New Economics Papers
on Financial Markets
Issue of 2006‒06‒10
forty-five papers chosen by
Carolina Valiente

  1. Determinants of Interest Margins in Colombia By Dairo Estrada; Esteban Gómez; Inés Orozco
  2. Bond Yield Compression in the Countries Converging to the Euro By Lucjan T. Orlowski; Kirsten Lommatzsch;
  3. Long-Horizon Mean Reversion for the Brussels Stock Exchange: Evidence for the 19th Century By J. ANNAERT; W. VAN HYFTE
  4. Capital Flows and Monetary Policy By Javier Gómez Pineda
  5. Evaluating Foreign Exchange Market Intervention: Self-Selection, Counterfactuals and Average Treatment Effects By Rasmus Fatum; Michael M. Hutchison
  6. Real Exchange Rate Misalignment: Prelude to Crisis? By David M. Kemme; Saktinil Roy;
  7. Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Lessons for the Central and Eastern European Countries By Roman Horvath
  8. Deteriorating Cost Efficiency in Commercial Banks Signals an Increasing Risk of Failure By Anca Podpiera; Jiri Podpiera
  9. Contagion Across and Integration of Central and Eastern European Stock Markets: Evidence from Intraday Data By Balazs Egert; Evzen Kocenda;
  10. An empirical analysis of the annuity rate in Chile By Thorburn, Craig; Morales, Marco; Rocha, Roberto
  11. Pareto Improving Financial Innovation in Incomplete Markets By Sergio Turner
  12. Foreign Exchange Interventions and Interest Rate Policy in the Czech Republic: Hand in Glove? By Balazs Egert; Lubos Komarek
  13. The Behavioural Equilibrium Exchange Rate of the Czech Koruna By Lubos Komarek; Martin Melecky
  14. Who gets private equity? The role of debt capacity, growth and intangible assets By K. BAEYENS; S. MANIGART
  15. General to Specific Modelling of Exchange Rate Volatility : a Forecast Evaluation By Luc, BAUWENS; Genaro, SUCARRAT
  16. Finance, Competition, Instability, and Development Microfoundations and Financial Scaffolding of the Economy By Jan Kregel; Leonardo Burlamaqui
  17. Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds By James J. Choi; David Laibson; Brigitte C. Madrian
  18. Bankruptcy, Counterparty Risk, and Contagion By Holger Kraft; Mogens Steffensen
  19. Internationalization and the evolution of corporate valuation By Schmukler, Sergio L.; Levine, Ross; Gozzi, Juan Carlos
  20. Evidence of Bank Lending Channel for Argentina and Colombia By José Gómez González; Fernando Grosz
  21. Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrome By Martín Uribe
  22. Noise Traders By James Dow; Gary Gorton
  23. The Application of Structured Feedforward Neural Networks to the Modelling of Daily Series of Currency in Circulation By Marek Hlavacek; Michael Konak; Josef Cada
  24. Mutual Fund Investing – One of the Main Ways of Saving for Retirement in Russia By Tatjana Sedash
  25. Book Values and Market Values of Equity and Debt By Marco Realdon
  26. Assessing the Impact of Market Microstructure Noise and Random Jumps on the Relative Forecasting Performance of Option-Implied and Returns-Based Volatility By Gael M. Martin; Andrew Reidy; Jill Wright
  27. "Does the Appointment of the Outside Director Increase Firm Value? The Evidence from Taiwan" By Hsu-Huei Huang; Paochung Hsu; Haider A. Khan; Yun-Lin Yu
  28. Stratégies d'investissement en actions et fonds à capital garanti. By Roland Gillet; Robert Goffin; Isabelle Nagot; Ariane Szafarz
  29. Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues By Balázs Égert,; László Halpern; Ronald MacDonald
  30. Currency Crises, Current Account Reversals and Growth : The Compounded Effect for Emerging Markets By Komarek, Lubos; Melecky, Martin
  31. Does Propitious Selection Explain why Riskier People Buy less Insurance By Philippe, DE DONDER; Jean, HINDRIKS
  32. Who Really Wants to be a Millionaire : Estimates of Risk Aversion from Game Show Data By Hartley, Roger; Lanot, Gauthier; Walker, Ian
  33. Interest Income and Household Savings: Evidence Based on the Maturation of Postal Savings Certificates By Noriko Inakura; Satoshi Shimizutani
  34. Effects of Macroeconomic Shocks to the Quality of the Aggregate Loan Portfolio By Ivan Baboucek; Martin Jancar
  35. Contagion ou globalisation sur les marchés financiers internationaux ? By Marie Brière; Ariane Chapelle; Ariane Szafarz
  36. Noise, Information, and the Favorite-Longshot Bias By Marco Ottaviani; Peter Norman Sørensen
  37. The Brave New World of Central Banking: The Policy Challenges Posed by Asset Price Booms and Busts By Stephen G. Cecchetti
  38. La Política Monetaria en Colombia By Javier Gómez Pineda
  39. Sovereign Risk : Constitutions Rule By Kohlscheen, Emanuel
  40. Ascesa e declino della nozione di “saggio proprio di interesse” i n Sraffa By Franco DONZELLI
  41. Testing the Predictions of Decision Theories in a Natural Experiment When Half a Million Is at Stake By Pavlo Blavatskyy; Ganna Pogrebna
  42. Don’t Fall from the Saddle: the Importance of Higher Moments of Credit Loss Distributions By J. ANNAERT; Crispiniano Garcia Joao Batista; J. LAMOOT; G. LANINE
  43. Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank By Jan Strasky
  44. Designing realised kernels to measure the ex-post variation of equity prices in the presence of noise By Neil Shephard; Ole E. Barndorff-Nielsen; Peter Reinhard Hansen; Asger Lunde
  45. On multiple agent models of moral hazard By Andrea Attar; Eloisa Campioni; Gwenaël Piaser; Uday Rajan

  1. By: Dairo Estrada; Esteban Gómez; Inés Orozco
    Abstract: This paper analyzes the determinants of interest margins in the Colombian Financial System. Based on the model by Ho and Saun- ders (1981), interest margins are modelled as a function of the pure spread and bank-speci¯c institutional imperfections using quarterly data for the period 1994:IV-2005:III. Additionally, the pure spread is estimated as a function of market power and interest rate volatility. Results indicate that interest margins are mainly a®ected by credit institutions' ine±ciency and to a lesser extent by credit risk exposure and market power. This implies that public policies should be ori- ented towards creating the necessary market conditions for banks to enhance their e±ciency.
