New Economics Papers
on Financial Markets
Issue of 2006‒07‒28
33 papers chosen by
Carolina Valiente

  1. A Habit-Based Explanation of the Exchange Rate Risk Premium By Adrien Verdelhan
  2. Real Exchange Rate Volatility and Asset Market Structure By Christoph Thoenissen
  3. Acquisition versus greenfield - the impact of the mode of foreign bank entry on information and bank lending rates By Sophie Claeys; Christa Hainz
  4. The response of firms‘ investment and financing to adverse cash flow shocks - the role of bank relationships By Catherine Fuss; Philip Vermeulen
  5. A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility. By Eric Hillebrand; Gunther Schnabl
  6. Bank Lending with Imperfect Competition and Spillover Effects By Sumru G. Altug; Murta Usman
  7. Deposit insurance design and implementation : policy lessons from research and practice By Demirguc-Kunt, Asli; Kane, Edward J.; Laeven, Luc
  8. The impact of ECB monetary policy decisions and communication on the yield curve By Claus Brand; Daniel Buncic; Jarkko Turunen
  9. Exchange rate stabilization in developed and underdeveloped capital markets. By Viera Chemlarova; Gunter Schnabl
  10. In Search of Distress Risk By John Y. Campbell; Jens Hilscher; Jan Szilagyi
  11. Multiplicity in General Financial Equilibrium with Portfolio Constraints, Second Version By Suleyman Basak; David Cass; Juan Manuel Licari; Anna Pavlova
  12. Optimal monetary policy with uncertainty about financial frictions. By Richhild Moessner
  13. A factor risk model with reference returns for the US dollar and Japanese yen bond markets. By Carlos Bernadell; Joachim Coche; Ken Nyholm
  14. Cross-border bank contagion in Europe By Reint Gropp; Marco Lo Duca; Jukka Vesala
  15. Financing constraints and firms’ cash policy in the euro area. By Annalisa Ferrando; Rozália Pál
  16. Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration By Joshua Aizenman; Daniel Riera-Crichton
  17. Did capital market convergence lower the effectiveness of the interest rate as a monetary policy tool? By Jansen, Pieter W.
  18. Public debt and long-term interest rates - the case of Germany, Italy and the USA By Paolo Paesani; Rolf Strauch; Manfred Kremer
  19. Extreme Adverse Selection, Competitive Pricing, and Market Breakdown By George J. Mailath; Georg Noldeke
  20. Money and Production, and Liquidity Trap By Pradeep Dubey; John Geanakoplos
  21. On the determinants of external imbalances and net international portfolio flows - a global perspective By Roberto A. De Santis; Melanie Lührmann
  22. Agency Conflicts, Asset Substitution, and Securitization By Yingjin Hila Gan; Christopher Mayer
  23. The Theory of Money and Financial Institutions: A Summary of a Game Theoretic Approach By Martin Shubik
  24. The 90-Day DTF Interest Rate: Why Does It Remain Constant? By Peter Rowland
  25. A Skeptical Appraisal of Asset-Pricing Tests By Jonathan Lewellen; Stefan Nagel; Jay Shanken
  26. Private investment and financial development in a globalized world By Yongfu Huang
  27. House Prices and Monetary Policy in Colombia By Martha López
  28. Fair interest rates when lending to the poor: Are fair prices derived from basic principles of justice? By Marek Hudon
  29. Do reorganization costs matter for efficiency ? Evidence from a bankruptcy reform in Colombia By Gine, Xavier; Love, Inessa
  30. The Perceived Value-added of Venture Capital Investors. Evidence from Finnish Biotechnology Industry By Mari Maunula
  31. Ownership concentration and firm performance: Evidence from an emerging market By Irena Grosfeld
  32. Teaching Entrepreneurship: Impact of Business Training on Microfinance Clients and Institutions By Martin Valdivia; Dean Karlan
  33. Globalización. El proceso real y financiero By Beethoven Herrera Valencia

  1. By: Adrien Verdelhan (Boston University)
    Keywords: Exchange rate, Time-varying risk premium, Habits
    JEL: F31 G12 G15
    Date: 2006–07–04
  2. By: Christoph Thoenissen
    Abstract: We examine the influence of financial asset market structure for the volatility of the real exchange rate. Adding distribution costs to two-country two-sector models has been shown to increase the volatility of the terms of trade and thus the real exchange rate. We argue that incomplete markets are a necessary condition for the terms of trade and real exchange rate to display realistic levels of volatility. We also illustrate that for some parameter values, how one models incomplete markets also matters for international business cycle properties of the these models.
