nep-fmk New Economics Papers
on Financial Markets
Issue of 2006‒10‒21
sixty-six papers chosen by
Carolina Valiente
London South Bank University

  1. Bank interest rates in a small European economy: Some exploratory macro level analyses using Finnish data By Kauko , Karlo
  2. The role of comparing in financial markets with hidden information By Niinimäki, Juha-Pekka; Takalo, Tuomas; Kultti, Klaus
  3. Pricing risky bank loans in the new Basel II environment By Hasan, Iftekhar; Zazzara, Cristiano
  4. Volatility in International Financial Market Issuance: The Role of the Financial Center By Marco Cipriani; Graciela L. Kaminsky
  5. The transparency of the banking industry and the efficiency of information-based bank runs By Chen, Yehning; Hasan, Iftekhar
  6. Legislation, investor protection and financial growth By Rainio, Elina
  7. Financial Liberalisation and Breaks in Stock Market Volatility: Evidence from East Asia By Panicos Demetriades; Michail Karoglou; Siong Hook Law
  8. Why do bank runs look like panic? A new explanation By Chen, Yehning; Hasan, Iftekhar
  9. The value of information in a multi-agent market model By Toth, Bence; Scalas, Enrico; Huber, Juergen; Kirchler, Michael
  10. Money market volatility, A simulation study By Kempa , Michal
  11. The Financial Services Authority : A Model of Improved Accountability? By Ojo, Marianne
  12. Why the marginal MRO rate exceeds the ECB policy rate? By Välimäki , Tuomas
  13. The demand for money market mutual funds By Kauko , Karlo
  14. The cyclical behaviour of European bank capital buffers By Jokipii, Terhi; Milne , Alistair
  15. The Threat of Capital Drain: A Rationale for Public Banks? By Hendrik Hakenes; Isabel Schnabel
  16. Adaptive learning in an expectational difference equation with several lags: selecting among learnable REE By Bask, Mikael
  17. Relationship lending and competition: Higher switching cost does not necessarily imply greater relationship benefits By Vesala , Timo
  18. Banking fragility and distress: An econometric study of macroeconomic determinants By Pesola , Jarmo
  19. Individual Investor Sentiment and Stock Returns - What Do We Learn from Warrant Traders? By Schmitz, Philipp; Glaser, Markus; Weber, Martin
  20. Financial Distress and Idiosyncratic Volatility: An Empirical Investigation By Chen, Jing; Chollete, Lorán
  21. La complémentarité des banques et des microbanques dans une approche de la comptabilité des flux et des stocks By SODOKIN, Koffi
  22. Announcement effects on exchange rate movements: continuity as a selection criterion among the REE By Bask , Mikael
  23. Fundamentals and technical trading: behaviour of exchange rates in the CEECs By Bask , Mikael; Fidrmuc , Jarko
  24. Cross-border Listings, Capital Controls, and Equity Flows To Emerging Markets By Hali J. Edison; Francis E. Warnock
  25. Contagion and interdependence: measuring CEE banking sector co-movements By Jokipii , Terhi; Lucey, Brian
  26. Exchange rate volatility without the contrivance of fundamentals and the failure of PPP By Bask, Mikael
  27. Identifying the interdependence between US monetary policy and the stock market By Bjørnland , Hilde; Leitemo, Kai
  28. The effect of a transaction tax on exchange rate volatility By Lanne , Markku; Vesala , Timo
  29. Pricing Implications of Shared Variance in Liquidity Measures By Chollete, Lorán; Næs, Randi; Skjeltorp, Johannes A.
  30. Open market operations: beyond the new consensus By Toporowski , Jan
  31. A wavelet analysis of scaling laws and long-memory in stock market volatility By Vuorenmaa , Tommi
  32. Ageing, interest rates, and financial flows By Saarenheimo , Tuomas
  33. Robust volatility forecasts and model selection in financial time series By L. Grossi; G. Morelli
  34. Social Security and Risk Sharing By Piero Gottardi; Felix Kubler
  35. Policy words and policy deeds: the ECB and the euro By Siklos, Pierre; Bohl , Martin
  36. The mixed oligopoly of cross-border payment systems By Kauko, Karlo
  37. A Dozen Consistent CAPM-Related Valuation Models - So Why Use the Incorrect One? By Ekern, Steinar
  39. A Note on a Barrier Exchange Option: The World’s Simplest Option Formula? By Lindset, Snorre; Persson, Svein-Arne
  40. Optimal contracts under imperfect enforcement revisited By Hvide, Hans K.
  41. General Equilibrium Model of Arbitrage Trade and Real Exchange Rate Persistence By Berka, Martin
  42. Non-exclusivity and adverse selection: An application to the annuity market By Agar Brugiavini; Gwenaël Piaser
  43. La Curva de Retorno y el Modelo C-CAPM: Evidencia para Chile By González, Manuel
  44. International economic spillovers and the liquidity trap By Tarkka , Juha; Kortelainen , Mika
  45. Assessing effects of price regulation in retail payment systems By Kemppainen , Kari
  46. Investment Lilberalization - Why a Restrictive Cross-Border Merger Policy can be Counterproductive By Norbäck, Pehr-Johan; Persson, Lars
  47. What's in it for us? Network effects and bank payment innovation By Milne , Alistair
  48. The Interplay between Money Market Development and Changes in Monetary Policy Operations in Small European Countries, 1980–2000 By Forssbaeck, Jens; Oxelheim, Lars
  49. Outside options: Another reason to choose the first-price auction. By Oliver Kirchkamp,; Eva Poen,; Philipp Reiß
  50. Producer Prices in the Transition to a Common Currency By Andrén, Niclas; Oxelheim, Lars
  51. Subsidies and Sustainability in Microfinance. By Marek Hudon; Daniel Traca
  52. Using Option Pricing Theory to Infer About Equity Premiums By Aase, Knut K.
  53. Forecasting and testing a non-constant volatility By Abramov, Vyacheslav; Klebaner, Fima
  54. Baby Boomer Retirement Security: the Roles of Planning, Financial Literacy, and Housing Wealth By Annamaria Lusardi; Olivia S. Mitchell
  55. National Survey Evidence on Disasters and Relief: Risk Beliefs, Self-Interest, and Compassion By W. Kip Viscusi; Richard J. Zeckhauser
  56. Expectations in first-price auctions By Oliver Kirchkamp,; Philipp Reiß
  57. Dependence on external finance: an inherent industry characteristic? By von Furstenberg, George M.; von Kalckreuth, Ulf
  58. La fonction monétaire des institutions de microfinance et leurs relations de complémentarité avec les banques officielles dans les pays en développement By SODOKIN, Koffi
  59. Efficient Statistical Equilibria in Markets By Jörnsten, Kurt; Ubøe, Jan
  60. The Nonequivalence of the Earnings and Dividends Approaches to Equity Valuation By Stecher, Jack D.
  61. The perpetual American put option for jump-diffusions with applications By Aase, Knut K.
  62. Forecasting with a forward-looking DGE model: combining long-run views of financial markets with macro forecasting By Männistö , Hanna-Leena
  63. Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  64. A note on a new interpretation for the precautionary saving motive By M. Menegatti
  65. Standard setting and competition in securities settlement By Milne , Alistair
  66. Restricción de balanza de pagos y vulnerabilidad externa en la argentina de los noventa. Un análisis de caso By Fugarolas Álvarez-Ude, Guadalupe; Matesanz Gómez, David

  1. By: Kauko , Karlo (Bank of Finland Research)
    Abstract: This paper presents econometric analyses on the determination of bank deposit and lending rates using longitudinal Finnish data. Interest rate pass-through is very strong, possibly complete, in the case of lending rates; in the case of deposit rates the pass-through is far from complete, even in the long term. The monetary union has benefited customers by decreasing the average rate on new loans. Credit and interest rate risk premiums are clearly observable in banks' lending rates. The impact of money market rates on loan stock rates seems to have been non-linear; no obvious explanation for this phenomenon has been found.
    Keywords: banking; interest rates
    JEL: E43 E44 G21
    Date: 2005–05–11
  2. By: Niinimäki, Juha-Pekka (Department of Economics, Helsinki School of Economics); Takalo, Tuomas (Bank of Finland Research); Kultti, Klaus (Department of Economics, University of Helsinki)
    Abstract: This paper studies how comparing can be used to provide information in financial markets in the presence of a hidden characteristics problem. Although an investor cannot precisely estimate the future returns of an entrepreneur’s projects, the investor can mitigate the asymmetric information problem by ranking different entrepreneurs and financing only the very best ones. Information asymmetry can be eliminated with certainty if the number of compared projects is sufficiently large. Because comparing favours centralised information gathering, it creates a novel rationale for the establishment of a financial intermediary.