    Keywords: Interest Margins, Competition, Credit Risk, Interest Rate Risk.
    JEL: L11 L41 L89 G21 G28
  2. By: Lucjan T. Orlowski; Kirsten Lommatzsch;
    Abstract: We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.
    Keywords: term spread, term premium, yield compression, monetary convergence, new Member States, EMU, conditional volatility, asymmetric GARCH models
    JEL: E43 E44 F36
    Date: 2005–10–01
    Abstract: In this paper, we introduce a completely new and unique historical dataset of Belgian stock returns during the nineteenth and the beginning of the twentieth century. This high-quality database comprises stock price and company related information on more than 1500 companies. Given the extensive use of CRSP return data and the data mining risks involved it provides an interesting out-of-sample dataset with which to test the robustness of ‘prevailing’ asset pricing anomalies. We re-examine mean reversals in long-horizon returns using the framework of Hodrick (1992) and Jegadeesh (1991). Our simulation experiments demonstrate that it has considerably better small sample properties than the traditional regression framework of Fama and French (1988a). In the short run, returns exhibit strong persistence, which is partially induced by infrequent trading. Contrary to Fama and French (1988a) and Poterba and Summers (1988), our results suggest that, in the long run, there is little to no evidence of stock prices containing autoregressive stationary components but instead resemble a random walk. Capital appreciation returns exhibit stronger time-varying behavior than total returns. Belgian stock returns demonstrate significant seasonality in January notwithstanding the absence of taxes. In addition, in contrast to other months, January months do show some evidence of mean reversion.
    Keywords: Brussels Stock Exchange, Financial Market History, Market Efficiency, Univariate Stock Return Predictability
    JEL: G10 G14 N23
    Date: 2006–03
  4. By: Javier Gómez Pineda
    Abstract: Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under di¤erent policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency.
    Keywords: Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability
    JEL: F41 F32 G15 H62 H63
  5. By: Rasmus Fatum (School of Business, University of Alberta); Michael M. Hutchison (Department of Economics, University of California Santa Cruz)
    Abstract: Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection” choice made by the intervening central bank. We estimate the “counterfactual” exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect” (ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004.
    Keywords: foreign exchange intervention; Bank of Japan; self-selection, matching methods
    JEL: E58 F31 G15
    Date: 2006–05
  6. By: David M. Kemme; Saktinil Roy;
    Abstract: A model of the long run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (1981) decomposition of macrofundamentals into transitory and permanent components. Short run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals.
    Keywords: Russia, Poland, equilibrium real exchange rates, misalignment, cointegration, exogenous shocks, macroeconomic crises
    JEL: F31 F36 P17
    Date: 2005–10–01
  7. By: Roman Horvath
    Abstract: This paper estimates the medium-term determinants of the bilateral exchange rate variability and exchange rate pressures for 20 developed countries in the 1990s. The results suggest that the optimum currency area criteria explain the dynamics of bilateral exchange rate variability and pressures to a large extent. Next, we predict exchange rate volatility and pressures for the Central and Eastern European Countries (CEECs). We find that the CEECs encounter exchange rate pressures at approximately the same level as the euro area countries did before they adopted the euro.
    Keywords: Euro Adoption, Exchange Rates, GMM, Optimum Currency Area.
    JEL: F15 F31 E58
    Date: 2005–12
  8. By: Anca Podpiera; Jiri Podpiera
    Abstract: While it is generally consented that management quality is often the key determinant of banks' success in a risky world, somewhat paradoxically early warning systems are mainly built on financial ratios driving management quality assessment to the periphery. In this paper we show, using estimated cost efficiency scores for the Czech banking sector, that cost inefficient management was a predictor of bank failures during the years of banking sector consolidation, and thus suggest the inclusion of cost efficiency in early warning systems.
    Keywords: Bank failure, cost efficiency, stochastic frontier, hazard model.
    JEL: J21 J28 E58
    Date: 2005–12
  9. By: Balazs Egert; Evzen Kocenda;
    Abstract: We analyze interrelations between three stock markets in Central and Eastern Europe and, in addition, interconnections which may exist between Western European (DAX, CAC, UKX) and Central and Eastern European stock markets (BUX, PX-50, WIG20). The novelty of our paper rests mainly on the use of the five-minute tick intraday price data from the mid-2003 to the early 2005 for stock indices and on the wide range of econometric techniques employed. We find no robust cointegration relationship for any of the stock index pairs or for any of the extended specifications. There are signs of short-term spillover effects both in terms of stock returns and stock price volatility. Granger causality tests show the presence of bidirectional causality for returns as well as volatility series. The results based on a VAR framework indicate a more limited number of short-term relationships between the stock markets. In general, it appears that spillover effects are stronger from volatility to volatility than contagion effects from return to return series.
