|
on Financial Markets |
|
Issue of 2005‒09‒11
thirty-six papers chosen by |
| By: | Daniel Esteban Osorio Rodríguez; Mauricio Avella Gómez |
| Abstract: | In this paper we try to elucidate the relationship between foreign and domestic banks external indebtedness and the business cycle in Colombia. After a brief review of related literature, we characterize the historical behavior of banking external indebtedness in Colombia, and perform statistical and econometric calculations on the aforementioned relationship. |
| Keywords: | banking external indebtedness, |
| JEL: | G21 |
| Date: | 2005–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000070:001161&r=fmk |
| By: | Rosalind L. Bennett; Mark D. Vaughan; Timothy J. Yeager |
| Abstract: | Does growing commercial-bank reliance on Federal Home Loan Bank (FHLBank) advances increase expected losses to the Bank Insurance Fund (BIF)? Our approach to this question begins by modeling the link between advances and expected losses. We then quantify the effect of advances on default probability with a CAMELS-downgrade model. Finally, we assess the impact on loss-given-default by estimating resolution costs in two scenarios: the liquidation of all banks with failure probabilities above two percent and the liquidation of all banks with advance-to-asset ratios above 15 percent. The evidence points to non-trivial increases in expected losses. The policy implication is that the FDIC should price FHLBank-related exposures. |
| Keywords: | Banks and banking ; Financial institutions ; Deposit insurance |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedrwp:05-05&r=fmk |
| By: | Rasmus Fatum (School of Business, University of Alberta) |
| Abstract: | This paper analyzes the effects of official, daily Bank of Canada intervention in the CAD/USD exchange rate market over the January 1995 to September 1998 period. Using an event study methodology and different criteria for effectiveness, movements in the CAD/USD exchange rate over the 1 through 10 days surrounding intervention events are investigated. It is shown that Bank of Canada intervention was systematically associated with both a change in the direction and a smoothing of the CAD/USD exchange rate. Bank of Canada intervention did not, however, succeed in reducing the volatility of the CAD/USD exchange rate. Additionally, the paper introduces the issue of currency co-movements to the intervention literature. It is shown that the effects of intervention are weakened when adjusting for general currency co-movements against the USD, suggesting that currency co-movements should be taken into account when addressing the effects of central bank intervention aimed at managing a minor currency vis-à-vis a major currency. |
| Keywords: | foreign exchange intervention; event studies; currency co-movement |
| JEL: | E58 F31 G14 G15 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:05-07&r=fmk |
| By: | Aart Kraay; Jaume Ventura |
| Abstract: | Over the past decade the US has experienced widening current account deficits and a steady deterioration of its net foreign asset position. During the second half of the 1990s, this deterioration was fueled by foreign investment in a booming US stock market. During the first half of the 2000s, this deterioration has been fuelled by foreign purchases of rapidly increasing US government debt. A somewhat surprising aspect of the current debate is that stock market movements and fiscal policy choices have been largely treated as unrelated events. Stock market movements are usually interpreted as reflecting exogenous changes in perceived or real productivity, while budget deficits are usually understood as a mainly political decision. We challenge this view here and develop two alternative interpretations. Both are based on the notion that a bubble the 'dot-com' bubble) has been driving the stock market, but differ in their assumptions about the interactions between this bubble and fiscal policy (the 'Bush' deficits). The 'benevolent' view holds that a change in investor sentiment led to the collapse of the dot-com bubble and the Bush deficits were a welfare-improving policy response to this event. The 'cynical' view holds instead that the Bush deficits led to the collapse of the dot-com bubble as the new administration tried to appropriate rents from foreign investors. We discuss the implications of each of these views for the future evolution of the US economy and, in particular, its net foreign asset position. |
| JEL: | F21 F32 F36 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11543&r=fmk |
| By: | James J. Choi; David Laibson; Brigitte C. Madrian |
| Abstract: | It is typically difficult to determine whether households save optimally. But in some cases, savings incentives are strong enough to imply sharp normative restrictions. We consider employees who receive employer matching contributions in their 401(k) plan and are allowed to make discretionary, penalty-free, in-service withdrawals. For these employees, contributing below the match threshold is a dominated action. Nevertheless, half of employees with these clear-cut incentives do contribute below the match threshold, foregoing matching contributions that average 1.3% of their annual pay. Providing these "undersavers" with specific information about the free lunch they are giving up fails to raise their contribution rates. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11554&r=fmk |
| By: | Andreas Humpe; Peter D. Macmillan |
