New Economics Papers
on Financial Markets
Issue of 2006‒08‒05
123 papers chosen by
Carolina Valiente

  1. Banks, markets, and efficiency By Fecht, Falko; Martin, Antoine
  2. The Credit Risk Transfer Market and Stability Implications for U.K. Financial Institutions By Li L. Ong; Jorge A. Chan-Lau
  3. Progress in China's Banking Sector Reform: Has Bank Behavior Changed? By Richard Podpiera
  4. U.S. Dollar Risk Premiums and Capital Flows By Ravi Balakrishnan; Volodymyr Tulin
  5. Market-Based Estimation of Default Probabilities and Its Application to Financial Market Surveillance By Jorge A. Chan-Lau
  6. Idiosyncratic and Systemic Risk in the European Corporate Sector: A CDO Perspective By Yinqiu Lu; Jorge A. Chan-Lau
  7. Do banks diversify loan portfolios? A tentative answer based on individual bank loan portfolios By Kamp, Andreas; Pfingsten, Andreas; Porath, Daniel
  8. A “wreckers theory” of financial distress By von Kalckreuth, Ulf
  9. Quantitative easing and Japanese bank equity values By Takeshi Kobayashi; Mark Spiegel; Nobuyoshi Yamori
  10. Cyclical implications of minimum capital requirements By Heid, Frank
  11. A New Risk Indicator and Stress Testing Tool: A Multifactor Nth-to-Default CDS Basket By Antonio Garcia Pascual; Renzo G. Avesani; Jing Li
  12. Sudden Stops and Currency Drops: A Historical Look By Luis Catão
  13. Financial integration and systemic risk By Fecht, Falko; Grüner, Hans Peter
  14. Prepaid cards: an important innovation in financial services By Julia S. Cheney; Sherrie L.W. Rhine
  15. The Impact of ECB Communication on Financial Market Expectations By Michael Lamla; Sarah M. Rupprecht
  16. Microfinance games By Gine, Xavier; Jakiela, Pamela; Karlan, Dean; Morduch, Jonathan
  17. Is Systematic Default Risk Priced in Equity Returns? A Cross-Sectional Analysis Using Credit Derivatives Prices By Jorge A. Chan-Lau
  18. Financial intermediaries, markets and growth By Fecht, Falko; Huang, Kevin; Martin, Antoine
  19. Cost Efficiency of Domestic and Foreign Banks in Thailand: Evidence from Panel Data By Chantapong, Saovanee; Menkhoff, Lukas
  20. Are More Competitive Banking Systems More Stable? By Martin Cihák; Klaus Schaeck; Simon Wolfe
  21. Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market By Alessandro Beber; Michael W. Brandt; Kenneth A. Kavajecz
  22. Finance and growth in a bank-based economy: is it quantity or quality that matters? By Koetter, Michael; Wedow, Michael
  23. Toward a Lender of First Resort By Daniel Cohen; Richard Portes
  24. Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia By Kerstin Bernoth; Guntram B. Wolff
  25. The Role of IMF Support in Crisis Prevention By Juan Zalduendo; Uma Ramakrishnan
  26. Quality of Institutions, Credit Markets and Bankruptcy By Hainz, Christa
  27. Using the Balance Sheet Approach in Surveillance: Framework, Data Sources, and Data Availability By Johan Mathisen; Anthony J. Pellechio
  28. Review and Implementation of Credit Risk Models of the Financial Sector Assessment Program (FSAP) By Renzo G. Avesani; Kexue Liu; Alin Mirestean; Jean Salvati
  29. Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia By Bernoth, Kerstin; Wolff, Guntram B.
  30. Microenterprises and Multiple Bank Relationships: Evidence from a Survey among Professionals By Doris Neuberger; Solvig Räthke
  31. Search in asset markets By Ricardo Lagos; Guillaume Rocheteau
  32. Firm-level evidence on international stock market comovement By Brooks, Robin; Del Negro, Marco
  33. The Introduction of the Euro and its Effects on Investment Decisions By Haselmann, Rainer; Helmut, Herwartz
  34. Foreign entry and bank competition By Rajdeep Sengupta
  35. Getting Shut Out of the International Capital Markets: It Doesn't Take Much By Robert P. Flood; Nancy P. Marion
  36. The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis By Reitz, Stefan; Taylor, Mark P.
  37. Interest Rate Determination in Lebanon By Mangal Goswami; Juan Sole; Tushar Poddar; Victor Echevarria Icaza
  38. What drives volatility persistence in the foreign exchange market? By David Berger; Alain Chaboud; Erik Hjalmarsson; Edward Howorka
  39. The eurosystem money market auctions: a banking perspective By Bartzsch, Nikolaus; Craig, Ben; Fecht, Falko
  40. A Framework for Independent Monetary Policy in China By Marvin Goodfriend; Eswar Prasad
  41. Authorities' beliefs about foreign exchange intervention: getting back under the hood By Christopher J. Neely
  42. Banks’ regulatory capital buffer and the business cycle: evidence for German savings and cooperative banks By Stolz, Stephanie; Wedow, Michael
  43. Stock returns and volatility: pricing the short-run and long-run components of market risk By Tobias Adrian; Joshua Rosenberg
  44. Transmission of volatility and trading activity in the global interdealer foreign exchange market: evidence from electronic broking services (EBS) data By Fang Cai; Edward Howorka; Jon Wongswan
  45. In search of distress risk By Campbell, John Y.; Hilscher, Jens; Szilagyi, Jan
  46. Transmission Mechanism in Transition Economies: Surveying the Surveyable By Balázs Égert; Ronald MacDonald
  47. Accounting for distress in bank mergers By Koetter, Michael; Bos, Jaap W. B.; Heid, Frank; Kool, Clemens J. M.; Kolari, James W.; Porath, Daniel
  48. International Financial Integration, Sovereignty, and Constraints on Macroeconomic Policies By Kenneth Kletzer
  49. The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004 By Gian Maria Milesi-Ferretti; Philip R. Lane
  50. Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision By Richard Podpiera; Martin Cihák
  51. Evaluating the German bank merger wave By Koetter, Michael
  52. The Korean Crisis: What Did We Know and When Did We Know It? What Stress Tests of the Corporate Sector Reveal By Matthew T. Jones; Meral Karasulu
  53. General equilibrium of financial markets By Monique Florenzano
  54. Determinants of Venezuela's Equilibrium Real Exchange Rate By Juan Zalduendo
  55. Can Affine Term Structure Models Help Us Predict Exchange Rates? By Antonio Diez de los Rios
  56. International diversification at home and abroad By Cai, Fang; Warnock, Francis E.
  57. Monetary disequilibria and the Euro/Dollar exchange rate By Nautz, Dieter; Ruth, Karsten
  58. The forecast ability of risk-neutral densities of foreign exchange By Craig, Ben; Keller, Joachim
  59. Exchange Rate Misalignment: An Application of the Behavioral Equilibrium Exchange Rate (BEER) to Botswana By Atsushi Iimi
  60. Real-time macroeconomic data and ex ante predictability of stock returns By Döpke, Jörg; Hartmann, Daniel; Pierdzioch, Christian
  61. IMF-Supported Programs and Crisis Prevention: An Analytical Framework By Jun Il Kim
  62. Spending Seigniorage: Do Central Banks Have a Governance Problem? By Alain Ize
  63. Time series properties of a rating system based on financial ratios By Krüger, Ulrich; Stötzel, Martin; Trück, Stefan
  64. Determinants of current account developments in the central and east European EU member states – consequences for the enlargement of the euro area By Herrmann, Sabine; Jochem, Axel
  65. Inefficient or just different? Effects of heterogeneity on bank efficiency scores By Bos, Jaap W. B.; Heid, Frank; Koetter, Michael; Kolari, James W.; Kool, Clemens J. M.
  66. Sovereign Insurance and Program Design: What is Optimal for the Sovereign? By Miguel Messmacher
  67. The Lender of Last Resort in the European Single Financial Market By Pedro Gustavo Teixeira; Garry J. Schinasi
  68. The supervisor’s portfolio: the market price risk of German banks from 2001 to 2003 – Analysis and models for risk aggregation By Memmel, Christoph; Wehn, Carsten
  69. Consumption, wealth and business cycles : why is Germany different? By Hamburg, Britta; Hoffmann, Mathias; Keller, Joachim
  70. Forecasting and Combining Competing Models of Exchange Rate Determination By Carlo Altavilla; Paul De Grauwe
  71. Forecasting stock market volatility with macroeconomic variables in real time By Döpke, Jörg; Hartmann, Daniel; Pierdzioch, Christian
  72. Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies By Enrique G. Mendoza
  73. Business Groups in Emerging Markets – Financial Control and Sequential Investment By Christa Hainz
  74. Taxes and the financial structure of German inward FDI By Ramb, Fred; Weichenrieder, Alfons J
  75. The Cost of Reserves By Eduardo Levy Yeyati
  76. How Do Central Banks Write on Financial Stability? By Martin Cihák
  77. Inflation Targeting in Dollarized Economies By Eric Parrado; Rodolfo Maino; Leonardo Leiderman
  78. The Loss Aversion / Narrow Framing Approach to the Equity Premium Puzzle By Nicholas Barberis; Ming Huang
  79. Are Asset Price Guarantees Useful for Preventing Sudden Stops? A Quantitative Investigation of the Globalization Hazard-Moral Hazard Tradeoff By Ceyhun Bora Durdu; Enrique G. Mendoza
  80. Measurement matters – Input price proxies and bank efficiency in Germany By Koetter, Michael
  81. Annuity markets in Chile : competition, regulation - and myopia ? By Walker, Eduardo
  82. Uncovered Interest Parity By Peter Isard
  83. Economies through transparency By Emiliano Grossman; Fabian Muniesa; Emilio Luque
  84. Corporate response to distress: evidence from the Asian financial crisis By Mara Faccio; Rajdeep Sengupta
  85. Government Debt in Emerging Market Countries: A New Data Set By Anastasia Guscina; Olivier Jeanne
  86. Common stationary and non-stationary factors in the euro area analyzed in a large-scale factor model By Eickmeier, Sandra
  87. Measuring business sector concentration by an infection model By Düllmann, Klaus
  88. Time-Variation of Higher Moments in a Financial Market with Heterogeneous Agents: An Analytical Approach By Alfarano, Simone; Lux, Thomas; Wagner, Friedrich
  89. How costly is exchange rate stabilisation for an inflation targeter? The case of Australia By Mark Crosby; Tim Kam; Kirdan Lees
  90. Perspectives on Low Global Interest Rates By Luis Catão; G. A. Mackenzie
  91. German bank lending to industrial and non-industrial countries: driven by fundamentals or different treatment? By Nestmann, Thorsten
  92. World Crude Oil Markets: Monetary Policy and the Recent Oil Shock By Noureddine Krichene
  93. Is Housing Wealth an 'ATM'? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates By Vladimir Klyuev; Paul Mills
  94. Fiscal Discipline and Exchange Rate Regimes: Evidence from the Caribbean By Guillermo Tolosa; Rupa Duttagupta
  95. Incorporating prediction and estimation risk in point-in-time credit portfolio models By Hamerle, Alfred; Knapp, Michael; Liebig, Thilo; Wildenauer, Nicole
  96. Asset pricing implications of Pareto optimality with private information By Kocherlakota, Narayana R.; Pistaferri, Luigi
  97. Does Consumption-Wealth Ratio Signal Stock Returns? : VECM Results for Germany By Xu, Fang
  98. A Superior Hybrid Cash-Flow Tax on Corporations By Howell H. Zee
  99. The dynamic relationship between the Euro overnight rate, the ECB´s policy rate and the term spread By Nautz, Dieter; Offermanns, Christian J.
