nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒09‒23
fifty-four papers chosen by
Carolina Valiente
London South Bank University

  1. Bank Efficiency, Ownership and Market Structure By Heiko Hesse; Thorsten Beck
  2. Financial system structure in Colombia : a proposal for a reform agenda By De la Cruz, Javier; Stephanou, Constantinos
  3. Banking and SME Financing in the United States By Charles Ou
  4. FU.S. banking deregulation, small businesses, and interstate insurance of personal income By Yuliya Demyanyk; Charlotte Ostergaard; Bent E. Sørensen
  5. Communication Dilemma in Speculative Markets By Nevzat Eren; Han N. Ozsoylev
  6. Financial Market Imperfections and the impact of exchange rate movements on exports By Berman, Nicolas; Berthou, Antoine
  7. Customer order flow, information and liquidity on the Hungarian foreign exchange market By Áron Gereben; György Gyomai; Norbert Kiss M.
  8. Banks’ regulatory buffers, liquidity networks and monetary policy transmission By Merkl, Christian; Stolz, Stéphanie
  9. Stock Market Development and Economic Growth: A Matter of Information Dynamics By Salvatore Capasso
  10. Group versus individual liability : a field experiment in the Philippines By Gine, Xavier; Karlan, Dean S.
  11. Empirical risk analysis of pension insurance – the case of Germany By Gerke, Wolfgang; Mager, Ferdinand; Reinschmidt, Timo; Schmieder, Christian
  12. Intraday Seasonalities and Macroeconomic News Announcements By Harju, Kari; Hussain, Mujahid
  13. Intraday Linkages Across International Equity Markets By Harju, Kari; Hussain, Syed Mujahid
  14. Repurchasing Shares on a Second Trading Line By Dennis Y. Chung; Dušan Isakov; Christophe Pérignon
  15. The optimal degree of exchange rate flexibility: A target zone approach By Jesús Rodríguez López; Hugo Rodríguez Mendizábal
  16. The Euro and the Transatlantic Capital Market Leadership: A Recursive Cointegration Analysis By Enzo Weber
  17. Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating' By Reginaldo P. Nogueira Jnr
  18. Credit for what? Informal credit as a coping strategy of market women in northern Ghana By Schindler, Kati
  19. Subsidies and financial performances of the microfinance institutions: Does management matter? By Hudon, Marek
  20. Why exporters can be financially constrained in a recently liberalised economy? A puzzle based on Argentinean firms during the 1990s By Espanol, Paula
  21. Are twin currency and debt crises special? By Bauer, Christian; Herz, Bernhard; Karb, Volker
  22. Stochastic Volatility Driven by Large Shocks By George Kapetanios; Elias Tzavalis
  24. Optimizing Measures of Risk: A Simplex-like Algorithm By Alejandro Balbás; Raquel Balbás; Silvia Mayoral
  25. Financial Development and Inequality: Brazil 1985-99 By Meyer Bittencourt, Manoel F. Meyer
  26. On the Robustness of Racial Disrcimination Findings in Motgage Lending Studies By Judith A. Clarke; Nilanjana Roy; Marsha J. Courchane
  27. Die typisierende Berücksichtigung der persönlichen Steuerbelastung des Anteilseigners beim Squeeze-Out By Heintzen, Markus; Kruschwitz, Lutz; Löffler, Andreas; Maiterth, Ralf
  28. Robust Optimization of Consumption with Random Endowment By Wiebke Wittmüß
  29. A Price Earnings Index for the Danish Stock Market By Risager, Ole
  30. Can a time-varying equilibrium real interest rate explain the excess sensitivity puzzle? By Alexius, Annika; Welz, Peter
  31. Generic Determinacy and Money Non-Neutrality of International Monetary Equilibria By Dimitrios P. Tsomocos
  32. The Elastic Provision of Liquidity by Private Agents By Saunders, Drew
  33. Resource Allocation Contests: Experimental Evidence By David Schmidt; Robert Shupp; James M. Walker
  34. Bootstrap and Fast Double Bootstrap Tests of Cointegration Rank with Financial Time Series By Ahlgren, Niklas; Antell, Jan
  35. Die Primärinzidenz von Bankgeheimnis und Verrechnungssteuer in den Kantonen der Schweiz By Manfred Gärtner
  36. A Note on the (In)stability of Diamond’s By Blomgren-Hansen, Niels
  37. Nonlinear Models with Strongly Dependent Processes and Applications to Forward Premia and Real Exchange Rates By Richard T. Baillie; George Kapetanios
  38. Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment By Charles Bellemare; Bruce S. Shearer
  39. Was There A British House Price Bubble? Evidence from a Regional Panel By Gavin Cameron; John Muellbauer; Anthony Murphy
  40. The Value Premium on the Danish Stock Market By Risager, Ole
  41. Comparaison des taux de repaiement d’une institution de microfinance offrant des prêts en groupe et individuels. By Marek Hudon; Tchakodo Ouro-Koura
  42. Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  43. Effects of taxes financing decisions and firm value in Nigeria By Adelegan, Olatundun
  44. Assessing Russia’s Non-fuel Trade Elasticities: Does the Russian Economy React "Normally" to Exchange Rate Movements? By Christian Gianella; Corinne Chanteloup
  45. Financial Liberalisation, Bureaucratic Corruption and Economic By Blackburn, Keith; Forgues-Puccio, Gonzalo F.
  46. Ex-Ante vs. Ex-Post Efficiency in Personal Bankruptcy Proceedings By Eva-Maria Steiger
  47. Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries By Duo Qin
  48. International Lessons for the Property Price Boom in South Africa By Funke, Norbert; Kißmer, Friedrich; Wagner, Helmut
  49. Let's Talk about Bidding! - Coordination Mechanisms in Procurement Auctions By Werner Güth; Jeannette Brosig; Torsten Weiland
  50. Tendencies and problems of economical insolvency (bankruptcy) institution development in Belarus: 1991 - 2005 By Aliaksei P. Smolski
  51. Inside the Family Firm By Bennedsen, Morten; Nielsen, Kasper; Pérez-González, Francisco; Wolfenzon, Daniel
  52. Pension Sytems and the Allocation of Macroeconomic Risk By Lans Bovenberg; Harald Uhlig
  53. Competition, Hidden Information, and Efficiency: an Experiment By Antonio Cabrales; Gary Charness; Marie-Claire Villeval
  54. Competition, Hidden Information and Efficiency: An Experiment By Antonio Cabrales; Gary Charness; Marie-Claire Villeval

  1. By: Heiko Hesse; Thorsten Beck
    Abstract: Using a unique bank-level dataset on the Ugandan banking system over the period 1999 to 2005, we explore the factors behind consistently high interest rate spreads and margins. While foreign banks charge lower interest rate spreads, we do not find a robust and economically significant relationship between privatization, foreign bank entry, market structure and banking efficiency. Similarly, macroeconomic variables can explain little of the over-time variation in bank spreads. Bank-level characteristics, on the other hand, such as bank size, operating costs, and composition of loan portfolio, explain a large proportion of cross-bank, cross-time variation in spreads and margins. However, time-invariant bank-level fixed effects explain the largest part of bank-variation in spreads and margins. Further, we find tentative evidence that banks targeting the low-end of the market incur higher costs and therefore higher margins.
