nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒07‒21
23 papers chosen by
Carolina Valiente
London South Bank University

  1. Bank Lending and Asset Prices in the Euro Area By Frömmel, Michael; Schmidt, Torsten
  2. Choice of Corporate Risk Management Tools under Moral Hazard By Jan Bena
  3. The Effects of Budget Deficit Reduction on Exchange Rate: Evidence from Turkey By Yaprak Gulcan; Mustafa Erhan Bilman
  4. Group versus Individual Liability: A Field Experiment in the Philippines By Xavier Gine; Dean Karlan
  6. Monetary Policy Rules in Central and Eastern Europe By Frömmel, Michael; Schobert, Franziska
  7. Structural Breaks in the Real Exchange Rate Adjustment Mechanism By Copeland, Laurence; Heravi, Saeed
  8. Forecasting Stock Price Changes: Is it Possible? By Pedro N. Rodríguez,; Simón Sosvilla-Rivero
  9. Monetary Policy, the Bond Market, and Changes in FOMC Communication Policy By Troy Davig; Jeffrey R. Gerlach
  10. International Liquidity Swaps : Is the Chiang Mai Initiative Pooling Reserves Efficiently ? By Kohlscheen, Emanuel; Taylor, Mark P
  11. Energy Futures Market Trading Versus Physical Commodity Usage: A playground for manipulation or a miscalculation? By Ronald Ripple
  12. Efficiency and Foreign Ownership in Banking: An International Comparison By Adnan Kasman; Saadet Kirbas Kasman; Oscar Carvallo
  13. Uniform price auctions and fixed price offerings in IPOs: an experimental comparison By Ping Zhang
  14. Insurance Sector Risk By Jan Frederik Slijkerman
  15. Les modèles Q-investissement et les modèles d'Euler : relations de banque principale, asymétries informationnelles et modifications des structures financières des firmes de keiretsu financier By Laurent Soulat
  16. Is Satisficing Absorbable? - An Experimental Study By Werner Güth; M. Vittoria Levati; Matteo Ploner
  17. Trasformazione sistemica, ingresso nell'UE e sviluppo regionale nei paesi dell'Europa Centro-orientale By Carlofilippo FRATESCHI
  18. Proportionality of Willingness to Pay to Small Risk Changes – The Impact of Attitudinal Factors in Scope Tests By Andrea M. Leiter; Gerald J. Pruckner
  19. A Complete Characterization of Pure Strategy Equilibrium in Uniform Price IPO Auctions By Ping Zhang
  20. La crise monétaire turque de 2000/2001 : analyse de l'échec du plan de stabilisation par le change du FMI By Jérôme Héricourt; Julien Reynaud
  21. Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited By Robert W. Fairlie; Harry A. Krashinsky
  22. Contracting for an Innovation under Bilateral Asymmetric Information By Martimort, D.; Poudou, J.-C.; Sand-Zantman, W.
  23. Preferential Trading Arrangements as Strategic Positioning By Daniel Seidmann

  1. By: Frömmel, Michael; Schmidt, Torsten
    Abstract: We examine the dynamics of bank lending to the private sector for countries of the Euro area by applying a Markov switching error correction model. We identify for Belgium, Germany, Ireland and Portugal stable, mean reverting regimes and unstable regimes with no tendency to return to the long term credit demand equation, whereas for some other countries there is only weak evidence. Furthermore, for these as well as for other countries we detect in the less stable regimes a strong comovement with the development of the stock market. We interpret this as evidence for constraints in bank lending. In contrast, the banks' capital seems to have only marginal impact on the lending behaviour.
    Keywords: bank lending, credit demand, Euro area, Markov switching error correction, credit channel, asset prices, credit rationing
    JEL: C32 G21
    Date: 2006–07
  2. By: Jan Bena
    Abstract: This paper examines the choice of tools for managing a firm’s operational risks: cash reserves, insurance contracts, and financial assets under an optimal financing contract that solves moral hazard between insiders and outside investors. Risk management is valuable as it reduces the costs of raising external financing, increases debt capacity, lessens underinvestment, and improves welfare. I show that insurance is superior as it facilitates the outside financing relationship but leads to inefficient excessive continuation if used without coverage limits. When insurance against an operational risk is not available, the firm uses financial assets instead or resorts to holding cash reserves.
