nep-fmk New Economics Papers
on Financial Markets
Issue of 2008‒05‒05
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Corporate Debt Maturity Choice in Transition Financial Markets By Andreas Stephan; Oleksandr Talavera; Andriy Tsapin
  2. The Political Economy of Financial Systems By Stephen Haber; Enrico Perotti
  3. Financial Market Integration Under EMU By Marco Pagano; Marco Pagano
  4. Hedge Portfolios in Markets with Price Discontinuities By Gerald H.L. Cheang; Carl Chiarella
  5. Stock Retruns and Inflation: Pakistan Case By Akmal, Muhammad Shahbaz

  1. By: Andreas Stephan; Oleksandr Talavera; Andriy Tsapin
    Abstract: This paper investigates the determinants of liability maturity choice in transition markets. We formulate a model of firm value maximization that describes managers' choice of optimal debt structure. The theoretical predictions are tested using a unique panel of 4,300 Ukrainian firms during the period 2000-2005. Our estimates confirm the importance of liquidity, signaling, maturity matching, and agency costs for the liability term structure of firms operating in a transition economy. In addition, we find that companies do not react uniformly to determinants of debt maturity. Firms that mainly rely on external funds are sensitive to signaling and they consider the variability of firm value an important determinant of their debt maturity choice. For less constrained companies that rely more on internal funding, asset maturity is an essential determinant of debt structure.
    Keywords: Debt maturity, capital structure, transition period, Ukraine
    JEL: G32 G30 D24
    Date: 2008
  2. By: Stephen Haber (Stanford University); Enrico Perotti (University of Amsterdam)
    Abstract: This survey reviews the literature on the political economy of financial structure, broadly defined to include the size of capital markets and banking systems as well as the distribution of access to external finance across firms. The theoretical literature on the institutional basis for financial development and the recent evidence suggests that unconstrained political power undermines financial accumulation. Even under limited government, unaccountable institutions lead to regulatory capture, favor connected interests, and undermine finance access and entry. Thus the degree of access to political rights by citizens thus strongly affects their access to finance. Finally, we review the recent literature on the time variation of financial development across democracies during the XX century.
    Keywords: political institution; property rights; investor protection; financial development; access to finance; entry; banking
    JEL: G21 G28 G32 P16
    Date: 2008–04–25
  3. By: Marco Pagano (Università di Napoli, CSEF and CEPR); Marco Pagano (Università di Napoli, CSEF and CEPR)
    Abstract: The single most important policy-induced innovation in the international financial system since the collapse of the Bretton-Woods regime is the institution of the European Monetary Union. This paper provides an account of how the process of financial integration has promoted financial development in the euro area. It starts by defining financial integration and how to measure it, analyzes the barriers that can prevent it and the effects of their removal on financial markets, and assesses whether the euro area has actually become more integrated. It then explores to which extent these changes in financial markets have influenced the performance of the euro-area economy, that is, its growth and investment, as well as its ability to adjust to shocks and to allow risk-sharing. The paper concludes analyzing further steps that are required to consolidate financial integration and enhance the future stability of financial markets.
    Date: 2008–04–28
  4. By: Gerald H.L. Cheang (Division of Banking and Finance, Nanyang Business School, Nanyang Technology University,); Carl Chiarella (School of Finance and Economics, University of Technology, Sydney)
    Abstract: We consider a market consisting of multiple assets under jump-diffusion dynamics with European style options written on these assets. It is well-known that such markets are incomplete in the Harrison and Pliska sense. We derive a pricing relation by adopting a Radon-Nikodym derivative based on the exponential martingale of a correlated Brownian motion process and a multivariate compound Poisson process. The parameters in the Radon-Nikodym derivative de¯ne a family of equivalent martingale measures in the model, and we derive the corresponding integro-partial differential equation for the option price. We also derive the pricing relation by setting up a hedge portfolio containing an appropriate number of options to "complete" the market. The market prices of jump-risks are priced in the hedge portfolio and we relate these to the choice of the parameters in the Radon-Nikodym derivative used in the alternative derivation of the integro-partial differential equation.
    Keywords: incomplete markets; equivalent martingale measure; compound Poisson processes; Radon-Nikodym derivative; multi-asset options; integro-partial differential equation
    JEL: C00 G12 G13
    Date: 2008–03–01
  5. By: Akmal, Muhammad Shahbaz
    Abstract: According to theory there establishes the relationship between stock market prices and inflation, this study investigates whether this holds for Pakistan, over the period 1971-2006. I examined the concerned relationship taking into account the existence of structural break over the considered time episode. The empirical practice utilizes ARDL, co-integration technique in said conjunction to detect the long run and short run affects between involves variable by Error Correction Approach (ECM). The results supports the hypothesis that stocks hedges against inflation in log run but not in short, while black economy promotes the stock market prices to heave both in long run as well as in short run.
    Keywords: Stock Return; Inflation; Pakistan
    JEL: G1 G11
    Date: 2007–06–01

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