    Keywords: asymmetric information; banking; corporate finance; financial intermediation; ranking; venture capital
    JEL: G21 G24
    Date: 2006–01–01
  3. By: Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland); Zazzara, Cristiano (CAPITALIA Banking Group, University “Luiss-Guido Carli”, École Polytechnique Fédérale de Lausanne)
    Abstract: Recently, banking literature has had a quest for appropriate pricing of bank loans under the new Basel II rules and has been in pursuit of possible outcomes for undertaking such credit risk. In this paper, we propose a simplified formula to price bank’s corporate loans, aiming at making bank managers aware of the creation/destruction of shareholder value. We show that the mathematical treatability of the proposed formula and its easy feeding with internal and market inputs allow simple implementation by the final user.
    Keywords: Basel II; rating; pricing; exposure at default; EVA
    JEL: C63 G12 G21 G28
    Date: 2006–04–18
  4. By: Marco Cipriani; Graciela L. Kaminsky
    Abstract: We study the pattern of volatility of gross issuance in international capital markets since 1980. We find several short-lived episodes of high volatility. Over the long run, however, volatility has declined, suggesting that international financial integration has not made financial markets more erratic. We use VAR analysis to examine the determinants of the time-varying pattern of volatility, focusing in particular on the role of financial centers. Our results suggest that a significant portion of the decline in volatility of issuance in international capital markets can be explained by the reduction in the volatility of U.S. interest rates.
    JEL: F3
    Date: 2006–10
  5. By: Chen, Yehning (National Taiwan University); Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland)
    Abstract: In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit con-tract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An im-provement in transparency of a bank may reduce depositor welfare through increasing the chance of an inefficient contagious bank run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers’ control over the timing of information disclosure, and find that they may lack the incentive to reveal in-formation about their banks.
    Keywords: bank run; contagion; transparency; market discipline; deposit insurance
    JEL: G21 G28
    Date: 2005–10–11
  6. By: Rainio, Elina (Bank of Finland Research)
    Abstract: According to recent law and finance research, legislation is essential to financial development. More effi-cient financial markets would be achieved by reforming the laws governing investor protection and cor-porate governance systems. The Companies Act has traditionally played a very important role in the Fin-nish regulation of firms and financial markets. Nevertheless, the concrete effects of the Finnish corporate law have never before been examined properly. The aim of this study is to investigate the effects of the previous extensive reform of the Companies Act in 1980. The reform improved both shareholder and creditor rights, but the level of creditor rights rose substantially higher than the level of shareholder rights measured by different indices. The impact on stock returns was assessed by examining how news reports on the reform affected returns during the 1970s. Only the most important news had a significant impact on the returns. Otherwise there were no big surprises in the reform process and the stock prices adjusted efficiently to the new information relating to the small and closed financial markets.
    Keywords: companies act; financial markets; investor protection; news; corporate governance
    JEL: G14 G32 G38
    Date: 2006–10–10
  7. By: Panicos Demetriades; Michail Karoglou; Siong Hook Law
    Abstract: This paper employs several newly proposed techniques to identify the number and timing of structural breaks in the variance dynamics of stock market returns. These techniques are applied to five East Asian emerging markets, all of which liberalised their financial markets during the period under consideration. It is shown that the detected breakdates in the volatility of stock market returns do not correspond to official liberalisation dates; as a result the use of official liberalisation dates as breakdates is likely to result in inaccurate inference. By using data driven techniques to detect multiple structural changes a richer - and inevitably more accurate - pattern of volatility dynamics emerges in comparison to focussing on official liberalisation dates.
    Date: 2006–10
  8. By: Chen, Yehning (National Taiwan University); Hasan, Iftekhar (Rensselaer Polytechnic Institute and Bank of Finland.)
    Abstract: This paper demonstrates that, even if depositors are fully rational and always choose the Pareto dominant equilibrium when there are multiple equilibria, a bank run may still occur when depositors’ expectations of the bank’s fundamentals do not change. More specifically, a bank run may occur when depositors learn that noisy bank-specific information is revealed, or when they learn that precise bank-specific information is not revealed. The results in this paper are consistent with empirical evidence about bank runs. It also implies that suspension of convertibility can improve the efficiency of bank runs.
    Keywords: bank run; banking panic; suspension of convertibility
    JEL: G21 G28
    Date: 2006–09–27
  9. By: Toth, Bence; Scalas, Enrico; Huber, Juergen; Kirchler, Michael
    Abstract: We present an experimental and simulated model of a multi-agent stock market driven by a double auction order matching mechanism. Studying the effect of cumulative information on the performance of traders, we find a non monotonic relationship of net returns of traders as a function of information levels, both in the experiments and in the simulations. Particularly, averagely informed traders perform worse than the non informed and only traders with high levels of information (insiders) are able to beat the market. The simulations and the experiments reproduce many stylized facts of stock markets, such as fast decay of autocorrelation of returns, volatility clustering and fat-tailed distribution of returns. These results have an important message for everyday life. They can give a possible explanation why, on average, professional fund managers perform worse than the market index.
    Keywords: Economics; econophysics; financial markets; business and management; information theory and communication theory
    JEL: C63 C00 G14
    Date: 2006–10–04
  10. By: Kempa , Michal (RUESG, University of Helsinki and Bank of Finland)
    Abstract: This paper analyses different operational central bank policies and their impact on the behaviour of the money market interest rate. The model combines profit maximising behaviour by commercial banks with the central bank supplying the liquidity that keeps the market rate on target. It seems that frequent liquid-ity supplying operations represent an efficient tool to control money market rates. An averaging provision reduces the use of standing facilities and interest rates volatility in all days except for the last day of the maintenance period. Whenever banks have different maintenance horizons both the spikes in volatility and use of standing facilities disappear. The paper also compares two different liquidity supply policies and finds that the level of liquidity necessary to keep the rates on target depends on not only the aggregate but also assets values of individual banks.
    Keywords: Interbank market; interest rate volatility; central bank procedures; open market operations
    JEL: E43 E44 E52
    Date: 2006–06–12
  11. By: Ojo, Marianne
    Abstract: Prior to the adoption of the FSA (Financial Services Authority) model, supervision of UK banks was carried out by the Bank of England. Although the Bank of England's informal involvement in bank supervision dates back to the mid nineteenth century, it was only in 1979 that it acquired formal powers to grant or refuse authorization to carry out banking business in the UK. Events such as the Secondary Banking Crisis of 1973-74 and the Banking Coordination Directive of 1977 resulted in legislative changes in the form of the Banking Act 1979. Bank failures through the following years then resulted in changes to the legislative framework. This article looks into the claim that the FSA model has improved in terms of accountability in comparison to its predecessor, the Bank of England. It considers the impact the FSA has made on the financial services sector and on certain legislation since its introduction. Through a comparison with the Bank of England, previous and present legislation, reports and other sources, an assessment can be made as to whether the FSA provides more accountability. Evidence provided here supports the conclusion that the FSA is both equipped with better accountability mechanisms and executes its functions in a more accountable way than its predecessor.
    Keywords: regulators; accountability; supervision; financial; services
    JEL: G28
    Date: 2005–11
  12. By: Välimäki , Tuomas (Bank of Finland)
    Abstract: In the Eurosystem, banks’ interest rate expectations should no longer have resulted in a non-zero tender spread, the difference between marginal and minimum price for liquidity, when the ECB reformed its op-erational framework for monetary policy implementation in March 2004 so that the policy rates remain constant within reserves maintenance periods. Yet, the tender spread was wider in 2005 than in any single year after 2000, when the ECB switched from fixed to variable rate tenders. Parts of the relevant literature have argued that because of the ECB’s asymmetric preferences over deviations of the market rates up and down from the policy rate, the shortest euro interest rates persistently exceed the policy rate This paper argues, however, that when the central bank applies a quantity oriented liquidity policy, a positive tender spread may result from money market inefficiencies and banks’ risk aversion even if the central bank preferences are symmetric and the markets do not anticipate any changes in the policy rates. In such a case, the driving force behind the tender spread is banks’ uncertainty about their individual allotments at the marginal rate for the Eurosystem main refinancing operations (MROs). Furthermore, the allotment uncertainty is shown to be significantly related to the amount of liquidity supplied in each operation. Hence, the expansion in the MRO volumes experienced since 2002 may have had a major contribution to the emergence and observed growth of the tender spread.