    Keywords: contagion and spillover effects, market integration, European emerging markets, intra-day data
    JEL: C22 F36 G15 O16 P59
    Date: 2005–11–01
  10. By: Thorburn, Craig; Morales, Marco; Rocha, Roberto
    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 a panel of life insurance company data to examine econometrically the main determinants of the annuity rate, defined as the internal rate of return on annuities. The results indicate that the annuity rate is determined by the risk-free interest rate, the share of privately-issued higher yield securities in the portfolio of providers as a proxy for the spread over the risk-free rate, the leverage of providers, the level of broker ' s commissions, the market share of individual providers, the level of the premium, and the degree of market competition. The results also show that efforts to improve market transparency produced structural shifts in the parameters of the annuity rate equation. The results are consistent with separate research on money ' s worth ratios, and indicate the need to develop appropriate financial instruments, allowing providers to hedge their risks while extracting higher returns, and also to ensure competition and transparency in annuities markets, in order to ensure good outcomes for annuitants.
    Keywords: Insurance & Risk Mitigation,Pensions & Retirement Systems,Economic Theory & Research,Investment and Investment Climate,Non Bank Financial Institutions
    Date: 2006–06–01
  11. By: Sergio Turner
    Date: 2006
  12. By: Balazs Egert; Lubos Komarek
    Abstract: This paper studies the impact of daily official foreign exchange interventions on the Czech koruna's exchange rate vis-a-vis the euro (the German mark prior to 1999) from 1997 to 2002. Both the event study methodology, extended with official interest rate moves, and a variety of GARCH models reveal that central bank interventions, especially koruna purchases, seem to have been relatively ineffective from 1997 to mid-1998 compared to the size of the interventions. From mid-1998 to 2002, however, koruna sales turn out to be effective in smoothing the path of the exchange rate up to 60 days. Nevertheless, the event study approach indicates that the success of FX interventions may be intimately related to the coordination of intervention and interest rate policies.
    Keywords: Central bank intervention, Czech Republic, event study, foreign exchange intervention, GARCH, interest rate policy, transition economies.
    JEL: F31
    Date: 2005–12
  13. By: Lubos Komarek; Martin Melecky
    Abstract: The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The potential determinants of the real equilibrium exchange rate considered are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness. We find that the Czech koruna was on average undervalued over the period 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade and net foreign direct investment.
    Keywords: Czech Republic, equilibrium exchange rate modelling, ERM II, exchange rate misalignments, time-series analysis.
    JEL: C52 C53 E58 E61 F31
    Date: 2005–12
    Abstract: While informed private equity (PE) investors screen for the most promising ventures, firms may avoid raising of PE for issues of cost and control. A critical question therefore is: which firms get PE? We consider both supply and demand side arguments to study the characteristics of a sample of 231 firms that did receive PE and compare them to those of a matched sample. Supporting the pecking order theory, we show that firms rely on PE funding when there are no alternatives, i.e. when their debt capacity is limited, due to financial and bankruptcy risk and due to important investments in intangibles. PE investors, from their side, select firms with substantial growth options. Further, firms that receive PE have grown more before the funding event than companies that did not receive PE.
    Keywords: financing choice, private equity
    JEL: G32
    Date: 2006–02
  15. By: Luc, BAUWENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Genaro, SUCARRAT
    Abstract: The general-to-specific (GETS) approach to modelling is widely employed in the modelling of economic series, but less so in financial volatility modelling due to computational complexity when many explanatory variables are involved. This study proposes a simple way of avoiding this problem and undertakes an out-of-sample forecast evaluation of the methodology applied to the modelling of weekly exchange rate volatility. Our findings suggest that GETS specifications are especially valuable in conditional forecasting, since the specification that employs actual values on the uncertain information performs particularly well.
    Keywords: Exchange Rate Volatility, General to Specific, Forecasting
    JEL: C53 F31
    Date: 2006–02–15
  16. By: Jan Kregel; Leonardo Burlamaqui
    Abstract: The present paper attempts to utilize “the knowledge-based” nature of firms’ operations as set out in the diverse theoretical frameworks to stress the importance of organisational and managerial techniques in the creation of market dominance by particular financial firms in the same way that these theories have analysed industrial firms. The article will also analyze the process of competition between different firms and between different financial structures in terms of the impact of different organisational regimes on profitability, efficiency, and instability of the economic system. As the result, the diverse policy recommendations concerning financial regulation, institution building, and microfinancial structure are given.
    Date: 2006–01
  17. By: James J. Choi; David Laibson; Brigitte C. Madrian
    Abstract: We report experimental results that shed light on the demand for high-fee mutual funds. Wharton MBA and Harvard College students allocate $10,000 across four S&P 500 index funds. Subjects are randomized among three information conditions: prospectuses only (control), summary statement of fees and prospectuses, or summary statement of returns since inception and prospectuses. Subjects are randomly selected to be paid for their subsequent portfolio performance. Because payments are made by the experimenters, services like financial advice are unbundled from portfolio returns. Despite this unbundling, subjects overwhelmingly fail to minimize index fund fees. In the control group, over 95% of subjects do not minimize fees. When fees are made salient, fees fall, but 85% of subjects still do not minimize fees. When returns since inception (an irrelevant statistic) are made salient, subjects chase these returns. Interestingly, subjects who choose high-cost funds recognize that they may be making a mistake.
