|
on Financial Markets |
| By: | Diana Marina Del COlle, (Bank of Italy,Research Department, Turin Branch); Paolo Finaldi Russo (Bank of Italy, Economic Research Department, Rome); Andrea Generale (Bank of Italy, Economic Research Department, Rome) |
| Abstract: | The analysis of the determinants and the effects on firm performance of venture capital finance for a sample of Italian enterprises indicates that small, young and more innovative firms are more likely to be financed by a venture capitalist. Our results confirm that venture capital can help reduce financial constraints for firms that are more difficult for external investors to evaluate. We also show that larger firms resort to venture capitalists when their indebtedness with banks is high and we find evidence that venture capital financing is more frequent after periods of high growth and investment, a result that points to the advisory role of the venture capitalist. A novel result emerges; venture capital also finances firms with multiple banking relationships. In the presence of multiple lending, banks could have greater difficulty monitoring firms with asymmetric information; moreover, if firms default, banks are likely to have a weaker bargaining position. In these cases, the amount of bank credit is probably near its limit and firms need to resort to venture capital, a contract that reduces the amount of guarantees needed to access external finance. |
| Keywords: | Venture capital, Private equity |
| JEL: | G24 G32 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_584_06&r=fmk |
| By: | Alexei Karas; William Pyle; Koen Schoors |
| Abstract: | In nascent markets with relatively immature institutions, do depositors have the capacity to discipline banks with poor fundamentals? If so, what information specifically guides their response? Using a database from post-communist, pre-deposit-insurance Russia, we present evidence for quantity-based sanctioning of weaker banks by both firms and households, particularly after the 1998 financial crisis. More notably, the discipline that we observe is surprisingly sophisticated. Specifically, our evidence is consistent with the proposition that depositors interpret a bank’s deposit rate and capital as jointly reflecting its subsequent stability. In estimating a deposit supply function, we show that, particularly for poorly capitalized banks, interest rate increases run into diminishing, and eventually negative, returns in terms of deposit attraction. |
| Keywords: | banking, market discipline |
| JEL: | G21 O16 P2 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:mdl:mdlpap:0607&r=fmk |
| By: | Márcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Bernando S. de M. Carvalho (Gávea Investimentos) |
| Abstract: | We analyze the Brazilian experience in the 1990s to access the effectiveness of controls on capital inflows in restricting financial inflows and changing their composition towards long term flows. Econometric exercises (VARs) lead us to conclude that controls on capital inflows were effective in deterring financial inflows for only a brief period, from two to six months. The hypothesis to explain the ineffectiveness of the controls is that financial institutions performed several operations aimed at avoiding capital controls. We then conducted interviews with market players in order to provide several examples of the financial strategies that were used in this period to invest in the Brazilian fixed income market while bypassing capital controls. The main conclusion is that controls on capital inflows, while they may be desirable, are of very limited effectiveness under sophisticated financial markets. Therefore, policy-makers should avoid spending the scarce resources of bank supervision trying to implement them and focus more in improving economic policy. |
| JEL: | E44 F32 F34 F36 G15 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:516&r=fmk |
| By: | Luciano Pezzolo (Department of Economics, University Of Venice Cà Foscari); Giuseppe Tattara (Department of Economics, University Of Venice Cà Foscari) |
| Abstract: | This paper discusses how Genoese bankers collected money at exchange fairs. This money was then lent to the King of Spain - through the asientos - from the mid-sixteenth to the early seventeenth centuries. Genoese bankers raised capital at the exchange fairs , which were typical short-term credit mechanism, where foreign bills of exchange were discounted over a three-month period. The Genoese funded long-term obligations by means of short term loans which meant they were able to enforce payment to the King and at the same time successfully manage the supply of finance from a large number of easily substitutable markets, located in different states. The Bisenzone fair of exchange was the forerunner to an efficient, widely integrated international capital market where Genoese pre-eminence was firmly established and which the Genoese kept firmly under their control. The success of the Bisenzone fairs of exchange directly challenges the theory which suggests that the laws against usury restrained the development of capital markets in early modern Italy. |
| Keywords: | Financial markets, market integration, financial institutions |
| JEL: | N20 N23 N43 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:25_06&r=fmk |
| By: | Sjöberg, Lennart (Center for Risk Research); Engelberg, Elisabeth (Center for Risk Research) |
