nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒06‒03
seventy papers chosen by
Carolina Valiente
London South Bank University

  1. Foreign Exchange exposure, corporate financial policies and the exchange rate regime: Evidence from Brazil By Jose Luiz Rossi Junior
  2. The Macroeconomic Impact Of Bank Capital Requirements In Emerging Economies: Past Evidence To Assess The Future By Maria Concetta Chiuri; Giovanni Ferri; Giovanni Majnoni
  3. The Risk Aversion of Banks in Emerging Credit markets: Evidence from India By Sumon Kumar Bhaumik; Jenifer Piesse;
  4. Profits and Speculation in Intra-Day Foreign Exchange Trading By Mende, Alexander; Menkhoff, Lukas
  5. A market microstructure analysis of foreign exchange intervention By Paolo Vitale
  6. Foreign reserves management subject to a policy objective By Joachim Coche; Matti Koivu; Ken Nyholm; Vesa Poikonen
  7. Stock and Bond Returns with Moody Investors By Geert Bekaert; Eric Engstrom; Steven R. Grenadier
  8. The Role of Cash Holdings in Reducing Investment-Cash Flow Sensitivity: Evidence from a Financial Crisis Period in an Emerging Market By Ozgur Arslan; Chrisostomos Florackis; Aydin Ozkan
  9. Financial Market Regulation-Security Scams In India with historical evidence and the role of corporate governance By Supreena Narayanan
  10. Global Financial Transmission of Monetary Policy Shocks By Michael Ehrmann; Marcel Fratzscher
  11. Financial integration, international portfolio choice and the European Monetary Union By Roberto A. De Santis; Bruno Gérard
  12. Which news moves the euro area bond market? By Magnus Andersson; Lars Jul Hansen; Szabolcs Sebestyén
  13. Financial constraints on new firms: looking for regional disparities By Jean Bonnet (CREM - CNRS); Sylvie Cieply (CREM - CNRS); Marcus Dejardin (University of Namur - CREW)
  14. Proprietary Income, Entrepreneurial Risk, and the Predictability of U.S. Stock Returns By Mathias Hoffmann
  15. Euro area banking sector integration - using hierarchical cluster analysis techniques By Christoffer Kok Sørensen; Josep Maria Puigvert Gutiérrez
  16. Exchange-rate policies and trade in the MENA countries By Amina Lahrèche-Révil; Juliette Milgram
  17. Modelling currency in circulation in Malawi By kisu simwaka
  18. Risk, Uncertainty and Asset Prices By Geert Bekaert; Eric Engstrom; Yuhang Xing
  19. Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans By Ana Carla A. Costa; Joao M.P. De Mello
  20. Where is beta going ? the riskiness of value and small stocks By Franzoni, Francesco
  21. Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER? By Ian Babetskii; Balázs Égert;
  22. The Real Exchange Rate Misalignment in the Five Central European Countries By Frait, Jan; Komarek, Lubos; Meleck, Martin
  23. Forecasting the book return on owners' equity and the identification of mispriced securities: market efficiency tests on Swedish data By Skogsvik, Stina; Skogsvik, Kenth
  24. An analysis of money ' s worth ratios in Chile By Morales, Marco; Rocha, Roberto; Thorburn, Craig
  25. Monetary Policy and Asset Prices : What Role for Central Banks in New EU Member States? By Frait, Jan; Komarek, Lubos
  26. Dollarization Traps By John Duffy; Maxim Nikitin
  27. A Sovereign Debt Model with Trade Credit and Reserves By Kohlscheen, Emanuel; O'Connell, Stephen A.
  28. The risk-adjusted performance of US buyouts By Groh, Alexander; Gottschalg, Oliver
  29. Financial Systems and Economic Growth: An Evaluation Framework for Policy By Iris Claus; Veronica Jacobsen; Brock Jera
  30. Learning to Forecast the Exchange Rate: Two Competing Approaches By Paul De Grauwe; Agnieszka Markiewicz
  31. Real Effective Exchange Rate Dynamics in Malawi and South Africa By Kisu Simwaka
  32. Sequential Restructuring of Debt Classes, Absolute Priority Violation and Spread Reversals Under Chapter 11 By Adriana Breccia
  33. Multiple Lending and Constrained Efficiency in the Credit Market By Andrea Attar; Eloisa Campioni; Gwenäel Piaser; Gwenaël Piaser
  34. Exchange Rates and Order Flow in the Long Run By M. Martin Boyer; Simon van Norden
  35. Should monetary policy attempt to reduce exchange rate volatility in New Zealand? By Dominick Stephens
  36. Dynamics of real effective exchange rate in Malawi and South Africa By Kisukyabo Simwaka
  37. De l’efficacité des dépenses fiscales pour l’achat d’actions : le cas du régime d’épargne-actions du Québec By Cécile Carpentier; Jean-Marc Suret
  38. The Capital Structure of Multinational Companies under Tax Competition By Paolo Panteghini
  39. Which Firms Have a Soft Loan ? Managers' Believes in a Cross-Country Survey in Transition Economies By Bignebat, C.; Gouret, F.
  40. Bypassing the Financial Growth Cycle: Evidence from Capital Pool Companies By Cécile Carpentier; Jean-Marc Suret
  41. Information processing and measures of integration: New York, London and Tokyo By Susan Thorp; George Milunovich
  42. Le placement privé et la dimension réglementaire du financement des entreprises By Cécile Carpentier; Jean-Marc Suret
  43. Long-run money demand in the new EU Member States with exchange rate effects By Christian Dreger; Hans-Eggert Reimers; Barbara Roffia
  44. Volatility of GDP, macro applications and policy implications of real options for structure of capital Markets By José Pablo Dapena
  45. Implications of monetary union for catching-up member states By Marcelo Sánchez
  46. Competition for order flow and smart order routing systems By Foucault, Thierry; Menkveld, Albert
  47. Exchange Rate Regimes, Foreign Exchange Volatility and Export Performance in Central and Eastern Europe: Just Another Blur Project? By Balázs Égert; Amalia Morales-Zumaquero;
  48. Wealth Holdings and Portfolio Allocation of Older Couples: The Role of Spouses’ Marital History By Aydogan Ulker
  49. Un Análisis de cointegración con corrección de errores de las Fugas de Capital y la Inestabilidad Política en México , An econometric model of capital flight in Mexico By Alejandro Diaz-Bautista; Cesar Alfredo Olivas Andrade
  50. Bank Supervision Russian style: Rules versus Enforcement and Tacit Objectives By Sophie Claeys,; Gleb Lanine; Koen Schoors
  51. China’s Exchange Rate and International Adjustment in Wages, Prices, and Interest Rates: Japan Déjà Vu? By Ronald Ian McKinnon; Gunther Schnabl
  52. Interlocking Transactions : Do they Restrain the Emergence of Rice Producers' organizations in Cambodia ? By Lemeilleur, S.; Codron, J.M.; Fares, M.
  53. The importance of incentives in influencing private retirement saving: known knowns and known unknowns By Richard Blundell; Carl Emmerson; Matthew Wakefield
  54. Social Security and Risk Sharing By Piero Gottardi; Felix Kubler
  55. Macroeconomic Models and the Yield Curve: An assessment of the Fit By Jagjit S. Chadha; Sean Holly
  56. Los Determinantes de la Inversión Extranjera de Cartera en México: Un Análisis de Corte Estructural, The determinants of foreign portfolio investment in Mexico By Alejandro Diaz-Bautista; Mario Alberto Rosas Chimal
  57. Banking Entrepreneurship Differentials between Europe and USA. A Note By Miltiades N. Georgiou; Nicholas Kyriazes
  58. Profit Related Loans for Economically Disadvantaged Regions By Bruce Chapman; Ric Simes
  59. ON THE FUTURE CONTRACT QUALITY OPTION: A NEW LOOK By Alejandro balbas; Susana Reichardt
  60. The Secret Life of Mundane Transaction Costs By Richard N. Langlois
  61. Settlement-date Accounting for Equity Share Options – Conceptual Validity and Numerical Effects By Møller, Peder Fredslund
  62. Pairwise Tests of Purchasing Power Parity Using Aggregate and Disaggregate Price Measures By M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk
  63. Down or out: assessing the welfare costs of household investment mistakes By Calvet, Laurent; Campbell, John Y.; Sodini, Paolo
  64. Who really wants to be a millionaire? Estimates of risk aversion from gameshow data By Hartley, Roger; Lanot, Gauthier; Walker, Ian
  65. Entrepreneurship and Asymmetric Information in Input Markets By Robin Boadway; Motohiro Sato
  66. Application of Four-Rate Formula and Exchange Rate Formula to demonstration of single currency with different value and interest rate By Xiaozhong Zhai
  67. Authorisation and prudential supervision of providers of purchased payment facilities By Australian Prudential Regulation Authority
  68. Prudential Supervision of Lenders Mortgage Insurance – Amendments to Proposed Reforms By Australian Prudential Regulation Authority
  69. Poverty and Debt By James Mitchell; Kostas Mouratidis; Martin Weale
  70. Against 'Individual Risk': A Sympathetic Critique of Risk Assessment By Matthew Adler

  1. By: Jose Luiz Rossi Junior
    Abstract: Abstract Recent financial crises showed that emerging countries are extremely vulnerable to sudden swings in international capital flows. In these countries, commonly, periods of relative tranquility, characterized by substantial capital inflows and real GDP growth, are followed by periods when capital flows abroad, and output plummets . In some countries, such crises led not only to economic downturns but also to social unrest. Although there is a consensus among economists that emerging markets should take measures to reduce their external vulnerability, there is no agreement about the role of the choice of the exchange rate regime in this matter. At the center of this debate is the fact that due to the widespread problem of the dollarization of liabilities, depreciations of the home currency in emerging markets would cause a collapse in companies’ balance sheets, leading to a fall in output . Therefore, one mechanism through which the choice of the exchange rate regime could affect countries’ vulnerability would be to exert influence on corporate financial policies. One hypothesis in the international finance literature is that fixed exchange rate regimes would increase countries’ vulnerability by leading companies to disregard the exchange rate risk, biasing their borrowing towards foreign currency denominated debt , and/or reducing their hedging activities. According to this hypothesis, floating regimes would help to reduce countries’ vulnerability by inducing creditors and debtors to take seriously their exchange rate exposure. On the other hand, the so-called ‘original sin’ theory argues that, independently of the exchange rate regime, emerging countries will always be vulnerable to external shocks. There will always be a currency mismatch on companies’ balance sheets, since domestic companies would never be allowed to borrow in the domestic currency, and most of their revenues come from domestic activities. Since the theoretical literature has not reached a consensus, at the end of the day, the answer for this question should be empirical, as pointed out by Eichengreen and Hausmann (1999), ''...gathering survey (and other) data on hedged and unhedged exposures and analyzing their determinants should be a high priority for academics'' . This paper tries to shed light on this question by analyzing the behavior of foreign currency exposure for a sample of non-financial Brazilian companies from 1996 to 2002. This includes a period under a fixed exchange rate regime (1996-1998), and a period under a floating regime (1999-2002). I analyze whether companies’ exposure varies with the choice of the exchange rate regime. Moreover, I discriminate among the several determinants of companies’ exchange rate exposure, and finally I study the relationship among corporate financial policies, the choice of the exchange rate regime, and the exchange rate exposure. Brazil provides a perfect natural experiment for analyzing the relationship between foreign currency exposure and the choice of exchange rate regime in emerging markets. Brazil is one of the largest emerging markets economies, and had a fixed exchange rate regime from 1995 to January 1999. After that the currency was allowed to float freely, currency derivatives were available in both periods and companies kept substantial levels of foreign currency denominated debt. Finally, I know of no studies combining analysis of the exposure of companies, the determinants of that exposure and the role of the exchange rate regime in an emerging market economy in which fluctuations in the exchange rate and risk management policies are of major importance to the real economy. The main results can be summarized as follows. Fluctuations in the exchange rate are indeed problematic for emerging markets like Brazil; about 40% of Brazilian companies are exposed to changes in the exchange rate, and, unlike those in the US, Brazilian companies do not on average benefit from devaluations of the home currency. A 1% change in the exchange rate leads to a 0.22% fall in the average company’s stock market returns. This paper also shows that the floating exchange rate regime has been able to reduce such exposure. Under the fixed exchange rate regime about 60% of the companies are exposed to fluctuations on the real exchange rate; this proportion drops to 23% under the floating exchange rate regime. The results confirm that the high proportion of foreign currency denominated debt to total debt is the main source of risk for Brazilian companies, and that foreign sales and hedging activities are able to mitigate the negative exposure that comes from the impact of the fluctuations of the exchange rate on companies’ foreign liabilities. This paper also associates the reduction in the number of companies exposed to changes in the exchange rate with an improvement in companies’ risk management activities associated with the change of the exchange rate regime. Under the floating regime, not only do more companies hedge their exchange rate exposure, but these firms also hedge a larger proportion of their foreign currency denominated debt. Following the optimal hedging literature, I find that companies’ hedging activities are linked to the attempt to reduce their foreign currency exposure. Companies with higher ratio of foreign debt to total debt are more likely to use currency derivatives. Moreover, using a model developed by Holmstrom and Tirole (1997), and extended by Martinez and Werner (2003), I find that the fixed exchange rate regime induced companies to incur mismatches in their balance sheets, whereas the floating regime has been able to reduce such mismatches by leading companies to take seriously their exposure to fluctuations in the exchange rate.
