nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒10‒07
63 papers chosen by
Carolina Valiente
London South Bank University

  1. A ten-year retrospection of the behavior of Russian stock returns By Anatolyev, Stanislav
  2. Financial Development and Monetary Policy Efficiency By Stefan Krause; Felix Rioja
  3. The European Institutional Environment and SME Relationship Lending: Should We Care? By Hernandez-Canovas, Gines; Koeter-Kant, Johanna
  4. Bank profitability and the business cycle By Ugo Albertazzi; Leonardo Gambacorta
  5. Profitability of foreign banks in Central and Eastern Europe: Does the entry mode matter? By Havrylchyk , Olena; Jurzyk, Emilia
  7. Optimal regulatory design for the Central Bank of Russia By Claeys, Sophie
  8. Probability of default models of Russian banks By Peresetsky, Anatoly A.; Karminsky , Alexandr A.; Golovan , Sergei V.
  9. Financial Liberalization in a Small Open Economy By Jürgen von Hagen; Haiping Zhang
  10. Entry of Foreign Banks and their Impact on Host Countries By Lehner, Maria; Schnitzer, Monika
  11. Does the ECB respond to the stock market? By Wouter Botzen, W.J.; Marey, Philip S.
  12. Value-at-Risk for long and short trading positions: The case of the Athens Stock Exchange By Panayiotis Diamandis; Georgios Kouretas; Leonidas Zarangas
  13. The Emergence of Central Banks and Banking Regulation in Comparative Perspective By Richard S. Grossman
  14. A Competing Risk Analysis of Executions and Cancellations in a Limit Order Market By Bidisha Chakrabarty; Zhaohui Han; Konstantin Tyurin; Xiaoyong Zheng
  15. Asset allocation in the Athens Stock Exchange: A variance sensitivity analysis By Panayiotis Diamandis; Georgios Kouretas; Leonidas Zarangas
  16. Bank supervision Russian style: Rules versus enforcement and tacit objectives By Claeys, Sophie; Lanine , Gleb; Schoors, Koen
  17. Exchange and interest rate channels during a deflationary era - Evidence from Japan, Hong Kong and China By Mehrotra, Aaron
  18. Dealing with financial fragility in transition economies By Bonin , John; Wachtel , Paul
  19. Intangible Capital, Corporate Valuation and Asset Pricing By Jean-Pierre DANTHINE; Xiangrong JIN
  20. Choice of the substitution currency in Russia: How to explain the dollar's dominance? By Dorbec, Anna
  21. Growth expectations and banking system fragility in developing economies By Proto, Eugenio
  22. The inflationary consequences of real exchange rate targeting via accumulation of reserves By Sosunov, Kirill; Zamulin, Oleg
  23. Russian equity market linkages before and after the 1998 crisis: Evidence from time-varying and stochastic cointegration tests By M. Lucey , Brian; Voronkova, Svitlana
  24. Current Account Imbalances and Real Exchange Rates in the Euro Area By Arghyrou, Michael G; Chortareas, Georgios
  25. Scenario Based Principal Component Value-at-Risk: an Application to Italian Banks' Interest Rate Risk Exposure By Roberta Fiori; Simonetta Iannotti
  26. Banks’ Riskiness Over the Business Cicle: a Panel Analysis on Italian Intermediaries By Mario Quagliariello
  27. Monetary transmission mechanism in Central and Eastern Europe: Gliding on a wind of change By Coricelli, Fabrizio; Égert , Balázs; MacDonald, Ronald
  28. Liquidity provision in transition economy: the lessons from Russia By Dorbec , Anna
  31. Equilibrium exchange rates in Central and Eastern Europe: A meta-regression analysis By Égert , Balázs; Halpern , László
  32. Exchange rate regimes, foreign exchange volatility and export performance in Central and Eastern Europe: Just another blur project? By Égert , Balázs; Morales-Zumaquero, Amalia
  33. Tail Conditional Expectation for vector-valued Risks By Imen Bentahar
  34. Information Asymmetry, Share Mispricing and the Coordination Problem: Investor Portfolio Choice in Czech Voucher Privatization By Elena Yusupova
  35. Money Demand in General Equilibrium Endogenous Growth: Estimating the Role of a Variable Interest Elasticity By Gillman, Max; Otto, Glen
  36. A note on exchange rate pass-through in CIS countries By Korhonen, Iikka; Wachtel, Paul
  37. Risky Arbitrage, Asset Prices, and Externalities By Cuong Le Van; Frank H. Page; Myrna H. Wooders
  38. Political Instability and the August 1998 Ruble Crisis By Tatiana Fic; Omar F. Saqib
  39. Pursuing financial stability under an inflation-targeting regime By Q. Farooq Akram; Gunnar Bårdsen; Kjersti-Gro Lindquist
  41. United States Current Account Deficits: A Stochastic Optimal Control Analysis By Jerome L. Stein
  42. Open-end real estate funds: danger or diamond? By Steffen Sebastian; Marcel Tyrell
  43. Experienced and Novice Investors: Does Environmental Information Influence on Investment Allocation Decisions? By Holm, Claus; Rikhardsson, Pall
  44. Shareholder wealth effects from mergers and acquisitions in the Greek banking industry By Constantine Manasakis
  45. Crisis de rentabilidad, acumulación de capital y distribución de la renta en la economía de México By Juan Pablo Mateo Tomé
  46. The accrual anomaly – focus on changes in specific unexpected accruals results in new evidence. By Schøler, Finn
  47. Cross listing and firm value - corporate governance or market segmentation? An empirical study of the stock market By Ji, Gang
  48. Does ECB Communication Help in Predicting its Interest Rate Decisions? By David-Jan Jansen; Jakob de Haan
  49. Equilibrium exchange rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased? By Égert, Balázs
  50. Control Bands for Tracking Constant Portfolio Allocations with Fixed and Proportional Transaction Costs By Yiannis Kamarianakis; Anastasios Xepapadeas
  51. The Equity Trap, the Cost of Capital and the Firm’s Growth Path By Tobias Lindhe; Jan Södersten
  52. Why do Low- and High-Skill Workers Migrate? Flow Evidence from France By Dominique M. Gross; Nicolas Schmitt
  53. A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs By Paolo Panteghini
  54. A Spatio-Temporal Model of House Prices in the US By Sean Holly; M. Hashem Pesaran; Takashi Yamagata
  56. Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy,and Housing Wealth By Annamaria Lusardi; Olivia S. Mitchell
  57. Asset Meltdown - Fact or Fiction? By Marcel Marekwica; Raimond Maurer; Steffen Sebastian
  58. Overoptimism and Lender Liability in the Consumer Credit Market By Elisabetta Iossa; Giuliana Palumbo
  59. The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions By Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
  61. Local currencies in European History : an analytical framework By Jérôme Blanc
  62. 06-04 "Ethics and International Debt: A View from Feminist Economics," By Julie A. Nelson
  63. Comparative risk aversion when the outcomes are vectors By Sudhir A. Shah

  1. By: Anatolyev, Stanislav (New Economic School)
    Abstract: We study three aspects of the Russian stock market – factors influencing stock returns, integration of the stock market with world .financial markets, and market efficiency – from 1995 to present, putting emphasis on how these evolved over time. We .find many highly unstable relationships, and indeed, greater instability than that generated by financial crises alone. While most computed statistics exhibit constant ups and downs, there are recently clear tendencies in the development of the Russian stock market: a sharp rise in explainability of returns, an increased role of international financial markets, and a decrease in the profitability of trading.
