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on Financial Markets |
| By: | Jan Pieter Krahnen (Imperial College, London); Berc Rustem (Imperial College, London); Volker Wieland (University of Frankfurt); Stan Zakovic (Imperial College London) |
| Abstract: | Large banks often sell part of their loan portfolio in the form of collateralized debt obligations (CDO) to investors. In this paper we raise the question whether credit asset securitization affects the cyclicality (or commonality) of bank equity values. The commonality of bank equity values reflects a major component of systemic risks in the banking market, caused by correlated defaults of loans in the banks’ loan books. Our simulations take into account the major stylized fact of CDO transactions, the nonproportional nature of risk sharing that goes along with tranching. We provide a theoretical framework for the risk transfer through securitization that builds on a macro risk factor and an idiosyncratic risk factor, allowing an identification of the types of risk that the individual tranche holders bear. This allows conclusions about the risk positions of issuing banks after risk transfer. Building on the strict subordination of tranches, we first evaluate the correlation properties both within and across risk classes. We then determine the effect of securitization on the systematic risk of all tranches, and derive its effect on the issuing bank’s equity beta. The simulation results show that under plausible assumptions concerning bank reinvestment behaviour and capital structure choice, the issuing intermediary’s systematic risk tends to rise. We discuss the implications of our findings for financial stability supervision. |
| JEL: | G28 |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp2000604&r=fmk |
| By: | NIETO, Sebastián |
| Abstract: | In order to analyze the impact of the new banking capital regulation (Basel II) on the business cycle in an emerging economy, I develop a duopoly model composed of domestic and foreign banks. The principal results are: by the conduct of new banking capital regulation, the assessment of credit risk carried out by an international bank in a given country not only affects the total loans in that country but also the total assets supplied in other countries. Second, analyzing risk-averse banks, as portfolio diversification increases, the change in loans allocated in a given country by an international bank as a proportion of the original investment and the total level of loans for that country can be harshly affected by the behavior of a foreign bank following only “news” through the new capital regulation. Finally, even in the case that portfolio diversification increases without limits, the macroeconomic implication of a change of credit risk estimation, via the new capital regulation, is larger when banks are risk-neutral than risk-averse. |
| Date: | 2004–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001065:002651&r=fmk |
| By: | Benink, H.A. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Keywords: | regulatory;incentives;shadow committee;banking;subordinated debt;deposit insurance;Neo-Austrian finance;internal ratings;market discipline;capital requirements;Basel Committee; |
| Date: | 2001–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:euriar:3000345&r=fmk |
| By: | Elena Carletti (Center for Financial Studies, Frankfurt, and Wharton Financial Institution Center); Philipp Hartmann (European Central Bank, Frankfurt); Giancarlo Spagnolo (Stockholm School of Economics, Consip Research Unit, and CEPR) |
| Abstract: | We model the impact of bank mergers on loan competition, reserve holdings and aggregate liquidity. A merger changes the distribution of liquidity shocks and creates an internal money market, leading to financial cost efficiencies and more precise estimates of liquidity needs. The merged banks may increase their reserve holdings through an internalization effect or decrease them because of a diversification effect. The merger also affects loan market competition, which in turn modifies the distribution of bank sizes and aggregate liquidity needs. Mergers among large banks tend to increase aggregate liquidity needs and thus the public provision of liquidity through monetary operations of the central bank. |
| Keywords: | Credit Market Competition, Bank Reserves, Internal Money Market, Banking System Liquidity, Monetary Operations |
| JEL: | D43 G21 G28 L13 |
| Date: | 2006–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200608&r=fmk |
| By: | Johann Burgstaller (Department of Economics, Johannes Kepler University Linz, Austria) |
| Abstract: | Bond yield and retail interest rate spreads are presumed to lead real activity on the basis of financial accelerator mechanisms, markup cyclicality or simply because they are forward-looking. Empirical results for Austria show that retail rate spreads outperform many other indicators in this respect. Nevertheless, there is no evidence for a financial accelerator being behind this finding. |
| Keywords: | Leading indicator; business cycle; shock propagation; financial accelerator; bank markup |
| JEL: | E32 E44 G12 G21 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2006_16&r=fmk |
| By: | Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Øyvind Eitrheim (Norges Bank (Central Bank of Norway)) |
| Abstract: | We investigate empirically whether a central bank can promote financial stability by stabilising inflation and output, and whether additional stabilisation of asset prices and credit growth would enhance financial stability, in particular. We employ an econometric model of the Norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth, in addition to inflation and output. We find that output stability also promotes financial stability, while inflation stability is achieved at the expense of both output and financial stability. A stabilisation of house prices, equity prices and/or credit growth enhances stability in both inflation and output, but not financial stability. By contrast, stabilisation of the nominal exchange rate induces excess volatility in general. |
| Keywords: | Monetary policy, financial stability, asset prices, interest rate rules. |
| JEL: | C51 C52 C53 E47 E52 |
| Date: | 2006–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2006_07&r=fmk |
| By: | Bohl, Martin; Döpke, Jörg; Pierdzioch, Christian |