    Date: 2006–06
  3. By: Yaprak Gulcan (Department of Economics, Faculty of Business, Dokuz Eylül University); Mustafa Erhan Bilman (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: This study investigates the effect of budget deficit reduction on exchange rate between US dollar and Turkish lira (TL). Our article aims to illustrate that the evidence on the relationship between budget deficits and exchange rates is not clear-cut and to explain why the theoretical approaches that underlie the relationship are ambiguous while there is general agreement that cutting budget deficits and debt will lower interest rates. The relationship between deficit reduction and exchange rates has caused a debate among the most famous monetary policy makers and researchers. [Melvin (1989), Mishkin (1992), Greenspan (1995), Thiessen (1995), Krugman (1995), Feldstein (1995)] In addition, budget deficit can be counted as one of the most common and major problem that influences the macroeconomic stability in developing economies. In this sense, cointegration method and causality tests were used in order to find out the possible effects of budget deficit reduction on exchange rates during the period of 1960-2003 in Turkey.
    Keywords: Budget deficits, exchange rates, cointegration analysis
    JEL: H62 F31
    Date: 2005–12–12
  4. By: Xavier Gine (World Bank); Dean Karlan (Economic Growth Center, Yale University)
    Abstract: Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender’s overall profitability and the poor’s access to financial markets. We worked with a bank in the Philippines to conduct a field experiment to examine these issues. We randomly assigned half of the 169 pre-existing group liability “centers” of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients.
    Keywords: Microfinance, group liability, joint liability, social capital, micro-enterprises, informal economies
    JEL: C93 D71 D82 D91 G21 O12 O16 O17
  5. By: David Moreno; Rosa Rodríguez
    Abstract: This study presents new performance measures based on different asset pricing models which incorporate the third co-moment of asset returns. Recent asset pricing studies demonstrate the relevance of the component of an asset’s skewness related to the skewness of the market portfolio, and illustrate how this component helps to explain the time variation of ex-ante market risk premiums. We investigate the result of adding this new coskewness factor to the performance of mutual funds and find that it is significant even when factors based on size, book-to-market or momentum are included. Therefore, the omission of a coskewness factor may lead to erroneous evaluations of the performance of a mutual fund. Moreover, we find that the unconditional coskewness of mutual funds is related to the market timing ability and, therefore, the negative parameter found in the literature of market timing could reflect only a negative unconditional coskewness in the return distribution of mutual funds.
    Date: 2006–01
  6. By: Frömmel, Michael; Schobert, Franziska
    Abstract: We estimate monetary policy rules for six central and eastern European countries (CEEC) by taking changes in the policy settings explicitly into account. Distinguishing rather fixed and more flexible exchange rate arrangements we find that for most countries exchange rates played an important role in monetary policy during the fixed exchange rate regime, whereas their influence disappears after the introduction of floating exchange rate regimes. This indicates that most countries followed their officially announced policy settings. For Slovenia and to some extent for Romania, however, we find evidence for exchange rate targeting, although they officially announced a managed float.
    Keywords: monetary policy, Taylor rule, transition economies, CEEC, inflation targeting, interest rate policy
    JEL: E52 E58 P20
    Date: 2006–07
  7. By: Copeland, Laurence (Cardiff Business School); Heravi, Saeed (Cardiff Business School)
    Abstract: We show that the behaviour of the real exchange rates of the UK, Germany, France and Japan has been characterised by structural breaks which changed the adjustment mechanism. In the context of a Time-Varying Smooth Transition AutoRegressive of the kind introduced by Lundbergh et al (2003), we show that the real exchange rate process shifted in the aftermath of Black Wednesday in the case of the Pound, in 1984-5 in the case of the Franc and, more tentatively, during the Asian crisis of 1997-8 in the case of the Yen.
    Date: 2006–07
  8. By: Pedro N. Rodríguez,; Simón Sosvilla-Rivero
    Abstract: We examine the relation between monthly stock returns and lagged publicly available information. Our primary objective is to determine whether the variables proposed in the literature to predict the equity premium contain incremental information to an investor. We find that certain variables do provide incremental information and may have some practical value. Although this not necessarily imply that return-forecasting models may be used to predict future stock returns, some model specifications may be used to predict future stock movements.
  9. By: Troy Davig (Federal Reserve Bank of Kansas City); Jeffrey R. Gerlach (Department of Economics, College of William and Mary)
    Abstract: Using high-frequency data in a Markov-switching framework, we identify states that imply different responses of the yield curve to unexpected changes in the federal funds target. Empirical estimates reveal a low-volatility state where long-term bonds respond significantly, and in a predictable manner, to unexpected changes in the federal funds target. An alternative state exists with higher volatility, where unexpected changes in the federal funds target raise the short-end of the yield curve, but have no significant effect on the long-end. The low-volatility state for long-term bonds occurs from September 1995 to May 1999 and again from March 2000 to January 2002. The timing of the switches between the two states for long-term bonds coincides with changes in FOMC communication policy - though not all changes in communications policy induce a switch.