    Keywords: Exchange rate regime, hedging, exposure, debt composition
    JEL: F31 F41 G15
    Date: 2004–08–11
  2. By: Maria Concetta Chiuri (Dipartimento di Scienze Economiche - Università di Bari); Giovanni Ferri (Dipartimento di Scienze Economiche - Università di Bari); Giovanni Majnoni (World Bank)
    Abstract: We test for emerging economies the hypothesis - previously verified for G-10 countries only - that the enforcement of bank capital asset requirements (CARs) exerts a detrimental effect on the supply of credit. The econometric analysis on individual bank data suggests three main results. First, CAR enforcement - according to the 1988 Basel standard - significantly curtailed credit supply, particularly at less-well capitalized banks. Second, such negative impact was larger for countries enforcing CARs in the aftermath of a currency/financial crisis. Third, the adverse impact of CARs on the credit supply was significantly smaller for foreign-owned banks, suggesting that opening up to foreign investors may be an effective way to partly shield the domestic banking sector from negative shocks. Overall, CAR enforcement - by inducing banks to reduce their lending - may well have induced an aggregate credit slowdown or contraction in the examined emerging countries. This paper is relevant to the ongoing debate on the impact of the revision of bank CARs, as contemplated by the 1999 Basel proposal. Our results suggest that in several emerging economies the revision of bank CARs could well induce a credit supply retrenchment, which should not be underestimated.
    Keywords: bank capital asset requirements, capital crunch
    JEL: G18 G21 G28
  3. By: Sumon Kumar Bhaumik; Jenifer Piesse;
    Abstract: Using bank-level data from India, for nine years (1995-96 to 2003-04), we examine banks’ behavior in the context of emerging credit markets. Our results indicate that the credit market behavior of banks in emerging markets is determined by past trends, the diversity of the potential pool of borrowers to whom a bank can lend, and regulations regarding treatment of NPA and lending restrictions imposed by the Reserve Bank of India. Finally, we find evidence that suggest that credit disbursal by banks can be facilitated by regulatory and institutional changes that help banks mitigate the problems associated with enforcement of debt covenants and treatment of NPA on the balance sheets. On the basis of these results, we speculate on some possible policy recommendations.
    Keywords: Indian banking, Development, Credit-to-deposit ratio, Risk aversion
    JEL: G21 O16
    Date: 2005–08–01
  4. By: Mende, Alexander; Menkhoff, Lukas
    Abstract: This study examines profits and speculation in the USD/EUR trading of a bank in Germany over a four-month period. Dealing activity at the bank generates profits but speculation does not seem to contribute to this. We find that speculative positions fail to become profitable within a 30-minutes' horizon. Also, the suggestion that exchange rate volatility would foster speculative profits cannot be confirmed. To explain daily revenues, neither the bank's speculative trading volume nor its inventory position, but only customer trading emerges as a significant determinant. Furthermore, a spread analysis reveals that there is hardly any room for revenues from speculation.
    Keywords: foreign exchange markets, speculation, profits, market microstructure, flow analysis
    JEL: G15 F31
    Date: 2006–06
  5. By: Paolo Vitale (Department of Economics and Land History, Gabriele D‘Annunzio University, Viale Pindaro 42, 65127 Pescara (Italy).)
    Abstract: We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange intervention on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show i) how foreign exchange intervention influences exchange rates via both a portfolio-balance and a signalling channel and ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show i) that in extreme circumstances large scale foreign exchange intervention can have destabilizing effects for the functioning of FX markets and ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions.
    Keywords: Official Intervention, Order Flow, Foreign Exchange Micro Structure, Exchange Rate Dynamics.
    JEL: D82 G14 G15
    Date: 2006–05
  6. By: Joachim Coche (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matti Koivu (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vesa Poikonen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper studies the implications of introducing an explicit policy objective to the management of foreign reserves at a central bank. A dynamic model is developed which links together reserves management and the exchange rate by foreign exchange interventions. The exchange rate is modelled as a mean-reverting autoregressive process incorporating a linear response to interventions. The premise is that it is the objective of the central bank to prevent undervaluation of its currency. Given this objective, the model is formulated in a one- and a multi-period setting and solved to find the optimal asset allocation. The results show that asset allocation can significantly help in achieving the desired policy objective.
    Keywords: Foreign reserves management, foreign exchange intervention, exchange rate modelling, optimal asset allocation.
    JEL: G11 F31
    Date: 2006–05
  7. By: Geert Bekaert; Eric Engstrom; Steven R. Grenadier
    Abstract: We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature. In particular, our model is shown to jointly accommodate the mean and volatility of equity and long term bond risk premia as well as salient features of the nominal short rate, the dividend yield, and the term spread. Also, the model matches the evidence for predictability of excess stock and bond returns. However, the stock-bond return correlation implied by the model is somewhat higher than in the data.
    JEL: G12 G15 E44
    Date: 2006–05
  8. By: Ozgur Arslan; Chrisostomos Florackis; Aydin Ozkan
    Abstract: This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by focusing on cash holdings of firms as the basic classification scheme to separate firms into financially constrained and unconstrained categories. The idea is that high cash reserves increase the ability of firms to undertake profitable investment opportunities. Our classification scheme is based on an optimal cash model, which helps us identify the firms that deviate significantly from their target cash ratio. We conduct the analysis for an emerging market, just before and during a financial crisis to test the hypothesis that the hedging role of cash is more critical in states of the world characterized by high asymmetric information and excessive costs of external finance. The results are in line with our expectations and show that constrained firms exhibit greater investment to cash flow sensitivities than unconstrained firms. Also, there is strong evidence that cash stands as an effective device for firms mainly, during the crisis period.
    Keywords: Cash holdings, investment, financial constraints, financial crisis, emerging markets
    JEL: G31 G32
    Date: 2006–04
  9. By: Supreena Narayanan (Madras School of Economics)
    Abstract: The financial system consists of specialized and non specialized financial institutions, of organized and unorganized financial markets, of financial instruments and services, which facilitate transfer of funds. Procedures and practices adopted in the markets, and financial interrelationships are also parts of this system. In product or other service markets, purchasers part with their money in exchange for something now. In finance, money “now” is exchanged for a “promise to pay in the future”. However, in product or service markets, if the object sold – from a car to a haircut – is defective, the buyers often find out relatively soon. On the other hand, loan quality is not readily observable for quite some time and can be hidden for extensive periods. Moreover, banks and non-bank financial intermediaries can also alter the risk composition of their assets more quickly than most non-financial industries, and banks can readily hide problems by extending loans to clients that cannot service previous debt obligations. Theoretically, the financial market facilitates allocation of resources efficiently, which involves quick dissemination of information and reaction to it. The financial markets are susceptible to manipulation as some participants have information that others do not that is information asymmetry is ubiquitous in financial markets. To overcome this problem corporate governance is required to ensure that suppliers of finance to corporations are assured that they get their return on their investment . Despite the existence of institutional and legal framework numerous financial scams continue to be perpetuated both in developed and developing countries.The objectives of this study are : a) To examine some of the major misdemeanors which perpetuated in the financial system in 1991 and 2001 in India . b) Understand the financial regulatory measures which have been adopted after the 1991 share scam in India and why despite such measures adopted a security scam has recurred in 2001. c) Examine the theoretical structure of corporate governance for analyzing security scams that have occurred in the 1990s and the new millennium. The second section contains a summary of the events that occurred leading to the share scams and financial frauds in India and abroad during the recent decade that shook the financial markets. The third section surveys the rationale for regulation of securities markets and the functional procedures adopted in India in the aftermath of the scams. The fourth section looks at the theoretical underpinnings of corporate governance which, is followed by a discussion of the shortcomings of the regulatory set up in India which fails to prevent the recurrence of financial misdemeanors. Financial Liberalization is a phenomenon that is almost all pervasive in the world today. While liberalization has led to substantial benefits in terms of increased transparency, it has ushered in opportunities of corporate misgovernance. This implies that the mechanism by which legal institutions ensure that suppliers of funds receive the return on investment is not sufficient or appropriate. Recent trends through the 1990s in India and abroad reveal how corporate governance has not been effective permitting unscrupulous and opportunistic individuals to manipulate the market in their favor. The process of financial market regulation ensures that important guidelines are issued regarding how primary dealers (brokers) should operate with regards to mode of operation, conduct, litigation, amount of business to be handled, management of risk, internal control etc. These security scams and financial scandals discussed here involved the manipulation of huge amounts of money. The perpetrators of these gross transgression had such a comprehensive knowledge of how the system worked that they manipulated it to their advantage operating in an opportunistic manner . The essence of the argument in is that the occurrence and reoccurrence of such security scams and financial scandals can be attributed to a failure of corporate governance in finance despite the existence of an functioning regulatory authority empowered with the legal sanctions.
    JEL: G
    Date: 2005–06–20
  10. By: Michael Ehrmann; Marcel Fratzscher
    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: F30 F36 G15
    Date: 2006
  11. By: Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Bruno Gérard (Norwegian School of Management BI, Elias Smiths vei 18, Box 580 N-1302 Sandvika, Norway.)
    Abstract: We investigate the determinants of bilateral international equity and bond portfolio reallocation across a large cross section of countries over the 1997 to 2001 period. We first argue that financial integration is not a global phenomenon, as equity and bond home biases declined significantly only among European countries, Australia, New Zealand and Singapore. Then, we show that the European Economic and Monetary Union (EMU) eased the access to the equity market and, to a larger extent, the bond market; thereby, enhancing regional financial integration in the euro area. Beside the effect of the EMU, the strongest determinants of the changes in portfolio weights are expected diversification benefits and the initial degree of underweight.
    Keywords: Home bias, Risk diversification, International portfolio weights, EMU.
    JEL: C13 C21 F37 G11
    Date: 2006–05
  12. By: Magnus Andersson (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lars Jul Hansen (Danmarks Nationalbank, Havnegade 5, 1093 Copenhagen, Denmark); Szabolcs Sebestyén (Department of Fundamentos del Análisis Económico, University of Alicante, 03080 San Vicente del Raspeig, Spain.)
    Abstract: This paper explores a long dataset (1999-2005) of intraday prices on German long-term bond futures and examines market responses to major macroeconomic announcements and ECB monetary policy releases. In general, adjustments in prices are quick and new information is usually incorporated into prices within five minutes of announcements. The volatility adjustment is more long-lasting than that in the conditional mean, and excess volatility can be observed up to 30 minutes after the releases. Overall, German bond markets tend to react more strongly to the surprise component in US macro releases compared to euro area and domestic releases, and the strength of those reactions to US releases has increased over the period considered. The paper also provides evidence that the outcome of German unemployment figures has been known to investors ahead of the prescheduled release.
    Keywords: Monetary policy, intraday data, macroeconomic announcements.
    JEL: E43 E44 E58
    Date: 2006–05
  13. By: Jean Bonnet (CREM - CNRS); Sylvie Cieply (CREM - CNRS); Marcus Dejardin (University of Namur - CREW)
    Keywords: Financial constraints, credit rationing, new firms, regional disparities.
    JEL: G20 M13 R10
    Date: 2006
  14. By: Mathias Hoffmann
    Abstract: Small businesses tend to be owned by wealthy households. Such entrepreneur households also own a large share of U.S. stock market wealth. Fluctuations in entrepreneurs’ hunger for risk could therefore help explain time variation in the equity premium. The paper suggests an entrepreneurial distress factor that is based on a cointegrating relationship between consumption and income from proprietary and non-proprietary wealth. I call this factor the cpy residual. It reflects cyclical fluctuations in proprietary income, is highly correlated with cross-sectional measures of idiosyncratic entrepreneurial risk and has considerable forecasting power for U.S. stock returns. In line with the theoretical mechanism, the correlation between cpy and the stock market has been declining since the beginning of the 1980s as stock market participation has widened and as entrepreneurial risk has become more easily diversifiable in the wake of U.S. state-level bank deregulation.
