nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒07‒02
78 papers chosen by
Carolina Valiente
London South Bank University

  1. Domestic Bank Regulation and Financial Crises: Theory and Empirical Evidence from East Asia By Robert Dekle; Kenneth Kletzer
  2. Price Volatility and Financial Instability By H. L. Leon; DeLisle Worrell
  3. Foreign Exchange Risk Premium Determinants: Case of Armenia By Tigran Poghosyan; Evzen Kocenda;
  4. Financial Reforms in Sudan: Streamlining Bank Intermediation By Alexei Kireyev
  5. The Equilibrium Distributions of Value for Risky Stocks and Bonds By Ron Johannes
  6. The Monetary Transmission Mechanism in Jordan By Tushar Poddar; Hasmik Khachatryan; Randa Sab
  7. Financial System Standards and Financial Stability: The Case of Basel Core Principles By David Marston
  8. How Do Countries Choose Their Exchange Rate Regime? By Hélène Poirson
  9. Financial Implications of the Shrinking Supply of U.S. Treasury Securities By Charles Frederick Kramer; Garry J. Schinasi; T. Todd Smith
  10. Monetary Implications of Cross-Border Derivatives for Emerging Economies By Armando Méndez Morales
  11. Controlled Capital Account Liberalization: A Proposal By Raghuram Rajan; Eswar Prasad
  12. Deterring Abuse of the Financial System: Elements of an Emerging International Integrity Standard By John M Abbott; R. B. Johnston
  13. Securities Transaction Taxes and Financial Markets By Karl Friedrich Habermeier; Andrei Kirilenko
  14. Currency Crises and The Real Economy: The Role of Banks By Piti Disyatat
  15. Pricing the Weather Derivatives in Presence of Long Memory in Temperatures By Helene Hamisultane
  16. Banking Spreads in Latin America By Gaston R. Gelos
  17. Bank Size and Lending Relationships in Japan By Hirofumi Uchida; Gregory F. Udell; Wako Watanabe
  18. Measures to Limit the Offshore Use of Currencies: Pros and Cons By Li Cui; Inci Ötker; Shogo Ishii
  19. Malaysian Capital Controls: Macroeconomics and Institutions By Simon Johnson; Todd Mitton; Kalpana Kochhar; Natalia T. Tamirisa
  20. Euro-Area Banking at the Crossroads By Agnes Belaisch; Laura E. Kodres; Joaquim Vieira Ferreira Levy; Angel J. Ubide
  21. The International Monetary Fund's Balance-Sheet and Credit Risk By Ryan Felushko; Eric Santor
  22. Cultura Financeira dos Investidores e Diversificação das Carteiras By Victor Mendes; Margarida Abreu
  23. Financial Deregulation and Economic Growth in the Czech Republic, Hungary and Poland By Patricia McGrath; ;
  24. Is Online Trading Gambling with Peanuts? By Anderson, Anders
  25. Extracting Information from the Market to Price the Weather Derivatives By Helene Hamisultane
  27. Distribution margins, imported inputs, and the insensitivity of the CPI to exchange rates By Goldberg, Linda S.; Campa, Jose M.
  28. Forecasting ECB Monetary Policy: Accuracy Is (Still) a Matter of Geography By Helge Berger; Michael Ehrmann; Marcel Fratzscher
  29. A First Cut Estimate of the Equity Risk Premium in India By Varma Jayanth R; Barua Samir K
  30. Vanishing Contagion? By Sergio L. Schmukler; Tatiana Didier; Paolo Mauro
  31. Microfinance Games By Dean Karlan; Xavier Gine; Jonathan Morduch; Pamela Jakiela
  32. Implications of ERM2 for Poland’s Monetary Policy By Lucjan Orlowski; Kryzstof Rybinski;
  33. "THE FALLACY OF THE REVISED BRETTON WOODS HYPOTHESIS: Why TodayÕs International Financial System Is Unsustainable" By Thomas I. Palley
  34. The Microfinance Collateralized Debt Obligation: a Modern Robin Hood? By Byström, Hans
  35. The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans By Olivia S. Mitchell; Gary R. Mottola; Stephen P. Utkus; Takeshi Yamaguchi
  36. Financial Sustainability and Reform Options for the Albanian Pension Fund By Volker Treichel
  37. The Influence of Information Costs on the Integration of Financial Markets: Northern Europe, 1350-1560 By Oliver Volckart
  38. Interest Rate Pass-Through In the Common Monetary Area of the SACU Countries By Sander Harald; Kleimeier Stefanie
  39. Indonesia: Anatomy of a Banking Crisis By Barbara E. Baldwin; Charles Enoch; Olivier Frécaut; Arto Kovanen
  40. On the Pricing of Step-Up Bonds in the European Telecom Sector By Lando, David; Mortensen, Allan
  41. To Peg or Not to Peg: A Template for Assessing the Nobler By Aasim M. Husain
  42. The owner-occupiers’ capital structure during a house price boom By Lunde, Jens
  43. Original Sin - Analysing Its Mechanics and a proposed Remedy in a Simple Macroeconomic Model By Axel Lindner
  44. Considerations in the Choice of the Appropriate Discount Rate for Evaluating Sovereign Debt Restructurings By Julie Kozack
  45. How do mergers and acquisitions affect bondholders in Europe? : evidence on the impact and spillover of governance and legal standards By Renneboog,Luc; Szilagyi,Peter G.
  46. Economic Integration and the Exchange Rate Regime: Some Lessons from Canada By Vivek B. Arora; Olivier Jeanne
  47. The effect of monetary policy on asset prices: evidence from Germany and UK By Elena Corallo
  48. Business Groups in Emerging Markets - Financial Control and Sequential Investment By Christa Hainz
  49. Dynamic asset allocation and latent variables By Sørensen, Carsten; Trolle, Anders Bjerre
  50. The Measurement of Co-Circulation of Currencies and Dollarization in the Republic of Armenia By Hakob Zoryan
  51. Private Equity Waves By Han Smit; Ward A. van den Berg
  52. Euro Stoxx 50: 1997-2005. Shareholder value creation in Europe By Fernandez, Pablo; Carabias, Jose M.; Aznarez, Julio; Carbonell, Oscar E.
  53. Banking Reform in the Lower Mekong Countries By Olaf Unteroberdoerster
  54. A two-part fractional regression model for the capital structure decisions of micro, small, medium and large firms By Joaquim J.S. Ramalho; Jacinto Vidigal da Silva
  55. Un modelo de riesgo de crédito basado en opciones compuestas con barrera. Aplicación al mercado continúo español. By Carmen Badía, Merche Galisteo and Teresa Preixens
  57. Common Factors in Latin America's Business Cycles By Marco Aiolfi; Allan Timmermann; Luis Catão
  58. The evolution of competition in banking in a transition economy: an application of the Panzar-Rosse model to Armenia By Armenuhi Mkrtchyan
  59. Energy Options in an HJM Framework By Hansen, Thomas Lyse; Jensen, Bjarne Astrup
  60. Fiscal Policy and Welfare under Different Exchange Rate Regimes By Østrup, Finn
  61. PPP and the Balassa Samuelson Effect: The Role of the Distribution Sector By Luca Antonio Ricci; Ronald MacDonald
  62. Notes on the Suboptimality Result by J. D. Geanakoplos and H. M. Polemarchakis (1986) By Antonio Jimenez-Martinez
  63. When is FDI a Capital Flow? By Marin, Dalia; Schnitzer, Monika
  64. 102 errores en valoraciones de empresas By Fernandez, Pablo
  65. Gouvernance et investissement des fonds de pension privés aux Etats-Unis By Anne Lavigne
  66. Convergence and shocks in the road to EU: Empirical investigations for Bulgaria and Romania By Jean-Marc Figuet; Nikolay Nenovsky;
  67. Creación de valor para los accionistas de Telefónica By Fernandez, Pablo; Carabias, Jose M.
  68. Those Current Account Imbalances: A Sceptical View By W. Max Corden
  69. Latent Utility Shocks in a Structural Empirical Asset Pricing Model By Christensen, Bent Jesper; Raahauge, Peter
  70. Primary Surpluses and sustainable Debt Levels in Emerging Market Countries By Abdul Abiad; Jonathan David Ostry
  71. Probabilistic Business Failure Prediction in Discounted Cash Flow Bond and Equity Valuation By Skogsvik, Kenth
  73. Inflation Targeting in the Context of IMF-Supported Adjustment Programs By Pau Rabanal; Mario I. Bléjer; Alfredo Mario Leone; Gerd Schwartz
  74. Taxable Cash Dividends By Bechman, Ken L.; Raaballe, Johannes
  75. Debt, Deficits, and Destabilizing Monetary Policy in Open Economies By Andreas Schabert; Sweder van Wijnbergen
  76. The correct value of tax shields: An analysis of 23 theories By Fernandez, Pablo
  77. Inefficiency of equilibria in query auctions with continuous valuations By Grigorieva Elena; Herings P. Jean-Jacques; Müller Rudolf; Vermeulen Dries
  78. Subnational fiscal sustainability analysis : what can we learn from Tamil Nadu ? By Nagarajan, Mohan; Liu, Lili; Ianchovichina, Elena

  1. By: Robert Dekle; Kenneth Kletzer
    Abstract: A model of the domestic financial intermediation of foreign capital inflows based on agency costs is developed for studying financial crises in emerging markets. In equilibrium, the banking system becomes progressively more fragile under imperfect prudential regulation and public sector loan guarantees until a crisis occurs with a sudden reversal of capital flows. The crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of loans after idiosyncratic firm-specific revenue shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, corporate debt and equity values in an endogenous growth model. The model's assumptions and implications for the behavior of the economy before and after crisis are compared to the experience of five East Asian economies. The case studies compare three that suffered a crisis or near-crisis, Thailand and Malaysia, to two that did not, Taiwan Province of China and Singapore, and lend support to the model.