| Abstract: | The main objective of this paper is to examine whether a standard discounted value model is capable of explaining aggregate long term stock market movements in the US and Japan. An emphasis on the comparison between the relationships between selected macroeconomic variables based on the discounted value model and the stock market will reveal commonalities and differences between the US and Japanese long term stock market movements. Therefore, a cointegration analysis is applied to model the long term relationship between industrial production, the consumer price index, money supply, short as well as long term interest rates and the stock prices in the US and Japan. The results suggest a positive relationship between industrial production, CPI and short rates while the long rates yield a negative coefficient for the US stock market. In Japan, industrial production has a much smaller positive coefficient as in the US while the CPI shows a much higher positive coefficient than in the US. Generally, the results are consistent with the belief that changes in industrial output are likely to affect current and future corporate cash flows and have a positive effect on the stock market. The strong negative relationship between interest rates and the equity market, as suggested by theory, is not clear in the analysed data set. An explanation of the different behaviour of the Japanese stock market, especially in respect to interest rates, industrial output and the consumer price index, might be given by the boom and bust of the domestic real estate market and its potentially massive wealth effects as well as the following bad loan crisis due to a price collapse in housing prices. |
| Keywords: | Stock Market Indices, Cointegration, Interest Rates |
| JEL: | C22 G12 E44 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0511&r=fmk |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | The paper analyzes the effects of financial liberalization on inflation. We develop a monetary and endogenous growth, dynamic general equilibrium model with financial intermediaries subjected to obligatory "high" cash reserves requirement, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, that typically had high reserve requirements, the model indicates a positive inflation-financial repression relationship irrespective of the the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates. |
| Keywords: | Inflation; Financial Markets and the Macroeconomy |
| JEL: | E31 E44 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-31&r=fmk |
| By: | Raphael H. Solomon |
| Abstract: | The author describes a model with a corrupt banking system, in which bankers knowingly lend at market interest rates to back projects riskier than the market rate indicates. Faced with early withdrawals, bankers turn to an interbank market, which may be available in an unfettered way, available but subject to screening, or unavailable. The presence of corruption increases the probability of contagious bank failure significantly. This fact holds in a perfect information environment, as well as in some environments with imperfect information. The model suggests that financial stability can be imperilled by corrupt lending. |
| Keywords: | Financial institutions; Financial stability |
| JEL: | D82 G19 G21 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-23&r=fmk |
| By: | Iris Claus |
| Abstract: | This paper assesses the effects of bank leding in a small open economy with a floating exchange rate and sticky prices. A theoretical model with costly financial intermediation is developed for New Zealand. The results show that long-run and business cycle effects of bank lending are small. Whether firms borrow from financial intermediaries or public debt markets is unlikely to affect economic activity. In other words, the financial structure, or degree to which a country's financial system is intermediary based or market based, does not matter. |
| JEL: | E32 E44 E50 F41 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2005-04&r=fmk |
| By: | James B. Ang; Warwick J. McKibbin |
| Abstract: | The objective of this paper is to examine whether financial development leads to economic growth or vice versa in the small open economy of Malaysia. We argue that the results obtained from cross-sectional studies are not able to address this issue satisfactorily and highlight the importance of country specific studies. Using time series data from 1960 to 2001, we conduct cointegration and various causality tests to assess the finance-growth link by taking saving, investment, trade and real interest rate into account. Contrary to the conventional findings, our results support the view that output growth causes financial depth in the long-run. |
| JEL: | E44 O11 O16 O53 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2005-05&r=fmk |
| By: | Jesus Gonzalo; Jose Olmo |