    Keywords: Real exchange rate volatility, financial market structure, non-traded goods, distribution costs.
    JEL: F31 F41
    Date: 2006–07
  3. By: Sophie Claeys (Department of Financial Economics and CERISE, Ghent University, W. Wilsonplein 5D, B-9000 Ghent, Belgium.); Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany.)
    Abstract: Policy makers often decide to liberalize foreign bank entry but at the same time restrict the mode of entry. We study how different entry modes affect the interest rate for loans in a model in which domestic banks possess private information about their incumbent clients but foreign banks have better screening skills. Our model predicts that competition is stronger if market entry occurs through a greenfield investment and therefore domestic banks' interest rates are lower. We find empirical support for our results for a sample of banks from 10 transition countries of Eastern Europe for the period 1995-2003. JEL Classification: G21, D4, L31.
    Keywords: Banking, Foreign Entry, Mode of Entry, Interest Rate, Asymmetric Information.
    Date: 2006–07
  4. By: Catherine Fuss (National Bank of Belgium, 14, bd de Berlaimont, 1000 Brussels, Belgium.); Philip Vermeulen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm. JEL Classification: D92.
    Keywords: Financial constraints, lending relationships, firm investment, firm financing.
    Date: 2006–07
  5. By: Eric Hillebrand (Department of Economics, Louisiana State University, Baton Rouge, LA 70803, USA.); Gunther Schnabl (Department of Economics and Business Administration, Leipzig University, Marschenerstr. 31, 04109 Leipzig, Germany.)
    Abstract: While up to the late 1990s Japanese foreign exchange intervention was fully sterilized, Japanese monetary authorities left foreign exchange intervention unsterilized when Japan entered the liquidity trap in 1999. According to previous research on foreign exchange intervention, unsterilized intervention has a higher probability of success than sterilized intervention. Based on a GARCH framework and change point detection, we test for a structural break in the effectiveness of Japanese foreign exchange intervention. We find a changing impact of Japanese foreign exchange intervention on exchange rate volatility at the turn of the millennium when Japanese foreign exchange intervention started to remain unsterilized. JEL Classification: E58; F31; F33; G15.
    Keywords: Japan; foreign exchange intervention; exchange rate volatility; GARCH; change point detection; structural breaks.
    Date: 2006–06
  6. By: Sumru G. Altug; Murta Usman
    Abstract: We examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We examine pricesetting equilibria with horizontally differentiated banks. If bank lending takes place under a weak corporate governance mechanism and is fraught with agency problems and ineffective bank monitoring, then an equilibrium emerges in which loan supply is strategically restricted. In this equilibrium, the loan restriction, the “under-lending” strategy, provides an advantage to one bank by increasing its market share and sustaining monopoly interest rates. The bank’s incentives for doing so increase under conditions of increased volatility of lending capacities of banks, more severe borrower-side moral hazard, and lower returns on the investment projects. Although this equilibrium is not always unique, with poor bank monitoring and corporate governance, a more intense banking competition renders the bad equilibrium the unique outcome.
    Keywords: Bank lending, threshold effects, underlending equilibria, interest rate competition.
    JEL: E22 E62
    Date: 2006–07
  7. By: Demirguc-Kunt, Asli; Kane, Edward J.; Laeven, Luc
    Abstract: This paper illustrates the trends in deposit insurance adoption. It discusses the cross-country differences in design, and synthesizes the policy messages from cross-country empirical work as well as individual country experiences. The paper develops practical lessons from this work and distills the evidence into a set of principles of good design. Cross-country empirical research and individual-country experience confirm that, for at least the time being, officials in many countries would do well to delay the installation of a deposit insurance system.