    JEL: D14 D18 D43 D83
    Date: 2006–05
  18. By: Holger Kraft (Fachbereich Mathematik, Universität Kaiserslautern); Mogens Steffensen (Department of Applied Mathematics and Statistics, University of Copenhagen)
    Abstract: This paper provides a unifying framework for the modeling of various types of credit risks such as contagion effects. We argue that Markov chains can efficiently be used to tackle these problems. However, our approach is not limited to pricing problems with contagion. Other applications include the modeling of a more sophisticated default process of a firm. On the theoretical side, we derive pricing formulas for three building blocks that are generalizations of contingent claims studied in Lando (1998). These claims can be thought of as atoms forming the basis for all credit risky payments. Furthermore, we demonstrate that, in general, all contingent claims exposed to credit risk satisfy a system of partial differential equations. This is the key result to calculate prices of credit risky claims explicitly and efficiently.
    Keywords: default risk; financial distress; default correlation; contagion; Markov chains
    JEL: G13
    Date: 2006–05
  19. By: Schmukler, Sergio L.; Levine, Ross; Gozzi, Juan Carlos
    Abstract: By documenting the evolution of Tobin ' s q before, during, and after firms internationalize, the authors provide evidence on the bonding, segmentation, and market timing theories of internationalization. Using new data on 9,096 firms across 74 countries over the period 1989-2000, they find that Tobin ' s q does not rise after internationalization, even relative to firms that do not internationalize. Instead, q rises significantly before internationalization and during the internationalization year. But then q falls sharply in the year after internationalization, quickly relinquishing the increases of the previous years. To account for these dynamics, the authors show that market capitalization rises before internationalization and remains high, while corporate assets increase during internationalization. The evidence supports models stressing that financial internationalization facilitates corporate expansion, but challenges models stressing that internationalization produces an enduring effect on q by bonding firms to a better corporate governance system.
    Keywords: Small Scale Enterprise,Microfinance,Investment and Investment Climate,Economic Theory & Research,Markets and Market Access
    Date: 2006–06–01
  20. By: José Gómez González; Fernando Grosz
    Abstract: In this paper we find empirical evidence of bank lending channel for Colombia and Argentina. As for Argentina, we do not find evidence that changes in the interbank interest rate affect the growth rate of total loans directly. However, it does indirectly through interactions: the interbank interest rate affects the loan supply through its interactions with capitalization and liquidity. As for Colombia, there is direct bank lending channel, which is reinforced through interactions with capitalization and liquidity. Also, using a panel data of more than 3300 firms, we provide additional support to the existence of a bank lending channel for Colombia.
    Date: 2006–06–01
  21. By: Martín Uribe
    Abstract: This paper compares the equilibrium dynamics of an economy facing an aggregate collateral constraint on external debt to the dynamics of an economy facing a collateral constraint imposed at the level of each individual agent. The aggregate collateral constraint is intended to capture an environment in which foreign investors base their lending decisions predominantly upon macro indicators as opposed to individual abilities to pay. Individual agents do not internalize the aggregate borrowing constraint. Instead, in this economy a country interest-rate premium emerges to clear the financial market. The central finding of the paper is that the economy with the aggregate borrowing limit does not generate higher levels of debt than the economy with the individual borrowing limit. That is, there is no overborrowing in equilibrium.
    JEL: F41
    Date: 2006–05
  22. By: James Dow; Gary Gorton
    Abstract: Noise traders are agents whose theoretical existence has been hypothesized as a way of solving certain fundamental problems in Financial Economics. We briefly review the literature on noise traders. The is an entry for The New Palgrave: A Dictionary of Economics, 2nd Edition (Palgrave Macmillan: New York), edited by Steven N. Durlauf and Lawrence E. Blume, forthcoming in 2008.
    JEL: G1 G12 G14
    Date: 2006–05
  23. By: Marek Hlavacek; Michael Konak; Josef Cada
    Abstract: One of the most significant factors influencing the liquidity of the financial market is the amount of currency in circulation. Although the central bank is responsible for the distribution of the currency it cannot assess the demand for the currency, as that demand is influenced by the non-banking sector. Therefore, the amount of currency in circulation has to be forecasted. This paper introduces a feedforward structured neural network model and discusses its applicability to the forecasting of currency in circulation. The forecasting performance of the new neural network model is compared with an ARIMA model. The results indicate that the performance of the neural network model is better and that both models might be applied at least as supportive tools for liquidity forecasting.
    Keywords: Neural network, seasonal time series, currency in circulation.
    JEL: C45 C53
    Date: 2005–12
  24. By: Tatjana Sedash
    Abstract: One of the most acute problems in the world today is provision of a respectable living for the elderly. Today the process of aging population as a result of a declined birth rate and increased life expectancy) has touched all countries of the world - developed countries as well as countries like Russia. Consequently, reforming traditional pension systems to deal with the changing situation has become an important issue around the world. These reforms typically center on the implementation of some form of funding of future pension benefits. This also holds for Russia, where in 1995 pension reform legislation introduced the so-called “accumulation pension”. In this context, this article will deal with the issues concerning the establishment of mutual funds, legal aspects of their operating and their investing opportunities. There will be carried out a comparative analysis of mutual funds with the other forms of public investments, namely: Common Funds of Bank Management, Voucher Investment Funds and Joint-stock Investment Funds.
    JEL: G21 G23 G28
    Date: 2006–05
  25. By: Marco Realdon
    Abstract: This paper propses a contingent claims model to value a firm's debt and equity as functions of observable book values appearing in published financial statements. Equity fair value critically depends on expected earnings, equity book value and earnings volatility, because of the options to default or to voluntarily liquidate the firms. Debt value increases in earnings volability in the proximity of default. Default is triggered by the erosion of equity due to negative earnings. Debt and equity values are materially affected by the strength of the mean reversion of profitability. Voluntary liquidation before default may be optimal and it entails that a sudden sharp decline in profitability can be less detrimental to creditors than a slower but persistent one.