    Keywords: Foreign Bank Entry, Financial Sector Reform, Bank Efficiency, Financial Intermediation, Uganda
    JEL: G21 G30 O16
    Date: 2006
  2. By: De la Cruz, Javier; Stephanou, Constantinos
    Abstract: The objective of this policy paper is to identify and propose high-level legal and regulatory reforms to Colombia ' s financial system structure that would enhance efficiency and/or mitigate risks. Five specific and four general reforms are proposed and evaluated based on their compatibility with the aforementioned objectives, ease of implementation, impact, and consistency with international practice. Potential implications for supervision and competition, as well as likely criteria for developing a carefully sequenced reform roadmap, are also highlighted.
    Keywords: Banks & Banking Reform,Financial Intermediation,Corporate Law,Non Bank Financial Institutions,Financial Crisis Management & Restructuring
    Date: 2006–09–01
  3. By: Charles Ou
    Abstract: Loan markets for most small business borrowers in the United States have become more competitive over the past decade, evidenced by the emergence of a nationwide market for credit lines and credit cards and the entry of large regional banks in local markets. However, the impact of increased competition on the cost of funds to small firms, as indicated by the rate spreads between small business rates and the rates paid by the banks’ best prime customers, is more difficult to assess because of data limitations.
    Date: 2006
  4. By: Yuliya Demyanyk (Federal Reserve Bank of St. Louis); Charlotte Ostergaard (Norwegian School of Management and Norges Bank); Bent E. Sørensen (University of Houston and CEPR)
    Abstract: We estimate the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970–2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. We find that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. We further show that the impact of deregulation is stronger for proprietors’ income than other components of personal income. Our explanation of this result centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Our analysis casts light on the real effects of bank deregulation, on the risk sharing function of banks, and on the integration of bank markets.
    Keywords: Financial deregulation, integration of bank markets, interstate risk sharing, small business finance.
    Date: 2006–09–18
  5. By: Nevzat Eren; Han N. Ozsoylev
    Abstract: We study voluntary information exchange widely observed among traders in financial markets. In the context of a standard market microstructure model, based on Kyle (1984, 1985), we show that disparately informed traders are better off by exchanging information provided that they are risk averse and the market is opaque. For some parameter values, the equilibrium yields a prisoners' dilemma result in which traders hoard information even though it is beneficial for them to exchange. In the presence of interpersonal costs, which penalize those who hoard information when others disclose, information exchange can be sustained as an equilibrium outcome. Repeated interactions can also sustain, an equilibrium, information exchange.
    Date: 2006
  6. By: Berman, Nicolas; Berthou, Antoine
    Abstract: This paper studies the role of financial market imperfections in the way countries' exports react to a currency depreciation. Using quarterly data for 27 developed and developing countries over the period 1990-2005, we show that the impact of a depreciation will be less positive - or even negative - for a country as: (i) firms borrow in foreign currency ; (ii) they are credit constrained ; (iii) they are specialized in industries that require more external capital; (iv) the depreciation's or devaluation's magnitude is large. This last result confirms the existence of a non-linear relationship between an exchange rate depreciation and a country's exports reaction when financial imperfections are observed. This work offers a new explanation for the consequences of recent currency crises in middle income countries.
    Keywords: International Trade, Exchange Rate Movements, Financial Development, Financial Market Imperfections
    JEL: F10 F32 F37
    Date: 2006
  7. By: Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing)); Norbert Kiss M. (Magyar Nemzeti Bank)
    Abstract: Customer order flow – signed transaction volume between market makers and their customers – is a key concept in the microstructure approach to exchange rates. We attempt to explore what the data tells us about the role of customer order flow in the market for Hungarian forint, using the standard analytical framework of the FX microstructure literature. Our results confirm that customer order flow helps to explain exchange rate fluctuations, which suggests that customer order flow is a key source of information for the market makers. We also find that domestic and foreign customers play significantly different roles on the euro/Hungarian forint market: foreign players' order flow seems to provide the information that drives exchange rate fluctuations, whereas domestic customers are the source of market liquidity. We present evidence suggesting that current order flow from customers is able to provide a significantly better ‘forecast’ for the the exchange rate than the random walk benchmark in a simple Meese-Rogoff-type framework. However, we were unable to improve upon the random walk in a more realistic forecasting exercise. Finally, we highlight some features of our data that suggest that beyond microstructure, the traditional portfolio-balance channel of exchange rate determination is also in place.
    Keywords: customer order flow, microstructure, exchange rate.
    JEL: F31 G15
    Date: 2006
  8. By: Merkl, Christian; Stolz, Stéphanie
    Abstract: Based on a quarterly regulatory dataset for German banks from 1999 to 2004, this paper analyzes the effects of banks’ regulatory capital on the transmission of monetary policy in a system of liquidity networks. The dynamic panel regression results provide evidence in favor of the bank capital channel theory. Banks holding less regulatory capital and less interbank liquidity react more restrictively to a monetary tightening than their peers.
    Keywords: monetary policy transmission, bank lending channel, bank capital channel, liquidity networks
    JEL: C23 E52 G21 G28
    Date: 2006
  9. By: Salvatore Capasso (Università di Napoli "Parthenope" and CSEF)
    Abstract: The aim of this paper is to provide further insights into the linkages between stock market development and economic growth. When it is not possible to distinguish between investment projects with different rates of return, market valuation of those projects is an “average value” reflecting the expected return across all investment opportunities. Consequently, as in a typical lemon’s market, higher return projects are penalised since they attract lower than fair prices. This informational cost, or dilution cost, depends on the degree of informational asymmetry in the market, as well as on the type of financial contract issued by the firm to finance those projects – typically, equity or debt. On this basis, we interpret the development of stock market as the result of a change in the level of informational costs which decrease with capital accumulation and induce firms to switch from debt financing to a less costly equity financing.