  100. Uncertainty Determinants of Firm Investment By Christopher F. Baum; Mustafa Caglayan; Oleksandr Talavera
  101. The renminbi equilibrium exchange rate: an agnostic view By Antoine Bouveret; Sana Mestiri; Henri Sterdyniak
  102. Micro-credit, risk coping and the incidence of rural-to-urban migration By Ahsan, Quamrul
  103. Financing firms in India By Allen, Franklin; Chakrabarti, Rajesh; De, Sankar; Qian, Jun; Qian, Meijun
  104. Disintermediation and Monetary Transmission in Canada By Jorge Roldos
  105. Ultra high frequency volatility estimation with dependent microstructure noise By Ait-Sahalia, Yacine; Mykland, Per A.; Zhang, Lan
  106. Sovereign Borrowing Cost and the IMF's Data Standards Initiatives By John Cady; Anthony J. Pellechio
  107. The termination of subprime hybrid and fixed rate mortgages By Anthony Pennington-Cross; Giang Ho
  108. (UBS Pensions Series 043) The Optimal Design of Funded Pensions By Luciano Greco
  109. Another look at credit card pricing and its disclosure: Is the semi-annual pricing data reported by credit card issuers to the Fed helpful to consumers or researchers? By Mark Furletti; Christopher Ody
  110. Extreme Adverse Selection, Competitive Pricing, and Market Breakdown By George J. Mailath; Georg Nöldeke
  111. Fiscal Policy and Interest Rates--How Sustainable Is the "New Economy"? By David Hauner; Manmohan S. Kumar
  112. Financial constraints and capacity adjustment in the United Kingdom : Evidence from a large panel of survey data By von Kalckreuth, Ulf; Murphy, Emma
  113. Modeling the FIBOR/EURIBOR Swap Term Structure : An Empirical Approach By Blaskowitz, Oliver; Herwartz, Helmut; de Cadenas Santiago, Gonzalo
  114. Branching and Competitiveness across Regions in the Italian Banking Industry By V. CERASI - B. CHIZZOLINI - M. IVALDI
  115. Robust non-parametric quantile estimation of efficiency and productivity change in U.S. commercial banking, 1985-2004 By David C. Wheelock; Paul Wilson
  116. Adopting Full Dollarization in Postconflict Economies: Would the Gains Compensate for the Losses in Liberia? By Jiro Honda; Liliana Schumacher
  117. Exchange rate risk and economic reform: the case of endogenous institutional change in China By Veit, Wolfgang
  118. Bond pricing when the short term interest rate follows a threshold process By Lemke, Wolfgang; Archontakis, Theofanis
  119. The Euro's Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data By Ewe-Ghee Lim
  120. Firms' investment under financing constraints. An euro area investigation By Rozália Pál; Roman Kozhan
  121. Domestic Investment and the Cost of Capital in the Caribbean By Shaun K. Roache
  122. The Political Economy of Corruption and and the Role of Financial Institutions By Boerner, Kira; Hainz, Christa
  123. Oil Price Shocks and Currency Denomination (A revised version of EWP 2005-01) By Wohltmann, Hans-Werner; Winkler, Roland

  1. By: Fecht, Falko; Martin, Antoine
    Abstract: Following Diamond (1997) and Fecht (2004) we use a model in which financial market access of households restrains the efficiency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about inefficiencies, improved financial market access that limits monopoly rents also entails a positive effect. But this beneficial effect is only relevant if competition among banks does not sufficiently restrain monopoly rents already. Thus our results suggest that in the bank-dominated financial system of Germany, in which banks intensely compete for households' deposits, improved financial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' financial market participation might be beneficial.
    Keywords: Financial Intermediaries, Risk Sharing, Banking Competition, Comparing Financial Systems
    JEL: E44 G10 G21
    Date: 2005
  2. By: Li L. Ong; Jorge A. Chan-Lau
    Abstract: The increasing ability to trade credit risk in financial markets has facilitated its dispersion across the financial and other sectors. However, specific risks attached to credit risk transfer (CRT) instruments in a market with still-limited liquidity means that its rapid expansion may actually pose problems for financial sector stability in the event of a major negative shock to credit markets. This paper attempts to quantify the exposure of major U.K. financial groups to credit derivatives, by applying a vector autoregression (VAR) model to publicly available market prices. Our results indicate that use of credit derivatives does not pose a substantial threat to financial sector stability in the United Kingdom. Exposures across major financial institutions appear sufficiently diversified to limit the impact of any shock to the market, while major insurance companies are largely exposed to the "safer" senior tranches.
    Keywords: Credit risk , United Kingdom , Capital markets , Financial stability ,
    Date: 2006–06–12
  3. By: Richard Podpiera
    Abstract: Substantial effort has been devoted to reforming China's banking system in recent years. The authorities recapitalized three large state-owned banks, introduced new governance structures, and brought in foreign strategic investors. However, it remains unclear the extent to which currently reported data reflect the true credit risk in loan portfolios and whether lending decisions have started to be taken on a commercial basis. We examine lending growth, credit pricing, and regional patterns in lending from 1997 through 2004 to look for evidence of changing behavior of the large state-owned commercial banks (SCBs). We find that the SCBs have slowed down credit expansion, but that the pricing of credit risk remains undifferentiated and banks do not appear to take enterprise profitability into account when making lending decisions. Controlling for several factors, we find that large SCBs have continued to lose market share to other financial institutions in provinces with more profitable enterprises. The full impact of the most recent reforms will become clear only in several years, however, and these issues should be revisited in future research.
    Keywords: Banking systems , China , Credit risk , Bank supervision , Bank regulations ,
    Date: 2006–03–29
  4. By: Ravi Balakrishnan; Volodymyr Tulin
    Abstract: This paper sheds light on the attractiveness of U.S. assets by studying dollar risk premiums, calculated using Consensus exchange rate forecasts, and linking them to bilateral capital flows. The paper finds that the presence of negative dollar risk premiums (i.e. expectations of a dollar depreciation net of interest rate effects) amid record capital inflows could suggest that investors may favor U.S. assets for structural reasons. One possible explanation could be that the Asian crisis created a large pool of savings searching for relatively riskless investment opportunities, which were provided by deep, liquid, and innovative U.S. financial markets with robust investor protection. Moreover, the continued attractiveness of U.S. financial markets to European investors suggests that they offer a large array of assets, with different risk/return characteristics, that facilitate the structuring of diversified investment portfolios. Looking forward, this suggests that the allocative efficiency of U.S. financial markets could mitigate risks of a disorderly unwinding of global current account imbalances.
    Date: 2006–07–11
  5. By: Jorge A. Chan-Lau
    Abstract: This paper reviews a number of different techniques for estimating default probabilities from the prices of publicly traded securities. These techniques are useful for assessing credit exposure, systemic risk, and stress testing financial systems. The choice of techniques was guided by their ease of implementation and their applicability to a wide cross-section of countries and markets. Simple one-period cases are studied to sharpen the reader's intuition, and the usefulness of each technique for enhancing financial surveillance is illustrated with real applications.
    Keywords: Securities markets , Financial risk , Financial sector , Exchange rate policy surveillance , Bonds , Asset prices , International financial system , Financial institutions ,
    Date: 2006–05–02
  6. By: Yinqiu Lu; Jorge A. Chan-Lau
    Abstract: Systemic risk remains a major concern to policymakers since widespread defaults in the corporate and financial sectors could pose substantial costs to society. Forward-looking measures and/or indicators of systemic default risk are thus needed to identify potential buildups of vulnerability in advance. In this paper, we explain how to construct idiosyncratic and systemic default risk indicators using the information embedded in single-tranche standardized collateralized debt obligations (STCDOs) referencing credit derivatives indices. As an illustration, both risk indicators are constructed for the European corporate sector using midprice quotes for STCDOs referencing the iTraxx Europe index.
    Keywords: Financial risk , Europe , Credit risk , Risk management , Financial sector , Debt , Credit tranches , Asset prices , International capital markets ,
    Date: 2006–05–10
  7. By: Kamp, Andreas; Pfingsten, Andreas; Porath, Daniel
    Abstract: Theory of financial intermediation gives contradicting answers to the question whether banks should diversify or focus their loan portfolios. Our aim is to find out which of the two strategies is predominant in the German banking market. To this end we measure diversification for all German banks in the period from 1993 to 2002. As measures we use a broad set of heuristic approaches which capture the deviation of a bank's portfolio from a specified benchmark. Conceivable benchmarks are naive diversification across all industries or, alternatively, the economy's industry structure. With this framework our analysis comprises the widespread measures of concentration, like the Hirschman-Herfindahl index, but also the less known and in this context innovative group of distance measures. We find that different statistical measures of diversification may indicate contradicting results on the individual bank level. Since distance measures are more appealing from a theoretical point of view, the common practice to rely on measures of concentration only in the debate about diversification and focus, may be misleading. We further find that, despite these differences on the individual bank level, both approaches reveal that the majority of banks significantly increased loan portfolio diversification over the last decade. This tendency is especially driven by the large number of credit cooperatives and savings banks. However, some banks (especially regional banks and subsidiaries of foreign banks) reveal a strategy that seems to be more focused on certain industries.
    Keywords: bank lending, loan portfolio, portfolio theory, diversification, concentration measures, distance measures, focus
    JEL: C43 G11 G21
    Date: 2005
  8. By: von Kalckreuth, Ulf
    Abstract: In recent years, a number of papers have established a new empirical regularity. Stocks of distressed firms vastly underperform those of financially healthy firms. It is not necessary to attribute the negative excess returns of distressed firms to inefficient or irrational markets. We show that negative excess returns are the equilibrium outcome when a subset of participants is able to draw returns "in kind" from distressed companies. For firms close to bankruptcy, non-cash returns to ownership will be the dominant form of return to equity. If markets expect a contest for control, these returns will show up in stock valuation. The governance problem described here creates a link between the financial position of a firm and real allocation that may amplify macroeconomic real or financial shocks.
    Keywords: stock market anomalies, default risk, private benefits, moral hazard, limited liability
    JEL: G12 G14 G33 G34
    Date: 2005
  9. By: Takeshi Kobayashi; Mark Spiegel; Nobuyoshi Yamori
    Abstract: One of the primary motivations offered by the Bank of Japan (BOJ) for its quantitative easing program -- whereby it maintained a current account balance target in excess of required reserves, effectively pegging short-term interest rates at zero -- was to maintain credit extension by the troubled Japanese financial sector. We conduct an event study concerning the anticipated impact of quantitative easing on the Japanese banking sector by examining the impact of the introduction and expansion of the policy on Japanese bank equity values. We find that excess returns of Japanese banks were greater when increases in the BOJ current account balance target were accompanied by “nonstandard” expansionary policies, such as raising the ceiling on BOJ purchases of longterm Japanese government bonds. We also provide cross-sectional evidence that suggests that the market perceived that the quantitative easing program would disproportionately benefit financially weaker Japanese banks.
    Keywords: Monetary policy - Japan ; Bank of Japan ; Banks and banking - Japan
    Date: 2006
  10. By: Heid, Frank
    Abstract: Capital requirements play a key role in the supervision and regulation of banks. The Basel Committee on Banking Supervision is now changing the current framework by introducing risk-sensitive capital charges. There have been concerns that this will unduly increase volatility in the banks’ capital. Furthermore, when the credit supply is rationed, capital requirements may exacerbate an economic downturn. We examine the problem of cyclicality in a macroeconomic model which explicitly takes regulatory constraints into account. We find that the capital buffer which banks hold on top of the required minimum plays a crucial role in mitigating the volatility in capital requirements. Therefore, despite the fact that capital charges may vary significantly over time, the effects on the macroeconomy will be moderate.
    Keywords: minimum capital requirements, regulatory capital, economic capital, capital buffer, pro-cyclicality, business cycle, bank lending channel
    JEL: E32 E44 G21
    Date: 2005
  11. By: Antonio Garcia Pascual; Renzo G. Avesani; Jing Li
    Abstract: This paper generalizes a market-based indicator for financial sector surveillance using a multifactor latent structure in the determination of the default probabilities of an nth-todefault credit default swap (CDS) basket of large complex financial institutions (LCFIs). To estimate the multifactor latent structure, we link the market risk (the covariance of the LCFIs' equity) to credit risk (the default probability of the CDS basket) in a coherent manner. In addition, to analyze the response of the probabilities of default to changing macroeconomic conditions, we run a stress test by generating shocks to the latent multifactor structure. The results unveil a rich set of default probability dynamics and help in identifying the most relevant sources of risk. We anticipate that this approach could be of value to financial supervisors and risk managers alike.
    Keywords: Risk management , Economic indicators , Debt , Credit risk , Financial institutions , Investment policy , Commodity pricing policy , International capital markets , Banks , Economic models ,
    Date: 2006–05–08
  12. By: Luis Catão
    Abstract: This paper shows that recent manifestations of sudden stops (SSs) in international capital flows have striking parallels in the early financial globalization era preceding World War I. All main capital-importing countries then faced episodic capital flow reversals averaging some 5 percent of GDP and with a median duration of four years. Most SSs also displayed striking crosscountry synchronization, being immediately preceded by rising world interest rates. Both fixed and floating exchange rate regimes were hit, with no significant differences between them. Yet, not all SSs resulted in currency drops: while some countries experienced currency collapses, others managed to preserve exchange rate stability. These different responses are related to domestic "frictions" that heightened the procyclicality of absorption and hindered precautionary reserve accumulation in some countries relative to others.
    Keywords: Financial crisis , Capital flows , Exchange rate regimes ,
    Date: 2006–06–06
  13. By: Fecht, Falko; Grüner, Hans Peter
    Abstract: Recent empirical studies criticize the sluggish financial integration in the euro area and find that only interbank money markets are fully integrated so far. This paper studies the optimal regional and/or sectoral integration of financial systems given that integration is restricted to the interbank market. Based on Allen and Gale (2000)’s seminal analysis of financial contagion we derive the interbank market structure that maximizes consumers’ ex-ante expected utility, i.e. that optimizes the trade-off between the contagion and the diversification effect. We analyze the impact of various structural parameters including the underlying stochastic structure on this trade-off. In addition we derive the efficient design of the interbank market that allows for a cross-regional risk sharing between banks. We also provide a measure for the efficiency losses that result if financial integration is limited to an integration of the interbank market.
    Keywords: Interbank Market, Risk Sharing, Financial Co ion, Financial Integration
    JEL: D61 E44 G10 G21
    Date: 2005
  14. By: Julia S. Cheney; Sherrie L.W. Rhine
    Abstract: This paper describes the characteristics of closed-system and open-system prepaid cards. Of particular interest is a class of open-system programs that offer a set of features similar to conventional deposit accounts using card-based payment applications. The benefits that open-system prepaid cards offer for consumers, providers, and issuing banks contribute to the increased adoption of these payment applications. Using these cards, consumers can pay bills, make purchases, and get cash from ATM networks. At the same time, consumers who hold prepaid cards need not secure a traditional banking relationship nor gain approval for a deposit account or revolving credit. By offering prepaid cards, issuing banks may meet the financial needs of consumers who may not otherwise qualify for more traditional banking products and these banks may do so with a card-based electronic payment application that essentially eliminates credit risk for the bank.