    Keywords: Bank regulations , Asia , Financial crisis , Exchange rate regimes , Capital inflows , Economic models ,
  2. By: H. L. Leon; DeLisle Worrell
    Abstract: Statistical measures of the volatility of exchange rates, interest rates, and stock prices are estimated for a number of countries. Periods of high volatility are identified and compared with periods of financial difficulty. The results indicate that GARCH models of volatility could be potentially useful in assessing financial soundness. Daily data are more revealing, but monthly series allow comparisons among many countries. Country specific models may be needed for more reliable inference.
    Keywords: Exchange rates , Stock markets , Exchange rate instability , Price stabilization , Economic models ,
  3. By: Tigran Poghosyan; Evzen Kocenda;
    Abstract: This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a single country context. The analysis is performed using weekly data on foreign and domestic currency deposits in Armenian banking system. The paper provides the results of the simple tests of uncovered interest parity condition, which indicate that contrary to established view dominating in empirical literature there is a positive correspondence between exchange rate depreciation and interest rate differentials in Armenian deposit market. Furthermore, the paper presents and discusses a systematic positive risk premium required by the economic agents for foreign exchange transactions, which increases over the investment horizon. The two currency affine term structure framework is applied to identify the factors driving the systematic exchange rate risk premium in Armenia. At the end, possible directions for further research are outlined.
    Keywords: “forward discount” puzzle, exchange rate risk, affine term structure models, foreign and domestic deposits, transition and emerging markets, Armenia
    JEL: E43 E58 F31 G15 O16 P20
    Date: 2006–02–01
  4. By: Alexei Kireyev
    Abstract: The paper reviews the experience of financial reforms in Sudan with a view to assessing their macroeconomic impact and to shedding light on the question why such reforms have not yet brought about visible improvements in financial intermediation. The paper concludes that regardless of the progress achieved in recent years, deficiencies in the reform design, institutional weaknesses, shallow financial markets, shortcomings of the Islamic mode of finance, and strong seasonality remain key factors that constrain financial intermediation. Additional efforts, in particular in bank restructuring, credit instrument design, monetary policy management, and prudential regulation are needed to address the systemic problems of the financial sector and to make it capable of supporting private sector growth.
    Keywords: Bank reforms , Sudan , Financial systems , Islamic banking , Bank supervision , Monetary policy ,
  5. By: Ron Johannes
    Abstract: Within a unified theory for stocks and corporate bonds, based on dynamic optimization by investors, this paper derives analytical expressions for the momentary distributions of expected price, respectively known to approximate lognormal with systematic deviations (high peak, fat tail) and double exponential (for credit risk). Market equilibrium is regarded as a dynamic equilibrium characterized by a time-invariant probability distribution over microfinancial states, marginal redistributions of portfolios are regarded as indistinguishable, and real and fiat assets are regarded as essentially distinct. The formalism provides a basis for decomposing value changes by market fundamentals, investor sentiment, and investor acquisition of securities.
    Keywords: Financial assets , Investment , Stock markets , Bond markets , Economic models ,
  6. By: Tushar Poddar; Hasmik Khachatryan; Randa Sab
    Abstract: This paper examines monetary transmission in Jordan using the vector autoregressive approach. We find that the real 3-month CD rate, the Central Bank's operating target, affects bank retail rates and that monetary policy, measured by the spread between the 3-month CD rate and the U.S. Federal Funds rate, is effective in influencing foreign reserves. We do not find evidence of monetary policy affecting output. Output responds very little to changes in bank lending rates. Furthermore, equity prices and the exchange rate are not significant channels for transmitting monetary policy to economic activity. The effect of monetary policy on the stock market seems insignificant.
    Keywords: Monetary policy , Jordan , Bank rates , Foreign exchange reserves , Stock markets , Exchange rates , Economic models ,
    Date: 2006–03–02
  7. By: David Marston
    Abstract: The relationship between the observance of financial system standards and financial stability is complex owing to the multitude of macroeconomic and structural factors affecting stability. Therefore, assessments of standards in terms of technical criteria for compliance needs to be reinforced with additional information on other factors affecting risks in order to assess financial stability. Preliminary evidence from country data on observance of Basel Core Principles (BCPs) suggests that indicators of credit risk and bank soundness are primarily influenced by macroeconomic and macroprudential factors and that the direct influence of compliance with Basel Core Principles on credit risk and soundness is insignificant. BCP compliance could, however, influence risk and soundness indirectly through its influence on the impact of other macro variables.
    Keywords: Financial systems , Bank supervision ,
  8. By: Hélène Poirson
    Abstract: This paper investigates the determinants of exchange rate regime choice in 93 countries during 1990-98. Cross-country analysis of variations in international reserves and nominal exchange rates shows that (i) truly fixed pegs and independent floats differ significantly from other regimes and (ii) significant discrepancies exist between de jure and de facto flexibility. Regression results highlight the influence of political factors (political instability and government temptation to inflate), adequacy of reserves, dollarization (currency substitution), exchange rate risk exposure, and some traditional optimal currency area criteria, in particular capital mobility, on exchange rate regime selection.
    Keywords: Exchange rate regimes , Developing countries , Dollarization , Monetary unions ,
  9. By: Charles Frederick Kramer; Garry J. Schinasi; T. Todd Smith
    Abstract: Recent improvements in fiscal positions in advanced countries have sharply curtailed the issuance of government securities and created the possibility that government securities could disappear in some countries. The possibility that this might occur in the United States has attracted the most attention, in large part because of the international role of the U.S. dollar and the widespread perception that U.S. treasury securities have the lowest total financial risk (the combination of credit, market, and liquidity risks) among U.S. dollar assets. This paper analyzes the unique features of government securities and links them to the important roles that government securities, in particular U.S. treasury securities, have come to play in national and international financial markets. The paper then identifies and examines financial market-oriented public policy questions raised by the shrinking supply of U.S. treasuries.
    Keywords: Capital markets , United States , Public debt ,
  10. By: Armando Méndez Morales
    Abstract: This paper surveys concepts, practices and analytical literature to assess benefits and risks for monetary stability of cross-border currency and interest rate derivative operations in calm and turbulent periods, with a view of extracting implications for emerging economies. Monetary authorities must prevent one-sided positions in the currency, favor asset substitutability, and incorporate the enriched information set provided by derivative-based transactions into monetary policy design. In some circumstances, the use of derivatives by monetary authorities may help fulfill this role. By contrast, surcharges to compensate for a downward impact of derivatives on the cost of capital appear neither advisable nor necessary.
    Keywords: Financial systems , Currencies , Spot exchange rates , Foreign exchange , Economic models ,
  11. By: Raghuram Rajan; Eswar Prasad
    Abstract: In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms.
    Keywords: Capital account liberalization , Capital controls , Capital inflows , Reserves ,
    Date: 2005–11–02
  12. By: John M Abbott; R. B. Johnston
    Abstract: Assessing financial systems' stability has required the IMF to dig deeper into financial sector issues and to include financial integrity elements in its assessments. Integrity elements are increasingly being addressed by international standards. More progress is needed, however, to prepare a comprehensive framework to prevent the abuse of the financial systems by both outsiders and insiders.
    Keywords: Financial systems , Financial crisis , Emerging markets , International Capital markets , Anti-money laundering , Combating the financing of terrorism , Standards and codes ,
    Date: 2005–03–30
  13. By: Karl Friedrich Habermeier; Andrei Kirilenko
    Abstract: This paper argues that securities transaction taxes "throw sand" not in the wheels, but into the engine of financial markets where the transformation of latent demands into realized transactions takes place. The paper considers the impact of transaction taxes on financial markets in the context of four questions. How important is trading? What causes price volatility? How are prices formed? How valuable is the volume of transactions? The paper concludes that transaction taxes or such equivalents as capital controls can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets.
    Keywords: Taxes , Bonds , Capital markets , Capital controls ,
  14. By: Piti Disyatat
    Abstract: This paper shows that the quality of banks within each country is one of the important factors that can account for the fact that developing economies tend to suffer more severe output contractions in the wake of a currency crisis than more mature economies. In particular, countries with a banking sector whose balance sheets are healthy, in terms of having high net worth and low foreign currency exposure, are much less likely to suffer a contraction in the wake of an unexpected depreciation.
