nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒06‒17
53 papers chosen by
Carolina Valiente
London South Bank University

  1. Market Reactions to Central Bank Communication Policies : Reading Interest Rate Options Smiles. By Marie Brière
  2. Banks'procyclicality behavior : does provisioning matter ?. By Vincent Bouvatier; Laetitia Lepetit
  3. Resolving Macroeconomic Uncertainty in Stock and Bond Markets By Alessandro Beber; Michael W. Brandt
  4. Creating a more efficient financial system : challenges for Bangladesh By Rahman, Md. Habibur; Beck, Thorsten
  5. Optimal Monetary and Exchange Rate Policies in Crisis-Prone Small Open Economies By Rajesh Singh; Joydeep Bhattacharya
  6. Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties By Bernardo S. de M. Carvalho; Márcio G.P. Garcia
  7. The impact of monetary policy signals on the intradaily Euro-dollar volatility. By Darmoul Mokhtar
  8. Pricing the Weather Derivatives in Presence of Long Memory in Temperatures By Hélène Hamisultane
  9. Adopting a common currency basket arrangement into the 'ASEAN plus three' By Eiji Ogawa; Kentaro Kawasaki
  10. Currency Mismatches, Default Risk, and Exchange Rate Depreciation: Evidence from the End of Bimetallism By Michael D. Bordo; Christopher M. Meissner; Marc D. Weidenmier
  11. Direction-of-Change Forecasts Based on Conditional Variance, Skewness and Kurtosis Dynamics: International Evidence By Peter F. Christoffersen; Francis X. Diebold; Roberto S. Mariano; Anthony S. Tay; Yiu Kuen Tse
  12. Monetary Policy, Exchange Rate Overshooting, and Endogenous Physical Capital By Habib Ahmed; C. Paul Hallwood; Stephen M. Miller
  13. Competitive Equilibrium with Incomplete Financial Markets By David Cass
  14. Stability First: Reflections Inspired by Otmar Issing%u2019s Success as the ECB%u2019s Chief Economist By Vitor Gaspar; Anil K. Kashyap
  15. Extracting Information from the Market to Price the Weather Derivatives By Hélène Hamisultane
  16. Earthquake vulnerability reduction program in Colombia : a probabilistic cost-benefit analysis By Mahul, Olivier; Jamin, Luis; Ghesquiere, Francis
  17. Speculation-led growth and fragility in Turkey: Does EU make a difference or "can it happen again"? By Özlem Onaran
  18. The IMF and the Liberalization of Capital Flows By Joseph P Joyce; Ilan Noy
  19. What drives the market value of firms in the Defense industry ?. By Gunther Capelle-Blancard; Nicolas Couderc
  20. The impact of financial constraints on innovation : evidence from french manufacturing firms. By Frédérique Savignac
  21. Musings on the Cass Trick By David Cass
  22. The Austrian Insurance Industry: A Structure, Conduct and Performance Analysis By Jedlicka, Lorenz; Jumah, Adusei
  23. Capital Structure with Risky Foreign Investment By Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
  25. A tale of the water-supplying plumber: intraday liquidity provision in payment systems By Elisabeth Ledrut
  26. Factors Behind Low Long-Term Interest Rates By Rudiger Ahrend; Pietro Catte; Robert Price
  27. Equity Premia with Benchmark Levels of Consumption: Closed-Form Results By Andrew B. Abel
  28. The Variability of IPO Initial Returns By Michelle Lowry; Micah S. Officer; G. William Schwert
  29. Taux d'intérêt effectif, viabilité financière et réduction de la pauvreté par les institutions de microfinance au Bénin By Denis H. Acclassato
  30. Sources of Advantageous Selection: Evidence from the Medigap Insurance Market By Hanming Fang; Michael P. Keane; Dan Silverman
  31. Investments for the Short and Long Run By Eckhard Platen
  32. Frequent News and Pure Signals: The Case of a Publicly Traded Football Club By Georg Stadtmann
  33. The Effect of Dividends on Consumption By Malcolm Baker; Stefan Nagel; Jeffrey Wurgler
  34. MODELING THE EURO OVERNIGHT RATE By Ángel León; Francis Benito; Juan Nave
  35. Inflation Targeting and the Role of Exchange Rate Pass-through By Reginaldo P. Nogueira Jnr
  36. The Optimal Length of Contracts with Application to Outsourcing By Matthew Ellman
  37. The Open Economy Consequences of U.S. Monetary Policy By John Bluedorn; Christopher Bowdler
  38. Efficient Monetary Allocations and the Illiquidity of Bonds. By Boel, Paola; Camera, Gabriele
  39. Anonymous Markets and Monetary Trading. By Aliprantis, C.D.; Camera, Gabriele; Puzzello, D.
  40. Simulations de la couverture delta et de la couverture delta-gamma d’un portefeuille dans le cadre du modèle de Black et Scholes By Francois-Éric Racicot; Raymond Théoret
  41. Compatible Beliefs and Equilibrium By David Cass
  43. Are House Prices Nearing a Peak?: A Probit Analysis for 17 OECD Countries By OECD
  44. The Impossibility of Stationary Yield Spreads and I(1) Yields under the Expectations Theory of the Term Structure By Clive G. Bowsher; Roland Meeks
  45. Aggregate investment dynamics when firms face fixed investment cost and capital market imperfections By Christian Bayer
  46. Educational Debt Burden and Career Choice: Evidence from a Financial Aid Experiment at NYU Law School By Erica Field
  47. When Does Domestic Saving Matter for Economic Growth? By Philippe Aghion; Diego Comin; Peter Howitt
  48. Is European Monetary Policy Appropriate for the EMU Member Countries? A Counterfactual Analysis By Bernd Hayo
  49. Labor Supply Responses to Adverse Shocks under Credit Constraints: Evidence from Bukidnon, Philippines By Hazel Jean Malapit; Jade Eric Redoblado; Deanna Margarett Cabungcal-Dolor; Jasmin Suministrado
  50. Exchange rates and transition economies` export prices: is there evidence for pricing-to-market behaviour? By Emilia Penkova
  51. Designing realised kernels to measure the ex-post variation of equity prices in the presence of noise By Ole E. Barndorff-Nielsen; Peter Reinhard Hansen; Asger Lunde; Neil Shephard
  52. Consistent Measures of Risk By Casper G. de Vries; Mandira Sarma; Bjørn N. Jorgensen; Jean-Pierre Zigrand; Jon Danielsson
  53. Dividends and Taxes By Roger Gordon; Martin Dietz

  1. By: Marie Brière (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels.)
    Abstract: This paper compares the communication strategies of the Fed and the ECB and their impact on financial markets. Interest rates options were used to calculate daily probability distributions of market expectations and to examine how they are modified by central banks’ announcements. We found that Greenspan’s speeches have a stronger influence on rate levels and market uncertainty than Duisenberg’s. Moreover, market expectations most significant reaction is to economic indicators central banks mention as being important. Monetary decisions are regularly anticipated thanks to speeches and economic releases and the dominant speech themes were shown to be “monetary policy” and “domestic economy”.