    Keywords: Russia; transition; stock returns; integration; efficiency
    JEL: C22 F36 G14 G15
    Date: 2005–07–15
  2. By: Stefan Krause; Felix Rioja
    Abstract: We study how financial development is related to short run stabilization. Specifically, our objective is to derive monetary policy efficiency measures (PEMs) for 37 industrialized and developing countries, and analyze the impact that the size and depth of the banking sector and the capital sector have on policy performance. It is our contention that a more developed financial sector increases the scope of action of policy, resulting in improved policy performance. In our empirical analysis we use three financial development measures: private credit, liquid liabilities, and a financial aggregate index that comprises banking and stock market measures. Our findings suggest that more developed financial markets, controlling for central bank independence, inflation targeting and membership to the Economic and European Monetary Union, significantly contribute to explaining a more efficient monetary policy implementation.
    Date: 2006–09
  3. By: Hernandez-Canovas, Gines (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Koeter-Kant, Johanna
    Abstract: This paper examines the impact of country specific determinants on multiple banking using a unique survey sample of 4959 SMEs from 19 European countries. Our data shows that (1) SMEs in countries with inefficient loan enforcement mechanisms are more likely to maintain multiple bank relationships, (2) the association between multiple banking and bank fragility is non-monotonous, being negative when the banking system is relatively stable and positive for high values of bank fragility, and (3) multiple banking is more likely for SMEs in countries with larger banking systems as well as smaller and less active securities markets. Overall, this evidence suggests that SMEs need multiple banking as a diversification mechanism to overcome expensive adverse selection that may arise within a country that suffers from an inefficient legal system and fragile banks, but also that movement towards a more market based financial system decreases the likelihood of multiple bank relationships for SMEs. These findings have important implications for policy makers in Europe when contemplating SME access to finance.
    Keywords: SMEs; Relationship Lending; Banks
    JEL: G21 G32
    Date: 2006
  4. By: Ugo Albertazzi (Bank of Italy - Economic Research Department); Leonardo Gambacorta (Bank of Italy - Economic Research Department)
    Abstract: An important element of the macro-prudential analysis is the study of the link between business cycle fluctuations and banking sector profitability and how this link is affected by institutional and structural characteristics. This work estimates a set of equations for net interest income, non-interest income, operating costs, provisions, and profit before taxes, for banks in the main industrialized countries and evaluates the effects on banking profitability of shocks to both macroeconomic and financial factors. Distinguishing mainly the euro area from Anglo-Saxon countries, the analysis also identifies differences in the resilience of the respective banking systems and relates them to the characteristics of their financial structure.
    Keywords: bank profitability, economic cycle, macro-prudential analysis
    JEL: C53 G21
    Date: 2006–09
  5. By: Havrylchyk , Olena; Jurzyk, Emilia (K.U. Leuven, Belqium)
    Abstract: Using data for 265 banks in Central and Eastern European Countries for the period of 1995-2003, this paper analyses the differences in profitability between domestic and for-eign banks. We show that foreign banks, especially greenfield institutions, earn higher profits than domestic banks. However, this effect is acquired rather than inherited, since there is evidence that foreign banks tend to take over less profitable institutions. Profits of foreign banks in CEECs also exceed profits of their parent banks, explaining the reasons for their entry. Further, we study benefits and costs of foreign ownership by analyzing de-terminants of profitability for domestic, takeover, and greenfield banks. Profits of foreign banks are less affected by macroeconomic conditions in their host countries. However, greenfield banks are sensitive to the situation of their parent banks. Only domestic banks enjoy higher profits in more concentrated banking markets, whereas takeover banks suffer from diseconomies of scale due to the fact that they acquired large institutions.
    Keywords: foreign banks; bank profits; multinational banking; transition economies
    JEL: F36 G15 G21
    Date: 2006–04–25
  6. By: Pami Dua (Delhi School of Economics); Partha Sen (Delhi School of Economics)
    Abstract: This paper examines the relationship between the real exchange rate, level of capital flows, volatility of the flows, fiscal and monetary policy indicators and the current account surplus for the Indian economy for the period 1993Q2 to 2004Q1. The estimations indicate that the variables are cointegrated and each granger causes the real exchange rate. The generalized variance decompositions show that determinants of the real exchange rate, in descending order of importance include net capital inflows and their volatility (jointly), government expenditure, current account surplus and the money supply. A preliminary analysis suggests that a similar analysis can be performed for the foreign exchange reserves held by the RBI.
    Keywords: real exchange rate, capital flows, foreign exchange reserves, cointegration,
    JEL: C32 F31 F41
    Date: 2006–08
  7. By: Claeys, Sophie (BOFIT)
    Abstract: The Central Bank of Russia (CBR) assumes a wide range of functions not raditional to a central bank. In addition to the daily conduct of monetary policy, it acts as a regulator and supervisor of the banking sector. It is currently overssing the implementation of a deposit insurance scheme and is the main owner of Russia's largest commercial bank, Sberbank. As this additional functions may conflict with the CBR policy objectives, I review how the current design of the CBR deviates from the optimal allocation of regulatory powers within a central bank prescribed in the literature. I then empirically investigate the need for a supervisory body within the CBR. Using a simple Taylor rule framework I find that the CBR does not use its "hands-on" supervisory information to maintain financial stability, but rather to accomodate state-owned banks' balances.
    Keywords: Central Bank; Prudential Regulation and Supervision; Monetary Policy Rules; Russia
    JEL: G21 G28
    Date: 2005–07–08
  8. By: Peresetsky, Anatoly A. (New Economic School); Karminsky , Alexandr A. (Gazprombank, Moscow, Russia); Golovan , Sergei V. (New Economic School)
    Abstract: This paper presents results from an econometric analysis of Russian bank defaults during the period 1997–2003, focusing on the extent to which publicly available information from quarterly bank balance sheets is useful in predicting future defaults. Binary choice models are estimated to construct the probability of default model. We find that preliminary expert clustering or automatic clustering improves the predictive power of the models and incor-poration of macrovariables into the models is useful. Heuristic criteria are suggested to help compare model performance from the perspectives of investors or banks supervision authorities. Russian banking system trends after the crisis 1998 are analyzed with rolling regressions.
    Keywords: banks; Russia; probability of default model; early warning systems
    Date: 2004–12–30
  9. By: Jürgen von Hagen; Haiping Zhang
    Abstract: We analyze the long-run and short-run implications of financial liberalization in a small open economy. Our main results are as follows. First, whether financial deregulation in one sector can improve production efficiency may depend on financial regulation in other sectors. Second, financial liberalization may have opposite welfare implications to domestic agents with different productivity in the long run. Third, although some domestic agents lose in the long run, they benefit from financial liberalization during the transitional process of deregulation. Finally, a gradual implementation helps achieve a smooth transition.
