New Economics Papers
on Financial Markets
Issue of 2010‒03‒13
six papers chosen by

  1. The Financial Crisis: One Year Later By Robert Amzallag
  2. What explains stock markets'vulnerability to the 2007-2008 crisis ? By Didier, Tatiana; Love, Inessa; Peria, Maria Soledad Martinez
  3. Rethinking market discipline in banking : lessons from the financial crisis By Stephanou, Constantinos
  4. The Financial Crisis and the Regulation of Credit Rating Agencies: A European Banking Perspective By Utzig, Siegfried
  5. Should Governments Minimize Debt Service Cost and Risk? By Massimo Bernaschi; Alessandro Missale; Davide Vergni
  6. The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007 By Marc Flandreau; Juan H. Flores; Norbert Gaillard; Sebastián Nieto-Parra

  1. By: Robert Amzallag
    Abstract: This paper is meant to provide a fresh retrospective on the events shaping the evolution of the financial crisis and economic recession since last year. While continuing and updating last year’s analysis, the author offers an assessment of the three potential scenarios through which the crisis could have evolved. This update on the crisis derives from a reflection, sometimes a criticism, of the key players' role in both the causes and the solutions. Those are the governments, central banks, regulators, financial institutions, and their directors. It is from this retrospective analysis that the author can conclude by sharing his impression regarding future developments of the economy and the financial sector. <P>Cette publication se veut un retour actualisé sur les événements de la dernière année concernant l’évolution de la crise financière et de la récession économique. Poursuivant et mettant à jour l’analyse d’il y a un an, l’auteur offre une évaluation des trois scénarios potentiels qu’aurait pu suivre la crise. Ce retour sur la crise se fait à travers une réflexion, et parfois une critique, concernant le rôle des joueurs clés qui sont impliqués autant dans les causes que dans les solutions. Il s’agit des gouvernements, des banques centrales, des autorités de régulation, des institutions financières ainsi que des dirigeants de celles-ci. C’est à partir de cette analyse rétrospective que l’auteur peut conclure en partageant son impression quant aux développements futurs de l’économie et du secteur financier
    Keywords: financial crisis, recession, government intervention, financial regulation, financial history, financial forecasting , crise financière, récession, intervention gouvernementale, régulation financière, histoire financière, prévision financière
    Date: 2010–03–01
  2. By: Didier, Tatiana; Love, Inessa; Peria, Maria Soledad Martinez
    Abstract: This paper examines the determinants of stock markets'vulnerability to the 2007-2008 crisis. Given that the United States (US) was the crisis epicenter, the authors analyze the factors driving the co-movement between US returns and stock returns in 83 countries. The analysis distinguishes between the period before and after the collapse of Lehman Brothers. The findings indicate that the main channel of transmission was financial. There is also evidence of a"wake-up call"or"demonstration effect"in the first stage of the crisis, because countries with vulnerable banking and corporate sectors exhibited higher co-movement with the US market. However, despite a collapse in trade across countries, the analysis does not find support for this channel of transmission.
    Keywords: Debt Markets,Mutual Funds,Markets and Market Access,Economic Theory&Research,Emerging Markets
    Date: 2010–03–01
  3. By: Stephanou, Constantinos
    Abstract: The main objective of this paper is to rethink the use of market discipline for prudential purposes in light of lessons from the financial crisis. The paper develops the main building blocks of a market discipline framework, and argues for the need to take an expansive view of the concept. It also illustrates using actual bank case studies from the United States its apparent failures in the crisis, particularly the failure to prevent the buildup of systemic, as opposed to idiosyncratic, risks. However, while the role of market discipline in the design of macro-prudential regulation appears to be largely constrained, more can be done on the micro-prudential side to promote clearer market signals of bank riskiness and to encourage their use in the supervisory process.
    Keywords: Banks&Banking Reform,Debt Markets,Markets and Market Access,Emerging Markets,Access to Finance
    Date: 2010–03–01
  4. By: Utzig, Siegfried (Asian Development Bank Institute)