    Keywords: central bank communication, risk neutral density, futures option pricing, event studies.
    JEL: E43 E58 G13 G14
    Date: 2006–05
  2. By: Vincent Bouvatier (Centre d'Economie de la Sorbonne); Laetitia Lepetit (LAPE, Université de Limoges)
    Abstract: A panel of 186 European banks is used for the period 1992-2004 to determine if banking behaviors induced by the capital adequacy constraint and the provisioning system, amplify credit fluctuations. Our finding is consistent with the bank capital channel hypothesis, which means that poorly capitalized banks are constrained to expand credit. We also find that loan loss provisions (LLP) made in order to cover identified credit losses (non discretionary LLP) amplify credit fluctuations. Indeed, non discretionary LLP evolve cyclically. This leads to a misevaluation of expected credit risk which affect banks' incentives to grant new loans since lending costs are misstated. By contrast, LLP use for management objectives (discretionary LLP) do not affect credit fluctuations. The findings of our research are consistent with the call for the implementation of dynamic provisioning in Europe.
    Keywords: Bank lending, loan loss provisions, capital requirement.
    JEL: G21
    Date: 2006–05
  3. By: Alessandro Beber; Michael W. Brandt
    Abstract: We establish an empirical link between the ex-ante uncertainty about macroeconomic fundamentals and the ex-post resolution of this uncertainty in financial markets. We measure macroeconomic uncertainty using prices of economic derivatives and relate this measure to changes in implied volatilities of stock and bond options when the economic data is released. We also examine the relationship between our measure of macroeconomic uncertainty and trading activity in stock and bond option markets before and after the announcements. Higher macroeconomic uncertainty is associated with greater reduction in implied volatilities. Higher macroeconomic uncertainty is also associated with increased volume in option markets after the release, consistent with market participants waiting to trade until economic uncertainty is resolved, and with decreased open interest in option markets after the release, consistent with market participants using financial options to hedge macroeconomic uncertainty. The empirical relationships are strongest for long-term bonds and weakest for non-cyclical stocks.
    JEL: G1
    Date: 2006–06
  4. By: Rahman, Md. Habibur; Beck, Thorsten
    Abstract: While Bangladesh has embarked on a path to reform its financial system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government ' s role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Financial Intermediation,Investment and Investment Climate,Corporate Law
    Date: 2006–06–01
  5. By: Rajesh Singh; Joydeep Bhattacharya
    Keywords: banking crises, fixed versus flexible regimes
    JEL: F41
    Date: 2005
  6. By: Bernardo S. de M. Carvalho; Márcio G.P. Garcia
    Abstract: We analyze the Brazilian experience in the 1990s to assess the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) showed that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. To check this hypothesis, we conducted interviews with market players. We collected several examples of the financial strategies engineered to avoid the capital controls and invest in the Brazilian fixed income market. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets.
    JEL: E44 F32 F34 F36 G15
    Date: 2006–06
  7. By: Darmoul Mokhtar (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we investigate the impact of monetary policy signals stemming from the ECB Council and the FOMC on the intradaily Euro-dollar volatility, using high-frequency data (five minutes frequency). For that, we estimate an AR(1)-GARCH(1,1) model, which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. This structure allows us to test the signals persistence one hour after their occurence and to reveal a dissymmetry between the effect of the ECB and Federal Reserve signals on the exchange rate volatility.
    Keywords: Exchange rates, official interventions, monetary policy, GARCH models.
    JEL: C22 E52 F31 G15
    Date: 2006–06
  8. By: Hélène Hamisultane (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Weather derivatives are financial contracts which the underlying is not a traded asset. Therefore, they cannot be priced by the traditional financial theory based on the hedging portfolio and on the arbitrage-free argument. Some authors suggest to use the actuarial pricing approach to value the weather derivatives. But this method suffers from the fact that it is only based on the modelling of the temperatures. The market information is not necessary to value the weather derivatives by this approach. On the contrary, the financial method needs to infer the market price of weather risk since the market is incomplete for the weather derivatives. We suggest in this paper to compute and to compare the prices stemming from the both approaches. To calculate the prices, we will use the long memory processes for the daily average temperature since tests reveal the presence of a persistent phenomenon in the serie.
    Keywords: weather derivatives; incomplete market; long memory; ARFIMA process; FIGARCH process; LMSV process; fractional Brownian motion; PDE; Monte-Carlo simulations
    Date: 2006–06–09
  9. By: Eiji Ogawa; Kentaro Kawasaki
    Abstract: East Asian countries, for example "ASEAN plus three countries" (China, Korea, and Japan), have been well cognizant of importance of the regional financial cooperation since the Asian currency crisis in 1997. They have established the Chiang Mai Initiative (CMI) to manage currency crises. However, the CMI is not designed for "crisis prevention" because it includes no more than soft surveillance process as well as a network of currency swap arrangements. The surveillance process should be conducted over intra-regional exchange rates and exchange rate policies of the regional countries in order to stabilize intra-regional exchange rates in a situation of a strong economic relationship among the regional countries. On one hand, the regional exchange rate stability is related with an optimum currency area. Based on a Generalized PPP model, which detects a cointegration relationship among real effective exchanges rates, we investigate whether the region composed of "ASEAN plus three countries" is an optimum currency area. In the investigation, our interest is focused on an issue whether the Japanese yen could be regarded as an "insider" currency as well as other East Asian currencies. Or, is the Japanese yen still an "outsider" which is used as a target currency of foreign exchange rate policy for other East Asian countries. We employ a Dynamic OLS to estimate the long-term relationship among the East Asian currencies in a currency basket. Our empirical results indicate that the Japanese yen works as an exogenous variable in the cointegration system during a pre-crisis period while it works as an endogenous one during a post-crisis period. It implies that the Japanese yen could be regarded as an insider currency as well as other East Asian currencies after the crisis although it is regarded as an outsider currency as well as the US dollar and the euro before the Asian crisis.
    Date: 2006–06
  10. By: Michael D. Bordo; Christopher M. Meissner; Marc D. Weidenmier
    Abstract: It is generally very difficult to measure the effects of a currency depreciation on a country’s balance sheet and financing costs given the endogenous properties of the exchange rate. History provides at least one natural experiment to test whether an exogenous exchange rate depreciation can be contractionary (via an increased real debt burden) or expansionary (via an improved current account). France’s decision to suspend the free coinage of silver in 1876 played a paramount role in causing a large exogenous depreciation of the nominal exchange rates of all silver standard countries versus gold-backed currencies such as the British pound—the currency in which much of their debt was payable. Our identifying assumption is that France’s decision to end bimetallism was exogenous from the viewpoint of countries on the silver standard. To deal with heterogeneity we implement a difference in differences estimator. Sovereign yield spreads for countries on the silver standard increased in proportion to the potential currency mismatch. Yield spreads for silver countries increased ten to fifteen percent in the wake of the depreciation. Basic growth models suggest that the accompanying reduction in investment could have decreased output per capita by between one and four percent relative to the pre-shock trajectory. This also illustrates that a substantial proportion of the decrease in spreads gold standard countries identified in the “Good Housekeeping” literature could be attributable to the increase in exchange rate stability. Finally, if emerging markets are going to embrace international capital flows, the most export oriented countries will manage to mitigate the negative effects of a currency mismatch.