    Keywords: Monetary Policy, Bond Market, Markov-Switching, Central Bank Communications
    JEL: E43 E58 G12
    Date: 2006–07–11
  10. By: Kohlscheen, Emanuel (Department of Economics, University of Warwick); Taylor, Mark P (Department of Economics, University of Warwick)
    Abstract: We analyze the network of bilateral liquidity swaps (BSAs) among the ASEAN+3 countries. We find that the network has taken the correlation of capital flows in the region into account, in the sense that countries with lower correlation of reserve growth have engaged in larger BSAs. All else equal, a decimal point increase in the correlation of international reserve growth decreases the size of a bilateral swap agreement between 18 and 27%. Moreover, we find that the approximatedly $ 60bn of BSAs have had a limited impact, if any, on government bond spreads so far. Finally, we identify potential gains from inter-regional BSAs.
    Keywords: insurance ; international reserves ; liquidity ; sovereign risk ; swaps
    JEL: F30 F34
    Date: 2006
  11. By: Ronald Ripple (Department of Economics, Macquarie University)
    Abstract: The relationship between energy futures trading volume and physical commodity usage is evaluated with the aim of demonstrating the correct method of calculation. This relationship has been incorrectly calculated and the misleading results have been offered up as evidence of excessive speculator activity leading to higher and more volatile prices, on the one hand, and to support claims of high levels of market liquidity and transparency, on the other. It is shown that rather than constituting large multiples over physical usage the futures trading activity represents a fraction of usage. These fractions of physical usage represented by futures trading volume cannot support suggestions that futures markets are playgrounds for non-commercial market manipulators. Nevertheless, there is still strong evidence that the energy futures markets provide a valuable basis for price discovery and risk mitigation, since a significant share of physical usage is represented by futures market activity.
    Keywords: Futures contracts, trading volume, consumption, crude oil, natural gas
    JEL: Q48 G18
    Date: 2006–05
  12. By: Adnan Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Saadet Kirbas Kasman (Department of Economics, Faculty of Business, Dokuz Eylül University); Oscar Carvallo (Venezuelan Banking Association)
    Abstract: This paper estimates cost and profit efficiency for Latin American and the Caribbean banking sectors. This study also conducts a comparative analysis of the performance of foreign and domestic banks operating in these counties. Using a model proposed by Battese and Coelli (1995), a common cost and profit frontiers with country-specific environmental variables have been estimated for a panel of 427 banking firms from sixteen countries. The empirical analysis reveals the importance of the environmental variables in explaining the efficiency differences among countries. The results show that profit efficiency levels are well below those corresponding to cost efficiency, implying that the most important inefficiency is on the revenue side. The results further indicate that on average foreign banks are more efficient than domestic banks.
    Keywords: Banking, efficiency, foreign ownership
    JEL: G21 G28
    Date: 2005–11–23
  13. By: Ping Zhang (University of Nottingham)
    Abstract: We compare the performances of uniform price auctions with fixed price offerings using laboratory experiments. In the uniform treatment, there is no evidence that the tacit collusion equilibria, which predict symmetric behaviors among bidders, have been achieved. On the contrary, in accordance with another set of equilibria, subjects with higher expected value bid more aggressively and obtain a higher allocation. The resulting market price increases with the market value and is significantly higher than the expected value of a bidder with a low value signal. As a consequence, our experiment suggests that the uniform price auctions are superior to fixed price offerings in terms of raising revenues.
    Keywords: experiment, IPO, uniform price auction, fixed price offering, share auction
    JEL: D44 G12 C91
    Date: 2006–04
  14. By: Jan Frederik Slijkerman (Faculty of Economics, Erasmus Universiteit Rotterdam)
    Abstract: We model and measure simultaneous large losses of the market value of insurers to understand the impact of shocks on the insurance sector. The downside risk of insurers is explicitly modelled by common and idiosyncratic risk factors. Since reinsurance is important for the capacity of insurers, we measure risk dependence among European insurers and reinsurers. The results point to a relatively low insurance sector wide risk. Dependence among insurers is higher than among reinsurers.