    Keywords: non-insurable background risk, entrepreneurial income, equity risk premium, long-horizon predictability
    JEL: E21 E31 G12
    Date: 2006
  15. By: Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Josep Maria Puigvert Gutiérrez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: In this study we apply cluster analysis techniques, including a novel smoothing method, to detect some basic patterns and trends in the euro area banking sector in terms of the degree of homogeneity of countries. We find that in the period 1998-2004 the banking sectors in the euro area countries seem to have become somewhat more homogeneous, although the results are not unequivocal and considerable differences remain, leaving scope for further integration. In terms of clustering, the Western and Central European countries (like Germany, France, Belgium, and to some extent also the Netherlands, Austria and Italy) tend to cluster together, while Spain and Portugal and more recently also Greece usually are in the same distinct cluster. Ireland and Finland form separate clusters, but overall tend to be closer to the Western and Central European cluster.
    Keywords: Financial integration, cluster analysis, banking sector.
    JEL: C49 F36 G21
    Date: 2006–05
  16. By: Amina Lahrèche-Révil (University of Picardie); Juliette Milgram (Department of Economic Theory and Economic History, University of Granada.)
    Abstract: Compared to the new European members (NEM) and to the new candidate countries, the Middle-East and North African (MENA) countries are a very heterogeneous and fragmented EU frontier. As far as monetary issues are concerned, exchange rate regimes are very different and bilateral exchange rates quite volatile. Moreover, weak trade integration and generalized capital controls constitute major obstacles to economic and financial integration. Existing works yet suggest that anchoring to the euro would undoubtedly be the best exchange-rate strategy for most MENA countries. Monetary integration and trade integration are interdependent. This is especially the case when trade flows are sensitive to the volatility of exchange rates or to movements in relative prices. The objective of this paper is to evaluate the potential of monetary integration in the South Mediterranean area, in a context of trade liberalization and of a strong orientation of trade flows towards the EU. The empirical part of the paper would rely on a gravity equation of trade which would include exchange rates volatility and relative prices, in order to gauge the impact of de facto exchange-rate and monetary conditions on trade integration. The sample of countries is large (OECD, NEM, MENA and Asian countries) in order both to have robust estimates and to investigate whether the MENA countries exhibit a specific sensitivity of trade flows to exchange-rate volatility and exchange-rate misalignments. The impact of the competitiveness of third countries will also be investigated. This latter issue is especially important, though seldom assessed, when it comes to the potential trade-diverting effect of the latest EU enlargement on MENA trade wit the EU. The gravity setting also allows simulating the consequences for the trade of MENA countries of a deeper monetary integration, by comparing the impact on trade of a regional monetary integration and of a euro peg.
    Keywords: Exchange rate regime, trade, regional integration, Euro, MENA
    JEL: F15 F31 F33
    Date: 2006–05–31
  17. By: kisu simwaka (Reserve Bank of Malawi)
    Abstract: The purpose of this study is therefore twofold. First, to establish the claim that currency in circulation has been rising. Second, to empirically quantify and give a full account of the reasons determining the dynamics and volatility of currency in circulation. Using annual data for the 1965-2004 period, this paper confirms that currency in circulation as a proportion of money stock has increased. From the initial estimation results, the paper establishes strong positive effects of inflation rate, underground economy activities, financial deepening on the CU/M2 ratio, and significant negative effect of interest rates on this ratio. The other highlight result from this study is the positive and significant association between small-scale agriculture produce and CU/M2 ratio. Using annual data, among other things, this study confirms findings from other studies that cash preference is a function of real interest rates. However, one striking finding here is the importance small-scale agriculture as a determinant of currency in circulation. This reflects the agriculture-dependent nature of the economy. Better performance of this sector injects cash in the economy and because of the lack of banking facilities in rural areas, most of the injected cash remains in circulation. The message from empirical results using monthly data is similar, with interest rates, financial deepening, tobacco selling season dummy and inflation rate playing significant roles in determining movements in currency in circulation. As expected, technological innovations in the banking system or payment systems, particularly cash dispensers (ATMs) have a significant impact on the overall level of currency in circulation, whereas no major impact seems to come from the MALSWITCH smart card, however, initial indications reveal its negative effect on the CU/M2 ratio. Policy implications from these results are many. First, of late the Bank has reduced the bank rate and as is normally the case, all other interest rates were similarly adjusted. While the policy move has or is on course to achieve its intended goals, it has other side repercussions such as deposit taking capabilities by commercial banks. Currently, the minimum saving rate for the four major commercial banks averages around 7.5%. This against the current monthly inflation rate of 12.2 (for October 2004) leaves real savings rate of around –4.7% which rationally discourages savings mobilisation and consequent reduction in the availability of loanable funds for productive investment and economic growth. The public is most likely to hold their assets in cash rather than bank deposit form since the opportunity cost of doing so is essentially zero. However, due to high inflation in the past, savers in Malawi were used to high interest rates so that current demand deposits are considered as unattractive and non-worthwhile form of holding money. It is time the public get used to lower interest rates as in other countries and on the belief that causality direction is from interest rates to inflation, the reduction in the bank rate could eventually lead to a drop in inflation and, therefore, an increase in the real interest rate. Second, if the Bank intends to focus on reducing the CU/M2 ratio, intensification of smart card use and publicity could play an important role. The smart card is a direct alternative of cash as a means of payment so that its widespread use can directly reduce currency in circulation. This, as is the case in other countries could also reduce the positive impact of ATM transactions on the overall level of currency in circulation. Third, the overall civic education on the use of banking facilities, in rural areas as well as to small-scale business men (vendors) is important for increased deposit taking and, therefore, the reduction in the amount of currency in circulation.
    Keywords: Currency in circulation, Seasonality, Money demand model
    JEL: E
    Date: 2005–04–13
  18. By: Geert Bekaert; Eric Engstrom; Yuhang Xing
    Abstract: We identify the relative importance of changes in the conditional variance of fundamentals (which we call “uncertainty”) and changes in risk aversion (“risk” for short) in the determination of the term structure, equity prices and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in dividend yields and the equity risk premium is primarily driven by risk, uncertainty plays a large role in the term structure and is the driver of counter-cyclical volatility of asset returns.
    JEL: G12 G15 E44
    Date: 2006–05
  19. By: Ana Carla A. Costa; Joao M.P. De Mello
    Abstract: A large body of literature has stressed the institution-development nexus as critical in explaining differences in countries’ economic performance. The empirical evidence, however, has been mainly at the aggregate level, associating macro performance with measures of quality of institutions. This paper, by relating a judicial decision on the legality of payroll loans in Brazil to bank-level decision variables, provides micro evidence on how creditor legal protection affects market performance. Payroll loans are personal loans with principal and interests payments directly deducted from the borrowers’ payroll check, which, in practice, makes a collateral out of future income. In June 2004, a high-level federal court upheld a regional court ruling that had declared payroll deduction illegal. Using personal loans without payroll deduction as a control group, we assess whether the ruling had an impact on market performance. Evidence indicates that it had an adverse impact on risk perception, interest rates, and amount lent.
    JEL: L19 G21 D86 O16
    Date: 2006–05
  20. By: Franzoni, Francesco
    Abstract: This paper finds that the market betas of value and small stocks have decreased by about 75% in the second half of the twentieth century. The decline in beta can be related to a long-term improvement in economic conditions that made these companies less risky.
    Keywords: value; stocks; beta; risk; financial market
    JEL: D40 G10
    Date: 2006–01–09
  21. By: Ian Babetskii; Balázs Égert;
    Abstract: This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-ow approach advocated, for instance, by Faruqee (1995) and Alberola and others (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioural Equilibrium Exchange Rate (BEER) popularised by MacDonald (1997) and Clark and MacDonald (1998) in that the Czech real exchange rate vis-à-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment gures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation till 2002, an undervaluation in 2003 and a correction towards equilibrium in the second half of 2004
    Keywords: Equilibrium exchange rate; real exchange rate; behavioral equilibrium exchange rate; Czech koruna, transition economies; stock-ow approach; productivity.
    JEL: F31
    Date: 2005–07–01
  22. By: Frait, Jan (Czech National Bank, Prague); Komarek, Lubos (Czech National Bank, Prague); Meleck, Martin (University of New South Wales, Sydney)
    Abstract: The paper focuses on the developments of real exchange rates and their fundamental determinants in the five new EU Member States (Czech Republic, Hungary, Poland, Slovakia, and Slovenia). First, the approaches that can be used for estimation of equilibrium real exchange rates are briefly discussed. Then, we use well-established determinants of real exchange rates associated with the behavioral equilibrium exchange rate (BEER) approach to assess misalignments of the real exchange rates for the five new EU Member States. The estimates of the equilibrium exchange rates are obtained by means of both purely statistical approaches (HP filter, band-pass filter) and applying several multivariate estimation methods to our reduced-form BEER model. The results obtained indicate that the tendency towards appreciation of real exchange rates in the economies under consideration have been driven primarily by fundamental determinants.
    Keywords: Exchange rate misalignments ; equilibrium exchange rates ; ERM II ; Central European Countries
    Date: 2006
  23. By: Skogsvik, Stina (Centre for Financial Analysis and Managerial Economics in Accounting); Skogsvik, Kenth (Centre for Financial Analysis and Managerial Economics in Accounting)
    Abstract: The general purpose of the study is to evaluate whether financial statement information is relevant to investors in determining stock values, and to test whether the Swedish stock market is efficient with respect to publicly available financial statement information. One major contribution of the study is to provide a more valid test of traditional "fundamental analysis", and a more powerful test of market efficiency than in previous research. <p> Ou & Penman (1989) constructed the so-called Pr-measure to predict the sign of one-year-ahead earnings changes and tested a trading strategy based on these predictions on U.S. stock market data. The results in Ou & Penman indicated that financial statements capture fundamentals that are not reflected in stock market prices. However, later studies have shown that the results presented in Ou & Penman are very sensitive to various choices of test procedures. Also, a lack of stability in the results over time and across countries has been documented. <p> An obvious shortcoming of a trading strategy based solely on the Pr-measure is that it does not incorporate any assessment of whether its predictions of future earnings changes are already included in stock market prices or not. This study contributes by formulating an investment strategy that combines the predictions of future company profitability according to a prediction model with the assessment of whether these predictions are reflected in stock market prices. The study provides a more powerful test of market efficiency, since positions will only be taken in those stocks for which the predictions of future company profitability are not reflected in current prices. In principle, the investor takes a long position when the estimated prediction model indicates an increase in the future company profitability, while the market's expectation is that future profitability will decrease. Analogously, the investor takes a short position when the prediction model indicates a decrease in future profitability, while the market expects the future profitability to increase. <p> The sample companies were all listed on the Stockholm Stock Exchange. The prediction models were estimated and validated using financial statement information for the period 1970-2002. Logit analysis was chosen as the statistical method of estimation - the probability of an increase in the future return on owners' equity was estimated given the past return on owners' equity. The performance of the investment strategy was evaluated in the period 1983-2003. Based on the latest available annual report, the probability of an increase in the future return on owners' equity was estimated in accordance with the prediction model. Next, an assessment of whether these predictions were reflected in stock market prices was made. For this purpose a specification of the residual income valuation model has been used. Stock market positions were held for 36 months. <p> Two abnormal return metrics have been tried in the study - the abnormal CAPM return (Jensen's alpha) and the market adjusted return. Controls for company characteristics such as size, book-to-market, E/P-ratio and dividend yield have also been conducted. The abnormal return to the investment strategy was considerably higher than for an investment strategy in the spirit of Ou & Penman, i.e. a strategy based only on the prediction model. In the main, the tests show that the abnormal return to the strategy was significant. Thus, the results reported in this study are not consistent with the efficient market hypothesis.