    Keywords: Banks & Banking Reform,Financial Intermediation,Financial Crisis Management & Restructuring,Insurance & Risk Mitigation,Non Bank Financial Institutions
    Date: 2006–07–01
  8. By: Claus Brand (Corresponding author: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Daniel Buncic (School of Economics, University of New South Wales, Sydney Australia.); Jarkko Turunen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: We analyse high-frequency changes in the euro area money market yield curve on dates when the ECB regularly sets and communicates decisions on policy interest rates to construct different indicators of monetary policy news relating to policy decisions and to central bank communication. The indicators show that ECB communication during the press conference may result in significant changes in market expectations of the path of monetary policy. Furthermore, our results suggest that these changes have a significant and sizeable impact on medium to long-term interest rates. JEL Classification: E43, E58.
    Keywords: Money market rates, yield curve, ECB, central bank communication.
    Date: 2006–07
  9. By: Viera Chemlarova (Sam Houston State University - Department of Economics and International Business, SHSU Box 2118, Huntsville , TX 77341-2118, United States.); Gunter Schnabl (University of Leipzig - Faculty of Economics and Business Administration, Marschnerstrasse 31, D-04109 Leipzig, Germany.)
    Abstract: The target zone model by Krugman (1991) assumes that foreign exchange intervention targets exchange rate levels. We argue that the fit of this model depends on the stage of development of capital markets. Foreign exchange intervention of countries with highly developed capital markets is in line with Krugman's (1991) model as the exchange rate level is targeted (mostly to sustain the competitiveness of exports) and the volatility of day-to-day exchange rate changes are left to market forces. In contrast, countries with underdeveloped capital markets control both volatility of day-to-day exchange rate changes as well as long-term fluctuations of the exchange rate levels to sustain the competitiveness of exports as well as to reduce the risk for short-term and long-term payment flows. Estimations of foreign exchange intervention reaction functions for Japan and Croatia trace the asymmetric pattern of foreign exchange intervention in countries with developed and underdeveloped capital markets. JEL Classification: F31.
    Keywords: Foreign exchange intervention; target zones; underdeveloped capital markets.
    Date: 2006–06
  10. By: John Y. Campbell; Jens Hilscher; Jan Szilagyi
    Abstract: This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.
    JEL: G1
    Date: 2006–07
  11. By: Suleyman Basak (London Business School and CEPR, Institute of Finance and Accounting); David Cass; Juan Manuel Licari; Anna Pavlova
    Abstract: This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.
    Keywords: Multiple equilibria, asset pricing, portfolio constraints, indeterminacy, financial equilibrium
    JEL: G12 D52
    Date: 2006–03–01
  12. By: Richhild Moessner (Bank of England, Threadneedle Street, London, EC2R 8AH, United Kingdom.)
    Abstract: This paper studies optimal discretionary monetary policy in the presence of uncertainty about the degree of financial frictions. Changes in the degree of financial frictions are modelled as changes in parameters of a hybrid New-Keynesian model calibrated for the UK, following Bean, Larsen and Nikolov (2002). Uncertainty about the degree of financial frictions is modelled as Markov switching between regimes without and with strong financial frictions. Optimal monetary policy is determined for different scenarios of permanent and temporary regime shifts in financial frictions, as well as for variations in financial frictions over the business cycle. Optimal monetary policy is found to be state-dependent. In each state, optimal monetary policy depends on the transition probabilities between the different regimes. JEL Classification: E52; E58; E61; E44.
    Keywords: Monetary policy; uncertainty; financial frictions.
    Date: 2006–06
  13. By: Carlos Bernadell (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joachim Coche (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a new methodology for simulating fixed-income return distributions. It is shown that a traditional factor risk model, when augmented with reference returns, is capable of generating visually consistent return distributions for a broad range of fixed income instruments such as government and nongovernment instruments in the US dollar and Japanese yen bond markets. The reference returns result from a regime-switching Nelson-Siegel yield curve model following Bernadell, Coche and Nyholm (2005). Empirical results are encouraging: simulated distributions exhibit most characteristics observed in the fixed income markets such as non-normal right-skewed distributions for short maturity instrument while instruments with longer maturity are closer to being normally distributed. JEL Classification: C15; C32; C53; G11; G15.