    Keywords: Payment systems
    Date: 2006
  15. By: Michael Lamla (Department of Management, Technology and Economics, ETH Zurich (Swiss Federal Institute of Technology), Switzerland); Sarah M. Rupprecht (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: This paper analyzes European financial markets’ comprehension and interpretation of ECB communication signals. By applying a novel indicator developed by Berger et al. (2006), that quantifies the contents of the ECB’s introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB’s interpretation and forecasts of price developments represent important news to financial market agents.
    Keywords: Central Bank Communication, Expectations, Term Structure of Interest Rates, Yield Curve, ECB.
    JEL: E43 E44 E58
    Date: 2006–04
  16. By: Gine, Xavier; Jakiela, Pamela; Karlan, Dean; Morduch, Jonathan
    Abstract: Microfinance has been heralded as an effective way to address imperfections in credit markets. But from a theoretical perspective, 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. The authors created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted 11 different games that allow them to unpack microfinance mechanisms in a systematic way. They 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: Banks & Banking Reform,Insurance & Risk Mitigation,Financial Intermediation,Social Accountability,Civic Participation and Corporate Governance
    Date: 2006–07–01
  17. By: Jorge A. Chan-Lau
    Abstract: This paper finds that systematic default risk, or the event of widespread defaults in the corporate sector, is an important determinant of equity returns. Moreover, the market price of systematic default risk is one order of magnitude higher than the market price of other risk factors. In contrast to studies by Fama and French (1993, 1996 ) and Vassalou and Xing (2004), this paper uses a market-based measure of systematic default risk. The measure is constructed using price information from credit derivatives prices, namely the spreads of standardized single-tranche collateralized debt obligations on credit derivatives indices.
    Date: 2006–06–22
  18. By: Fecht, Falko; Huang, Kevin; Martin, Antoine
    Abstract: We build a model in which financial intermediaries provide insurance to households against a liquidity shock. Households can also invest directly on a financial market if they pay a cost. In equilibrium, the ability of intermediaries to share risk is constrained by the market. This can be beneficial because intermediaries invest less in the productive technology when they provide more risk-sharing. Our model predicts that bank-oriented economies should grow slower than more market-oriented economies, which is consistent with some recent empirical evidence. We show that the mix of intermediaries and market that maximizes welfare under a given level of financial development depends on economic fundamentals. We also show the optimal mix of two structurally very similar economies can be very different.
    Keywords: Financial Intermediaries, Risk Sharing, Finance and Growth, Comparing Financial Systems
    JEL: E44 G10 G20
    Date: 2005
  19. By: Chantapong, Saovanee; Menkhoff, Lukas
    Abstract: The paper estimates and compares cost efficiency of domestic and foreign banks in Thailand by using bank-panel data between 1995 and 2003. It also examines the effect of foreign bank entry on banking efficiency in Thailand since the significant acquisitions by foreign banks after the 1997 financial crisis. The widely used translog functional form specification is statistically tested by pooled regressions. The estimated results suggest that the unit costs of production of domestic and foreign banks are indistinguishable, although the two types of banks focus on different areas of the banking business. The findings suggest that based on bank operating efficiency, if foreign banks represent the best-practice banks in the industry, to a large extent, domestic banks in Thailand have caught up to the best-practice standards throughout 1995-2003, significantly after the 1997 financial crisis . This may be due to greater foreign participation through acquisitions, which increases the competitive pressure in the banking industry, and also to financial restructuring of domestic banks, which increases the cost efficiency of domestic banks, thereby benefiting banking customers.
    Keywords: Banks, Financial Policy, Capital and Ownership Structure, Cost Efficiency
    JEL: D24 G21 G32
    Date: 2005
  20. By: Martin Cihák; Klaus Schaeck; Simon Wolfe
    Abstract: This paper provides the first empirical analysis of the cross-country relationship between a direct measure of competitive conduct of financial institutions and banking system fragility. Using the Panzar and Rosse H-Statistic as a measure for competition in 38 countries during 1980-2003, we present evidence that more competitive banking systems are less prone to systemic crises and that time to crisis is longer in a competitive environment. Our results hold when concentration and the regulatory environment are controlled for and are robust to different methodologies, different sampling periods, and alternative samples.
    Keywords: Banking systems , Bank regulations , Bank supervision , Financial crisis ,
    Date: 2006–06–14
  21. By: Alessandro Beber; Michael W. Brandt; Kenneth A. Kavajecz
    Abstract: Do bond investors demand credit quality or liquidity? The answer is both, but at different times and for different reasons. Using data on the Euro-area government bond market, which features a unique negative correlation between credit quality and liquidity across countries, we show that the bulk of sovereign yield spreads is explained by differences in credit quality, though liquidity plays a non-trivial role especially for low credit risk countries and during times of heightened market uncertainty. In contrast, the destination of large flows into the bond market is determined almost exclusively by liquidity. We conclude that credit quality matters for bond valuation but that, in times of market stress, investors chase liquidity, not credit quality.
    JEL: G0 G12
    Date: 2006–07
  22. By: Koetter, Michael; Wedow, Michael
    Abstract: With this paper we seek to contribute to the literature on the relation between finance and growth. We argue that most studies in the field fail to measure the quality of financial intermediation but rather resort to using proxies on the size of nancial systems. Moreover, cross-country comparisons suffer from the disadvantage that systematic differences between markedly different economies may drive the result that finance matters. To circumvent these two problems we examine the importance of the quality of banks' financial intermediation in the regions of one economy only: Germany. To approximate the quality of financial intermediation we use cost effciency estimates derived with stochastic frontier analysis. We find that the quantity of supplied credit is indeed insignificant when a measure of intermediation quality is included. In turn, the efficiency of intermediation is robust, also after excluding banks likely to operate in multiple regions and distinguishing between dierent banking pillars active in Germany.
    Keywords: Finance-growth nexus, financial intermediation, regional growth
    JEL: G21 G28 O4 R11
    Date: 2005
  23. By: Daniel Cohen; Richard Portes
    Abstract: If interest rates (country spreads) rise, debt can rapidly be subject to a snowball effect, which becomes self-fulfilling with regard to the fundamentals themselves. This is a market imperfection, because we cannot be confident that the unaided market will choose the "good" over the "bad" equilibrium. We propose a policy intervention to deal with this structural weakness in the mechanisms of international capital flows. This is based on a simple taxonomy that breaks down the origin of crises into three components: confidence (spreads and currency crisis), fundamentals (real growth rate), and economic policy (primary deficit). Theory then suggests a set of circumstances in which a lender of first resort would be desirable. The policy would seek to short-circuit confidence crises, partly by using IMF support to improve ex ante incentives. Theory also illuminates the potential role of collective action clauses in reducing the risk of self-fulfilling debt crises.
    Keywords: Interest rates , Debt , Markets , Financial crisis , Financial systems ,
    Date: 2006–03–23
  24. By: Kerstin Bernoth; Guntram B. Wolff
    Abstract: We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both the official fiscal position and the expected “creative” part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia.
    Keywords: risk premia, government bond yields, creative accounting, stock-flow adjustments, gimmickry, transparency
    JEL: E43 E62 F34 G12 H60
    Date: 2006
  25. By: Juan Zalduendo; Uma Ramakrishnan
    Abstract: This paper examines the role of IMF-supported programs in crisis prevention; specifically, whether, conditional on an episode of intense market pressures, IMF financial support helps prevent a capital account crisis from developing and, if so, through what channels. In doing so, the paper distinguishes between the seal of approval inherent in IMF support and its financing, evaluates the interaction of IMF support with economic policies, and assesses whether IMF financing has a different impact on the likelihood of a crisis than other forms of liquidity. The main result is that IMF financing helps prevent crises through the liquidity provided (i.e., money matters). However, since the effect holds even after controlling for (gross) foreign exchange reserves, stronger policies and the seal of approval under an IMFsupported program must also play a role. Finally, the results suggest that IMF financing as a crisis prevention tool is most effective for an intermediate range of economic fundamentals.
    Keywords: Fund-supported adjustment programs , Balance of payments assistance , Crisis prevention , Capital account , Financial crisis ,
    Date: 2006–03–31
  26. By: Hainz, Christa
    Abstract: The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated.
    Keywords: Credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking
    JEL: D82 G21 G33 K10
    Date: 2005
  27. By: Johan Mathisen; Anthony J. Pellechio
    Abstract: Recent improvements in statistical methodologies and data availability are facilitating detailed, high-frequency, timely macroeconomic balance sheet analysis. This paper provides practical instruction on how to design the framework to analyze vulnerabilities in a country as well as an overview of data sources that can be employed for this analysis. The paper also discusses how these new datasets are enhancing surveillance activities related to balance sheet vulnerabilities.
    Keywords: Exchange rate policy surveillance , Financial risk , Risk management , Financial crisis , Capital account , Capital controls , Data collection , Data analysis ,
    Date: 2006–04–27
  28. By: Renzo G. Avesani; Kexue Liu; Alin Mirestean; Jean Salvati
    Abstract: The paper presents the basic Credit Risk+ model, and proposes some modifications. This model could be useful in the stress-testing financial sector assesments process as a benchmark for credit risk evaluations. First, we present the setting and basic definitions common to all the model specifications used in this paper. Then, we proceed from the simplest model based on Bernoulli-distributed default events and known default probabilities to the fully-fledged Credit Risk+ implementation. The latter is based on the Poisson approximation and uncertain default probabilities determined by mutually independent risk factors. As an extension we present a Credit Risk+ specification with correlated risk factors as in Giese (2003). Finally, we illustrate the characteristics and the results obtained from the different models using a specific portfolio of obligors.
    Date: 2006–06–06
  29. By: Bernoth, Kerstin; Wolff, Guntram B.
    Abstract: We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected ”creative” part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.
    Keywords: Risk premia, government bond yields, creative accounting, stock-flow adjustments, gimmickry, transparency
    JEL: E43 E62 F34 G12 H6
    Date: 2006
  30. By: Doris Neuberger (University of Rostock); Solvig Räthke (University of Rostock)
    Abstract: An overview of previous evidence about relationship banking to SMEs shows that multiple banking relationships prevail even at small firms, but there is hardly evidence on the number of banking relationships held by micro firms. To close this gap, we use data from a survey conducted among professionals in Germany in 2002. Being self-employed persons acting in the services sector, professionals are mostly informationally opaque micro firms. To explain the number of their banking relationships, we investigate characteristics of the firm and its loan demand, characteristics of the housebank and its relationship to the borrower, and variables of bank market structure and regulation. Consistent with the theory of asymmetric information, we find that these firms hold a small number of bank relationships, which increases in firm size and age. An increase in the duration or importance of the housebank relationship does not induce multiple banking relationships as predicted by the hold-up theory. Professionals rather tend to hold multiple banking relationships to increase their credit availability and finance larger loans. The type of the housebank and local banking market concentration do not seem to matter. All in all, the results indicate that multiple bank relationships help to overcome credit rationing.
    JEL: G21 G32
    Date: 2006
  31. By: Ricardo Lagos; Guillaume Rocheteau
    Abstract: We investigate how trading frictions in asset markets affect portfolio choices, asset prices and efficiency. We generalize the search-theoretic model of financial intermediation of Duffie, Gârleanu and Pedersen (2005) to allow for more general preferences and idiosyncratic shock structure, unrestricted portfolio choices, aggregate uncertainty and entry of dealers. With a fixed measure of dealers, we show that a steady-state equilibrium exists and is unique, and provide a condition on preferences under which a reduction in trading frictions leads to an increase in the price of the asset. We also analyze the effects of trading frictions on bid-ask spreads, trade volume and the volatility of asset prices, and find that the asset allocation is constrained-inefficient unless investors have all the bargaining power in bilateral negotiations with dealers. We show that the dealers’ entry decision introduces a feedback that can give rise to multiple equilibria, and that free-entry equilibria are generically inefficient.
    Date: 2006
  32. By: Brooks, Robin; Del Negro, Marco
    Abstract: We explore the link between international stock market comovement and the degree to which firms operate globally. Using stock returns and balance sheet data for companies in 20 countries, we estimate a factor model that decomposes stock returns into global, country-specific and industry-specific shocks. We find a large and highly significant link: on average, a firm raising its international sales by 10 percent raises the exposure of its stock return to global shocks by 2 percent and reduces its exposure to countryspecific shocks by 1.5 percent. This link has grown stronger since the mid-1980s.
    Keywords: Diversification, risk, international financial markets, industrial structure
    JEL: G11 G15
    Date: 2005
  33. By: Haselmann, Rainer; Helmut, Herwartz
    Abstract: In this paper we examine changes on investment decisions induced by the introduction of the Euro. There are two potential sources of portfolio reallocation. First, the introduction of the Euro diminished exchange rate risks within the EMU region, which relieved European investors from currency risk associated with intra-EMU investments. Second, monetary policy has been bundled within one single institution, which increased the correlation of different national stock and bond market returns. We test for structural breaks in the portfolio holdings of German investors and estimate a market model in the latter in order to account for the two described effects. We observe a significant decrease in national and an significant increase in intra-EMU as well as US investments. Therefore, the establishment of the EMU led to a decrease of investment home bias.