    Keywords: main refinancing operations; liquidity; tender spread; allotments
    JEL: D44 E58
    Date: 2006–10–03
  13. By: Kauko , Karlo (Bank of Finland Research)
    Abstract: This paper presents a model on the demand for money market funds (MMFs). These funds are a very close substitute for M1 deposits, except that MMFs do not satisfy immediate transaction requirements. The demand for MMFs strengthens when the intended volume of transactions is low. A high interest rate level makes it expensive to hold M1 deposits. High interest rate volatility, paradoxically, increases the risk of holding M1 deposits stronger than the risk of holding MMFs. The results are largely corroborated by Finnish data.
    Keywords: money market mutual funds; money demand
    JEL: E41 G23 G29
    Date: 2005–07–11
  14. By: Jokipii, Terhi (Bank of Finland Research); Milne , Alistair (Bank of Finland and Cass Business School London)
    Abstract: Using an unbalanced panel of commercial, savings and co-operative banks for the years 1997 to 2004 we examine the cyclical behaviour of European bank capital buffers. After controlling for other potential de-terminants of bank capital, we find that capital buffers of the banks in the accession countries (RAM) have a significant positive relationship with the cycle, while for those in the EU15 and the EA and the combined EU25 the relationship is significantly negative. We additionally find fairly slow speeds of ad-justment, with around two-thirds of the correction towards desired capital buffers taking place each year. We further distinguish by type and size of bank, and find that capital buffers of commercial and savings banks, and also of a sub-sample of large banks, exhibit negative co-movement. Co-operative banks and smaller banks on the other hand, tend to exhibit positive cyclical co-movement.
    Keywords: bank capital; bank regulation; business cycle fluctuations
    JEL: G21 G28
    Date: 2006–09–27
  15. By: Hendrik Hakenes (Max Planck Institute for Research on Collective Goods, Bonn); Isabel Schnabel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This paper yields a rationale for why subsidized public banks may be desirable from a regional perspective in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through a public guarantee. Under some conditions, cooperative banks can perform the same function without any subsidization; however, they may be crowded out by public banks. We also discuss the impact of the political structure on the emergence of public banks in a political-economy setting and the role of interregional mobility.
    Keywords: Public banks, cooperative banks, capital drain, credit rationing, financial integration, privatization
    JEL: G21 F36 H11 L33
    Date: 2006–04
  16. By: Bask, Mikael (Bank of Finland Research)
    Abstract: It is demonstrated in this paper that adaptive learning in least squares sense may be incapable to reduce, in a satisfactory way, the number of attainable equilibria in a rational expectations model. The model inves-tigated, as an illustration, is the monetary approach to exchange rate determination that is augmented with technical trading in the currency market in the form of moving averages since it is the most commonly used technique according to questionnaire surveys. Because of technical trading in foreign exchange, the current exchange rate is dependent on jmax lags of the exchange rate, and the model has, therefore jmax + 1 nonbubble rational expectations equilibria (REE), where most of them are adaptively learnable. Howe-ver, by assuming that a solution to the model should have a solution to a nested model as its limit, it is possible to single out a unique equilibrium among the adaptively learnable equilibria that is economically meaningful.
    Keywords: asset pricing; heterogenous agents; least squares learnability; rational expectations equilibria and technical trading
    JEL: C62 F31 G12
    Date: 2006–06–07
  17. By: Vesala , Timo (RUESG, University of Helsinki)
    Abstract: This paper studies relationship lending in a framework where the cost of switching banks measures the degree of banking competition. The relationship lender’s (insider bank’s) informational advantage creates a lock-in effect, which is at its height when the switching cost is infinitesimal. This is because a low switching cost gives rise to a potential adverse selection problem, and outsider banks are thus reluctant to make overly aggressive bids. This effect gradually fades as the magnitude of the switching cost increases, which de facto reduces the insider bank’s profits. However, after a certain threshold in the switching cost, the insider bank’s ‘mark-up’ begins to increase again. Hence, relationship benefits are a non-monotonous (V-shaped) function of the switching cost. The ‘dynamic implication’ of this pattern is that relationship formation should be more common under extreme market structures ie when the cost of switching banks is either very low or sufficiently high. Recent empirical evidence lends support to this prediction.
    Keywords: relationship lending; switching cost; banking competition
    JEL: D43 D82 G21 G24
    Date: 2005–02–13
  18. By: Pesola , Jarmo (Bank of Finland Research)
    Abstract: The macroeconomic determinants of banking sector distresses in the Nordic countries, Belgium, Ger-many, Greece, Spain and the UK are analysed using an econometric model estimated on panel data from partly the early 1980s to 2002. The dependent variable is the ratio of banks’ loan losses to lending. In ad-dition to the lagged dependent variable, the explanatory variables include a surprise change in incomes and real interest rates, both variables as a separate cross-product term with lagged aggregate indebtedness. The underlying macroeconomic account that this paper puts forward is that loan losses are basically gen-erated by strong adverse aggregate shocks under high exposure of banks to such shocks. The underlying innovations to income and real interest rates are constructed using published macro-economic forecast for these variables. According to the results, high customer indebtedness combined with adverse macroeco-nomic surprise shocks to income and real interest rates contributed to the distress in banking sector. Loan losses also display strong autoregressive behaviour which might indicate a feedback effect from loan losses back to macroeconomic level in deep recessions. The results can be used in macro stress-testing the banking sector.
    Keywords: financial fragility; shock; loan loss; banking crisis
    JEL: E44 G21
    Date: 2005–07–11
  19. By: Schmitz, Philipp (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre); Glaser, Markus (Sonderforschungsbereich 504); Weber, Martin (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)
    Abstract: In this paper, we propose a measure of individual investor sentiment that is derived from the market for bank-issued warrants. Due to a unique warrant transaction data set from a large discount broker we are able to calculate a daily sentiment measure and test whether individual investor sentiment is related to daily stock returns by using vector autoregressive models and Granger causality tests. We find that there exists a mutual influence of sentiment and stock market returns, but only in the very short-run (one and two trading days). Returns have a negative influence on sentiment, while the influence of sentiment on returns is positive for the next trading day. The influence of stock market returns on sentiment is stronger than vice versa. Our sentiment measure simultaneously avoids problems that are associated with existing sentiment measures, which are based on the closed-end fund discount, stock market transactions, the put-call ratio or investor surveys.
    Date: 2006–10–05
  20. By: Chen, Jing (Columbia University, Graduate School of Business); Chollete, Lorán (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We address the twin puzzles of anomalously low returns for high idiosyncratic volatility and high distress risk stocks, documented by Ang, Hodrick, Xing and Zhang (2006) and Campbell, Hilscher and Szilagyi (2005), respectively. We accomplish two objectives in this study. First, we investigate the link between idiosyncratic volatility and distress risk and find that the idiosyncratic volatility effect exists only conditionally on high distress risk. Second, using a corrected single-beta CAPM model, we provide a rational explanation for the twin puzzles. Joint statistical tests cannot reject the null hypothesis of zero abnormal returns across the idiosyncratic volatility and distress risk portfolios, for the corrected model.