    Keywords: Regime switching; scenario analysis; factor risk model.
    Date: 2006–06
  14. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Marco Lo Duca (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jukka Vesala (Financial Supervision Authority of Finland (Fin-FSA), Snellmaninkatu 6, P.O. Box 159, FIN-00101 Helsinki, Finland.)
    Abstract: This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification. JEL Classification: G21, F36, G15.
    Keywords: Banking, Contagion, Distance to default, Multinomial logit model.
    Date: 2006–07
  15. By: Annalisa Ferrando (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rozália Pál (European University Viadrina Frankfurt (Oder), Grosse Scharrnstr. 59, D-15230 Frankfurt (Oder) 15230, Germany.)
    Abstract: This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classiffication based on micro data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Contrary to previous evidence based mainly on US firms, our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing onditions, the internal cash flow is used in a systematic pattern for the inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms. JEL Classification: D92; G3; G32.
    Keywords: financing conditions; cash policy decisions.
    Date: 2006–06
  16. By: Joshua Aizenman; Daniel Riera-Crichton
    Abstract: This paper evaluates the impact of international reserves, terms of trade (TOT) shocks and capital flows on the real exchange rate (REER). We observe that international reserves (IR) cushions the impact of TOT shocks on REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. As suggested by theory, financial depth reduces the buffer role of IR in developing countries. The role of shock absorber for IR remains robust to the addition of various controls, dealing with capital flows (FDI, hot money, etc.), exchange rate management and monetary policy, as well as trade openness. We also find that short term capital inflows (Other Investment, Portfolio Investment) and increases in foreign reserves are associated with appreciated real exchange rate. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER and no effect on REER due to changes in reserve assets.
    JEL: F15 F21 F32 F36
    Date: 2006–07
  17. By: Jansen, Pieter W. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
    Abstract: International capital market convergence reduces the ability for monetary authorities to set domestic monetary conditions. Traditionally, monetary policy transmission is channelled through the short-term interest rate. Savings and investment decisions are effected through the response of the bond yield to changes in the short-term interest rate. We find that capital market integration increased correlation between long-term interest rates across countries. Short-term interest rates also show more integration across countries and the correlation with the international business cycle has increased. A stronger linkage between international economic conditions and bond yields has important implications for the effectiveness of monetary policy. Monetary policy makers, especially in small countries, will face more difficulties in influencing domestic conditions in the bond market when they apply the traditional monetary policy framework in case of a country specific shock.
    Keywords: Monetary policy; Term structure of interest rates; International capital market convergence
    JEL: E43
    Date: 2006
  18. By: Paolo Paesani (University of Rome – Tor Vergata – Department of Economics and Institutions, Via Columbia n. 2, 00133 Rome, Italy.); Rolf Strauch (European Central Bank, Monetary Policy Strategy Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Manfred Kremer (European Central Bank, Capital Markets and Financial Structure Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The debate on the sustainability of public finances is closely related to the analysis of the financial and macroeconomic consequences of government debt accumulation. Focusing on the USA, Germany and Italy over the 1983?2003 period, the central issue addressed in this paper is how the accumulation of government debt affects long-term interest rates, both nationally and across borders. The analysis is based on a small, multivariate econometric model, which allows us to disentangle the more permanent and transitory components of interest rate developments. Empirical evidence shows that in all cases a more sustained debt accumulation leads at least temporarily to higher long-term interest rates. This transitory impact also spills-over into other countries, mainly from the US to the two European countries. JEL Classification: E6, H63.
    Keywords: Public debt, Long-Term Interest Rates, Cointegration, Common Trends.
    Date: 2006–07
  19. By: George J. Mailath (Cowles Foundation, Yale University); Georg Noldeke (Universitat Bonn)
    Abstract: Extreme adverse selection arises when private information has unbounded support, and market breakdown occurs when no trade is the only equilibrium outcome. We study extreme adverse selection via the limit behavior of a financial market as the support of private information converges to an unbounded support. A necessary and sufficient condition for market breakdown is obtained. If the condition fails, then there exists competitive market behavior that converges to positive levels of trade whenever it is first best to have trade. When the condition fails, no feasible (competitive or not) market behavior converges to positive levels of trade.