    Keywords: Systemic risk; asymptotic dependence
    JEL: G15 G22 G38
    Date: 2006–06–12
  15. By: Laurent Soulat (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I], ESCEM - ESCEM Tours-Poitiers - [Groupe Ecole Supérieure de Commerce et de Management])
    Abstract: Cet article s'intéresse à l'évolution des structures financières des grandes firmes japonaises cotées à la première section du TSE sur la période 1990-1999. Il s'inscrit dans la continuité de la littérature sur les modèles Q-investissement : il étudie l'évolution de l'impact d'une affiliation à un keiretsu financier sur la sensibilité relative de l'investissement aux cash-flows. Les liens de banque principale étant traditionnellement supposés plus étroits pour les firmes affiliées, ils réduisent la contrainte de liquidité de ces firmes par rapport aux firmes indépendantes. Les résultats obtenus avec les modèles Q-investissements sont comparés à ceux provenant de l'utilisation de modèles Euler-investissement. En opposition avec les résultats la littérature économique établis sur des périodes antérieures, les firmes affiliées (quels que soient les modes de regroupement utilisés) présentent une sensibilité de l'investissement à leur richesse nette interne supérieure à celles des firmes indépendantes. La plus grande dépendance des investissements des firmes affiliées à leur capacité de financement n'est pas due à des évolutions contrastées entre les keiretsu financiers, mais résulte au contraire du degré de proximité de la firme avec le cœur du groupe (mesurée par l'appartenance à un Club des présidents) : les firmes membres des Clubs des présidents sont significativement plus dépendantes de leur richesse nette interne que les firmes affiliées non membres de Club. Ces résultats peuvent signaler que la dépendance bancaire des grandes firmes affiliées a diminué ou que les firmes les plus proches du noyau ont davantage contribuées à palier aux difficultés de leur banque principale.
    Keywords: Finance d'entreprise ; structure financière.
    Date: 2006–07–13
  16. By: Werner Güth; M. Vittoria Levati; Matteo Ploner
    Abstract: We experimentally investigate whether the satisficing approach is absorbable, i.e., whether it still applies after participants become aware of it. In a setting where an investor decides between a riskless bond and either one or two risky assets, we familiarize participants with the satisficing calculus applied to specific portfolio selection tasks. After experiencing this calculus repeatedly, participants are free to use it or to select their portfolio freely. The results support, to some extent, the absorbability of the satisficing approach.
    Keywords: Theory absorption; Satisficing behavior; Portfolio selection
    JEL: C91 D81 G11
    Date: 2006–07
  17. By: Carlofilippo FRATESCHI (Universit… di Padova, Dipartimento di Scienze economiche "Marco Fanno")
    Abstract: In this paper I consider the economic and social evolution of the PECO countries at the regional level. Growing integration in the EU market, and the general economic and financial globalization are the main external conditioning processes of that evolution. Local economies, characterized by different economic, social and geographic initial conditions, reacted in differentiated ways. The paper highlights four typical paths of evolution, common to all the ex-socialist East-European countries.
    Date: 2006–07
  18. By: Andrea M. Leiter (alpS GmbH - Center for Natural Hazard Management); Gerald J. Pruckner (University Linz)
    Abstract: Sensitivity (proportionality) of willingness to pay to (small) risk changes is often used as a criterion to test for valid measures of economic preferences. In a contingent valuation (CV) study conducted in Austria in February 2005 1,005 respondents were asked their willingness to pay (WTP) for preventing an increase in risk by 1/42,500 and 3/42,500, respectively. WTP for the higher risk variation is significantly higher than WTP for the lower risk change. We find evidence that those respondents who have personal experience with avalanches combine the information about future risk increase, provided in the survey, with the observed number of mortal avalanche accidents in the past. The proportionality of WTP holds if such prior experiences are taken into account and the influence of attitudinal factors in scope tests are controlled for.
    Keywords: Contingent Valuation, Willingness to Pay, Scope Test, Sensitivity of WTP
    JEL: D81 J17 Q54
    Date: 2006–06
  19. By: Ping Zhang (University of Nottingham)
    Abstract: Collusive equilibria in share auctions despite being the focus of previous theoretical research, have received little empirical or experimental support. We develop a theoretical model of uniform price initial public offering (IPO) auctions and show that there exists a continuum of pure strategy equilibria where investors with a higher expected valuation bid more aggressively and as a result the market price increases with the market value. The collusive equilibria lie in fact on the boundary of this set, which is obtained under stricter conditions when demand is discrete than in the continuous format. Our results have important implications for the design of IPO auctions.