| Abstract: | Using monthly data for the period 1953–2003, we apply a real-time modeling approach to investigate the implications of U.S. political stock market anomalies for forecasting excess stock returns. Our empirical findings show that political variables, selected on the basis of widely used model selection criteria, are often included in real-time forecasting models. However, they do not contribute to systematically improving the performance of simple trading rules. For this reason, political stock market anomalies are not necessarily an indication of market inefficiency. |
| Keywords: | Political stock market anomalies, predictability of stock returns, efficient markets hypothesis, real-time forecasting |
| JEL: | G11 G14 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4723&r=fmk |
| By: | Marco Realdon |
| Abstract: | This paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can depauperate the firm and expropriate other creditors by repaying their credit before bankruptcy. The bankruptcy court's right to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors. |
| Keywords: | equity holders's credit, debt repayment, assets liquidation, revocatoria, debt valuation, default, structural model |
| JEL: | G13 G33 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:06/16&r=fmk |
| By: | Christa N. Brunnschweiler (Center of Economic Research, Swiss Federal Institute of Technology Zurich (ETH)) |
| Abstract: | This paper examines the determinants of credit allocation to renewable energy firms in developing and transition countries. Using a simple en- dogenous growth model, we show that the development of the renewable energy sector, i.e. the diversification of renewable energy resources used in primary energy production, depends on the quality of financial intermedia- tion, debtor information costs to banks, and financing needs of renewable energy firms. Policies should aim at increasing financial sector perfor- mance through better institutional frameworks and improving financing conditions for new energy firms. The empirical analysis confirms the pos- itive effect of financial intermediary development on the renewable energy sector. |
| Keywords: | Financial intermediation, banks, renewable energy, economic growth |
| JEL: | Q42 G10 O41 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:06-49&r=fmk |
| By: | Emmanuel Farhi; Mikhail Golosov; Aleh Tsyvinski |
| Date: | 2006–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:321307000000000326&r=fmk |
| By: | Wouters, T.; Plantinga, A. (Groningen University) |
| Abstract: | We examine to what extent the popularity of an investment style can be attributed to style investing. The style investing hypothesis predicts that assets in the same style show strong comovement with respect to their underlying fundamentals and that reclassifying assets into a new style raises its correlation with that style. We test this prediction by studying how comovement varies with proxies of popularity. We use different kinds of data, such as data on stocks, mutual funds, IPO?s and financial analysts. We provide strong evidence that when popularity of a style is high investors base their demand for stocks on an individual stock level. We also find that style popularity is positively related to style performance. The evidence presented here challenges the view that investors base their asset allocation on a style level instead of an individual stock level. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:06e08&r=fmk |
| By: | Markku Lanne; Timo Vesalay |
| Abstract: | We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy between 'informed' and 'uninformed' traders' valuations. Since informed 'traders' valuations are likely to be less dispersed, a transaction tax penalizes informed trades disproportionately, leading to increased volatility. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility. |
| Keywords: | Transaction tax; exchange rates; volatility |
| JEL: | F31 F42 G15 G28 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2005/19&r=fmk |
| 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: | 2006–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00087886_v2&r=fmk |
| By: | Marco Realdon |
| Abstract: | This paper presents a tractable bond valuation model, which further develops the approach proposed by Piazzesi (2005). The short term inter-bank interest rate is equal to the target rate set by the central bank plus a spread. Bond yields are driven by the intensities that determine the probabilities that the central bank may raise or cut the target interest rate. Unlike in Piazzesi (2005), negative intensities have a convenient interpretation and do not complicate estimation, and two accurate approximations to the bond pricing equation provide new closed form solutions for discount bond prices that require no numerical integration. Unlike in Piazzesi the target interest rate can be constrained to be non-negative. Yields, especially long term ones, decrease when the central bank is expected to decide more frequent and/or larger average future changes in the target interest rate. The model lends itself to easy calibration and estimation. |
| Keywords: | Bond valuation, target interest rate, closed form solution, yield curve, central banker's meeting |
| JEL: | G13 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:06/15&r=fmk |
| By: | Markku Lanne |
| Abstract: | Forecasts of the realized volatility of the exchange rate returns of the Euro against the U.S. Dollar obtained directly and through decomposition are compared. Decomposing the realized volatility into its continuous sample path and jump components and modeling and forecasting them separately instead of directly forecasting the realized volatility is shown to lead to improved out-of-sample forecasts. Moreover, gains in forecast accuracy are robust with respect to the details of the decomposition. |
| Keywords: | Mixture model, Jump, Realized volatility, Gamma distribution |
| JEL: | C22 C52 C53 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/20&r=fmk |
| By: | Tood Keister (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | This paper shows how expectations-driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation. The model of Morris and Shin (1998) is extended to allow speculators to trade in a second currency market. If speculators believe that a devaluation of this other currency will make a domestic devaluation more likely, they will engage in trades that link the two markets. A sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of a crisis there, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables, and these restrictions are broadly consistent with existing empirical evidence. |