| Abstract: | Financial decision making rarely follows models derived from economic theory which postulate that people are rational economic actors. Psychological alternatives abound. The Tversky-Kahneman heuristics approach is currently dominating, but it needs to be complemented with emotional and personality factors, since cognitive limitations by no means provide exhaustive explanations of the psychology of decision making. In this paper, attitudes to financial risk taking and gambling are related to sensation seeking, emotional intelligence, the perceived importance of money (money concern), and over-arching values, in groups of students of financial economics (N=93). Most of the students planned a career in finance. Comparative data were collected for a group of non-students. Data on values were also available from a random sample of the population for a comparison. It was found that a positive attitude to economic risk taking and gambling behavior were associated with a high level of sensation seeking, a lower level of money concern, and giving low priority to altruistic values concerning peace and the environment. The subgroup of participants planning a career in finance showed an even more pronounced interest in gambling and a lower level of emotional intelligence. |
| Keywords: | Decision making; finance; risk attitude; financial advice |
| Date: | 2006–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhb:hastba:2006_003&r=fmk |
| By: | Hakan Berument; Yýlmaz Akdi; Cemal Atakan |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0602&r=fmk |
| By: | Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies); Ilias Lekkos (Research Department, Eurobank Ergasias, Greece); Theodore Panagiotidis (Department of Economics, Loughborough University, UK) |
| Abstract: | This paper explores the ability of factor models to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models.We find some evidence that the non-linear models predict better than the linear ones. At short horizons, the nearest-neighbours (NN) model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. At long horizons, the STVAR model increases its forecasting ability over the linear models, whereas the NN model does not outperform the rest of the models. |
| Keywords: | Interest rate swap spreads, term structure of interest rates, factor models, regime switching, smooth transition models, nearest-neighbours, forecasting. |
| JEL: | C51 C52 C53 E43 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2006/05&r=fmk |
| By: | Horst Entorf (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Jochen Moebert (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)); Katja Sonderhof (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology)) |
| Abstract: | Following the well-known approach by Adler and Dumas (1984), we evaluate the foreign exchange rate exposure of nations. Results based on data from 27 countries show that national foreign exchange rate exposures are significantly related to the current balance variables of corresponding economies. |
| Keywords: | Exchange rate exposure, international trade, current balance. |
| JEL: | G15 F31 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:tud:ddpiec:169&r=fmk |
| By: | Justin Wolfers; Eric Zitzewitz |
| Abstract: | While most empirical analysis of prediction markets treats prices of binary options as predictions of the probability of future events, Manski (2004) has recently argued that there is little existing theory supporting this practice. We provide relevant analytic foundations, describing sufficient conditions under which prediction markets prices correspond with mean beliefs. Beyond these specific sufficient conditions, we show that for a broad class of models prediction market prices are usually close to the mean beliefs of traders. The key parameters driving trading behavior in prediction markets are the degree of risk aversion and the distribution of beliefs, and we provide some novel data on the distribution of beliefs in a couple of interesting contexts. We find that prediction markets prices typically provide useful (albeit sometimes biased) estimates of average beliefs about the probability an event occurs. |
| JEL: | D4 D8 G13 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12200&r=fmk |
| By: | Hakan Berument; Nergiz Dinçer; Hasan Olgun |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0604&r=fmk |
| By: | Richard H. Clarida |
| Abstract: | This volume collects the eleven original papers that were written for the NBER Project on G7 Current Account Imbalances. Four major themes emerged from the papers written for the project. First, there was broad agreement that the current account imbalances that prevailed among the G7 countries as of June 2005 would ultimately decline, although there was no consensus on when or how this would occur . Second, there was agreement that adjustments in global currency markets would likely be associated with the shifts in global saving and investment patterns that would be required to bring about the ultimate decline in G7 current account imbalances. Third, while the focus of the conference was on current account imbalances in the G7 countries, it was recognized that the aggregate excess of saving over investment that existed among the emerging market economies at the time of the conference, as well as the currency intervention policies of some of these countries, were contributing to the current imbalances in the G7 that prevailed as of June 2005. Fourth, there was a consensus that re-valuation of the evolving foreign asset and liability positions of the G7 countries would play a role during process by which current account imbalances narrowed, although there was range of opinion concerning how large a role such revaluation effects would play. |