    Keywords: financial frictions, financial liberalization, foreign borrowing, macroeconomic fluctuations, overshooting
    JEL: E32 E44 F34 F41
    Date: 2006
  10. By: Lehner, Maria; Schnitzer, Monika
    Abstract: Foreign bank entry is frequently associated with spillover effects for local banks and increasing competition in the local banking market. We study the impact of these effects on host countries. In particular, we ask how these effects interact and how they depend on the competitive environment of the host banking market. An increasing number of banks is more likely to have positive welfare ffects the more competitive the market environment, whereas spillovers are less likely to have positive welfare effects the stronger competition. Hence, competitive effects seem to reinforce each other, while spillovers and competition tend to weaken each other.
    Keywords: foreign bank entry; multinational bank; competition in banking; spillover effects
    JEL: F37 G21 L13 O16
    Date: 2006–09
  11. By: Wouter Botzen, W.J. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Marey, Philip S.
    Abstract: The role of asset prices in monetary policy has been widely debated. This paper examines the role that stock prices play in the monetary policy of the ECB. For this purpose, standard and augmented forward-looking Taylor rules are estimated for the ECB using monthly data between 1999 and 2005. Of special interest is the impact of adding stock prices to the standard Taylor rule of the ECB. The GMM estimations of a standard Taylor rule and augmented Taylor rules for the Euro area indicate that the ECB considered stock price developments in setting interest rates. Monetary policy of the ECB stabilized asset prices by raising interest rates when the stock market index was above average and lowering rates when the index was below average. Stock prices are not only relevant as instruments but also as arguments in the ECB policy rule. The empirical plausibility of the Taylor rule improves when it allows for a reaction to the stock market. These results challenge previous studies.
    Keywords: Taylor rules; Asset prices; ECB monetary policy
    JEL: E4 E5
    Date: 2006
  12. By: Panayiotis Diamandis (Department of Business Administration, Athens University of Economics and Business); Georgios Kouretas (Department of Economics, University of Crete); Leonidas Zarangas (Department of Finance and Auditing, Technological Educational Institute of Epirus)
    Abstract: This paper provides Value-at-Risk estimates for daily stock returns with the application of various parametric univariate models that belong to the class of ARCH models which are based on the skewed Student distribution. We use daily data for three stock indexes of the Athens Stock Exchange (ASE) and three stocks of Greek companies listed in the ASE. We conduct our analysis with the adoption of the methodology suggested by Giot and Laurent (2003). Therefore, we estimate an APARCH model based on the skewed Student distribution to fully take into account the fat left and right tails of the returns distribution. We show that the estimated VaR for traders having both long and short positions in the Athens Stock Exchange is more accurately modeled by a skewed Student APARCH model that by a normal or Student distributions.
    Keywords: Value-at-Risk, risk management, APARCH models, skewed Student distribution
    JEL: C53 G21 G28
    Date: 2006–01
  13. By: Richard S. Grossman (Department of Economics, Wesleyan University)
    Date: 2006–06
  14. By: Bidisha Chakrabarty (Saint Louis University); Zhaohui Han (Financial Engineering Group, ITG Inc.); Konstantin Tyurin (Indiana University Bloomington); Xiaoyong Zheng (North Carolina State University)
    Abstract: The competing risks technique is applied to the analysis of times to execution and cancellation of limit orders submitted on an electronic trading platform. Time-to-execution is found to be more sensitive to the limit price variation than time-to-cancellation, even though it is less sensitive to the limit order size. More importantly, investors who aim to reduce the expected time-to-execution for their limit orders without inducing any significant increase in the risk of subsequent cancellation should submit their orders when the market depth is smaller on the side of their orders or when the market depth is greater on the opposite side of their orders. We also provide a new diagnostic plots method for evaluating the goodness-of-fit of different competing risks models.
    Keywords: Market microstructure, limit order, competing risks, hazard rate, frailty
    JEL: G14 G23
    Date: 2006–10
  15. By: Panayiotis Diamandis (Department of Business Administration, Athens University of Economics and Business); Georgios Kouretas (Department of Economics, University of Crete); Leonidas Zarangas (Department of Finance and Auditing, Technological Educational Institute of Epirus)
    Abstract: This paper provides an analysis of asset allocation using univariate portfolio GARCH models from the Athens Stock Exchange. We use daily data for the period January 1997 to February 2005. Our analysis adopts the methodology due to Manganelli (2004) and we are able to recover from the univariate approach the multivariate dimension of the portfolio allocation problem. Manganelli (2004) suggests that such a dual problem can be solved with the application of a variance sensitivity analysis which considers the change in the portfolio variance induced by an infinitesimal change in the portfolio allocation. Our main findings are based on the estimation of the variance sensitivity for a portfolio of two assets and the way sensitivity has been changing over time and this has implications for risk management. In addition we compute the second derivative of the estimated variance with respect to portfolio weights and this gives an indication of the benefits arising from diversification at any given point of time.
    Keywords: asset allocation, GARCH models, risk management, sensitivity analysis
    JEL: C53 G21 G28
    Date: 2006–02
  16. By: Claeys, Sophie (CERISE); Lanine , Gleb (CERISE); Schoors, Koen (CERISE)
    Abstract: We focus on the conflict between two central bank objectives – individual bank stability and systemic stability. We study the licensing policy of the Central Bank of Russia (CBR) during 1999-2002. Banks in poorly banked regions, banks that are too big to be disciplined adequately, and banks that are active on the interbank market enjoy protection from license withdrawal, which suggests a tacit concern for systemic stability. The CBR is also found reluctant to with-draw licenses from banks that violate the individual's deposits-to-capital ratio as this conflicts with the tacit CBR objective to secure depositor confidence and systemic stability.
    Keywords: bank supervision; bank crisis; Russia
    JEL: E50 G20 N20
    Date: 2005–09–05
  17. By: Mehrotra, Aaron (BOFIT)
    Abstract: We examine the role of the exchange and interest rate channels during recent deflation episodes in Japan, Hong Kong and China. We estimate open-economy structural vector autoregressive (SVAR) models for the three economies with different monetary regimes and varying degrees of openness. In both Japan and Hong Kong, shocks to the nominal effective exchange rate have a statistically significant impact on prices, with a notably stronger effect in Hong Kong. Our results provide evidence about the role of external influences in the deflation episodes of these economies, and could also be seen to weakly support suggestions to depreciate the currency in order to escape from a liquidity trap. The importance of the interest rate channel is also found to be high in Japan and Hong Kong. In China, where interest rates have not been an important monetary policy tool, neither exchange nor interest rate shocks significantly influence price developments.