| Date: | 2005–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0501&r=fmk |
| By: | Juan A. Rojas (Universidad Carlos III de Madrid); Carlos Urrutia (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with exogenous borrowing constraints overestimates the positive effect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced. |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0409&r=fmk |
| By: | Ajit Singh; Ann Zammit |
| Abstract: | This paper considers the Greenspan/Summers/IMF (GSI) argument that the Asian way of doing business was the deep cause of the Asian crisis. The IMF reform programme for the crisis-affected Asian countries suggested they should abandon the Asian business model and adopt the US corporate model. The main findings are: a) contrary to GSI doctrine, poor corporate governance and lack of competition are not common characteristics of the Asian business model; b) that the stock-market based US business model has severe limitations for developing country corporations, not least because of imperfect share prices and the imperfect market for corporate control. |
| Keywords: | Asian and US corporate models; stock markets; Asian crisis |
| JEL: | D21 G3 O1 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp329&r=fmk |
| By: | Baquero, G.; Verbeek, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Believers in the law of small numbers tend to overinfer the outcome of a random process after a small series of observations. They believe that small samples replicate the probability distribution properties of the population. We provide empirical evidence indicating that investors are mistakenly driven by this psychological bias when hiring or firing a fund manager after a successful (or losing) performance streak. Using quarterly data between 1994 and 2000 of 752 hedge funds, we analyze actual money flows into and out of hedge funds and their relationship with the length of the streak. We first show that persistence patterns have a predictive ability of future relative performance of a manager: the longer the winner streak, the larger the probability for a fund to remain a winner. Investors, in turn, appear to be aware of quality dispersion across managers and respond by following a momentum strategy: the longer the winning (losing) streak, the more likely they will invest in (divest from) that fund. Yet, we find that investors place excessive weight in the managers’ track record as a criterion for decision. Our model shows that the length of the streak has an economically and statistically significant impact on money flows beyond rationally expected performance, which confirms a “hot-hand†bias driving to a large extent momentum investing. Apparently, even sophisticated investors exhibit psychological biases that may have adverse effects on their wealth. |
| Keywords: | Law of Small Numbers;Performance Persistence;Overreaction;Hedge Fund Investors;Hot-Hand Bias; |
| Date: | 2006–07–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008811&r=fmk |
| By: | Tilke, Stephan |
| Abstract: | The objective of this paper is to study the effect of importance sampling (IS) techniques on stochastic credit portfolio optimization methods. I introduce a framework that leads to a reduction of volatility of resulting optimal portfolio asset weights. Performance of the method is documented in terms of implementation simplicity and accuracy. It is shown that the incorporated methods make solutions more precise given a limited computer performance by means of a reduced size of the initially necessary optimization model. For a presented example variance reduction of risk measures and asset weights by a factor of at least 350 was achieved. I finally outline how results can be mapped into business practice by utilizing readily available software such as RiskMetrics’ CreditManager as basis for constructing a portfolio optimization model that is enhanced by means of IS. |
| Keywords: | CVaR, credit risk, stochastic portfolio optimization, importance sampling, CreditMetrics, CreditManager |
| JEL: | C15 C61 G11 G28 |
| Date: | 2006–08–31 |
| URL: | http://d.repec.org/n?u=RePEc:bay:rdwiwi:706&r=fmk |
| By: | Fischer, Christoph; Porath, Daniel |
| Abstract: | Panel unit root tests of real exchange rates – as opposed to univariate tests – usually reject non-stationarity. These tests, however, could be biased if the real exchange rate contained MA roots. Indeed, two independent arguments claim that the real exchange rate, being a sum of a stationary and a non-stationary component, is possibly an ARIMA (1, 1, 1) process. Monte Carlo simulations show, how systematic changes in the parameters of the components, of the test equation and of the correlation matrix affect the size of first and second generation panel unit root tests. Two components of the real exchange rate, the real exchange rate of a single good and a weighted sum of relative prices, are constructed from the data for a panel of countries. Computation of the relevant parameters reveals that panel unit root tests of the real exchange rate are severely oversized, usually much more so than simple ADF tests. Thus, the evidence for PPP from panel unit root tests may be merely due to extreme size biases. |
| Keywords: | panel unit root test, purchasing power parity, real exchange rate, Monte Carlo simulation |
| JEL: | C33 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4721&r=fmk |
| By: | Pelsser, A.A.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | In this inaugural address Professor Pelsser investigates how one can strike a balance between investmens with a high expected return and high risk (e.g. stocks) versus low-risk investments with a low return (e.g.bonds). Using an example of a life-insurance company he shows in this address how one can employ optimisation-techniques to make a trade-off between the desire to find an investment return as high as possible under the constraint that the insurance company should be able to meet its obligations to the policyholders under all economic circumstances. |
| Keywords: | asset liability management;business cinance, corporation finance;corporate finance and governance;financial management;investments for insurance companies;investment policy; |