    Keywords: Financial crisis , Banks , Financial sector , External debt , Economic models ,
  15. By: Helene Hamisultane (EconomiX, University of 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
    JEL: G13 C63 C51
    Date: 2006–04
  16. By: Gaston R. Gelos
    Abstract: Intermediation spreads in Latin America are high by international standards. This paper examines the determinants of bank interest margins in that region using bank and country-level data from 85 countries, including 14 Latin American economies. The results suggest that Latin America has higher interest rates, less efficient banks, and larger reserve requirements than other regions and that these factors have a significant impact on spreads. However, Latin American countries do not differ markedly from their peers in other aspects that are found important in determining the cost of financial intermediation, such as inflation and bank profit taxation.
    Keywords: Bank rates , Latin America , Financial intermediation , Interest rates , Inflation , Taxation ,
    Date: 2006–02–28
  17. By: Hirofumi Uchida; Gregory F. Udell; Wako Watanabe
    Abstract: Current theoretical and empirical research suggests that small banks have a comparative advantage in processing soft information and delivering relationship lending. The most comprehensive analysis of this view found using U.S. data that smaller SMEs borrow from smaller banks and smaller banks have stronger relationships with their borrowers (Berger, Miller, Petersen, Rajan, and Stein 2005) (BMPRS). We employ essentially the same methodology as BMPRS on a unique Japanese data set but our findings are different in interesting ways. Like BMPRS we find that more opaque firms are more likely to borrow from small banks. Unlike BMPRS, however, our methodology allows us to attribute this to the ability of large banks to deliver financial statement lending. Finally, quite unlike BMPRS we do not, on balance, find that small banks have stronger relationships with their SMEs. We offer some speculation on potential explanations for these differences. One possibility is that the credit culture and deployment of SME lending technologies differ in Japan from the U.S. However, we note that strong conclusions cannot be reached without more research.
    Date: 2006–06
  18. By: Li Cui; Inci Ötker; Shogo Ishii
    Abstract: Several Asian emerging market economies have recently adopted measures to limit the offshore trading of their currencies. This paper provides a general overview of such measures and evaluates the experiences of selected countries that resorted to such measures. It concludes that the measures could be effective if they were comprehensive and effectively enforced, and were accompanied by consistent macroeconomic policies and structural reforms. Such measures, however, could adversely affect investor confidence, financial market development, and nonspeculative economic and financial activities, and impose administrative burden on all parties involved.
    Keywords: Offshore financial centers , Currencies , Exchange restrictions , Capital controls ,
  19. By: Simon Johnson; Todd Mitton; Kalpana Kochhar; Natalia T. Tamirisa
    Abstract: We analyze the capital controls imposed in Malaysia in September 1998. In macroeconomic terms, these controls neither yielded major benefits nor were costly. At the same time, the stock market interpreted the capital controls (and associated events) as favoring firms with stronger political connections, and some connected firms reportedly received advantages immediately following the crisis. Analysis of financial accounts indicates that connected firms outperformed unconnected firms before the 1997-98 crisis but not afterward. After the crisis, connected firms were either not supported as much as the market had expected or the benefits they received were not manifest in their published accounts.
    Keywords: Capital controls , Malaysia , Financial crisis , Political economy , Stock markets ,
    Date: 2006–03–07
  20. By: Agnes Belaisch; Laura E. Kodres; Joaquim Vieira Ferreira Levy; Angel J. Ubide
    Abstract: This paper analyses the process of disintermediation, the progress in consolidation, the impact of new technologies, and the role of ownership and control structures for the euro area banking sector. The impact of these trends on competition policy, "too big to fail" concerns, and financial stability is investigated. In this setting, the paper endorses stronger cross-border coordination among supervisory authorities but notes that more formal cross-border arrangements through supranational agencies seem, at this stage, premature. However, an increased capacity to perform centralized market surveillance, building on domestic supervisory information, is needed to ensure the efficiency and stability of euro-area financial markets.
    Keywords: Euro area , Banking ,
  21. By: Ryan Felushko; Eric Santor
    Abstract: The authors examine the characteristics of International Monetary Fund (IMF) lending from the 1960s to 2005. They find that there has been an increase in portfolio concentration, that lending terms have effectively lengthened, and that the proportion of total lending that occurs due to exceptional access has risen dramatically. Moreover, the typical IMF borrower represents a greater risk burden than in previous periods. The authors estimate a model of expected credit loss for the IMF's portfolio and find that the credit risk being borne on the IMF's balance sheet is rising over time. This increase in the risk burden is supported by the use of alternative measures of balance-sheet risk: both the Basel II capital requirement approach and the market-based interest rate approach produce similar results.
    Keywords: International topics
    JEL: F3
    Date: 2006
  22. By: Victor Mendes; Margarida Abreu
    Abstract: This paper studies the factors that determine the financial literacy level of the Portuguese individual investors and explores the relation between financial literacy and financial behavior, particularly portfolio diversification. Our results suggest that the average financial literacy level of Portuguese individual investors is low: two in three investors reveal an insufficient level of financial knowledge. We also find that the investor with a high literacy level is a married man, about 44 years old, living in the coast or in the Oporto region, and is an independent worker. Moreover, our results show that the level of financial literacy has a strong impact on portfolio diversification behavior, in different ways. In fact, academic degree, specific financial culture, and information sources are relevant variables for the explanation of individual financial decisions.
    Keywords: Financial Literacy; Portfolio Diversification; Financial Behavior; Portugal.
    JEL: G11 G14
  23. By: Patricia McGrath; ;
    Abstract: Advocates of financial regulation, Arestis and Demetriades, argue that financial liberalisation does not impact on financial market efficiency and the allocation of investment. Results in this study find that Czech, Hungarian and Polish firms are subject to scrutiny when applying for credit. The firm’s ability to provide collateral, the potential of the proposed investment project and individual financial backgrounds are all factors that are used before loans are offered, and it likely that allocational efficiency is strengthened in these circumstances, and not weakened. Stiglitz has the view that financial repression improves the quality of the pool of loans. Results here indicate that companies in these countries previously had very limited access to credit while government owned companies and government projects received the bulk of credit. After deregulation it became apparent that the quality of the pool of loans was very poor. This study supports Shaw’s assertion that financial deregulation improves financial deepening.
    Keywords: Transition Economies, Industrial Development, Financial Deregulation, Economic Growth, Eastern Europe
    JEL: G G2 G21
    Date: 2005–11–01
  24. By: Anderson, Anders (Sonderforschungsbereich 504)
    Abstract: Previous studies of investor behavior have documented that trading is harmful to the portfolio return, but have been unable to measure how important this underperformance is for the individual. By the use of detailed individual financial data, as well as trades from a Swedish online broker, I measure the cost of online trading. It is found that the more important the portfolio is, measured as the fraction of the investor's portfolio of total financial assets, the higher is turnover. In addition, financially important portfolios have slightly lower trading performance. The overall result suggest that the cost of online trading can be substantial. The top quintile of investors who have the highest share of their total financial assets in stocks invested at the brokerage firm under study loose 3.34% of financial wealth annually, which corresponds to 1.87% of aggregate income within this group. These investors do not only have lower overall wealth and income, but also have the highest aggregate trading losses. Therefore, trading losses are mainly carried by those who can afford them the least. Across individuals, annual losses for 36% of investors exceed 1% of their financial wealth, and 17% lose more than 5%.
    Date: 2005–09–27
  25. By: Helene Hamisultane (EconomiX, University of 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 prices. 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 market, mean-reverting jump diffusion process, EGARCH process, PIDE, inversion problem
    JEL: G13 C63 C51
    Date: 2005–12
  26. By: Valentina Hartarska; Steven B. Caudill; Daniel M. Gropper
    Abstract: Microfinance institutions are important, particularly in developing countries, because they expand the frontier of financial intermediation by providing loans to those traditionally excluded from formal financial markets. This paper presents the first systematic statistical examination of the performance of MFIs operating in Eastern Europe and Central Asia. A cost function is estimated for MFIs in the region from 1999-2004. First, the presence of subsidies is found to be associated with higher MFI costs. When output is measured as the number of loans made, we find that MFIs become more efficient over time and that MFIs involved in the provision of group loans and loans to women have lower costs. However, when output is measured as volume of loans rather than their number, this last finding is reversed. This may be due to the fact that such loans are smaller in size; thus for a given volume more loans must be made.
    Keywords: Eastern Europe, banking, microfinance, efficiency
    JEL: G20 G21 O16
    Date: 2006–01–01
  27. By: Goldberg, Linda S. (Federal Reserve Bank of New York); Campa, Jose M. (IESE Business School)
    Abstract: Border prices of traded goods are highly sensitive to exchange rates, but the CPI and the retail prices of traded goods are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass-through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5%, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass-through into CPIs is expected to be closer to 15%.