| Abstract: | None doubts that financial markets are related (interdependent). What is not so clear is whether there exists contagion among them or not, its intensity, and its causal direction. The aim of this paper is to define properly the term contagion (different from interdependence) and to present a formal test for its existence, the magnitude of its intensity, and for its direction. Our definition of contagion lies on tail dependence measures and it is made operational through its equivalence with some copula properties. In order to do that, we define a NEW copula, a variant of the Gumbel type, that is sufficiently flexible to describe different patterns of dependence, as well as being able to model asymmetric effects of the analyzed variables (something not allowed with the standard copula models). Finally, we estimate our copula model to test the intensity and the direction of the extreme causality between bonds and stocks markets (in particular, the flight to quality phenomenon) during crises periods. We find evidence of a substitution effect between Dow Jones Corporate Bonds Index with 2 years maturity and Dow Jones Stock Price Index when one of them is through distress periods. On the contrary, if both are going through crises periods a contagion effect is observed. The analysis of the corresponding 30 years maturity bonds with the stock market reflects independent effects of the shocks. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we051810&r=fmk |
| By: | Philippe Martin; Hélène Rey |
| Abstract: | This paper develops a theory of financial crisis based on the demand side of the economy. We analyze the impact of financial and trade globalizations on asset prices, investment and the possibility of self-fulfilling financial crashes. In a two-country model, we show that financial and trade globalizations have different effects on asset prices, investment and income in the emerging market and in the industrialized country. Whereas trade globalization always has a positive effect on the emerging market, financial globalization may not, especially when trade costs are high. For intermediate levels of financial transaction costs and high levels of trade costs, pessimistic expectations can be self-fulfilling and may lead to a collapse in demand for goods and assets of the emerging market. Such a crash in asset prices is accompanied by a current account reversal, a drop in income and investment and more market incompleteness. We show that countries with lower income are more prone to such demand-based financial crashes. Our model can replicate the main stylized facts of financial crashes in emerging markets. Our results strongly suggest that emerging markets should liberalize trade in goods before trade in assets. |
| JEL: | F3 F4 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11550&r=fmk |
| By: | Bernadette A. Minton; René Stulz; Rohan Williamson |
| Abstract: | This paper examines the use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2003 only 19 large banks out of 345 use credit derivatives. Though few banks use credit derivatives, the assets of these banks represent on average two thirds of the assets of bank holding companies with assets in excess of $1 billion. Few banks are net buyers of credit protection and disclose using credit derivatives to hedge loans. Banks are more likely to be net protection buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios. The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a bank's loan portfolio and negatively or not related to other types of bank loans. The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks. |
| JEL: | G10 G20 G21 D82 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11579&r=fmk |
| By: | Francisco Gallego; Geraint Jones |
| Abstract: | Fear of floating” is one of the central empirical characteristics of exchange rate regimes in emerging markets. However, while some view “fear of floating” in terms of the optimal ex post monetary response to external shocks, protecting balance sheets and avoiding inflation, others have argued that from an ex ante perspective such a policy leads to private sector underinsurance against sudden stops. A commitment to floating during potential crises would increase the incentives of the private sector to conserve international liquidity. This paper develops a model of the optimal exchange rate regime when both ex ante and ex post concerns are present. Since it is only “fear of floating” during potential sudden stops which undermines insurance, we reexamine the data on exchange rate regimes for evidence that exchange rate flexibility is state-contingent. We find most emerging markets exhibit non-contingent policies with a uniformly low level of flexibility, which together with an absence of substituteinsurance policies supports the claim that greater exchange rate flexibility during sudden stops would be desirable for such countries. However, more recent floats with intermediate levels of credibility exhibit little state contingency because of a uniformly high degree of flexibility. More established floats with high credibility exhibit statecontingent regimes, retaining a capacity for discretionary intervention, but floating during potential crises. Exchange rate flexibility is associated with increased private sector hoarding of dollar assets and reduced incidence of sudden stops. Together the evidence suggests that the insurance benefits to floating for emerging markets can be substantial and that the credibility of the monetary policy framework is central to successful implementation of this policy. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:326&r=fmk |
| By: | Christer Ljungwall (China Centre for Economic Research at Peking University); Steven Wang (Department of Economics and statistics, Goteborg University) |