    JEL: N1 N2 F3
    Date: 2006–06
  11. By: Peter F. Christoffersen (McGill University and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania); Roberto S. Mariano (Singapore Management University); Anthony S. Tay (Singapore Management University); Yiu Kuen Tse (Singapore Management University)
    Abstract: Recent theoretical work has revealed a direct connection between asset return volatility forecastability and asset return sign forecastability. This suggests that the pervasive volatility forecastability in equity returns could, via induced sign forecastability, be used to produce direction-of change forecasts useful for market timing. We attempt to do so in an international sample of developed equity markets, with some success, as assessed by formal probability forecast scoring rules such as the Brier score. An important ingredient is our conditioning not only on conditional mean and variance information, but also conditional skewness and kurtosis information, when forming direction-of-change forecasts.
    Keywords: Volatility, variance, skewness, kurtosis, market timing, asset management, asset allocation, portfolio management
    JEL: G10 G12
    Date: 2006–02–01
  12. By: Habib Ahmed (Islamic Development Bank); C. Paul Hallwood (University of Connecticut); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: We develop an open economy macroeconomic model with real capital accumulation and microeconomic foundations. We show that expansionary monetary policy causes exchange rate overshooting, not once, but potentially twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firmsâ decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities.
    Keywords: physical capital, open economy macroeconomic, monetary policy, exchange rate
    JEL: F31 F32
    Date: 2006–06
  13. By: David Cass (Department of Economics, University of Pennsylvania)
    Abstract: This is my classic paper, written in early 1984, concerning existence and optimality in general financial equilibrium with incomplete markets for nominal assets, just now being published in a special issue of the Journal of Mathematical Economics.
    Keywords: financial equilibrium, incomplete markets, Cass trick
    JEL: D52
    Date: 2006–06–02
  14. By: Vitor Gaspar; Anil K. Kashyap
    Abstract: In this paper, we review Otmar Issing's career as the ECB's inaugural chief economist and we document many notable successes. We try to infer some general principles that contributed to these successes and draw some lessons. In doing so, we review the evidence using Woodford’s (2003) recent revival of the Wicksellian approach to monetary policy making. Suitably interpreted the baseline model can rationalize Issing’s three guiding principles for successful policymaking. This baseline model, however, fails to account for the important role that monetary and financial analysis played in the conduct of policy during Issing’s tenure. We propose an extension of the model to account for financial developments and show that this extended model substantially improves our understanding of ECB practice. We conclude by listing six open questions, relevant for the future of central banking in Europe that Issing may want to consider in case leisure allows.
    JEL: E31 E52 E58 E44
    Date: 2006–06
  15. By: Hélène Hamisultane (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Weather derivatives were first launched in 1996 in the United-States to allow companies to protect themselves against weather fluctuations. Even now their valuation still remains tricky. Because their underlying is not a traded asset, the weather options cannot be priced by using the Black and Scholes formula. Other pricing methods were proposed but they cannot be calibrated to the market since there are no available weather option price. However, quoted prices exist for the weather futures. The purpose of this paper is to extract two types of information from these prices, the risk-neutral distribution and the market price of risk, to value the weather derivatives. The prices are calculated by assuming that the daily average temperature obeys a mean-reverting jump-EGARCH process since it is shown that the temperature is not normally distributed and exhibits a time-varying volatility.
    Keywords: weather derivatives; incomplete markets; mean-reverting jump diffusion process; EGARCH process; PIDE; inversion problem
    Date: 2006–06–09
  16. By: Mahul, Olivier; Jamin, Luis; Ghesquiere, Francis
    Abstract: Cost-benefit analysis is a standard tool for determining the efficiency of planned projects. But one of the major difficulties in risk mitigation investments is that benefits are by nature uncertain. In this context, the standard approach relying on the average value of benefits may provide an incomplete picture of the efficiency of the risk mitigation project under consideration. This paper presents a probabilistic cost-benefit analysis relying on a catastrophe risk model. It produces risk metrics such as the exceedance probability curve of the benefit-cost ratio, thus providing the decisionmaker with a more complete risk analysis of the net benefits of the project. This is illustrated with the earthquake vulnerability reduction project in Colombia.
    Keywords: Insurance & Risk Mitigation,Investment and Investment Climate,Banks & Banking Reform,Natural Disasters,Non Bank Financial Institutions
    Date: 2006–06–01
  17. By: Özlem Onaran (Department of Economics, Vienna University of Economics & B.A.)
    Abstract: The aim of this paper is to analyze the pattern of speculation-led growth in Turkey. It is dependent on international capital flows, whose continuity becomes more and more critical given the current account deficit, which is estimated to reach 6.1% as a ratio to GDP at the end of 2005. The paper assesses the sustainability of this speculation-led growth in the context of EU enlargement and compares the current state of fragility with former crises in Turkey as well as in East Asia and Latin America. Following a severe financial crisis in 2001, Turkey has entered a new phase of fragile growth led by boom-euphoric expectations. The paper aims at explaining this new phase and the evolution of the risk perceptions of both the creditors as well as the debtors in this "speculation game" based on the post-Keynesian/Minskyan concepts of endogenous expectations and financial fragility.
    JEL: E12 G15 G32 O52
    Date: 2006–05
  18. By: Joseph P Joyce (Department of Economics, Wellesley College); Ilan Noy (Department of Economics, University of Hawaii)
    Abstract: Using data from a panel of developing economies from the 1982-98 period, the claim that the International Monetary Fund precipitated financial crises during the 1990s by pressuring countries to liberalize their capital accounts prematurely is evaluated. Examining whether the changes in the regime governing capital flows took place during participation in IMF programs, evidence finds that IMF program participation is correlated with capital account liberalization episodes during the 1990s. Alternative indicators of capital account openness were used to test the robustness of the results by comparing the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently to determine whether decontrol was premature.