    Keywords: Exchange rate; pass through; import prices; distribution margins;
    Date: 2006–04–03
  28. By: Helge Berger; Michael Ehrmann; Marcel Fratzscher
    Abstract: Monetary policy in the euro area is conducted within a multicountry, multicultural, and multilingual context involving multiple central banking traditions. How does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the European Central Bank (ECB)? Using a database of surveys of professional ECB policy forecasters in 24 countries, we find remarkable differences in forecast accuracy, and show that they are partly related to geography and clustering around informational hubs, as well as to country-specific economic conditions and traditions of independent central banking in the past. In large part, this heterogeneity can be traced to differences in forecasting models. While some systematic differences between analysts have been transitional and are indicative of learning, others are more persistent.
    Keywords: Monetary policy , Europe , European Central Bank , Economic forecasting , Data collection , Data analysis ,
    Date: 2006–02–17
  29. By: Varma Jayanth R; Barua Samir K
    Abstract: We estimate the equity risk premium in India using data for the last 25 years. We address the shortcomings of existing indices by constructing our own total return index for the 1980s and early 1990s. We use our estimates of the extent of financial repression during this period to construct a series of the risk free rate in India going back to the early 1980s. We find that the equity risk premium is about 8?% on a geometric mean basis and about 12?% on an arithmetic mean basis. There is no significant difference between the pre reform and post reform period: the premium has declined marginally on a geometric mean basis and has risen slightly on an arithmetic mean basis. The reason for this divergence between the sub period behaviour of the two means is the increase in the annualized standard deviation of stock market returns from less than 20% in the pre reform period to about 25% in the post reform period. The higher standard deviation depresses the geometric mean in the post reform period.
    Date: 2006–06–26
  30. By: Sergio L. Schmukler; Tatiana Didier; Paolo Mauro
    Abstract: While a number of emerging market crises were characterized by widespread contagion during the 1990s, more recent crises (notably, in Argentina) have been mostly contained within national borders. This has led some observers to wonder whether contagion might have become a feature of the past, with markets now better discriminating between countries with good and bad fundamentals. This paper argues that a prudent working assumption is that contagion has not vanished permanently. Available data do not seem to point to a disappearance of the main channels that contribute to transmitting crises across countries. Moreover, anticipation of the Argentine crisis by international investors may help explain the recent absence of contagion.
    Keywords: Financial crisis , Emerging markets ,
    Date: 2006–01–25
  31. By: Dean Karlan (Economic Growth Center, Yale University); Xavier Gine (World Bank); Jonathan Morduch (New York University); Pamela Jakiela (University of California, Berkeley)
    Abstract: Microfinance has been heralded as an effective way to address imperfections in credit markets. From a theoretical perspective, however, the success of microfinance contracts has puzzling elements. In particular, the group-based mechanisms often employed are vulnerable to free-riding and collusion, although they can also reduce moral hazard and improve selection. We created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted eleven different games that allow us to unpack microfinance mechanisms in a systematic way. We find that risk-taking broadly conforms to predicted patterns, but that behavior is safer than optimal. The results help to explain why pioneering microfinance institutions have been moving away from group-based contracts.
    Keywords: Microfinance, Group Lending, Information Asymmetries, Contract Theory, Experimental Economics
    JEL: O12 D92 D10 D21 D82 C93
  32. By: Lucjan Orlowski; Kryzstof Rybinski;
    Abstract: This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).
    Keywords: inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration, GARCH
    JEL: E58 E61 F33 P24
    Date: 2005–12–01
  33. By: Thomas I. Palley
    Abstract: The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the U.S. trade deficit and has failed to understand the microeconomics of transactions within the system. According to this brief by Thomas I. Palley, the international financial system is unsustainable for reasons of demand, not supply. He recommends a global system of managed exchange rates to replace the current system before it crashes, along with the U.S. economy. East Asian economies are pursuing export-led growth and running huge trade surpluses with the United States by actively pursuing policies aimed at maintaining undervalued exchange rates. Their governments continue to accumulate U.S. financial assets in order to support and stabilize the international financial system.While East Asian policymakers are correct in their belief that they can improve economic outcomes through exchange rate intervention, the system is undermining the structure of income and aggregate demand and eroding U.S. manufacturing capacity.
    Date: 2006–06
  34. By: Byström, Hans (Department of Economics, Lund University)
    Abstract: The aim of this paper is to highlight a potentially very fruitful link between micro-entrepreneurs and the international capital markets. We discuss the role structured finance and credit derivatives could play in extending finance to micro-entrepreneurs on a much larger scale than today’s mainly non-commercial microfinance industry. The mechanisms of so called collateralized debt obligations (CDOs) are described and extended to the microfinance world. Finally, a hypothetical, but realistic, example of such a microfinance CDO (MiCDO) is used to discuss the implications of securitization and tranching of microcredits.
    Keywords: commercial microfinance; structured finance; securitization; collateralized debt obligation; MiCDO
    JEL: G15 G21 O16 R51
    Date: 2006–06–18
  35. By: Olivia S. Mitchell (Wharton School, University of Pennsylvania); Gary R. Mottola (Vanguard Center for Retirement Research); Stephen P. Utkus (Vanguard Center for Retirement Research); Takeshi Yamaguchi (Wharton School, University of Pennsylvania)
    Abstract: Most workers in defined contribution retirement plans are inattentive portfolio managers: only a few engage in any trading at all, and only a tiny minority trades actively. Using a rich new dataset on 1.2 million workers in over 1,500 plans, we find that most 401(k) plan participants are characterized by profound inertia. Almost all participants (80%) initiate no trades, and an additional 11% makes only a single trade, in a two-year period. Even among traders, portfolio turnover rates are one-third the rate of professional money managers. Those who trade in their 401(k) plans are more affluent older men, with higher incomes and longer job tenure. They tend to use the internet for 401(k) account access, hold a larger number of investment options, and are more likely to hold active equity funds rather than index or lifecycle funds. Some plan features, including offering own-employer stock, also raise trading levels.
    Date: 2006–04
  36. By: Volker Treichel
    Abstract: This paper studies the financial sustainability of the Albanian pension fund and assesses possible options for its reform. The paper concludes that the pension fund is not sustainable in its current form and proposes for the urban scheme a combination of parametric changes to the existing pay-as-you-go system that would be conducive to broadening the contribution base and strengthening the financial performance of the pension fund. In addition, it proposes the establishment of a voluntary funded pillar in the urban scheme. For the rural scheme, the paper concludes that it should either be merged with the scheme for the urban self-employed or be replaced by a mandatory and funded second pillar. The paper also proposes administrative reforms to strengthen revenue collections.
    Keywords: Pensions , Albania , Transition economies ,
  37. By: Oliver Volckart
    Abstract: In this paper, the influence of information costs on the integration of Northern European financial markets between ca. 1350 and 1560 is explored. The approach is based on splitting information costs into their constitutive components and on measuring one of these, i.e. the costs of transmitting information, which have particular importance for market integration. The analysis has two main results: First, under pre-industrial conditions, when transmitting information was extremely labour intensive and very little capital intensive, transmission costs can be largely identified with labour costs, and were subject to the same influences. Next, the integration of financial markets depended crucially on the level of transmission costs, high costs being strongly and significantly correlated with weak integration, while lower costs favoured convergence.
    Keywords: Financial markets, integration, information costs, economic history
    JEL: E44 F31 F36 N24
    Date: 2006–05
  38. By: Sander Harald; Kleimeier Stefanie (METEOR)
    Abstract: We investigate the interest rate pass-through in the four Common Monetary Area (CMA) countries of the South African Customs Union (SACU). We employ an empirical pass-through model that allows for thresholds, asymmetric adjustment, and structural changes. We show that CMA bank lending markets exhibit quite some degree of homogenization as the pass-through is often fast and complete. Deposit markets are somewhat more heterogeneous by showing differing degrees of interest rate stickiness and asymmetric adjustment. Policy makers should therefore be concerned about imperfect competition which may be at the heart of the remaining cross-country differences in monetary transmission in the CMA.
    Keywords: monetary economics ;
    Date: 2006
  39. By: Barbara E. Baldwin; Charles Enoch; Olivier Frécaut; Arto Kovanen
    Abstract: This study looks at the first two years of the banking crisis that erupted in Indonesia in late 1997. It finds that the banking sector was weak at the outset, and that governance problems intensified the crisis and seriously delayed its resolution. Although a strategy was put in place over the initial months, protracted delays in implementation led to an explosion in the costs of resolution. By end-1999, the critical elements to reconstruct the banking system were in place, and the political transition seemed completed; but, in a continuing unsettled environment, the new authorities still faced daunting challenges. This study looks at the first two years of the banking crisis that erupted in Indonesia in late 1997. It finds that the banking sector was weak at the outset, and that governance problems intensified the crisis and seriously delayed its resolution. Although a strategy was put in place over the initial months, protracted delays in implementation led to an explosion in the costs of resolution. By end-1999, the critical elements to reconstruct the banking system were in place, and the political transition seemed completed; but, in a continuing unsettled environment, the new authorities still faced daunting challenges. This study looks at the first two years of the banking crisis that erupted in Indonesia in late 1997. It finds that the banking sector was weak at the outset, and that governance problems intensified the crisis and seriously delayed its resolution. Although a strategy was put in place over the initial months, protracted delays in implementation led to an explosion in the costs of resolution. By end-1999, the critical elements to reconstruct the banking system were in place, and the political transition seemed completed; but, in a continuing unsettled environment, the new authorities still faced daunting challenges.