| JEL: | F3 F4 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12194&r=fmk |
| By: | Richard H. Clarida; Manuela Goretti; Mark P. Taylor |
| Abstract: | We find evidence of threshold behavior in current account adjustment for the G7 countries, such that the dynamics of adjustment towards equilibrium depend upon whether the current-account/ net-output ratio breaches estimated, country specific current account surplus or deficit thresholds. Both the speeds of adjustment and the size of the thresholds are found to differ significantly across countries. In addition, we also find evidence of shifts in means and variances of exchange rate changes, stock returns, and interest differentials that coincide with the current account adjustment regimes identified by the model. |
| JEL: | F3 F4 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12193&r=fmk |
| By: | Chew Lian Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Sandy Suardi (School of Economics, The University of Queensland) |
| Abstract: | This paper tests for the presence of nonlinear dynamics in selected Asian short rates and employs a regime varying unit root test to detect non-stationarity for distinct regimes. Nonlinearities in the form of Markov-switching dynamics are found in all short rates sample. The mean-reverting behaviour of interest rates is dependent on both the level and volatility of interest rates. The occasional random walk and mean-reverting dynamics of short rates are attributed to the macroeconomic fundamentals, exchange rate regimes and monetary policy objectives in these economies. |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n14&r=fmk |
| By: | Leslie Rosenthal (Keele University, Department of Economics) |
| Abstract: | This paper considers the informational efficiency of the UK owner-occupied housing market over the period 1991-2001. Original small-area, monthly, house price index series are developed from raw housing transactions observations for a number of UK counties and cities. These series are then tested for characteristics indicative of weak market efficiency and seasonality. The major conclusions drawn are that there exists little evidence to support notions of inefficiency in these markets for this period. |
| Keywords: | Housing Markets; Market efficiency; Seasonality. |
| JEL: | R31 R20 R10 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2004/05&r=fmk |
| By: | Long Chen; Ralitsa Petkova; Lu Zhang |
| Abstract: | Fama and French (2002) estimate the equity premium using dividend growth rates to measure the expected rate of capital gain. We use similar methods to study the value premium. From 1941 to 2002, the expected HML return is on average 5.1% per annum, consisting of an expected-dividend-growth component of 3.5% and an expected-dividend-to-price component of 1.6%. The ex-ante HML return is also countercyclical: a positive, one-standard-deviation shock to real consumption growth rate lowers this premium by about 0.45%. Unlike the equity premium, there is only mixed evidence suggesting that the value premium has declined over time. |
| JEL: | G1 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12183&r=fmk |
| By: | Georges Dionne; Sadok Laajimi; Sofiane Mejri; Madalina Petrescu |
| Abstract: | In this paper, we investigate the hybrid contingent claim approach with publicly traded Canadian companies listed on the Toronto Stock Exchange. Our goal is to assess how combining their continuous valuation by the market with the value given in their financial statements improves our ability to predict their probability of default. Our results indicate that the predicted structural probabilities of default (PDs from the structural model) contribute significantly to explaining default probabilities when PDs are included alongside the retained accounting variables. We also show that quarterly updates to the PDs add a large amount of dynamic information to explain the probabilities of default over the course of a year. This flexibility would not be possible with a reduced-form model. We also conducted a preliminary analysis of correlations between sructural probabilities of default for the firms in our database. Our results indicate that there are substantial correlations in the studied data. |
| Keywords: | Default risk, public firm, structural model, reduced form model, hybrid model, probit model, Toronto Stock Exchange, correlations between default probabilities |
| JEL: | G21 G24 G28 G33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0613&r=fmk |
| By: | Anusha Chari; Peter Blair Henry |
| Abstract: | We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firm's expected future sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment. |
| JEL: | E F G |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12186&r=fmk |
| By: | Patrizio Pagano (Bank of Italy, Economic Research Department); Massimiliano Pisani (Bank of Italy, Economic Research Department) |