    Keywords: Adverse selection, Market breakdown, Separation, Competitive pricing
    JEL: D40 D82 D83 G12 G14
    Date: 2006–07
  20. By: Pradeep Dubey (Dept. of Economics, Stony Brook); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short term loans in the future, then the economy will fall into a liquidity trap today.
    Keywords: Central bank, Inside money, Outside money, Incomplete assets, Production, Monetary equilibrium, Liquidity, Liquidity trap
    JEL: D50 D51 D52 D58 D60 E12 E31 E32 E41 E42 E43 E44 E50 E51 E52 E58 E63
    Date: 2006–07
  21. By: Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie Lührmann (Institute for Fiscal Studies, 7, Ridgmount Street, WC1E 7AE London, United Kingdom.)
    Abstract: In a panel covering a large number of countries from 1970 to 2003, we show that net portfolio flows play an important role in correcting external imbalances, since they are driven by common determinants represented by countries’ demographic profiles, the quality of institutions, monetary aggregates and initial net financial asset positions. Population ageing causes current account deficits, net equity inflows and net outflows in debt instruments. A higher money to GDP ratio – associated with lower interest rates – favours international investments in domestic stocks to the detriment of the less attractive domestic bonds. Additionally, current account balances are driven negatively by real GDP growth, losses in competitiveness and increases in the quality of the institutions; net equity flows are driven positively by the quality of the institutions and negatively by per capita income; while net flows in debt instruments are driven by long-term interest rate differentials and deviations from the UIP. JEL Classification: F21, F32, F41, O16.
    Keywords: Current accounts, net portfolio flows, panel regressions.
    Date: 2006–07
  22. By: Yingjin Hila Gan; Christopher Mayer
    Abstract: Asset-backed securities represent one of the largest and fastest growing financial markets. Under securitization, agents perform functions (for fees) that would alternatively be performed by a vertically integrated lender with ownership of a whole loan. We examine how outsourcing impacts performance using data on 357 commercial mortgage-backed securities deals with over 46,000 individual loans. To alleviate agency conflicts in managing troubled loans, underwriters often sell the first-loss position to the special servicer, the party who is charged with handling delinquencies and defaults. When holding the first-loss position, special servicers appear to behave more efficiently, making fewer costly transfers of delinquent loans to special servicing, but liquidating a higher percentage of loans that are referred to special servicing. Special servicers are also more likely to own the first loss position in deals that require additional effort (deals with higher delinquencies). Market pricing reflects the existence of agency costs. Despite the apparent reduction of agency costs, the first-loss position is increasingly owned by a party other than the special servicer. We pose a number of explanations, including conflicts between junior and senior securities holders (the asset substitution problem) and risk aversion among special servicers. Consistent with asset substitution, we show that special servicers delay liquidation when they hold the first-loss position in deals with more severe delinquency problems.
    JEL: D8 G2 G3 L2
    Date: 2006–07
  23. By: Martin Shubik (Cowles Foundation, Yale University)
    Abstract: A game theoretic approach to the theory of money and financial institution is given utilizing both the strategic and coalitional forms for describing the economy. The economy is first modeled as a strategic market game, then the strategic form is used to calculate several cooperative forms that differ from each other in their utilization of money and credit and their treatment of threats. It is shown that there are natural upper and lower bounds to the monetary needs of an economy, but even in the extreme structures the concept of "enough money" can be defined usefully, and for large economies the games obtained from the lower and upper bounds have cores that approach the same limit that is an efficient price system. The role of disequilibrium is then discussed.