| Date: | 2003–05–02 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:euriar:3000988&r=fmk |
| By: | Ángel León; Javier Mencía; Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros) |
| Abstract: | We derive the statistical properties of the SNP densities of Gallant and Nychka (1987). We show that these densities, which are always positive, are more general than the truncated Gram-Charlier expansions of Jondeau and Rochinger (2001), who impose parameter restrictions to ensure positivity. We also use the SNP densities for option valuation. We relate real and risk-neutral measures, obtain closed-form prices for European options, and study the "Greeks". We show that SNP densities generate wider option price ranges than the truncated expansions. In an empirical application to S&P 500 index options, we find that the SNP model beats the standard and Practitioner's Black-Scholes formulas, and truncated expansions. |
| Keywords: | Kurtosis, density expansions, Gram-Charlie, skewness, S&P index options. |
| JEL: | G13 C16 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cmf:wpaper:wp2005_0509&r=fmk |
| By: | Bruggen, G.H. van; Spann, M.; Lilien, G.L.; Skiera, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | We study the performance of Virtual Stock Markets (VSMs) in an institutional forecasting environment. We compare VSMs to the Combined Judgmental Forecast (CJF) and the Key Informant (KI) approach. We find that VSMs can be effectively applied in an environment with a small number of knowledgeable informants, i.e., in thin markets. Our results show that none of the three approaches differ in forecasting accuracy in a low knowledge-heterogeneity environment. However, where there is high knowledge-heterogeneity, the VSM approach outperforms the CJF approach, which in turn outperforms the KI approach. Hence, our results provide useful insight into when each of the three approaches might be most effectively applied. |
| Keywords: | Virtual Stock Markets;Forecasting;Information Markets;Electronic Markets; |
| Date: | 2006–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008773&r=fmk |
| By: | Alexandra Lai; Oana Secrieru |
| Abstract: | The authors examine the impact of multinational enterprises (MNEs) on exchange rate pass-through in an environment where an MNE engages in Cournot (quantity) competition with domestic and foreign rivals. The MNE differs from its competitors because it has a lower marginal cost as a result of increased efficiency, and economies of scope as a result of operating in two markets. An MNE can also choose to locate its production for the foreign market domestically (in the location of the MNE's parent), or in the foreign country (the location of the subsidiary). When it locates all its production domestically, it engages in <em>intrafirm trade</em> (IT) in final goods. Otherwise, it is said to engage in <em>international production</em> (IP). Consistent with other studies on exchange rate pass-through under imperfect competition, the authors' analysis shows that exchange rate pass-through into domestic and foreign prices is incomplete. Moreover, the presence of an MNE increases the sensitivity of domestic market prices, and reduces the sensitivity of foreign market prices, to exchange rate movements, relative to arm's-length trade. Furthermore, IT domestic and foreign prices are more sensitive to exchange rate movements than their IP counterparts, and react in the opposite direction. The authors' results indicate that it is important to distinguish between the domestic and the foreign market when looking at the sensitivity of prices and their direction of change. This could potentially explain why some empirical studies find IT prices more sensitive to exchange rate movements and others find them less sensitive. |
| Keywords: | Economic models; Exchange rates; Market structure and pricing |
| JEL: | F23 L16 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-30&r=fmk |
| By: | Pattikawa, L.H. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Despite their strategic importance firm’s motivations to extend brands have received only modest attentions by marketing scholars. We use multiple events duration models to examine the timing of launching brand extensions. We provide a theoretical framework of brand extensions based on the real option framework. Using a real option framework allows us to make a parallel comparison between firms launching brand extensions with an agent exercising a call option in a financial market. Specifically, we consider the timing of extensions as an opportunistic behaviour to cope with uncertainty, competition, and lack of financial resources. By using 428 pharmaceutical brands that were extended in the period 1973-2005, we demonstrate the use of several different variant of Cox models to deal with multiple extensions within the same brand (Andersen-Gill model, Marginal model, and two Conditional models). Our results show that firms launch brand extensions in response to increase in competition pressure, uncertainty concerning their expectation on firms’ stock prices, and lack of financial resources. |
| Keywords: | Brand Extension;Real Options;Hazard Models; |
| Date: | 2006–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008783&r=fmk |
| By: | Lars Jonung (European Commission); Ludger Schuknecht (European Central Bank and Center for Financial Studies); Mika Tujula (European Central Bank) |
| Abstract: | This paper compares the boom-bust cycle in Finland and Sweden 1984-1995 with the average boom-bust pattern in industrialized countries as calculated from an international sample for the period 1970-2002. Two clear conclusions emerge. First, the Finnish-Swedish experience is much more volatile than the average boom-bust pattern. This holds for virtually every time series examined. Second, the bust and the recovery in the two Nordic countries differ markedly more from the international pattern than the boom phase does. The bust is considerably deeper and the recovery comes earlier and is more rapid. We explain the highly volatile character of the Finnish and Swedish boom-bust episode by the design of economic policies in the 1980s and 1990s. The boom-bust cycle in Finland and Sweden 1984-1995 was driven by financial liberalization and a hard currency policy, causing large pro-cyclical swings in the real rate of interest transmitted via the financial sector into the real sector and then into the public finances. |
