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on Financial Markets |
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Issue of 2009‒04‒13
seven papers chosen by |
| By: | Elias Karakitsos |
| Abstract: | All of the various schemes that have been put forward to resolve the current credit crisis follow either the "business as usual" or the "good bank" model. The "business as usual" model takes different forms--insurance or guarantee of the assets or liabilities of the financial institutions, creation of a "bad bank" to buy toxic assets, temporary nationalization--and is the one favored by banks and pursued by government. It amounts to a bailout of the financial system using taxpayer money. Its drawback is that the cost may exceed by trillions the original estimate of $700 billion, and despite the mounting cost, it may not even prevent the bankruptcy of financial institutions. Moreover, it runs the risk of government insolvency, and turning an already severe recession into a depression worse than that in the 1930s. The "good bank" solution consists of creating a new banking system from the ashes of the old one by removing the healthy assets and liabilities from the balance sheet of the old banks. It has a relatively small cost and the major advantage that credit flows will resume. Its drawback is that it lets the old banks sink or swim. But if they sink, with huge losses, these might spill over into the personal sector, and the ultimate cost may be the same as in the business-as-usual model: a catastrophic depression. In this new Policy Note, author Elias Karakitsos of Guildhall Asset Management and the Centre for Economic and Public Policy, University of Cambridge, outlines a modified "good bank" approach, with the government either guaranteeing a large proportion of the personal sector's assets or assuming the first loss in case the old banks fail. It has the same advantages as the original good-bank model, but it makes sure that, in the eventuality that the old banks become insolvent, the economy is shielded from falling into depression, and recovery is ultimately ensured. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levypn:09-3&r=fmk |
| By: | Francis A. Longstaff; Brett Myers |
| Abstract: | How does the market value complex structured-credit securities? This issue is central to understanding the current financial crisis and identifying effective policy measures. We study this issue from a novel perspective by contrasting the valuation of CDO equity with that of bank stocks. This is possible because both CDO equity and bank stock represent levered first-loss residual claims on an underlying portfolio of debt. There are strong similarities in the two types of equity investments. Using an extensive data set of CDX index tranche prices, we find that the discount rates applied by the market to bank and CDO equity are very comparable. In addition, a single factor explains more than 64 percent of the variation in bank and CDO equity returns. Although banks are presumably active credit-portfolio managers, we find that bank alphas are significantly negative during the sample period and comparable in magnitude to those of more-passively-managed CDO equity. Both banks and CDO equity display significant sensitivity to "shadow banking'' factors such as counterparty credit risk, the availability of collateralized financing for debt securities, and the liquidity of the derivatives market. A key implication is that we may be able to value "toxic'' assets using readily-available stock market information. |
| JEL: | G12 G13 G21 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14871&r=fmk |
| By: | Simon Gilchrist; Vladimir Yankov; Egon Zakrajsek |
| Abstract: | To identify disruptions in credit markets, research on the role of asset prices in economic fluctuations has focused on the information content of various corporate credit spreads. We re-examine this evidence using a broad array of credit spreads constructed directly from the secondary bond prices on outstanding senior unsecured debt issued by a large panel of nonfinancial firms. An advantage of our "ground-up'' approach is that we are able to construct matched portfolios of equity returns, which allows us to examine the information content of bond spreads that is orthogonal to the information contained in stock prices of the same set of firms, as well as in macroeconomic variables measuring economic activity, inflation, interest rates, and other financial indicators. Our portfolio-based bond spreads contain substantial predictive power for economic activity and outperform---especially at longer horizons---standard default-risk indicators. Much of the predictive power of bond spreads for economic activity is embedded in securities issued by intermediate-risk rather than high-risk firms. According to impulse responses from a structural factor-augmented vector autoregression, unexpected increases in bond spreads cause large and persistent contractions in economic activity. Indeed, shocks emanating from the corporate bond market account for more than 30~percent of the forecast error variance in economic activity at the two- to four-year horizon. Overall, our results imply that credit market shocks have contributed significantly to U.S.\ economic fluctuations during the 1990--2008 period. |
| JEL: | E32 E44 G12 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14863&r=fmk |
| By: | Cécile Carpentier; Douglas Cumming; Jean-Marc Suret |