    Keywords: IPO, uniform price auction, divisible goods, share auctions, tacit collusion
    JEL: D44 G12 D82
    Date: 2006–04
  20. By: Jérôme Héricourt (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Julien Reynaud (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Cet article propose un examen empirique de l'échec du Plan de Stabilisation par le Change mis en place sous l'impulsion du FMI en Turquie à partir de janvier 2000. Nous estimons un modèle vectoriel à correction d'erreur dans lequel les chocs de court terme sont modélisés à l'aide d'une parité de taux d'intérêt non couverte. L'emploi de données en fréquence quotidienne, inhabituelle dans ce type d'étude, nous permet de rendre compte de la contrainte liée à la fixité du taux de change, pesant au jour le jour sur l'autorité monétaire. Nos résultats soulignent que l'apparente flexibilité laissée à la banque centrale turque au travers des ajustements de la base monétaire était en réalite largement tributaire des facteurs externes, laissant la banque centrale pieds et poings liés au bon vouloir du marché.
    Keywords: Crise de change, politique monétaire, Plan de Stabilisation par le Change, Turquie, VECM.
    Date: 2006–07–10
  21. By: Robert W. Fairlie (University of California, Santa Cruz and IZA Bonn); Harry A. Krashinsky (University of Toronto)
    Abstract: Hurst and Lusardi (2004) recently challenged the long-standing belief that liquidity constraints are important causal determinants of entry into self-employment. They demonstrate that the oft-cited positive relationship between entry rates and assets is actually unchanging as assets increase from the 1st to the 95th percentile of the asset distribution, but rise drastically after this point. They also apply a new instrument, changes in house prices, for wealth in the entry equation, and show that instrumented wealth is not a significant determinant of entry. We reinterpret these findings: first, we demonstrate that bifurcating the sample into workers who enter self-employment after job loss and those who do not reveals steadily increasing entry rates as assets increase in both subsamples. We argue that these two groups merit a separate analysis, because a careful examination of the entrepreneurial choice model of Evans and Jovanovic (1989) reveals that the two groups face different incentives, and thus have different solutions to the entrepreneurial decision. Second, we use microdata from matched Current Population Surveys (1993-2004) to demonstrate that housing appreciation measured at the MSA-level is a significantly positive determinant of entry into selfemployment. Our estimates indicate that a 10 percent annual increase in housing equity increases the mean probability of entrepreneurship by roughly 20 percent and that the effect is not concentrated at the upper tail of the distribution.
    Keywords: entrepreneurship, liquidity constraints, self-employment
    JEL: J23
    Date: 2006–07
  22. By: Martimort, D.; Poudou, J.-C.; Sand-Zantman, W.
    Abstract: This article analyzes the optimal contract design between an inventor and a developer. The inventor is privately informed on the value of his idea. The developer must exert some non-verifiable effort to improve the probability of success of this innovation but may also choose to opt out of the relationship upon learning the quality of the idea. While first-best efficiency requires that all marginal returns on innovation be left to the developer, second-best efficiency taking into account this bilateral asymmetric information leads to distort downwards the developer’s incentives to prevent innovators from overstating the value of their ideas. There exists a trade-off between inviting inventor to reveal their ideas and inducing both effort and participation from the developer. The extent of this trade-off depends on the regime of property rights on ideas, i.e., on how easy to steal ideas. Since decreasing the marginal share of developers makes it more difficult to have them participating to the contract, countervailing incentives might sometimes appear. Taking into account those various effects leads to reduce the responsiveness of the contract to the exact value of the idea and might force to give up additional rents to the developer. Some extensions of our framework, including the cases of limited commitment, partial disclosure and double moral hazard, are studied to show the robustness and limits of our previous findings.
    Keywords: Contracts, Innovation, Ideas Stealing, Bilateral Asymmetric Information
    JEL: D82 D86 L24 O31
    Date: 2006
  23. By: Daniel Seidmann (University of Nottingham)
    Abstract: We analyze a three-country model of trade negotiations in which countries can form bilateral free trade areas, customs unions or a trilateral preferential trading arrangement, and can continue negotiating after reaching an agreement. In contrast to the literature on multilateral bargaining, the set of agreements can form a (nonpartitional) network; while in contrast to the network literature, players can reach multilateral agreements. We show that patient enough countries reach bilateral arrangements if and only if insiders gain more than outsiders; and we characterize conditions under which a hub and spoke pattern emerges. We also use variants on the model to explain why a US commitment not to bargain bilaterally sustained progress at GATT negotiations; and the rarity of open access preferential trading arrangements.
    Date: 2006–04

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