. By: Dilip Mookherjee (Institute for Economic Development, Boston University); Ulf von Lilienfeld-Toal (Department of Economics, University of Frankfurt)
    Abstract: Should the law restrict liability of defaulting borrowers? We abstract from possible benefits arising from limited rationality or risk-aversion of borrowers, contractual incompleteness, or lender moral hazard. We focus instead on general equilibrium implications of liability rules with moral hazard among borrowers with varying wealth. If lenders are on the short side of the market, weakening liability rules lower lender profits, may cause additional exclusion among the poor, but generate additional rents for wealthier borrowers. For certain changes in liability rules (such as a ban on bonded labor, or weakening bankruptcy rules below a wealth threshold) they also raise productivity among borrowers of intermediate wealth. Hence they can be interpreted as a form of efficiency-enhancing redistribution from lenders and poor borrowers to middle class borrowers. Our model provides a possible rationale for why weaker liability rules are observed in wealthier countries.
  51. By: D'Mello, Ranjan (Wayne State University); Krishnaswami, Sudha (University of New Orleans); Larkin, Patrick J. (Fayetteville State University)
    Abstract: We empirically examine whether the elimination of negative synergies, the reduction of internal capital market inefficiencies, and the mitigation of information problems following spinoffs lower cost of equity. The results indicate that there is no decrease in the cost of equity in the full sample, which suggests that the gains around spinoffs are primarily a consequence of improvements in cash flow and operating performance rather than a decline in systematic risk or the cost of equity. However, we find a positive relation between the spinoff gains and a decrease in the cost of equity for the subsample of firms with high information asymmetry, and for the subsample of non-focus-increasing spinoffs shown in prior studies to have no improvements in future cash flow or operating performance. For firms with high information asymmetry, the relation between the spinoff gains and the decline in cost of equity is attributable to a decline in the cost of equity of the post-spinoff parent entity. The results indicate that spinoffs facilitate a decrease in adverse selection costs, and this is especially value enhancing for the parent firms, which are higher growth and more reliant on external capital.
    Keywords: Spinoff, Cost of equity, Information asymmetry
    JEL: G34 C22 C12
    Date: 2005
  52. By: R. Andergassen
  53. By: Sylvia Kaufmann (Oesterreichische Nationalbank, Economic Studies Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division)
    Abstract: In this paper we study the role of financial systems for the cost channel transmission of monetary policy in a calibrated business cycle model. We analyze the different effects that monetary policy has on the economy, in particular on output and inflation, which are due to differences in country-specific financial systems. For a plausible calibration of the model, differences in financial systems have a rather limited effect on the transmission mechanism and do not appear to give rise to cross country differences in the strength of the cost channel.
    Keywords: Financial Systems, Cost Channel, Transmission Mechanism
    JEL: E40 E50
    Date: 2006–03–14

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