| Keywords: | Boom, Bust, Asset Price Cycles, Real Interest Rates, Financial Crisis, Finland, Sweden |
| JEL: | E32 E62 E63 |
| Date: | 2006–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200613&r=fmk |
| By: | Helios Herrera (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)); Enrique Schroth (HEC Lausanne) |
| Abstract: | We study product innovation and imitation in the market of corporate underwriting with a dynamic model where client switching costs and the bankers' expertise in deal structuring characterize the life cycle of a security. While the clientele loyalty allows positive rent extraction, the superior expertise can account for the documented market leadership of the innovator. As expertise on product structuring is acquired by imitators, the innovator's market share advantage decreases. Also, the speed of entry by imitators increases for later generation products. Our predictions are consistent with well documented evidence on the market share leadership of innovators. We also present new evidence from equity-linked and derivative corporate products that supports the dynamic predictions of our learning model. |
| Keywords: | Innovation and imitation, first-mover advantages, learning |
| JEL: | G24 L12 L89 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0504&r=fmk |
| By: | Smit, J.T.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | The development of theory about private equity during the last decades follows the pattern of economic development. While buyouts have found their origin in restructuring we observe more recently a trend of facilitating growth, where the firm and financier follow a path of acquisitions. A traditional valuation analysis approaches the investment problem from the perspective of a single transaction. New trends ask for an expanded valuation framework, not only to evaluate individual acquisitions but to shape the strategic thinking process. This address describes a framework for applying real options and game theory to strategy planning and valuation. It treats an acquisition strategy as a package of corporate real options, actively managed by the firm in a context of competitive responses or changing market conditions. Combining the quantitative options models developed in finance with game theory principles from economics and the qualitative insights from strategic management theory provides a richer framework that helps us better understand the restructuring of fragmented markets. |
| Keywords: | private equity;waardering;financiering;acquisities;buy-and-build;reele opties;speltheorie; |
| Date: | 2003–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:euriar:3000299&r=fmk |
| By: | Nick Netzer; Florian Scheuer |
| Abstract: | We examine equilibria in competitive insurance markets when individuals take unobservable labor supply decisions. Precautionary labor motives intro-duce countervailing incentives in the insurance market, and equilibria with positive profits can occur even in the standard case in which individuals exogenously differ in risk only. We then extend the model to allow for both privately known risks and labor productivities. This endogenously introduces two-dimensional heterogeneity in the insurance market since precautionary labor effects lead to differences in income and hence risk aversion. Under these circumstances, separating and pooling equilibria exist, which generally differ from those with exogenous two-dimensional heterogeneity considered by the existing literature. Notably, in contrast to standard screening models, profits may be increasing with insurance coverage, and the correlation between risk and coverage can be zero or negative in equilibrium, a phenomenon frequently observed in empirical studies. |
| Keywords: | Insurance markets, adverse selection, precautionary labor |
| JEL: | D82 G22 J22 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp614&r=fmk |
| By: | Lindhe, Tobias (Finansdepartementet); Södersten, Jan (Department of Economics) |
| Abstract: | This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae. |
| Keywords: | dividend taxation; equity trap; cost of capital; nucleus theory; growth path |
| JEL: | H24 H25 H32 |
| Date: | 2006–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2006_019&r=fmk |
| By: | Helga Fehr-Duda (Institute of Economic Research, Swiss Federal Institute of Technology Zurich (ETH)); Marc Schürer (Institute of Economic Research, Swiss Federal Institute of Technology Zurich (ETH)); Renate Schubert (Institute of Economic Research, Swiss Federal Institute of Technology Zurich (ETH)) |
| Abstract: | When valuing risky prospects, people typically overweight small probabilities and underweight medium and large probabilities, but there is vast heterogeneity in individual behavior. We explore the relationship between person-specific probability weights, estimated from investment decisions in a laboratory experiment, and personal characteristics. We find considerable interaction effects with gender. While women’s probability weighting is strongly and significantly susceptible to mood states, men’s is not. Moreover, we show that cheerful and optimistic people weight probabilities of investment gains more favorably than do pessimistic people. People who calculate expected payoffs are less prone to probability distortions than those who do not use a lottery’s expected value as a decision criterion. None of the factors studied impact subjects’ valuations of monetary outcomes. |
| Keywords: | Probability Weighting Function, Prospect Theory, Risk Aversion, Gender Differences |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:06-54&r=fmk |
| By: | Jong, A. de; Rosellón, M.; Verwijmeren, P. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | The consequences of international accounting standards are likely to reach beyond the impact on financial statements. This paper demonstrates one of the economic implications of international standards. We focus on the impact of the IFRS regulation on preference shares (IAS 32) in the Netherlands. IAS 32 causes most preference shares to lose their classification as equity and these shares will hence be classified as liabilities. We document that for Dutch firms with preferred stock outstanding, the reclassification will on average increase the reported debt ratio by 35%. We find that 71% of the firms that are affected by IAS 32 buy back their preference shares or alter the specifications of the preference shares in such a way that the classification as equity can be maintained. The main determinant of the decision whether to give these consequences to IAS 32 is the magnitude of the impact of IAS 32 on a firm’s debt ratio. We conclude that IFRS does not only lead to a decrease in the use of financial instruments that otherwise would have added to the capital structure diversity, but also changes firms’ real capital structure. |