    Keywords: investment home bias, realized volatility, Euro introduction
    JEL: F21 F33 F36 G15
    Date: 2005
  34. By: Rajdeep Sengupta
    Abstract: Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.
    Keywords: Bank competition ; Credit control
    Date: 2006
  35. By: Robert P. Flood; Nancy P. Marion
    Abstract: We use a simple model of international lending to show that an emerging market borrower who might default can be shut out of international capital markets without warning. A modest haircut on obligations, for example, can shut down lending.
    Keywords: International capital markets , Emerging markets , Loans ,
    Date: 2006–06–19
  36. By: Reitz, Stefan; Taylor, Mark P.
    Abstract: The coordination channel has been proposed as a means by which foreign exchange market intervention may be effective, in addition to the traditional portfolio balance and signaling channels. If strong and persistent misalignments of the exchange rate are caused by non-fundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then central bank intervention may act as a coordinating signal, encouraging stabilizing speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness.
    Keywords: foreign exchange intervention, coordination channel, market microstructure, nonli mean reversion
    JEL: C10 F31 F41
    Date: 2006
  37. By: Mangal Goswami; Juan Sole; Tushar Poddar; Victor Echevarria Icaza
    Abstract: This paper seeks to understand how interest rates are formed in Lebanon, by focusing on the pass-through from benchmark rates, prevailing liquidity conditions, and the main characteristics of the Lebanese economy, notably its open capital account, fixed exchange rate, high government borrowing requirement, large public debt, and high degree of deposit dollarization. We find that international interest rates are an important element in the determination of interest rates in Lebanon. In particular, the pass-through of global benchmark rates to interest rates on sovereign bonds is about 70 percent. The less-than-complete pass-through could be attributed to a home-bias effect reflecting a relatively stable and dedicated investor base. The study also shows that interest rates in Lebanon are affected by liquidity conditions as well as perceived sovereign risk.
    Date: 2006–04–20
  38. By: David Berger; Alain Chaboud; Erik Hjalmarsson; Edward Howorka
    Abstract: We analyze the factors driving the widely-noted persistence in asset return volatility using a unique dataset on global euro-dollar exchange rate trading. We propose a new simple empirical specification of volatility, based on the Kyle-model, which links volatility to the information flow, measured as the order flow in the market, and the price sensitivity to that information. Through the use of high-frequency data, we are able to estimate the time-varying market sensitivity to information, and movements in volatility can therefore be directly related to movements in two observable variables, the order flow and the market sensitivity. The empirical results are very strong and show that the model is able to explain almost all of the long-run variation in volatility. Our results also show that the variation over time of the market's sensitivity to information plays at least as important a role in explaining the persistence of volatility as does the rate of information arrival itself. The econometric analysis is conducted using novel estimation techniques which explicitly take into account the persistent nature of the variables and allow us to properly test for long-run relationships in the data.
    Keywords: Foreign exchange rates ; Foreign exchange market
    Date: 2006
  39. By: Bartzsch, Nikolaus; Craig, Ben; Fecht, Falko
    Abstract: This paper analyzes the individual bidding behaviour of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Our approach takes a variety of characteristics of the individual banks into account. In particular, we consider variable that capture the different use of liquidity and the different attitude towards liquidity risk of the individual banks. It turns out that these characteristics are reflected in the banks' respective bidding behaviour to a large extent. Thus our study contributes to a deeper understanding of the way liquidity risk is managed in the banking sctor.
    Keywords: Money Market Auctions, Liquidity Management, Interbank Market
    JEL: E51 G21
    Date: 2005
  40. By: Marvin Goodfriend; Eswar Prasad
    Abstract: As China's economy becomes more market based and continues its rapid integration into the global economy, having an independent and effective monetary policy regime oriented to domestic objectives will become increasingly important. Employing modern principles of monetary policy in light of the current state of China's financial institutions, we motivate and present a package of proposals to guide the operation of a new monetary policy regime. Specifically, we recommend an explicit low long-run inflation objective, operational independence for the People's Bank of China (PBC) with formal strategic guidance from the government, and a minimal set of financial sector reforms (to make the Chinese banking system robust against interest rate fluctuations). We argue that anchoring monetary policy with an explicit inflation objective would be the most reliable way for the PBC to tie down inflation expectations, and thereby enable monetary policy to make the best contribution to macroeconomic and financial stability, as well as economic growth. The management and monitoring of money (and credit) growth by the PBC would continue to play a useful role in the stabilization of inflation, but a money target would not constitute a good stand-alone nominal anchor.
    Keywords: Monetary policy , China , Flexible exchange rates , Inflation targeting , Financial sector , Bank reforms , Central bank policy , Central bank role , Money supply , Financial systems , Transition economies ,
    Date: 2006–05–10
  41. By: Christopher J. Neely
    Abstract: This paper presents the results of a survey of monetary authorities with respect to their beliefs about foreign exchange intervention. The survey provides evidence on new intervention issues that would be difficult to investigate otherwise, such as conditional response times, non-foreign exchange factors in intervention and beliefs about profitability. At the same time, the survey provides new evidence on issues that have been investigated with other methods, such as channels of effectiveness, effect on currency components, profitability, and motivations for secrecy. Respondents disagreed with the predominant views on intervention*s effect on volatility and common arguments against intervention. The exchange rate regime of a central bank explains its beliefs about several important aspects of intervention, including factors in a successful intervention and the potential profitability of intervention.
    Keywords: Foreign exchange ; Banks and banking, Central
    Date: 2006
  42. By: Stolz, Stephanie; Wedow, Michael
    Abstract: This paper analyzes the effect of the business cycle on the regulatory capital buffer of German savings and cooperative banks in the period 1993–2003. The capital buffer is found to fluctuate anticyclically over the business cycle. The fluctuation is stronger for savings banks than for cooperative banks, as, for savings banks, risk-weighted assets fluctuate more strongly with the business cycle. Further, low-capitalized banks do not catch up with their wellcapitalized peers. The gap between low-capitalized and well capitalized banks even widened over the observation period. Finally, low-capitalized banks do not decrease risk-weighted assets in a business cycle downturn by more than well-capitalized banks. This finding seems to imply that their low capitalization does not force them to retreat from lending.
    Keywords: Capital Regulation, Bank Capital, Business Cycle Fluctuations
    JEL: G21 G28
    Date: 2005
  43. By: Tobias Adrian; Joshua Rosenberg
    Abstract: We decompose the time series of equity market risk into short- and long-run volatility components. Both components have negative and highly significant prices of risk in the cross section of equity returns. A three-factor model with the market return and the two volatility components compares favorably to benchmark models. We show that the short-run component captures market skewness risk, while the long-run component captures business cycle risk. Furthermore, short-run volatility is the more important cross-sectional risk factor, even though its average risk premium is smaller than the premium of the long-run component.
    Keywords: Stocks - Rate of return ; Risk
    Date: 2006
  44. By: Fang Cai; Edward Howorka; Jon Wongswan
    Abstract: This paper studies the transmission of volatility and trading activity in the foreign exchange market across trading regions for the euro-dollar and dollar-yen currency pairs, using high-frequency intraday data from Electronic Broking Services (EBS). In contrast with previous studies that use indicative quote frequency to proxy for trading activity, we use actual regional trading volume to identify five distinct trading regions in the foreign exchange market: Asia Pacific, the Asia-Europe overlap, Europe, the Europe-America overlap, and America. Based on realized volatility computed from high-frequency data and a regional volatility model, we find statistically significant evidence for volatility spillovers at both the own-region and the inter-region levels, but the economic significance of own-region spillovers is much more important than that of inter-region spillovers. We also examine the transmission of trading activity (trading volume and number of transactions) across the five trading regions and find similar results to those for volatility, but the economic significance of own-region spillovers is even more dominant.
    Keywords: Foreign exchange rates ; International finance
    Date: 2006
  45. By: Campbell, John Y.; Hilscher, Jens; Szilagyi, Jan
    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.
    Date: 2005
  46. By: Balázs Égert; Ronald MacDonald
    Abstract: This paper surveys recent advances in the monetary transmission mechanism (MTM). In particular, while laying out the functioning of the separate channels in the MTM, special attention is paid to exploring possible interrelations between different channels through which they may amplify or attenuate each others’ impact on prices and the real economy. We take stock of the empirical findings especially as they relate to countries in Central and Eastern Europe, and compare them to results reported for industrialised countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance and potential development of the different channels.
    Keywords: monetary transmission, transition, Central and Eastern Europe, credit channel, interest rate channel, interest-rate pass-through, exchange rate channel, exchange rate pass-through, asset price channel
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006
  47. By: Koetter, Michael; Bos, Jaap W. B.; Heid, Frank; Kool, Clemens J. M.; Kolari, James W.; Porath, Daniel
    Abstract: The inability of most bank merger studies to control for hidden bailouts may lead to biased results. In this study, we employ a unique data set of approximately 1,000 mergers to analyze the determinants of bank mergers. We use data on the regulatory intervention history to distinguish between distressed and non-distressed mergers. We find that, among merging banks, distressed banks had the worst profiles and acquirers perform somewhat better than targets. However, both distressed and non-distressed mergers have worse CAMEL profiles than our control group. In fact, non-distressed mergers may be motivated by the desire to forestall serious future financial distress and prevent regulatory intervention.
    Keywords: Mergers, bailout, X-efficiency, multinomial logit
    JEL: G14 G21 G34
    Date: 2005
  48. By: Kenneth Kletzer
    Abstract: This paper considers the consequences of international financial market integration for national fiscal and monetary policies that derive from the absence of an international sovereign authority to define and enforce contractual obligations across borders. The sovereign immunity of national governments serves as a fundamental constraint on international finance and is used to derive intertemporal budget constraints for sovereign nations and their governments. It is shown that the appropriate debt limit for a country allows for state-contingent repayment. With noncontingent debt instruments, debt renegotiation occurs in equilibrium with positive probability. A model of tax smoothing is adopted to show how information imperfections lead to conventional bond contracts that are renegotiated when a critical level of indebtedness is reached. Renegotiation is interpreted in terms of nominal and real denominated bonds, and implications are drawn about the intertemporal borrowing constraint for monetary policies, the accumulation of reserve assets, and current account sustainability.
    Date: 2006–04–05
  49. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: We construct estimates of external assets and liabilities for 145 countries for the period 1970-2004. We describe our estimation methods and present key features of the data at the country and the global level. We focus on trends in net and gross external positions, and the composition of international portfolios, distinguishing between foreign direct investment, portfolio equity investment, official reserves, and external debt. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories that account for this discrepancy.
    Keywords: Financial assets , Foreign investment , External debt , Reserves ,
    Date: 2006–03–29
  50. By: Richard Podpiera; Martin Cihák
    Abstract: Over the past two decades, there has been a clear trend toward integrating the regulation and supervision of banks, nonbank financial institutions, and securities markets. This paper reviews the international experience with integrated supervision. We survey the theoretical arguments for and against the integrated supervisory model, and use data on compliance with international standards to assess the validity of some of these arguments. We find that (i) full integration is associated with higher quality of supervision in insurance and securities and greater consistency of supervision across sectors, after controlling for the level of development; and (ii) fully integrated supervision is not associated with a significant reduction in supervisory staff.
    Keywords: Financial sector , Bank regulations , Bank supervision , Insurance regulations , Insurance supervision , Securities regulations ,
    Date: 2006–03–15
  51. By: Koetter, Michael
    Abstract: German banks experienced a merger wave throughout the 1990s. However, the success of bank mergers remains a continuous matter of debate. In this paper we suggest a taxonomy as how to evaluate post-merger performance on the basis of cost efficiency (CE). We categorise mergers a success that fulfill simultaneously two criteria. First, merged institutes must exhibit CE levels above the average of non-merging banks. Second, banks must exhibit CE changes between merger and evaluation year above efficiency changes of non-merging banks. We employ this taxonomy to characterise (successful) mergers in terms of various key-performance and structural indicators and investigate the implications for three important policy issues. Our main conclusions are twofold. First, approximately every second merger is a success. Second, the margin of success is narrow, as the CE differential between merging and non-merging banks is one percentage point.
    Keywords: Banks mergers, regulation, distress, cost efficiency, Germany
    JEL: G21 G28 G33 G34 L44
    Date: 2005
  52. By: Matthew T. Jones; Meral Karasulu
    Abstract: The objective of this paper is to provide a retrospective assessment of our ability to have predicted the impact of the 1997 crisis on the Korean corporate sector. We perform some simple stress tests on the aggregate balance sheets and income statements of the corporate sector to determine what could have been foreseen before the onset of the crisis. Our results show that data available in mid-1997 clearly showed that the corporate sector was very sensitive to various shocks, particularly interest rate shocks. Had stress tests been performed at the time, they would have revealed that the corporate sector was highly vulnerable to adverse economic developments. Our findings suggest that close surveillance of corporate sector balance sheets can play a useful role in understanding potential financial vulnerabilities.