| Abstract: | This paper documents the existence of a significant forecast error on crude oil futures, particularly evident since the mid-1990s, which is negative on average and displays a non-trivial cyclical component (risk premium). We show that the forecast error on oil futures could have been explained in part by means of real-time US business cycle indicators, such as the degree of utilized capacity in manufacturing. An out-of-the-sample prediction exercise reveals that futures which are adjusted to take into account this time-varying component produce significantly better forecasts than those of the unadjusted futures and random walk, particularly at horizons of more than 6 months. |
| Keywords: | Oil, Forecasting, Futures |
| JEL: | E37 E44 G13 Q4 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_585_06&r=fmk |
| By: | Marcello Pericoli (Bank of Italy, Economic Research Department); Massimo Sbracia (Bank of Italy, Economic Research Department) |
| Abstract: | This paper analyzes the Risk Appetite Index (RAI), a measure of investors’ risk aversion proposed by Kumar and Persaud (2001, 2002). We show that the RAI distinguishes between risk and risk aversion only under theoretically restrictive assumptions on the distribution of returns and the shocks affecting assets’ riskiness. However, by comparing the RAI with a measure of risk aversion derived from the CAPM — a model that does not require those restrictive assumptions — we find that estimates are surprisingly similar. We explain this result by proving that, under a certain condition, the RAI can approximate the risk aversion parameter of a CAPM. This occurs if the ratio between the variance of the returns on assets and the variance of the riskiness of assets is sufficiently small—a condition that is met in our sample. |
| Keywords: | CAPM, risk aversion |
| JEL: | G11 G12 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_586_06&r=fmk |
| By: | Hakan Berument; Esin Gözpýnar; Baþak Ceylan |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0606&r=fmk |
| By: | Evzen Kocenda; Ali M. Kutan; M. Taner Yigit |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0501&r=fmk |
| By: | Márcio Gomes Pinto Garcia (Department of Economics PUC-Rio); Juliana Salomão |
| Abstract: | More than eleven years after the end of hyperinflation in Brazil, domestic bond markets have been unable to lengthen the average maturity of both public and private bonds. This paper shows that the lengthening is theoretically and practically (we analyzed the experiences of Israel, Mexico and Poland), a consequence of persistent stabilization programs that successfully reduced systemic risk. Therefore, it is pointless to try to achieve the lengthening as an objective in isolation. It is necessary to improve the economic fundamentals that maintain a high level of systemic risk. Only in this context, measures that aim at lengthening bonds’ maturity will indeed produce positive results. |
| JEL: | E43 E44 F34 H63 G15 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:rio:texdis:515&r=fmk |
| By: | Eiji Ogawa; Junko Shimizu |
| Abstract: | We investigate the extent to which a common currency basket peg would stabilize effective exchange rates of East Asian currencies. We use an AMU (Asian Monetary Unit), which is a weighted average of ASEAN10 plus 3 (Japan, China, and Korea) currencies, as a common currency basket to investigate the stabilization effects. We compare our results with another result on stabilization effects of the common G3 currency (the US dollar, the Japanese yen, and the euro) basket in the East Asian countries (Williamson (2005)). We obtained the following results: first, the AMU peg system would be more effective in reducing fluctuations of the effective exchange rates as more countries applied the AMU peg system in East Asia. Second, the AMU peg system would more effectively stabilize the effective exchange rates than a common G-3 currency basket peg system for four (Indonesia, the Philippines, South Korea and Thailand) of the seven countries. The results suggest that the AMU basket peg would be useful for the East Asian countries whose trade weights on Japan are relatively higher than others. |
| JEL: | E6 F3 F4 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12198&r=fmk |
| By: | Denis Belomestny; Markus Reiß |
| Abstract: | The calibration of financial models has become rather important topic in recent years mainly because of the need to price increasingly complex options in a consistent way. The choice of the underlying model is crucial for the good performance of any calibration procedure. Recent empirical evidences suggest that more complex models taking into account such phenomenons as jumps in the stock prices, smiles in implied volatilities and so on should be considered. Among most popular such models are Levy ones which are on the one hand able to produce complex behavior of the stock time series including jumps, heavy tails and on other hand remain tractable with respect to option pricing. The work on calibration methods for financial models based on Lévy processes has mainly focused on certain parametrisations of the underlying Lévy process with the notable exception of Cont and Tankov (2004). Since the characteristic triplet of a Lévy process is a priori an infinite-dimensional object, the parametric approach is always exposed to the problem of misspecification, in particular when there is no inherent economic foundation of the parameters and they are only used to generate different shapes of possible jump distributions. In this work we propose and test a non-parametric calibration algorithm which is based on the inversion of the explicit pricing formula via Fourier transforms and a regularisation in the spectral domain. Using the Fast Fourier Transformation, the procedure is fast, easy to implement and yields good results in simulations in view of the severe ill-posedness of the underlying inverse problem. |