    Abstract: Credit rating agencies (CRAs) bear some responsibility for the financial crisis that started in 2007 and remains ongoing. This is acknowledged by policymakers, market participants, and by the agencies themselves. It soon became clear that, given the depth of the crisis, CRAs would not be able to satisfy policymakers by eliminating flaws in their rating methods and improving corporate governance. Although the CRAs were more or less unregulated before the outbreak of the financial crisis, after the crisis started, politicians became increasingly vocal in demanding regulation. Initially, these demands were confined to a more binding form of self-regulation. But as the crisis progressed, the calls for state regulation grew ever louder. It became apparent after the November 2008 G-20 summit in Washington that state regulation could no longer be avoided. <p>In Europe, the course had been set in this direction even before then. Since European policymakers saw the crisis as evidence that the Anglo-Saxon approach to the financial markets had failed, they believed they were now strongly placed to have a decisive influence on shaping a new international financial order. It is remarkable to note the shift in European policy from a self-regulatory approach, which was comparatively liberal in international terms, to quite rigorous state regulation of CRAs. Both the European Commission and the European Parliament drew up far-reaching plans. Although European policymakers knew that only globally consistent regulation would be appropriate for a new world financial order, their initial draft legislation was geared more toward stand-alone European regulation. While the final version of the European Union Regulation on Credit Rating Agencies focuses firmly on the European arena, the key point for all market participants is that this is unlikely to have an adverse effect on the global ratings market. It must nevertheless be recognized that the scope of the selected regulatory approach is extremely narrow. Certainly, it has the potential to improve the corporate governance of CRAs and prevent conflicts of interests. But it can do nothing to address the repeated calls for greater competition or for CRAs to be made liable for their ratings.
    Keywords: regulation credit rating agencies; europe credit rating agency; european bank financial crisis; financial crisis; credit rating agency
    JEL: G18 G21 G24
    Date: 2010–01–26
  5. By: Massimo Bernaschi (Istituto Applicazioni del Calcolo ``M. Picone'', CNR); Alessandro Missale (University of Milan); Davide Vergni (Istituto Applicazioni del Calcolo ``M. Picone'', CNR)
    Abstract: Simulation-based cost-risk analysis of the interest expenditure is increasingly used for policy evaluation of public debt strategies by governments around the world. This paper is a first attempt to empirically evaluate this approach by comparing its implications for the maturity structure of public debt with those derived from the optimal taxation theory of debt management. To this end, we simulate the time path of the distribution of the interest expenditure for stylized portfolios of different maturities using simple stochastic models of the evolution of the term structure of interest rates, and examine the performance of such portfolios with standard cost-risk indicators. We find that: i) the ranking of debt portfolios by expenditure risk may depend on the length of the simulation period; to obtain the same policy conclusions as the optimal taxation theory, the time horizon must extend up to the redemption date of the longest maturity bond issued over the simulation period; ii) in sharp contrast with optimal taxation theory, a cost-risk trade off naturally emerges when a risk premium on long term bonds is considered, but this may not be sufficient to identify the optimal maturity structure. Our analysis points to the danger of assuming the cost-risk minimization of the interest expenditure as the main objective of debt management. A policy that either aims to minimize the interest expenditure over a too short horizon or does not consider that risk premiums may reflect a fair price for insurance may lead to sub-optimal debt strategies.
    Keywords: debt management, maturity structure, interest costs, interest rate risk, optimal taxation, simulation models, term structure,
    Date: 2009–12–15
  6. By: Marc Flandreau (Graduate Institute of international and Development Studies in Geneva and CEPR); Juan H. Flores (Department of Economic History, University of Geneva.); Norbert Gaillard (Sciences Po, Paris); Sebastián Nieto-Parra (Development Centre, OECD, Paris)
    Abstract: We provide a comparison of salient organizational features of primary markets for foreign government debt over the very long run. We focus on output, quality control, information provision, competition, pricing, charging, and signaling. We find that the market setup experienced a radical transformation in the recent period, and we interpret this as resulting from the rise of liability insurance provided by rating agencies. Underwriters have given up their former role as gatekeepers of liquidity and certification agencies to become aggressive competitors in a new Speculative Grade market.
    Keywords: certification, primary bond market, sovereign debt crises, banks competition
    JEL: F34 G14 G24 N2
    Date: 2009–07

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