    Keywords: deflation; zero lower bound; SVAR
    JEL: E31 F41
    Date: 2005–12–30
  18. By: Bonin , John (Wesleyan University); Wachtel , Paul (New York University)
    Abstract: We examine the efforts of transition economies to deal with financial fragility and resolve banking cries We characterize the birthing process of banking in transition and the three essential features of banking crises in transition economies: (i) bad loans and the relationship to state owned industries, (ii) development of institutional infrastructure and (iii) credible commitments to resolution and privatization. We then discuss the experiences of seven important transition countries in order to identify the salient features of their efforts to resolve banking crises.
    JEL: G21 P34
    Date: 2004–12–30
  19. By: Jean-Pierre DANTHINE; Xiangrong JIN
    Abstract: Recent studies have found unmeasured intangible capital to be large and important. In this paper we observe that by nature intangible capital is also very different from physical capital. We find it plausible to argue that the accumulation process for intangible capital differs significantly from the process by which physical capital accumulates. We study the implications of this hypothesis for rational firm valuation and asset pricing using a two-sector general equilibrium model. Our main finding is that the properties of firm valuation and stock prices are very dependent on the assumed accumulation process for intangible capital. If one entertains the possibility that intangible investments translates into capital stochastically, we find that plausible levels of macroeconomic volatility are compatible with highly variable corporate valuations, P/E ratios and stock returns.
    Keywords: intangible capital; corporate valuation; stock return volatility
    JEL: D24 D50 G12
    Date: 2006–09
  20. By: Dorbec, Anna (University of Paris X Nanterre)
    Abstract: The analysis of external economic relations of Russia reveals a paradox: while Europe is the main trade and direct investment partner of Russia, this is far from being the case concerning its currency’s role in Russia's financial activities. The dollar is much preferred by economic agents for financial operations. This paper proposes a disaggregated approach to this issue by separating the ‘means of exchange’ and ‘store of value’ components of the use of substitution currencies. The influence of three main factors (inertial component, real trade relations and exchange rate fluctuations) on the relative demand for the euro by Russian economic agents is tested for the period 1999-2004. Finally we suggest a theoretical interpretation of the results based on the conventions theory approach.
    Keywords: dollarisation; euroisation; transition; Russia; currency substitution; asset substitution; network externalities; hysteresis; conventions
    JEL: E41 E52 F31 F41 G20
    Date: 2005–12–01
  21. By: Proto, Eugenio (University of Warwick, Department of Economics)
    Abstract: The likelihood of a banking crisis appears to be higher in fast-developing countries. An explanation is provided in a Diamond and Dybvig framework, where banks are vehicles of consumption-smoothing, offering insurance against shocks to the consumption path of consumers. The theoretical model shows that the higher consumer growth expectations, the higher the optimal level of illiquidity insurance — even if it implies higher exposure bank runs. Empirical evidence supports this result and suggests that the effect of deposit interest rates on the probability of crisis is stronger after a period of high, uniterrupted growth. Policies of providing bail-outs or deposit insurance are demonstrated to be efficient even when they increase the fragility of the banking system.
    Date: 2005–11–07
  22. By: Sosunov, Kirill (Higher School of Economics, Moscow); Zamulin, Oleg (New Economic School)
    Abstract: The paper investigates the ability of monetary authorities to keep the real exchange rate undervalued over the long run by implementing a policy of accumulating foreign exchange reserves. We consider a model of a three-sector, small, open economy, where the central bank continuously purchases foreign currency reserves and compare them to Russian and Chinese economies in recent years. Both countries appear to pursue reserve accumulation policies. We find a clear trade-off between the steady state levels of the real exchange rate and inflation. After calibration, the model predicts an 8.5% real undervaluation of the Russian currency and a 13.7% undervaluation of the Chinese currency. Predicted inflation is found to match observed levels.
    Keywords: real exchange rate targeting; foreign exchange reserves; Dutch disease
    JEL: E52 F41
    Date: 2006–08–24
  23. By: M. Lucey , Brian (BOFIT); Voronkova, Svitlana (BOFIT)
    Abstract: This paper examines the relationships between the Russian and other Central European (CE) and developed countries’ equity markets over the 1995-2004 period. Along with the traditional Johansen and Juselius (1990) multivariate cointegration tests, we apply novel cointegration approaches, including Gregory-Hansen (1996) test, which allows for a structural break in the relationships, as well as the newly developed stochastic cointegration test by Harris, McCabe and Leybourne (2002) and the non-parametric cointegration method of Breitung (2002). The latter tests point to a significant agreement that in the aftermath of the Russian crisis of 1998 there was an increasing degree of comovements of the Russian market with other developed markets, but not with CE developing markets. This result is further confirmed by dynamic conditional correlation modeling, which allows us to investigate graphically the evolution of comovements in the system. The results of detailed cointegration analysis suggest a. that the time-varying nature of equity markets comovements should be explicitly accounted for while modeling long run relationships b. that there is a decline in diversification benefits for foreign investors seeking to invest in Russian equities over the long horizon.
    Keywords: Stock Market Integration; CEE Stock markets; Russian Stock Market; Cointegration
    JEL: G10 G15
    Date: 2005–10–20
  24. By: Arghyrou, Michael G (Cardiff Business School); Chortareas, Georgios
    Abstract: Global current account imbalances have been one of the focal points of interest for policymakers during the last few years. Less attention has been paid, however, to the diverging current account balances of the individual euro area countries. In this paper we consider the dynamics of current account adjustment and the role of real exchange rates in current account determination in the EMU. After controlling for the effects of income growth, we find the relationship between real exchange rates and the current account to be substantial in size and subject to non-linear effects. Overall, we argue that real exchange rates can offer further insights, beyond the effects of the income catch-up process, relevant to current account determination in the EMU.
    Keywords: current account; real exchange rate; EMU; nonlinearities
    JEL: C51 C52 F31 F32 F41
    Date: 2006–09
  25. By: Roberta Fiori (Banca d'Italia); Simonetta Iannotti (Banca d'Italia)
    Abstract: The paper develops a Value-at-Risk methodology to assess Italian banks’ interest rate risk exposure. By using 5 years of daily data, the exposure is evaluated through a Principal Component VaR based on Monte Carlo simulation according to two different approaches (parametric and non-parametric). The main contribution of the paper is a methodology for modelling interest rate changes when underlying risk factors are skewed and heavy-tailed. The methodology is then implemented on a one year holding period in order to compare the results from those resulting from the Basel II standardized approach. We find that the risk measure proposed by Basel II gives an adequate description of risk, provided that duration parameters are changed to reflect market conditions. Finally, the methodology is used to perform a stress testing analysis.
    Keywords: Interest rate risk, VAR, PCA, Non-normality, Non parametric methods
    JEL: C14 C19 G21
    Date: 2006–09
  26. By: Mario Quagliariello (Banca d'Italia)
    Abstract: Supervisors and policy makers pay increasing attention to the possible procyclical nature of banks’ behaviour. Indeed, to guarantee macro and financial stability, it is important to understand whether, and to what extent, banks are affected by the macroeconomy and second round effects occur. This paper provides a comprehensive investigation of these issues using a large dataset of Italian intermediaries over the period 1985-2002. In particular, estimating both static and dynamic models, it investigates whether loan loss provisions and non-performing loans show a cyclical pattern. The estimated relations may be employed to carry out stress tests to assess the effects of macroeconomic shocks on banks’ balance sheets.