| Keywords: | European option, jump diffusion, minimax rates, severely ill-posed, nonlinear inverse problem, spectral cut-off |
| JEL: | G13 C14 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-035&r=fmk |
| By: | Bilin Neyaptý; Nergiz Dinçer |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0503&r=fmk |
| By: | Hakan Berument; Nergiz Dinçer |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0513&r=fmk |
| By: | Antony Unwin; Martin Theus; Wolfgang Härdle |
| Keywords: | company rating, default probability, support vector machines, colour coding |
| JEL: | C14 G33 C45 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-031&r=fmk |
| By: | Andrew Ang; Li Gu; Yael V. Hochberg |
| Abstract: | Recent studies suggest that the underperformance of IPOs in the post-1970 sample may be a small sample effect or “Peso” problem. That is, IPO underperformance may result from observing too few star performers ex-post than were expected ex-ante. We develop a model of IPO performance that captures this intuition by allowing returns to be drawn from mixtures of outstanding, benchmark, or poor performing states. We estimate the model under the null of no ex-ante average IPO underperformance and construct small sample distributions of various statistics measuring IPO relative performance. We find that small sample biases are extremely unlikely to account for the magnitude of the post-1970 IPO underperformance observed in data. |
| JEL: | G12 G14 G32 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12203&r=fmk |
| By: | Hakan Berument; Onur Ince |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0508&r=fmk |
| By: | Jörg Polzehl; Vladimir Spokoiny |
| Abstract: | GARCH models are widely used in financial econometrics. However, we show by mean of a simple simulation example that the GARCH approach may lead to a serious model misspecification if the assumption of stationarity is violated. In particular, the well known integrated GARCH effect can be explained by nonstationarity of the time series. We then introduce a more general class of GARCH models with time varying coefficients and present an adaptive procedure which can estimate the GARCH coefficients as a function of time. We also discuss a simpler semiparametric model in which the beta-parameter is fixed. Finally we compare the performance of the parametric, time varying nonparametric and semiparametric GARCH(1,1) models and the locally constant model from Polzehl and Spokoiny (2002) by means of simulated and real data sets using different forecasting criteria. Our results indicate that the simple locally constant model outperforms the other models in almost all cases. The GARCH(1,1) model also demonstrates a relatively good forecasting performance as far as the short term forecasting horizon is considered. However, its application to long term forecasting seems questionable because of possible misspecification of the model parameters. |
| Keywords: | varying coefficient GARCH, adaptive weights |
| JEL: | C14 C22 C53 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-033&r=fmk |
| By: | Michael Fritsch; Dirk Schilder |
| Abstract: | We examine the role of spatial proximity for Venture Capital (VC) investments in Germany. The main database is a survey of 85 personal interviews with representatives of different types of financial institutions. The analysis shows that spatial proximity is far less important for VC investments than is often believed. For example, the results indicate that syndication is partly used as an alternative to spatial proximity. Telecommunication does not work as a substitute for face-to-face contact. On the whole, regional proximity is not a dominant factor in VC partnerships. Therefore, the absence of VC firms in a region does not appear to cause a severe regional equity gap. |
| Keywords: | Venture Capital, spatial proximity, start-up financing |
| JEL: | G24 O16 D21 M13 R12 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:esi:egpdis:2006-14&r=fmk |
| By: | Penelope A. Smith (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Lei Lei Song (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne) |
| Abstract: | This paper examines the response of consumption to income, credit and interest rate changes in Australia. In contrast to previous studies on consumption in Australian, this paper adopts an Euler equation approach. The Euler equation derives from the consumers' utility maximising problem under the assumption that rule of thumb consumers have borrowing restrictions. To assess the role of credit explicitly, credit variables are also included in the Euler equation. The paper further assumes that coe±cients are time-varying. The results con¯rm the signi¯cant e®ects of income and credit on consumption and also reveal that while consumption growth is not responsive to interest rate changes, the coe±cient on the real interest rate was time varying and the coe±cient becomes smaller in absolute terms since the mid 1990s. This implies that consumption may have been less responsive to interest rate changes since then. |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2005n20&r=fmk |