    Keywords: Credit Markets, Economic Growth, Information Asymmetries, Stock Markets
    JEL: O16 O40 G10
    Date: 2006–09–01
  10. By: Gine, Xavier; Karlan, Dean S.
    Abstract: Group liability is often portrayed as the key innovation that led to the explosion of the microcredit movement, which started with the Grameen Bank in the 1970s and continues on today with hundreds of institutions around the world. Group lending claims to improve repayment rates and lower transaction costs when lending to the poor by providing incentives for peers to screen, monitor, and enforce each other’s loans. However, some argue that group liability creates excessive pressure and discourages good clients from borrowing, jeopardizing both growth and sustainability. Therefore, it remains unclear whether group liability improves the lender’s overall profitability and the poor’s access to financial markets. The authors worked with a bank in the Philippines to conduct a field experiment to examine these issues. They randomly assigned half of the 169 pre-existing group liability ' centers ' of approximately twenty women to individual-liability centers (treatment) and kept the other half as-is with group liability (control). We find that the conversion to individual liability does not affect the repayment rate, and leads to higher growth in center size by attracting new clients.
    Keywords: Banks & Banking Reform,Knowledge Economy,Banking Law,Education for the Knowledge Economy,Contract Law
    Date: 2006–09–01
  11. By: Gerke, Wolfgang; Mager, Ferdinand; Reinschmidt, Timo; Schmieder, Christian
    Abstract: With this paper we seek to contribute to the literature on pension insurance systems. The financial literature tends to focus exclusively on the US pension insurance system. This is the first major empirical study to address the German occupational pension insurance (PSVaG) plan in Germany. The study is based on a Merton-type one-factor model, in which we determine the credit portfolio risk profile of the occupational pension insurance plan and compare two alternative pricing plans. We find that there is a low, yet non-negligible risk of very high losses that may threaten the existence of the occupational pension insurance plan (PSVaG). While relating risk premiums to firms’ default probabilities would cause them to diverge widely, a marginal risk contribution method would produce less pronounced differences compared to the current, uniform pricing plan.
    Keywords: Pension insurance, Risk-adjusted premiums, Credit portfolio risk
    JEL: C15 G18 G22 G23 G28
    Date: 2006
  12. By: Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Mujahid (Swedish School of Economics and Business Administration)
    Abstract: Using a data set consisting of three years of 5-minute intraday stock index returns for major European stock indices and U.S. macroeconomic surprises, the conditional mean and volatility behaviors in European market were investigated. The findings suggested that the opening of the U.S market significantly raised the level of volatility in Europe, and that all markets respond in an identical fashion. Furthermore, the U.S. macroeconomic surprises exerted an immediate and major impact on both European stock markets’ returns and volatilities. Thus, high frequency data appear to be critical for the identification of news that impacted the markets.
    Keywords: Macroeconomic surprises; intraday seasonality; Flexible Fourier Form; conditional mean; conditional volatility; information spillover
    Date: 2006–09–13
  13. By: Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Syed Mujahid (Swedish School of Economics and Business Administration)
    Abstract: Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets.
    Keywords: Intraday; diurnal pattern; conditional mean; volatility spillovers; Flexible Fourier Form; VAR; EGARCH; asymmetry
    Date: 2006–09–13
  14. By: Dennis Y. Chung (Simon Fraser University); Dušan Isakov; Christophe Pérignon (Simon Fraser University)
    Abstract: This paper studies a unique buyback method allowing firms to reacquire their own shares on a separate trading line where only the firm is allowed to buy shares. This temporary trading platform is opened concurrently with the original trading line on the stock exchange. This share repurchase method is called the Second Trading Line and has been extensively used by Swiss companies since 1997. This type of repurchase is unique for two reasons. First, unlike open market programs, the repurchasing company does not trade under the cover of anonymity. Second, all transactions made by the repurchasing firm are publicly available in real time to every market participant. This is a case of instantaneous disclosure which contrasts sharply with other markets characterized by delayed or no disclosure. Using actual repurchase data from all buybacks implemented through second trading lines, we find that managers exhibit timing ability for the majority of programs. We also document that the daily repurchase decision is statistically associated with short-term price changes. However, we reject the opportunistic repurchase hypothesis and find no evidence that managers exploit their information advantage when reacquiring shares. We also find that repurchases on the second trading line have a beneficial impact on the liquidity of repurchasing firms (i.e., higher trading volumes, smaller bid-ask spreads, and thicker total depths). Exchanges and regulators may consider the second trading line an attractive share reacquisition mechanism because of its transparency and positive liquidity effects.
    Keywords: Share Repurchases; Disclosure Environment; Information Asymmetry; Liquidity
    JEL: G14 G35
    Date: 2005–11–22
  15. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Hugo Rodríguez Mendizábal (Department of Economics, Universidad Autónoma de Barcelona)
    Abstract: This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature on target zones that previous models were not able to generate jointly, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.
    Keywords: Target zones, exchange rate agreements, monetary policy, time consistency.
    JEL: E52 F31 F33
    Date: 2006–09
  16. By: Enzo Weber
    Abstract: In this paper, the capital market relations between the Euro area and the USA are subject to investigation. Formally based on the uncovered interest rate parity (UIP), first a longrun equilibrium between Euro and US government bond yields is established in backward recursively estimated vector error correction models (VECMs). Subsequently, the focus lies on interest rate leadership and adjustment as well as capital market integration. One major finding shows, that the foundation of the European Monetary Union (EMU) strengthened its role relative to the USA. Furthermore, the transatlantic connections have become closer in the course time.
    Keywords: Capital Market, UIP, Euro, Transatlantic Relations
    JEL: E44 F36 C32
    Date: 2006–09
  17. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on exchange rate pass-through and the "Fear of Floating" hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. We then use several different methodologies to examine the existence of "Fear of Floating" practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, "Fear of Floating" seems to play only a minor role for most economies in our sample.