    Keywords: Book values, mean reverting return on assets, equity valuation, debt valuation, default option, structural models, voluntary liquidation.
    JEL: G13 G33
    Date: 2006–06
  26. By: Gael M. Martin; Andrew Reidy; Jill Wright
    Abstract: This paper presents a comprehensive empirical evaluation of option-implied and returns-based forecasts of volatility, in which new developments related to the impact on measured volatility of market microstructure noise and random jumps are explicitly taken into account. The option-based component of the analysis also accommodates the concept of model-free implied volatility, such that the forecasting performance of the options market is separated from the issue of misspecification of the option pricing model. The forecasting assessment is conducted using an extensive set of observations on equity and option trades for News Corporation for the 1992 to 2001 period, yielding certain clear results. According to several different criteria, the model-free implied volatility is the best performing forecast, overall, of future volatility, with this result being robust to the way in which alternative measures of future volatility accommodate microstructure noise and jumps. Of the volatility measures considered, the one which is, in turn, best forecast by the option-implied volatility is that measure which adjusts for microstructure noise, but which retains some information about random jumps.
    Keywords: Volatility Forecasts; Quadratic Variation; Intraday Volatility Measures; Model-free Implied Volatility.
    JEL: C10 C53 G12
    Date: 2006
  27. By: Hsu-Huei Huang (Department of Finance, National University of Kaohsiung); Paochung Hsu (Department of Finance, Providence University); Haider A. Khan (GSIS, University of Denver); Yun-Lin Yu (Cathay United Bank)
    Abstract: We examine the stock market reaction to the announcement of outside director appointments in Taiwan. We employ a sample of 58 outside director announcements made by Taiwan Stock Exchange listed firms during the period 1 January, 1999 to 30 June, 2003. Using this data, we can test some important hypotheses regarding the role of outside directors in conjunction with other conditions for corporate performance in affecting the stock market reactions. Our empirical findings indicate that there exists a significantly positive reaction to the announcements. The cumulative abnormal returns ---one indicator of stock market reaction measured by using the methodology of market model based event study --- reached 4.776%. We also find that the abnormal returns are positive and higher with respect to each of the following characteristics: poorer prior corporate performance, the CEO as chairman of the board, larger free cash flow and a higher degree of information asymmetry. Further, we find that the announcement effect is decreasing as number of outside directors increases. Our findings are different from existing literature, for instance, those of Lin, Pope and Young (2003) and Rosenstein and Wyatt (1990) mainly because the outside director appointment is not mandatory in Taiwan. This suggests that the announcement effects could be different across countries. The appointment appears to be more beneficial for a country with poor corporate governance mechanisms.
    Date: 2006–05
  28. By: Roland Gillet (Université Paris1-Panthéon-Sorbonne, Paris et Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Robert Goffin (Université Paris1-Panthéon-Sorbonne, Paris.); Isabelle Nagot (Université Paris1-Panthéon-Sorbonne, Paris.); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Brussels.)
    Abstract: Les fonds à capital garanti proposés par les institutions financières connaissent une grande popularité. Pourtant, ce type de placement peut souvent être mis en œuvre facilement par l’investisseur individuel à moindres frais via un recours direct aux marchés financiers. Sur base d'un cas simple, cet article détaille les diverses possibilités ainsi accessibles à l'investisseur et en compare les implications pratiques en terme de rentabilité et d'horizon de placement. Tout en intégrant les considérations stratégiques propres aux émetteurs, il vise à démystifier la "boîte noire" que constituent encore aux yeux de trop nombreux investisseurs les fonds à capital garanti et justifie toute l'attention accordée par les autorités de contrôle à la communication financière relative à ces produits.
    Keywords: fonds communs, gestion de portefeuille, capital garanti, stratégies d’investissement.
    JEL: G11 G13 G20 G21
    Date: 2006–05
  29. By: Balázs Égert,; László Halpern; Ronald MacDonald
    Abstract: In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.
    Keywords: equilibrium exchange rate, Purchasing Power Parity, trend appreciation, Balassa-Samuelson effect, productivity, inflation differential, tradable prices, regulated prices, Fundamental Equilibrium Exchange Rate, Behavioural Equilibrium Exchange Rate, Permanent Equilibrium Exchange Rate, NATREX, CHEER, transitional economies, euro.
    JEL: C15 E31 F31 O11 P17
    Date: 2005–10–01
  30. By: Komarek, Lubos (Czech National Bank); Melecky, Martin (University of New South Wales)
    Abstract: This paper investigates the possible negative effect of external crises, sudden stops in capital flows and currency crises in emerging market economies. We find that a current account reversal has an important effect, both direct and indirect, on economic growth, and depresses GDP by about 1 percentage point in the current year, when using a broad group of emerging markets. On the other hand, currency crises themselves, identified as a sharp depreciation, do not appear to have a significant direct impact on growth. Their overall effect on growth is positive, though rather insignificant from an economic point of view. The joint occurrence of the currency crisis and the current account reversal appears to be the most damaging event for economic growth. Both the direct and compounded effects are about 5 times larger than those of the reversal in the current year. The estimated cumulative losses for current account reversals and the joint crisis are 2 and 21 percentage points, respectively. The time necessary for the adjustment of actual growth back to its equilibrium rate is roughly 2.5 years after the current account reversal and 6.5 years after the joint occurrence of the currency crisis and the reversal.