| By: | Alex Dickson (Keele University, Department of Economics); Roger Hartley (Keele University, Department of Economics) |
| Abstract: | We show how non-price-taking behavior by agents in partial equilibrium can be analyzed using strategic versions of Marshallian supply and demand curves. There is a Nash equilibrium of a two-good, strategic market game at a given price if and only if the strategic supply and demand curves intersect at that price. This result allows us to prove new existence and uniqueness results for such games, which have previously been obtained only by imposing somewhat restrictive assumptions such as symmetry on each side of the market. It also enables us to show that many conventional comparative statics results of Marshallian analysis survive strategic play by buyers and sellers. Finally, we show that price manipulation in this game always has the effect of reducing supply and demand and that thick markets are almost competitive. |
| Keywords: | Strategic Market Game, Imperfect Competition, Marshallian Cross |
| JEL: | C72 D43 D50 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:kee:kerpuk:2004/07&r=fmk |
| By: | Elisabeth Müller (Centre for European Economic Research (ZEW), Department of Industrial Economics and International Management, L7, 1, 68161 Mannheim, Germany. mueller@zew.de); Volker Zimmermann (KfW Bankengruppe, Palmengartenstraße 5-9, 60325 Frankfurt/Main, Germany. Volker.Zimmermann@kfw.de) |
| Abstract: | This paper analyzes the importance of equity finance for the R&D activity of small and medium-sized enterprises. We use information on almost 6000 German SMEs from a company survey. Using the intensity of banking competition at the district level as instrument to control for endogeneity, we find that a higher equity ratio is conducive to more R&D for young but not for old companies. Equity may be a constraining factor for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can relay less on outside financing. The positive influence is found for R&D intensity but not for the decision whether to perform R&D. Equity financing is therefore especially important for the most innovative, young companies. |
| Keywords: | R&D activity, equity finance, small and medium-sized enterprises |
| JEL: | G32 O32 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:111&r=fmk |
| By: | John Y. Campbell; Yves Nosbusch |
| Abstract: | In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital. |
| JEL: | G1 H3 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12204&r=fmk |
| By: | Denis Belomestny; Grigori Milstein |
| Abstract: | Here we develop an approach for efficient pricing discrete-time American and Bermudan options which employs the fact that such options are equivalent to the European ones with a consumption, combined with analysis of the market model over a small number of steps ahead. This approach allows constructing both upper and low bounds for the true price by Monte Carlo simulations. An adaptive choice of local low bounds and use of the kernel interpolation technique enhance efficiency of the whole procedure, which is supported by numerical experiments. |
| Keywords: | American and Bermudan options, Lower and Upper bounds, Monte Carlo simulation, Variance reduction |
| JEL: | C15 G12 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-038&r=fmk |
| By: | Hakan Berument; M. Eray Yücel |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0511&r=fmk |
| By: | Amy Finkelstein; James Poterba; Casey Rothschild |
| Abstract: | This paper shows how models of insurance markets with asymmetric information can be calibrated and solved to yield quantitative estimates of the consequences of government regulation. We estimate the impact of restricting gender-based pricing in the United Kingdom retirement annuity market, a market in which individuals are required to annuitize tax-preferred retirement savings but are allowed considerable choice over the annuity contract they purchase. After calibrating a lifecycle utility model and estimating a model of annuitant mortality that allows for unobserved heterogeneity, we solve for the range of equilibrium contract structures with and without gender-based pricing. Eliminating gender-based pricing is generally thought to redistribute resources from men to women, since women have longer life expectancies. We find that allowing insurers to offer a menu of contracts may reduce the amount of redistribution from men to women associated with gender-blind pricing requirements to half the level that would occur if insurers were required to sell a single pre-specified policy. The latter "one policy" scenario corresponds loosely to settings in which governments provide compulsory annuities as part of their Social Security program. Our findings suggest that recognizing the endogenous structure of insurance contracts is important for analyzing the economic effects of insurance market regulations. More generally, our results suggest that theoretical models of insurance market equilibrium can be used for quantitative policy analysis, not simply to derive qualitative findings. |
| JEL: | D82 H55 L51 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12205&r=fmk |