    Keywords: procyclicality, banks, loan loss provisions, non-performing loans, business cycle
    JEL: E30 E32 E44 G28
    Date: 2006–09
  27. By: Coricelli, Fabrizio (University of Siena, University of Ljubljana and CEPR); Égert , Balázs (Oesterreichische Nationalbank); MacDonald, Ronald (University of Glasgow and CESIfo)
    Abstract: This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical findings for Central and Eastern Europe are then briefly compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.
    Keywords: monetary transmission; transition; Central and Eastern Europe; credit channel; interest rate channel; interest-rate pass-through; exchange rate channel; exchange rate pass-through; asset price channel
    JEL: E31 E51 E58 F31 O11 P20
    Date: 2006–08–14
  28. By: Dorbec , Anna (Université Paris X Nanterre)
    Abstract: This paper provides micro and macroeconomic analysis of the economic role of banks in the Russian economy. Using a large panel containing Russian enterprises’ balance sheet and income statement data, we evaluate the determinants of bank financing. Econometric model put out the existence of liquidity providing activity of Russian banks. Even though the overall liquidity provision system suffers from certain deficiencies, we demonstrate its importance in the macroeconomic context, using time series econometric analysis. Bank credit appears to be a significant factor in explaining the non-payment dynamics and use of informal financing. Finally, the uncertainty concept helps us to understand the reasons for a limitation of Russian banks in their liquidity providing role.
    Keywords: liquidity; finance; transition; Russia; uncertainty; banks; inter-enterprise credit
    JEL: D80 G21
    Date: 2004–11–01
  29. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Some investors in the Collateralized Debt Obligations (CDOs) market have been publicly accused of not fully understanding the risks and dynamics of these products. They won't have an excuse any more. This report explains the mechanics of CDOs: their implied cash flows, the variables affecting those cash flows, their pricing, the sensitivity of CDO price to those variables, the functioning of the markets where they are traded, their different types, the conventions used for trading CDOs,...We built our description of CDOs pricing upon the Vasicek asymptotic single factor model because of its simplicity and the insights it provides regarding the pricing of CDOs. Additionally, we provide an extensive and updated review of the literature which extends the Vasicek model by relaxing its, somehow restrictive, assumptions in order to build more realistic and, as a consequence, more complicated CDO princing models.
    Date: 2006–04
  30. By: Max Bruche (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: One of the strengths of structural models (or firm-value based models) of credit (e.g. Merton, 1974) as opposed to reduced-form models (e.g. Jarrow and Turnbull, 1995) is that they directly link the price of equity to default probabilities, and hence to the price of corporate bonds (and credit derivatives). Yet when these models are estimated on actual data, the existence of data other than equity prices is typically ignored. This paper describes how all available price data (equity prices, bond prices, possibly credit derivative prices) can be used in estimation, and illustrates that using e.g. bond price data in addition to equity price data greatly improves estimates. In this context, the issue of possibly noisy data and/or model error is also discussed.
    Date: 2006–06
  31. By: Égert , Balázs (Oesterreichische Nationalbank); Halpern , László (Oesterreichische Nationalbank)
    Abstract: This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates.
    Keywords: equilibrium exchange rate; Balassa-Samuelson effect; meta-analysis
    JEL: C15 E31 F31 O11 P17
    Date: 2005–06–29
  32. By: Égert , Balázs (Oesterreichische Nationalbank); Morales-Zumaquero, Amalia (University of Málaga and Centro de Estudios Andaluces)
    Abstract: This paper attempts to analyze the direct impact of exchange rate volatility on the export performance of ten Central and Eastern European transition economies as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export flows are studied. To this end, we first analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and second, use these changes to construct dummy variables we include in our export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specific periods.
    Keywords: exchange rate volatility; export; trade; transition; structural breaks
    JEL: F31
    Date: 2005–07–11
  33. By: Imen Bentahar
    Abstract: In his paper we introduce a quantile-based risk measure for multivariate financial positions "the vector-valued Tail-conditional-expectation (TCE)". We adopt the framework proposed by Jouini, Meddeb, and Touzi [9] to deal with multi-assets portfolios when one accounts for frictions in the financial market. In this framework, the space of risks formed by essentially bounded random vectors, is endowed with some partial vector preorder >= accounting for market frictions. In a first step we provide a definition for quantiles of vector-valued risks which is compatible with the preorder >=. The TCE is then introduced as a natural extension of the "classical" real-valued tail-conditional-expectation. Our main result states that for continuous distributions TCE is equal to a coherent vector-valued risk measure. We also provide a numerical algorithm for computing vector-valued quantiles and TCE.
    Keywords: Risk measures, vector-valued risk measures, coherent risk-measures, quantiles, tail-conditional-expectation
    JEL: C60 G13
    Date: 2006–04
  34. By: Elena Yusupova
    Abstract: Voucher privatization in the Czech Republic presented a natural experiment of the ability of investors to construct their portfolios under conditions of asymmetric information and the absence of stock market prices. This paper provides a theoretical model of an optimal portfolio choice made by the investors maximizing their expected return and at the same time solving a coordination problem in a non-cooperative game with other investors. The perception of share misvaluation and private information are endogenized. The model offers an interpretation and theoretical justification of earlier empirical findings and explains the crucial role of the auctioneer, different optimal strategies for different types of investors and the redundancy of legal limits constraining ownership stakes in firms. The results provide implications for the design of voucher privatization, which should lead to more efficient share distribution and price setting.
    Keywords: Voucher privatization, Asymmetric information, Portfolio and strategic investors, Portfolio choice, Mispricing
    JEL: D81 D82 G11
    Date: 2006–07
  35. By: Gillman, Max (Cardiff Business School); Otto, Glen
    Abstract: The paper presents and tests a theory of the demand for money that is derived from a general equilibrium, endogenous growth economy, which in effect combines a special case of the shopping time exchange economy with the cash-in-advance framework. The model predicts that both higher inflation and financial innovation - that reduces the cost of credit - induce agents to substitute away from money towards exchange credit. The implied interest elasticity of money demand rises with the inflation rate and financial innovation rather than being constant as is typical in shopping time specifications. Using quarterly data for the US and Australia, we find evidence of cointegration for the money demand model. This money demand stability results because of the extra series that capture financial innovation; included are robustness checks and comparison to a standard money demand specification.
    JEL: C23 E41 O42
    Date: 2006–09
  36. By: Korhonen, Iikka (BOFIT); Wachtel, Paul (Stern School of Business, New York University)
    Abstract: We assess the extent and speed of exchange rate pass-through in the countries of the Commonwealth of Independent States (CIS). We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid periods of very high inflation and the Russian crisis. We find that exchange rate movements have a clear impact on price developments in the CIS countries. The speed of the pass-through is also fairly high: in most cases the full effect is transmitted into domestic prices in less than 12 months. Unlike in many other emerging market economies, an additional effect from US prices on to domestic prices is not significant. The extent of the exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries. Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries.