    JEL: F3
  19. By: Gunther Capelle-Blancard (Centre d'Economie de la Sorbonne et EconomiX Université Paris Nanterre); Nicolas Couderc (Centre d'Economie de la Sorbonne)
    Abstract: This paper investigates the relative importance of different types of news in driving significant stock price changes of firms in the defense industry. We implement a systematic event study with a sample of the 58 largest publicly listed companies in the defense industry, over the time period 1995-2005. We first identify, for each firm, the statistically significant abnormal returns over the time period, and then we look for information releases likely to cause such stock price movements. We find that stock price movements in the defense industry are, in many ways, influenced by the same events as in other industries (key role of formal earnings announcements or analysts' recommendations) but this industry also has some specific features, in particular the influence of geopolitical events and the relevance and frequency of bids and contracts on stock prices.
    Keywords: Event study, financial markets, defense industry, information releases, GARCH models.
    JEL: G14 G34 L64
    Date: 2005–12
  20. By: Frédérique Savignac (CREST et Centre d'Economie de la Sorbonne)
    Abstract: This paper examines the impact of financial constraints on innovation for established firms. We make use of a qualitative indicator of the existence of financial constraints based on firms' own assessment obtained thanks to a French specific survey. Thus, the existence of financial constraints for innovation is measured by a direct indicator whereas previous studies rely on proxies (like the cash-flow sensitivity) subject to interpretation problems. The descriptive analysis of balance sheet structures reveals that innovative firms without financial constraints have the best profile in terms of economic performances, financing structure and risk whereas non innovative firms facing financial constraints have the poorest profile. From the econometric point of view, the probabilities of implementing innovative projects and of facing financial constraints are simultaneously estimated by a recursive bivariate probit model to account for the endogeneity of the financial constraint variable. We then find that firms having innovative projects face financial constraints that significantly reduce the likelihood that they implement their innovative investment. The probability of facing financing constraints is explained by firms' ex ante financing structure and economic performances, by industry sector and it decreases with firms' size.
    Keywords: Innovation, financing constraints, recursive bivariate probit.
    JEL: G31 C35 O31
    Date: 2006–04
  21. By: David Cass (Department of Economics, University of Pennsylvania)
    Abstract: This is a leisurely introduction, in the vein of a piece in the history of science, to belated publication of my well-known paper on incomplete Markets, Competitive Equilibrium with Incomplete Financial Markets.
    Keywords: financial equilibrium, incomplete markets, Cass trick
    JEL: D52
    Date: 2006–06–02
  22. By: Jedlicka, Lorenz (Department of Economics, BWZ, University of Vienna); Jumah, Adusei (Department of Economics, BWZ, University of Vienna and Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)
    Abstract: There exist a vast number of studies on the banking industry. However, the insurance industry remains relatively unexplored. Increasingly, Austrian insurance institutions are becoming important as financial intermediaries in the domestic market, and – based on proximity advantage – also in the Central and Eastern European markets. This paper applies the structure, conduct and performance (SCP) approach to a sample of 52 Austrian insurance firms. The main finding is that the standard SCP hypothesis of highly concentrated markets, which create incentives to engage in collusive behaviour and which in turn leads to higher industry profit rates, cannot be supported by the Austrian insurance industry leads to higher industry profit rates, cannot be supported by the Austrian insurance industry.
    Keywords: Insurance industry, Market structure, Conduct and performance, Industrial organisation
    JEL: G22 L1
    Date: 2006–05
  23. By: Mihir A. Desai; C. Fritz Foley; James R. Hines Jr.
    Abstract: American multinational firms respond to politically risky environments by adjusting their capital structures abroad and at home. Foreign subsidiaries located in politically risky countries have significantly more debt than do other foreign affiliates of the same parent companies. American firms further limit their equity exposures in politically risky countries by sharing ownership with local partners and by serving foreign markets with exports rather than local production. The residual political risk borne by parent companies leads them to use less domestic leverage, resulting in lower firm-wide leverage. Multinational firms with above-average exposures to politically risky countries have 8.4 percent less domestic leverage than do other firms. These findings illustrate the impact of risk exposures on capital structure.
    JEL: F23 G32 G15 G18
    Date: 2006–06
  24. By: Francisco J. Mas (Universidad de Alicante); Antonio Ladrón de Guevara Martínez (Universitat Pompeu Fabra); Felipe Ruiz Moreno (Universidad de Alicante)
    Abstract: The main objective of this work is to propose an oligopolistic competition model thatincorporates product differentiation through quality of service in the Spanish bank loansmarket. This model allows us to detect the competitive behavior patterns in terms of the outputof all the financial entities with respect to three strategic groups defined in terms of size. Thismodel of competitive interactions is tested with a sample of 100 firms in the Spanish bank loanmarket between 1992 and 1994. This period of time is characterized by both, the end of a longprocess of deregulation and the integration of the Spanish Banking System in the EuropeanBanking System. The findings evidence a stronger aggressiveness from the larger-size groupwhen the medium and smaller-size groups increase their output. Besides, the results detect anaggressive conduct between the entities within the larger-size group. El objetivo de este trabajo consiste en proponer un modelo de competencia oligopolísticacon diferenciación de producto vía calidad de servicio en el mercado de créditos bancarios, elcual permite detectar el patrón de conducta competitiva del output (variaciones conjeturales anivel de cantidades de créditos vendidos) para todas y cada una de las entidades financierasrespecto de cada uno de los grupos estratégicos definidos por tamaño. Este modelo deinteracciones competitivas es contrastado con 100 entidades del mercado español de créditosbancarios entre 1992 y 1994, período temporal que marca la culminación de un proceso dedesregulación e integración europea del sistema bancario español y que incide directamente enla competencia en términos de cantidades de créditos vendidos. Los resultados obtenidosevidencian que el grupo de entidades de mayor tamaño tiene una actitud agresiva ante unaumento del output de los grupos de entidades pequeñas y medianas. Además, se detecta unaconducta agresiva entre las entidades del grupo de mayor tamaño.
    Keywords: Variación Conjetural, Comportamiento Competitivo, Grupos Estratégicos, Banking; Competition; Strategic Groups.
    Date: 2006–06
  25. By: Elisabeth Ledrut
    Abstract: This paper provides an overview of the literature on intraday credit in payment systems to date and explores the dilemma central banks face when deciding on their intraday credit policies. On the one hand, any strategy in which the costs of liquidity are not fully borne by payment system participants can be expected to yield an inefficient outcome . Participants would consume more credit than optimal and, due to moral hazard, central banks would be faced with larger amounts at risk and a greater risk of default than would otherwise be the case. On the other hand, a strategy making intraday liquidity expensive increases the risk of payment delays and payment system gridlocks, due to participants limiting their intraday borrowings and delaying the sending of payments, which can hamper the well functioning of the payment system. This could further influence the allocation of real resources, as achieving economic efficiency requires intraday credit to be provided without cost, even accounting for default risk and moral hazard. Recent developments in payment system design, which have improved the turnover ratio of reserves, have reduced the stringency of the dilemma in a number of countries.
    Keywords: large-value payment system; intraday credit; liquidity.
