nep-fmk New Economics Papers
on Financial Markets
Issue of 2010‒01‒30
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Determinants of Buyouts in Private Equity Firms By Nordström, Louise; Wiberg, Daniel
  2. Bubbles in Asset Prices By Burton G. Malkiel
  3. Are Financial Crises Alike? By Mardi Dungey; Renee Fry; Vance Martin; Chrismin Tang; Brenda González-Hermosillo
  4. Correlations in Emerging Market Bonds: The Role of Local and Global Factors By Irina Bunda; A. Javier Hamann; Subir Lall
  5. The reception of public signals in financial markets – what if central bank communication becomes stale? By Michael Ehrmann
  6. Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets By Christoph Trebesch; Udaibir S. Das; Michael G. Papaioannou
  7. The Need for a Different Approach to Financial Reporting and Standard-setting By Östman, Lars

  1. By: Nordström, Louise (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Wiberg, Daniel (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: Private equity companies have become a major force in the economic landscape. Financial- and operational-engineering are innovative characteristics of this emerging method of finance. The existing empirical data provide strong evidence that private equity activity contribute positively to the rapid growth of companies. In this paper probability of private equity funded buyouts in the Nordic market is investigated. Operationally this is done by applying a logit model on a number of firm specific accounting measures. The main finding is that it is the dynamics of these variables in the target firms that are important for potential buyouts. That is, the growth measured as change in employees, change in the debt equity level, and the change in EBITDA margin, all have a significant effect on the probability of being bought by a private equity firm.
    Keywords: private equity; buyouts; performance
    JEL: G32 G34
    Date: 2009–12–18
  2. By: Burton G. Malkiel (Princeton University)
    Abstract: The severe world-wide recession of 2008-09 has focused attention on the role of asset-price bubbles in exacerbating economic instability in capitalist economies. The boom in house prices in the United States from 2000 through 2006 is a case in point. According to the Case-Shiller 20-city index, the inflation-adjusted price of a median-sized house in the United States doubled over the period 2000-2006. House prices rose far more than the underlying fundamental drivers of home prices such as family income and rents. The bursting of the bubble was followed by a sharp rise in foreclosures and massive declines in the value of mortgage-backed securities and a variety of derivatives tied to these securities. The collapse of these prices led to the weakening, and in some cases the collapse, of major financial institutions around the world and contributed to one of the most serious recessions in the United States in the entire post-World War II period. The housing bubble is the most recent example of the asset-price bubbles that have often afflicted capitalist economies. Sharp increases in asset prices have frequently led to crashes and subsequent sharp declines in economic activity. Many economists have argued, controversially, that central banks should adjust their policy instruments to account not only for their forecasts of future inflation and the gap between actual and potential output, but for asset prices as well. This paper will address three topics. First, I will describe what economists mean when they use the term bubble, and I will contrast the behavioral-finance view of asset pricing with the efficient-market paradigm in an attempt to understand why bubbles might persist and why they may not be arbitraged away. Second, I will review some major historical examples of asset-price bubbles as well as the (minority) view that they may not have been bubbles at all. I will also examine the corresponding changes in real economic activity that have followed the bursting of such bubbles. Finally, I will examine the most hotly-debated aspect of any discussion of asset-price bubbles: what, if anything, should policy makers do about them? Should they react to sharp increases in asset prices that they deem to be unrelated to fundamentals? Should they take the view that they know more than the market does? Should they recognize that asset-price bubbles are a periodic flaw of capitalism and conduct their policies so as to temper any developing excesses? Or should they focus solely on their primary targets of inflation and real economic activity? In my discussion I will pay particular attention to bubbles that are associated with sharp increases in credit and leverage.
    Keywords: Asset prices, price bubbles, housing prices, housing bubble
    JEL: D01 D40 E30 H30 G33
    Date: 2010–01
  3. By: Mardi Dungey; Renee Fry; Vance Martin; Chrismin Tang; Brenda González-Hermosillo
    Abstract: This paper investigates whether financial crises are alike by considering whether a single modeling framework can fit multiple distinct crises in which contagion effects link markets across national borders and asset classes. The crises considered are Russia and LTCM in the second half of 1998, Brazil in early 1999, dot-com in 2000, Argentina in 2001-2005, and the recent U.S. subprime mortgage and credit crisis in 2007. Using daily stock and bond returns on emerging and developed markets from 1998 to 2007, the empirical results show that financial crises are indeed alike, as all linkages are statistically important across all crises. However, the strength of these linkages does vary across crises. Contagion channels are widespread during the Russian/LTCM crisis, are less important during subsequent crises until the subprime crisis, where again the transmission of contagion becomes rampant.