    Keywords: Inflation Targeting; Exchange Rate Pass-Through, 'Fear of Floating'
    JEL: E31 E52 F31 F41
    Date: 2006–09
  18. By: Schindler, Kati
    Abstract: This paper analyzes the use of informal credit as a coping strategy against risk by market women in the city of Tamale, Ghana. Using qualitative research techniques, the analysis reveals that intra-household structure and allocation decisions determine these market-based coping strategies. Market women invest a considerable amount of working hours in maintaining complex credit networks as a safeguard against extreme risks. As a policy implication, this research suggests to provide market women with access to formal, reliable and long-term microfinance institutions, both to improve their ability to cope with risks and to reduce the risks they face.
    Keywords: micro-credit, informal markets, networks, coping strategies, intra-household allocation, women, Ghana
    JEL: D13 O12 O17
    Date: 2006
  19. By: Hudon, Marek
    Abstract: This paper uses a unique database from a leading microfinance rating agency to assess the impact of management on the functioning of microfinance institutions (MFIs). It focuses on MFIs’ financial performance, and on the level of subsidies received. The results show that the management skills are the main attribute, among six others, influencing the return on assets The technical, organisational and communication competences of the top managers seem to play a key role. For-profit, cooperatives and non-profit institutions reach relatively similar performances. Finally, results show that the well-managed MFIs have not received significantly more subsidies than other less competent institutions. It is however the size of the institutions, proxied by the number of borrowers that matters.
    Keywords: microfinance, subsidies, management, governance, non-profit
    JEL: L31 M54 O16 Q14
    Date: 2006
  20. By: Espanol, Paula
    Abstract: Trade-related characteristics have only been recently started to be included in empirical studies analysing the determinants of the financial constraints faced by firms. A result broadly shared by these studies is that exporting firms tend to be those less financially constrained. In this paper we test this result using panel data built up from quarterly balance sheet information for 74 Argentinean big firms covering the years of the currency board regime (1992-2001). We estimate an investment equation splitting up the sample between exporters and non-exporters. Using three alternative econometric models (random effects, fixed effects and instrumental variables) we find that, contrary to what is commonly stressed in the literature, exporting firms are the ones facing larger financial constraints on investment. We propose an explanation for this original result based on the currency appreciation that follows financial liberalisation processes in emerging countries, particularly in Argentina, which triggers a profit squeeze phenomenon for exportable firms, reducing their investment capacity.
    Keywords: financial constraint, investment, foreign trade, Argentine
    JEL: E22 O16 O54
    Date: 2006
  21. By: Bauer, Christian; Herz, Bernhard; Karb, Volker
    Abstract: We show theoretically and empirically that twin currency and debt crises should be treated as a particular crisis type. Twin currency and debt crises differ from both pure currency and pure debt crises in their determinants, the course of the crises, and their economic consequences. We find that each crises type has a unique set of macroeconomic causes. We also uncover internal contagion and selection bias effects which may lead to biased results if twin crises are not treated separately. Such a separation considerably improve the efficiency of early warning systems especially on debt and twin crises.
    Date: 2006
  22. By: George Kapetanios (Queen Mary, University of London); Elias Tzavalis (Queen Mary, University of London)
    Abstract: This paper presents a new model of stochastic volatility which allows for infrequent shifts in the mean of volatility, known as structural breaks. These are endogenously driven from large innovations in stock returns arriving in the market. The model has a number of interesting properties. Among them, it can allow for shifts in volatility which are of stochastic timing and magnitude. This model can be used to distinguish permanent shifts in volatility coming from large pieces of news arriving in the market, from ordinary volatility shocks.
    Keywords: Stochastic volatility, Structural breaks
    JEL: C22 C15
    Date: 2006–09
  23. By: John Galbraith; Serguei Zernov
    Abstract: Dependence among large observations in equity markets is usually examined using second-moment models such as those from the GARCH or SV classes. Such models treat the entire set of returns, and tend to produce very similar estimates on the major equity markets, with a sum of estimated GARCH parameters, for example, slightly below one. Using dependence measures from extreme value theory, however, it is possible to characterie dependence among only the largest (or largest negative) financial returns; these alternative characterizations of clustering have important applications in risk management. In this paper we compare the NASDAQ and degree of extreme dependence. Although GARCH-type characterizations of second-moment dependence in the two markets produce similar results, the same is not true in the extremes: we find significantly more extreme dependence in the NASDAQ returns. More generally, the study of extreme dependence may reveal contrasts which are obscured when examining the conditional second moment.
    JEL: G10 G18
    Date: 2006–09
  24. By: Alejandro Balbás (Universidad Carlos III); Raquel Balbás (Universidad Autónoma de Madrid); Silvia Mayoral (Universidad de Navarra)
    Abstract: The minimization of general risk or dispersion measures is becoming more and more important in Portfolio Choice Theory. There are two major reasons. Firstly, the lack of symmetry in the returns of many assets provokes that the classical optimization of the standard deviation may lead to dominated strategies, from the point of view of the second order stochastic dominance. Secondly, but not less important, many institutional investors must respect legal capital requirements, which may be more easily studied if one deals with a risk measure related to capital losses. This paper proposes a new method to simultaneously minimize several risk or dispersion measures. The representation theorems of risk measures are applied to transform the general risk minimization problem in a minimax problem, and later in a linear programming problem between infinite-dimensional Banach spaces. Then, new necessary and sufficient optimality conditions are stated and a simplex-like algorithm is developed. The algorithm solves the dual (and therefore the primal) problem and provides both optimal portfolios and their sensitivities. The approach is general enough and does not depend on any particular risk measure, but some of the most important cases are specially analyzed.
    Keywords: Risk Measure. Deviation Measure. Portfolio Selection. Infinite-Dimensional Linear Programming. Simpl
    JEL: G11
  25. By: Meyer Bittencourt, Manoel F. Meyer
    Abstract: We examine the impact that financial development had on earnings inequality in Brazil in the 1980’s and 90’s. The empirical evidence, based on panel time series and time series data, shows that more broad access to financial and credit markets had a significant and robust effect in reducing inequality during the period investigated. We suggest that this is not only because the poor can invest the acquired credit in all sorts of productive activities, but also because those with access to financial markets can insulate themselves against recurrent poor macroeconomic performance, which is exemplified by extreme inflation rates. The main implication of the results is that a seemingly non-distortionary policy, such as more credit aimed at the poor, alleviates the high inequality present in Brazil and consequently improves welfare without distorting economic efficiency.