    Keywords: Distress risk; idiosyncratic volatility; single-beta CAPM
    JEL: C12
    Date: 2006–08–04
  21. By: SODOKIN, Koffi (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: L'objectif de ce papier est de démontrer les relations complémentaires entre les banques officielles (les banques) et les institutions de microfinance (les microbanques) dans un modèle flux-stock initialement proposé par Godley et Lavoie. Nous montrons que les banques officielles accommodent conjointement avec les microbanques les demandes de financement des coûts de production des firmes et des microfirmes jugées solvables dans les pays en développement (P.E.D). En conséquence, dans les économies contemporaines des pays les moins avancés, le système bancaire est à deux paliers avec une structure atypique. Un premier palier constitué par la Banque Centrale qui harmonise l'ensemble du système de paiement, un second palier constitué de deux catégories de banques. La première catégorie est constituée des banques commerciales officielles (les banques) et une deuxième catégorie constituée des banques de facto (les microbanques). Les banques et les microbanques jouent un rôle central dans le processus macroéconomique de production des revenus en coordonnant conjointement les anticipations et les actions des différents secteurs économiques des P.E.D. / This paper aims to show complementary of official banks and microbanks in a stock-flow accounting framework initially proposed by Godley and Lavoie. We show that the official banks and microbanks finance the production costs of credits worthy firms and microfirms in Low Developing Countries (LDCs). Consequently, in the contemporary economies of LDCs, the banking system is at two stages with an atypical structure. At the first stage we have the Central Bank which harmonizes the whole payment system, and at the second stage, we have two categories of banks. The first category are the official commercial banks (banks) and the second category are the banks de facto (the microbanks). Banks and microbanks play a central role in the macroeconomic process of income generation by coordinate together anticipations and actions of the various economic sectors in LDs
    Keywords: Banques ; microbanques ; complémentarité ; flux-stock ; pays en développement ; Banks ; microbanks ; complementarity ; flow-stock ; West Africa ; Low developing countries.
    JEL: E40 E42 E44 E51 O11 O17
    Date: 2006–10
  22. By: Bask , Mikael (Bank of Finland Research)
    Abstract: The aim of this paper is to analyse the announcement effects on exchange rate movements using the basic asset pricing model, where currency trade is partly determined by technical trading in the form of moving averages since it is the most commonly used technique according to questionnaire surveys. Specifically, the announcement and implementation of temporary as well as permanent monetary policy are analysed, where the exchange rate model developed is summarised in a linear difference equation in current exoge-nous fundamentals, a large number of lags of the endogenous exchange rate and time-t dating of exchange rate expectations. However, since there are a large number of rational expectations equilibria, continuity is proposed as a selection criterion among the equilibria, meaning that the parameter for the time-t – 1 ex-change rate should have the limit 0 when there is no technical trading to have an economically meaning-ful equilibrium. It turns out that there is a unique rational expectations equilibrium that satisfy the conti-nuity criterion, and focusing on this equilibrium, it is shown that the exchange rate is much more sensitive to changes in money supply than when technical trading is absent in currency trade. This result is impor-tant since it sheds light on the so-called exchange rate disconnect puzzle in international finance.
    Keywords: asset pricing; exchange rate disconnect puzzle; heterogeneous agents; least squares learnability; monetary policy and technical trading
    JEL: E51 E52 F31 G12
    Date: 2006–06–07
  23. By: Bask , Mikael (Bank of Finland Research); Fidrmuc , Jarko (Department of Economics, University of Munich, CESifo and Comenius University in Bratislava)
    Abstract: We present a model of exchange rates, which incorporates the monetary approach and technical trading, and we present the reduced form based on the minimal state variable solution, where both fundamentals and backward-looking term determine the spot exchange rates. Finally, we estimate the impact of the monetary fundamentals for a panel of Central and Eastern European countries (Czech Republic, Poland, Romania and Slovakia) in the second half of the 1990s as well as the complete model of exchange rate determination for daily data over the more recent free-floating period.
    Keywords: foreign exchange market; fundamental analysis; panel cointegration; technical analysis
    JEL: C23 F31 F36
    Date: 2006–06–12
  24. By: Hali J. Edison; Francis E. Warnock
    Abstract: We investigate the impact of two types of financial liberalizations on short- and long-horizon capital flows to emerging markets in a framework that controls for push and pull factors. The first type of liberalization, a reduction in capital controls, is countrywide but uncertain, because its extent and permanence is not known with certainty. The second type, a cross-border listing, is a firm-level liberalization that has no uncertainty. Consistent with theoretical predictions, we find that the deterministic cross-listing results in an immediate but short-lived increase in capital inflows. In contrast, the uncertain reduction in capital controls results in increased inflows only over a longer horizon, if at all.
    JEL: F21 F3 G15
    Date: 2006–10
  25. By: Jokipii , Terhi (Bank of Finland and Trinity College Dublin); Lucey, Brian (Institute for International Integration Studies, Trinity College Dublin)
    Abstract: Making use of ten years of daily data, this paper examines whether banking sector co-movements be-tween the three largest Central and Eastern European Countries (CEECs) can be attributed to contagion or to interdependence. Our tests based on simple unadjusted correlation analysis uncover evidence of conta-gion between all pairs of countries. Adjusting for market volatility during turmoil, however, produces dif-ferent results. We then find contagion from the Czech Republic to Hungary during this time, but all other cross-market co-movements are rather attributable rather to strong cross-market linkages. In addition, we construct a set of dummy variables to try to capture the impact of macroeconomic news on these markets. Controlling for own-country fundamentals, we discover that the correlations diminish between the Czech Republic and Poland, but that coefficients for all pairs remain substantial and significant. Finally, we ad-dress the problem of simultaneous equations, omitted variables and heteroskedasticity, and adjust our data accordingly. We confirm our previous findings. Our tests provide evidence in favour of parameter insta-bility, again signifying the existence of contagion arising from problems in the Czech Republic affecting Hungary during much of 1996.
    Keywords: contagion; interdependence; macroeconomic news; banking sector; stock returns
    JEL: F30 F40 G15
    Date: 2006–07–03
  26. By: Bask, Mikael (Bank of Finland Research)
    Abstract: Since the magnitude of exchange rate overshooting may not be the same for different exchange rates of a currency, a monetary expansion or contraction in, for example, the EMU, will affect the exchange rate between the U.S. dollar and the yen, even though there are no changes in monetary fundamentals in the U.S. or Japan. This fact is demonstrated in a sticky-price monetary model due originally to Dornbusch (1976) that is enlarged with currency traders that use Chartism in the form of moving averages. It is also demonstrated that purchasing power parity (PPP) does not necessarily hold in long-run equilibrium. The-se results are interesting since, according to the empirical literature, there are often large movements in nominal exchange rates that are apparently unexplained by macroeconomic fundamentals, and there is also a weak support for PPP.
    Keywords: Chartism; foreign exchange; macroeconomic fundamentals; moving averages; overshooting and PPP
    JEL: F31 F41
    Date: 2006–10–10
  27. By: Bjørnland , Hilde (University of Oslo, Department of Economics); Leitemo, Kai (Department of Economics, Norwegian School of Management BI)
    Abstract: We estimate the interdependence between US monetary policy and the S&P 500 using structural VAR methodology. A solution is proposed to the simultaneity problem of identifying monetary and stock price shocks by using a combination of short-run and long-run restrictions that maintains the qualitative proper-ties of a monetary policy shock found in the established literature (CEE 1999). We find great interde-pendence between interest rate setting and stock prices. Stock prices immediately fall by 1.5 per cent due to a monetary policy shock that raises the federal funds rate by ten basis points. A stock price shock in-creasing stock prices by one per cent leads to an increase in the interest rate of five basis points. Stock price shocks are orthogonal to the information set in the VAR model and can be interpreted as non-fundamental shocks. We attribute a major part of the surge in stock prices at the end of the 1990s to these non-fundamental shocks.
    Keywords: VAR; monetary policy; asset prices; identification
    JEL: E43 E52 E61
    Date: 2005–07–11
  28. By: Lanne , Markku (Economics Department, European University Institute); Vesala , Timo (RUESG/Department of Economics, University of Helsinki)
    Abstract: We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange mar-kets. Our argument stems from the decentralised trading practice and the presumable discrepancy be-tween ‘informed’ and ‘uninformed’ traders’ valuations. Since informed traders’ valuations are likely to be less dispersed, a transaction tax penalises informed trades disproportionately, leading to increased volatil-ity. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transac-tion costs is found to have a significant positive effect on volatility.
    Keywords: transaction tax; exchange rates; volatility
    JEL: F31 F42 G15 G28
    Date: 2006–10–10
  29. By: Chollete, Lorán (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Næs, Randi (Norges Bank); Skjeltorp, Johannes A. (Norges Bank)
    Abstract: This paper constructs fundamental liquidity measures and investigates the pricing implications of shared variation in a large set of high frequency liquidity measures. Through a common factor analysis we estimate three orthogonal liquidity variables that statistically capture time series variation in market wide liquidity. We uncover three main results. First, we document that not one but two of the common liquidity factors are significantly related to cross-sectional differences in returns. Interestingly, the two factors are related to the time and quantity dimension of liquidity, not the price dimension. Second, and perhaps more striking, we discover substantial heterogeneity in the liquidity factors. In particular, order-based liquidity measures cannot explain return differences while trade-based liquidity measures can explain returns. This heterogeneity is borne out by asset pricing tests, which indicate substantial differences in the pricing of trade and order-based portfolios. Third, there is strong evidence of parameter instability in the pricing of liquidity.
