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on Financial Markets |
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Issue of 2009‒01‒17
six papers chosen by |
| By: | Ines Drumond (CEMPRE and Faculdade de Economia, Universidade do Porto); José Jorge (CEMPRE and Faculdade de Economia, Universidade do Porto) |
| Abstract: | This paper assesses the potential procyclical effects of Basel II capital requirements by evaluating to what extent those effects depend on the composition of banks' asset portfolios and on how borrowers' credit risk evolves over the business cycle. By developing a heterogeneous-agent general equilibrium model, in which firms' access to credit depends on their financial position, we find that regulatory capital requirements, by forcing banks to finance a fraction of loans with costly bank capital, have a negative effect on firms' capital accumulation and output in steady state. This effect is amplified with the changeover from Basel I to Basel II, in a stationary equilibrium characterized by a significant fraction of small and highly leveraged firms. In addition, to the extent that it is more costly to raise bank capital in bad times, the introduction of an aggregate technology shock into a partial equilibrium version of the model supports the Basel II procyclicality hypothesis: Basel II capital requirements accentuate the bank loan supply effect underlying the bank capital channel of propagation of exogenous shocks. |
| Keywords: | Business Cycles, Procyclicality, Financial Constraints, Bank Capital Channel, Basel II, Heterogeneity |
| JEL: | E44 E32 G28 E10 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:fepwps:307&r=fmk |
| By: | Ľuboš Pástor; Pietro Veronesi |
| Abstract: | We survey the recent literature on learning in financial markets. Our main theme is that many financial market phenomena that appear puzzling at first sight are easier to understand once we recognize that parameters in financial models are uncertain and subject to learning. We discuss phenomena related to the volatility and predictability of asset returns, stock price bubbles, portfolio choice, mutual fund flows, trading volume, and firm profitability, among others. |
| JEL: | G0 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14646&r=fmk |
| By: | Smith, Reginald |
| Abstract: | The credit crisis roiling the world's financial markets will likely take years and entire careers to fully understand and analyze. A short empirical investigation of the current trends, however, demonstrates that the losses in certain markets, in this case the US equity markets, follow a cascade or epidemic flow like model along the correlations of various stocks. A few images and explanation here will suffice to show the phenomenon. Also, whether the idea of "epidemic" or a "cascade" is a metaphor or model for this crisis will be discussed. Animations of the spread of the crisis are available at http://reggiesmithsci.googlepages.com/cr editcrisis |
| Keywords: | networks; econophysics; equities; stock market; correlation; credit crisis |
| JEL: | G15 G10 |
| Date: | 2008–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12659&r=fmk |
| By: | Orlowski, Lucjan T |
| Abstract: | This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed. |
| Keywords: | subprime mortgage crisis; credit crisis; liquidity crisis; market risk; credit risk; default risk; counterparty risk; collateralized debt obligations; Level 3 Assets; Basel II |
| JEL: | G12 G15 E44 G21 |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12696&r=fmk |
| By: | John B. Taylor |
| Abstract: | This paper is an empirical investigation of the role of government actions and interventions in the financial crisis that flared up in August 2007. It integrates and summarizes several ongoing empirical research projects with the aim of learning from past policy. The evidence is presented in a series of charts which are backed up by statistical analysis in these research projects. |
| JEL: | E0 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14631&r=fmk |
| By: | Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes. |
| JEL: | E32 E44 F3 N20 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14656&r=fmk |