| Keywords: | Economic Consequences;Accounting Changes;IFRS;IAS 32;Preference Shares;Magnitude Effect; |
| Date: | 2006–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008567&r=fmk |
| By: | VÁSQUEZ, Diego Mauricio; MELO, Luis Fernando |
| Abstract: | En este documento se presenta la descripción y los resultados de la estimación de la estructura a plazos de las tasas de interés en Colombia utilizando el método de funciones B-spline cúbicas. Adicionalmente, se llevan a cabo comparaciones entre los resultados obtenidos a través de esta metodología y los presentados por Arango, Melo y Vásquez (2002) respecto a los métodos de Nelson y Siegel, y de la Bolsa de Valores de Colombia. Se observa que el desempeño del método de estimación de funciones Bspline cúbicas es similar al de Nelson y Siegel, y estos dos métodos superan al de la Bolsa de Valores de Colombia. |
| Date: | 2004–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001065:002649&r=fmk |
| By: | Waris, F.S.; Mubarik, F.M.; Pau, L-F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | The purpose of this research report is to analyse the mobile payment market size and its revenue basis, as well as adoption bottlenecks, in view of establishing the adoption and deployment of mobile banking services in The Netherlands. The research report describes various aspects with regard to mobile payments/mobile banking in The Netherlands. Issues like implementation, regulatory framework, estimated business case, deployment scenario’s, recommended business model, a SWOT analysis of the technical solutions, organisational bottlenecks, an analysis of the reasons for success and failures, and open issues and challenges are addressed. The main aim is to try to answer the question whether there is a market in The Netherlands for mobile banking services, and providing an analysis of why M-banking services have not been so successful in The Netherlands. Furthermore, it needs to be mentioned that the focus of this paper was on micro-payments, which are generally considered to be payments of up to €10. |
| Keywords: | Mobile payments;Mobile banking;The Netherlands;Business Models;Mobiel betalen;Mobiel bankieren;Nederland;Business modellen; |
| Date: | 2006–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008419&r=fmk |
| By: | Julia Hirsch (University of Frankfurt); Uwe Walz (University of Frankfurt) |
| Abstract: | The main objective of the present paper is to disentangle observed differences in the design of contracts across VC types into firm selection effects and corporate governance differences between VC types (different contracts). Based on a theoretical approach developed in the first part of the paper, we investigate in the second part these issues empirically by using a unique, hand-collected German data set consisting of all contractual details of VC investments into 290 entrepreneurial firms in the period 1990-2004. By employing various matching procedures, we show that VC types differ in both firm choice and corporate governance approach. |
| Keywords: | Venture Capital, Corporate Governance, Matching, Contract Design |
| JEL: | G24 G32 G34 |
| Date: | 2006–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200612&r=fmk |
| By: | Engelbert J. Dockner (University of Vienna, Austria); Florian O.O. Wagener (CeNDEF, Universiteit van Amsterdam) |
| Abstract: | Many economic problems can be formulated as dynamic games in which strategically interacting agents choose actions that determine the current and future levels of a single capital stock. We study necessary conditions that allow us to characterize Markov perfect Nash equilibria (MPNE) for these games. These conditions result in an auxiliary system of ordinary differential equations that helps us to explore stability, continuity and differentiability of MPNE. The techniques are used to derive detailed properties of MPNE for several games including the exploitation of a finite resource, the voluntary investment in a public capital stock, and the inter-temporal consumption of a reproductive asset. |
| Keywords: | Capital accumulation games; Markov equilibria; Resource games; Differential games |
| JEL: | C73 D92 Q22 |
| Date: | 2006–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060055&r=fmk |
| By: | Radkevitch, U.L.; Heck, E. van; Koppius, O. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Companies increasingly outsource IT-related tasks using reverse auction mechanisms embedded into online marketplaces. However, a considerable proportion of auctions at these marketplaces do not result in a contract between buyer and supplier. Extant literature mostly refers to costly bidding and bid evaluation to explain this phenomenon. Another possible explanation is that because of the low entry barriers, buyers with a low commitment to exchange can use the marketplace solely for information gath-ering purposes such as price benchmarking and obtaining free consultations, having little or no intention to contract a supplier. We test this explanation by looking at how different types of costs incurred by the buyer during the sourcing process, are related to the outcome of reverse auctions in terms of contract award. We argue that higher levels of search, preparation and negotiation costs are associated with higher commitment to exchange and find that opportunistic behaviour does indeed play a part in the non-contracted projects, while committed buyers are more likely to enter into a contract with a supplier. The hypotheses are tested on a sample of 2,574 reverse auctions at a leading online marketplace for IT services and further verified across projects of different value and different levels of buyer experience. On the practical side, we recommend setting up entry barriers for buyers with a low level of commitment. |
| Keywords: | Reverse Auctions;Online Markets;IT Outsourcing;Opportunism;Transaction Costs; |
| Date: | 2006–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008853&r=fmk |