    Keywords: Market microstructure; Common factor; Asset pricing; Liquidity factor; high frequency liquidity
    JEL: G12 G14
    Date: 2006–08–04
  30. By: Toporowski , Jan (SOAS, University of London)
    Abstract: The emergence of the New Consensus in monetary policy has been followed by a renewal of interest in central banks’ operating procedures, and specifically in the role of open market operations. There is a general view that overnight interest rates are most effectively controlled by standing or discount window facilities, rather than open market operations, and this view will probably now extend also to lender-of-last-resort intervention. The paper argues that this reduced role for open market operations is only in the context of controlling overnight rates of interest. In spite of the emphasis on control of overnight interest rates, medium and long-term interest rates remain the crucial instruments in the monetary transmission mechanism. Longer-term interest rates are susceptible to influence by open market operations, and their importance grows with financial development.
    Keywords: central banks; monetary policy; open market operations
    JEL: E52 E58
    Date: 2006–06–21
  31. By: Vuorenmaa , Tommi (Department of Economics, University of Helsinki)
    Abstract: This paper investigates the dependence of average stock market volatility on the timescale or on the time interval used to measure price changes, which dependence is often referred to as the scaling law. Scaling factor, on the other hand, refers to the elasticity of the volatility measure with respect to the timescale. This paper studies, in particular, whether the scaling factor differs from the one in a simple random walk model and whether it has remained stable over time. It also explores possible underlying reasons for the observed behaviour of volatility in terms of heterogeneity of stock market players and periodicity of in-traday volatility. The data consist of volatility series of Nokia Oyj at the Helsinki Stock Exchange at five minute frequency over the period from January 4, 1999 to December 30, 2002. The paper uses wavelet methods to decompose stock market volatility at different timescales. Wavelet methods are particularly well motivated in the present context due to their superior ability to describe local properties of times se-ries. The results are, in general, consistent with multiscaling in Finnish stock markets. Furthermore, the scaling factor and the long-memory parameters of the volatility series are not constant over time, nor con-sistent with a random walk model. Interestingly, the evidence also suggests that, for a significant part, the behaviour of volatility is accounted for by an intraday volatility cycle referred to as the New York effect. Long-memory features emerge more clearly in the data over the period around the burst of the IT bubble and may, consequently, be an indication of irrational exuberance on the part of investors.
    Keywords: long-memory; scaling; stock market; volatility; wavelets
    JEL: C14 C22
    Date: 2005–10–11
  32. By: Saarenheimo , Tuomas (Bank of Finland Research)
    Abstract: The median age of the global population is presently increasing by nearly three months every year. Over the next couple of decades, almost every country in the world is set to experience an unprecedented increase in the share of elderly population. This development has the potential to fundamentally affect the functioning of economic and financial systems globally. This study concentrates on the effects of ageing on the evolution of global interest rates and financial flows. The study uses a 73-cohort general equilibrium overlapping generations model of five major economic areas (USA, EU-15, Japan, China, and India). Utilising actual population data and UN population projections, the model yields predictions for major economic and financial variables up to 2050. The model predicts a decline in global equilibrium real interest rates over the next two decades, but the size of the decline depends crucially on the future evolution of public pension benefits. If the present generosity of pension systems is maintained – leading to a steep increase in the cost of the pension systems – the maximum decline of interest rates is projected to be about 70 basis points from present levels. If pension benefits are reduced to offset the increasing cost pressures, the decline in global equilibrium interest rates can be much larger, while increases in the retirement age work in the opposite direction. The results do not anticipate a ‘financial market meltdown’ – a collapse in asset prices associated with the retirement of the baby-boomers – predicted by some. On the contrary, bond prices should fare fairly well over the next three decades. The main reason for this is that increasing life expectancy at retirement creates a need for higher retirement saving – in the future, people will want to retire wealthier than they do today. This trend more than offsets the negative effect of the retirement of baby-boomers on asset demand.
    Keywords: ageing; real interest rates; financial flows; public pension systems
    JEL: E44 J11
    Date: 2005–02–13
  33. By: L. Grossi; G. Morelli
    Abstract: In order to cope with the stylized facts of financial time series, many models have been proposed inside the GARCH family (e.g. EGARCH, GJR-GARCH, QGARCH, FIGARCH, LSTGARCH) and the stochastic volatility models (e.g. SV). Generally, all these models tend to produce very similar results as concerns forecasting performance. Most of the time it is difficult to choose which is the most appropriate specification. In addition, all these models are very sensitive to the presence of atypical observations. The purpose of this paper is to provide the user with new robust model selection procedures in financial models which downweight or eliminate the effect of atypical observations. The extreme case is when outliers are treated as missing data. In this paper we extend the theory of missing data to the family of GARCH models and show how to robustify the loglikelihood to make it insensitive to the presence of outliers. The suggested procedure enables us both to detect atypical observations and to select the best models in terms of forecasting performance.
    Keywords: GARCH models, extreme value, robust estimation
    JEL: C16 C22 C53 G15
    Date: 2006
  34. By: Piero Gottardi (Department of Economics, University Of Venice Cà Foscari); Felix Kubler (University of Pennsylvania and Universitat Mannheim)
    Abstract: In this paper we identify conditions under which the introduction of a pay-as-you-go social security system is ex-ante Pareto-improving in a stochastic overlapping generations economy with capital accumulation and land. We argue that these conditions are consistent with many calibrations of the model used in the literature. In our model financial markets are complete and competitive equilibria are interim Pareto efficient. Therefore, a welfare improvement can only be obtained if agents' welfare is evaluated ex ante, and arises from the possibility of inducing, through social security, an improved level of intergenerational risk sharing. We will also examine the optimal size of a given social security system as well as its optimal reform. The analysis will be carried out in a relatively simple set-up, where the various effects of social security, on the prices of long-lived assets and the stock of capital, and hence on output, wages and risky rates of returns, can be clearly identified.
    Keywords: Intergenerational Risk Sharing, Social Security, Ex Ante Welfare Improvements, Interim Optimality, Price Effects.
    Date: 2006
  35. By: Siklos, Pierre (Department of Economics and Viessmann Research Centre on Modern Europe, Wilfrid Laurier University); Bohl , Martin (Department of Economics, Westfälische Wilhelms University Münster)
    Abstract: This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognises the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate – interest rate relationship is more apparent when the proxy for monetary policy is the euro area – US differential than when any other proxy for monetary policy is employed. Finally, interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements.
    Keywords: communication policy; exchange rates; interest rates; volatility
    JEL: E50 E60 F30
    Date: 2006–04–11
  36. By: Kauko, Karlo (Bank of Finland Research)
    Abstract: This paper presents a model depicting cross-border payment systems as a mixed oligopoly. A private net settlement system that maximises profit competes with the central banks’ gross settlement system that maximises welfare. It may be optimal for the central bank system to encourage increased use of the private system by charging fees that exceed the marginal cost. The central bank system is not only a competitor but also an essential service provider, because central bank money is needed for net settlement of payments in the private system. In some cases the central bank system can paradoxically induce the private system to charge lower fees by making it expensive to use central bank money for settlement purposes.
    Keywords: payment systems; network economics; mixed oligopolies
    JEL: F36 G29 L13 L44
    Date: 2005–05–11
  37. By: Ekern, Steinar (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: This paper focuses on applications of the CAPM in capital budgeting and in valuation of "mispriced" financial assets. Most textbooks in finance do not warn against a common pitfall in discounting expected cash flows by risk adjusted discount rates that are conceptually inconsistent with the CAPM. Betas computed from returns based on investment cost rather than on market value, may give systematically inappropriate discount rates and numerically incorrect present values for non-zero NPVs and "mispriced" assets. The paper provides a self contained collection of a dozen consistent CAPM-related methods, that all give correct valuation results. The models include approaches based on certainty equivalents, equilibrium and disequilibrium required discount rates, simplified discounting rules based on absence of arbitrage for particular cash flow patterns, as well as required adaptations to make valuations from more advanced valuation methods consistent with correct CAPM procedures. Derivations of the valuation methods are shown in an appendix. A running base case numerical example illustrates the various procedures. Further illustrations are provided by a textbook example that also demonstrates how some simple procedures work for more complex cases than previously recognized.