    Keywords: Financial development and markets, credit, inequality and welfare, inflation
    JEL: D31 E44 O11 O54
    Date: 2006
  26. By: Judith A. Clarke (Department of Economics, University of Victoria); Nilanjana Roy (Department of Economics, University of Victoria); Marsha J. Courchane (ERSGroup, Washington DC)
    Abstract: That mortgage lenders have complex underwriting standards, often differing legitimately from one lender to another, implies that any statistical model estimated to approximate these standards, for use in fair lending determinations, must be misspecified. Exploration of the sensitivity of disparate treatment findings from such statistical models is, thus, imperative. We contribute to this goal. This paper examines whether conclusions from several bank-specific studies, undertaken by the Office of the Comptroller of the Currency, are robust to changes in the link function adopted to model the probability of loan approval and to the approach used to approximate the finite sample null distribution for the disparate treatment hypothesis test. We find that discrimination findings are reasonably robust to the range of examined link functions, which supports the current use of the logit link. Based on several features of our results, we advocate regular use of a resampling method to determine p-values.
    Keywords: Logit, Mortgage lending discrimination, Fair lending, Stratified sampling, Binary response, Semiparametric maximum likelihood, Pseudo log-likelihood, Profile log-likelihood, Bootstrapping
    Date: 2006–09–08
  27. By: Heintzen, Markus; Kruschwitz, Lutz; Löffler, Andreas; Maiterth, Ralf
    Abstract: For the valuation of a company it is necessary to take the in come tax of its owners into account. When looking at a squeeze-out with investors who have different wealth this implies that fair compensation payments will be different. This is in contradiction to the German Stock Companies Act. In this paper we discuss how this problem can be solved in an acceptable manner and we determine different average income rates using German tax data. It can be shown that using particular weighted averages indeed lead to the proposal of an income tax rate of 35% which is required by the Association of German CPAs.
    JEL: G31 G34 K22
    Date: 2006–08
  28. By: Wiebke Wittmüß
    Abstract: We consider the problem of optimal consumption for an investor who is risk and uncertainty avers. We model these preferences of the investor with the help of a convex risk-measure. Apart from consumption the agent has the possibility to invest initial capital and random endowment in a market where stock-prices are semimartingales. We formulate this as a maximin problem that will be solved by duality methods.
    Keywords: duality theory, risk measures, optimal consumption, model uncertainty
    JEL: D11 D81
    Date: 2006–09
  29. By: Risager, Ole (Department of Economics, Copenhagen Business School)
    Abstract: Price-earnings ratios are part of the toolkit that is used for assessing the valuation of individual firms on the stock market as well as the entire market itself. This paper presents consistent P/E series for the liquid Danish shares adjusted for share buybacks. The results show that over the period from 1969 to 2003, the average (trailing) P/E equals 13.5. The P/E reaches its lowest level in 1980, which is likely to be due to a soaring oil price, high wage increases and interest rates approaching 20 percent. Notwithstanding optimistic equity pricing also in Denmark in the late 1990s, the upturn in Danish valuations was more moderate than in the US. The correction that sets in subsequently reversed essentially the gains in the Danish P/E in the 1990s.
    Keywords: Price-earning; ratio
    JEL: H00
    Date: 2004–12–08
  30. By: Alexius, Annika (Department of Economics); Welz, Peter (Riksbanken)
    Abstract: The strong response of long-term interest rates to macroeconomic shocks has typically been explained in terms of informational asymmetries between the central bank and private agents. The standard models assume that the equilibrium real interest rate is constant over time and independent of structural shocks. We incorporate time-variation in the equilibrium real interest rate as function of structural shocks to e.g. productivity and demand. This extended model implies that forward interest rates at long horizons move about 40 basis points as the short-term interest rate increases one percentage point. In terms of regressions of changes in long-term interest rates on changes in the short-term interest rate, including a time-varying equilibrium real interest rate explains about half of the puzzle.
    Keywords: Term structure; equilibrium real interest rate; unobserved components model
    JEL: C51 E43 E52
    Date: 2006–09–11
  31. By: Dimitrios P. Tsomocos
    Abstract: I address the issue of the 'number' of International Monetary Equilibria that the international finance model of Geanakoplos and Tsomocos (2002) possesses. The mainstream competitive model has locally unique equilibria with respect to the real side of the economy; however, it manifests nominal indeterminacy. Kareken and Wallace (1981) extend the O.L.G. indeterminacy result to a monetary model of the international economy. However, the role of monetary sector together with the market and agent heterogeneity remove real and nominal indeterminacy in the Geanakoplos and Tsomocos model. In particular, nominal indeterminacy abruptly disappears when private liquid wealth is non-zero. Finally, monetary policy becomes non-neutral since monetary changes affect nominal variables which in turn determine different real allocations. Lucas did not find these non-neutral effects in his model of international finance because he postulated a 'sell-all model' in which every agent sells everything he owns in every period. Thus, the number of transactions remain unaffected by definition regardless of any policy changes. Instead, when transactions emerge endogenously in equilibrium monetary policy has non-neutral effects provided that there exist potential gains to trade at the initial allocation of goods.
    Keywords: Determinacy, exchange rates, liquid wealth, non-neutrality, monetary policy
    JEL: D5 E5 E6 F1 F2 F3
    Date: 2006
  32. By: Saunders, Drew
    Abstract: I study a model of entrepreneurial investment in which investment projects are heterogeneous with respect to their exposure to an aggregate liquidity shock. A firm that is affected by the shock will mitigate its exposure by purchasing claims issued by a firm that is not. Liabilities of the unaffected firm may earn a liquidity premium due to their fungibility; and, because they are backed by productive investment, their supply is elastic to the demand. The segmentation implies that an aggregate liquidity shock has different consequences across sectors. The unaffected firm plays a role like that of a bank by supplying liquidity to other firms; this mechanism recalls the “real bills” doctrine of classical monetary theory.
    Keywords: Liquidity ; Money Supply Elasticity
    JEL: E44 E51 E22
    Date: 2006–08
  33. By: David Schmidt (Federal Trade Commission, Bureau of Economics); Robert Shupp (Ball State University); James M. Walker (Indiana University Bloomington)
    Abstract: Across many forms of rent seeking contests, the impact of risk aversion on equilibrium play is indeterminate. We design an experiment to compare individuals’ decisions across three contests which are isomorphic under risk-neutrality, but are typically not isomorphic under other risk preferences. The pattern of individual play across our contests is not consistent with a Bayes-Nash equilibrium for any distribution of risk preferences. We show that replacing the Bayes-Nash equilibrium concept with the quantal response equilibrium, along with heterogeneous risk preferences can produce equilibrium patterns of play that are very similar to the patterns we observe.