    Keywords: Banking , Indonesia , Financial sector , Financial crisis , Bank supervision ,
  40. By: Lando, David (Department of Finance, Copenhagen Business School); Mortensen, Allan (Department of Finance, Copenhagen Business School)
    Abstract: This paper investigates the pricing of step-up bonds, i.e. corporate bonds with provisions stating that the coupon payments increase as the credit rating level of the issuer declines. To assess the risk-neutral rating transition probabilities necessary to price these bonds, we introduce a new calibration method within the reduced-form rating-based model of Jarrow, Lando, and Turnbull (1997). We also treat split ratings and adjust for rating outlook. Step-up bonds have been issued in large amounts in the European telecom sector, and we find that, through most of the sample, step-up bonds issued by the two largest issuers have traded at a discount relative to comparable fixed-coupon bonds from the same issuers. Our findings cannot be attributed to traditional liquidity factors, and they suggest that issuing step-up bonds increased the cost of capital for the issuers.
    Keywords: defaultable bonds; step-up coupons; rating-based models
    JEL: G12 G13
    Date: 2004–11–12
  41. By: Aasim M. Husain
    Abstract: This paper proposes a template for assessing whether or not a country's economic and financial characteristics make it an appropriate candidate for a pegged exchange rate regime. The template employs quantifiable measures of attributes-trade orientation, financial integration, economic diversification, macroeconomic stabilization, credibility, and "fear-offloating" type effects-that have been identified in the literature as key potential determinants of regime choice. To illustrate, the template is applied to Kazakhstan and Pakistan. The results indicate a fairly strong case against a pegged regime in Pakistan. The implications for Kazakhstan are mixed, although changes in that economy in recent years strengthen the case against a peg.
    Keywords: Exchange rate regimes , Pakistan , Kazakhstan ,
    Date: 2006–03–09
  42. By: Lunde, Jens (Department of Finance, Copenhagen Business School)
    Abstract: House and flat prices have been through a tremendous bust and boom cycle in Denmark. From 1986 to 1993 real prices for houses and flats dropped by one third on average, foreclosures accounted for around 1/6 of the house and flat turnovers in numbers, and in reality the market for owner-occupied houses and flats was in a crisis. Initiated by a strong interest rate drop and by an expansive finance policy, the market turned. From 1993H1 to 2004H1 real house prices increased 76% and real flat prices 128%. Moreover, Denmark has a leading position in the international household debt race and as in many other countries the fear of the consequences of a strong interest rate increase for the housing market is widespread. Therefore, in order to examine the financial stability among owner-occupiers, a sample of approx. 40,000 owner-occupier families with data at household level has been drawn from the tax statistics for each year from 1987 to 2003. Through the analysis it is shown that the distributions of the owner-occupiers’ capital structure, measured by the net liability/housing wealth ratios, have more or less been the same throughout the 16 years, even during the long-lasting steep house and flat price rise. Moreover, since 1994 the median value of the net liability/income ratio has increased by 71% for all owner-occupiers and by 54% for owner-occupiers between 30-39 years of age.Finally, one last, important aspect of the financial stability of owner-occupiers, namely, their capacity to service their debt has been analysed. The owner-occupiers’ net interest expenditures/ income ratios before tax have been nearly halved from 1987 to 2003. Most of the drop happened during the years of the “housing market failure. From 1994 on the ratios were more slightly reduced and were in 2003 at 8.8% (median value) for all owner-occupiers and 12.2% for owner-occupiers between 30-39 years of age. However, if the reductions of the tax rates for deducting interest expenditures are taken into account, the 2003 after-tax-ratios are only about 2 percentage points below the 1987 after-tax ratios. At March 2005, a new challenge facing Danish owner-occupiers is that 50% of their mortgages carry interest adjustment.
    Keywords: house prices; housing wealth; real estate wealth; housing debt; mortgage debt; personal wealth; personal finance; loan-to-value; debt-to-income; interest expenditures; interest-to-income; financial stability
    JEL: D14 E44 G21 R20 R31
    Date: 2006–05–01
  43. By: Axel Lindner
    Abstract: This paper analyses the problem of "original sin" (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) in a simple thirdgeneration model of currency crises. The approach differs from alternative frameworks by explicitly modeling the price setting behavior of firms if prices are sticky and the future exchange rate is uncertain. Monetary policy optimally trades off effects on price competitiveness and on debt burdens of firms. It is shown that the proposal by Eichengreen and Hausmann of creating an artificial basket currency as denominator of debt is attractive as a provision against contagion.
    Keywords: original sin; currency crises
    JEL: F34
    Date: 2006–06
  44. By: Julie Kozack
    Abstract: Assessments regarding the effectiveness of sovereign debt restructurings are often summarized by comparisons of the net present value of debt service before and after the restructuring. These calculations are inherently sensitive to the choice of discount rate. This paper explores issues that arise in selecting discount rates when evaluating sovereign debt restructurings. It suggests using a range of discount rates and centering the analysis around the internal rate of return to assess whether the debt restructuring has generated net present value savings or costs to the debtor.
    Keywords: Sovereign Debt Restructuring Mechanism , Discount rates ,
    Date: 2006–01–03
  45. By: Renneboog,Luc; Szilagyi,Peter G. (Tilburg University, Center for Economic Research)
    Abstract: This paper contributes to the comparative corporate governance literature by showing how cross-country differences in governance and legal standards affect the bondholder wealth effects of European merger and acquisitions (M&As). Using investment-grade Eurobonds, we find some remarkable results. Firstly, M&As involving European firms are considerably more bondholderfriendly than are US domestic deals. Bidding firm bondholders earn economically significant positive returns, while target bondholders incur positive but insignificant returns. Overall, acquisitions do generate value to European bidding firms, but most of the wealth effect is captured by the bondholders. Secondly, bondholder gains in both bidding and target firms are systematically higher in M&As that involve Continental European firms. Thirdly, bidder abnormal bond returns are lower in cross-border deals. However, this is counterbalanced if creditor rights and the efficiency of credit contract enforcement are stronger in the target country. There is also strong evidence that, consistent with crossborder spillovers, improved creditor protection redistributes wealth from shareholders to bondholders. Finally, we document that bondholder wealth changes are subject to changes in asset risk and to a negative listing effect similar to that previously reported for changes in shareholder wealth.
    Keywords: bondholder returns;Eurobonds;mergers and acquisitions;creditor rights; takeover;corporate governance;shareholders abnormal returns;M&A;insolvency
    JEL: G34 G32 G12 G14
    Date: 2006
  46. By: Vivek B. Arora; Olivier Jeanne
    Abstract: The Canadian experience with a floating exchange rate regime can shed some light on the question of whether A question of current interest in many parts of the world is whether with growing economic integration among groups of countries makes a fixed exchange rate, or even a common currency, becomes more desirable. This paper looks at the lessons that one may draw from tThe Canadian experience, with a floating exchange rate regime, especially since the inception of the 1989 U.S.-Canada Free Trade Agreement, suggests. We find that exchange rate flexibility has not prevented economic integration between Canada and the United States from increasing substantially, during the 1990s, and has played a useful role in buffering the Canadian economy against asymmetric external shocks. A fixed exchange rate thus does not seem to be a prerequisite for economic integration. It may, however, yield substantial have benefits for some countries that lack monetary credibility or that may be tempted by self-destructive beggar-thy-neighbor policies.
    Keywords: Exchange rate regimes , Canada , United States , Floating exchange rates , Trade ,
  47. By: Elena Corallo (Cattaneo University (LIUC))
    Abstract: The main objective of this paper is to focus on the effect of monetary policy on asset prices for Germany and UK. Studying this relationship is complicated because asset prices and interest rates are endogenously determined, behave simultaneously and can be affected by other variables. In order to test this relation and solve these problems we use the heteroskedasticity based approach developed by Rigobon and Sack (2004) which focuses the analysis on the shift in the variance of policy shocks that occurs on the days of the monetary authority's meetings. The assumption of a shift in the variance, which we believe to be weaker than the restrictions imposed in the traditional literature, allows to identify the effect of monetary policy on asset prices solving the endogeneity and simultaneity problem. The result we find indicate that German and UK monetary policy do not affect the stock market behaviour. Monetary policy seems to be neutral on the economy. While for Germany we have no significant effect on the exchange rate, an increase of British interest rate appreciates the sterling.
    Date: 2006–01
  48. By: Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.: +49 89 2180 3232, Fax.: +49 89 2180 2767, christa.hainz at
    Abstract: Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.