    Keywords: CAPM present values; disequilibrium valuation; cost based betas; simple rules; Jensen's alpha; absence of arbitrage; CAPM adaptations
    JEL: G11 G12 G31
    Date: 2006–05–30
  38. By: Hsiao Chink Tang
    Abstract: This paper investigates the relative strength of four monetary policy transmission channels (exchange rate, asset price, interest rate and credit) in Malaysia using a 12-variable open economy VAR model. By comparing the baseline impulse response with the constrained impulse response where a particular channel is being switched off, the interest rate channel is found to be the most important in influencing output and inflation in the horizon of about two years, and the credit channel beyond that. The asset price channel is also relevant in the shorter-horizon, more so than the exchange rate channel, particularly in influencing output. For inflation, the exchange rate channel is more relevant than the asset price channel.
    Date: 2006–08
  39. By: Lindset, Snorre (Dept. of Industrial Economics and Technology Management, Norwegian University of Science and Technology (NTNU)); Persson, Svein-Arne (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: The paper analyzes a barrier exchange option that is knocked out the first time the two underlying assets have identical market values. Under rather general conditions regarding the price processes for the underlying assets, probably the world’s simplest option pricing formula is derived. It applies both to options of American and European type.
    Keywords: Barrier Exchange Option; Option Pricing
    JEL: G10
    Date: 2005–09–12
  40. By: Hvide, Hans K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: We consider a financing game with costly enforcement based on Townsend (1979), but where monitoring is non-contractible and allowed to be stochastic. Debt is the optimal contract. Moreover, the debt contract induces creditor leniency and strategic defaults by the borrower on the equilibrium path, consistent with empirical evidence on repayment and monitoring behavior in credit markets.
    Keywords: Costly state verification; debt contract; priority violation; strategic defaults
    JEL: D02 D82 G21 G33
    Date: 2005–09–12
  41. By: Berka, Martin
    Abstract: Modelling of the physical characteristics of goods and geography can explain both the puzzling persistence and volatility in the deviations of the international relative prices and the real exchange rate (the PPP persistence puzzle). In a two-country, three-good general equilibrium model, arbitrage firms trade goods across borders using a linear transportation technology. Distance and product weights (their physical mass) determine the costs to arbitrage trade, while the differences in the endowments between countries create profitable trading opportunities. Tradability of goods is endogenous, in that only goods with a deviation from the law of one price in excess of their trade cost are traded. The adjustment of prices across borders is non-linear, with heterogeneous thresholds that depend positively on the weight of a product and distance { an empirical regularity. Aggregation of the law of one price deviations implies a smooth threshold non-linearity in the real exchange rate, justifying a reoccurring finding in the recent empirical literature. When stochastic endowments follow an AR(1) process calibrated to match the quarterly HP-filtered US and EU GDPs, and the aggregate trade costs consume 1.7% of the GDP, the half-life of deviation in the real exchange rate matches the persistence found in the data. A model with quadratic adjustment costs in the volume of trade is also capable of creating real exchange rate volatility, and so can explain the PPP puzzle entirely as a trade phenomenon.
    Keywords: Arbitrage trade; real exchange rate; persistence; volatility
    JEL: F41 F19 F49
    Date: 2005–08
  42. By: Agar Brugiavini (Department of Economics, University Of Venice Cà Foscari); Gwenaël Piaser (Department of Economics, University of Venice Cà Foscari)
    Abstract: Using a common agency framework, we characterize possible equilibria when annuities contracts are not exclusive. We discuss theoretical and empirical implications of these equilibria. First, we show that at equilibrium prices are not linear. Then we characterize an equilibrium. We provide conditions for existence and show that this equilibrium is efficient.
    Keywords: Menus, Common Agency, Insurance, Annuity Markets, Adverse Selection, Efficiency
    JEL: D82 H5 J2 G1
    Date: 2006
  43. By: González, Manuel
    Abstract: This document tries to show how the capital asset pricing model based on the consumption theory under uncertainty could reproduce the statistical moments of Chilean interest rates. In order to reach this objective a model like the one proposed by Lucas (1980) is simulated and the parameters of the model are estimated by means of the simulated method of moments. To carry out the simulations, processes for the rate of growth of endowment were specified covering AR (1), GARCH (1,1) and Markov switching specifications. Results show that the performance of the model is not the most adequate, but between the three chosen specifications, the one that allows for the coexistence of two states for the rate of growth of the endowment of the economy is the best in reproducing moments of interest rates.
    Keywords: Consumption-CAPM Model; Simulated Method of Moments; Markov Switching Processes
    JEL: E21 E27 E43
    Date: 2004–12
  44. By: Tarkka , Juha (Bank of Finland Research); Kortelainen , Mika (Bank of Finland Research)
    Abstract: We study the effect of the zero bound constraint of interest rates on international transmission of eco-nomic policy and supply shocks. After some preliminary analysis with a simple theoretical model, we ap-ply a rich two-country simulation model to the problem. The model framework consists of EDGE, Bank of Finland’s dynamic equilibrium model for the euro area, linked to a similar model calibrated to resem-ble the US economy. The models have new Keynesian properties because of price rigidities and forward-looking pricing, consumption and investment behaviour. We assume freely floating exchange rates. Monetary policies are modelled with Taylor type policy rules, taking into account the zero bound con-straint for interest rates. We find that effects of policy and supply side shocks differ significantly from the ‘normal’ situation if one of the countries is in the ‘liquidity trap’, ie if the interest rate is constrained by the zero bound. Being in the liquidity trap amplifies the domestic effects of fiscal policy, but mitigates its spillover to abroad. Changing the long run inflation target, which does not have international spillovers in the normal case, does have effects abroad if the country where the target is changed is in a temporary li-quidity trap. The effects of supply shocks are also very different in the liquidity trap case compared to the normal case.
    Keywords: zero bound; liquidity trap; international spillovers; edge
    JEL: F42 F47
    Date: 2005–07–11
  45. By: Kemppainen , Kari (Bank of Finland Research)
    Abstract: This paper considers effects of price regulation in retail payment systems by applying the model of tele-communications competition by Laffont-Rey-Tirole (1998). In our two-country model world there is one retail payment network located in each country and markets are segmented à la Hotelling. We show that the optimal price under price regulation is the weighted average of pre-regulation domestic and cross-border prices where the degree of home-bias in making payments serves as the weight. Furthermore, we find that the general welfare effects of price regulation are ambiguous: gross social welfare is higher un-der price discrimination than under price regulation in the special case where costs of access to banking services (transportation costs) are high. However, there also exist cases where prohibitively high transac-tion costs make price discrimination to reduce total welfare. Finally, if transportation costs are reduced sufficiently, segmentation of payment markets is eliminated. Markets then become fully-served as in the original Laffont-Rey-Tirole model, suggesting that price discrimination would be beneficial for welfare.
    Keywords: payment systems; price regulation; retail payments
    JEL: D49 G28 L59
    Date: 2005–07–11
  46. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics); Persson, Lars (Research Institute of Industrial Economics)
    Abstract: Investment liberalizing countries are often concerned that cross-border mergers & acquisitions, in contrast to greenfield investments, might have an adverse effect on domestic firms and consumers. However, given that domestic assets are sufficiently scarce, we identify a preemption effect and an asset complementarity effect, which imply that the acquisition price is significantly higher than the domestic seller's profits. Moreover, we show that for the acquisition to take place, the MNE must be sufficiently efficient when using the domestic assets, otherwise rivals will expand their business, thereby making the acquisition unprofitable. Consequently, restricting cross-border M&As may also hurt consumers.
    Keywords: Investment Liberalization; Mergers & Acquisitions; Development; Ownership
    JEL: F23 K21 L13 O12
    Date: 2006–06–13
  47. By: Milne , Alistair (Faculty of Finance, Cass Business School and Bank of Finland)
    Abstract: The developed world exhibits substantial but poorly understood differences in the efficiency and quality of low-value payment services. This paper compares payments arrangements in the UK, Norway, Swe-den, and Finland, and discusses the impact of network effects on incentives to adopt new payments tech-nology. A model is presented, in which private benefits for investment in shared inter-bank payments in-frastructure are weak. In contrast, due to ‘account externalities’, there are strong incentives for investment in intra-bank payment systems. These two features, distinguishing bank payments from other network in-dustries, can help explain some of the observed cross country differences in payments arrangements.