    Keywords: Money, Prices, Core, Threat, Market game, Strategic market game
    JEL: C71 C72 E40
    Date: 2006–07
  24. By: Peter Rowland
    Abstract: Since mid-July 2002 this rate has remained more or less constant at around 7.8 percent. More importantly, it did not react to any of two 100-basis-point increases in the overnight repo rate, the main tool of monetary policy that Banco de la República has to influence domestic interest rates, which has rendered the repo rate rather inefficient as a monetary policy tool. This paper studies the DTF rate and its development over time. It shows that a significant pass-through from the overnight interest rates to the DTF rate that was present before July 2002 thereafter seems to have vanished. It also provides a number of explanations to why the DTF rate has remained constant: Overnight rates have in real terms been negative and might, therefore, have been more out of the market than the DTF rate; due to heavy government borrowing, the yield curve has been too steep to allow a further lowering of the DTF rate; competition in the financial system is low, leading to sticky interest rates; the DTF rate is not a free-market auction rate but an offer rate set by the banks; and the DTF rate is a very dominant benchmark.
  25. By: Jonathan Lewellen; Stefan Nagel; Jay Shanken
    Abstract: It has become standard practice in the cross-sectional asset-pricing literature to evaluate models based on how well they explain average returns on size- and B/M-sorted portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset-pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) in fact provides quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models don’t work as well as originally advertised.
    JEL: G12
    Date: 2006–07
  26. By: Yongfu Huang
    Abstract: Using recently developed panel data techniques on data for 43 developing countries over the period 1970-98, this paper provides an exhaustive analysis of causality between aggregate private investment and financial development. GMM estimation on averaged data, and a common factor approach on annual data allowing for global interdependence and heterogeneity across countries suggest positive causal effects going in both directions. The finding has rich implications for the development of financial markets and the conduct of macroeconomic policies in developing countries in an integrated global economy.
    Keywords: Private Investment, Financial Development, Global Interdependence, Common Factor Analysis, Panel Unit Root Test, Panel Cointegration Test
    JEL: F36 F41 E22 E44
    Date: 2006–07
  27. By: Martha López
    Abstract: This paper investigates the possible responses of an inflation-targeting monetary policy in the face of asset price deviations from fundamental values. Focusing on the housing sector of the Colombian economy, we consider a general equilibrium model with frictions in credit market and bubbles in housing prices. We show that monetary policy is less efficient when it responds directly to asset price of housing than a policy that reacts only to deviations of expected inflation (CPI) from target. Some prudential regulation may provide a better outcome in terms of output and inflation variability.
    Keywords: House price bubbles, interest rate rules, monetary policy, inflation Targeting.
    JEL: E32 E40 E47 E52
  28. By: Marek Hudon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and Harvard University, Boston.)
    Abstract: This paper addresses the fairness of prices, with a focus on fair interest rates as they apply to microlending transactions for the poor. Under different assumptions on fairness in interest rate policies and the principles of justice as described in A Theory of Justice (Rawsl, 1976), the paper determines the extent of the ‘just’ range of a price. Using the original notion of fair reservation price and fair bargaining range, it is shown that some unfair considerations can make the fair bargaining range negative. Therefore, we propose an additional criterion for fairness: a fair distribution of the benefits within the fair bargaining range between borrowers and lenders. This new criterion is particularly useful and relevant, at minimum, for socially-minded ones active on the microfinance markets.
    Keywords: justice, microfinance, interest rate, principles.
    JEL: L31 M54 O16 Q14
    Date: 2006–07
  29. By: Gine, Xavier; Love, Inessa
    Abstract: The authors study the effect of reorganization costs on the efficiency of bankruptcy laws. They develop a simple model that predicts that in a regime with high costs, the law fails to achieve the efficient outcome of liquidating unviable businesses and reorganizing viable ones. The authors test the model using the Colombian bankruptcy reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, they find that the pre-reform reorganization proceeding was so inefficient that it failed to separate economically viable firms from inefficient ones. In contrast, by substantially lowering reorganization costs, the reform improved the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia.