    Keywords: Fundamental analysis; Return on owners' equity; Market efficiency
    Date: 2005–06–21
  24. By: Morales, Marco; Rocha, Roberto; Thorburn, Craig
    Abstract: Empirical analyses of annuities markets have been limited to a few industrial countries and restricted by data limitations. Chile provides excellent conditions for research on annuities because of the depth of its market and the availability of data. The authors use an extensive dataset on individual annuities to examine econometrically a measure of market performance-money ' s worth ratios (MWRs)-or the ratio of the expected present value of annuity payments to the premium. The results show that annuitants in Chile have generally a good deal for their premiums, as indicated by MWRs higher than one, and also higher than those estimated for other countries. The difference between Chile and other countries is striking considering that annuities in Chile are indexed to prices. The wide range of indexed instruments in Chile, allowing providers to hedge their risks while extracting higher returns, helps explain the difference. The high degree of market competition has also contributed to this outcome. Efforts to improve market transparency through a new electronic quotation system have decreased the dispersion of MWRs. Finally, MWRs tend to decrease for contracts with longer durations, reflecting pricing for higher longevity and reinvestment risks. These results are consistent with separate research on the annuity rate, and indicate the need to ensure competition and market transparency, as well as to develop appropriate financial instruments for providers to ensure good outcomes for annuitants.
    Keywords: Pensions & Retirement Systems,Insurance & Risk Mitigation,Non Bank Financial Institutions,Investment and Investment Climate,Contractual Savings
    Date: 2006–05–01
  25. By: Frait, Jan (Czech National Bank, Prague); Komarek, Lubos (Czech National Bank, Prague and Prague School of Economics)
    Abstract: The paper deals with the relationship between monetary policy and asset prices. Besides surveying the general discussion, it attempts to extend it to recent developments in the new Member States of the EU (NMS), namely the Czech Republic, Hungary, Poland and Slovakia (the EU4). After a brief description of the current macroeconomic situation in the NMS, the appropriate reaction of monetary policy to asset price bubbles is dealt with and the main pros and cons associated with this reaction are summarised. Afterwards, the risks of asset market bubbles in the EU4 countries are evaluated. Since the capital markets are still underdeveloped and the real estate price boom seems to be a natural reaction to the initial undervaluation, the risks are viewed as rather small. The conclusion is thus that it is crucial for central banks in mature economies as well as in the NMS to conduct their monetary policies as well as their supervisory and regulatory roles in a way that does not promote the build-up of asset market bubbles. In exceptional times, central banks of small open economies must be ready to use monetary policy steps as a kind of insurance against the adverse effects of potential asset market bubbles.
    Keywords: Monetary Policy ; Asset Markets ; Central Banking ; New EU Member States
    JEL: E52 E58 G12
    Date: 2006
  26. By: John Duffy; Maxim Nikitin
    Abstract: We study unofficial dollarization, i.e., the use of foreign money alongside the domestic currency, in an environment where spatial separation and limited communication create a role for currency and banks arise endogenously to provide insurance against liquidity preference shocks. Unofficial dollarization has been a common phenomenon in emerging market economies during high inflations. However, successful disinflations have not necessarily been followed by dedollarization. In particular, Argentina, Bolivia, Peru, Russia, and Ukraine remained highly dollarized long after the inflation rate was reduced to single digits. We refer to this phenomenon as a "dollarization hysteresis paradox." It has also been observed in these economies that higher inflation has a negative impact on output and financial intermediation, that dollarization and capital flight adversely affect capital accumulation, and that post-stabilization output growth is impeded by dollarization. This paper presents an overlapping-generations model with random relocation of agents between two locations that explains the dollarization hysteresis paradox and several other stylized facts. The key link between inflation, dollarization, and capital accumulation in the model is that high inflation undermines financial intermediation, which leads to the adoption of a less efficient production technology. As a result, it is possible for economies to become stuck in low output "development traps," where the marginal product of capital is the same as the return from holding dollars. In such an environment, we show how dollarization can preclude further capital accumulation, even in the presence of successful inflation stabilization policies. We complement previous work on dollarization by allowing the "hard" currency to compete with domestic capital as a store of value instead of focusing on either currency substitution (where the use of a "hard" currency replaces the domestic currency as a medium of exchange) or official dollarization (where the domestic currency is abandoned altogether and replaced with the US dollar). We assume that in the first period of life, agents inelastically supply labor and receive the competitive market wage. A given fraction of agents will be relocated to another location, and they can take only domestic currency with them. Competitive banks arise endogenously in this environment to insure against liquidity (relocation) shock. They issue demand deposits and hold portfolios of domestic currency and the capital market assets, which may include productive capital and dollars. There are two different productive technologies that banks can invest in. The first one is a primitive autarkic technology that they can use directly. The second one is an advanced technology that requires the use of a financial center. The financial center is a profit-maximizing natural monopoly. Its profit depends positively on the scale of intermediation and production. Our model predicts that an increase in inflation will reduce the capital stock, output and the scale of intermediation. If inflation is low enough, the financial center makes a positive profit, and the advanced technology is used. However, when inflation exceeds a certain threshold, the profit of the center falls below zero, and it shuts down. Hence competitive banks switch to the inefficient autarkic technology. Even though the capital stock falls, the marginal product of capital falls as well due to the switch in technology. This creates the possibility of a "dollarization trap," in which dollars are held as a store of value alongside the autarkic productive capital. The arbitrage condition between the return on dollars and the marginal product of capital determines the capital stock and output. A subsequent disinflation does not affect this arbitrage condition, and thus has no effect on capital accumulation. Therefore, as long as the economy gets stuck in the dollarization trap during a high inflation episode, a successful stabilization of inflation is followed neither by dedollarization nor by output recovery.
    Keywords: Dollarization, Inflation, Financial Intermediation, Asset Substitution, Hysteresis
    JEL: E40 E50 F41
    Date: 2004–08–11
  27. By: Kohlscheen, Emanuel (University of Warwick); O'Connell, Stephen A. (Swarthmore College, PA)
    Abstract: This paper analyzes sovereign debt in an economy in which the availability of short-term trade credit reduces international trade transaction costs. The model highlights the distinction between gross and net international reserve positions. Borrowed reserves provide net wealth and liquidity services during a negotiation, as long as they are not fully attachable by creditors. Moreover, reserves strengthen the bargaining position of a country by shielding it from a cut-off from short-term trade credits thereby diminishing its degree of impatience to conclude a negotiation. We show that competitive banks do lend for the accumulation of borrowed reserves, which provide partial insurance
    JEL: F30 F34
    Date: 2006
  28. By: Groh, Alexander; Gottschalg, Oliver
    Abstract: This paper assesses the risk-adjusted performance of US buyouts.
    Keywords: risk-adjusted performance; US buyouts; risk; investment
    JEL: E22 G11 G32
    Date: 2006–01–01
  29. By: Iris Claus; Veronica Jacobsen; Brock Jera (New Zealand Treasury)
    Abstract: The purpose of this paper is to develop an analytical framework for discussing the link between financial systems and economic growth. Financial systems help overcome an information asymmetry between borrowers and lenders. If they do not function well, economic growth will be negatively affected. Three policy implications follow. First, the analysis underscores the importance of maintaining solid legal foundations because the financial system relies on these. Second, it demonstrates the necessity for reforming tax policy as it applies to investment, as this is demonstrated to significantly affect the operation of the financial system. Finally, given the importance of financial development for economic growth, a more in-depth review of New Zealand’s financial system in the context of financial regulation and supervision would be valuable.
    Keywords: Economic growth; financial development; financial systems; financial regulation; legal system; institutions; tax
    JEL: G10 G20 G38 H25 K20 K34 O16
    Date: 2004–09
  30. By: Paul De Grauwe; Agnieszka Markiewicz
    Abstract: In this paper, we investigate the behavior of the exchange rate within the framework of an asset pricing model. We assume boundedly rational agents who use simple rules to forecast the future exchange rate. They test these rules continuously using two learning mechanisms. The first one, the fitness method, assumes that agents evaluate forecasts by computing their past profitability. In the second mechanism, agents learn to improve these rules using statistical methods. First, we find that both learning mechanisms reveal the fundamental value of the exchange rate in the steady state. Second, both mechanisms mimic regularities observed in the foreign exchange markets, namely exchange rate disconnect and excess volatility. Fitness learning rule generates the disconnection at different frequencies, while the statistical method has this ability only at the high frequencies. Statistical learning can produce excess volatility of magnitude closer to reality than fitness learning but can also lead to explosive solutions.
    JEL: C32 F31
    Date: 2006
  31. By: Kisu Simwaka (Reserve Bank of Malawi, P.O. Box 30063, Lilongwe, Malawi)
    Abstract: This study investigates the main determinants of real effective exchange rate in Malawi and South Africa. In our empirical analysis, we conducted unit root and cointegration test in order to determine the time series properties of the data and establish whether there is a long run relationship between real effective exchange rate and explanatory variables. Having ascertained that almost all variiables are integrated of order one and cointegrated, an error correction model is formulated and estimated for the two real effective exchange rate equations using the Ordinary Least Squre (OLS) method. The empirical results for both Malawi and South Africa are highly supportive of the real exchange rate model. In particular, we find a negative and significant relationship between real effective exchange rate and the degree of openness for both countries. On the other hand, while there is an inverse relationship between real effetcive exchange rate and governmernt consumption in the case of Malawi, a positive ralationship between real effective exchange rate and government consumption obtains in the case of South Africa. Additionally, whereas there is a positive relationship between real effetcive exchange rate and international capital flows in the case of Malawi, a negative realtionship obtains in the case of South Africa.. However, results from both countries indicate a positive relationship between real exchange rate one hand and excess domestic credit and lagged real effective exchange rate on the other hand. They also indicate a negative relationship between real effective exchange rate and nominal devaluation in both countries. The study yields some policy implications. First, it has been learnt that excessive domestic credit causes the real exchange rate to appreciate for both countries. This therefore calls for prudent fiscal and monetary policy measures. Such measures include mopping out excess liquidity from the market to stem the growth of money supply. For both countries, the most powerful policy is just an intermediate policy and can only be successful if there is fiscal discipline. With fiscal discipline there can be no excess liquidity. Second, the study has found that policies aimed at eliminating trade restrictions depreciate the REER. One policy implication that can be drawn from this finding is that the government should continue implementing trade liberalisation policies that it had already started in 1988. Furthermore, developments in the external sector of the economy (changes in terms of trade, degree of openness anf international capital flows) which are not under the control of domestic authorities seemingly contribute more to changes in real effective exchange rate. The policy implications are that the government ability in influencing the behaviour of real effective exchange rate is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shock is limited, at best. In the long- run however, appropriate structural changes and conducive competitive policy could be designed and implemented. These may include export diversification (to counter deteorating terms of trade in specific commodities) and implementing measures to limit market imperfection. Based on the available evidence, it can be concluded that macroeconomic fundamentals play a vital role in explaining changes in real effective exchange rate in both Malawi and South Africa. Keywords: real effective exchange rate, cointegration; error correction model
    Keywords: real effective exchange rate, cointegration; error correction model
    JEL: F3 F4
    Date: 2004–07–18
  32. By: Adriana Breccia
    Abstract: Under U.S. Bankruptcy Code, equity holders can restructure different debt classes at a time. Recognizing this allows us to endogenize, in continuous time, not only the restructuring threshold but also the restructuring order of senior and junior classes. Unlike previous studies, sequential restructuring explains absolute priority violation (APV) not just among debt and equity but also among debt classes. The extent of APV leads to positive credit spreads even if senior creditors are fully secured and virtually immune to default risk. Moreover, sequential restructuring can lead to reversals in the credit spreads. We provide sufficient conditions for avoiding reversals.
    Keywords: Strategic debt service, bankruptcy, Nash Bargaining, debt priority structure, geometric Brownian motion
    JEL: G12 G32 G33
    Date: 2006–05
  33. By: Andrea Attar (Università di Roma, La Sapienza; LUISS, University of Rome); Eloisa Campioni (LUISS, University of Rome); Gwenäel Piaser (Department of Economics, University Of Venice Cà Foscari); Gwenaël Piaser
    Abstract: This paper studies the relationship between competition and incentives in an economy with financial contracts. We concentrate on non-exclusive credit relationships, those where an entrepreneur can simultaneously accept more than one contractual offer. Several homogeneous lenders compete on the contracts they offer to finance the entrepreneur's investment project. We model a common agency game with moral hazard, and we characterize its equilibria. As expected, notwithstanding the competition among the principals (lenders), non-competitive outcomes can be supported. In particular, positive profit equilibria are pervasive. We then provide a complete welfare analysis and show that all equilibrium allocations turn out to be constrained Pareto efficient.