    JEL: E51 E58 G21
    Date: 2006–05
  26. By: Rudiger Ahrend; Pietro Catte; Robert Price
    Abstract: Long-term bond yields have been low in recent years both in nominal and real terms, and . especially in the United States - they have reacted differently to shifts in monetary and fiscal stances relative to previous cycles. This article examines various possible explanations for this behaviour, such as the effects of changes in monetary policy frameworks on inflation and interest rate expectations; developments in ex ante saving-investment balances, and shifts in investors. portfolio preferences (including official reserve accumulation, .petro-dollar. recycling and pension fund demand for longer maturities). The paper finds that it is unlikely that any individual explanation can account for the level and profile of bond yields in recent years, but that an important element has been a compression in term premia, together with shifts in expected short rates. Even though bond yields have started to rise in the early part of 2006, they are unlikely to go back to the levels that prevailed in the 1980s or the early 1990s, as several of the factors that drove them lower are set to persist. <P>Éléments à l’origine de la faiblesse des taux d’intérêt à long terme Au cours des années récentes les rendements des obligations à long terme ont été faibles tant en termes nominaux qu’effectifs. Par rapport aux cycles économiques antérieurs, ils ont réagi différemment aux changements de politique monétaire et budgétaire, notamment aux États-Unis. Cet article examine plusieurs explications potentielles de ces comportements comme les effets d’un changement de cadre de la politique monétaire sur l’inflation et les anticipations de taux d’intérêt; l’évolution des soldes ex ante d’épargne et d’investissement et les changements de préférence dans les placements des investisseurs (y compris l’accumulation des réserves officielles, le recyclage des « pétrodollars » et la demande des fonds de pension pour des obligations à maturité longue). L’article conclut qu’il est improbable qu’une seule explication puisse rendre compte du niveau et du profil des rendements obligataires au cours des dernières années. Toutefois, un élément clef a été la réduction de la prime de risque, accompagnée par des changements dans les anticipations de taux d’intérêt à court terme. Néanmoins, bien que les rendements des obligations aient commencé à remonter au début de l’année 2006, il est peu vraisemblable qu’ils atteignent les niveaux enregistrés dans les années 1980 et au début des années 1990, dans la mesure où plusieurs des facteurs qui ont entraîné leur déclin sont amenés à perdurer.
    Keywords: financial markets, marchés financiers, capital flows, flux de capitaux, credibility, monetary policy, crédibilité, politique monétaire, risk premia, current account
    JEL: E43 F2 G11 G15
    Date: 2006–06–13
  27. By: Andrew B. Abel
    Abstract: I calculate exact expressions for risk premia, term premia, and the premium on levered equity in a framework that includes habit formation, keeping/catching up with the Joneses, and possible departures from rational expectations. Closed-form expressions for the first and second moments of returns and for the R2 of a regression of stock returns on the dividend-price ratio are derived under lognormality for the case that includes keeping/catching up with the Joneses. Linear approximations illustrate how these moments of returns are affected by parameter values and illustrate quantitatively how well the model can account for values of the equity premium, the term premium, and the standard deviations of the riskless return and the rate of return on levered equity. For empirically relevant parameter values, the linear approximations yield values of the various moments that are close to those obtained from the exact solutions.
    JEL: G12
    Date: 2006–06
  28. By: Michelle Lowry; Micah S. Officer; G. William Schwert
    Abstract: The monthly volatility of IPO initial returns is substantial and fluctuates dramatically over time. Moreover, the monthly volatility of initial returns is significantly positively correlated with monthly mean initial returns. This contrasts strongly with the strong negative correlation between the mean and volatility of secondary-market returns. Consistent with IPO theory, our empirical findings suggest that information asymmetry about the firm’s market value drives this positive correlation. Specifically, months in which a greater portion of the offerings are for companies for which information asymmetry is likely to be a problem tend to have higher average initial returns and a higher volatility of initial returns. Moreover, information asymmetry proxies are able to explain much of the positive correlation between average initial returns and the variability of initial returns, and the same proxies are significantly associated with both the level and dispersion of initial returns at the firm level.
    JEL: G32 G24 G14
    Date: 2006–06
  29. By: Denis H. Acclassato (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: L'importance des Institutions de Microfinance (IMF) dans les pays en développement n'est plus à démontrer. Elles ont accompli un miracle en permettant à des milliers d'exclus du système bancaire classique d'accéder à des services financiers. Mais une polémique nait quant aux coûts élevés associés à ces services. Cette étude a évalué, à partir d'une base de données financée par l'Association ‘‘Consortium Alafia'' des praticiens de la microfinance au Bénin, le niveau de taux d'intérêt viable pour la microfinance en termes d'offre de services financiers. Les résultats montrent que les micro-projets dont le taux de rentabilité interne ne dépasse pas 36% ne pourraient être financés par les Institutions de Microfinance. La réglementation sur l'usure pourrait donc être suicidaire pour les IMF si elle se bornait simplement à obliger les IMF à se conformer à la loi qui fixe le seuil d'usure à 27%. Quasiment aucune IMF n'assurerait son autosuffisance opérationnelle, donc sa pérennité, en respectant ce seuil.
    Keywords: Taux d'intérêt effectif ; Viabilité financière ; Pauvreté ; Institution de Microfinance
    Date: 2006–06–08
  30. By: Hanming Fang; Michael P. Keane; Dan Silverman
    Abstract: We provide strong evidence of advantageous selection in the Medigap insurance market, and analyze its sources. Using Medicare Current Beneficiary Survey (MCBS) data, we find that, conditional on controls for the price of Medigap, medical expenditures for senior citizens with Medigap coverage are, on average, about $4,000 less than for those without. But, if we condition on health, expenditures for seniors on Medigap are about $2,000 more. These two findings can only be reconciled if those with less health expenditure risk are more likely to purchase Medigap, implying advantageous selection. By combining the MCBS and the Health and Retirement Study (HRS), we investigate the sources of this advantageous selection. These include income, education, longevity expectations and financial planing horizons, as well as cognitive ability. Once we condition on all these factors, seniors with higher expected medical expenditure are indeed more likely to purchase Medigap. Surprisingly, risk preferences do not appear to be a source of advantageous selection. But cognitive ability emerges as a particularly important factor, consistent with a view that many senior citizens have difficulty understanding Medicare and Medigap rules.