| Abstract: | This paper uses quarterly balance of payment data over the years 1993:1 - 2003:4 to explore the determinants of Chin's capital flight. The long run relationship and dynamic interactions among the variables are examined using cointegration and innovation accounting methodology. The result that capital flight is stimulated by external debts growth is noteworthy. The 'Holy Trinity' exlpains the link: For the agents in Chian, when the authorities insist in keeping a rgidly pegged CNY excahnge rate and monetary policy autonomy, incurring external debts is a ready challenge for large-scale cpaital inflows and outflows. As the country's external debts are state-guaranteed, the 'revolving-door syndrome' intensifies debtors moral hazard in expecting a government bail-out, and they over-borrow from abroad; hence there is an incident of capital flight. Despite China's strict control of its fiancial account, capital flight happens, and it is defacto being funded by increasing external debts. Hence, reforms in external debts management and fiscal resource allocation should be introduced to downsize such capital flight. |
| Keywords: | capital flight, cointegration, China |
| JEL: | F21 G15 F32 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:606&r=fmk |
| By: | Jorge Hermann; Rómulo Chumacero |
| Abstract: | Este documento muestra un hecho estilizado robusto en la relación entre dinero e inflación en Chile: la inflación precede (estadísticamente) al crecimiento del dinero y no viceversa. Este hallazgo es robusto a la consideración del tipo de política monetaria, período muestral, agregado monetario, consideración de segundos momentos condicionales o la inclusión de metas de inflación. A su vez, se presenta una motivación teórica de porqué la evolución de los agregados monetarios no necesariamente está asociada a la inflación. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:324&r=fmk |
| By: | Ralph de Haas; Ilko Naaborg |
| Abstract: | On the basis of focused interviews with managers of foreign parent banks and their affiliates in Central Europe and the Baltic States, the development of small-business lending by foreign banks is analysed. Our approach allows us to complement the standard empirical literature, which has difficulty in analysing qualitative issues such as the role of changing lending technologies. It is found that the acquisition of local banks by foreign banks has not led to a persistent bias in these banks' credit supply towards large multinational corporations. Instead, increased competition and the improvement of subsidiaries' lending technologies have led foreign banks to gradually expand into the SME and retail markets. |
| Keywords: | foreign banks; transition economies; small-business lending |
| JEL: | F23 F36 G21 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:050&r=fmk |
| By: | Alejandro Balbas; Anna Downarowicz; Javier Gil-Bazo |
| Abstract: | Oil-linked derivatives are becoming very important in Modern Investment Theory. Accordingly, the analysis of Pricing Techniques and Portfolio Choice Problems involving these securities is a major topic for both managers and researchers. We focus on both the No-Arbitrage Approach and Stochastic Discount Factor (SDF) based methods in order to study oil-linked derivatives available at The New York Mercantile Exchange, Inc, one of the world's largest markets in energy and precious metals. First, we generalize some theoretical properties of the SDF in order to capture the effects induced by the bid-ask spread when analyzing dominated/efficient portfolios. Secondly, we apply our findings and empirically analyze the existence of dominated assets and portfolios in the oil derivatives market. Our results reveal the systematic presence of dominated prices, which should be taken into account by traders when composing their portfolios. Additionally, the test yields pricing and portfolio choice methods as well as new strategies that may allow brokers to outperform their service for their clients. It is worth to point out that the conclusions of the test have two important characteristics: On the one hand, they are very precise since we draw on perfectly synchronized bid/ask prices, as provided by Reuters. On the other hand, they are robust in the sense that they do not depend on any assumption about the underlying asset price dynamics. Finally, despite the empirical test focuses on oil derivatives, the methodology is general enough to apply to a broad range of markets. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb055013&r=fmk |
| By: | Rangan Gupta (University of Connecticut and University of Pretoria) |
| Abstract: | The paper analyzes the effects of financial liberalization on inflation. We develop a monetary and endogenous growth, dynamic general equilibrium model of a small open semi-industrialized economy, with financial intermediaries subjected to obligatory "high" reserve ratio, serving as the source of financial repression. When calibrated to four Southern European semi-industrialized countries, namely Greece, Italy, Spain and Portugal, that typically had high reserve requirements, the model indicates a positive inflation-financial repression relationship irrespective of the the specification of preferences. But the strength of the relationship obtained from the model is found to be much smaller in size than the corresponding empirical estimates. |
| Keywords: | Inflation; Financial Markets and the Macroeconomy |
| JEL: | E31 E44 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-32&r=fmk |
| By: | Esteban Jadresic; Jorge Selaive |