    Keywords: Common Agency, Financial Markets, Efficiency
    JEL: D4 D6 G2
    Date: 2006
  34. By: M. Martin Boyer; Simon van Norden
    Abstract: Several recent papers have underlined the importance of the microstructure effects in understanding exchange rate behavior by documenting stable long-run relationships between cumulated order flows and spot exchange rates. This stands in contrast to the widely-studied failure of exchange rates to conform to the long-run behavior implied by “conventional” macroeconomic models and is consistent with the prediction of micro-structure models. We reexamine the evidence for stable long-run relationships. We find that such evidence exists only for a small number of the major currencies we examine and that is it statistically fragile. We conclude that this implication of microstructure models does not fit the data as well as previous studies suggest. <P>Plusieurs études récentes ont souligné l’importance de la microstructure des marchés pour la compréhension des comportements des taux de change en documentant les relations stables à long terme entre les flux des commandes cumulées et les taux de change courants. Les résultats contrastent avec ceux de nombreuses études sur l’échec des taux de change de se conformer au comportement à long terme que supposent les modèles macroéconomiques « conventionnels » et sont conformes à la prédiction des modèles microstructurels. Nous réexaminons l’évidence de relations stables à long terme et constatons que celle-ci n’existe que dans un petit nombre des taux de change étudiés et qu’elle est fragile du point de vue statistique. Nous concluons que l’implication des modèles microstructurels ne correspond pas aux données aussi bien que des études précédentes laissent supposer.
    Keywords: cointegration, foreign exchange rates, order flow, microstructure, cointégration, flux de commandes, microstructure, taux de change
    JEL: F31 G15
    Date: 2006–05–01
  35. By: Dominick Stephens (Reserve Bank of New Zealand)
    Abstract: Previous research has suggested that including exchange rate stabilisation within the goals of monetary policy significantly increases the volatility of inflation, output and interest rates, and that the benefits of exchange rate stabilisation therefore do not justify the costs. The current paper tests whether this finding is robust when various alternative models of exchange rate determination are considered. The analysis is carried out in the context of optimal full-information monetary policy rules in a New Keynesian model that is calibrated to represent the New Zealand economy. For the models that feature rational expectations, we support the conclusion that seeking to avoid exchange rate volatility would have more costs than benefits. Indeed, a major cost of including the exchange rate within the goals of monetary policy is that inflation expectations become less anchored to the inflation target, meaning that larger movements in nominal interest rates are required to control inflation.
    JEL: E52 E58
    Date: 2006–05
  36. By: Kisukyabo Simwaka (Reserve Bank of Malawi, P.O. Box 30063, Lilongwe, Malawi)
    Abstract: This study investigates the main determinants of real effective exchange rate in Malawi and South Africa. In our empirical analysis, we conducted unit root and cointegration test in order to determine the time series properties of the data and establish whether there is a long run relationship between real effective exchange rate and explanatory variables. Having ascertained that almost all variables are integrated of order one and cointegrated, an error correction model is formulated and estimated for the two real effective exchange rate equations using the Ordinary Least Square (OLS) method. The empirical results for both Malawi and South Africa are highly supportive of the real exchange rate model. In particular, we find a negative and significant relationship between real effective exchange rate and the degree of openness for both countries. On the other hand, while there is an inverse relationship between real effective exchange rate and governmernt consumption in the case of Malawi, a positive ralationship between real effective exchange rate and government consumption obtains in the case of South Africa. Additionally, whereas there is a positive relationship between real effective exchange rate and international capital flows in the case of Malawi, a negative relationship obtains in the case of South Africa.. However, results from both countries indicate a positive relationship between real exchange rate one hand and excess domestic credit and lagged real effective exchange rate on the other hand. They also indicate a negative relationship between real effective exchange rate and nominal devaluation in both countries. The study yields some policy implications. First, it has been learnt that excessive domestic credit causes the real exchange rate to appreciate for both countries. This therefore calls for prudent fiscal and monetary policy measures. Such measures include mopping out excess liquidity from the market to stem the growth of money supply. For both countries, the most powerful policy is just an intermediate policy and can only be successful if there is fiscal discipline. With fiscal discipline there can be no excess liquidity. Second, the study has found that policies aimed at eliminating trade restrictions depreciate the REER. One policy implication that can be drawn from this finding is that the government should continue implementing trade liberalisation policies that it had already started in 1988. Furthermore, developments in the external sector of the economy (changes in terms of trade, degree of openness anf international capital flows) which are not under the control of domestic authorities seemingly contribute more to changes in real effective exchange rate. The policy implications are that the government ability in influencing the behaviour of real effective exchange rate is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shock is limited, at best. In the long- run however, appropriate structural changes and conducive competitive policy could be designed and implemented. These may include export diversification (to counter deteriorating terms of trade in specific commodities) and implementing measures to limit market imperfection. Based on the available evidence, it can be concluded that macroeconomic fundamentals play a vital role in explaining changes in real effective exchange rate in both Malawi and South Africa. Key words: real effective exchange rate, stationarity, cointegration
    Keywords: real effective exchange rate, stationarity, cointegration
    JEL: F1 F2
    Date: 2004–07–19
  37. By: Cécile Carpentier; Jean-Marc Suret
    Abstract: The Quebec Stock Savings Plan (QSSP) is one of the oldest tax expenditures programs put in place by the Quebec government to capitalize small businesses. Subsequently adopted by other provinces, QSSP is primarily intended to increase the demand for newly issued shares of small businesses. This increase should, in turn, boost the share price and lower the cost of equity for small firms. While it has been in force for 25 years in Quebec, evidence of the effectiveness of this program is sparse. This paper contains an empirical examination of this program that determines whether it constitutes an effective means of financing emerging companies.<P> We concisely analyze the arguments in favor of this tax expenditures program, and summarize its evolution and findings of earlier studies. We observe that the QSSP has been frequently modified, and that the target companies were successively large, small, and medium-sized firms and funds (Part 1). Our conceptual analysis of the rationale and the required success conditions for this program clarifies the reasons for these adjustments and failures (Part 2). We show that several conditions must be met to significantly decrease the issuers’ equity cost. The issue should be sold mainly in Quebec to individual investors, and it should be an initial public offering. Seasoned offerings are sold at market price, and the investor is the only beneficiary of the program. The same situation prevails when the shares are sold to non-taxable investors, or to non-Quebec residents. In terms of public policy, these conditions can be met only by small companies, which launch IPOs modest enough to be sold entirely to individual investors in Quebec.<P> In the third section of the paper, we analyze the QSSP issues from 1992 to 2002, and show that few of these issues satisfied the efficiency conditions of the program. As designed in 1992, the program should mainly benefit investors rather than issuers, because the stock issues are sold largely outside of the province to non-eligible investors, who do not qualify for the credit. Seasoned issues now predominate. As the price of these issues is set by the market, a significant effect on the financing cost is unlikely. Although the QSSP might have increased the demand for securities and have permitted issues which would not be realizable without the program, the extremely high issuing activity across the provinces casts doubt on this argument. The QSSP funds mainly own shares of large corporations. Based on the proportion of capital of small emerging companies held in the funds, the funds’ effect on small firm finance is probably insignificant, and incurs a high cost for the government.<P> Given the efficiency conditions of the QSSP program, a significant effect of the program on the equity cost of growing companies is currently unlikely. To conclude, we propose some research avenues that could confirm the indirect evidence presented in our paper. <P>Le Régime d’épargne-actions du Québec (RÉAQ) est l’un des plus anciens programmes de dépenses fiscales mis en place par le gouvernement pour capitaliser les petites entreprises. Ce programme a été étudié puis instauré dans deux autres provinces. Son principal objectif est d’augmenter la demande de titres nouvellement émis. Cette augmentation de la demande provoque normalement une augmentation du prix des titres, ce qui diminue le coût des fonds propres. Bien qu’implanté depuis 25 ans, il existe peu d’analyses de l’efficacité du RÉAQ. Dans le cadre de la présente étude, nous étudions conceptuellement puis empiriquement ce programme, pour déterminer s’il constitue un moyen efficace d’aide au financement des entreprises en croissance.<P> Nous examinons brièvement les arguments utilisés pour justifier ce programme, puis résumons son évolution et les résultats des études antérieures. Il ressort que le RÉAQ a été très fréquemment modifié, et que les entreprises visées ont été successivement les grandes, les petites puis les moyennes entreprises, ainsi que les fonds d’investissement (Partie 1). Notre analyse conceptuelle de la rationalité et des conditions de succès de ce type de programme permet de comprendre les raisons de ces ajustements successifs et des problèmes vécus par le programme (Partie 2). Nous montrons que plusieurs conditions doivent être réunies pour obtenir une diminution significative du coût des fonds propres des émetteurs. L’émission doit être vendue intégralement ou presque au Québec, à des investisseurs individuels et constituer un premier appel public à l’épargne. Les émissions subséquentes sont en effet vendues au prix du marché, et l’investisseur est dans ce cas le seul bénéficiaire du crédit d’impôt. La même situation prévaut si les actions sont vendues à des investisseurs non imposables, ou à des non-résidents du Québec. Seules de petites entreprises, réalisant des premiers appels publics à l’épargne dont le produit brut est assez limité pour être placé entièrement au Québec, peuvent remplir les trois conditions nécessaires au succès en termes de politique publique.<P> Dans la troisième partie, nous analysons les émissions RÉAQ entre 1992 et 2002, et montrons que peu d’entre elles satisfont aux conditions d’efficacité du programme. Tel qu’il fonctionne depuis 1992, le programme profite vraisemblablement davantage aux investisseurs qu’aux émetteurs. En effet, les émissions sont très largement vendues hors Québec à des investisseurs non admissibles, qui ne bénéficient pas du crédit. Les émissions subséquentes sont devenues majoritaires. Le prix est fixé par le marché et un effet significatif sur le coût de financement est peu probable. Il est possible cependant que le programme ait pour effet d’augmenter la demande des titres, et de permettre des émissions qui n’auraient pas lieu autrement. La très forte activité d’émission dans toutes les provinces permet de douter de cet argument. Les fonds RÉAQ détiennent principalement des actions de grandes entreprises. Sur la base des proportions détenues dans le capital de petites sociétés en croissance, il semble peu probable qu’ils jouent un rôle déterminant dans le financement de ces sociétés. Par ailleurs, cet effet est obtenu à un coût élevé pour le gouvernement.<P> Actuellement, les conditions de fonctionnement du RÉAQ rendent peu probable un effet significatif sur le coût du capital des entreprises en croissance. Nous proposons, en conclusion, un certain nombre d’avenues de recherche qui permettraient de confirmer les preuves indirectes présentées dans cette étude.
    Date: 2005–03–01
  38. 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.
    Keywords: capital structure, country risk, default, multinationals, tax competition
    JEL: G31 H25 H32
    Date: 2006
  39. By: Bignebat, C.; Gouret, F.
    Abstract: This paper is an empirical work grounded in the soft budget constraint literature. A loan is soft when a bank cannot commit to hold an enterprise to a fixed initial budget and/or the timing of repayment. Using data collected by the EBRD (BEEPS 2002) in 26 transition economies, we analyze the determinants of managers' expectations to have a soft loan. We show that managers' believes integrate some of the decision criteria of the banks: managers' expectations to have soft loans are lower when the initial financing requires collateral, higher for big firms and higher when firms had recently experienced financial distress. ...French Abstract : Ce papier empirique s'inscrit dans la littérature sur la contrainte budgétaire lâche. Un prêt est lâche quand la banque ne peut pas s'engager, de manière crédible, à maintenir le prêt à un certain montant et/ou à certaines échéances. A l'aide de données collectées par la BERD (BEEPS 2002) dans 26 pays en transition, on analyse les croyances des managers d'obtenir un prêt lâche. Les managers intègrent dans leurs croyances les critères de décision des banques. Les anticipations d'avoir un prêt lâche sont plus faibles quand le financement engage un collatéral. Les grandes firmes et les firmes qui ont connu des difficultés financières ont, elles, des anticipations plus élevées.