    Keywords: Financial crisis , Korea, Republic of , Economic forecasting , Interest rates , Financial risk ,
    Date: 2006–05–10
  53. By: Monique Florenzano (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: The purpose of this paper is to explain the role of financial assets in allowing individual agents of an economy to make at time 0 some limited commitments into the future which, at some extent, redistribute their revenue among several time periods and different states of the world. It is done studying in different contexts the general equilibrium of a simple two-period exchange model, under weaker assumptions and in a more general setting than the ones usually described in the literature.<br />Several equilibrium existence theorems are stated and proved. Even in this simple framework, they often require a rather sophisticated mathematical background and are of a deep economic significance. Moreover, they are a necessary step towards further developments (including infinite horizon, continuous time, continuum of states of the world, defaut and collateral securities, ...).
    Keywords: general equilibrium; incomplete financial markets; arbitrage, numeraire assets; real assets; pseudo-equilibrium
    Date: 2006–07–17
  54. By: Juan Zalduendo
    Abstract: The Venezuelan Bolivar is pegged to the U.S. dollar and supported by foreign exchange restrictions. To assess the appropriateness of the peg during the current period of high oil export earnings and the likely consequences of a liberalization, this paper attempts to disentangle the effects of oil prices from other factors underlying the equilibrium real exchange rate, and examines the role of foreign exchange controls by extending the application of a vector error correction (VEC) model to parallel market exchange rates. Several findings are worth noting. First, oil prices have indeed played a significant role in determining a time-varying equilibrium real exchange rate path. Second, oil prices are not the only important determinant of the real effective exchange rate: declining productivity is also a key factor. Third, appreciation pressures are rising. Finally, the speed of convergence of a VEC model using parallel rather than official rates is higher, suggesting that the government has been able to maintain sharp deviations between the official and equilibrium rates because of Venezuela's oil dependency and the concentration of oil income in government hands.
    Keywords: Real effective exchange rates , Venezuela, Republica Bolivariana de , Oil prices , Foreign exchange , Exchange control measures , Exchange markets ,
    Date: 2006–03–31
  55. By: Antonio Diez de los Rios
    Abstract: The author proposes an arbitrage-free model of the joint behaviour of interest and exchange rates whose exchange rate forecasts outperform those produced by a random-walk model, a vector autoregression on the forward premiums and the rate of depreciation, and the standard forward premium regression. In addition, the model is able to reproduce the forward premium puzzle.
    Keywords: Exchange rates; Interest rates; Econometric and statistical methods
    JEL: E43 F31 G12 G15
    Date: 2006
  56. By: Cai, Fang; Warnock, Francis E.
    Abstract: We analyze foreigners’ and domestic institutional investors’ positions in U.S. equities. Controlling for many factors, we uncover a common preference for large firms and firms that are diversified internationally. The domestic preference for internationally diversified firms implies that investors might obtain substantial international diversification by investing at home. Using an international factor model, we show that exposure to foreign equity markets is indeed greater for domestic firms that are more diversified internationally, suggesting that at least some of the home-grown foreign exposure translates into international diversification benefits. After accounting for home-grown foreign exposure, the share of ‘foreign’ equities in investors’ portfolios nearly doubles, reducing (but not eliminating) the observed home bias.
    Keywords: home bias, international portfolio allocation, foreign exposure
    JEL: G11 G15 G3
    Date: 2005
  57. By: Nautz, Dieter; Ruth, Karsten
    Abstract: Although stable money demand functions are crucial for the monetary model of the exchange rate, empirical research on exchange rates and money demand is more or less disconnected. This paper tries to fill the gap for the Euro/Dollar exchange rate. We investigate whether monetary disequilibria provided by the empirical literature on U.S. and European money demand functions contain useful information about exchange rate movements. Our results suggest that the empirical performance of the monetary exchange rate model improves when insights from the money demand literature are explicitly taken into account.
    Keywords: Euro/Dollar Exchange Rate, Monetary Model, Money Demand Functions
    JEL: E41 F31
    Date: 2005
  58. By: Craig, Ben; Keller, Joachim
    Abstract: We estimate the process underlying the pricing of American options by using higher-order lattices combined with a multigrid method. This paper also tests whether the risk-neutral densities given from American options provide a good forecasting tool. We use a nonparametric test of the densities that is based on the inverse probability functions and is modified to account for correlation across time between our random variables, which are uniform under the null hypothesis. We find that the densities based on the Americanoption markets for foreign exchange do quite well for the forecasting period over which the options are thickly traded. Further, simple models that fit the densities do about as well as more sophisticated models. Keywords: Risk-neutral densities from option prices, American exchange rate options, Evaluating Density Forecasts, Pentionominal tree, Density evaluation, Overlapping data problem
    Keywords: Risk-neutral densities from option prices, American exchange rate options, Evaluating Density Forecasts, Pentionominal tree, Density evaluation
    JEL: C52 C63 F31 F47
    Date: 2005
  59. By: Atsushi Iimi
    Abstract: Botswana's successive currency devaluations and recent move from a fixed to a crawling peg exchange rate regime raise the question of whether the exchange rate might be misaligned with economic fundamentals. This paper, applying the behavioral equilibrium exchange rate (BEER) approach, analyzes the behavior of the real exchange rate for the period 1985-2004. It finds that the pula was undervalued in the later 1980s but overvalued in recent years. Some policy lessons from experiences in other countries with crawling peg arrangements are therefore considered in the context of Botswana.
    Keywords: Exchange rates , Botswana , Devaluation , Crawling peg , Exchange rate regimes ,
    Date: 2006–06–13
  60. By: Döpke, Jörg; Hartmann, Daniel; Pierdzioch, Christian
    Abstract: We report results on the ex ante predictability of monthly excess stock returns in Germany using real-time and revised macroeconomic data. Our real-time macroeconomic data cover the period 1994-2005. We report three results. 1) Real-time macroeconomic data did not contribute much to ex ante stock-return predictability. 2) The performance of an investor who had to rely on noisy real-time macroeconomic data would have been comparable to the performance of an investor who had access to revised macroeconomic data. 3) In real time, it is important for an investor to know which real-time variable to use for predicting stock returns.
    Keywords: Ex ante predictability of stock returns, real-time macroeconomic data, performance of investment strategies, Germany
    JEL: C53 E44 G11
    Date: 2006
  61. By: Jun Il Kim
    Abstract: This paper presents an analytical framework for considering the role of IMF-supported programs in preventing crises, particularly capital account crises. The model builds upon the global games framework to establish a unique relationship between the crisis probability and the parameters of the program, which is assumed to be negotiated between the IMF and the member country, taking explicit account of each party's interests. In the model, from the perspective of the borrowing country, IMF financing and policy adjustment are (perfect) substitutes inasmuch as they both contribute to the country's liquidity and thus reduce the likelihood of a crisis. In equilibrium, however, IMF financing promotes stronger policies, implying that financing and adjustment are strong complements in crisis prevention. Conditionality plays a crucial role in sustaining the program, providing mutual assurances-to the member country that, if it undertakes the agreed policies, financing will indeed be forthcoming, and to the IMF that the country will implement the agreed policies as the IMF disburses its resources. The model helps explain how liquidity crises may come about, how IMF support can reduce the likelihood of a crisis by providing liquidity and sustaining stronger policies, and why the observed mix between financing and adjustment may vary across programs.
    Date: 2006–07–07
  62. By: Alain Ize
    Abstract: This paper reviews how central banks allocate seigniorage, based on systematic crosscountry comparisons of their financial accounts. Central banks are classified as weak or strong, depending upon their structural profitability. Weak central banks typically (although not exclusively) operate in smaller and less wealthy countries, lack independence from their governments, and are burdened by compulsory transfers and low capital. Their operating expenditures, nonperforming assets, international reserve carrying costs, and international reserve accumulation needs are high. Governance appears to be a potential concern in many central banks, both weak and strong, with operating expenditures often adjusting upward for high profitability and capital accumulation adjusting downward for low profitability. The main policy implications are briefly reviewed.
    Date: 2006–03–16
  63. By: Krüger, Ulrich; Stötzel, Martin; Trück, Stefan
    Abstract: This paper provides an overview on classical and new methods for testing time series properties of migration matrices. It is well known that due to cyclical behaviour of the economy transition matrices for many credit portfolios cannot be considered to be constant through time. Further, transition matrices are dependent on the used rating methodology. We investigate the changes in migrations of an extensiverating system based on financial ratios. Our findings are time-inhomogeneity, second-order Mrkov behaviour, a tendency for "rating equalization" and vast effects of migration behaviour on risk figures like expected shortfall and VaR. We further illustrate how changes in migration matrices can be related to macroeconomic factors.
    Keywords: Reduced Form Models, Rating Transitions, Markov Property, Internal Rating Systems, Time Homogeneity, Matrix Norms
    JEL: G13 G20 G33
    Date: 2005
  64. By: Herrmann, Sabine; Jochem, Axel
    Abstract: The current accounts of most EU member states in central and eastern Europe have been showing growing deficits in recent years. According to panel estimates the deficits can be attributed primarily to factors characteristic for the stage of development, ie the relative income level and high capital building. The positive impact of a closing income gap, however, is largely compensated by real appreciation. The net effect of government budget deficits is rather small, since they are mostly financed by private saving. Further integration of the financial sector is likely to improve the current accounts. Although the current account positions do not require fundamental policy reversals, there are clear risks of exchange rate adjustments that should be reduced before entering the euro area.
    Keywords: current account, new EU member countries, catching-up process
    JEL: F15 F32
    Date: 2005
  65. By: Bos, Jaap W. B.; Heid, Frank; Koetter, Michael; Kolari, James W.; Kool, Clemens J. M.
    Abstract: In this paper, we show the importance of accounting for heterogeneity among sample firms in stochastic frontier analysis. For a fairly homogenous sample of German savings and cooperative banks, we analyze how alternative theoretical assumptions regarding the nature of heterogeneity can be modeled and the extent to which the respective empirical specifications affect estimated efficiency levels and rankings. We find that the level of efficiency scores is affected in the case of both cost and profitmodels. On the cost side especially, level and rank correlations show that different specifications identify different banks as being best or worst performers. Our main conclusion is that efficiency studies in general and bank efficiency studies in particular should account for heterogeneity across sample firms. Especially when efficiency measures are employed for policy purposes, a careful choice of models and transparency regarding maximization methods are essential to be able to make inferences about managerial behavior.
    Keywords: Heterogeneity, X-efficiency, benchmarking, bank production
    JEL: G14 G21 G34
    Date: 2005
  66. By: Miguel Messmacher
    Abstract: The design of the optimal sovereign insurance contract is analyzed when: the sovereign chooses the contract; effort is not contractible; shocks are of uncertain magnitude; the sovereign can save; and the sovereign can default. Under these conditions: i) an ex ante premium leads to higher coverage; ii) the premium increases with the sovereign's incentive to take risks; iii) a deductible is chosen to limit moral hazard; iv) the deductible-to-support ratio is decreasing with the size of the realized shock; and v) the change in the choice of savings when insurance is available is ambiguous, as there is a trade-off between inducing higher effort and increasing the likelihood of default.
    Keywords: Insurance , Fund , Financial risk ,
    Date: 2006–03–21
  67. By: Pedro Gustavo Teixeira; Garry J. Schinasi
    Abstract: This paper examines challenges in effectively implementing the lender-of-last-resort function in the EU single financial market. Briefly highlighted are features of the EU financial landscape that could increase EU systemic financial risk. Briefly described are the complexities of the EU's financialstability architecture for preventing and resolving financial problems, including lender-of-last-resort operations. The paper examines how the lender-of-last-resort function might materialize during a systemic financial disturbance affecting more than one EU member state. The paper identifies challenges and possible ways of enhancing the effectiveness of the existing architecture.
    Date: 2006–05–31
  68. By: Memmel, Christoph; Wehn, Carsten
    Abstract: The Value at Risk of a portfolio differs from the sum of the Values at Risk of the portfolio’s components. In this paper, we analyze the problem of how a single economic risk figure for the Value at Risk of a hypothetical portfolio composed of different commercial banks might be obtained for a supervisor. Using the daily profits and losses and the daily Value at Risk figures of twelve German banks for the period from 2001 to 2003, we estimate the Value at Risk of the entire portfolio. We assume a reduced-form model and neglect the effects of a potential bankruptcy of one of the banks. We analyze different models for the cross-correlation of the banks’ profits and losses. In an empirical study, we apply backtesting methods to determine which aggregation model leads to the best out-of-sample estimates for the portfolio’s economic risk figure. Our main findings can be summarized in three statements. (i) The portfolio’s Value at Risk can be estimated from time series data very well. (ii) During ‘normal’ times, the portfolio’s Value at Risk is much lower than the sum of the single Values at Risk. (iii) The relative marginal risk contribution depends on the bank in question and is between 0.05 and 0.62.
    Keywords: Value at Risk, portfolio, cross-correlation, market risk regulation, risk forecast, model validation
    JEL: C52 G11 G21 G28
    Date: 2005
  69. By: Hamburg, Britta; Hoffmann, Mathias; Keller, Joachim
    Abstract: This paper studies the long-run relationship between consumption, asset wealth and income — the consumption-wealth ratio — in Germany, based on data from 1980 to 2003. Earlier papers for the Anglo-Saxon economies have documented that departures of these three variables from their common trend signal future changes in asset prices. We find that for Germany they predict changes in income — the consumption wealth ratio predicts business cycles, not stock market cycles. Asset price changes are found to have virtually no effect on German consumption, both in the short as well as in the long-run. Conversely, German asset prices are predictable from the U.S. consumption-wealth ratio. We offer an explanation of these findings that emphasizes structural differences between the bank-based German financial system and the rather market-based Anglo-American system: stock ownership by private households is much less widespread in Germany than in the Anglo-Saxon economies and the share of publicly traded equity in household wealth is much smaller in Germany than in the U.S., the UK or Australia.
