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on Financial Markets |
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Issue of 2009‒05‒30
eight papers chosen by |
| By: | Antonio Forte (Dipartimento di Economia e Metodi Matematici, Università di Bari); Giovanni Pesce (Dipartimento di Economia e Metodi Matematici, Università di Bari) |
| Abstract: | The advent of the international financial crisis, and of its effects on the economy, all the world now face the question how to manage the crisis and what measures to implement to restore a normal condition. In this paper we present and discuss the results and implications of an international expert survey. Our target is to understand the perception with regards to several aspects of the international financial crisis and some possible future implications for policy makers’ authorities. |
| Keywords: | international financial crisis, subprime, expert survey |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bai:series:wp0024&r=fmk |
| By: | Joshua Aizenman |
| Abstract: | This paper illustrates the paradox of prudential under-regulation in an economy that adopts financial reform, a reform which exposes the economy to future financial crises. There is individual-uncertainty about the crisis incidence, and the probability of the crisis is updated sequentially applying Bayesian inference. Costly regulation can mitigate the probability of the crisis. We identify conditions where the regulation level supported by the majority is positive after the reform, but below the socially optimal level. Tranquil time, when the crisis would not take place, reduces the regulation intensity. If the spell of no crisis is long enough, the regulation level may drop to zero, despite the fact that the socially optimal regulation level remains positive. The less informative is the prior regarding the probability of a crisis, the faster will be the drop in regulations induced by a no-crisis, good luck run. The challenges facing the regulator are aggravated by asymmetric information, as is the case when the public does not observe regulator’s effort. Higher regulator effort, while helping avoiding a crisis, may be confused as a signal that the environment is less risky, reducing the posterior probability of the crisis, eroding the support for costly future regulation. The other side of the regulation paradox is that crisis resulting with unanticipated high costs may induce over-regulation and stagnation, as the parties that would bear the cost of the over regulation are underrepresented in the decision making process. We also outline a regulatory structure that mitigates the above concerns, including information disclosure; increasing the independence of the regulatory agency from the political process; centralizing the regulatory process and increasing its transparency; and adopting global standards of minimum prudential regulations and information disclosure, enforced by the domestic regulator. |
| JEL: | F02 F15 F36 F42 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15018&r=fmk |
| By: | Jayanth R Varma |
| Abstract: | During the global financial turmoil of 2007 and 2008, no major derivative clearing house in the world encountered distress while many banks were pushed to the brink and beyond. An important reason for this is that derivative exchanges have avoided using value at risk, normal distributions and linear correlations. This is an important lesson. The global financial crisis has also taught us that in risk management, robustness is more important than sophistication and that it is dangerous to use models that are over calibrated to short time series of market prices. The paper applies these lessons to the important exchange traded derivatives in India and recommends major changes to the currentmargining systems to improve their robustness. It also discusses directions in which global best practices in exchange risk management could be improved to take advantage of recent advances in computing power and finance theory. The paper argues that risk management should evolve towards explicit models based on coherent risk measures (like expected shortfall), fat tailed distributions and non linear dependence structures (copulas).[W.P. No.2009-02-06] |
| Keywords: | Risk Management; Global Financial Crisis; Derivative Exchanges; Value at Risk; SPAN system; Coherent Risk Measures; Expected Shortfall; Robustness; Regime Switching; Risk Coverage Levels; Indian Derivative Markets; Stock Index Futures; Currency Derivatives |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:1981&r=fmk |
| By: | Jens Eisenschmidt (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Astrid Hirsch (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tobias Linzert (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Liquidity provision through its repo auctions has been one of the main instruments of the European Central Bank (ECB) to address the recent tensions in financial markets since summer 2007. In this paper, we analyse banks’ bidding behaviour in the ECB’s main refinancing operations (MROs) during the ongoing turmoil in money and financial markets. We employ a unique data set comprising repo auctions from March 2004 to October 2008 with bidding data from 877 counterparties. We find that increased bid rates during the turmoil can be explained by, inter alia, the increased individual refinancing motive, the increased attractiveness of the ECB’s tender operations due to its collateral framework and banks’ bidding more aggressively, i.e. at higher rates to avoid being rationed at the marginal rate in times of increased liquidity uncertainty. JEL Classification: E52, D44, C33, C34. |
| Keywords: | Central Bank Auctions, Financial Market Turmoil, Panel Sample Selection Model, Bidding Behavior, Monetary Policy Instruments. |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901052&r=fmk |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | The average Market Risk Premium (MRP) used in 2008 by professors in the United States (6.5%) was higher than the one used by their colleagues in Europe (5.3%), Canada (5.4%), the United Kingdom (5.6%) and Australia (5.9%). The dispersion of the MRP was high. 15% ofthe professors decreased their MRP in 2008 (1.5% on average) and 24% increased it (2% on average). 66% of the professors used a lower MRP in 2007 than in 2000 (22% used a higher one). The average MRP used in 2007 was 1.5% lower than the one used in 2000. Most previous surveys were interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references that professors use to justify their MRP and comments from 180 professors that illustrate the variety of interpretations of what the required MRP is and explain the confusion of students and practitioners about its concept and magnitude. |
| Keywords: | equity premium puzzle; required equity premium; expected equity premium; historical equity premium; |
| JEL: | G12 G31 M21 |
| Date: | 2009–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0784&r=fmk |
| By: | Fredj Jawadi (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Nicolas Million (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre); Mohamed El Hedi Arouri (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans) |
| Abstract: | This article studies the financial integration between the six main Latin American markets and the US market in a nonlinear framework. Using the threshold cointegration techniques of Hansen and Seo (2002), we show significant threshold stock market linkages between Mexico, Chile and the US. Thus, the dynamics of these markets depends simultaneously on local and global risk factors. More importantly, our results show an on-off threshold financial integration process that is activated only when the stock price adjustment exceeds some level. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00387110_v1&r=fmk |
| By: | Mohamed El Hedi Arouri (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans, EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre); Jamel Jouini (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This article investigates the evolution of the Mexican stock market integration into the world market. First, we estimate the time-varying Mexican degree of market integration using an international conditional version of the CAPM with segmentation effects. Second, we study the structural breaks in this series. Finally, we relate the obtained results to important facts and economic events |
| Date: | 2009–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00387114_v1&r=fmk |
| By: | John Y. Campbell (Dept. of Economics, Harvard University); Robert J. Shiller (Cowles Foundation, Yale University); Luis M. Viceira (Harvard Business School) |
| Abstract: | This paper explores the history of inflation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade. |
| Keywords: | Expectations hypothesis, Liquidity, Term premia, TIPS |
| JEL: | E43 E44 G12 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:1696&r=fmk |