    JEL: D84 G3 O12 P21
    Date: 2006
  40. By: Cécile Carpentier; Jean-Marc Suret
    Abstract: To close an asserted equity gap, the Canadian regulators implemented the Capital Pool Company program, which enables small firms to directly access the stock market, thus bypassing the conventional growth cycle. Similar to American Blind Pools/Blank-Checks, Capital Pool Companies have spawned more than half of the new issues on Canadian stock markets between 1995 and 2001. Underlying this program, along with several other governmental actions, are three postulates: 1) a significant number of profitable companies cannot be financed using conventional tools, 2) small firms can grow and succeed without the full set of services usually provided by the specialized intermediaries, and 3) individual investors are able to correctly price the stocks issued by small and generally young firms. Our analysis of close to 450 issuers resulting from this program fails to confirm any of these postulates. Companies that access the stock market through this program are of low quality, which is consistent with the adverse selection paradigm. Their abnormally low subsequent operating performance can be traced to the lack of incentive and monitoring tools, along with the “lemon” principle. Moreover, their market performance is also abnormally poor, confirming that individual investors cannot correctly assess the fair value of new ventures, in a strong asymmetric information context. In terms of public policy, development of mechanisms intended to facilitate the entry of emerging companies on the stock market apparently requires serious reexamination. Our results confirm the essential role played by financial intermediaries in small business finance. <P>Pour remédier à une discontinuité de marché supposée, les autorités canadiennes des valeurs mobilières ont mis en place le programme des sociétés de capital de démarrage. Celui-ci permet aux petites entreprises d’accéder directement au marché boursier, sans avoir recours aux étapes traditionnelles de financement de la croissance. Comparables aux Blind Pools américaines, les sociétés de capital de démarrage représentent plus de la moitié des émissions publiques initiales au Canada entre 1995 et 2001. Les hypothèses sous jacentes à ce programme, ainsi qu’à d’autres initiatives gouvernementales, sont les suivantes : 1) un nombre significatif de projets rentables ne peuvent pas être financés en utilisant les moyens de financement conventionnels, 2) les petites entreprises peuvent croître et être rentables sans les services fournis habituellement par les intermédiaires traditionnels, 3) les investisseurs individuels sont capables d’évaluer correctement le prix d’émission des petites, et généralement jeunes, entreprises. Notre analyse de près de 450 émetteurs résultants de ce programme ne permet pas de confirmer ces hypothèses. Les entreprises qui accèdent au marché boursier au moyen de ce programme sont de mauvaise qualité, ce qui est cohérent avec le paradigme de l’anti-sélection. Leur performance opérationnelle subséquente est anormalement faible, ce qui peut être relié à un manque d’outils d’incitation et de surveillance, ainsi qu’au même paradigme de l’anti-sélection. En outre, leur performance boursière est également anormalement faible, ce qui tend à montrer que les investisseurs individuels ne sont pas en mesure d’évaluer correctement le prix de ces nouvelles émissions, dans un contexte d’asymétrie informationnelle forte. En termes de politiques publiques, le développement de mécanismes de marché visant à faciliter l’accès au marché boursier d’entreprises en démarrage requiert un sérieux réexamen. Nos résultats confirment le rôle crucial joué par les intermédiaires de financement traditionnels auprès des petites entreprises.
    Keywords: capital pool company, small business finance, initial public offering, société de capital de démarrage, financement de la PME, émission publique initiale
    Date: 2004–09–01
  41. By: Susan Thorp (School of Finance and Economics, University of Technology, Sydney); George Milunovich (Department of Economics, Macquarie University)
    Abstract: Equity markets do not pass all overnight information into prices instantaneously at the opening of trade. The New York market takes up to 30 minutes after the opening time to absorb overnight foreign news, Tokyo takes about 90 minutes, and London about 120 minutes on average. These delays in information absorption are not commercially significant but do have implications for measures of market integration. We adjust intra-daily return series for non-instantaneous news absorption and then use adjusted series to predict opening price variation in three major equity markets. Because the adjusted daytime returns series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign daytime returns, explains 12% of opening price variation (close-open returns) in New York, 14% in Tokyo and 30% in London. For New York and Tokyo, the largest influences come from the market that trades immediately prior (London and New York respectively) whereas opening price variation in London is linked closer with New York than Tokyo. Foreign volatility spillovers are also significant, and subject to asymmetry effects.
    Keywords: GARCH; spillover; integration; transmission; efficiency
    JEL: G14 G15
    Date: 2006–05–01
  42. By: Cécile Carpentier; Jean-Marc Suret
    Abstract: Acknowledging that securities regulation penalizes small growing firms in their attempt to raise equity capital, most of the Canadian provinces have recently reformed their exemption rules. These rules allow the issuance of securities outside the boundaries of securities regulation. The rules governing the resale of securities issued within the exemption system have been eased considerably. In part because this task is fairly complex, securities regulations are not yet harmonized across the provinces. The first objective of this paper is to present to non-specialists of securities regulation the broad outlines and the challenges of this liberalization. Non-conventional financing, such as accessing the stock market via capital pool companies or private placements in public equities, along with reverse takeovers, are becoming more common than non-exempted issues. This trend in business financing, together with the growing liberalization, is taking shape in a context of reinforcement of regulation and control of disclosure and governance for public companies that follow financial scandals. The co-occurrence of these events raises important questions that have received little attention to date, and implies serious risks that remain unexplored. Analysis of these risks is the second objective of this study. In particular, we assess the risks inherent in the decrease in market liquidity and in market quality. As some American works assert that private equity development may engender significant risks for investors, public policy makers should put in place efficient mechanisms to monitor these transactions and issuers in the new regulatory context. <P>Acceptant l’argument qui veut que la réglementation des valeurs mobilières puisse pénaliser le financement des entreprises de petite taille en croissance, la plupart des provinces canadiennes ont modifié récemment leur réglementation des régimes de dispenses. Ceux-ci permettent l’émission de titres en dehors du cadre standard de la réglementation des valeurs mobilières. Les règles qui régissent la revente des titres émis par voie de dispense ont également été fortement assouplies. Il s’agit de sujets complexes, d’autant que les réglementations ne sont pas encore harmonisées. Le premier objectif de ce texte est de présenter, à des non spécialistes du droit des valeurs mobilières, les grandes lignes et les enjeux de cette libéralisation. Les opérations de financement non conventionnelles, telles que l’entrée en Bourse par l’intermédiaire de sociétés de capital de démarrage, les placements privés par des sociétés ouvertes, et les prises de contrôle inversées sont devenues plus fréquentes que celles régies par les dispositions fondamentales de la réglementation des valeurs mobilières. Les modifications de comportement des entreprises et la libéralisation des règles surviennent par ailleurs au moment où les exigences et les contrôles en termes de gouvernance et d’information sont renforcés pour les sociétés ouvertes, à la suite des scandales boursiers. La coïncidence de ces divers facteurs soulève d’importantes questions qui ne semblent pas avoir été étudiées, et comporte des risques sérieux qui n’ont pas été évalués. Leur analyse est le second objectif de cette étude. Nous évoquons notamment les risques liés à la réduction de la liquidité du marché et de la qualité du marché. Il semble également, sur la base des travaux américains, que le développement du placement privé puisse faire courir des risques importants aux investisseurs. Les autorités devraient donc mettre en place des mécanismes efficaces d’observation des transactions et de l’évolution des entreprises dans le cadre de ces nouvelles réglementations.
    Keywords: private placement, securities regulation, financing, placement privé, réglementation des valeurs mobilières, financement
    Date: 2004–11–01
  43. By: Christian Dreger (German Institute for Economic Research (DIW) Berlin, 14191 Berlin, Germany.); Hans-Eggert Reimers (Hochschule Wismar, University of Technology, Business and Design, PF 1210, 23952 Wismar, Germany.); Barbara Roffia (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Generally speaking, money demand models represent a natural benchmark against which monetary developments can be assessed. In particular, the existence of a well-specified and stable relationship between money and prices can be perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. In this study a money demand analysis in the new Member States of the European Union (EU) is conducted using panel cointegration methods. A well-behaved long-run money demand relationship can be identified only if the exchange rate as part of the opportunity cost is included. In the long-run cointegrating vector the income elasticity exceeds unity. Moreover, over the whole sample period the exchange rates vis-à-vis the US dollar turn out to be significant and a more appropriate variable in the money demand than the euro exchange rate. The present analysis is of importance for the new EU Member States as they are expected to join in the future years the euro area, where money is deemed to be highly relevant - within the two-pillar monetary strategy of the European Central Bank (ECB) - in order to detect risks to price stability over the medium term.
    Keywords: Money demand, new EU Member States, exchange rate, panel cointegration.
    JEL: C23 E41 E52
    Date: 2006–05
  44. By: José Pablo Dapena
    Abstract: The traditional marshallian rule of investing (abandoning) when the value of an underlying asset is above (below) the cost of an alternative investment is modified in the presence of uncertainty and irreversibility giving rise to an option component into decisions. This component is affected by the degree of volatility of underlying assets, which in turn can derive their volatility from the economy as a whole, affecting the investment process and therefore the accumulation of capital and future growth. In the same tense, the evidence of volatility in the returns of the underlying assets of the economy affects the market value of debt contracts, conveying recommendations regarding the financial architecture of the economy and the type of financial instruments better suited. The paper explores the application of contingent claims analysis both to the potential effect of macro volatility on aggregate investment, and to the effect on the presence of high levels of indebtedness of the economy, with a special application to the Argentinean economy where we obtain that economies with high level of volatility would require a significant level of internal saving and capital markets driven mainly by equity instruments of financing, which helps to better accommodate uncertainty by means of the price of assets.
    Keywords: volatility, contingent claims, real options, aggregate investment, saving, capital markets.
    JEL: G00 F36 O16
    Date: 2006–04
  45. By: Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We examine the implications of monetary union for macroeconomic stabilisation in catching up participating countries. We allow member states’supply conditions to differ inside the union, especially with regard to sectoral characteristics. Sectoral productivity shocks on balance hamper the stabilisation properties of a currency union. In the face of aggregate supply disturbances, the stabilisation costs of renouncing monetary autonomy diminish with a flatter output-inflation tradeoff and - barring idiosyncratic shocks - with a larger reference country size, more homogeneous supply slopes and a higher preference for price stability.
    Keywords: Monetary union, Balassa-Samuelson effect, Exchange rates, Price stability.
    JEL: E52 E58 F33 F40
    Date: 2006–05
  46. By: Foucault, Thierry; Menkveld, Albert
    Abstract: In this paper, the authors study the changes in liquidity following the introduction of a new electronic limit order market when, prior to its introduction, trading is centralized in a single limit order market. They also study how automation of routing decisions and trading fees affect the relative liquidity of rival markets.
    Keywords: market fragmentation; centralized limit order book; smart routers; trading fees; trade-throughs
    JEL: F02 F12 F18
    Date: 2006–01–01
  47. By: Balázs Égert; Amalia Morales-Zumaquero;
    Abstract: This paper attempts to analyze the direct impact of exchange rate volatility on the export performance of ten Central and Eastern European transition economies as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export ows are studied. To this end, we rst analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and second, use these changes to construct dummy variables we include in our export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specic periods.
    Keywords: exchange rate volatility, export, trade, transition, structural breaks
    JEL: F31
    Date: 2005–07–01
  48. By: Aydogan Ulker
    Abstract: This paper analyses the role of the elderly couples’ past marital history in determining their current wealth holdings and portfolio allocation using data from the first wave of the Health and Retirement Study. The results suggest that, for those who remarry after divorce, there is recovery from the negative shocks of marital breakdowns, which occur earlier in the life cycle. While the net cost of divorce in terms of household wealth accumulation is higher for men than it is for women, in the “long run” it turns out to be statistically insignificant for both gender groups. Therefore, the elderly couples’ marital history plays a minor role in explaining the dispersion in their wealth holdings near the end of the life cycle. However, the results also show that both the probability of owning a particular asset and the fraction of net worth allocated to that asset might significantly vary depending on the elderly couples’ marital experience. Most importantly, the couples in which the spouses have divorced before invest relatively heavily on non-housing assets rather than owner occupied housing. The further analysis of financial wealth only yields that the ownership and allocation of financial assets are not affected in a major significant way.
    Keywords: wealth, portfolio allocation, elderly, marital history
    JEL: D31 G11 J12 J14
    Date: 2004–09
  49. By: Alejandro Diaz-Bautista (COLEF); Cesar Alfredo Olivas Andrade (UACJ)
    Abstract: Resumen El presente estudio se centra en analizar los factores que provocan el éxodo de capital en México, entre los que se incluyen: el saldo en cuenta corriente, el grado de sobrevaluación de la moneda, el diferencial en las tasas de interés entre México y Estados Unidos y el diferencial en las tasas de inflación México-Estados Unidos. De igual forma, se incluyen factores como la inestabilidad política y las llamadas crisis recurrentes en el análisis de las fugas de Capital en México. Asimismo, se plantean los modelos más comunes para la estimación de la fuga de capital aplicados a México. Abstract The study is centered on the model of capital flight from Mexico. Some of the variables that are used in the econometric model are the current account, the level of overvaluation of the currency, the interest rate differential between Mexico and the United States, political factors and economic crisis.