| Abstract: | In a typical tactical asset allocation set up a manager receives compensation for his excess of return given a tracking error target. Critics of this framework cite its lack of control over the total portfolio risk. Current approaches recommend what we call a mixed allocation, derived from concerns about relative and absolute return and risk. This work provides an analytical framework for mixed tactical asset allocation, based on the premise that after the investor sets a tracking error target, a fundamental trade off remains unsolved: the one between excess of return and total risk. The article derives a separation theorem for tactical allocation, wherein the portfolio is a linear combination of an alpha portfolio providing excess returns and a beta portfolio providing overall risk hedge. The author shows how the formal expression summarizes all previous works. Moreover, it also includes the simplest Black-Litterman allocation. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:325&r=fmk |
| By: | Rasmus Fatum (School of Business, University of Alberta); Michael M. Hutchison (Department of Economics, University of California) |
| Abstract: | This article examines the rationale behind the massive increase in Japanese foreign exchange market intervention operations in 2003-04, and evaluates its effectiveness both in limiting yen exchange rate appreciation and influencing the direction of monetary policy. The two main questions addressed in this study are: Was the intervention effective in slowing exchange rate appreciation compared to a counterfactual case with no intervention? And, has intervention on such a large scale authorized by the Ministry of Finance been able to directly influence liquidity creation or indirectly influence the stance of Bank of Japan policy? |
| Keywords: | foreign exchange intervention; Japanese monetary policy |
| JEL: | E51 E58 F31 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:05-05&r=fmk |
| By: | John Y. Campbell; João F. Cocco |
| Abstract: | Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households' consumption decisions. Rising house prices may stimulate consumption by increasing households' perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters. This finding is consistent with heterogeneity in the wealth effect across these groups. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions. |
| JEL: | D1 G1 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11534&r=fmk |
| By: | Ralph de Haas; Ilko Naaborg |
| Abstract: | We use focused interviews with bank managers to analyse how multinational banks use internal capital markets to control their subsidiaries. It is found that foreign bank affiliates are strongly influenced by the capital allocation and credit steering mechanisms of the parent bank. Parent banks generally set credit growth targets, which may then be supported by book capital and debt funding. This passive approach establishes a minimum amount of local book capital and is driven by regulatory considerations. In addition, some banks have started to use semi-active economic capital models. By charging subsidiaries for the use of economic capital, parent banks introduce a constraint at the individual loan level. This bottom-up approach determines the pace at which subsidiaries are able to meet their credit growth targets. Our findings suggest that the credit growth of subsidiaries may critically depend on the financial position of the parent bank. |
| Keywords: | foreign banks; transition economies; internal capital markets |
| JEL: | F23 F36 G21 G31 G32 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:051&r=fmk |
| By: | Fiona Atkins (School of Economics, Mathematics & Statistics, Birkbeck College) |
| Abstract: | This paper estimates the money demand function for Jamaica using a Structural co-integrating VAR. This approach provides estimates of the long run structural relations and also reveals the complex short run feedbacks of monetary policy on key macro variables. In recent years Jamaican governments have adopted an inflation targeting framework for policy and have moved towards reliance on interest rates rather than direct money control as the primary instrument. This policy presumes that monetary transmission runs from the interest rate to directly affect the level of output which then feeds into the inflation process. However, in an economy with limited financial sector development interest rate transmission may be more circumspect, having a strong direct affect on money demand which then influences aggregate demand and output and hence inflation. These feedbacks are investigated within the error correction model.. Stability of Money demand is vital for predictable policy, and is investigated using CUSUM tests for parameter stability. The Jamaican financial sector suffered a major crisis in the mid 1990’s, the paper considers whether the stability of money demand was compromised. It is argued that the finding of stable money demand suggests that the specific policy responses may have successfully bolstered confidence and prevented financial implosion. |
| Keywords: | Caribbean, Jamaica, money demand |
| JEL: | C51 C52 E41 E52 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:0512&r=fmk |
| By: | Mardi Dungey; Renee Fry; Brenda Gonzales-Hermosillo; Vance L. Martin |
| Abstract: | The transmission of the financial crises in 1998 though international equity markets is estimated through a multi-factor model of financial markets specifically allowing for contagion effects. The application measures the strength of contagion emanating from the Russia crisis of 1998, and the LTCM near collapse, using a panel of 10 emerging and developed financial markets. Pre and post default periods for Russia are distinguished. The results show that contagion is significant and widespread from both crises, although the LTCM crises has more impact on developed than emerging markets. Consisten with the existing literature, regional effects are found to be strong during financial crises. Asian markets are found to be relatively immune from contagion, perhaps reflecting the effect of their own recent crisis. |