    Keywords: exchange rate pass-through; inflation; exchange rate regime; transition countries
    JEL: E31 E42 F31 F42
    Date: 2005–06–10
  37. By: Cuong Le Van (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Frank H. Page (University of Alabama - [University of Alabama]); Myrna H. Wooders (Vanderbilt University - [Vanderbilt University])
    Abstract: We introduce a no-risky-arbitrage price condition (NRAP) for asset market models allowing both unbounded short sales and externalities such as trading volume. We then demonstrate that NRAP is sufficient for the existence of competitive equilibrium in the presence ofexternalities. Moreover, we show that if all risky arbitrages are utility increasing, then NRAP characterizes competitive equilibrium in the<br />presence of externalities.
    Keywords: Risky Arbitrage, Competitive Equilibrium, Viable<br />Asset Prices
    Date: 2006–10–02
  38. By: Tatiana Fic; Omar F. Saqib
    Abstract: The main objective of this study is to highlight the importance of political instability, defined as frequent changes in and of government, in undermining the Russian exchange rate based stabilization program of the 1990s. The empirical evidence supports the significance of political instability along with economic fundamentals in determining Russian real effective exchange rate and exchange market pressure, used as a proxy to the crisis.
    Keywords: Currency crises, political instability
    JEL: F31 C13
    Date: 2006
  39. By: Q. Farooq Akram (Norges Bank (Central Bank of Norway)); Gunnar Bårdsen (Norwegian University of Science and Technology and Norges Bank); Kjersti-Gro Lindquist (Norges Bank (Central Bank of Norway))
    Abstract: We evaluate two main views on pursuing financial stability within a flexible inflation targeting regime. It appears that potential gains from an activist or precautionary approach to promoting financial stability are highly shock dependent. We find support for the conventional view that concern for financial stability generally warrants a longer target horizon for inflation. The preferred target horizon depends on the financial stability indicator and the shock. An extension of the target horizon favoring financial stability may contribute to relatively higher variation in inflation and output.
    Keywords: Monetary policy, financial stability
    JEL: C51 C52 C53 E47 E52
    Date: 2006–09–26
  40. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This report analyzes reduced-from credit risk models, and reviews the three main approaches to incorporate credit risk correlation among firms within the framework of reduced models. The first approach, conditionally independent defaults (CID) models, introduces credit risk dependence of the firms' default intensity processes on a common set of state variables. Contagion models extend the CID approach to account for default clustering (periods in which the firms's credit risk is increased and in which the majority of the defaults take place). Finally, default dependecies can also be accounted for using copula functions. The copula approach takes as given the marginal default probabilities of the different firms and plugs them into a copula function, which provides the model with the default dependece structure. After a description of copulas, we present two different approaches of using copula functions in intensity models, and discuss the choice and calibration of the copula function.
    Date: 2006–04
  41. By: Jerome L. Stein
    Abstract: The "Pessimists" and the "Optimists" disagree whether the US external deficits and the associated buildup of US net foreign liabilities are problems that require urgent attention. A warning signal should be that the debt ratio deviates significantly from the optimal ratio. The optimal debt ratio or debt burden should take into account the vulnerability of consumption to shocks from the productivity of capital, the interest rate and exchange rate. The optimal debt ratio is derived from inter-temporal optimization using Dynamic Programming, because the shocks are unpredictable, and it is essential to have a feedback control mechanism. The optimal ratio depends upon the risk adjusted net return and risk aversion both at home and abroad. On the basis of alternative estimates, we conclude that the Pessimists' fears are justified on the basis of trends. The trend of the actual debt ratio is higher than that of the optimal ratio. The Optimists are correct that the current debt ratio is not a menace, because the current level of the debt ratio is not above the corresponding level of the optimum ratio.
    Keywords: U.S. current account deficits, external debt, stochastic optimal control, dynamic programming, inter-temporal optimization
    JEL: C61 F32 F34 F37
    Date: 2006
  42. By: Steffen Sebastian; Marcel Tyrell
    Date: 2006–05
  43. By: Holm, Claus (Department of Management Science and Logistics, Aarhus School of Business); Rikhardsson, Pall (Department of Management Science and Logistics, Aarhus School of Business)
    Abstract: This paper examines the effect of environmental information on the investment <p> decisions of investors. The motivation for the experimental design <p> applied in this study is that unless actual decision making is observed, <p> the potential usefulness of environmental information (or lack <p> thereof) cannot be taken for granted. The study is based on an experiment <p> where groups of investors (varied by experience) were asked to <p> make investment allocation decisions based on financial information and <p> on supplementary environmental information (varied between cases). As <p> an investment allocation decision (varied by investment horizons) the <p> groups were asked to allocate funds to two companies based on the available <p> information. The findings suggest that environmental information has <p> the potential to influence investment allocation decisions. The findings <p> also suggest that the influence of environmental information on investment <p> allocation decisions is mitigated by the variables considered explicitly <p> in this study, i.e., the investment horizon (varied as short and long) <p> and investor experience (varied as novice and experienced investor). It is <p> concluded that because allocation decisions are multifaceted problems, <p> mixed results related to the influence of environmental information should <p> be expected
    Keywords: Environmental reporting; Environmental disclosures; Allocation; Decision making; Investment horizon; Investors; Experiment;
    Date: 2006–06–14
  44. By: Constantine Manasakis (Department of Economics, University of Crete)
    Abstract: This paper examines the shareholder wealth effects of mergers and acquisitions in the Greek banking industry from 1995 to 2001, using the “event study methodology”. The results suggest that targets’ shareholders earned significant abnormal returns upon the announcement of horizontal and diversifying deals. On the other hand, bidders’ shareholders had significant losses in cases of horizontal and zero effects in diversifying deals. Although mergers and acquisitions in the Greek banking industry are not found to be value-enhancing, they can be rationalized as an external growth strategy, whose goal was to strengthen the position of the participants in the domestic market and help them become more tenacious in a fiercely competitive international environment.
    Keywords: Mergers and Acquisitions; Banking; Valuation effects
    JEL: G34 G21 G14
    Date: 2006–05–31
  45. By: Juan Pablo Mateo Tomé (Departamento de Economía Aplicada I - [Universidad Complutense de Madrid])
    Abstract: En esta ponencia se expone una estimación de la tasa de ganancia en la economía mexicana para el período 1970-2003. Sostenemos que esta variable es clave en la comprensión de la aparición de la crisis. El nexo que permite explicar su aparición radica en el proceso de acumulación de capital, función de la masa de ganancia generada. Cuando se estanca, se derrumba la acumulación de capital y, ante la ausencia de una recomposición de las condiciones de valorización del capital, caracterizamos el período objeto de estudio como de “crisis estructural.” El análisis de la evolución de los determinantes de la rentabilidad en esta fase nos permite identificar la disfuncionalidad del papel de la crisis, ya que impulsa la composición del capital, lo que se rige en una presión extra para la modificación del patrón de distribución de la renta.