    Keywords: Wealth Effect on Consumption, Business Cycles, Monetary Policy Transmission, Financial Systems, Asset Price Predictability
    JEL: E21 E32 E44 G12 G20
    Date: 2005
  70. By: Carlo Altavilla; Paul De Grauwe
    Abstract: This paper investigates the out-of-sample forecast performance of a set of competing models of exchange rate determination. We compare standard linear models with models that characterize the relationship between exchange rate and its underlying fundamentals by nonlinear dynamics. Linear models tend to outperform at short forecast horizons especially when deviations from long-term equilibrium are small. In contrast, nonlinear models with more elaborate mean-reverting components dominate at longer horizons especially when deviations from long-term equilibrium are large. The results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model.
    Keywords: non-linearity, exchange rate modelling, forecasting
    JEL: C53 F31
    Date: 2006
  71. By: Döpke, Jörg; Hartmann, Daniel; Pierdzioch, Christian
    Abstract: We compared forecasts of stock market volatility based on real-time and revised macroeconomic data. To this end, we used a new dataset on monthly real-time macroeconomic variables for Germany. The dataset covers the period 1994-2005. We used a statistical, a utility-based, and an options-based criterion to evaluate volatility forecasts. Our main result is that the statistical and economic value of volatility forecasts based on real-time data is comparable to the value of forecasts based on revised macroeconomic data.
    Keywords: Forecasting stock market volatility, Real-time macroeconomic data, Evaluation of forecasting accuracy
    JEL: C53 E44 G11
    Date: 2005
  72. By: Enrique G. Mendoza
    Abstract: This paper shows that the dominant view that the high variability of real exchange rates is due to movements in exchange rate-adjusted prices of tradable goods does not hold for Mexican data for periods with a managed exchange rate. The relative price of nontradables accounts for up to 70 percent of real exchange rate variability during these periods. The paper also proposes a model in which this fact, and the sudden stops that accompanied the collapse of Mexico's managed exchange rates, could result from a Fisherian debt-deflation mechanism operating via nontradables prices in economies with dollarized liabilities.
    Keywords: Real effective exchange rates , Mexico , Dollarization , Price adjustments ,
    Date: 2006–04–11
  73. By: Christa Hainz
    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
  74. By: Ramb, Fred; Weichenrieder, Alfons J
    Abstract: The paper analyses the financial structure of German inward FDI. From a tax perspective, intra-company loans granted by the parent should be all the more strongly preferred over equity the lower the tax rate of the parent and the higher the tax rate of the German affiliate. From our study of a panel of more than 8,000 non-financial affiliates in Germany, we find only small effects of the tax rate of the foreign parent. However, our empirical results show that subsidiaries that on average are profitable react more strongly to changes in the German corporate tax rate than this is the case for less profitable firms. This gives support to the frequent concern that high German taxes are partly responsible for the high levels of intra-company loans. Taxation, however, does not fully explain the high levels of intra-company borrowing. Roughly 60% of the cross-border intra-company loans turn out to be held by firms that are running losses.
    Keywords: foreign direct investment, financial structure, taxation
    JEL: F23 H25
    Date: 2005
  75. By: Eduardo Levy Yeyati
    Abstract: The cost of holding international reserves to self insure against foreign currency liquidity runs is typically estimated as the sovereign spread on the risk-free return on reserves paid on the debt issued to purchase them. However, to the extent that reserves lower the probability of a run-induced default, they reduce the spread paid on the stock of sovereign debt, adding to the marginal benefits of reserve accumulation. This paper illustrates this aspect numerically, showing that the costs of reserves, as typically measured, may have been considerably overstated.
    Date: 2006–07
  76. By: Martin Cihák
    Abstract: To showcase their increasing focus on financial stability, many central banks and other institutions have started publishing regular reports on financial stability. The paper presents a survey of the available financial stability reports, and proposes a framework for assessing such documents. It illustrates how the framework can be implemented, and uses the findings to identify prevalent practices, recent trends, and areas for improvement.
    Date: 2006–07–12
  77. By: Eric Parrado; Rodolfo Maino; Leonardo Leiderman
    Abstract: The shift to inflation targeting has contributed to the relatively low inflation observed in some emerging market economies although, as noted by many economists, the preconditions required for a successful implementation were not in place. The existence of managed exchange rate regimes, a narrow base of domestic nominal financial assets, the lack of market instruments to hedge exchange rate risks, together with fear of floating and dollarization, have been stressed as factors that might weaken the efficacy of monetary policy. By examining various aspects of monetary transmission and policy formulation in two highly dollarized economies (Peru and Bolivia) vis-à-vis two economies with low levels of dollarization (Chile and Colombia), we found that, while dollarization imposes differences in both the transmission capacity of monetary policy and its impact on real and financial sectors, it does not preclude the use of inflation targeting as a policy regime.
    Date: 2006–07–07
  78. By: Nicholas Barberis; Ming Huang
    Abstract: We review a recent approach to understanding the equity premium puzzle. The key elements of this approach are loss aversion and narrow framing, two well-known features of decision-making under risk in experimental settings. In equilibrium, models that incorporate these ideas can generate a large equity premium and a low and stable risk-free rate, even when consumption growth is smooth and only weakly correlated with the stock market. Moreover, they can do so for parameter values that correspond to sensible attitudes to independent monetary gambles. We conclude by suggesting some possible directions for future research.
    JEL: G11 G12
    Date: 2006–07
  79. By: Ceyhun Bora Durdu; Enrique G. Mendoza
    Abstract: An implication of the "globalization hazard" hypothesis is that sudden stops could be prevented by offering foreign investors price guarantees on emerging markets assets. These guarantees create a tradeoff, however, because they weaken globalization hazard by creating international moral hazard. We study this tradeoff using an equilibrium asset-pricing model. Without guarantees, margin calls and trading costs cause Sudden Stops driven by Fisher's debt-deflation process. Price guarantees prevent this deflation by propping up foreign asset demand, but their effectiveness and welfare implications depend critically on the price elasticity of foreign demand and on making the guarantees contingent on debt levels.
    Keywords: Asset prices , Globalization , Deflation , Economic models ,
    Date: 2006–03–31
  80. By: Koetter, Michael
    Abstract: Most bank efficiency studies that use stochastic frontier analysis (SFA) employ each bank’s own implicit input price when estimating efficient frontiers. But the theoretical foundation of most studies is a cost minimisation and/ or profit maximisation problem assuming perfect input markets. At the very least, traditional input price proxies therefore contain substantial measurement error. In this paper, we examine the magnitude and direction of this error in cost and profit efficiency (CE and PE) measurement. We suggest two input market definitions to approximate exogenous input prices alternatively and estimate CE and PE of German banks between 1993 and 2003. Our main findings are threefold. First, after accounting for systematic differences across banks, mean CE is sensitive to alternative input prices. Second, distortions of mean PE due to traditional input prices are small. Third, across CE models small cooperative banks located in large western states are identified as top performers. Large banks and those located in eastern states rank lowest.
    Keywords: Germany, Banks, cost efficiency, profit efficiency, stochastic frontier analysis, measurement error
    JEL: C51 G20 L11
    Date: 2005
  81. By: Walker, Eduardo
    Abstract: The author studies annuity rates in Chile and relates them with industry competition. He finds (1) that annuity insurance companies paying higher broker commissions paid lower annuity rates; and (2) a structural break of the long-run elasticity of annuity rates to the risk-free rate in 2001. Moreover, this structural break coincided with the submission of a new draft pension law proposing greater transparency in annuity markets and a generalized drop in broker commissions. The high commissions charged in the 1990s were partly returned to annuitants as informal (and illegal) cash rebates. Myopic pensioners preferred cash rebates over present values. Thus, the legal threat caused the drop in broker commissions, reduced the illegal practice of cash rebates, increased competition by way of annuity rates, and raised the long-run elasticity to one.
    Keywords: Insurance&Risk Mitigation,Economic Theory&Research,Pensions&Retirement Systems,Investment and Investment Climate,Non Bank Financial Institutions
    Date: 2006–08–01
  82. By: Peter Isard
    Abstract: This paper provides an overview of the uncovered interest parity assumption. It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses different interpretations of the evidence and the implications for macroeconomic analysis. The uncovered interest parity assumption has been an important building block in multiperiod models of open economies, and although its validity is strongly challenged by the empirical evidence, at least at short time horizons, its retention in macroeconomic models is supported on pragmatic grounds by the lack of much empirical support for existing models of the exchange risk premium.
    Date: 2006–04–24
  83. By: Emiliano Grossman; Fabian Muniesa (CSI - Centre de sociologie de l'innovation - [CNRS : UMR7120] - [Ecole Nationale Supérieure des Mines de Paris]); Emilio Luque
    Abstract: The notion of transparency is widely used as an analytical tool and as a guideline to propose and enforce new configurations of economic life. Focusing on several transparency-making devices, this paper tries to explore both the pervasiveness of this notion and its ambivalence in a number of relevant sites. We begin by exploring the deployment of transparency in the economic literature at large. We identify three thematic areas, namely, markets and price discovery, corporate management and institutional investors, and state regulations and economic policy. We then tackle these three areas of meaning through three brief case studies: (1) transparency and anonymity in the context of exchange automation, (2) ballot statement controversies in the light of corporate governance principles and (3) the use of transparency at state level in the context of the EU financial regulation. In the concluding section, we try to condense our findings into a tentative typology. We point to an important, yet not always explicit distinction between ‘literal' transparency and ‘abstract' transparency, and we observe combinations between ‘disciplinary' and ‘enabling' uses of transparency-making devices. These articulations of transparency, we suggest, are central to the development of new instruments of government.
    Keywords: Transparency ; economic sociology ; governmentality ; stock exchange ; pension funds ; European Union
    Date: 2006–07–27
  84. By: Mara Faccio; Rajdeep Sengupta
    Abstract: This paper provides a comprehensive examination of the ways in which companies respond to a country-wide crisis through the restructuring of their assets (through asset sales, mergers or liquidations) or liabilities. We find the restructuring of liabilities to be the most common type of response. On the other hand, we argue that firms may be reluctant to engage in major asset sales due to substantial price discounts that need to be applied to these transactions during the crisis. In fact, we document that transaction multiples dropped by 40% during the crisis, compared to a pre-crisis period. We contrast financial and corporate governance considerations and find strong support for the notion that, during a crisis, financial constraints have a large impact on the restructuring choice. However, we find corporate governance (e.g., control) considerations to matter only marginally both in statistical and economic terms.
    Keywords: Corporate governance ; Financial crises - Asia
    Date: 2006
  85. By: Anastasia Guscina; Olivier Jeanne
    Abstract: This paper presents a new database on government debt in 19 emerging market countries since 1980. The data set focuses on the structure of debt in terms of jurisdiction of insurance, maturity, currency composition and indexation. The paper presents stylized facts on debt structures and preliminary evidence on their determinants. We observe substantial crosscountry variation in the structure of domestic debt and find it to be associated with countries' record of monetary stability.
    Keywords: Debt management , Public debt , Domestic debt , External debt , Emerging markets , Databases ,
    Date: 2006–04–26
  86. By: Eickmeier, Sandra
    Abstract: In this paper we rely on techniques recently developed by Bai and Ng (2004a) to estimate common euro-area stationary and non-stationary factors using a large-scale dynamic factor model. We find that euro-area economies share four non-stationary factors or trends and one stationary factor. By means of rotation techniques, we estimate a euro-area business cycle which is a fairly good match to EuroCOIN, the euro-area coincident business cycle indicator published by the CEPR. Fluctuations of common euro-area factors mainly reflect variations of German and French real economic activity as well as of producer prices and financial prices (long-term interest rates and/or real effective exchange rates) in various countries. As concerns the transmission channels, macroeconomic shocks seem to proliferate in the euro area more strongly through trade, exchange rates and long-term interest rates than through stock prices. Among the external driving forces, shocks to US economic activity seem to be more strongly linked to shocks to the euro-area factors than oil price shocks. We finally find evidence of mild overall convergence; results for individual countries are mixed.
    Keywords: Dynamic factor models, factor rotation, common trends, international business cycles, international transmission channels
    JEL: C32 C50 F02 F40
    Date: 2005
  87. By: Düllmann, Klaus
    Abstract: Results from portfolio models for credit risk tell us that loan concentration in certain industry sectors can substantially increase the value-at-risk (VaR). The purpose of this paper is to analyze whether a tractable “infection model” can provide a meaningful estimate of the impact of concentration risk on the VaR. I apply rather parsimonious data requirements, which are comparable to those for Moody’s Binomial Expansion Technique (BET) and considerably lower than for a multi-factor model. The infection model extends the BET model by introducing default infection into the hypothetical portfolio on which the real portfolio is mapped in order to obtain a simple solution for the VaR. The infection probability is calibrated for a range of typical values of input parameters, which capture the concentration of a portfolio in industry sectors, default dependencies between exposures and their credit quality. The accuracy of the new model is measured for test portfolios with a realistic industry-sector composition, obtained from the German central credit register. I find that a carefully calibrated infection model provides a reasonably close approximation to the VaR obtained from a multi-factor model and outperforms by far the BET model. The simulation results suggest that the calibrated infection model promises to provide a fit-for-purpose tool to measure concentration risk in business sectors that could be useful for risk managers and banking supervisors alike.