    Date: 2010–01–14
  4. By: Irina Bunda; A. Javier Hamann; Subir Lall
    Abstract: This paper examines the comovement in emerging market bond returns and disentangles the influence of external and domestic factors. The conceptual framework, set in the context of asset allocation, allows us to describe the channels through which shocks originating in a particular emerging or mature market are transmitted across countries and markets. We show that using a simple measure of cross-country correlations together with the commonly used average correlation coefficient can be more informative during episodes of heightened market instability. Data for the period 1997-2008 are analyzed for evidence of true contagion and common external shocks.
    Keywords: Asset prices , Bond markets , Cross country analysis , Economic models , Emerging markets , Financial crisis ,
    Date: 2010–01–11
  5. By: Michael Ehrmann (European Central Bank)
    Abstract: How do financial markets price new information? This paper analyzes price setting at the intersection of private and public information, by testing whether and how the reaction of financial markets to public signals depends on the relative importance of private information in agents’ information sets at a given point in time. It studies the reaction of UK short-term interest rates to the Bank of England’s inflation report and to acroeconomic announcements. Due to the quarterly frequency at which the Bank of England releases one of its main publications, it can become stale over time. In the course of this process, financial market participants need to rely more on private information. The paper develops a stylized model which predicts that, the more time has elapsed since the latest release of an inflation report, market volatility should increase, the price response to macroeconomic announcements should be more pronounced, and macroeconomic announcements should play a more important role in aligning agents’ information set, thus leading to a stronger volatility reduction. The empirical evidence is fully supportive of these hypotheses.
    Keywords: public signals, inflation reports, monetary policy, interest rates, announcement effects, co-ordination of beliefs, Bank of England
    JEL: E58 E43 G12 G14
    Date: 2009
  6. By: Christoph Trebesch; Udaibir S. Das; Michael G. Papaioannou
    Abstract: "Top down" spillovers of sovereign default risk can have serious consequences for the private sector in emerging markets. This paper analyzes the effects of these spillovers using firm-level data from 31 emerging market economies. We assess how sovereign risk affects corporate access to international capital markets, in the form of external credit (loans and bond issuances) and equity issuances. The study first analyzes the impact of sovereign debt crises during the 1980s and 1990s. It goes on to examine the 1993 to 2007 period, using additional measures of sovereign risk-sovereign bond spreads and sovereign ratings-as explanatory variables. Overall, we find that sovereign default risk is a crucial determinant of private sector access to capital, be it external debt or equity. We also find that crisis resolution patterns matter and that defaults towards private creditors have stronger adverse consequences than defaults to official creditors.
    Date: 2010–01–12
  7. By: Östman, Lars (Dept. of Business Administration, Stockholm School of Economics)
    Abstract: International Financial Reporting Standards are questioned. Possibly, there is a need for a different kind of standards and a different procedure for developing them. No doubt, there is a need for a more profound theoretical approach to these issues. Theory-building in accounting should include approaches whereby problem descriptions have a broad coverage and cross the boarders of traditional specialisations. In this paper, a theoretical approach is outlined. According to this approach, insights into control problems for every organisation and system can be gained by analysing relationships between global value chains and a hierarchy of one or several organisations. Time is crucial. Instrumentality is regarded as an inevitable and necessary guide line for any control system that relates resources to functions and visions. Instrumentality concerns the effects of tools on certain functions. In the paper financial reporting and standard-setting are placed in a wide context in which longitudinal relationships are essential for individuals, organisations and control systems. Basic financial accounting concepts and their relationships with business events are discussed. The importance of uncertainty for financial reporting is emphasized, and so is the fact, that control from top-levels is exercised at a distance. A tendency to instrumentalism is also recognized: measures and procedures, for example standard setting procedures, tend to be important in themselves, irrespective of ultimate economic functions in a wider perspective. The analysis in the paper is one application of a general approach to financial control for all types of organisations. The general approach is based on a number of previous research-oriented books published over several decades and the author´s specific own experiences from internal and external processes with organisations in focus. Consistency and integrative power of the ideas have been tested in relation to certain books in various fields outside the core of the subject: applied systems theory, theatre, sociology, economic history, institutional theory and economics.
    Keywords: financial reporting; International Financial Reporting Standards; standard-setting; accounting standard setting bodies; supervisory boards; corporate governance; transparency; market value accounting; mark-to-market; fair values; historical values; accounting theory.
    Date: 2010–01–19

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