    Keywords: External Crises ; Economic Growth ; Open Transition Economy ; Panel Data
    JEL: F32 C23 O40 O52
    Date: 2005
  31. By: Philippe, DE DONDER; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: Empirical testing of asymmetric information in the insurance market has uncovered a negative correlation between risks levels and insurance purchases, rather than the positive correlation predicted by the standard insurance theory. Hemenway (1990) proposes an explanation for this negative correlation, called “propitious selection”. He argues that potential insurance buyers have different tastes for risk and that ‘individuals who are highly risk avoiding are more likely both to try to reduce the hazard and to purchase insurance’ (p. 1064). Chiappori and Salanie (2000) also suggest that this line of argument, which they call ‘cherry picking’, may explain the observed negative correlation. In this paper, we show that the propitious selection argument does not imply negative correlation between risk levels and insurance purchases, because it fails to take into account the supply side of the insurance market. To illustrate this claim, we provide a model where, although we assume that individuals differ in risk aversion and that the more risk averse individuals exert more precaution and buy more insurance, we end up with a positive correlation between risk and insurance purchases at equilibrium. The reason is that, in any separating equilibrium, the more risk averse individuals face insurance overprovision which, combined with moral hazard, increases their risk relative to the less risk averse individuals. To obtain the negative correlation between risk and insurance purchases, one further needs the extra condition of decreasing marginal willingness to pay for the less risk averse individuals. Finally, we find that propitious selection has profound policy implications for social insurance
    Keywords: preference-based adverse selection, cherry picking, precaution, social insurance
    JEL: D82 G22
    Date: 2006–03–15
  32. By: Hartley, Roger (University of Manchester); Lanot, Gauthier (Queen’s University,); Walker, Ian (University of Warwick,)
    Keywords: Risk aversion ; gameshow
    JEL: D81 C93 C23
    Date: 2005
  33. By: Noriko Inakura; Satoshi Shimizutani
    Abstract: Japan's traditionally high household saving rate has declined substantially since the early 1990s. While this decline is often explained as a result of the rapid increase in the population share of the elderly who are dissaving, we argue that the cause is a decline in interest income triggered by falling interest rates. To examine our hypothesis, we focus on the effect of the maturation of relatively high-yielding postal savings certificates. Estimating a savings function, we find that the reduction in interest income caused by the maturation of the postal saving certificates reduced household saving rates by 3 percentage points.
    Keywords: interest rate income, household saving rate, postal saving certificate
    JEL: D12 E21 G29
    Date: 2006–05
  34. By: Ivan Baboucek; Martin Jancar
    Abstract: The paper concerns macro-prudential analysis. It uses an unrestricted VAR model to empirically investigate transmission involving a set of macroeconomic variables describing the development of the Czech economy and the functioning of its credit channel in the past eleven years. Its novelty lies in the fact that it provides the first systematic assessment of the links between loan quality and macroeconomic shocks in the Czech context. The VAR methodology is applied to monthly data transformed into percentage change. The out-of-sample forecast indicates that the most likely outlook for the quality of the banking sector's loan portfolio is that up to the end of 2006 the share of non-performing loans in it will follow a slightly downward trend below double-digit rates. The impulse response is augmented by stress testing exercises that enable us to determine a macroeconomic early warning signal of any worsening in the quality of banks' loans. The paper suggests that the Czech banking sector has attained a considerable ability to withstand a credit risk shock and that the banking sector's stability is compatible both with price stability and with economic growth. Despite being devoted to empirical investigation, the paper pays great attention to methodological issues. At the same time it tries to present both the VAR model and its results transparently and to openly discuss their weak points, which to a large degree can be attributed to data constraints or to the evolutionary nature of an economy in transition.
    Keywords: Czech Republic, Macro-prudential analysis, Non-performing loans, VAR model.
    JEL: G18 G21 C51
    Date: 2005–01
  35. By: Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Ariane Chapelle (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.); Ariane Szafarz (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and DULBEA, Brussels.)
    Abstract: L'interdépendance entre les marchés financiers constitue un souci majeur pour l'investisseur en quête de diversification internationale de son portefeuille. La littérature récente pointe en effet une augmentation des corrélations géographiques des rendements financiers durant ces dernières décennies. Les résultats sont cependant moins tranchés en ce qui concerne, d'une part, les corrélations entre actifs de classes différentes et, d'autre part, les dépendances pendant les périodes de crises financières. A cet égard, les effets conjoncturels de la contagion (pendant les crises) ne sont pas toujours clairement isolés des effets structurels de la globalisation (permanente). Cet article fait le point sur la méthodologie de test et les résultats empiriques relatifs à l'interdépendance entre rendements. Les tests de globalisation et de contagion sont scindés grâce à une définition ex ante rigoureuse des périodes de crise. La construction d'une large base de données permet ensuite d’étudier la stabilité des matrices de corrélations entre quatre classes d’actifs: les actions, les obligations gouvernementales et, ce qui est plus rare dans la littérature empirique, les obligations privées scindées en deux catégories: "investment grade" et "high yield". De plus, le découpage géographique s'opère en 4 zones distinctes: les Etats-Unis, le Royaume-Uni, le Japon et l'Europe. Les résultats confirment globalement l’instabilité des corrélations et pointent en faveur du cumul des effets de globalisation et de contagion, tout en soulignant qu’un plafond de globalisation semble atteint depuis au moins 8 ans sur les marchés d’actions. En outre, l’étude par classes de titres et l’analyse fine de la contagion, basée sur l'identification des 15 crises ayant secoué les marchés entre 1982 et 2005, permettent de dégager des résultats inédits concernant tant les corrélations intra- qu’inter-classes.
    Keywords: contagion, globalisation, marchés financiers internationaux.