    Keywords: network effects; incentives; payment technology; externalities
    JEL: G21 L14
    Date: 2005–07–11
  48. By: Forssbaeck, Jens (Lund Institute of Economics Research); Oxelheim, Lars (Research Institute of Industrial Economics)
    Abstract: We study the interplay between money market development and changes in monetary policy operating procedures in 11 European countries from c. 1980 up to the launch of EMU. Aspects of money market development such as the size and structure of different market segments, and institutional and regulatory changes, are addressed. We recount and empirically examine the extent of reorientation of monetary policy instruments away from quantitative direct control instruments toward indirect market-based instruments. The process of financial deregulation is uniform across the countries. The path of money market development varies substantially, whereas changes in central bank instruments show both similarities and differences. We hypothesise a relationship between the two processes and provide tentative evidence.
    Keywords: Monetary policy operations; Money market; European Union; Deregulation
    JEL: E52 E58 G28 N24
    Date: 2006–09–22
  49. By: Oliver Kirchkamp,; Eva Poen,; Philipp Reiß
    Abstract: In this paper we derive equilibrium bidding functions for first-price and second-price auctions with private values when bidders have outside options. We then study bidding behaviour with the help of experiments. We find that bidders respond to outside options and to variations of common knowledge about competitors’ outside options, though bidders in first-price auctions show more overbidding with outside options than without. In second-price auctions overbidding is not affected by outside options. As expected first-price auctions yield more revenue than second-price auctions. This revenue-premium is higher in the presence of outside options.
    Keywords: Auction, Experiment, Outside Option
    JEL: C72 C92 D44
    Date: 2006–06
  50. By: Andrén, Niclas (Institute of Economic Research); Oxelheim, Lars (Research Institute of Industrial Economics)
    Abstract: We analyze producer price developments in the transition from a national exchange rate regime to a monetary union. The focus is on the European Economic and Monetary Union (EMU). Stylized facts witness about an exploding gaps in producer-price inflation during the years immediately following the completion of the EMU. Price convergence is found to be an important driver throughout the entire euro period (1999-2005), but with no significant differences in speed compared to the pre euro period. Productivity growth had its primary effect in the first years and effective exchange-rate changes in the later years of the euro period.
    Keywords: Producer prices; Relative prices; Price convergence; Euro; Balassa-Samuelson
    JEL: E31 E44 F15 F23 G34
    Date: 2006–09–22
  51. By: Marek Hudon (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and Harvard University, Boston.); Daniel Traca (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels)
    Abstract: This paper gives first empirical evidence on the impact of subsidies on MFI performance. We find that Subsidy Intensity tends to be associated with a lower sustainability. However, we show that this relationship is due to the fact the institutions that receive more subsidies tend to focus on the poorest, and thus have a lower loan size per GDPpc, which raises their administrative costs per dollar of loan. We find no evidence that higher subsidy intensity is associated with shirking or rent-seeking.
    Keywords: Microfinance, Subsidies, Sustainability.
    JEL: O16 O17 G21
    Date: 2006–10
  52. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper we make use of option pricing theory to infer about historical equity premiums. This we do by comparing the prices of an American perpetual put option computed using two different models: The first is the standard one with continuous, zero expectation, Gaussian noise, the second is a strikingly similar model, except that the zero expectation noise is of Poissonian type. The interesting fact that makes this comparison worthwhile, is that the probability distribution under the risk adjusted measure turns out to depend on the equity premium in the Poisson model, while this is not so for the standard, Brownian motion version. This difference is utilized to find the intertemporal, equilibrium equity premium. We apply this technique to the US equity data of the last century and find that, if the risk free short rate was around one per cent, this corresponds to a risk premium on equity about two and a half per cent. On the other hand, if the risk free rate was about four per cent, we find that this corresponds to an equity premium of around four and a half per cent. The advantage with our approach is that we only need equity data and option pricing theory, no consumption data was necessary to arrive at these conclusions. We round off the paper by investigating if the procedure also works for incomplete models.
    Keywords: Historical equity premiums; perpetual American put option; equity premium puzzle; risk free rate puzzle; geometric Brownian motion; geometric Poisson process; CCAPM
    JEL: G00
    Date: 2005–11–30
  53. By: Abramov, Vyacheslav; Klebaner, Fima
    Abstract: In this paper we study volatility functions. Our main assumption is that the volatility is deterministic or stochastic but driven by a Brownian motion independent of the stock. We propose a forecasting method and check the consistency with option pricing theory. To estimate the unknown volatility function we use the approach of \cite{Goldentayer Klebaner and Liptser} based on filters for estimation of an unknown function from its noisy observations. One of the main assumptions is that the volatility is a continuous function, with derivative satisfying some smoothness conditions. The two forecasting methods correspond to the the first and second order filters, the first order filter tracks the unknown function and the second order tracks the function and it derivative. Therefore the quality of forecasting depends on the type of the volatility function: if oscillations of volatility around its average are frequent, then the first order filter seems to be appropriate, otherwise the second order filter is better. Further, in deterministic volatility models the price of options is given by the Black-Scholes formula with averaged future volatility \cite{Hull White 1987}, \cite{Stein and Stein 1991}. This enables us to compare the implied volatility with the averaged estimated historical volatility. This comparison is done for five companies and shows that the implied volatility and the historical volatilities are not statistically related.
    Keywords: Non-constant volatility; approximating and forecasting volatility; Black-Scholes formula; best linear predictor
    JEL: G13
    Date: 2006–06–06
  54. By: Annamaria Lusardi; Olivia S. Mitchell
    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.
    JEL: D91 E21
    Date: 2006–10
  55. By: W. Kip Viscusi; Richard J. Zeckhauser
    Abstract: A nationally representative sample of respondents estimated their fatality risks from four types of natural disasters, and indicated whether they favored governmental disaster relief. For all hazards, including auto accident risks, most respondents assessed their risks as being below average, with one-third assessing them as average. Individuals from high-risk states, or with experience with disasters, estimate risks higher, though by less than reasonable calculations require. Four-fifths of our respondents favor government relief for disaster victims, but only one-third do for victims in high-risk areas. Individuals who perceive themselves at higher risk are more supportive of government assistance.
    JEL: D80 D81 H53 Q54
    Date: 2006–10
  56. By: Oliver Kirchkamp,; Philipp Reiß
    Abstract: Bids in private value first price auctions consistently deviate from risk neutral symmetric equilibrium bids. It is difficult to explain this deviation with risk aversion. We propose and test two other explanations: (1) Bidders do not form correct expectations. (2) Bidders do not play a best reply against their expectations. We present a novel experimental setup which allows to observe bids and expectations separately. We extensively test the internal validity of this setup. We find that off equilibrium expectations explain, if at all, underbidding. Off equilibrium bids do not seem to be due to wrong expectations but due to deviations from a best reply
    Keywords: Experiments, Auction, Expectations.
    JEL: C92 D44
    Date: 2006–06
  57. By: von Furstenberg, George M.; von Kalckreuth, Ulf
    Abstract: Rajan and Zingales (1998) use U.S. Compustat firm data for the 1980s to obtain measures of manufacturing sectors’ Dependence on External Finance (DEF). They take any differences in these measures to be structural/technological and thus applicable to other countries. Their joint assumptions about how to obtain representative values of DEF by sector and about why these values differ fundamentally between sectors have been adopted in additional studies seeking to show that sectors benefit unequally from a country’s level of financial development. However, the assumptions as such have not been examined. The present study, conducted with cyclically adjusted annual measures of DEF derived from U.S. industry data for 1977-1997, attempts to do so using data that are aggregated by sector. We find that those variables that may be regarded as structural/ technological have very low explanatory power, and that the DEF figures calculated from micro data do not correspond closely to what is obtained from aggregate figures. Hence key assumptions on which RZ's argumentation is based could not be validated.