    Keywords: rent seeking, experiments, risk aversion, game theory
    JEL: C72 C92 D72
    Date: 2005–02
  34. By: Ahlgren, Niklas (Swedish School of Economics and Business Administration); Antell, Jan (Swedish School of Economics and Business Administration)
    Abstract: The likelihood ratio test of cointegration rank is the most widely used test for cointegration. Many studies have shown that its finite sample distribution is not well approximated by the limiting distribution. The article introduces and evaluates by Monte Carlo simulation experiments bootstrap and fast double bootstrap (FDB) algorithms for the likelihood ratio test. It finds that the performance of the bootstrap test is very good. The more sophisticated FDB produces a further improvement in cases where the performance of the asymptotic test is very unsatisfactory and the ordinary bootstrap does not work as well as it might. Furthermore, the Monte Carlo simulations provide a number of guidelines on when the bootstrap and FDB tests can be expected to work well. Finally, the tests are applied to US interest rates and international stock prices series. It is found that the asymptotic test tends to overestimate the cointegration rank, while the bootstrap and FDB tests choose the correct cointegration rank.
    Keywords: Bootstrap; Cointegration; Financial time series; Likelihood ratio test
    Date: 2006–09–14
  35. By: Manfred Gärtner
    Abstract: Swiss banking secrecy laws not only tempt foreign investors to remain silent about at least part of their capital incomes and, thus, not pay taxes as obliged by law. Therefore, Switzerland introduced a withholding tax on capital income in 1934, primarily in order to coerce domestic residents to report levels of wealth and derived incomes properly. This paper asks whether a withholding tax rate of 35 percent suffices to achieve this goal. For this purpose, marginal income tax rates are computed and income distributions are estimated for each of Switzerland's 26 cantons, distinguishing between married and unmarried tax payers. From these raw data we compute income levels and shares of tax payers for whom the withholding tax does not work as intended.
    Keywords: Banking secrecy, income tax, withholding tax, incidence, tax evasion, income distribution
    JEL: D31 H22 H24 H26 O52
    Date: 2006–09
  36. By: Blomgren-Hansen, Niels (Department of Economics, Copenhagen Business School)
    Abstract: Diamond’s two-period OLG growth model is based on the assumption that the stock of capital in any period is equal to the wealth accumulated in the previous period by the generation of pensioners. This stock equlibrium condition may appear an innocuous paraphrase of the ordinary macro-economic flow equilibrium condition, S = I. This is not the case. In this note I demonstrate that Diamond’s solution is unstable in a monetary market economy where households and firms make independent decisions as to how much to save and how much to invest. An increase in the rate of interest above the Diamond long-run equilibrium level will cause saving to fall by more than investment and, hence, result in excess demand for loanable funds and an upward pressure on the rate of interest. However, substituting the ordinary S = I flow equilibrium condition for Diamonds stock equilibrium condition reveals that the model has another solution - the rate of interest equals the rate of growth - and that this solution is stable in a capital-based economy (contrary to the pure consumption loan model of interest suggested by Samuelson(1958)). The model has interesting implications. Diamond’s model predict that an increase in rate of time preference causing the young generation to save less will reduce the capital stock and raise the rate of interest. However,the S = I based two period OLG model reveals that the old generation’s consumption falls by more than the the young generation’s consumption increases. Consequently, excess supply of loanable funds will drive down the rate of interest. If the rate of interest is equal to the rate of growth an increase in the time preference has no effect on the supply of loanable funds and, consequently, neither on the rate of interest or the stock of capital. Whether people prefer to consume as young or old should not be a matter of public concern (although the transition from one state to another may be).
    Keywords: None
    JEL: H00
    Date: 2005–09–13
  37. By: Richard T. Baillie (Michigan State University and Queen Mary, University of London); George Kapetanios (Queen Mary, University of London)
    Abstract: This paper considers estimation and inference in some general non linear time series models which are embedded in a strongly dependent, long memory process. Some new results are provided on the properties of a time domain <i>MLE</i> for these models. The paper also includes a detailed simulation study which compares the time domain <i>MLE</i> with a two step estimator, where the Local Whittle estimator has been initially employed to filter out the long memory component. The time domain <i>MLE</i> is found to be generally superior to two step estimation. Further, the simulation study documents the difficulty of precisely estimating the parameter associated with the speed of transition. Finally, the fractionally integrated, nonlinear autoregressive-<i>ESTAR</i> model is found to be extremely useful in representing some financial time series such as the forward premium and real exchange rates.
    Keywords: Non-linearity, <i>ESTAR</i> models, Strong dependence, Forward premium, Real exchange rates
    JEL: C22 C12 F31
    Date: 2006–09
  38. By: Charles Bellemare; Bruce S. Shearer
    Abstract: The, often observed, positive correlation between incentive intensity and risk has been explained in two ways: the presence of transaction costs as determinants of contracts and the sorting of risk-tolerant individuals into firms using high-intensity incentive contracts. The empirical importance of sorting is perhaps best evaluated by directly measuring the risk tolerance of workers who have selected into incentive contracts under risky environments. We use experiments, conducted within a real firm, to measure the risk preferences of a sample of workers who are paid incentive contracts and face substantial daily income risk. Our experimental results indicate the presence of sorting; Workers in our sample are risk-tolerant. Moreover, their level of tolerance is considerably higher than levels observed for samples of individuals representing broader populations. Interestingly, the high level of risk tolerance suggests that both sorting and transaction costs are important determinants of contract choices when workers have heterogeneous preferences.
    Keywords: Risk aversion, sorting, incentive contracts, field experiments
    JEL: J33 M52 C93
    Date: 2006
  39. By: Gavin Cameron; John Muellbauer; Anthony Murphy
    Abstract: This paper investigates the bubbles hypothesis with a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment, and interaction effects between an index of credit availability and real and nominal interest rates. No evidence for a recent bubble is found.