    JEL: G15 G11
    Date: 2006–05
  36. By: Marco Ottaviani (London Business School); Peter Norman Sørensen (Department of Economics, University of Copenhagen)
    Abstract: According to the favorite-longshot bias, longshots are overbet relative to favorites. We propose an explanation for this bias (and its reverse) based on an equilibrium model of informed betting in parimutuel markets. The bias arises because bettors take positions without knowing the positions simultaneously taken by other privately informed bettors. The direction and the extent of the bias depend on the amount of private information relative to noise present in the market. With realistic ex-post noise and ex-ante asymmetries, our model replicates the main qualitative features of expected returns observed in horse races.
    Keywords: parimutuel betting; favorite-longshot bias; private information; noise; lotteries
    JEL: D82 D83 D84
    Date: 2006–05
  37. By: Stephen G. Cecchetti
    Abstract: At the dawn of the 21st century, property and equity ownership are spread more broadly across the population than they once were. One consequence of this is that asset price booms and crashes now have a direct impact on general welfare. The fact that bubbles distort nearly all economic decisions gives policymakers a stronger interest in asset price stability. In this essay I examine the theoretical and empirical case for the existence of equity and property bubbles, and then summarize the economic distortions that they create. The evidence suggests increasing our attention on property prices. I go on to discuss the possible policy responses, including examining the consequences of changing the way in which housing is included in standard aggregate price measures.
    Keywords: . Central bank policy, equity price bubbles, housing price bubbles.
    JEL: E5 G0
    Date: 2005–12
  38. By: Javier Gómez Pineda
    Abstract: El artículo hace una narración de la política monetaria en Colombia. Por ser una narración de la política monetaria en una economía abierta, el artículo hace énfasis en los conceptos de "trilema"de la política monetaria, ancla nominal y regimenes monetarios. Además, la narración incluye el período actual de régimen de inflación objetivo, presenta los antecedentes académicos y la definición del régimen de inflación objetivo, y presenta las características actuales de este régimen en Colombia. La principal implicación de política es que el requisito más importante para mantener la estabilidad de precios es que el Banco de la República procure mantener la meta de inflación firme, y dirija las tasas de interés en consecuencia, ante aumentos de la inflación producidos por presiones de demanda, devaluaciones y aumentos en la inflación de alimentos.
    Keywords: Política monetaria; Trilema; Ancla nominal; Régimen monetario; Inflación objetivo.
    JEL: E52 E58 F32 F41
  39. By: Kohlscheen, Emanuel (Department of Economics, University of Warwick)
    Abstract: This paper models the executive’s choice of whether to reschedule external debt as the outcome of an intra-governmental negotiation process. The executive’s necessity of a confidence vote from the legislature is found to provide the rationale for why some democracies may not renegotiate their foreign obligations. Empirically, parliamentary democracies are indeed less prone to reschedule their foreign liabilities or accumulate arrears on them. Most of the democracies that have been able to significantly reduce their debt/GNP ratio without a ’credit incident’ were parliamentary. Moreover, countries with stronger political checks on the executive and lower executive turnover have a lower rescheduling propensity. These results suggest that North andWeingast’s account of the evolution of institutions in 17th century England gives substantial mileage in understanding the international debt markets in the contemporary developing world.
    Date: 2005
  40. By: Franco DONZELLI
    Abstract: Rise and decline of the notion of "own rate of interest" ; in Sraffa. The notion of “commodity rate of interest”, introd uced by Sraffa in a short review-article published in1932, is tak en up by Keynes a few years later under the label of “own rate of interest”. The latter expression soon spreads in the literature, eventually replacing Sraffa’s original name. At its birth Sraffa ’s notion, developed within the framework of a stationary equilib rium model of Wicksellian derivation, appears to be a very promis ing tool of analysis. Sraffa focuses his attention on the phenome non of the possible multiplicity of the “own rates of interest” a ssociated with the various commodities produced and traded in a m onetary economy, suggesting that such phenomenon ought to be inte rpreted as a disequilibrium occurrence, originated by the exogeno us perturbations to which the economy is continuously subjected. By assuming that the agents correctly expect, and the “forward” c ommodity markets perfectly anticipate, the underlying stationary equilibrium prices, Sraffa is able to show that the divergence am ong the “own rates of interest” associated with the various commo dities can be interpreted as an effective market signal, analogou s to the one supposedly provided by the divergence between market and natural prices in classical price theory: such a signal, in fact, would affect producers’ decisions, fostering the appropriat e changes in the production levels of the various “industries” an d thereby promoting the convergence of the economy towards the gi ven stationary equilibrium. At first sight, Sraffa’s analysis se ems to foreshadow interesting theoretical developments in the are a of expectations formation, equilibration processes, the working of “forward” and “futures” commodity markets, and related topics . But such hopes are bound to be disappointed, for Sraffa drops t he notion of “own rate of interest” shortly after its introductio n in 1932, subsequently abstaining from any discussion of both th at notion and any other related concept in all his later writings . In this paper, after dispelling a certain ambiguity surroundin g Sraffa’s original definition of the concept of “own rate of int erest”, we shall explain why Sraffa does not proceed along the ro ad deceptively opened by his 1932 article. In particular, we shal l single out three different reasons explaining why Sraffa almost immediately gives up any kind of research in that area: first, i n the 1932 paper Sraffa’s analysis of expectations formation and the functioning of “forward” markets is not pursued for its own s ake, but only with the purpose of making the adjustment process t owards the stationary equilibrium of the economy more plausible a nd robust; secondly, the constant costs (or constant returns) ass umption, that Sraffa is forced to make in order to analyse the di sequilibrium adjustment process, is an assumption that he will co me to disown in his later work; finally, in the 1932 paper the an alytical treatment of the notion of “own rate of interest” is ser iously incomplete, for Sraffa is unable (or unwilling) to contriv e that sort of “futures” contract, essentially different from the “forward” contract actually envisaged therein, that alone would make the notion of “own rate of interest” applicable to a real (t hat is, a moneyless) economy, as Sraffa pretends to be able to do . Now, since the required sort of “futures” contract, which Sraf fa neglects, is instead systematically employed in modern general equilibrium theory, of both the Arrow-Debreu and the Incomplete Markets type, the paper also examines the peculiar fate of the no tion of “own rate of interest” in such contemporary theoretical m odels.