    Keywords: Growth and finance, financial development, industry structure
    JEL: E50 G20 G30 O14 O16
    Date: 2006
  58. By: SODOKIN, Koffi (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: Deux objectifs sont poursuivis dans ce papier. Le premier objectif est lié à l’explication des paiements monétaires (formation des revenus monétaires) comme la base d’une construction analytique de la fonctionnalité complémentaire des microstructures financières populaires et des institutions bancaires officielles dans les pays en développement. L’objectif second est de montrer que dans le processus de production des économies en développement, une partie des revenus monétaires créés et non dépensée dans la consommation des biens produits est conservée après les opérations de paiements, sous forme de dépôts auprès des microstructures financières populaires et des institutions bancaires officielles. La part conservée auprès des microstructures financières populaires, quand elle ne sert pas à financer l’achat des biens de consommation et des activités génératrices de revenu, est souvent déposée auprès des institutions bancaires officielles. Les microstructures financières populaires sont complémentaires sur un point de vue structurel aux institutions bancaires officielles. Elles constituent, à cet effet, des « super comptes » de dépôts de facto pour les agents économiques qui n’ont pas accès au système bancaire officiel. Sur un point de vue fonctionnel et de part leur rôle de financement de la production des microentreprises, les microstructures financières populaires provoquent des créations de revenu de nature nécessairement monétaire. Elles sont des banques de facto et sont fonctionnellement complémentaires aux institutions bancaires officielles.
    Keywords: Microstructures financières populaires ; intermédiaires non monétaires ; banques officielles ; création monétaire ; économies en développement.
    Date: 2006–10
  59. By: Jörnsten, Kurt (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Ubøe, Jan (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper we will study statistical equilibria in commodity markets where agents have a specified utility attached to every transaction in their offer sets. A probability measure on the product of all offer sets is called benefit efficient if market transactions with higher total benefit are more probable. We will characterize all such probability measures and show how this defines a new family of statistical equilibria in commodity markets. If agents are indifferent with respect to utility, these equilibria reduce to the classical entropy maximizing states. Moreover, we show how to construct what we call the most likely explanation for a set of observed commodity prices.
    Keywords: Commodity markets; statistical equilibria; efficient probability measures
    JEL: D40 D50 G10
    Date: 2005–05–26
  60. By: Stecher, Jack D. (Dept. of Accounting, Auditing and Law, Norwegian School of Economics and Business Administration)
    Abstract: Accounting theory treats a wide class of equity valuation approaches as equivalent. For example, under clean surplus accounting, the earnings approach is viewed as identical to the discounted dividends approach. Empirical research, however, typically finds that the two valuation approaches do not predict market prices equally well. This paper offers a theoretical explanation for this apparent anomaly: expectations of discounted infinite sums (incomes, cash flows, or dividends) are undefined unless some restrictive probabilistic conditions hold. Without the usual stationarity and ergodicity assumptions, it may still be possible to estimate upper and lower bounds on such sums, but these bounds need not coincide. In such a setting, earnings and discounted dividends yield intervals of justifiable valuations, which intersect but need not coincide. Depending on the extent to which a firm is held by insiders, differences in the valuations that different formulae justify may not show up in market prices. This provides an explanation for two additional empirical puzzles. First, empirical studies detecting little incremental information in dividends over earnings may be predisposed toward this finding. Second, stronger apparent reactions to dividend omissions than to initiations may be an illusion.
    Keywords: Equity Valuation; Residual Income; Dividends
    JEL: C65 D82 G12 M41
    Date: 2006–03–03
  61. By: Aase, Knut K. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In this paper we solve an optimal stopping problem with an infinite time horizon, when the state variable follows a jump-diffusion. Under certain conditions our solution can be interpreted as the price of an American perpetual put option, when the underlying asset follows this type of process. We present several examples demonstrating when the solution can be interpreted as a perpetual put price. This takes us into a study of how to risk adjust jump-diffusions. One key observation is that the probability distribution under the risk adjusted measure depends on the equity premium, which is not the case for the standard, continuous version. This difference may be utilized to find intertemporal, equilibrium equity premiums, for example. Our basic solution is exact only when jump sizes can not be negative. We investigate when our solution is an approximation also for negative jumps. Various market models are studied at an increasing level of complexity, ending with the incomplete model in the last part of the paper.
    Keywords: Optimal exercise policy; American put option; perpetual option; optimal stopping; incomplete markets; equity premiums; CCAPM.
    JEL: G00
    Date: 2005–11–30
  62. By: Männistö , Hanna-Leena (Bank of Finland Research)
    Abstract: To develop forecasting procedures with a forward-looking dynamic general equilibrium model, we built a small New-Keynesian model and calibrated it to euro area data. It was essential in this context that we allowed for long-run growth in GDP. We brought additional asset price equations based on the expecta-tions hypothesis and the Gordon growth model, into the standard open economy model, in order to extract information on private sector long-run expectations on fundamentals, and to combine that information into the macro economic forecast. We propose a method of transforming the model in forecasting use in such a way, as to match, in an economically meaningful way, the short-term forecast levels, especially of the model's jump-variables, to the parameters affecting the long-run trends of the key macroeconomic variables. More specifically, in the model we have used for illustrative purposes, we pinned down the long-run inflation expectations and domestic and foreign potential growth-rates using the model's steady state solution in combination with, by assumption, forward looking information in up-to-date financial market data. Consequently, our proposed solution preserves consistency with market expectations and results, as a favourable by-product, in forecast paths with no initial, first forecast period jumps. Further-more, no ad hoc re-calibration is called for in the proposed forecasting procedures, which clearly is an advantage from point of view of transparency in communication.
    Keywords: forecasting; New Keynesian model; DSGE model; rational expectations; open economy
    JEL: E17 E30 E31 F41
    Date: 2005–10–11
  63. By: Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
    Abstract: We use 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. <br> <br> <i>ZUSAMMENFASSUNG - (Ist die "event study" Methodologie nützlich für die Analyse von Fusionen? Ein Vergleich von Aktienmärkte und Bilanzdaten) <br> Wir analysieren eine Stichprobe von 167 Fusionen, die zwischen 1990 und 2002 stattgefunden haben und welche 544 Unternehmen -entweder als fusionierende Parteien oder als Wettbewerber- involviert haben. Wir vergleichen eine auf "event studies" basierende Rentabilitätsmaß der Fusion zu einer alternativen Maß, die durch Bilanzdaten konstruiert wurde. Wir finden, dass diese zwei maße positiv und signifikant korrelieren besonders wenn wir ein langes Fenster um die Fusionsankündigung in dem "event study" benutzen.</i>
    Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
    JEL: L4 K21 G34
    Date: 2006–09
  64. By: M. Menegatti
    Abstract: This paper proposes a new interpretation for the precautionary saving motive: when future income is uncertain, agents increase saving in order to cause a reduction in the disutility due to uncertainty. Furthermore the paper shows that the usual necessary and sufficient condition for precautionary saving is the condition ensuring this effect to occur.
    Keywords: Precautionary saving, Risk aversion, Prudence
    JEL: D11 D81 E21
    Date: 2006
  65. By: Milne , Alistair (Cass Business School, London, UK and Bank of Finland)
    Abstract: This paper examines the impact of messaging and technical standards on competition in the supply of se-curities transaction management services. Two simple switching cost models are used to clarify the im-pact of standards on barriers to entry and on the incentives to adopt harmonised and simplified securities processing standards. Policy implications are discussed briefly.
    Keywords: securities settlement; standards; inter-operability; switching costs
    JEL: L15 L86
    Date: 2005–10–11
  66. By: Fugarolas Álvarez-Ude, Guadalupe; Matesanz Gómez, David
    Abstract: En el presente trabajo se aplica el modelo de restricción de balanza de pagos de Thirlwall a la economía argentina en el periodo 1968-2003 y en subperiodos seleccionados. Los objetivos centrales son dos. En primer lugar, a través de dicho modelo indagar en las causas del lento crecimiento económico en Argentina en dicho periodo y, en segundo lugar, en analizar las causas de la reciente crisis de 2002 a luz de los resultados obtenidos. Mediante técnicas econométricas de cointegración llegamos a la conclusión de que el modelo de restricción de balanza de pagos perrmite explicar los objetivos centrales propuestos. In this paper, we applied balance of payments constraint model by Thirlwall to the Argentine economy in 1968-2003 period. Central aims are two: first, to inquiry in the demand causes of the slow economic growth of the Argentine economy in the period and, second, to analyse demand factors of the last and deep crises in 2002. By using cointegration techniques we show that balance of payments constraint model permit us to explain our central goals in this work.
    Keywords: restricción de balanza de pagos; modelo de Thirlwall; cointegración
    JEL: C22 F43 C32 F31
    Date: 2005

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