| By: | Denis Belomestny; Markus Reiß |
| Abstract: | We investigate the problem of calibrating an exponential Lévy model based on market prices of vanilla options. We show that this inverse problem is in general severely ill-posed and we derive exact minimax rates of convergence. The estimation procedure we propose is based on the explicit inversion of the option price formula in the spectral domain and a cut-off scheme for high frequencies as regularisation. |
| Keywords: | European option, jump diffusion, minimax rates, severely ill-posed, nonlinear inverse problem, spectral cut-off |
| JEL: | G13 C14 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2006-034&r=fmk |
| By: | Hakan Berument; Seyit Mümin Cilasun; Yýlmaz Akdi |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bil:bilpap:0603&r=fmk |
| By: | Julian Fennema |
| Abstract: | Our understanding of the effect of investment-financing constraints in transition economies faces significant problems, both in terms of choice of the underlying theoretical model of investment behaviour and in the estimation framework adopted. These problems drive the choice in this paper of implementing a double hurdle estimation routine based on the Abel and Eberly (1998) investment model. We find evidence that a model incorporating intermittent adjustment of capital stock and using rates of capacity utilisation captures different effects compared to a standard accelerator model. Application of this methodology to sample of firms from Romania and Spain suggests that firms in Romania may be more financially constrained than previously estimated. |
| Keywords: | investment, financing constraints, double hurdle, transition |
| JEL: | D21 D92 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0602&r=fmk |
| By: | Minh Ha-Duong (CIRED - Centre International de Recherche sur l'Environnement et le Développement - http://www.centre-cired.fr - [CNRS : UMR8568] - [] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale du Génie Rural des Eaux et des Forêts][Ecole Nationale des Ponts et Chaussées]) |
| Abstract: | This paper provides an introduction to the mathematical theory of possibility, and examines how this tool can contribute to the analysis of far distant futures. The degree of mathematical possibility of a future is a number between O and 1. It quantifies the extend to which a future event is implausible or surprising, without implying that it has to happen somehow. Intuitively, a degree of possibility can be seen as the upper bound of a range of admissible probability levels which goes all the way down to zero. Thus, the proposition `The possibility of X is Pi(X) can be read as `The probability of X is not greater than Pi(X).<br /><br />Possibility levels offers a measure to quantify the degree of unlikelihood of far distant futures. It offers an alternative between forecasts and scenarios, which are both problematic. Long range planning using forecasts with precise probabilities is problematic because it tends to suggests a false degree of precision. Using scenarios without any quantified uncertainty levels is problematic because it may lead to unjustified attention to the extreme scenarios.<br /><br />This paper further deals with the question of extreme cases. It examines how experts should build a set of two to four well contrasted and precisely described futures that summarizes in a simple way their knowledge. Like scenario makers, these experts face multiple objectives: they have to anchor their analysis in credible expertise; depict though-provoking possible futures; but not so provocative as to be dismissed out-of-hand. The first objective can be achieved by describing a future of possibility level 1. The second and third objective, however, balance each other. We find that a satisfying balance can be achieved by selecting extreme cases that do not rule out equiprobability. For example, if there are three cases, the possibility level of extremes should be about 1/3. |
| Keywords: | Futures, futurible, scenarios, possibility, imprecise probabilities, uncertainty, fuzzy logic |
| Date: | 2006–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00003925_v2&r=fmk |
| By: | Michael Bordo; Harold James |
| Abstract: | The case for monetary simplification and unification has been made since the middle of the nineteenth century. It rests on four principal arguments ;reduced transaction costs; establishing credibility; preventing bad policy in other states; political integration via money. In this paper we argue that the case for monetary integration is becoming increasingly less persuasive. In making our case we posit a different concept of money to the one that underlay the nineteenth century discussions which we term "Newtonian" since it was based on the assumption of a single reference external to the state reflected in the definition of value in terms of precious metals. In the twentieth century, views of money have shifted to a more " Einsteinian" or relativistic conception. Measures of value that move relative to each other are helpful in terms of dealing with large shifts in relative prices that affect different countries very differently. In the current age of globalization, "Einsteinian" money is capable of accommodating shifts that were politically destructive in the " Newtonian" world. |
| JEL: | N20 F33 E42 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12189&r=fmk |