    Keywords: rate of interest, forward transactions, commodity futures, stationary equilibrium, disequilibrium, expectations
  41. By: Pavlo Blavatskyy; Ganna Pogrebna
    Abstract: In the television show Affari Tuoi an individual faces a sequence of binary choices between a risky lottery with equiprobable prizes of up to half a million euros and a monetary amount for certain. The decisions of 114 show participants are used to test the predictions of ten decision theories: risk neutrality, expected utility theory, fanning-out hypothesis (weighted utility theory, transitive skew-symmetric bilinear utility theory), (cumulative) prospect theory, regret theory, rank-dependent expected utility theory, Yaari’s dual model, prospective reference theory and disappointment aversion theory. Assumptions of risk neutrality and loss aversion are clearly violated, respectively, by 55% and 46% of all contestants. There appears to be no evidence of nonlinear probability weighting or disappointment aversion. Observed decisions are generally consistent with the assumption of regret aversion and there is strong evidence for the fanning-out hypothesis. Nevertheless, we find no behavioral patterns that cannot be reconciled within the expected utility framework (or prospective reference theory that gives identical predictions).
    Keywords: decision theory, natural experiment, television show, expected utility, nonexpected utility
    JEL: C93 D81
    Date: 2006–06
  42. By: J. ANNAERT; Crispiniano Garcia Joao Batista; J. LAMOOT; G. LANINE
    Abstract: The original Panjer recursion of the CreditRisk+ model is said to be unstable and therefore to yield inaccurate results of the tail distribution of credit portfolios. A much-hailed solution for the flaws of the Panjer recursion is the saddlepoint approximation method. In this paper we show that the saddlepoint approximation is an accurate and robust tool only for relatively homogenous credit portfolios with low skewness and kurtosis of the loss distribution. However, often credit portfolios are heterogeneous with large skewness and kurtosis. We show that for such portfolios the commonly applied saddlepoint approximations (the Lugannani-Rice and the Barndorff-Nielsen formulas) are not reliable. Moreover, when applied to such credit portfolios, the Lugannani-Rice formula is fragile. We explain it by the dependence of the high-order standardized cumulants and the relative error on the saddlepoints. The more the cumulants and the relative error vary, the less accurate the saddlepoint approximation is. Hence, the saddlepoint approximation is not a universal substitute to the Panjer recursion algorithm.
    Date: 2006–02
  43. By: Jan Strasky
    Abstract: This paper analyses the performance of the inflation forecast-based (IFB) monetary policy rules in the quarterly projection model of the Czech National Bank. The paper begins by reviewing the model and its parametrization, including the variance-covariance matrix of disturbances employed in simulations. The main part of the paper presents the results of an extensive grid search over various targeting horizons and coefficient values for a simple IFB rule with optimized coefficients, and suggests three possibilities for improvement: a shorter targeting horizon, a higher relative weight placed on inflation gap stabilization, and a lower coefficient on partial interest rate adjustment. These results are supported by an analysis of the impact of individual shocks on the optimal coefficients of the IFB rule. The last section of the paper argues for inclusion of the real exchange rate stabilization objective in the policy maker’s loss function and repeats the grid search for an optimal rule allowing for the real exchange rate feedback term. The previous results are not dramatically altered and we conclude that the stabilization properties of the extended rules are comparable with the those of the original optimized IFB rules.
    Keywords: Exchange rates, inflation targeting, monetary policy rules, open economy.
    JEL: E52 E58 F41
    Date: 2005–12
  44. By: Neil Shephard; Ole E. Barndorff-Nielsen; Peter Reinhard Hansen; Asger Lunde
    Abstract: This paper shows how to use realised kernels to carry out efficient feasible inference on the ex-post variation of underlying equity prices in the presence of simple models of market frictions. The issue is subtle with only estimators which have symmetric weights delivering consistent estimators with mixed Gaussian limit theorems. The weights can be chosen to achieve the best possible rate of convergence and to have an asymptotic variance which is close to that of the maximum likelihood estimator in the parametric version of this problem. Realised kernels can also be selected to (i) be analysed using endogenously spaced data such as that in databases on transactions, (ii) allow for market frictions which are endogenous, (iii) allow for temporally dependent noise. The finite sample performance of our estimators is studied using simulation, while empirical work illustrates their use in practice.
    Keywords: Bipower variation, Long run variance estimator, Market frictions, Quadratic variation, Realised variance
    JEL: C13 C22
    Date: 2006
  45. By: Andrea Attar (IDEI, Toulouse); Eloisa Campioni (LUISS, University of Rome); Gwenaël Piaser (Department of Economics, University Of Venice Cà Foscari); Uday Rajan (Ross School of Business, University of Michigan)
    Abstract: In multiple principal, multiple agent models of moral hazard, we provide conditions under which the outcomes of equilibria in direct mechanisms are preserved when principals can offer indirect communication schemes. We discuss the role of random allocations and recommendations and relate the result to the existing literature.
    Keywords: Moral Hazard, Multiple Agents, Direct Mechanism.
    JEL: D82
    Date: 2006

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