| By: | Verbeek, M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | The use of advanced econometric techniques is becoming more and more standard in risk management and investments. Empirical results are important for, e.g., deriving and evaluating asset pricing models, determining attractive investment strategies or the evaluation of the performance of mutual funds. On the basis of a number of examples, the author illustrates the power of empirical evidence, paying particular attention to cases where statistical evidence can be highly misleading. |
| Keywords: | data snooping;look-ahead bias;mutual funds;predictability;efficient market hypothesis; |
| Date: | 2002–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:euriar:3000349&r=fmk |
| By: | Radkevitch, U.L.; Heck, E. van; Koppius, O. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Following their larger counterparts, an increasing number of small firms outsource their IT tasks to lower cost offshore destinations. For small firms, however, offshore outsourcing is a difficult undertaking as it involves high transaction costs. Online marketplaces for IT services, which have recently become available to small firms, make offshore IT outsourcing more accessible and manageable, although differences in the marketplace design result in varying outcomes across the marketplaces. This has consequences for SME’s decision as to which online marketplace to use, because different markets may have different types of benefits and costs. This paper sets to analyze some of the similarities and differences between online marketplaces for IT services and their effects for small firms. First, we analyze if and how online marketplaces reduce small firms’ transaction costs in offshore IT outsourcing. Second, we examine the effects of market entry barriers on outcomes of online marketplaces and their implications for small firms. The results indicate that online marketplaces for IT services do reduce transaction costs for small firms in offshore outsourcing across ten specific market processes. More surprising, however, is the finding that the lower market entry barriers for suppliers result in lower prices for buyers without compromising other aspects of market performance. |
| Keywords: | Offshore IT Outsourcing;Online Market;Reverse Auction;Process-Stakeholder Analysis; |
| Date: | 2006–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008851&r=fmk |
| By: | Marije Schouwstra (Faculty of Economics and Econometrics, Universiteit van Amsterdam); Michael Ellman (Faculty of Economics and Econometrics, Universiteit van Amsterdam) |
| Abstract: | This model of policy evaluation has been developed to identify factors that cause policy outcomes to diverge from the intended results. In this model the explanatory factors may be inherent to the conceptual and institutional framework to which policy makers adhere, or they may be ‘real world’ factors such as badly-defined performance indicators or cyclical economic problems. This model can be used by scholars for analyzing and evaluating government policies and the policies of international organizations and by policy makers to improve their policies. The model can also be used for cross-country comparisons to establish why a certain policy works in one country or situation and why it does not work in another country or situation. |
| Keywords: | model of policy analysis model of policy evaluation public policy international financial institutions evaluation international organizations cross country comparison policy analysis conceptual framework institutional framework normative formal |
| JEL: | E61 F35 F37 F53 G38 H43 H83 O19 O21 O22 |
| Date: | 2006–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060063&r=fmk |
| By: | Mauricio A. Hernández; Munir Jalil Barney; Carlos Esteban Posada |
| Abstract: | os rasgos característicos de muchas economías desarrolladas y en desarrollo de los últimos dos decenios han sido la gran expansión de sus agregados monetarios, por encima del aumento de su ingreso nominal, y la reducción de sus tasas de inflación. Suponiendo que la conjunción de ambos rasgos indica aumentos significativos de la demanda de saldos reales de dinero, en este documento se reporta un intento de estimación de la demanda de saldos reales de moneda doméstica mediante un ejercicio realizado bajo el método denominado mínimos cuadrados ordinarios dinámicos en panel para una muestra de 63 países a lo largo del período 1975- 2002. De acuerdo con los resultados, los aumentos del gasto en consumo privado, la caída de los diferenciales de inflación con respecto a Estados Unidos y la reducción de la tasa de interés en Estados Unidos (tasa a tres meses sobre Treasure bills) contribuyeron a aumentar la demanda de dinero doméstico en el período mencionado. |
| Keywords: | demanda de dinero; consumo; tasa de interés; inflación, panel; cointegración; mínimos cuadrados ordinarios dinámicos. |
| JEL: | C23 E41 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:402&r=fmk |
| By: | Huw Dixon (Economics Department, University of York, Heslington, York, YO10 5DD, United Kingdom.); Engin Kara (University of York, Heslington, York, YO10 5DD, United Kingdom.) |
| Abstract: | This paper adopts the Impulse-Response methodology to understand inflation persistence. It has often been argued that existing models of pricing fail to explain the persistence that we observe. We adopt a common general framework which allows for an explicit modelling of the distribution of contract lengths and for different types of price setting. In particular, we find that allowing for a distribution of contract lengths can yield a more plausible explanation of inflation persistence than indexation. JEL Classification: E17, E3. |
| Keywords: | DGE models, inflation, persistence, price-setting. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060672&r=fmk |
| By: | Mauricio Hernández Monsalve; Munir A. Jalil Barney; Carlos Esteban Posada |
| Abstract: | Dos rasgos característicos de muchas economías desarrolladas y en desarrollo de los últimos dos decenios han sido la gran expansión de sus agregados monetarios, por encima del aumento de su ingreso nominal, y la reducción de sus tasas de inflación. Suponiendo que la conjunción de ambos rasgos indica aumentos significativos de la demanda de saldos reales de dinero, en este documento se reporta un intento de estimación de la demanda de saldos reales de moneda doméstica mediante un ejercicio realizado bajo el método denominado “mínimos cuadrados ordinarios dinámicos en panel” para una muestra de 63 países a lo largo del período 1975- 2002. De acuerdo con los resultados, los aumentos del gasto en consumo privado, la caída de los diferenciales de inflación con respecto a Estados Unidos y la reducción de la tasa de interés en Estados Unidos (tasa a tres meses sobre Treasure bills) contribuyeron a aumentar la demanda de dinero doméstico en el período mencionado. |