    Keywords: Rentabilidad ; crisis ; acumulación ; México ; composición del capital
    Date: 2006–10–04
  46. By: Schøler, Finn (Department of Management Science and Logistics, Aarhus School of Business)
    Abstract: This paper deals with the accrual anomaly first documented by Sloan (1996), i.e. the finding that the stock market prices appear to overweigh the role of accruals persistence and under-weigh the role of operating cash flow persistence. In an analysis based on Danish financial statement data it is demonstrated that different specific components of earnings have significantly different earnings persistence characteristics and that these differences are not fully reflected in share prices. <p> In the analysis presented here the earnings persistence effect of two particular unexpected accrual components are specifically analyzed, namely the unexpected inventory accrual component and the unexpected accounts receivable accrual component, i.e. changes in accruals not motivated by corresponding changes in company activity-level. Additionally and for comparison, the accounting accruals are split into expected and unexpected accruals, estimated by the extended Jones model like in both some US-analyses and some international studies of the accrual anomaly phenomenon. <p> It is found that the persistence of earnings is decreasing in the magnitude of the unexpected accrual components of earnings and that the persistence of current earnings performance is particularly decreasing in the magnitude of unexpected changes in inventory. The special accrual parts are related to the perceptions of earnings persistence implicit in the market prices, and it is found that the differences in earnings persistence are not rationally reflected by share price differences
    Keywords: Discretionary accruals; Earnings management; Earnings Persistence; Accrual anomaly;
    Date: 2006–06–26
  47. By: Ji, Gang (BOFIT)
    Abstract: This study investigates the economic consequences of cross-listing on the Chinese stock market. We argue that by adopting a higher disclosure standard through cross- listing firms voluntarily commit themselves to reducing information asymmetry. As a result, cross-listed firms are able to benefit from growth opportunities with less appropriated cash flow and lower cost of capital. The empirical evidence shows that cross-listed firms indeed command higher valuations than their non-cross-listed counterparts, after controlling for certain firm-specific attributes. This lends support to the corporate governance hypothesis of cross-listing on the Chinese stock market. The study also argues that an overall upgrad-ing of accounting standards cannot substitute for the cross-listing mechanism.
    Keywords: corporate governance; listing; China
    Date: 2005–11–11
  48. By: David-Jan Jansen; Jakob de Haan
    Abstract: We examine the usefulness of communication by the European Central Bank for predicting its interest rate decisions. We use ordered probit models based on the Taylor rule which we estimate using statements by ECB officials as well as macroeconomic variables. Statements by ECB officials on the main refinancing rate and future inflation are significantly related to ECB decisions. However, an out-of-sample evaluation shows that communication-based models do not outperform models based on macroeconomic data in predicting decisions. Both sets of models only accurately predict decisions to leave interest rates unchanged.
    Keywords: ECB communication, interest rate decision, Taylor rule, ordered probit models
    JEL: E43 E52 E58
    Date: 2006
  49. By: Égert, Balázs (Oesterreichische Nationalbank)
    Abstract: This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands.
    Keywords: Balassa-Samuelson; Dutch Disease; Bulgaria; Croatia; Romania; Russia; Ukraine; Turkey
    JEL: E31 O11 P17
    Date: 2005–06–27
  50. By: Yiannis Kamarianakis (Institute of Applied and Computational Mathematics, Foundation for Research and Technology, Greece); Anastasios Xepapadeas (Department of Economics, University of Crete)
    Abstract: The vast majority of research related to optimal asset allocation strategies in the presence of transaction costs, requires formulation of highly sophisticated numerical schemes for the estimation of no-transaction bands; moreover, the optimization objectives examined are far less compared to the number of works that assume frictionless trading. In this article, we point out that an investor may alternatively try to track a constant allocation strategy as derived under the frictionless markets hypothesis and any optimization objective, by applying a loss function that reflects his/her risk preferences. We focus in the two-asset case (one riskless and one risky) and assume a fixed cost per transaction plus a cost proportional to the change in the risky fraction process. Using a recently proposed transformation of the risky fraction process by Nagai (2005), we derive optimal rebalancing policies for the quadratic loss case, using two alternative methods. First, we calculate no transaction bands for investors who choose the boundaries of the bands and their optimal rebalancing actions so that they minimize long run cost per unit time. The latter is defined as the expected cost per transaction cycle (opportunity cost/tracking error plus transaction cost) divided by the expected cycle time. In the second case, the objective is to minimize the expected discounted squared tracking error plus discounted transaction costs over an infinite horizon. On that purpose, similar to Suzuki and Pliska (2004), we use impulse control theory in a continuous-time, dynamic setting and characterize the optimal strategy in terms of a quasi-variational inequality. For both formulations, we derive explicit solutions, which we use to perform sensitivity analysis for the control bands with respect to the market parameters and the magnitude of the transaction costs.
    Keywords: risky fraction process, stochastic impulse controls, control bands, quasi-variational inequalities
    JEL: C53 G21 G28
    Date: 2006–05
  51. By: Tobias Lindhe; Jan Södersten
    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 size 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
  52. By: Dominique M. Gross; Nicolas Schmitt
    Abstract: With a focus on the role of cultural clustering and income distribution, this paper investigates whether standard determinants influence international migration of workers to France with the same intensity across different skill levels and with or without free mobility. We find that low-skill migrants respond to most push and pull migration factors. High-skill migrants however respond only to financial incentives and cultural clustering does not matter. Migration policy is effective at controlling flows of low-skill migrants but free mobility has no impact on high-skill flows. Hence, France must rely on growing earnings and skill-premium to attract high-skill workers from high income countries.
    JEL: F22 J24 O24
    Date: 2006
  53. By: Paolo Panteghini
    Abstract: The evidence shows that in most countries the present value of depreciation allowances is less than 100% of the cost of capital. In this article we use a real-option model with debt financing, and show that less favorable depreciation allowances are offset by tax benefits arising from debt financing. Allowing partial deduction of capital cost is thus a necessary condition for investment neutrality to hold.
    Keywords: capital structure, irreversibility, real options and taxation
    JEL: D92 G33
    Date: 2006
  54. By: Sean Holly; M. Hashem Pesaran; Takashi Yamagata
    Abstract: In this paper we model the dynamic adjustment of real house prices using data at the level of US States. We consider interactions between housing markets by examining the extent to which real house prices at the State level are driven by fundamentals such as real income, as well as by common shocks, and determine the speed of adjustment of house prices to macroeconomic and local disturbances. We take explicit account of both cross sectional dependence and heterogeneity. This allows us to find a cointegrating relationship between house prices and incomes and to identify a small role for real interest rates. Using this model we examine the role of spatial factors, in particular the effect of contiguous states by use of a weighting matrix. We are able to identify a significant spatial effect, even after controlling for State specific real incomes, and allowing for a number of unobserved common factors.