    Keywords: House Prices, Bubble, Spatial Economics
    JEL: C51 E39
    Date: 2006
  40. By: Risager, Ole (Department of Economics, Copenhagen Business School)
    Abstract: A number of influential studies have documented a strong value premium for US stocks over the period 1963 to 1990 (Fama and French (1992), Lakonishok et al. (1994)). Stocks with low price-earnings multiples, price-book values and other measures of value are reported to have given a higher mean return than the high multiple growth firms. Work by Basu (1997) and others have shown that the value dominance is also a feature of the earlier market history of the United States. The value premium is reported also to exist in a number of other countries over the period 1975 to 1995 (Fama and French (1998)). The results for these markets are based on Morgan Stanley (MSCI) data. Since these data are softer due to a relatively short time horizon and due to a small number of stocks in some cases down at 10 stocks, the conclusions are likely to be less robust. There is therefore a need for more research on this issue. The purpose of this paper is to report evidence for the Danish stock market and to test whether the value premium is a genuine long-term feature of the market or just a phenomenon that pops up now and then. To research this issue we have collected accounting and stock market data for more than half a century. We report in particular on the insights obtained when portfolios are formed on the basis of the price-earnings multiple. The paper shows that there is a value premium. The paper also analyzes whether the premium is likely to be due to risk (Fama and French (1992,98)) or mispricing as emphasized by the Behavioral Finance School (Chan et al. (2000), Lakonishok et al. (1994) and La Porta et al. (1997)).
    Keywords: Stock market;
    JEL: H00
    Date: 2005–11–23
  41. By: Marek Hudon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and Harvard University, Boston.); Tchakodo Ouro-Koura (Centre Warocqué, Université Mons-Hainaut and Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: Cette contribution porte sur l’analyse des taux de remboursements des clients d’une institution de microfinance (IMF) en utilisant une base de donnée unique provenant du Togo. L’analyse fournit une comparaison des technologies de prêt individuel et en groupe offerte par l’IMF selon les caractéristiques d’emprunteurs. Nous montrons que la méthodologie de prêt reste un élément explicatif des remboursements à temps, alors que cette constatation n’est plus valable en tenant compte des remboursements en retard. Le lieu de résidence des clients par rapport à l’institution, ainsi que l’objet du prêt apparaissent aussi comme des éléments explicatifs importants du taux de repaiement de l’IMF.
    Keywords: repaiement, microfinance, prêt, groupe
    JEL: L31 M54 O16 Q14
    Date: 2006–09
  42. By: Tomaso Duso (Humboldt University Berlin and WZB,; Klaus Gugler (University of Vienna,; Burcin Yurtoglu (University of Vienna,
    Abstract: Using a sample of 167 mergers during the period 1990-2002 involving 544 firms either as merging firms or competitors, we contrast a measure of the merger’s profitability based on event studies with one based on accounting data. We find positive and significant correlations between them when using a long window around the announcement date and, for rivals, in case of anticompetitive mergers.
    Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
    JEL: L4 K21 G34
    Date: 2006–09
  43. By: Adelegan, Olatundun
    Abstract: The study sets out to measure how the taxation of dividend and debt affects firm value. Tax hypothesis predicts that firm value is negatively related to dividends and positively related to debt. The study covered 1197 firm-year observations of manufacturing firms in Nigeria from 1984 to 2000. To achieve the objective, the study estimated the model on the average values for each firm and tested for industry effects using the ordinary least square (OLS) method. We found the opposite of tax hypotheses predictions from the regression results. We hypothesized that the relationship between dividends, debt and firm value will be affected by the size of the firm. We therefore partitioned the firms into two on the basis of size measured as market capitalization. We estimated separate equations for each sub-sample and found positive relationship between dividend and firm value and negative relationship between debt and firm value in both small-sized firms and big firms’ sub-sample. The study concludes that dividend and debt convey information about profitability of firms. This information about firms’ profitability obscures any tax effect of financing decisions. However, we found that earnings and investment are key determinants of firm value in Nigeria.
    Date: 2006
  44. By: Christian Gianella; Corinne Chanteloup
    Abstract: This paper attempts to assess the impact of exchange rate movements on Russian import and nonfuel export performance, using an error correction model. The estimation of trade equations shows that long-run price elasticities for imports and non-fuel exports are close to 0.6 and 0.7 respectively, hence relatively similar to those obtained for OECD countries. The Marshall-Lerner condition clearly holds. More precisely, we find that a 10% real appreciation (depreciation) of the currency leads on average to a non-fuel current account deterioration (improvement) of around 1% of GDP. Moreover, the short-term dynamics of the error correction model indicate that the response of the trade balance to exchange rate shocks is rapid, the adjustment being almost complete after one quarter. Finally, the evolution of import prices and non-fuel export prices of Russia, relatively to its competitors on domestic and third markets, suggests that the Russian economy lost already in 2004 the price-competitiveness advantage it had gained after the 1998 crisis. <P>Évaluation des élasticités-prix du commerce extérieur hors hydrocarbures en Russie : L'économie russe réagit-elle "normalement" aux mouvements de taux de change ? <BR>Cette étude vise à évaluer l'impact des mouvements du taux de change sur les importations et les exportations hors hydrocarbures de la Russie, à partir d'un modèle à correction d'erreur. Les estimations d'équation de commerce extérieur montrent que les élasticités-prix de long terme pour les importations et les exportations hors hydrocarbures se situent respectivement autour de 0.6 et 0.7, soit des valeurs similaires à celles obtenues pour les pays membres de l'OCDE. La condition de Marshall-Lerner est clairement vérifiée. Plus précisément, une appréciation (dépréciation) réelle de 10% du taux de change conduit à une dégradation (amélioration) de la balance courante hors produits pétroliers d'environ 1%. Par ailleurs, la dynamique de court terme du modèle à correction d'erreur indique que la réponse de la balance commerciale aux chocs sur le taux de change est rapide, l'ajustement étant quasiment achevé après un trimestre. Enfin, l'évolution des prix à l'import et à l'export -- hors hydrocarbures -- de la Russie, relativement à de ses concurrents sur les marchés domestiques et tiers, suggère que l'économie russe a épuisé dès 2004 l'avantage de compétitivité-prix qu'elle avait gagné après la crise de 1998.
    Keywords: exchange rates, taux de change, Russia, Russie, foreign trade, non-fuel trade balance, price elasticities, price-competitiveness, commerce extérieur, balance commerciale hors hydrocarbures, élasticité-prix, compétitivité-prix
    JEL: C22 F19 O11 P27
    Date: 2006–09–04
  45. By: Blackburn, Keith; Forgues-Puccio, Gonzalo F.
    Abstract: We study the effect of international financial integration on economic development when the quality of governance may be compromised by corruption. Our analysis is based on a dynamic general equilibrium model of a small economy in which growth is driven by capital accumulation and public policy is administered by government- appointed bureaucrats. Corruption may arise due to the opportunity for bureaucrats to embezzle public funds, an opportunity that is made more attractive by financial liberalisation which, at the same time, raises efficiency in capital production. Our main results may be summarised as follows: (1) corruption is always bad for economic development, but its effect is worse if the economy is open than if it is closed; (2) the incidence of corruption may, itself, be affected by both the development and openness of the economy; (3) financial liberalisation is good for development when governance is good, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy.