    Keywords: Banks & Banking Reform,Corporate Law,Small Scale Enterprise,Microfinance,Economic Theory & Research
    Date: 2006–07–01
  30. By: Mari Maunula
    Keywords: venture capital, biotechnology
    JEL: G24 L65 M13
    Date: 2006–07–11
  31. By: Irena Grosfeld
    Abstract: The initial view of the advantages of ownership concentration in joint stock companies was determined by the concern about the opportunistic managerial behavior. The growing importance of knowledge and human capital in the operation of firms shifts the focus of concern: excessive ownership concentration may stifle managerial initiative. This may be particularly true, and the results obtained in this paper support this hypothesis, in firms with high share of knowledge related activities. I explore the determinants of ownership concentration and the relationship between ownership structure and firm value in the context of a transition economy, i.e. an economy undergoing important changes in its legal and regulatory framework, in macroeconomic policy and most of all, in its property rights allocation. I focus on all non-financial companies traded on the Warsaw Stock Exchange since its inception in 1991 and up to 2003. We can observe that ownership of companies becomes more dispersed with the number of years of listing. The results reported in this paper suggest that firm adjust their ownership structure to firm specific characteristics and that firms belonging to the sector of high technology tend to have lower ownership concentration. The positive impact of ownership concentration on firm value detected in OLS regressions becomes even stronger when we control for the endogeneity of ownership.
    Date: 2006
  32. By: Martin Valdivia (Grupo de Analisis para el Dessarrollo); Dean Karlan (Economic Growth Center, Yale University)
    Abstract: Can one teach entrepreneurship, or is it a fixed personal characteristic? Most academic and policy discussion on microentrepreneurs in developing countries focuses on their access to credit, and assumes their human capital to be fixed. However, a growing number of microfinance organizations are attempting to build the human capital of micro-entrepreneurs in order to improve the livelihood of their clients and help further their mission of poverty alleviation. Using a randomized control trial, we measure the marginal impact of adding business training to a Peruvian village banking program for female microentrepreneurs. Treatment groups received thirty to sixty minute entrepreneurship training sessions during their normal weekly or monthly banking meeting over a period of one to two years. Control groups remained as they were before, meeting at the same frequency but solely for making loan and savings payments. We find that the treatment led to improved business knowledge, practices and revenues. The microfinance institution also had direct benefits through higher repayment and client retention rates. Larger effects found for those that expressed less interest in training in a baseline survey have important implications for implementing similar market-based interventions with a goal of recovering costs.
    Keywords: entrepreneurship, microfinance, business training, business skills, adult education
    JEL: C93 D12 D13 D21 I21 J24 O12
  33. By: Beethoven Herrera Valencia
    Abstract: Durante el último decenio del Siglo XX, el proceso de internacionalización económica tomó una dinámica acelerada y todo parece indicar que esta tendencia se mantendrá durante la primera fase del nuevo milenio. Existe un gran consenso acerca de la irreversibilidad de este proceso, fundado en los cambios tecnológicos que permiten comunicaciones inmediatas en tiempo real y, adicionalmente, en las facilidades crecientes para el comercio y para los flujos de capital. Al mismo tiempo, se empieza a cuestionar la pertinencia de las políticas económicas adoptadas por los países en desarrollo, orientadas a mejorar su participación en la economía global. Las asimetrías entre el proteccionismo del centro y las exigencias de apertura a los países periféricos son objeto de fuertes críticas, y son cada vez más numerosos los que se preguntan si las políticas monetaria, fiscal, de intercambio y de apertura al flujo de capitales externo son realmente apropiadas para asegurar un crecimiento sostenible y una distribución igualitaria de los beneficios del desarrollo. Si bien existen numerosos análisis críticos a la manera como se efectuó la inserción de los países en la economía global, hasta ahora nadie ha propuesto de manera convincente el retorno a las economías fuertemente proteccionistas y con una intensa intervención del Estado. Nos parece entonces de gran interés evaluar los logros y las fallas de la modalidad de inserción adoptada por las economías en desarrollo –y por Latinoamérica como región– y así, discernir las vías de integración y de acceso al mercado mundial que se deban privilegiar y las correcciones que conviene introducir para optimizar el desempeño de estas economías en el escenario mundial. El presente trabajo se propone analizar el proceso de evolución del comercio, de las inversiones y de los flujos de capital, así como las razones que determinan la localización de las empresas, la especialización por producto y por proceso productivo dentro de la nueva etapa de globalización económica. Desde esta perspectiva, se confrontan los objetivos derivados de las teorías de comercio y las tendencias observadas en la evidencia empírica.
    Date: 2005–10–31

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