    Keywords: asset correlation, concentration risk, credit risk, multi-factor model, value-at-risk
    JEL: C15 C20 G21
    Date: 2005
  88. By: Alfarano, Simone; Lux, Thomas; Wagner, Friedrich
    Abstract: A growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets. More and more, this literature has been concerned with the explanation of some of the stylized facts of financial markets. It now seems that some previously mysterious time-series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the interaction among different groups of speculative traders. However, most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions. In this paper, this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by Kirman [1993]. Embedding the herding framework into a simple equilibrium asset pricing model, we are able to derive closed-form solutions for the time-variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series.
    Date: 2005
  89. By: Mark Crosby; Tim Kam; Kirdan Lees (Reserve Bank of New Zealand)
    Abstract: This paper quantifies the costs of mitigating exchange rate volatility within the context of a flexible inflation targeting central bank. Within a standard linearquadratic formulation of inflation targeting, we append a term that penalises deviations in the exchange rate to the central bank’s loss function. For a simple forward-looking New Keynesian model, we show that the central bank can reduce volatility in the exchange rate relatively costlessly by aggressively responding to the real exchange rate. However, when we append correlated shocks – to better match summary statistics of the Australian data – we find that the costs associated with reducing exchange rate volatility are larger: output volatility increases substantially. Finally, we apply our method to a variant of a small backward-looking New Keynesian model of the Australian economy. Under this model, large increases in inflation and output volatility accrue if the central bank attempts to mitigate exchange rate volatility.
    JEL: C51 E52 F41
    Date: 2006–06
  90. By: Luis Catão; G. A. Mackenzie
    Abstract: This paper looks at the dramatic decline in global real interest rates in recent years from a historical perspective and examines the various factors that may account for this trend. We show that current levels of real interest rates on long-term bonds in advanced economies are not low by historical standards and that it is the real long bond rates of the early 1980s through much of the 1990s that look anomalous. We also find that current global long-term interest rates are roughly in line with what one would predict given current price-earnings (P/E) ratios and under reasonable assumptions about the equity risk premia and the expected rate of growth of earnings in advanced countries. Finally, we provide econometric evidence that global long-term interest rates are significantly affected by commodity prices, expected productivity growth, and fiscal consolidation in advanced countries.
    Keywords: Interest rates , Savings , Investment , Economic models ,
    Date: 2006–04–05
  91. By: Nestmann, Thorsten
    Abstract: This paper shows that the substantial disparity in German bank lending towards industrial (IC) and non-industrial (Non-IC) countries is largely explained by differences in countries’ endowments and only to a minor extent by German banks’ different treatment of these country groups. This is demonstrated by applying a decomposition technique to an augmented gravity model that is estimated for German foreign lending using a new micro panel data-set on individual claims from the Deutsche Bundesbank covering the period from 1996 to 2002.
    Keywords: German bank lending, gravity models, Oaxaca decompositio alysis
    JEL: F30 F34 G21
    Date: 2005
  92. By: Noureddine Krichene
    Abstract: This paper examines the relationship between monetary policy and oil prices within a world oil demand and supply model. Low price and high income elasticities of demand and rigid supply explain high price volatilities and producers' market power. Exchange and interest rates do influence oil market equilibrium. The relationship between oil prices and interest rates is a two-way relationship that depends on the type of oil shock. During a supply shock, rising oil prices caused interest rates to increase; whereas during a demand shock, falling interest rates caused oil prices to rise. Record low interest rates led to high oil price volatility in 2005. Data shows that world economic growth and price stability require stable oil markets and therefore more prudent monetary policies.
    Keywords: Oil prices , Interest rates , Exchange rates , Monetary policy , Oil crisis ,
    Date: 2006–03–21
  93. By: Vladimir Klyuev; Paul Mills
    Abstract: This paper examines the role increasing personal wealth and home equity withdrawal (HEW) have had in the decline in the personal saving rate in the United States. It does so by comparing the U.S. experience with those of Australia, Canada, and the United Kingdom. Mortgage market liberalization and innovation should reduce household cash flow and collateral constraints while making housing wealth more liquid as HEW becomes easier over time. Regression analysis indicates the expected negative relationship between U.S. saving and net worth, with a somewhat smaller coefficient than in previous studies. HEW is estimated to have a temporary negative impact on saving of the order of 20 cents on the dollar.
    Date: 2006–07–12
  94. By: Guillermo Tolosa; Rupa Duttagupta
    Abstract: This paper assesses the nature of fiscal discipline under alternative exchange rate regimes. First, it shows in a simple theoretical framework that fiscal agencies under a currency union with a fixed exchange rate can have the largest incentive to overspend or "free-ride" (compared to those under other exchange rate regimes) owing to their ability to spread the costs of overspending in terms of the inflation tax across both time-given the fixed exchange rate-and space-given the currency union. In contrast, such free-riding behavior does not arise under flexible regimes owing to the immediate inflationary impact of spending. Next, empirically, it shows that fiscal stances in countries with fixed pegs and currency unions regime demonstrate greater free-riding behavior than countries with more flexible regimes in 15 Caribbean countries during 1983-2004.
    Keywords: Fiscal policy , Caribbean , Monetary unions , Exchange rate regimes , Flexible exchange rates , Currency pegs ,
    Date: 2006–05–12
  95. By: Hamerle, Alfred; Knapp, Michael; Liebig, Thilo; Wildenauer, Nicole
    Abstract: In this paper we focus on the analysis of the effect of prediction and estimation risk on the loss distribution, risk measures and economic capital. When variables for the determination of probability of default and loss distribution have to be predicted because they are not available at the time the prediction is made, the prediction is prone to errors. The model parameters for the estimation of probability of default or asset correlation are not available, and usually have to be estimated using historical data. The incorporation of prediction and estimation risk generally leads to broader loss distributions and therefore to rising values of risk parameters such as Value at Risk or Expected Shortfall. The level of economic capital required may be strongly underestimated if prediction and estimation risk are ignored.
    Keywords: probability of default, PD, credit risk, default correlation, asset correlation, point in time, value at risk, estimation risk
    JEL: C1 G21
    Date: 2005
  96. By: Kocherlakota, Narayana R.; Pistaferri, Luigi
    Abstract: In this paper, we consider a dynamic economy in which the agents in the economy are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption that agents have constant relative risk aversion, we derive a novel asset pricing kernel for financial asset returns. The kernel equals the reciprocal of the gross growth of the ãth moment of the consumption distribution, where ã is the coefficient of relative risk aversion. We use data from the consumer expenditure survey (CEX) and show that the new stochastic discount factor performs better than existing stochastic discount factors at rationalizing the equity premium. However, its ability to simultaneously explain the equity premium and the expected return to the Treasury bill is about the same as existing discount factors.
    Date: 2005
  97. By: Xu, Fang
    Abstract: This paper studies the signalling effect of the consumption-wealth ratio (cay) on German stock returns via vector error correction models (VECMs). The effect of cay on U.S. stock returns has been recently confirmed by Lettau and Ludvigson with a two-stage method. In this paper, performances of the VECMs and the two-stage method are compared in both German and U.S. data sets. It is found that the VECMs are more suitable to study the effect of cay on stock returns than the two-stage method. Using the Conditional-Subset VECM, cay signals real stock returns and excess returns in both data sets significantly. The estimated coefficient on cay for stock returns turns out to be two times greater in U.S. data than in German data. When the two-stage method is used, cay has no significant effect on German stock returns. Besides, it is also found that cay signals German wealth growth and U.S. income growth significantly.
    Keywords: stock returns, consumption-wealth ratio, VECM
    JEL: C32 G10
    Date: 2005
  98. By: Howell H. Zee
    Abstract: This paper proposes a new hybrid cash-flow tax on corporations that, on one hand, taxes only excess corporate profits as they accrue, and, on the other hand, treats real and financial transactions neutrally. It is, therefore, a superior tax compared to the cash-flow tax on real transactions that seems to have gained common acceptance. The hybrid tax is a modified version of the cash-flow tax on real and financial transactions combined. The modification involves replacing expensing of fixed assets with normal depreciation allowances, but the undepreciated value of fixed assets is carried forward with interest at the opportunity cost of equity capital.
    Date: 2006–05–12
  99. By: Nautz, Dieter; Offermanns, Christian J.
    Abstract: This paper investigates how the dynamic adjustment of the European overnight rate Eonia to the term spread and the ECB’s policy rate has been affected by rate expectations and the operational framework of the ECB. In line with recent evidence found for the US and Japan, the reaction of the Eonia to the term spread is non-symmetric. Moreover, the response of the Eonia to the policy rate depends on both, the repo auction format and the position of the Eonia in the ECB’s interest rate corridor.
    Keywords: Monetary Policy Impleme ion, Term Structure of Interest Rates, Nonli Cointegration
    JEL: E43 E52
    Date: 2006
  100. By: Christopher F. Baum (Boston College); Mustafa Caglayan (University of Glasgow); Oleksandr Talavera (DIW Berlin)
    Abstract: We investigate the impact of measures of uncertainty on firms' capital investment behavior using a panel of U.S. firms. Increases in firm-specific and CAPM-based measures have a significant negative impact on investment spending, while market-based uncertainty has a positive impact.
    Keywords: capital investment, asymmetric information, financial frictions, uncertainty, CAPM
    JEL: E22 D81 C23
    Date: 2006–07–28
  101. By: Antoine Bouveret; Sana Mestiri; Henri Sterdyniak (Observatoire Français des Conjonctures Économiques)
    Date: 2006
  102. By: Ahsan, Quamrul
    Abstract: The focus of this paper is on the rural poor of south Asia and their struggle to cope with the seasonal risk of unemployment and the ensuing income risks. In the absence of formal credit or insurance markets the rural poor typically resort to, among other options, the following informal strategies to cope with seasonal income risks: (i) seasonal rural-to-urban migration, and (ii) mutual (ex-post) transfers between families of friends and relatives. Access to credit through a microfinance institution could also provide a competing source of insurance. The question raised in this paper is how the access to credit may affect the more traditional/time honoured means of risk coping, such as seasonal migration. Given that credit, i.e., a creditfinanced activity, is potentially a substitute for seasonal migration, it is reasonable to argue that easy access to credit (or high return on credit) will lower the incidence of migration. However, there also exists a potential complementarity between the two activities (if implemented jointly) in terms of gains due to diversification of income risks. That is, given that income from migration is not typically subject to the same shocks as income generated by a credit-financed activity, a joint adoption of both activities creates opportunities for diversification of risk in the family incomes portfolio. If the diversification gains are large enough then the adoption of both activities jointly will be preferred to adopting either of the activities individually. In that event, introduction of microfinance in rural societies may result in raising the incidence of migration. The joint adoption case for rural households is modelled using a choice theoretic framework, and exact conditions are derived for when joint adoption is preferable to adoption of a single project. The model of joint adoption is estimated by applying a Bivariate Probit regression model on a single cross-section of household survey data from rural Bangladesh. Our preliminary results show that indeed the probability of participation in migration by household members is positively related to the probability of the household being a credit recipient.
    Keywords: Development, South Asia, Poverty, Microfinance, Rural labour markets, Rural-to-urban migration, Risk-coping strategies
    JEL: D1 D81 J43 J61 O1 Q12 R23
    Date: 2005
  103. By: Allen, Franklin; Chakrabarti, Rajesh; De, Sankar; Qian, Jun; Qian, Meijun
    Abstract: The authors examine the legal and business environments, financing channels, and governance mechanisms of various types of firms in India and compare them to those from other countries. Despite its English commonlaw origin, strong legal protection provided by the law, and a democratic government, corruption within India's legal system and government significantly weakens investor protection in practice. External financing of firms has been dominated by nonmarket sources of financing, while the characteristics of listed firms are similar to those from countries with weak investor protection. The evidence, including results based on a survey of small and medium-scale private firms, shows thatalternative financing channels provide the most important source of funds. The authors also find that informal governance mechanisms, such as those based on reputation, trust, and relationships are more important than formal mechanisms (such as courts) in resolving disputes, overcoming corruption, and supporting growth.
    Keywords: Banks&Banking Reform,Corporate Law,Financial Intermediation,Governance Indicators,Small Scale Enterprise
    Date: 2006–08–01
  104. By: Jorge Roldos
    Abstract: This paper studies changes in Canada's monetary policy transmission, associated with the important changes in financial structure experienced in the 1990's, using two methodologies. First, VAR models show a clear break in monetary transmission beginning in 1988, after changes in financial regulation initiated the process of financial disintermediation. Second, estimates of the interest rate elasticity of aggregate demand in IS equations increase in the 1990's, suggesting that the systematic component of monetary policy has become more relevant. The ratio of direct to indirect finance, a measure of disintermediation, contributes to explain changes in the interest rate elasticity, suggesting an increased effectiveness of monetary policy associated with a larger use of market-based sources of finance.
    Date: 2006–04–11
  105. By: Ait-Sahalia, Yacine; Mykland, Per A.; Zhang, Lan
    Abstract: We analyze the impact of time series dependence in market microstructure noise on the properties of estimators of the integrated volatility of an asset price based on data sampled at frequencies high enough for that noise to be a dominant consideration. We show that combining two time scales for that purpose will work even when the noise exhibits time series dependence, analyze in that context a refinement of this approach based on multiple time scales, and compare empirically our different estimators to the standard realized volatility.