    Keywords: Business groups, self-enforcing contract, institutions, internal capital market
    JEL: G31 G32 G34 K49 L22
    Date: 2006–06
  49. By: Sørensen, Carsten (Department of Finance, Copenhagen Business School); Trolle, Anders Bjerre (Department of Finance, Copenhagen Business School)
    Abstract: We derive an explicit solution to the portfolio problem of a power utility investor with preferences for wealth at a ¯nite investment horizon. The investor can invest in assets with return dynamics described as part of a general multivariate model. The modeling framework encompasses discrete-time VAR-models where some of the state-variables (e.g. expected excess returns) may not be directly observable. A realistic multivariate model is estimated and applied to analyze the portfolio implications of investment horizon and return predictability when real interest rates and expected excess returns on stock and bonds are not directly observed but must be estimated as part of the problem faced by the investor. The solution exhibits small variability in portfolio allocations over time compared to the case when excess returns are assumed observable.
    Keywords: Portfolio choice; predictability; VAR; unobserved state-variables; hedging demands
    JEL: G11
    Date: 2006–06–26
  50. By: Hakob Zoryan
    Abstract: This paper attempts to estimate the actual (de facto) level of dollarization in Armenia. "Co-circulation" involves the regular use of two or more currencies within an economy. The existence of an unknown amount of foreign currency in circulation makes the outcome of domestic monetary policy uncertain. The volume of foreign currency deposits is easily obtained from the official statistics. However, it is very hard to determine the stock of foreign currency in circulation. The effective money supply may be much larger than the domestic money supply and is subject to behavioral responses which are very different than the movements of the presently measured money supply. The purpose of this paper is to assess the level of dollarization, that is, to evaluate the size and/or proportion of foreign currency in the total money stock of Armenia as a highly dollarized country.
    JEL: E5 E4 G21 P3 F3 P2
    Date: 2005–06–01
  51. By: Han Smit (Erasmus Universiteit Rotterdam); Ward A. van den Berg (Erasmus Universiteit Rotterdam)
    Abstract: This study presents a dynamic model for the private equity market in which information revelation and uncertainty rationally explain the cyclical pattern of investment flows into private equity. The net benefit of private equity over public equity is i) uncertain and ii) agents have private information about the benefits of their investment. When these distinguishing characteristics determine investment behavior in private equity markets, rational investment waves may arise endogenously. Investment behavior reveals private information on the benefits of private equity financing and may trigger a cascade when investors jump on the bandwagon and invest irrespective of their private information content. We argue that the procyclical behavior of private equity volumes is strengthened by the revelation of information on the benefits of private equity investments. The occurrence and length of such waves in the market for private equity depend on the capabilities of agents.
    Keywords: private equity; information economics
    JEL: G24 G34
    Date: 2006–06–09
  52. By: Fernandez, Pablo (IESE Business School); Carabias, Jose M. (IESE Business School); Aznarez, Julio (ESE, Business School); Carbonell, Oscar E. (IPADE Business School)
    Abstract: 2005 was a very good year for the shareholders of the companies in the Euro Stoxx 50. The shareholder value creation of these 50 companies was €292.9 billion. The companies that created most value for their shareholders were Total (€30 billion), Sanofi-Synthelabo (€23.2 billion) and Eni (€20.7 billion). The companies that destroyed most value were telecoms: Deutsche Telekom (€-14.8 billion), France Telecom (€-11.8 billion) and Telecom Italia (€-7.1 billion). In 2005, the Euro Stoxx 50 was slightly more volatile than the S&P 500. Shareholder value creation in the three-year period 2003-2005 was €551 billion. The market value of the 50 companies included in the Euro Stoxx 50 was €2.1 trillion in 2005, although only €1.8 trillion were included in the index. SAP was the top shareholder value creator and Deutsche Telekom the top shareholder value destroyer during the eight-year period 1997-2005. A portfolio long in the companies that entered the index and short in the companies that abandoned the index had on average a 6.85% return in the 20 days prior to the index recomposition and a 0.97% return in the 20 days after the index recomposition.
    Keywords: shareholder value creation; created shareholder value; shareholder value added; shareholder return; required return to equity;
    JEL: G12 G31 M21
    Date: 2006–04–15
  53. By: Olaf Unteroberdoerster
    Abstract: This paper reviews recent banking reform efforts in the lower Mekong countries (LMCs), comprising Cambodia, the Lao People's Democratic Republic, and Vietnam. Linked by close economic and cultural ties, the three LMCs face the dual challenge of economic development and transition to market-based economies. Two-tier banking systems were formally introduced in the late 1980s. However, state-owned banks with weak balance sheets continue to dominate the banking systems of Vietnam and Lao P.D.R. Cambodia's main challenge is to reconstruct a banking system after decades of civil strife. Based on progress made and brief cross-country comparisons, the paper identifies key challenges and options for further reform.
    Keywords: Bank reforms , Vietnam , Cambodia , Lao People's Democratic Republic , Transition economies ,
    Date: 2004–09–27
  54. By: Joaquim J.S. Ramalho (Department of Economics, University of Évora); Jacinto Vidigal da Silva (Department of Mangment, University of Évora)
    Abstract: A key theme in corporate finance has been the study of the main factors that affect the financing decisions of firms. In this paper we examine the following two hypotheses which traditional theories of capital structure are relatively silent about: (i) the determinants of capital structure are different for micro, small, medium and large firms; and (ii) the factors that determine whether or not a firm issues debt are different from those that determine how much debt it issues. Using a binary choice model to explain the probability of a firm raising debt and a fractional regression model to explain the amount issued, we find strong support for both hypotheses. Nevertheless, the pecking-order theory seems to be suitable to describe the capital structure choices made by all size-based groups of firms.
    Keywords: Corporate finance, capital structure, leverage, micro firms, SMEs, fractional data, two-part model
    JEL: C51 G32
    Date: 2006
  55. By: Carmen Badía, Merche Galisteo and Teresa Preixens (Universitat de Barcelona)
    Abstract: In this work the valuation methodology of compound option written on a downand-out call option, developed by Ericsson and Reneby (2003), has been applied to deduce a credit risk model. It is supposed that the firm has a debt structure with two maturity dates and that the credit event takes place when the assets firm value falls under a determined level called barrier. An empirical application of the model for 105 firms of Spanish continuous market is carried out. For each one of them its value in the date of analysis, the volatility and the critical value are obtained and from these, the default probability to short and long-term and the implicit probability in the two previous probabilities are deduced. The results are compared with the ones obtained from the Geske model (1977).
    Keywords: Credit risk, default probability, structural approach, compound barrier option.
    JEL: G13 G33
    Date: 2006
  56. By: BEN ALI Mohamed Sami; ;
    Abstract: Capital account liberalization and exchange rate regime choice, what scope for flexibility in Tunisia? This study evaluates within a game-theoretic framework the exchange rate regime from a welfare perspective. In a tradable-nontradable goods model framework, Tunisia’s exchange rate regime choice is cast in terms of strategic interactions between the monetary authority and domestic enterprises. The monetary authority is assumed to choose an optimal exchange rate regime according to a welfare-related criterion by minimising a loss function defined in terms of external competitiveness and domestic inflation. Simulations outcomes reveal that capital account liberalization in the Tunisian economic context is compatible with a flexible exchange rate regime.
    Keywords: Exchange rate regime, Liberalization, Convertibility, Capital Account, Welfare, Tunisia.
    JEL: F31 F32 F37 F47
    Date: 2006–03–01
  57. By: Marco Aiolfi; Allan Timmermann; Luis Catão
    Abstract: This paper constructs new business cycle indices for Argentina, Brazil, Chile, and Mexico based on common dynamic factors extracted from a comprehensive set of sectoral output, external data, and fiscal and financial variables spanning over a century. The constructed indices are used to derive a business cycle chronology for these countries and characterize a set of new stylized facts. In particular, we show that all four countries have historically displayed a striking combination of high business cycle and persistence relative to benchmark countries, and that such volatility has been time-varying, with important differences across policy regimes. We also uncover a sizeable common factor across the four economies which has greatly limited scope for regional risk sharing.
    Keywords: Business cycles , Latin America , Argentina , Brazil , Chile , Mexico , Economic models ,
    Date: 2006–03–07
  58. By: Armenuhi Mkrtchyan
    Abstract: The structure of the banking industry typically undergoes fundamental changes during the transition to a market economy. This research employs the method suggested by Panzar and Rosse (1987) to evaluate the empirical evidence on the evolution of competitive structure in the Armenian banking industry during its recent transition and on the possible forces-market power or efficiency/contestability-that underlie that evolution. The results point to monopolistic competition.The reduction of bank numbers and the simultaneous increase in concentration is accompanied by a decline in competition intensity, which supports the market-power hypothesis
    JEL: L1 L8
    Date: 2005–06–01
  59. By: Hansen, Thomas Lyse (Dong A/S); Jensen, Bjarne Astrup (Department of Finance, Copenhagen Business School)
    Abstract: It is a delicate matter to trade spot products and financial derivatives in energy markets. Op-posite to bond and stock markets, the underlying assets are real products and a significant part of the demand for them represents a real need for the products, which can only be substituted away with some difficulties or, in some cases, only in a prohibitively costly manner. This is particularly true in the spot market, where the demand is almost always met, but where the spot price processes can be quite different from the spot price processes conventionally used in the pricing of derivatives. This pattern of real demand is also the main reason for the existence of the well-known convenience yield in energy markets.