    Keywords: House Price, Cross Sectional Dependence, Spatial Dependence
    JEL: C21 C23
    Date: 2006–09
  55. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: In recent years, some papers hav tried to bridge the gap between the two main approaches in credit risk modelling: structural and reduced form models. Based on incomplete information versions of standard structural models, they are able to obtain reduced form models in which the intensity of default is not given exogenously but determined endogenously within the model and it is a function of the firm's characteristics and the level of informtion that investors posses. They key element to link both approaches lies in the model's information assumptions. Using a specification of a structural model where investors do not have complete information about the dynamics of the processes which trigger the firm's default, these models derive a cumulative rate of default consistent with a reduced form model. This paper pretends to be an introduction to this literature, providing some of basic insights of the modelling structure and the main conclusion and results.
    Date: 2006–04
  56. By: Annamaria Lusardi (Dartmouth College and NBER); Olivia S. Mitchell (University of Pennsylvania and NBER)
    Abstract: We compare wealth holdings across two cohorts of the Health and Retirement Study: the early Baby Boomers in 2004, and individuals in the same age group in 1992. Levels and patterns of total net worth have changed relatively little over time, though Boomers rely more on housing equity than their predecessors. Most important, planners in both cohorts arrive close to retirement with much higher wealth levels and display higher financial literacy than non-planners. Instrumental variables estimates show that planning behavior can explain the differences in savings and why some people arrive close to retirement with very little or no wealth.
    Keywords: Wealth Holdings, Housing Wealth, Lack of Planning, Literacy, Cohorts
    JEL: D91 E21
    Date: 2006–09–28
  57. By: Marcel Marekwica; Raimond Maurer; Steffen Sebastian
    Date: 2006–08
  58. By: Elisabetta Iossa (Brunel University); Giuliana Palumbo (Bank of Italy)
    Abstract: Credit purchases of consumer goods are commonly made upon terms governed by an agreement between the lender and the seller. This type of purchase is generally subject to a legal principle of joint responsibility under which the lender and the seller are jointly liable to the consumer for breach of the sale contract by the seller. We study the rationale for this principle in situations where market failure arises because consumers under estimate the risk of product failure - for example due to selle rmisrepresentation - and it is difficult to enforce seller responsibility. We show that joint responsibility increases welfare and reduces the incentives of sellers to misrepresent the quality of their products.
    Keywords: consumer credit, lender liability, misrepresentation, overoptimism, product failure
    JEL: D18 G28 K13
    Date: 2006–09
  59. By: Thiess Buettner (Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Mannheim, Germany); Michael Overesch (ZEW, L 7,1 D-68161 Mannheim, Postfach 103443 D-68034); Ulrich Schreiber (Mannheim University and ZEW, Mannheim Business School, L 5, 6, 68131 Mannheim, Deutschland); Georg Wamser (Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Mannheim, Germany)
    Abstract: This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.
    Keywords: Corporate Income Tax, Multinationals, Leverage, Thin-Capitalization Rules, Firm-Level Data
    JEL: H25 H26 G32
    Date: 2006–09
  60. By: Abel Elizalde (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This report reviews the structural approach for credit risk modelling, both considering the case of a single firm and the case with default dependences between firms. In the single firm case, we review the Merton (1974) model and first passage models, examining their main characteristics and extensions. Liquidation process models extend first passage models to account for the possibility of a lengthy liquidation process which might or might not end up in default. Finally, we review structural models with state dependet cash flows (recession vs. expansion) or debt coupons (ratingbased). The estimation of structural models is addressed, covering the different ways proposed in the literature. In the second part of the text, we present some approaches to model default dependences between firms. They account for two types of default correlations: cyclical default correlation and contagion effects. We close the paper with a brief mention of factor models. The paper pretends to be a guide to the literature, providing a comprehensive list of references and, along the way, suggesting different possible extensions for its furure development.
    Date: 2006–04
  61. By: Jérôme Blanc (LEFI - Laboratoire d'économie de la firme et des institutions - [Université Lumière - Lyon II])
    Abstract: Although today's main organisation principle of monetary spaces is the nation-state's one, everyone can see it is not totally the case because of the existence and the development of local and social currencies and other sorts of parallel currencies. European history gives very useful lessons on this matter. One can distinguish, indeed, three historical periods : firstly, an “old regime” with a great diversity of money, including forms of local currencies ; secondly, the building of nation states and, consequently, what Benjamin Cohen (1998) calls a “westphalian model of geography of money”, centred on the principle of one nation, one money, excluding local currencies different from national currencies ; thirdly, the contesting of such a regime of monetary sovereignty. European history gives, then, evidences that the contemporary dynamics of local currencies is not a new one, but that it is undoubtedly the most important of the third period. <br />European history leads however to make significant differences between forms of monetary localisms. Those differences are analyzed within the following framework. First, we have to make a distinction between the nature of issuers : public authorities, groups of citizens, businesses and banks. Monetary localisms before the Westphalian era were mainly organized by public authorities (lords) and religious orders, whereas today's monetary localisms mainly come from citizens and businesses (except from emergency issues and secessions logics). Second, we have to make a distinction between the rationales for monetary localisms : sovereignty, seignoriage and financing needs, protecting spaces, revitalizing spaces, transforming the nature of exchanges and money. Monetary localisms before the Westphalian era were mainly organized in order to capture money and dynamize spaces, whereas one can find the four rationales in today's monetary localisms. <br />The paper, after presenting the analytical framework, concentrates on three sorts of local currencies : local currencies as a result of necessities, local currencies issued by banks and local currencies aiming to change money. It concludes on the differences between local currencies in European history and contemporary local currencies.
    Keywords: Local currencies;monetary history;Europe;Owen;Gesell;Banks of issue
    Date: 2006–10–03
  62. By: Julie A. Nelson
    Abstract: Feminist scholars examine not only the gendered impacts of development programs whose design has been influenced by disciplines such as economics, but also the gendered biases that permeate the models and methods of the disciplines themselves. This essay draws on aspects of feminist critiques of economics, philosophy, psychology, law, and finance to analyze the way in which international debt is discussed. Feminist critiques raise serious questions about the rational choice framework that often undergirds scholarly discussions of “agents,” “contract,” “ethics,” and “capital and debt.”
  63. By: Sudhir A. Shah (Delhi School of Economics)
    Abstract: Pratt (1964) and Yaari (1969) contain the classical results pertaining to the equivalence of various notions of comparative risk aversion of von Neumann-Morgenstern utilities in the setting with real-valued outcomes. Some of these results have been extended to the setting with outcomes in < n . We obtain ana-logues of the classical results in the setting with outcomes in ordered topological vector spaces when differentiability is not required, and in the setting with out-comes in ordered Hilbert spaces when differentiability is required, as is the case when we work with a vector-valued generalized notion of an Arrow-Pratt coeffi-cient.
    Keywords: Comparative risk aversion, vector space of outcomes, acceptance set, vector-valued risk premia, vector-valued Arrow-Pratt coefficient, Pettis integral, ordered topological vector spaces, ordered Hilbert spaces
    JEL: D01 D81
    Date: 2006–09

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