    Keywords: Market microstructure, Serial dependence, High frequency data, Realized volatility, Subsampling, Two Scales Realized Volatility
    Date: 2005
  106. By: John Cady; Anthony J. Pellechio
    Abstract: The effects of the IMF's data standards initiatives on sovereign borrowing costs in private capital markets are investigated for 26 emerging market and developing countries. Stable and significant panel econometric estimates indicate that subscription to the Special Data Dissemination Standard (SDDS) reduces launch spreads by an average of 20 percent while participation in the General Data Dissemination System (GDDS) reduces spreads for those countries with access to capital markets by an average of 8 percent. These estimates correspond to discounts of some 50 and 20 basis points, respectively. Evidence of similar discounts is also found when launch yields are analyzed.
    Keywords: Public debt , Capital markets , Transparency , Special Data Dissemination Standard , General Data Dissemination System , Economic models ,
    Date: 2006–04–05
  107. By: Anthony Pennington-Cross; Giang Ho
    Abstract: Adjustable rate and hybrid loans have been a large and important component of subprime lending in the mortgage market. While maintaining the familiar 30-year term the typical adjustable rate loan in subprime is designed as a hybrid of fixed and adjustable characteristics. In its most prevalent form, the first two years are typically fixed and the remaining 28 years adjustable. Perhaps not surprisingly, using a competing risks proportional hazard framework that also accounts for unobserved heterogeneity, hybrid loans are sensitive to rising interest rates and tend to temporarily terminate at much higher rates when the loan transforms into an adjustable rate. However, these terminations are dominated by prepayments not defaults.
    Keywords: Mortgages ; Adjustable rate mortgages
    Date: 2006
  108. By: Luciano Greco
    Abstract: In many countries, pension funds based on individual accounts have been affeted by high operating costs. Contract theory helps to unravel the nature of such problems: managers of pension funds have strong incentives to manipulate market expectations about their capacity through wasteful activities (e.g. promotion). Thus, competiton among pension funds entails effiecency loses, due to pension savings attraction efforts, as well as gains, related to investments in asset management skills. Regulations capping fees or costs of pension funds worsen market inefficiency, while a public pension fund competing with private ones improves (at least weekly) it. Taking into account political and commitment constraints affecting public institutions, a quasi-competitve pension scheme - centralizing contribution collection, auctioning the right to manage raised money to competitive fund managers, and affording an opting out choice to households -Pareto-dominates (at leaset weekly) the market of pension funds.Keywords: Pension funds, signaling, Public-private provision mechanismJEL classification: D02, H11, H55
    Date: 2006–07
  109. By: Mark Furletti; Christopher Ody
    Abstract: Credit Card Pricing Developments and Their Disclosure,” a January 2003 Payment Cards Center Discussion Paper, examined the history and dynamics of credit card pricing and how such pricing is described to consumers in Truth in Lending solicitation disclosures. In this paper, we examine credit card pricing as revealed to consumers in a different context: that of a semiannual shopping guide that the Board of Governors publishes pursuant to the Truth in Lending Act. Specifically, we ask two questions: Are the data on credit card pricing in the guide useful to consumers? Are the data collected for the guide (commonly known as Terms of Credit Card Plan [TCCP] data) of value to researchers? With respect to both of these questions, we find that the data are becoming less useful.
    Keywords: Credit cards
    Date: 2006
  110. By: George J. Mailath; Georg Nöldeke
    Date: 2006–07–29
  111. By: David Hauner; Manmohan S. Kumar
    Abstract: This paper explores the determinants of long-term government bond yields in the Group of Seven (G-7) economies and analyzes the factors that could explain the conundrum of very low rates in the face of a variety of adverse factors in recent years. In particular, the paper focuses on the deteriorating fiscal position in the G-7 economies and enquires which factors could have offset their impact on long-term interest rates, and how sustainable they are likely to be. A model of interest rate determination is elaborated and estimated for the G-7, with explicit emphasis on capital flows and public savings. The results suggest a high likelihood of a substantial impact of the weaker budgetary positions in the G-7 on global interest rates when the offsetting unprecedented capital flows slow down.
    Keywords: Interest rates , Fiscal policy , Foreign exchange reserves , Reserves , Group of Seven , Capital flows , Public sector savings , Economic models ,
    Date: 2006–05–10
  112. By: von Kalckreuth, Ulf; Murphy, Emma
    Abstract: The interrelationship between financial constraints and firm activity is a hotly debated issue. The way firms cope with financial constraints is fundamental to the analysis of monetary transmission, of financial stability and of growth and development. The CBI Industrial Trends Survey contains detailed information on the financial constraints faced by a large sample of UK manufacturers. This paper uses the quarterly CBI Industrial Trends Survey firm level data between January 1989 and October 1999. The cleaned sample contains 49,244 quarterly observations on 5,196 firms. As more than 63% of the observations refer to firms with less than 200 employees, the data set is especially well suited for comparing large and small companies. The data set is presented and a new method of checking the informational content of the data is developed. Whereas the relationship between investment activity and financial constraints is theoretically ambivalent due to simultaneity, the link between financial constraints on the one hand and the prevalence and duration of capacity gaps on the other should be unambiguously positive. Looking at the relationship between both types of constraints, two important results emerge. First, there is shown to be informational content in the survey data on financial constraints. Specifically, financially constrained firms take longer to close capacity gaps. This indicates that financial constraints do indeed play a part in the investment process. Second, small firms close their capacity gaps faster than large firms do, but financial constraints seem to be of higher relevance to their adjustment dynamics.
    Keywords: Financial constraints, investment, capacity adjustment, small firm finance, duratio alysis
    JEL: C33 C41 D21 D92
    Date: 2005
  113. By: Blaskowitz, Oliver; Herwartz, Helmut; de Cadenas Santiago, Gonzalo
    Abstract: In this study we forecast the term structure of FIBOR/EURIBOR swap rates by means of recursive vector autoregressive (VAR) models. In advance, a principal components analysis (PCA) is adopted to reduce the dimensionality of the term structure. To evaluate ex–ante forecasting performance for particular short, medium and long term rates and for the level, slope and curvature of the swap term structure, we rely on measures of both statistical and economic performance. Whereas the statistical performance is investigated by means of the Henrikkson–Merton statistic, the economic performance is assessed in terms of cash flows implied by alternative trading strategies. Arguing in favor of local homogeneity of term structure dynamics, we propose a data driven, adaptive model selection strategy to “predict the best forecasting model” out of a set of 100 alternative implementations of the PCA/VAR model. This approach is shown to outperform forecasting schemes relying on global homogeneity of the term structure.
    Keywords: Principal components, Factor Analysis, Ex–ante forecasting, EURIBOR swap rates, Term structure, Trading strategies
    JEL: C32 C53 E43 G29
    Date: 2005
  115. By: David C. Wheelock; Paul Wilson
    Abstract: This paper describes a non-parametric, unconditional quantile estimator that unlike traditional non-parametric frontier estimators is both robust to data outliers and has a root-n convergence rate. We use this estimator to examine changes in the efficiency and productivity of U.S. banks between 1985 and 2004. We find that larger banks experienced larger efficiency and productivity gains than small banks, consistent with the presumption that recent changes in regulation and information technology have favored larger banks.
    Keywords: Production (Economic theory) ; Banks and banking
    Date: 2006
  116. By: Jiro Honda; Liliana Schumacher
    Abstract: This paper discusses whether adopting the U.S. dollar as the sole legal tender could help Liberia, a postconflict economy, to boost growth and strengthen fiscal discipline. In view of the performance of exchange rate regimes in many countries and Liberia's own experience with dollarization, we conclude that Liberia should not adopt full dollarization for the following reasons: (i) the alleged benefits voiced by the proponents of dollarization, in terms of enhanced fiscal discipline and faster economic growth, are not supported by the empirical evidence; (ii) dollarization would increase the Liberian economy's vulnerability to external shocks and Liberia's social fragility; (iii) banks in fully dollarized economies face additional capitalization requirements that Liberian banks cannot meet at present; and (iv) dollarization would be costly in terms of real resources because of the loss of seigniorage.
    Date: 2006–04–10
  117. By: Veit, Wolfgang
    Abstract: Over the past 15 years the mutual importance of institutional economics and development economics have grown strongly. This paper attempts to apply institutional analysis to issues of economic development by analysing China’s reform process after her accession to the WTO on the background of the hypothesis of vertically dependent institutions. It will be shown that institutions on a lower level (e.g. a fixed exchange rate regime) are dominated by higher level institutions like (e.g. laws governing firms, financial and labour markets). The latter are dominated by institutions on a higher level, for example by regulations governing the economic and political system. Consequently, economic policy options like a change in the exchange rate regime will depend on adjustments in areas ranging from constitutional to company law. In the second chapter, the concept of hierarchical institutions is introduced. In the third chapter, the general results of China’s recent trade liberalisation under WTO rules and the issue of a fixed exchange rate to the US Dollar are recounted. In the fourth chapter, reforms necessitated by China’s accession to the WTO, and reflected by the present exchange rate regime, are identified. This is followed by the analysis of institutions that are conducive to successful implementation of those reforms in China.
    Date: 2005
  118. By: Lemke, Wolfgang; Archontakis, Theofanis
    Abstract: Using a stochastic discount factor approach, we derive the exact solution for arbitrage-free bond yields for the case that the short-term interest rate follows a threshold process with the intercept switching endogenously. The yield functions, mapping the one-month rate into n-period yields, respectively. This is in contrast to linear short-rate process which imply an affine yield function. The intervals for which convexity or concavity prevails increase with time to maturity.
    Keywords: Threshold process, term structure of interest rates, nonli yield function
    JEL: C63 E43 G12
    Date: 2006
  119. By: Ewe-Ghee Lim
    Abstract: This paper examines opposing views on the euro's challenge to the dollar as an international currency. One view emphasizes Europe's large economy and diversification effects as undergirding a vigorous challenge. The other emphasizes "network externalities," particularly undergirding continued dollar dominance. The data to date support the second view but also show the euro has significantly overtaken the legacy currencies as a reserve currency. Generally, large economic size alone is insufficient to challenge the network externalities supporting vehicle currencies, but scope exists for the euro to advance as an international store of value. The paper discusses the euro's medium-term prospects.
    Date: 2006–06–27
  120. By: Rozália Pál (European University Viadrina); Roman Kozhan (The University of Warwick)
    Abstract: In this paper we describe a theoretical model of optimal investment of various types of financially constrained firms. We show that the resulting relationship between internal funds and investment is non-monotonic. In particular, the magnitude of the cash flow sensitivity of the investment is lower for firms with credit rationing compared to firms that are able to obtain short-term external financing. The inverse relationship is driven by the leverage multiplier effect. A positive cash flow shock increases the short-term borrowing capacity of the firm, which in turn has a positive effect on investment and firm's growth. Moreover, the leverage multiplier effect is the highest for firms relying on short-term credits and it is lower for firms that are able to obtain long-term financing. Analysing a large euro area data set we find strong empirical support for our theoretical predictions. The results also help to explain some contradictory findings in the financing constraints literature.
    Keywords: Financing constraints, growth, investment, cash flow sensitivity
    JEL: D92 G3 G32
    Date: 2006–07–21
  121. By: Shaun K. Roache
    Abstract: Investment-to-GDP ratios across the Caribbean tend to be relatively high. In many countries, these ratios have been trending higher since the mid-1990s, largely reflecting public investment and foreign direct investment. Private domestic investors have been less prominent. This may be one reason why such high investment has delivered Caribbean growth rates below the middle-income average. This paper seeks to understand how higher private investment may be encouraged. Using new data, it concludes that: the multiplier effects of public investment and FDI on private domestic investment are weak; and private domestic investment (PDI) is sensitive to the cost of capital. Public policy designed to raise PDI should focus on creating conditions for a lower cost of capital. The focus should be on removing barriers to lower real interest rates, rather than the further extension of costly tax concessions.
    Date: 2006–06–26
  122. By: Boerner, Kira; Hainz, Christa
    Abstract: In transition and developing countries, we observe rather high levels of corruption even they have democratic political systems. This is surprising from a political economy perspective, as a majority of the people generally suffers from high corruption levels. Our model based on the fact that corrupt officials have to pay an entry fee to get lucrative positions. In a probabilistic voting model, we show that a lack of financial institutions can lead more corruption as more voters are part of the corrupt system. Well-functioning financial institutions, in turn, can increase the political support for anti-corruption measures.
    Keywords: Corruption, Financial Markets, Institutions, Development, Voting
    JEL: D72 D73 O17
    Date: 2005
  123. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the dynamic effects of anticipated price increases of imported raw materials upon two large open economies. It is assumed that the economies have an asymmetric macroeconomic structure on the supply side and are dependent upon a small third country for oil or raw materials imports. The dynamic behavior of several macroeconomic variables is discussed both under US dollar and Euro-currency denomination. It is shown that with Euro-currency denominated oil the stagnationary effects of oil price increases upon both the domestic and foreign economy are reduced. The paper also discusses several monetary policy responses to oil price shocks.
    Keywords: oil price shocks, international policy coordination, currency denomination
    JEL: E63 F42 Q43
    Date: 2005

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