| JEL: | C15 F31 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2005-15&r=fmk |
| By: | Claudia M. Buch; Kai Carstensen; Andrea Schertler |
| Abstract: | Changes in foreign asset holdings are one channel through which agents adjust to macroeconomic shocks. In this paper, we test whether foreign bank assets change as a result of domestic and foreign macroeconomic shocks. We frame our empirical analysis in a standard new open economy macro model in which financial markets are imperfectly integrated. We test the implications of this model using dynamic panel models for changes in foreign bank assets. We find evidence that nominal interest rate differentials and inflation differentials drive changes in foreign bank assets permanently, while growth rate differentials and exchange rates have only a temporary effect. |
| Keywords: | international banking, macroeconomic shocks |
| JEL: | F3 F41 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1254&r=fmk |
| By: | Pierluigi Balduzzi; Cesare Robotti |
| Abstract: | The risk premia assigned to economic (nontraded) risk factors can be decomposed into three parts: (i) the risk premia on maximum-correlation portfolios mimicking the factors; (ii) (minus) the covariance between the nontraded components of the candidate pricing kernel of a given model and the factors; and (iii) (minus) the mispricing assigned by the candidate pricing kernel to the maximum-correlation mimicking portfolios. The first component is the same across asset-pricing models and is typically estimated with little (absolute) bias and high precision. The second component, on the other hand, is essentially arbitrary and can be estimated with large (absolute) biases and low precisions by multi-beta models with nontraded factors. This second component is also sensitive to the criterion minimized in estimation. The third component is estimated reasonably well, both for models with traded and nontraded factors. We conclude that the economic risk premia assigned by multi-beta models with nontraded factors can be very unreliable. Conversely, the risk premia on maximum-correlation portfolios provide more reliable indications of whether a nontraded risk factor is priced. These results hold for both the constant and the time-varying components of the factor risk premia. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2005-13&r=fmk |
| By: | Paul S. Calem; Michael B. Gordy; Loretta J. Mester |
| Abstract: | To explain persistence of credit card interest rates at relatively high levels, Calem and Mester (AER, 1995) argued that informational barriers create switching costs for high-balance customers. As evidence, using data from the 1989 Survey of Consumer Finances, they showed that these households were more likely to be rejected when applying for new credit. In this paper, they revisit the question using the 1998 and 2001 SCF. Further, they use new information on card interest rates to test for pricing effects consistent with information-based switching costs. The authors find that informational barriers to competition persist, although their role may have declined |
| Keywords: | Credit cards |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:05-16&r=fmk |
| By: | Refet S. Gurkaynak |
| Abstract: | Federal funds futures are popular tools for calculating market-based monetary policy surprises. These surprises are usually thought of as the difference between expected and realized federal funds target rates at the current FOMC meeting. This paper demonstrates the use of federal funds futures contracts to measure how FOMC announcements lead to changes in expected interest rates after future FOMC meetings. Using several 'surprises' at different horizons, timing, level, and slope components of unanticipated policy actions are defined. These three components have differing effects on asset prices that are not captured by the contemporaneous surprise measure. |
| Keywords: | Monetary policy ; Federal funds rate ; Federal funds market (United States) |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2005-29&r=fmk |
| By: | Fernando A. Broner; Roberto Rigobon |
| Abstract: | The standard deviations of capital flows to emerging countries are 80 percent higher than those to developed countries. First, we show that very little of this difference can be explained by more volatile fundamentals or by higher sensitivity to fundamentals. Second, we show that most of the difference in volatility can be accounted for by three characteristics of capital flows: (i) capital flows to emerging countries are more subject to occasional large negative shocks (“crises”) than those to developed countries, (ii) shocks are subject to contagion, and (iii) – the most important one – shocks to capital flows to emerging countries are more persistent than those to developed countries. Finally, we study a number of country characteristics to determine which are most associated with capital flow volatility. Our results suggest that underdevelopment of domestic financial markets, weak institutions, and low income per capita, are all associated with capital flow volatility. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:328&r=fmk |
| By: | Paul Cavelaars |