    Keywords: HJM; Framework; Energy options
    JEL: G00
    Date: 2005–01–05
  60. By: Østrup, Finn (Department of Finance, Copenhagen Business School)
    Abstract: The article analyses how government spending is determined under different exchange rate regimes in the context of a small open economy. Assuming nominal wage contracts which last for one period and assuming a benevolent government which determines government spending to optimise a representative individual’s utility, it is demonstrated that there are differences between exchange rate regimes with respect to the level of government spending. These differences arise first because a rise in government spending affects macroeconomic variables differently under different exchange rate regimes, and second because the government’s inclination to expand government spending is affected by inflation which depends on the exchange rate regime. At low rates of inflation, the government is inclined to set a higher level of government spending under a fixed exchange rate regime than under a floating exchange rate regime in which the monetary authority optimises preferences which include an employment target and an inflation target. As government spending affects the representative individual’s utility, the choice of exchange rate regime has an impact on welfare.
    Keywords: exchange rate regimes; fiscal policy; monetary union; inflation targeting
    JEL: E42 E61 E62 F33
    Date: 2005–05–19
  61. By: Luca Antonio Ricci; Ronald MacDonald
    Abstract: This paper investigates the impact of the distribution sector on the real exchange rate, controlling for the Balassa-Samuelson effect, as well as other macro variables. Long-run coefficients are estimated using a panel dynamic OLS estimator. The main result is that an increase in the productivity and competitiveness of the distribution sector with respect to foreign countries leads to an appreciation of the real exchange rate, similarly to what a relative increase in the domestic productivity of tradables does. This contrasts with the result that one would expect by considering the distribution sector as belonging to the non-tradable sector. One explanation may lie in the use of the services from the distribution sector in the tradable sector. Our results also contribute to explaining the so-called PPP puzzle.
    Keywords: Purchasing power parity , Exchange rates , Trade , Prices , Economic models ,
  62. By: Antonio Jimenez-Martinez (School of Economics, Universidad de Guanajuato)
    Abstract: J. D. Geanakoplos and H. M. Polemarchakis (1986) prove the generic constrained suboptimality of equilibrium allocations in two period economies with incomplete markets. In these notes we provide a complete and detailed version of their proof.
    Keywords: Incomplete Asset Markets, Constrained Suboptimality, Genericity, Transversality Theory
    JEL: A23 C60 D52 D60
  63. By: Marin, Dalia; Schnitzer, Monika
    Abstract: In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe.
    Keywords: Multinational firms; Firm specific capital costs; Internal capital markets; international capital flows
    JEL: F23 F21 G32 L20 D23
    Date: 2006–06
  64. By: Fernandez, Pablo (IESE Business School)
    Abstract: Este documento de investigación es una recolección de 102 errores cometidos en distintas valoraciones de empresas. La mayor parte de las valoraciones que aparecen referidas en el documento proceden de valoraciones a las que el autor ha tenido acceso al colaborar en procesos de compra venta de empresas, en arbitrajes y en procesos judiciales. Todos los nombres de personas, empresas y ciudades se han modificado. El siguiente refrán aclara la intención con la que el autor escribió estas páginas: "Cuando veas a un sabio echar un borrón, cuida tú de no echar dos". Los errores se clasifican en seis categorías: 1) errores acerca de la tasa de descuento y del riesgo de la empresa; 2) errores al calcular o prever los flujos esperados; 3) errores al calcular el valor terminal; 4) inconsistencias y errores conceptuales; 5) errores al interpretar la valoración, y 6) errores de organización. El Anexo 1 contiene la lista de los errores.
    Keywords: valoraciones de empresas; errores al calcular el valor terminal; nconsistencias y errores conceptuales;
    Date: 2006–05–25
  65. By: Anne Lavigne (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: Les fonds de pension américains suscitent en France une crainte souvent irrationnelle. Perçus comme les emblèmes du capitalisme inhumain et sans visage, on leur prête une puissance économique et financière, au mieux déstabilisante, au pire destructrice. L'objectif principal de cette contribution est d'éclairer un lectorat francophone sur les grands traits de la gouvernance des fonds de pension privés aux Etats-Unis, et l'incidence de cette gouvernance sur leurs comportements financiers et leurs performances. Dans un premier temps, on dresse un panorama des relations d'agence au sein des fonds de pension, en insistant sur les différences entre fonds à cotisations et prestations définies. Dans un second temps, on présente les implications de ces schémas de gouvernance pour la politique d'investissement des fonds de pension, en soulignant les différences d'exposition au risque financier des fonds à cotisations et prestations définies.
    Keywords: Fonds de pension, gouvernance, Etats-Unis
    Date: 2006–06–23
  66. By: Jean-Marc Figuet; Nikolay Nenovsky;
    Abstract: Despite their progress Bulgaria and Romania significantly differ from the EU economies. In this article, on the basis of the theoretical and empirical achievements of the theory of optimal and (endogenous) currency areas we study to what extent the two South European economies are able to adopt the common economic (and above all monetary) policy of the EU, and to what extent the convergence to the EU stimulates the economic development of these countries. Despite the similarities, the two countries now differ fundamentally in their choice of a monetary regime – while Romania uses inflation targeting and a flexible exchange rate, Bulgaria has adopted a currency board regime. For this purpose we analyze: (i) the degree of nominal, real and financial convergence and synchronization of the economic cycle with that of the European Union (using unconditional ß convergence approach). Income and price levels, inflation rate, interest rate, monetary aggregates, credit, productivity etc. are among the studied variables; (ii) the resistance to different external and internal shocks (using VAR model) as well as (iii) the mechanisms for balancing and absorption of these shocks. To give a better comparative picture we compose the panel including Hungary and Czech Republic.
    Keywords: convergence, shocks, EU enlargement, Bulgaria and Romania
    JEL: E3 F4 P2
    Date: 2006–02–01
  67. By: Fernandez, Pablo (IESE Business School); Carabias, Jose M. (IESE Business School)
    Abstract: En este documento se define y analiza la creación de valor para los accionistas de Telefónica entre diciembre de 1991 y diciembre de 2005. En ese período, el aumento de la capitalización de Telefónica fue de 55.695 millones de euros; el aumento del valor para los accionistas fue de 45.153 millones de euros, y la creación de valor para los accionistas fue de 12.442 millones de euros (expresado en euros de 2005). Telefónica fue, entre las mayores empresas de telecomunicaciones, la tercera empresa más rentable en el periodo 2003-2005. Fue la duodécima empresa por capitalización bursátil en 1998 y la séptima en 2005. La rentabilidad media anual de Telefónica en este período de catorce años fue del 16,8%, superior a la del IBEX 35 (13,7%). La rentabilidad de Telefónica en estos catorce años fue del 783,9% (cada euro invertido en acciones de Telefónica en diciembre de 1991 se convirtió en 8,84 euros en diciembre de 2005), mientras que la rentabilidad del IBEX 35 en estos catorce años fue del 506,1%. La inflación acumulada alcanzó el 58,8% (lo que, en media, costaba 1 euro en diciembre de 1991, costó 1,59 euros en diciembre de 2005). La rentabilidad de Telefónica fue superior a la del IBEX 35 todos los años, con excepción de 1994, 1995, 2000, 2001, 2002 y 2005. La capitalización de Telefónica durante estos catorce años osciló entre el 11,2% y el 27,6% del total de la capitalización del IBEX 35.
    Keywords: creación valor para accionistas; aumento valor para accionistas; rentabilidad para accionistas;
    JEL: G12 G31 G32
    Date: 2006–05–29
  68. By: W. Max Corden (Department of Economics, The University of Melbourne)
    Abstract: The international current account imbalance, where the United States has a vast deficit and several countries, notably Japan, China, Germany and the oil exporters have corresponding surpluses, is usually seen as a problem. The argument here is that current account imbalances simply indicate intertemporal trade – the exchange of goods and services for claims. There are likely to be gains from trade of that kind as from ordinary trade. What then are the problems? This paper considers several scenarios, notably one where net savings of the surplus countries decline so that the world real interest rate rises, and another where the US fiscal deficit is reduced, so that the world real interest rate falls and there could be a world wide aggregate demand problem, essentially caused by the high net savings of the surplus countries.
    Date: 2006–06
  69. By: Christensen, Bent Jesper (Department of Finance, Copenhagen Business School); Raahauge, Peter (Department of Finance, Copenhagen Business School)
    Abstract: We consider a random utility extension of the fundamental Lucas (1978) equilibrium asset pricing model. The resulting structural model leads naturally to a likelihood function. We estimate the model using U.S. asset market data from 1871 to 2000, using both dividends and earnings as state variables. We find that current dividends do not forecast future utility shocks, whereas current utility shocks do forecast future dividends. The estimated structural model produces a sequence of predicted utility shocks which provide better forecasts of future long-horizon stock market returns than the classical dividend-price ratio.