    Keywords: Corruption, development, financial liberalisation
    JEL: D73 F36 O11
    Date: 2006
  46. By: Eva-Maria Steiger
    Abstract: Amidst a sharp increase in household debt levels, many countries have substantially reformed their consumer bankruptcy regulations. I first classify the mechanisms triggered by current U.S. and European bankruptcy regulations and then evaluate these mechanisms within a hidden action model. I analyze the consumer’s incentives prior to distress and during a ’period of good conduct’ following bankruptcy, appraising the capacity of existing regulations to implement those conflicting objectives. Though the institution of debt release provides adequate bankruptcy regulation ex-post, the prospect of debt release also distorts the debtor’s choices prior to distress. I propose alternative regulations that provide superior incentives, minimizing the overall distortions at both dates. A numerical example illustrates the findings.
    Keywords: Personal Bankruptcy, Limited Liability, Moral Hazard, Law & Economics
    JEL: D18 D91 G33 K35
    Date: 2006–09
  47. By: Duo Qin (Queen Mary, University of London)
    Abstract: This study measures purchasing power parity (PPP) by means of the dynamic-factor errorcorrection model (DF-ECM) approach. Under this new approach, PPP is embedded in latent disequilibrium factors, which are extracted from a large variable set of bilateral price disparities; the factors are then used as error-correction leading indicators to explain exchange rate and inflation. Modelling experiments on five OECD countries using monthly data show promising results, which reverse the common belief that PPP is at best a very long-run relationship at the macro level.
    Keywords: Purchasing power parity, Law of one price, Dynamic factor, Error correction
    JEL: F31 C22 C33
    Date: 2006–09
  48. By: Funke, Norbert; Kißmer, Friedrich; Wagner, Helmut
    Abstract: South Africa appears to share some of the characteristics (property price boom, easing of monetary policy, strong domestic demand growth) of asset price booms in industrial countries that were often followed by a period of weak growth. The international experience suggests that a number of practical obstacles need to be overcome before a more proactive role of monetary policy is warranted. However, a larger variety of available mortgage contracts, including longer-term fixed-rate contracts, should allow for a more efficient allocation of interest rate risks. Also, a more systematic nationwide collection of property price data, including data on commercial property price developments, would provide a more representative basis for analysis.
    Keywords: Asset Prices, property prices, monetary policy, economic development
    JEL: E44 E52 E58
    Date: 2006
  49. By: Werner Güth; Jeannette Brosig; Torsten Weiland
    Abstract: Collusive agreements are often observed in procurement auctions. They are probably more easily achieved when competitors’ costs are easily estimated. If, however, the individual costs of bidders are private information, effective ring formation is difficult to realize. We compare experimentally different coordination mechanisms in a first-price procurement auction in how they promote the prospects of collusive arrangements. One mechanism allows bidders to coordinate by means of unrestricted pre-play communication. The second one enables bidders to restrict their bidding range and the last one gives them the opportunity to implement mutual shareholding. According to our results firstprice procurement is quite collusion-proof when allowing for the latter two coordination mechanisms whereas, on average, pre-play communication increases bidders’ profits.
    Keywords: competition, collusion, auction, bidding, public procurement
    JEL: C72 H57 K42
    Date: 2006–09
  50. By: Aliaksei P. Smolski (Belarus State Economic University)
    Abstract: The paper investigates becoming and development of bankruptcy institution in Republic of Belarus after USSR disintegration. It shows the approaches of government to regulation of bankruptcy at different stages of transitional economy development and its current state. The economical, legal and political problems of bankruptcy institution application in Belarus are reviewed.
    Keywords: bankruptcy, Belarus, insolvency, transition economy
    JEL: E61 G33 K12 P21
  51. By: Bennedsen, Morten (Department of Economics, Copenhagen Business School); Nielsen, Kasper (Department of Economics, Copenhagen Business School); Pérez-González, Francisco (Department of Economics, Copenhagen Business School); Wolfenzon, Daniel (Department of Economics, Copenhagen Business School)
    Abstract: This paper uses a unique dataset from Denmark to investigate (1) the role of family characteristics in corporate decision making, and (2) the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or an external chief executive officer (CEO). We show that a departing CEO’s family characteristics have a strong predictive power in explaining CEO succession decisions: family CEOs are more frequently selected the larger the size of the family, the higher the ratio of male children and when the departing CEOs had only had one spouse. We then analyze the impact of family successions on performance. We overcome endogeneity and omitted variables problems of previous papers in the literature by using the gender of a departing CEO’s first-born child as an instrumental variable (IV) for family successions. This is a plausible IV as male first-child family firms are more likely to pass on control to a family CEO than female first-child firms, but the gender of the first child is unlikely to affect firms' performance. We find that family successions have a dramatic negative causal impact on firm performance: profitability on assets falls by at least 6 percentage points around CEO transitions. These estimates are significantly larger than those obtained using ordinary least squares. Finally, our findings demonstrate that professional nonfamily CEOs provide extremely valuable services to the organizations they work for.
    Keywords: Family firms; Successions; CEO turnover; governance
    JEL: G32 G34 M13
    Date: 2005–09–14
  52. By: Lans Bovenberg; Harald Uhlig
    Abstract: This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall ``life-cycle´´ risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.
    Keywords: Social optimum, pension systems, risk sharing, overlapping generations
    JEL: E21 E61 E62 O40 H21 H55
    Date: 2006–09
  53. By: Antonio Cabrales (Universidad Carlos III de Madrid); Gary Charness (University of California); Marie-Claire Villeval (GATE CNRS)
    Abstract: We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
    Keywords: experiment, hidden information, competition, efficiency
    JEL: A13 B49 C91 C92 D21 J41
    Date: 2006–09
  54. By: Antonio Cabrales (Universidad Carlos III de Madrid); Gary Charness (University of California, Santa Barbara); Marie-Claire Villeval (CNRS-GATE and IZA Bonn)
    Abstract: We devise an experiment to explore the effect of different degrees of competition on optimal contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how these different degrees of competition affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies remain. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. Competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.
    Keywords: experiment, hidden information, competition, efficiency
    JEL: A13 B49 C91 C92 D21 J41
    Date: 2006–09

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