    JEL: D82 G22 I11
    Date: 2006–06
  31. By: Eckhard Platen (School of Finance and Economics, University of Technology, Sydney)
    Abstract: This paper aims to discuss the optimal selection of investments for the short and long run in a continuous time financial market setting. First it documents the almost sure pathwise long run outperformance of all positive portfolios by the growth optimal portfolio. Secondly it assumes that every investor prefers more rather than less wealth and keeps the freedom to adjust his or her risk aversion at any time. In a general continuous market, a two fund separation result is derived which yields optimal portfolios located on the Markowitz efficient frontier. An optimal portfolio is shown to have a fraction of its wealth invested in the growth optimal portfolio and the remaining fraction in the savings account. The risk aversion of the investor at a given time determines the volatility of her or his optimal portfolio. It is pointed out that it is usually not rational to reduce risk aversion further than is necessary to achieve the maximum growth rate. Assuming an optimal dynamics for a global market, the market portfolio turns out to be growth optimal. The discounted market portfolio is shown to follow a particular time transformed diffusion process with explicitly known transition density. Assuming that the transformed time growth exponentially, a parsimonious and realistic model for the market portfolio dynamics results. It allows for efficient portfolio optimization and derivative pricing.
    Keywords: growth optimal portfolio; portfolio selection; risk aversion; minimal market model
    JEL: G10 G13
    Date: 2005–08–01
  32. By: Georg Stadtmann (Department of Economics, WHU Koblenz; Institute for Development Strategies, Indiana University)
    Abstract: We use stock market data for Borussia Dortmund GmbH & Co. KGaA – one of the leading German football clubs – for an application of the news model. Due to the specific characteristics of the news generating process, the case of a publicly traded sport club is a very appropriate candidate for testing this model. By applying a traditional as well as a reversed news model we elaborate whether new information can explain subsequent changes in the stock price of Borussia Dortmund. We find that sport as well as corporate governance related variables are important drivers of the stock price.
    Keywords: News Model, Football Industry, Betting Odds, Stock Market
    JEL: G14 L83
    Date: 2006–06
  33. By: Malcolm Baker; Stefan Nagel; Jeffrey Wurgler
    Abstract: Classical models predict that the division of stock returns into dividends and capital appreciation does not affect investor consumption patterns, while mental accounting and other economic frictions predict that investors have a higher propensity to consume from stock returns in the form of dividends. Using two micro data sets, we show that investors are indeed far more likely to consume from dividends than capital gains. In the Consumer Expenditure Survey, household consumption increases with dividend income, controlling for total wealth, total portfolio returns, and other sources of income. In a sample of household investment accounts data from a brokerage, net withdrawals from the accounts increase one-for-one with ordinary dividends of moderate size, controlling for total portfolio returns, and also increase with mutual fund and special dividends. We comment on several potential explanations for the results.
    JEL: E2 G3 D1
    Date: 2006–06
  34. By: Ángel León (Universidad de Alicante); Francis Benito (Universidad de Alicante); Juan Nave (Universidad de Castilla-La Mancha)
    Abstract: This paper describes the evolution of the daily Euro overnight interestrate (EONIA) by using several models containing the jump component such asa single regime ARCH-Poisson-Gaussian process, with either a piecewisefunction or an autoregressive conditional specification (ARJI) for the jumpintensity, and a two regime-switching process with jumps and time varyingtransition probabilities. To model the jump intensity, we include the followingeffects which are significant for the occurrence of jumps such as: (1) the end ofmaintenance period effect because of reserve requirements, (2) the end ofmonth effect, also known as the calendar day effect, caused mainly by theaccounting adjustments and finally, (3) the meeting effect caused by thefortnightly meetings of the Governing Council of the European Central Bank(ECB). These effects lead to a better performance and several of them are alsoincluded for the behavior of the transition probabilities. Since the target of theECB is keeping the EONIA rate close to the official rate, we have modeled theconditional mean of the overnight rate series as a reversion process to theofficial rate distinguishing two alternative speeds of reversion, in concrete, adifferent speed if EONIA is higher or lower than the official rate. We also studythe jumps of the EONIA rate around the ECB’s meetings by using the ex-postprobabilities of the ARJI model. Finally, we develop an out-of-sampleforecasting analysis to measure the performance of the different candidatemodels.
    Keywords: ARCH-Poisson-Gaussian; Regime switching; mean reversion; Autoregressive conditional jump intensity; Maintenance period; Calendar day effect; ECB’s meeting.
    JEL: C13 C22 E43 E52
    Date: 2006–06
  35. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on the exchange rate pass-through for a set of emerging and developed economies before and after the adoption of Inflation Targeting. We use an ARDL model for a sample of developed and emerging market economies to estimate the short-run and the long-run effects of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. This reduction, however, does not mean that the pass-through is no longer existent for developed and emerging market economies, especially when it comes to the long-run. This finding highlights the importance of using dynamic models when dealing with the inflation-depreciation relationship. The results also show the important role of foreign producer costs for the imports pricing behaviour in developed economies, and of inflation stability in emerging markets.
    Keywords: Inflation Targeting, Exchange Rate Pass-through
    JEL: E31 E52 F31 F41
    Date: 2006–01
  36. By: Matthew Ellman
    Abstract: This paper resolves three empirical puzzles in outsourcing by formalizing the adaptation cost of long-term performance contracts. Side-trading with a new partner alongside a long- term contract (to exploit an adaptation-requiring investment) is usually less effective than switching to the new partner when the contract expires. So long-term contracts that prevent holdup of specific investments may induce holdup of adaptation investments. Contract length therefore trades of specific and adaptation investments. Length should increase with the importance and specificity of self-investments, and decrease with the importance of adaptation investments for which side-trading is ineffective. My general model also shows how optimal length falls with cross-investments and wasteful investments.
    Keywords: Contract length, market forces, incomplete contracts, holdup
    JEL: D23
  37. By: John Bluedorn (Nuffield College and Department of Economics, University of Oxford); Christopher Bowdler (Nuffield College and Department of Economics, University of Oxford)
    Abstract: We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy's open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices.
    JEL: E52 F31 F41
    Date: 2006–06–01
  38. By: Boel, Paola; Camera, Gabriele
    Abstract: We construct a monetary economy with heterogeneity in discounting and consumption risk. Agents can insure against this risk with both money and nominal government bonds, but all trades must be monetized. We demonstrate that a deflationary policy a la Friedman cannot sustain the efficient allocation. The reason is that no-arbitrage imposes a stringent bound on the return money can pay. The efficient allocation can be sustained when bonds have positive yields and – under certain conditions – only if they are illiquid. Illiquidity – meaning bonds cannot be transformed into consumption as efficiently as cash – is necessary to eliminate arbitrage opportunities.
    Keywords: Money ; Heterogeneity ; Friedman Rule ; Illiquid Assets
    JEL: E4 E5
    Date: 2004–11
  39. By: Aliprantis, C.D.; Camera, Gabriele; Puzzello, D.
    Abstract: We study an infinite-horizon economy with two basic frictions that are typical in monetary models. First, agents’ trading paths cross at most once due to pairwise trade and other meeting obstacles. Second, actions must be compatible with individual incentives due to commitment and enforcement limitations. We find that, with patient agents, relaxing the first friction by introducing centralized markets, opens the door to an informal enforcement scheme sustaining a non-monetary efficient allocation. Hence, we present a matching environment in which agents repeatedly access large markets and yet the basic frictions are retained. This allows the construction of models based on competitive markets in which money plays an essential role.