    Keywords: Randomutility; asset pricing; maximumlikelihood; structuralmodel; return predictability
    JEL: G00
    Date: 2004–12–14
  70. By: Abdul Abiad; Jonathan David Ostry
    Abstract: This paper aims to put some constraints on the way primary surpluses are projected when making assessments of public debt sustainability. Projections should be tied either to the country's historical track record in generating surpluses-if the institutional and other factors accounting for this track record are expected to persist-or to some model that links primary surpluses to their fundamental determinants, either on the basis of constant institutions and policies or a credible reform program. History-based or model-based primary surplus projections provide a useful benchmark for judging the realism of fiscal forecasts underlying debt sustainability calculations. Together with information on future growth and interest rates, the primary surplus projections can be used to generate measures of overborrowing, and the magnitude of adjustment needed to return debt to a sustainable level.
    Keywords: Public debt , Emerging markets ,
    Date: 2005–10–04
  71. By: Skogsvik, Kenth (Center for Financial Analysis and Managerial Economics in Accounting)
    Abstract: The purpose of the paper is to incorporate probabilistic business failure predictions in discounted cash flow (DCF) models for the valuation of company bonds and owners´ equity. The analysis shows that period-specific probabilities of business failure are instrumental to the assessment of expected values of cash flows in such models. Under somewhat restrictive conditions the failure risk can alternatively be accommodated through an adjustment of the discount rate, i.e. expected values of future cash flows conditioned on business survival can simply be discounted with such a discount rate. The result holds both in bond and equity DCF valuation modelling. In order for the accounting-based residual income valuation model to appropriately capture the failure risk, an additional accounting “failure loss recognition” principle as well as a novel term in the model specification have been identified.
    Keywords: Business failure prediction; DCF valuation; Bond valuation; Fundamental valuation; Residual income valuation
    Date: 2006–05–01
  72. By: Denis H. Acclassato (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: Microfinance institutions (MFIs) have grown fast in WAEMU surprising political decision makers. They reacted by setting up in the late 90's, a specific legislation. A legal usury rate for credits was defined fixing the borrower ceiling interest rate at 27 percent per year for microfinance institutions and 18 percent for banks. This statutory frame, fast elaborated, revealed early its incapacities and therefore, weakened structures in charge of the regulation of the sector. This structure is confronted with the difficult choice to maintain institutions outside the statutory frame or to apply a rigorous supervision and to precipitate a massive decline of MFIs. This law limits incentives to better governance, the efficiency and the flexibility expected from a good statutory frame. This paper models the behaviour of microfinance institutions in the context of interest rate ceilings and requirement of a minimal level of governance. We use comparative statics to show that a relaxation of the constraint on the usury rate does not lead necessarily to an increase of the borrower interest rate.
    Keywords: regulation, usury ; governance ; microfinance
    Date: 2006–06–26
  73. By: Pau Rabanal; Mario I. Bléjer; Alfredo Mario Leone; Gerd Schwartz
    Abstract: This paper argues that the IMF's traditional monetary conditionality-a ceiling on net domestic assets of the central bank and a floor on its net international reserves-should be adapted in IMF-supported adjustment programs with countries which have a framework of explicit inflation targets for the implementation of monetary policy. This adaptation should aim at enhancing correspondence and consistency between the monetary objectives of the central bank and the targets established under the IMF-supported adjustment program, as well as between the different instruments used to achieve the policy objectives and targets. The paper reviews various general options in this regard, and, using the case of Brazil as an example, demonstrates how these options may be implemented in practice.
    Keywords: Inflation targeting , Brazil , Monetary policy , Conditionality , Fund-supported adjustment programs ,
  74. By: Bechman, Ken L. (Department of Finance, Copenhagen Business School); Raaballe, Johannes (Department of Finance, Copenhagen Business School)
    Abstract: Firms pay out cash using both dividends and share repurchases. In many aspects these two means are similar, but one important difference is that dividends are generally taxed more heavily than share repurchases. Nevertheless firms persist in paying out large amounts in dividends. This paper provides an explanation for this dividend puzzle by developing a class of signaling models violating the “single-crossing property in which information about the quality of the firm is asymmetric between the management and the shareholders. In these models a high-quality firm can always signal its quality by using share repurchases only. However, in certain cases share repurchases become costlier on the margin for a high-quality firm than for a low-quality imitator. In such cases, the high-quality firm signals most cost efficiently by means of a combination of share repurchases and taxable cash dividends financed by the issuance of new shares. Taxable cash dividends financed by the issuance of new shares then can be considered a positive kind of money burning whose role is to signal a firm’s high quality. The implications of the models are consistent with several important empirical facts about dividends and share repurchases. Thus, this paper’s main contribution is to examine a range of new signaling models that provides a role for taxable cash dividends and share repurchases and to derive their empirical implications.
    Keywords: Dividends; Share Repurchases; Signaling; Single-Crossing Property; Money Burning
    JEL: D82 G35
    Date: 2006–06–28
  75. By: Andreas Schabert (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the CB is aggressively raising the interest rate in response to higher expected inflation. The constraint on stabilizing interest rate policy is tighter the higher the primary deficit and the more open the economy is. If the government cannot borrow from abroad in its own currency, stability requires interest rate policy to be accommodating (passive). Inflation stabilization is nevertheless feasible if the CB uses an instrument not associated with default risk, e.g. money supply.
    Keywords: Fiscal-monetary policy interactions; sovereign default risk; foreign debt; inflation targeting; original sin
    JEL: E52 E63 F41
    Date: 2006–05–17
  76. By: Fernandez, Pablo (IESE Business School)
    Abstract: This paper provides guidelines to evaluate the appropriateness of 23 different valuation methods for estimating the present value of tax shields. We first show that the value of tax shields is the difference between the present values of two different cash flows with their own risks: the present value of taxes for the unlevered company and the present value of taxes for the levered company. This implies, as a first guideline, that, for the particular case of a perpetuity and a world without costs of leverage, the value of tax shields is equal to the tax rate times the value of debt. The value of tax shields can be lower when costs of leverage exist. In that case, we show that, since the existence of leverage costs is independent of taxes, a second guideline for the appropriateness of the valuation method should be that the value of tax shields, when there are no taxes, is negative. We then look at the case of constant growth and derive similar conclusions. Second, we identify 23 valuation theories proposed in the literature to estimate the present value of tax shields and illustrate their performance relative to the proposed guidelines. Eight of these theories do not satisfy the two proposed guidelines for the case of perpetuities. Only one of the valuation methods is consistent with these restrictions when we look at the case of constant growth and no leverage costs. Two theories provide consistent valuations when we allow for leverage costs and growth. Finally, we use the 23 theories to value a hypothetical firm and show remarkable differences in the values obtained, which demonstrates the importance of using a method consistent with the proposed guidelines.
    Keywords: value tax shields; valuation theories; valuation methods;
    JEL: G12 G31 M21
    Date: 2006–05–13
  77. By: Grigorieva Elena; Herings P. Jean-Jacques; Müller Rudolf; Vermeulen Dries (METEOR)
    Abstract: We show that, when bidders have continuous valuations, any ex post equilibrium in an ex post individually rational query auction can only be ex post efficient when the running timeof the auction is infinite for almost all realizations of valuations of the bidders. We also show that this result applies to the general class of bisection auctions. In contrast we show that, when we allow for inefficient allocations with arbitrarily small probability, there is a query auction (to be more specific, a bisection auction) that attains this level of approximate efficiency in equilibrium, while additionally the running time of the auction in equilibrium is finite for all realizations of valuations.
    Keywords: mathematical economics;
    Date: 2006
  78. By: Nagarajan, Mohan; Liu, Lili; Ianchovichina, Elena
    Abstract: In the late 1990s the Indian state of Tamil Nadu experienced an unprecedented fiscal deterioration, which was part of the widespread fiscal deterioration in Indian states. This deterioration was troubling because current expenditure outgrew total revenue, leaving little fiscal space for infrastructure spending. The paper presents a framework for subnational fiscal sustainability analysis and applies it to Tamil Nadu where subsequent fiscal adjustment has been ambitious and politically challenging, but has promised to put state finance on a sustainable path and create fiscal space for infrastructure investment. The paper emphasizes the differences between fiscal sustainability analysis at the national and subnational levels, attempts to take into account uncertainty, and discusses the key components of the state ' s fiscal accounts and how they respond to reforms and shocks. Risks to Tamil Nadu ' s fiscal outlook include interest rate shocks, pressures on the primary balance, and contingent liabilities. Though the state ' s efforts to remove constraints to economic growth, minimize recurrent expenditures and maximize its revenue potential will be critical for fiscal sustainability, national policies feature prominently in subnational fiscal adjustment. Tamil Nadu ' s quest for fiscal sustainability is relevant for other countries. Decentralization has given subnational governments in developing countries significant spending and taxation responsibilities, and the capacity to incur debt. The fiscal stress of the Indian states echoed the fiscal crises of subnational governments in several other major emerging economies.
    Keywords: Banks & Banking Reform,Fiscal Adjustment,Public Sector Economics & Finance,Economic Theory & Research,Economic Stabilization
    Date: 2006–06–01

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