| Abstract: | This paper studies the implications of globalisation for the effectiveness of monetary policy in large open economies, such as the euro area and the United States. The analysis allows for imperfect competition and an endogenous home bias in consumption. I find that globalisation (a reduction in the costs of international trade) causes a monetary expansion to have a larger (smaller) e¤ect on prices (output). To the extent that globalisation also induces stronger competition in the goods market, I find that its impact on the incentive for activist monetary policy is ambiguous. Finally, globalisation reduces the beggary-thy-neighbour effects of monetary policy. |
| Keywords: | trade costs; openness; monetary policy. |
| JEL: | F15 F41 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:048&r=fmk |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research) |
| Abstract: | In a simple open EME macromodel, calibrated to the typical institutions and shocks of a densely populated emerging market economy, a monetary stimulus preceding a temporary supply shock can lower interest rates, raise output, appreciate exchange rates, and lower inflation. Simulations generalize the analytic result with regressions validating the parameter values. Under correct incentives, such as provided by a middling exchange rate regime, which imparts limited volatility to the nominal exchange rate around a trend competitive rate, forex traders support the policy. The policy is compatible with political constraints and policy objectives, but analysis of strategic interactions brings out cases where optimal policy will not be chosen. Supporting institutions are required to coordinate monetary, fiscal policy and markets to the optimal equilibrium. The analysis contributes to understanding the key issues for countries such as India and China that need to deepen markets in order to move to more flexible exchange rate regimes. |
| Keywords: | Exchange rate, hedging, supply shocks, EMEs, incentives, politics |
| JEL: | F31 F41 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2005-002&r=fmk |
| By: | Michael D. Bordo; Angela Redish |
| Abstract: | On the seventieth birthday of the Bank of Canada, we evaluate the Bank's contribution to monetary policy in an international context. We focus on: the reasons for the establishment of the central bank in 1935, its unique record of floating in a sea of fixed currencies under Bretton Woods; its experience with the Great Inflation and monetarism; its pioneering adoption of inflation targeting; and recent innovations in the payments and the phasing out of reserve requirements. |
| JEL: | E58 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11586&r=fmk |
| By: | anonymous |
| Abstract: | Few would argue that the time is ripe for financial education in America as financial products and services are growing in diversity and complexity. |
| Keywords: | Financial literacy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedccf:9&r=fmk |
| By: | Raghbendra Jha; Ibotomi S. Longjam |
| Abstract: | In an economy undergoing structural reforms the composition of savings goes through considerable change. It is important to understand such changes both for increasing the volume of aggregate savings (to garner resources for higher economic growth) as well as for affecting their composition (towards more productive instruments) through an understanding of inter-asset substitutability. We conduct nonparametric tests to examine whether data on financial savings in India can be rationalized in terms of a utility function of a representative economic agent. The parametric test has the disadvantage that in some cases it is not possible to distinguish between rejections of the functional for from a rejection of weak separability. We establish that data on financial savings in India are consistent with the existence of utility function for a representative individual with a sub-preference where contractual savings (insurance and provident funds) can be separated out. This result would facilitate the construction of a suitable financial aggregate using these assets. |
| JEL: | E21 E41 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2004-06&r=fmk |
| By: | John B. Carlson; Ben R. Craig; William R. Melick |
| Abstract: | This paper demonstrates how options on federal funds futures, which began trading in March 2003, can be used to recover the implied probability density function (PDF) for future Federal Open Market Committee (FOMC) interest rate outcomes. The discrete nature of the choices made by the FOMC allows for a very straightforward recovery of the implied PDF using ordinary least squares (OLS) estimation. This simple recovery method stands in contrast to the relatively complicated PDF recovery techniques developed for options written on assets such as equities, foreign exchange, or commodity futures where the underlying prices are most appropriately modeled as being drawn from continuous distributions. The OLS estimation is used to recover PDFs for single FOMC meetings as well as PDFs for joint estimation of multiple FOMC meetings, and allows for the imposition of restrictions on the recovered probabilities, both within and across FOMC meetings. Finally, recovered probabilities are used to assess the impact of data releases and Fed communication on the perceived likelihood of actual policy outcomes. |
| Keywords: | Federal Open Market Committee ; Monetary policy ; Interest rate futures |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0507&r=fmk |