    Keywords: Capital flight, Mexico, current account, interest rate differential, political factors and economic crisis.
    JEL: C50 F20 N2
    Date: 2005–11–18
  50. By: Sophie Claeys,; Gleb Lanine; Koen Schoors
    Abstract: We focus on the conflict between two central bank objectives, namely individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) in 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately and banks that are active on the interbank market enjoy protection from license withdrawal, showing a tacit concern for systemic stability. The CBR is also reluctant to withdraw licenses from banks that violate the individuals’ deposits to capital ratio, because this conflicts with the tacit CBR objective to secure depositor trust and systemic stability.
    Keywords: Bank supervision, bank crisis, Russia.
    JEL: G2 N2 E5
    Date: 2005–06–01
  51. By: Ronald Ian McKinnon; Gunther Schnabl
    Abstract: China keeps its exchange rate tightly fixed to the dollar. Its productivity growth and trade surplus have been high, and it continues to accumulate large dollar reserves. Many observers take this as evidence that the renminbi is undervalued and should be appreciated to reduce the Chinese trade surplus. We argue that an appreciation of the renminbi need not reduce China’s trade surplus but could cause serious deflation in China. To show this, we consider international adjustment between China and the United States from both an asset-market and a labor-market perspective, and compare this to Japan’s unsuccessful appreciation of the yen.
    Keywords: China, exchange rate, adjustment, assets markets, labour markets
    JEL: F15 F31 F33
    Date: 2006
  52. By: Lemeilleur, S.; Codron, J.M.; Fares, M.
    Abstract: Formal credit institutions in Cambodia have largely failed to provide access to farm credit to small and medium-scale paddy producers. The paper describes interlinked transactions between commercial rice millers and paddy producers in the paddy market that facilitate the provision of credit. Moreover, interlinked transactions are also used as an incentive device for producers who can only be imperfectly monitored. This kind of interlinked transaction, which tends to be dominant, may emerge as the best governance structure to minimize production and transaction costs. However, we show that in the context of producers' vulnerability to weather damage to crops, perverse risks may also cause indebtedness among producers. Thus, interlocking transactions could lead to unequal relations of economic power, often at the cost of delaying agrarian growth. These dependency relationships may explain, in part, why development institutions fail to promote producers' organizations with rice marketing capabilities. ...French Abstract : Au Cambodge, la défaillance du marché financier rural reste un des freins déterminants au développement des petites et moyennes exploitations agricoles. Cet article décrit les contratsliés entre riziers commerciaux et producteurs de riz paddy facilitant l'octroi de crédit pour ces derniers. Par ailleurs, les contrats-liés sont utilisés par le rizier comme mécanisme d'incitation à l'effort des producteurs, qui ne peut être qu'imparfaitement contrôlé. Les contrats-liés qui tendent à être la forme dominante dans les relations entre riziers et producteurs, semble émerger comme meilleure structure de gouvernance pour réduire les coûts de production et de transaction. Cependant, nous montrons que dans un contexte de forte vulnérabilité des producteurs aux aléas climatiques, le risque d'endettement peut être important pour de nombreux producteurs. Ainsi, les contrats-liés peuvent mener à des relations de pouvoir entre acteurs, générant un manque l'efficacité globale sur le marché du riz. Ces rapports de dépendance pourraient alors expliquer, en partie, les difficultés rencontrées par les institutions de développement dans la promotion des organisations de producteurs à vocation économique.
    JEL: L14 L22 Q13
    Date: 2006
  53. By: Richard Blundell (Institute for Fiscal Studies and University College London); Carl Emmerson (Institute for Fiscal Studies); Matthew Wakefield (Institute for Fiscal Studies)
    Abstract: We summarise what economic theory predicts about how retirement savings decisions are affected by marginal withdrawal rates created by the tax, tax credit and benefit system, and by the information individuals are provided with. All these predictions vary across individuals with their circumstances. * In documenting the incentives to save in a private pension provided by the tax, tax credit and benefit system we show that some individuals face a very strong incentive to place funds in a private pension at particular times during their working lives. Those who are basic rate taxpayers who expect to become higher rate taxpayers or move onto the taper of the Working Tax Credit have an incentive to delay making any private pension contributions until that time, while those expecting to move off that taper have an incentive to bring forward future pension contributions. * When examining retirement saving it is important to consider both saving decisions and also the choice of retirement age. We cite previous evidence that both of these margins have been adjusted by individuals in the light of changed financial incentives. In particular there is evidence that spending by working age individuals was increased in the light of the introduction of the State Earnings-Related Pension Scheme. In addition evidence from West Germany and the United States shows that individuals’ retirement ages can be affected substantially by changing financial incentives. There is less evidence of reduced spending by working age individuals in the light of the decision to index the Basic State Pension in line with prices rather than the greater of prices or earnings. * New evidence from the English Longitudinal Study of Ageing shows that it is low and high wealth individuals who are most likely to be out of the labour market prior to the State Pension Age, though often for very different stated reasons. This suggests that if retirement incomes of those with low wealth are to be increased then increased labour market participation is perhaps a margin for them to adjust. * Incentives to work and save are potentially affected by two recent UK reforms: the introduction of the two new tax credits (Working Tax Credit and Child Tax Credit) and the introduction of the Pension Credit. We present some preliminary evidence on whether the strong incentive to contribute to a private pension provided by the two new tax credits has boosted private pension participation, the results of which are somewhat inconclusive and are worthy of further research. * Examining the distribution of current pensioner incomes with respect to the incentives induced by the Pension Credit reform we find that many single pensioners will see an unambiguous increase in the incentive to increase their private retirement income – for example through increased saving or later retirement. There are still large numbers of single pensioners who see a reduction in the incentive to increase their retirement income, the majority of whom have private income which they might decide to reduce. Fewer individuals in pensioner couples are eligible for the Pension Credit. Despite this we find that a similar proportion faces a reduced incentive to acquire greater income as we did for single pensioners. * If the expectations of individuals do not reflect the current rules of the system, then we cannot expect to observe responses fully in line with economic theory that is predicated on full information. Recent evidence from the English Longitudinal Study of Ageing suggests that on average individuals underestimate their longevity and overestimate the private pension income that they can expect to receive. On the other hand, expectations of being in paid employment at older ages are, on average, similar to the current proportions of older individuals who are in paid work and individuals’ expectations of remaining in the labour market at older ages appear to square up with the marginal financial incentives to remain in work that are created by different types of pension scheme.
    Date: 2006–04
  54. By: Piero Gottardi; Felix Kubler
    Abstract: In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with many calibrations of the model used in the literature. In our model financial markets are complete and competitive equilibria are interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents’ welfare is evaluated ex ante, and arises from the possibility of inducing, through social security, an improved level of intergenerational risk sharing. We will also examine the optimal size of a given social security system as well as its optimal reform. The analysis will be carried out in a relatively simple set-up, where the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can be clearly identified.
    Keywords: intergenerational risk sharing, social security, ex ante welfare improvements, interim optimality, price effects
    JEL: D58 D91 E62 H55
    Date: 2006
  55. By: Jagjit S. Chadha; Sean Holly
    Abstract: Many have questioned the empirical relevance of the Calvo-Yun model. This paper appends three widely-studied macroeconomic models (Calvo-Yun, Hybrid and Svensson) with forward rate curves. We back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level, slope and curvature of the yield curve. With each model we trace the response of the yield curve to macroeconomic shocks. We assess the fit of each model with the observed behaviour in forward rates. We find limited support for Calvo-Yun model in terms of fit with the observed yield curve but we find some support for each of the Hybrid and Svensson models. We conclude that macroeconomic persistence seems to be priced into the yield curve.
    Keywords: Macromodels, Yield Curve, Persistence
    JEL: E43 E44 E47
    Date: 2006–05
  56. By: Alejandro Diaz-Bautista (COLEF); Mario Alberto Rosas Chimal (COLEF)
    Abstract: Sumario El estudio utiliza las herramientas de series tiempo como las pruebas de raíz unitaria y corte estructural para analizar las series de los determinantes de la Inversión Extranjera de Cartera (IEC) y la misma IEC. Varias series fueron consideradas para el análisis de la IEC, entre los cuales se encuentran los cambios en el stock monetario, la Inversión Extranjera en el Mercado de dinero, la Inversión Extranjera total, la Inversión Extranjera en el mercado de renta variable, el Índice de Precios y Cotizaciones de la BMV, el precio utilidad esperada de los instrumentos del mercado de renta variable, la calificación riesgo país, el tipo de cambio nominal a 30 días, la Volatilidad del IPC de la BMV, la tasa de interés mexicana y la tasa de referencia externa. Entre las series consideradas, diez de las series presentan una tendencia de corte estructural. De igual forma se describen la historia y los antecedentes de la IEC en México. La evidencia empírica muestra que los determinantes de la inversión extranjera total y la inversión extranjera de cartera tienen una relación de largo plazo. Abstract The determinants of foreign portfolio investment in Mexico are studied, as well as the structural measures that have favored the stabilization of the economy. As the starting point, the authors review the literature with some theoretical models of the determinants of capital flows with structural breaks, and present the results of the empirical evidence of foreign portfolio investment in Mexico.
    Keywords: Foreign portfolio investment, FDI, Structural break, Mexico.
    JEL: C50 F20 N2
    Date: 2005–11–18
  57. By: Miltiades N. Georgiou; Nicholas Kyriazes
    Date: 2006–05
  58. By: Bruce Chapman; Ric Simes
    Abstract: There is an increasing recognition that economically disadvantaged areas do not have an inherent capacity to regenerate economic activity or to deliver automatically socially propitious outcomes. In such circumstances, there might be a strong case for public sector intervention of various types. In what follows we a case for the provision of financial resources for the establishment or consolidation of community social, and other, regional enterprises. The circumstances underlying the impotence of markets to solve financing issues are explored, and some attention is given to historical attempts to address the problem. Most importantly, we outline a potential new approach for the public sector in this area. An important and novel aspect of the exercise involves the government providing some proportion of the required finance in the form of a loan to be repaid by the enterprise only when and if the project becomes economically successful. This form of government intervention, known as income related loans, is designed to limit the extent of economic risks faced by the relevant enterprise, and has the desirable equity characteristic of repaying to taxpayers some return to their investment. Through reference to the Higher Education Contribution Scheme it is explained that the essential bases of this form of public sector approach to financing investment is well established, both conceptually and in administrative terms.
    Keywords: community investment; income related loans
    JEL: G18 G24 G38
    Date: 2004–12
  59. By: Alejandro balbas; Susana Reichardt
    Abstract: The paper provide a new method to replicate and price the quality options usually embedded in many future contracts. The replicating strategies may draw on both the future contract and its related calls and puts. They also yield the quality option theoretical price in perfect markets, as well as upper and lower bounds for its bid or ask prices if frictions are incorporated. With respect to previous literature, this new approach seems to reflect four contributions: Firstly, the analysis does not depend on any dynamic assumption concerning the TSIR behaviour, secondly, it incorporates the information contained in calls and puts whose underlying security is the future contract, thirdly, it allows us to use real market perfectly synchronized prices, and fourthly, transaction costs can be considered. The paper presents an empirical test involving the German market that reveals some differences with regard to previous studies.
    Date: 2005–06
  60. By: Richard N. Langlois (University of Connecticut)
    Abstract: Transaction costs, one often hears, are the economic equivalent of friction in physical systems. Like physicists, economists can sometimes neglect friction in formulating theories; but like engineers, they can never neglect friction in studying how the system actually does let alone should work. Interestingly, however, the present-day economics of organization also ignores friction. That is, almost single-mindedly, the literature analyzes transactions from the point of view of misaligned incentives and (especially) transaction-specific assets. The costs involved are certainly costs of running the economic system in some sense, but they are not obviously frictions. Stories about frictions in trade are not nearly as intriguing as stories about guileful trading partners and expensive assets placed at risk. But I will argue that these seemingly dull categories of cost what Baldwin and Clark (2003) call mundane transaction costs actually have a secret life. They are at least as important as, and quite probably far more important than, the more glamorous costs of asset specificity in explaining the partition between firm and market. These costs also have a secret life in another sense: they have a secret life cycle. I will argue that these mundane transaction costs provide much better material for helping us understanding how the boundaries among firms, markets, and hybrid forms change over time.
    Keywords: transaction costs, division of labor, modularity, standards, property rights.