    Keywords: Money ; Infinite games ; Matching models ; Social norms
    JEL: C72 C73 D80 E00
    Date: 2005–10
  40. By: Francois-Éric Racicot (Département des sciences administratives, Université du Québec (Outaouais) et LRSP); Raymond Théoret (Département de stratégie des affaires, Université du Québec (Montréal))
    Abstract: Plusieurs gestionnaires de portefeuille pensent encore à tort qu’une couverture delta suffit pour protéger leur portefeuille contre les fluctuations des marchés financiers. Mais une augmentation marquée de la volatilité des cours boursiers les décevra dans leurs attentes. Après avoir exposé les rudiments mathématiques de l’équation de Black et Scholes, cet article présente des simulations inédites dans Excel de la couverture delta et de la couverture delta-gamma basées sur la formule de Black et Scholes. On y constate que la couverture delta-gamma est de loin préférable à une simple couverture delta.
    Keywords: Ingénierie financière, produits dérivés, couverture.
    JEL: G12 G13 G33
    Date: 2006–06–12
  41. By: David Cass (Department of Economics, University of Pennsylvania)
    Abstract: In this paper I investigate the nature of the beliefs which agents must hold (at least implicitly) in order to justify their considering various alternatives, in two distinct settings: the Walrasian model without production (with competitive equilibrium), and the sell-all version of the Shapley- Shubik market game (with Nash equilibrium). For this purpose I introduce a weak consistency requirement on behavior, one which I refer to as (having) compatible beliefs. My main conclusion is that, in this respect, these two versions of market allocation are essentially identical. For both, contemplating different choices requires varying the associated set of values of the variables defining compatible beliefs. And — though prima facie very different — it turns out that both equilibrium concepts can be recast entirely in terms of having compatible beliefs. My analysis also leads unequivocally to the interesting conclusion that, in the Walrasian model (even elaborated to encompass production, financial markets, and so on), budget constraints must hold, ab initio, with equality. This has one very important consequence: the First Basic Welfare Theorem, as usually stated, is false, as I demonstrate with two distinct counterexamples, the second of which is (in classical terms) unexceptional.
    Keywords: general equilibrium, market game, competitive hypothesis, compatible beliefs
    JEL: B49 C71 D51
    Date: 2006–06–02
  42. By: Ángel Hernando Veciana (Universidad de Alicante)
    Abstract: This paper studies the incentives of a bidder to acquire information in anauction when her information acquisition decision is observed by the otherbidders before they bid. Our results show that the sealed bid (second price)auction induces more information acquisition about a common component ofthe value than the open (English) auction, but less about the private componentof the value. Moreover, under our assumptions more information about theprivate value and less information about the common value improves efficiencyand revenue in some sense. Consequently, our results suggest new argumentsin favor of the open auction.
    Keywords: auctions, open information acquisition, asymmetric information.
    JEL: D41 D44 D82
    Date: 2006–06
  43. By: OECD
    Abstract: House prices have been moving up strongly in real terms since the mid-1990s in the majority of OECD countries, with the ongoing upswing the longest of its kind in the OECD area since the 1970s. If interest rates were to rise significantly, real house prices may be at risk of nearing a peak. The historical record suggests that the subsequent drops in prices in real terms might be large and that the process could be protracted. To quantify the probability that a peak is nearing in the current situation a probit model was estimated for the period 1970-2005 on a restricted set of what are generally agreed to be the main explanatory variables. Aside from interest rates, these include measures of overheating, such as the gap between real house prices and their long-run trend and the rate of change in real house prices in the recent past. The main finding is that an increase in interest rates by about 1 to 2 percentage points would result in probabilities of a peak nearing of 50% or more in the United States, France, Denmark, Ireland, New Zealand, Spain and Sweden. <P>La hausse des prix des logements touche-t-elle à son terme ? Les prix des logements ont fortement augmenté en termes réels depuis le milieu des années 90 dans la majorité des pays de l'OCDE, et leur augmentation actuelle est la plus longue que la zone OCDE ait connue depuis les années 70. Si les taux d.intérêt venaient à augmenter ensiblement, la progression des prix réels des logements pourrait toucher à sa fin. Les évolutions passées donnent à penser que les baisses de prix qui s'ensuivraient pourraient être importantes en termes réels et que le processus d'ajustement pourrait durer un certain temps. Pour mesurer la probabilité que les prix cessent d'augmenter dans la situation actuelle, un modèle probit a été estimé sur la période 1970-2005 pour un ensemble restreint de ce que l'on considère en général comme les principales variables explicatives. En plus des taux d'intérêt, ces variables comprennent des indicateurs de surchauffe, comme l'écart entre les prix réels des logements et leur tendance de long terme, ainsi que le taux de variation des prix réels des logements au cours de la période récente. L'analyse démontre qu.une hausse de 1 ou 2 points des taux d.intérêt ferait passer à 50 % ou plus la probabilité d'un retournement du marché aux États-Unis, en France, au Danemark, en Irlande, en Nouvelle-Zélande, en Espagne et en Suède.
    Keywords: financial markets, marchés financiers, house prices, prix des logements, business cycles, cycles conjoncturels
    JEL: E32 E52 F42
    Date: 2006–06–01
  44. By: Clive G. Bowsher (Nuffield College, University of Oxford); Roland Meeks (Nuffield College, University of Oxford)
    Abstract: It is a widely encountered misconception that the vector of spreads between longer-term interest rates and the short rate is stationary under the Expectations Theory (ET). By considering a complete term structure of maturities it is shown that the ET determines the conditional mean of the VAR process followed by the yield curve. We prove that under this process, the zero-coupon yield curve is I(2), immediately casting doubt on the empirical usefulness of the ET. Furthermore, the yield spreads are shown to be a non-stationary, cointegrated I(1) process. This result invalidates many existing approaches to evaluating and formally testing the ET. Finally, time series features of yield curve data simulated under the ET are compared with those of actual US Treasury zero-coupon yield curves.
    Keywords: Expectations theory, term structure, yield curve, I(2) process, I(1) process, cointegration.
    JEL: C32 C33 G12
    Date: 2006–06–08
  45. By: Christian Bayer
    Abstract: In this paper a model of aggregate investment is derived, which incorporates fixed investment costs and capital market imperfections on the micro-level. Aggregate investment reacts nonlinearly with respect to aggregate shocks to productivity and liquidity of firms. Employing nonparamatric kernel estimation methods to analyse a sample of annual account data of UK companies, these nonlinearities also show up empirically. Furthermore a difference in strength between the long- and the short-run effect of liquidity on investment is found, which is inconsistent with models that solely explain the empirical correlation of investment and liquidity as the result of some long-run relationship like liquidity-dependent costs-of-capital or principal-agent problems.