| Date: | 2006–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001043:002648&r=fmk |
| By: | Dittmann, I.; Maug, E. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | We document the importance of the choice of error measure (percentage vs. logarithmic errors) for the comparison of alternative valuation procedures. We demonstrate for several multiple valuation methods (averaging with the arithmetic mean, harmonic mean, median, geometric mean) that the ranking of valuation methods is largely a function of the error measure chosen. Percentage errors give a higher weight to relative overestimates than to underestimates, and all established multiple valuation methods exhibit a positive bias according to this measure. Percentage errors lead to consequences that are not intuitive: E.g. setting company values equal to their book values often becomes the best valuation method. Logarithmic errors give equal weight to relative overestimates and underestimates and avoid unwanted consequences. With logarithmic errors, median and geometric mean are unbiased while the arithmetic mean is biased upward as much as the harmonic mean is biased downward. Measuring the diversification discount with the arithmetic mean generates a discount about twice as large as with the geometric mean or the median, whereas the harmonic mean leads to a diversification premium. |
| Keywords: | Valuation;Conglomerate Discount;Financial Ratios; |
| Date: | 2006–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30008401&r=fmk |
| By: | Chauvin, Nicolas Depetris; Kraay, Aart |
| Abstract: | The authors use preliminary results from an ongoing effort to construct estimates of debt relief to study its allocation across a sample of 62 low-income countries. They find some evidence that debt relief, particularly from multilateral creditors, has been allocated to countries with better policies in recent years. Somewhat surprisingly, conditional on per capita incomes and policy, more indebted countries are not much more likely to receive debt relief. But countries that have large debts especially to multilateral creditors are more likely to receive debt relief. The authors do not find much evidence that debt relief responds to shocks to GDP growth. Finally, most of the persistence in debt relief is driven by slowly changing country characteristics, indicating that it may be difficult for countries to " exit " from cycles of repeated debt relief. |
| Keywords: | External Debt,Banks & Banking Reform,Strategic Debt Management,Foreign Direct Investment,Economic Theory & Research |
| Date: | 2006–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4000&r=fmk |
| By: | Guiseppe Dari-Mattiacci (ACLE, Universiteit van Amsterdam, and George Mason University, Arlington, Virginia, USA); Hans-Bernd Schäfer (Hamburg University, Hamburg, Germany; and George Mason University, USA) |
| Abstract: | Should loss of earnings be compensated? The established law and economics wisdom considers pure economic loss as a transfer of wealth from the victim to a third party, whose earnings increase as a consequence of the accident. Such transfers do not amount to a social loss and, hence, should not be compensated. We revisit these arguments and show that the social loss should be calculated by taking into account that: (a) pure economic loss often involves impairment costs resulting from the fact that valuable resources cannot be temporarily used; and (b) the third-party earnings come at the cost of increased capacity. This increased capacity mitigates the expected harm and, hence, is a form of precaution. By taking into account these factors, we show that most pure economic loss cases do result in a socially relevant loss. In addition, we argue that the absence of a social loss is a necessary, but not sufficient, condition for the denial of compensation. The victim (or a third party) may have actually paid for protection against purely private losses. Thus, compensation should be awarded irrespective of whether national law treats the case under tort or contract (where compensation is undisputed). Finally, we offer considerations on the optimal design of liability rules. |
| Keywords: | economic loss; financial loss; tort; damage; compensation |
| JEL: | K13 |
| Date: | 2006–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20060068&r=fmk |
| By: | Mathias Siems; Priya Lele |
| Abstract: | In this paper we build a new and meaningful shareholder protection index for five countries and code the development of the law for over three decades. At-tributing and comparing legal differences by numbers is contrary to the tradi-tional way of doing comparative law and the use of a quantitative methodology to account for variations across legal systems has been subjected to some searching criticisms. However, we believe that with a cautious approach, it has the potential to open new vistas of research in the area of comparative law and as such should not be shunned. This paper provides an illustration of the inter-esting possibilities that diligent quantification of legal rules ('leximetrics') pro-vides for comparing variations across time series and across legal systems. For instance, our study finds, that in all of our panel countries shareholder protec-tion has been improving in the last three decades; that the protection of minority against majority shareholders is considerably stronger in 'blockholder countries' as compared to the non-blockholder countries and that convergence in share-holder protection is taking place since 1993 and is increasing since 2001. Fi-nally, our examination of the legal differences between the five countries does not confirm the distinction between common law and civil law countries. |
| Keywords: | Shareholder protection, leximetrics, numerical comparative law, law and fi-nance, La Porta et al., LLSV, coding, comparative company law, comparative corporate law, comparative corporate governance, legal origins, legal development, convergence |
| JEL: | G00 G30 G38 K00 K22 N20 N40 P50 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cbr:cbrwps:wp324&r=fmk |