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on Financial Markets |
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Issue of 2010‒06‒11
six papers chosen by |
| By: | Yeva Nersisyan; L. Randall Wray |
| Abstract: | While most economists agree that the world is facing the worst economic crisis since the Great Depression, there is little agreement as to what caused it. Some have argued that the financial instability we are witnessing is due to irrational exuberance of market participants, fraud, greed, too much regulation, et cetera. However, some Post Keynesian economists following Hyman P. Minsky have argued that this is a systemic problem, a result of internal market processes that allowed fragility to build over time. In this paper we focus on the shift to the "shadow banking system" and the creation of what Minsky called the money manager phase of capitalism. In this system, rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income--what is sometimes called "financialization"--as the financial system evolved from hedge to speculative and, finally, to a Ponzi scheme. The policy response to the financial crisis in the United States and elsewhere has largely been an attempt to rescue money manager capitalism. Moreover, in the case of the United States. the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail--and that alternative policies should be adopted. The effective solution should come in the way of downsizing the financial sector by two-thirds or more, and effecting fundamental modifications. |
| Keywords: | Institutional Investors; Financial Crisis; Financialization; Money Managers; Financial Concentration; Shadow Banking; Subprime Mortgages; Securitized Mortgages |
| JEL: | G21 G23 G28 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_587&r=fmk |
| By: | Jörg Bibow |
| Abstract: | This paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets' exposure to the turmoil in global finance itself. As "innocent bystanders," even countries that had taken out "self-insurance" proved vulnerable to the global "sudden stop" in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the U.S. dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities. |
| Keywords: | Financial Crisis; Capital Flows; Self-insurance; Capital Controls; Bretton Woods II Hypothesis; Global Saving Glut Hypothesis |
| JEL: | E12 E43 E44 F02 F10 F32 F33 F42 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_591&r=fmk |
| By: | Florian Steiger |
| Abstract: | This paper examines the possibility of using derivative-implied risk premia to explain stock returns. The rapid development of derivative markets has led to the possibility of trading various kinds of risks, such as credit and interest rate risk, separately from each other. This paper uses credit default swaps and equity options to determine risk premia which are then used to form portfolios that are regressed against the returns of stock portfolios. It turns out that both, credit risk and implied volatility, have high explanatory power in regard to stock returns. Especially the returns of distressed stocks are highly dependent on credit risk fluctuations. This finding leads to practical implications, such as cross-hedging opportunities between equity and credit instruments and potentially allows forecasting stock returns based on movements in the credit market. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1005.5538&r=fmk |
| By: | Suresh Sundaresan; Zhenyu Wang |
| Abstract: | The proposal for banks to issue contingent capital that must convert into common equity when the banks' stock price falls below a specified threshold, or "trigger," does not in general lead to a unique equilibrium in equity and contingent capital prices. Multiple or no equilibrium arises because both equity and contingent capital are claims on the assets of the issuing bank. For a security to be robust to price manipulation, it must have a unique equilibrium. For a unique equilibrium to exist, mandatory conversion cannot result in any value transfers between equity holders and contingent capital investors. The necessary condition for unique equilibrium is usually not satisfied by contingent capital with a fixed coupon rate; however, contingent capital with a floating coupon rate is shown to have a unique equilibrium if the coupon rate is set equal to the risk-free rate. This structure of contingent capital anchors its value to par throughout the time before conversion, making it implementable in practice. Although contingent capital with a unique equilibrium is robust to price manipulation, the no-value-transfer condition may preclude it from generating the desired incentives for bank managers and demand from investors. |
| Keywords: | Bank capital ; Bank stocks ; Equilibrium (Economics) ; Stock - Prices ; Interest rates |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:448&r=fmk |
| By: | Adam Ashcraft; Paul Goldsmith-Pinkham; James Vickery |
| Abstract: | We study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis. |
| Keywords: | Credit ratings ; Mortgages ; Mortgage-backed securities ; Subprime mortgage ; Financial crises ; Financial risk management |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:449&r=fmk |
| By: | Haouat, Meriem; Moccero, Diego Nicolas; Sosa Navarro , Ramiro |
| Abstract: | Foreign bank presence has substantially increased in Latin America during the second half of the 1990s, which has prompted an intense debate on its banking and macroeconomic consequences. In this paper, we apply ARCH techniques to jointly estimate the impact of foreign bank presence on the level and volatility of real credit in a panel of eight Latin American countries, using quarterly data over the period 1995:1-2001:4. Results show that, together with financial development, foreign bank presence has contributed to reduce real credit volatility, improving the buffer shock function of the banking sector. This finding is consistent with the fact that foreign banks are typically well diversified institutions holding higher quality assets and having access to a broad set of liquidity sources. Keywords: foreign banks; credit volatility; Latin America; panel data; ARCH techniques |
| Keywords: | Foreign Banks; Credit Volatility; Latin America; Panel Data; ARCH techniques |
| JEL: | E51 C33 G21 |
| Date: | 2010–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22991&r=fmk |