  46. By: Erica Field
    Abstract: This paper examines the influence of educational debt aversion on the career choice of law school students, including the decision to attend law school and the decision to work in public interest law. To isolate the role of debt aversion, I analyze experimental data from NYU Law School’s Innovative Financial Aid Study in which two career-contingent financial aid packages were randomly assigned to participating admits. Because the packages had equivalent monetary value and differed only in the duration of indebtedness, differences in career choices associated with financial aid assignment can be attributed to psychological debt aversion. The results indicate that debt aversion matters: In classes for which the lottery was announced prior to enrollment, participants randomly assigned to the low-debt package are nearly twice as likely to enroll. In classes without selective matriculation, lottery winners have a 36-45% higher rate of first job placement in public interest law. Both results are consistent with a simple model of debt aversion in which psychic costs of holding debt during and after school generate differences in the discounted lifetime utility of the financial aid packages and, hence, in the value of attending law school and of working in public interest law.
    JEL: I22 J24 D11 D12 H24
    Date: 2006–06
  47. By: Philippe Aghion; Diego Comin; Peter Howitt
    Abstract: Can a country grow faster by saving more? We address this question both theoretically and empirically. In our model, growth results from innovations that allow local sectors to catch up with the frontier technology. In relatively poor countries, catching up with the frontier requires the involvement of a foreign investor, who is familiar with the frontier technology, together with effort on the part of a local bank, who can directly monitor local projects to which the technology must be adapted. In such a country, local saving matters for innovation, and therefore growth, because it allows the domestic bank to cofinance projects and thus to attract foreign investment. But in countries close to the frontier, local firms are familiar with the frontier technology, and therefore do not need to attract foreign investment to undertake an innovation project, so local saving does not matter for growth. In our empirical exploration we show that lagged savings is significantly associated with productivity growth for poor but not for rich countries. This effect operates entirely through TFP rather than through capital accumulation. Further, we show that savings is significantly associated with higher levels of FDI inflows and equipment imports and that the effect that these have on growth is significantly larger for poor countries than rich.
    JEL: E2 O2 O3
    Date: 2006–06
  48. By: Bernd Hayo (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: This paper analyses whether interest rate paths in the EMU member countries would have been different if the previous national central banks had not handed over monetary policy to the ECB. Using estimates of monetary policy reaction functions over the last 20 years before the formation of EMU, we derive long-run rules the relate interest rate setting to the expected one-year ahead inflation rate and the current output gap. These Taylor rules allow to derive long-run target rates which are employed in the simulation of counterfactual interest rate paths over the time period January 1999 to December 2004 and then compared to actual short-term interest rates in the euro area. It is found that for almost all EMU member countries euro area interest rates tend to be below the national target interest rates, even after explicitly accounting for a lower real interest rate in the EMU period, with Germany being the only exception.
    Keywords: Taylor rule, monetary policy, ECB, European Monetary Union
    JEL: E5
    Date: 2006
  49. By: Hazel Jean Malapit; Jade Eric Redoblado; Deanna Margarett Cabungcal-Dolor; Jasmin Suministrado
    Abstract: The ability of households to insure consumption from adverse shocks is an important aspect of vulnerability to poverty. How is consumption insurance achieved in a low-income setting where formal credit and insurance markets have been observed to be imperfect or missing? Using 2003 data from the Philippine province of Bukidnon, we investigate how labor supply is used to buffer transitory income shocks, in light of credit constraints. We find that the most vulnerable households are those with little education and with few or no able-bodied male members. Appropriate policy responses include counter-cyclical workfare programs targeted to households with high female-to-male ratios, households with high dependency ratios, and households with little or no education, as well as the provision of universal education and health care. These programs are likely to be effective in strengthening the labor endowments of households and improving their ability to cope with adverse shocks in the future.
    Keywords: Labor supply, credit constraints, consumption smoothing, coping strategies, idiosyncratic shocks, Philippines
    JEL: J22 J43
    Date: 2006
  50. By: Emilia Penkova
    Abstract: The paper tests for potential pricing-to-market for a wide range of export industries in selected transition economies, namely Poland, Hungary and Bulgaria, at the four-digit level over the period 1990-1998. Panel estimation is undertaken and a fixed-effects linear model is estimated. The empirical evidence reported here offers new evidence for transition economies that have not been investigated before. Given the industries sampled, more price discrimination across destination is observed in Bulgaria than in Poland and Hungary. There is no evidence showing pricing-to-market in relation to common industries across source countries.
  51. By: Ole E. Barndorff-Nielsen (University of Aarhus); Peter Reinhard Hansen (Stanford University); Asger Lunde (Aarhus School of Business); Neil Shephard (Nuffield College, University of Oxford)
    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.
    JEL: C13 C22
    Date: 2006–05–31
  52. By: Casper G. de Vries; Mandira Sarma; Bjørn N. Jorgensen; Jean-Pierre Zigrand; Jon Danielsson
    Abstract: In this paper we compare overall as well as downside risk measures with respect to the criteria of first and second order stochastic dominance. While the downside risk measures, with the exception of tail conditional expectation, are consistent with first order stochastic dominance, overall risk measures are not, even if we restrict ourselves to two-parameter distributions. Most common risk measures preserve consistent preference orderings between prospects under the second order stochastic dominance rule, although for some of the downside risk measures such consistency holds deep enough in the tail only. Infact, the partial order induced by many risk measures is equivalent to sosd. Tail conditional expectation is not consistent with respect to second order stochastic dominance. In this paper we compare overall as well as downside risk measures with respect to the criteria of first and second order stochastic dominance. While the downside risk measures, with the exception of tail conditional expectation, are consistent with first order stochastic dominance, overall risk measures are not, even if we restrict ourselves to two-parameter distributions. Most common risk measures preserve consistent preference orderings between prospects under the second order stochastic dominance rule, although for some of the downside risk measures such consistency holds deep enough in the tail only. Infact, the partial order induced by many risk measures is equivalent to sosd. Tail conditional expectation is not consistent with respect to second order stochastic dominance.KEY WORDS: stochastic dominance, risk measures, preference ordering,utility theoryJEL Classification: D81, G00, G11
    Date: 2006–05
  53. By: Roger Gordon; Martin Dietz
    Abstract: How do dividend taxes affect firm behavior and what are their distributional and efficiency effects? To answer these questions, the first problem is coming up with an explanation for why firms pay dividends, in spite of their tax penalty. This paper surveys three different models for why firms pay dividends, and then uses each model to examine the behavioral and efficiency effects of dividend taxes. The three models examined are: the “new view,” an agency cost explanation, and a signaling model. While all three models forecast dividends, their forecasts regarding other firm behavior, and their forecasts for the efficiency and distributional effects of a dividend tax, often differ. Given the evidence to date, we find the agency model is the one most consistent with the data.
    JEL: H25 G35
    Date: 2006–06

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