| Abstract: | We analyze the economic consequences of disclosure and regulation within a context of significant information asymmetry and lenient regulation. In Canada, firms can enter the stock market at a pre-revenue stage, using full disclosure (initial public offerings, IPOs) or the minimal disclosure allowed by reverse mergers (RMs). Our sample is a set of 1,455 IPOs and RMs between 1993 and 2003. Controlling for several dimensions, including self-selection, we find that the level of disclosure and regulation significantly influence the value and long-run performance of newly listed firms. Overall, our results suggest that disclosure has a significant economic impact. These results are consistent with theories suggesting that a commitment by a firm to increase its disclosure level lowers the information asymmetry component of the cost of capital. The results are also consistent with the hypothesis that increased disclosure reduces the heterogeneity of expectations and mispricing. <P>Nous analysons les conséquences économiques des règles de divulgation et d’inscription en Bourse dans un contexte où l’asymétrie informationnelle est grande et la réglementation des valeurs mobilières peu contraignante. L’échantillon porte sur 1 455 émissions initiales et prises de contrôle inversées, effectuées entre 1993 et 2003. Au Canada, les entreprises peuvent accéder au marché boursier avant même de percevoir des revenus, en effectuant soit un appel public à l’épargne qui implique une divulgation complète, soit une prise de contrôle inversée comportant une divulgation minimale. En contrôlant pour diverses dimensions, incluant l’auto-sélection du mode d’entrée, nous montrons que le niveau de divulgation et de réglementation auquel se soumet l’émetteur influence de façon significative la valeur et la performance à long terme des entreprises nouvellement inscrites en Bourse. Nos résultats indiquent que la divulgation a un effet économique important, et sont en accord avec les propositions qui lient l’augmentation de la divulgation à la réduction de l’asymétrie et du coût du capital. Ils sont également cohérents avec l’hypothèse qui veut que l’augmentation de l’information réduit l’hétérogénéité des anticipations et les erreurs d’évaluation. |
| Keywords: | Disclosure, Securities Regulation, Initial Public Offerings, Reverse Mergers, Listing Standards , Divulgation, réglementation des valeurs mobilières, prise de contrôle inversée, norme minimales d’inscription en Bourse |
| JEL: | G24 G32 G14 G1 |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2009s-06&r=fmk |
| By: | Lucian Tatu (Academy of Economic Studies, Bucharest, Romania); Delia Tatu (Academy of Economic Studies, Bucharest, Romania) |
| Abstract: | An important component of the transaction costs faced by investors in financial securities is the bid-ask spread set by market maker. The goal of this study is to determine the importance of the components of spread (order processing costs, inventory costs and adverse selection costs) using models based on autocovariance derived by Roll(1984), George, Kaul and Nimalendran (1991) and Stoll (1989). Also, we examine the relationship between some stock characteristics (such as daily volume of trading and average stock price) and spread. The data set contains information about Bucharest Stock Exchange (BSE) first tier quoted stocks, for the period 27.11.2006- 19.12.2006.This paper was presented at the 18th International Conference of the International Trade and Finance Association, meeting at Universidade Nova de Lisboa, Lisbon, Portugal on May 23, 2008Keywords: bid-ask spread, inventory cost, adverse selection cost, order cost |
| Date: | 2008–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:bep:itfapp:1125&r=fmk |
| By: | Ricardo Gimeno (Banco de España); José Manuel Marqués (Banco de España) |
| Abstract: | In this paper we propose an affine model that uses as observed factors the Nelson and Siegel (NS) components summarising the term structure of interest rates. By doing so, we are able to reformulate the Diebold and Li (2006) approach to forecast the yield curve in a way that allows us to incorporate a non-arbitrage opportunities condition and risk aversion into the model. These conditions seem to improve the forecasting ability of the term structure components and provide us with an estimation of the risk premia. Our approach is somewhat equivalent to the recent contribution of Christiensen, Diebold and Rudebusch (2008). However, not only does it seem to be more intuitive and far easier to estimate, it also improves that model in terms of fitting and forecasting properties. Moreover, with this framework it is possible to incorporate directly the inflation rate as an additional factor without reducing the forecasting ability of the model. The augmented model produces an estimation of market expectations about inflation free of liquidity, counterparty and term premia. We provide a comparison of the properties of this indicator with others usually employed to proxy the inflation expectations, such as the break-even rate, inflation swaps and professional surveys. |
| Keywords: | Interest Rate Forecast, Inflation Expectations, Affine Model, Diebold and Li |
| JEL: | G12 E43 E44 C53 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0906&r=fmk |
| By: | Andrea Cipollini; Franco Fiordelisi |
| Abstract: | This paper examines the impact of bank concentration on bank financial distress using a balanced panel of commercial banks belonging to EU 25 over the sample period running from 2003 to 2007. Financial distress is proxied by the observations falling below a given threshold of the empirical distribution of a risk adjusted indicator of bank performance: the Shareholder Value ratio. We employ a panel probit regression estimated by GMM in order to obtain consistent and efficient estimates following the suggestion of Bertschek and Lechner (1998). Our findings suggest, after controlling for a number of enviroment variables, a positive effect of bank concentration on financial distress. |
| Keywords: | EVA; Banking; Panel Probit; GMM |
| JEL: | C33 C35 G21 G32 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:wcefin:09021&r=fmk |