    JEL: D23 L22
    Date: 2005–11
  61. By: Møller, Peder Fredslund (Department of Accounting, Aarhus School of Business)
    Abstract: This paper shows that settlement-date accounting for equity share options can be seen as an accounting method which implements a shareholder focused residually rewarded partners’ equity view. This equity view represents a simple, natural extension of the shareholder proprietary view. It implicates an equity and income sharing model for accounting which is characterized by specification of both shareholders’ and non-shareholders’ parts of total equity and income. When using this equity and income sharing model, the remeasurements of equity share option obligations made by settlement-date accounting are fully conceptually valid. They represent measurements of one partner group’s share of total equity with effect for another group’s share of total equity and income: the shareholders’ part. Partially, this equity and income sharing model is already the basis for existing accounting standards. <p> It is shown that an intriguing implication of the equity and income sharing model is the fact that treasury shares can hedge present shareholders’ share price risk from the obligation to holders of equity share options. A special hedge accounting construct is needed to account for this hedge effect, and the construct of this model is shown. Numerical simulations are used to illustrate the long run expense effects for shareholders from equity share options by settlement-date accounting both when the expense effects are unhedged and when they are hedged with treasury share holdings. The results demonstrate that the expenses resulting from settlement-date accounting for equity share option awards are significantly higher on average than the expenses resulting from grant-date accounting. And they show that the cost of equity, the share price volatility and the lifetime of the equity share options are important determinants for the size of the differences in total expenses, which in a long run perspective is to be expected from the use of these two alternative accounting models for equity share options. The simulation results demonstrate that hedging with treasury share holdings is very effective to stabilize expenses resulting from options granted to employees
    Keywords: No keywords;
    Date: 2006–06–01
  62. By: M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk
    Abstract: In this paper we adopt a new approach to testing for purchasing power parity, PPP, that is robust to base country effects, cross-section dependence, and aggregation. Given data on N +1 countries, i, j = 0, 1, 2, ..., N, the standard procedure is to apply unit root or stationarity tests to N relative prices against a base country, 0, e.g. the US. The evidence is that such tests are sensitive to the choice of base country. In addition, the analysis is subject to a high degree of cross section dependence which is difficult to deal with particularly when N is large. In this paper we test for PPP applying a pairwise approach to the disaggregated data set recently analysed by Imbs, Mumtaz, Ravan and Rey (2005, QJE). We consider a variety of tests applied to all possible N(N +1)/2 pairs of real exchange rate pairs between the N + 1 countries and estimate the proportion of the pairs that are stationary, for the aggregates and each of the 19 commodity groups. This approach is invariant to base country effects and the proportion that are non-stationary can be consistently estimated even if there is cross-sectional dependence. To deal with small sample problems and residual cross section dependence, we use a factor augmented sieve bootstrap approach and present bootstrap pairwise estimates of the proportions that are stationary. The bootstrapped rejection frequencies at 26%-49% based on unit root tests suggest some evidence in favour of the PPP in the case of the disaggregate data as compared to 6%-14% based on aggregate price series.
    Keywords: purchasing power parity, panel data, pairwise approach, cross section dependence
    JEL: C23 F31 F41
    Date: 2006
  63. By: Calvet, Laurent; Campbell, John Y.; Sodini, Paolo
    Abstract: This paper investigates the efficiency of household investment decisions in a unique dataset containing the disaggregated wealth and income of the entire population of Sweeden.
    Keywords: asset allocation; diversification; familiarity; participation
    JEL: D50 D90 E30 O10
    Date: 2006–01–01
  64. By: Hartley, Roger (University of Manchester); Lanot, Gauthier (Keele University); Walker, Ian (University of Warwick)
    Abstract: This paper analyses the behaviour of contestants in one of the most popular TV gameshows ever to estimate risk aversion. This gameshow has a number of features that makes it well suited for our analysis: the format is extremely straightforward, it involves no strategic decision-making, we have a large number of observations, and the prizes are cash and paid immediately, and cover a large range – from £100 up to £1 million. Our data sources have the virtue that we are able to check the representativeness of the gameshow participants. Even though the CRRA model is extremely restrictive we find that a coefficient or relative risk aversion which is close to unity fits the data across a wide range of wealth remarkably well.
    Keywords: Risk aversion ; gameshow
    JEL: D81 C93 C23
    Date: 2006
  65. By: Robin Boadway (Queen's University); Motohiro Sato (Hitotsubashi University)
    Abstract: Entrepreneurs starting new firms face two sorts of asymmetric information problems. Information about the quality of new investments may be private, leading to adverse selection in credit markets. And, entrepreneurs may not observe the quality of workers applying for jobs, resulting in adverse selection in labor markets. We construct a simple model to illustrate some consequences of new firms facing both sorts of asymmetric information. Multiple equilibria can occur. Stable equilibria can be in the interior, or at a corner in which no entrepreneurs enter. Stable interior equilibria can involve involuntary unemployment, as well as credit rationing. Equilibrium outcomes mismatch workers to firms, and will generally result in an inefficient number of new firms. With involuntary unemployment, there will be too few new firms, but with full employment, there may be too many or too few. Taxes or subsidies on new firms and employment can be used to achieve a second-best optimum. Alternative information assumptions are explored.
    Keywords: entrepreneurship, asymmetric information, adverse selection
    JEL: D82 G14 H25
    Date: 2006–05
  66. By: Xiaozhong Zhai
    Abstract: Putting the theory of price system on the relationship among price, wage, labor time, interest rate and GNP (or GDP), four main variables in economics, Four-Rate Formula and Exchange Rate Formula are created (Xiaozhong Zhai 2003). Two formulas applying to analyses of economy and calculation can show some valuable data to macroeconomics, economist and policymaker. They can produce a proof to demonstrate that single currency, for example, single European currency with different value and interest rate in different conditions and regions, can not certainly benefit price stability, sound public finances, low interest rates, incentives for growth, investment and employment. Two formulas are very simple, practical and easy to deal with the complex phenomenon in economy. Exchange Rate Formula has an immediate signification in the international trade economy.
    Keywords: wage, price, GNP, interest rate, Four-Rate Formula and Exchange Rate Formula
    JEL: E
    Date: 2004–10–23
  67. By: Australian Prudential Regulation Authority (Australian Prudential Regulation Authority)
    Date: 2005–05–06
  68. By: Australian Prudential Regulation Authority (Australian Prudential Regulation Authority)
    Date: 2005–02–01
  69. By: James Mitchell; Kostas Mouratidis; Martin Weale
    Abstract: *There is widespread concern about rising levels of debt prompted by the rising overall levels of debt and the increasing reports of people having difficulties in managing their debts. *Analysis of the data on wealth and borrowing in the British Household Panel Survey in 1995 and 2000 finds that the non-mortgage debts of households headed by people aged under 35 are higher than those of households headed by older people. *However when one looks only at the households with unsecured debt, then the group of households headed by people aged 35-50 held more debt than did households headed by younger and older people. *Unsecured debts of people in poverty were as a proportion of their incomes, considerably higher than those of the population at large but, at around 10% of income the burden was not large in absolute terms. The average reported debts of people experiencing unemployment were at worst only slightly larger. Econometric analysis suggested that unsecured debt levels were raised by 4% of income for households below the poverty line. *Divorced women and single women with children had, on average very low levels of wealth but they did not have particularly large debts. The same was true of households created by family breakdown between 1995 and 2000. Only households whose heads described themselves as separated had relatively large unsecured debts, at just under 25% of their incomes on average. Our econometric analysis suggested that recent family breakdown raised debt as a proportion of income by 42% but the reliability of this finding is affected by the small number of households experiencing breakdown and the finding is not statistically significant.*There is evidence that taking on debt is in part motivated by an expectation of rising income in the near term. A household expecting its income to rise by 50% over the next two years would, on average, take extra unsecured debt of 5.8% of current income and total extra debt of 28% of current income compared with a household which does not expect its income to rise. *A life-cycle framework is used to investigate the borrowing and saving patterns households would adopt if they planned to keep their spending growing smoothly up age 65 and staying constant after that. This shows that between 1995 and 2000, if all households had followed the framework then, before taking initial assets and liabilities into account, 18% of households would have borrowed or dissaved and 6% would have borrowed or dissaved more than one year’s income. *This borrowing is a consequence of expectations of rising income; the data show that the income of this group did indeed rise relative to the average over the period 2000-2002 *A much higher proportion of people in poverty would have needed to borrow to smooth out their expected consumption. 53% of households in poverty in 1995 would have reached 2000 having borrowed or dissaved and 28% would have borrowed more than one year’s income. Again the incomes of this group rose relative to the average over the period 2000-2002. *Overall changes in people’s asset positions are only partially influenced by life-cycle factors. There also seems to be a tendency to spend out of existing wealth but, offsetting this, to let house price gains accrue. *Many people who would have benefited from reducing their wealth or going into debt over the period 1995 to 2000 actually let their wealth increase. However people who actually reduced their wealth between 1995 and 2000 tended to do it by considerably more than the life-cycle model suggests. *A general finding from this study is that there seems to be a large group of people and particularly people in poverty who would have been substantially helped by better access to credit; they were unable or unwilling to borrow despite the fact that they could reasonably expect rising incomes and those expectations, at least on average, seemed to be fulfilled
    Date: 2005–11
  70. By: Matthew Adler (University of Pennsylvania Law School)
    Abstract: "Individual risk" currently plays a major role in risk assessment and in the regulatory practices of the health and safety agencies that employ risk assessment, such as EPA, FDA, OSHA, NRC, CPSC, and others. Risk assessors use the term "population risk" to mean the number of deaths caused by some hazard. By contrast, "individual risk" is the incremental probability of death that the hazard imposes on some particular person. Regulatory decision procedures keyed to individual risk are widespread. This is true both for the regulation of toxic chemicals (the heartland of risk assessment), and for other health hazards, such as radiation and pathogens; and regulatory agencies are now beginning to employ individual risk criteria for evaluating safety threats, such as occupational injuries. Sometimes, agencies look to the risk imposed on the maximally exposed individual; in other contexts, the regulatory focus is on the average individual's risk, or perhaps the risk of a person incurring an above-average but nonmaximal exposure. Sometimes, agencies seek to regulate hazards so as to reduce the individual risk level (to the maximally exposed, high-end, or average individual) below 1 in 1 million. Sometimes, instead, a risk level of 1 in 100,000 or 1 in 10,000 or even 1 in 1000 is seen as de minimis. In short, the construct of individual risk plays a variety of decisional roles, but the construct itself is quite pervasive. This Article launches a systematic critique of agency decisionmaking keyed to individual risk. Part I unpacks the construct, and shows how it invokes a frequentist rather than Bayesian conception of probability. Part II surveys agency practice, describing the wide range of regulatory contexts where individual risk levels are wholly or partly determinative of agency choice: these include most of the EPA's major programs for regulating toxins (air pollutants under the Clean Air Act, water pollutants under the Clean Water Act and Safe Drinking Water Act, toxic waste dumps under the Superfund statute, hazardous wastes under RCRA, and pesticides under FIFRA) as well as the FDA's regulation of food safety, OSHA regulation of workplace health and safety risks, NRC licensing of nuclear reactors, and the CPSC's regulation of risky consumer products. In the remainder of the Article, I demonstrate that frequentist individual risk is a problematic basis for regulatory choice, across a range of moral views. Part III focuses on welfare consequentialism: the moral view underlying welfare economics and cost-benefit analysis. I argue that the sort of risk relevant to welfare consequentialism is Bayesian, not frequentist. Part IV explores the subtle, but crucial difference between frequentist and Bayesian risk. Part V moves beyond cost-benefit analysis and examines nonwelfarist moral views: specifically, safety-focused, deontological, contractualist, and democratic views. Here too, I suggest, regulatory reliance on frequentist individual risk should be seen as problematic. Part VI argues that current practices (as described at length in Part II) are doubly misguided: not only do they focus on frequentist rather than Bayesian risk, but they are also insensitive to population size. In short, the Article provides a wide ranging, critical analysis of contemporary risk assessment and risk regulation. The perspective offered here is that of the sympathetic critic. Risk assessment itself - the enterprise of quantifying health and safety threats - represents a great leap forward for public rationality, and should not be abandoned. Rather, the current conception of risk assessment needs to be reworked. Risk needs to be seen in Bayesian rather than frequentist terms. And regulatory choice procedures must be driven by population risk or some other measure of the seriousness of health and safety hazards that is sensitive to the size of the exposed population - not the risk that some particular person (whatever her place in the exposure distribution) incurs.
    Keywords: Risk,

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