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on Regulation |
| By: | James B. Bushnell; Howard Chong; Erin T. Mansur |
| Abstract: | Tradable permit regulations have recently been implemented for climate change policy in many countries. One of the first mandatory markets was the EU Emission Trading System, whose first phase ran from 2005-07. Unlike taxes, permits expose firms to volatility in regulatory costs, but are typically accompanied by property rights in the form of grandfathered permits. In this paper, we examine the effect of this type of environmental regulation on profits. In particular, changes in permit prices affect: (1) the direct and indirect input costs, (2) output revenue, and (3) the carbon permit asset value. Depending on abatement costs, output price sensitivity, and permit allocation, these effects may vary considerably across industries and firms. We run an event study of the carbon price crash on April 25, 2006 by examining the daily stock returns for 90 stocks from carbon intensive industries and approximately 600 stocks in the broad EUROSTOXX index. In general, firms in industries that tended to be either carbon intensive, or electricity intensive, but not involved in international trade, were hurt by the decline in permit prices. In industries that were known to be net short of permits, the cleanest firms saw the largest declines in share value. In industries known to be long in permits, firms granted the largest allocations were most harmed. |
| JEL: | G14 H22 H23 Q50 Q54 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15572&r=reg |
| By: | Vauhkonen, Jukka (Bank of Finland Research) |
| Abstract: | We consider the impact of mandatory information disclosure on bank safety in a spatial model of banking competition in which a bank’s probability of success depends on the quality of its risk measurement and management systems. Under Basel II capital requirements, this quality is either fully or partially disclosed to market participants by the Pillar 3 disclosures. We show that, under stringent Pillar 3 disclosure requirements, banks’ equilibrium probability of success and total welfare may be higher under a simple Basel II standardized approach than under the more sophisticated internal ratings-based (IRB) approach. |
| Keywords: | Basel II; capital requirements; information disclosure; market discipline; moral hazard |
| JEL: | D43 D82 G14 G21 G28 |
| Date: | 2009–11–03 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_029&r=reg |
| By: | Quiroga, Miguel (Department of Economics, School of Business, Economics and Law, Göteborg University); Sterner, Thomas (Department of Economics, School of Business, Economics and Law, Göteborg University); Persson, Martin (department of Energy and Environment, Chalmers University of Technology, Gothenburg) |
| Abstract: | We aim to study whether lax environmental regulations induce comparative advantages, causing the least-regulated countries to specialize in polluting industries. The study is based on Trefler and Zhu’s (2005) definition of the factor content of trade. For the econometrical analysis, we use a cross-section of 71 countries in 2000 to examine the net exports in the most polluting industries. We try to overcome three weaknesses in the empirical literature: the measurement of environmental endowments or environmental stringency, the possible endogeneity of the explanatory variables, and the influence of the industrial level of aggregation. As a result, we do find some evidence in favor of the pollution-haven effect. The exogeneity of the environmental endowments was rejected in several industries, and we also find that industrial aggregation matters.<p> |
| Keywords: | comparative advantage; environmental regulation; trade; pollution haven; Porter hypothesis |
| JEL: | F18 Q56 |
| Date: | 2009–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0412&r=reg |
| By: | Veiga, B. da; Chan, F.; McAleer, M. (Erasmus Econometric Institute) |
| Abstract: | The internal models amendment to the Basel Accord allows banks to use internal models to forecast Value-at-Risk (VaR) thresholds, which are used to calculate the required capital that banks must hold in reserve as a protection against negative changes in the value of their trading portfolios. As capital reserves lead to an opportunity cost to banks, it is likely that banks could be tempted to use models that underpredict risk, and hence lead to low capital charges. In order to avoid this problem the Basel Accord introduced a backtesting procedure, whereby banks using models that led to excessive violations are penalised through higher capital charges. This paper investigates the performance of five popular volatility models that can be used to forecast VaR thresholds under a variety of distributional assumptions. The results suggest that, within the current constraints and the penalty structure of the Basel Accord, the lowest capital charges arise when using models that lead to excessive violations, thereby suggesting the current penalty structure is not severe enough to control risk management. In addition, this paper suggests an alternative penalty structure that is more effective at aligning the interests of banks and regulators. |
| Keywords: | Value-at-Risk (VaR);GARCH;risk management;violations;forecasting;simulations;Basel accord penalties |
| Date: | 2009–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureir:1765017309&r=reg |
| By: | Goran Serdarevic (EEIP, a.s; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Teply (EEIP, a.s; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | The main goal of this paper is to provide an analysis of key regulatory changes in the European merger control and to evaluate their real impact on the efficiency of merger regulation. Our main contribution is an empirical analysis of a unique representative sample of 161 horizontal mergers covering the final regulatory assessments during the period from 1990 to 2008. We use stock market data to identify those cases where there are discrepancies between the Commission and market evaluation of the merger. The PROBIT model is then used to further investigate the sources of these discrepancies. Our results suggest that the Commission’s decisions are not purely explained by the motive of protecting consumer welfare and that other political and institutional factors do play a role in setting policy. We did not find evidence that the Commission protects competitors at the expense of consumers and foreign firms. Moreover, we conclude that the regulatory reform introduced in 2004 has significantly enhanced efficiency of the European merger control. To the authors’ best knowledge, this paper is the first study using stock market data to evaluate an impact of the recent EU merger control. |
| Keywords: | merger control, European Union, political economy, regulatory reform, PROBIT model |
| JEL: | L4 K21 C25 D78 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2009_28&r=reg |
| By: | Viral V. Acharya; Hyun Song Shin; Tanju Yorulmazer |
| Abstract: | What is the effect of financial crises and their resolution on banks’ choice of liquid asset holdings? When risky assets have limited pledgeability and banks have relative expertise in employing risky assets, the market for these assets clears only at fire-sale prices following a large number of bank failures. The gains from acquiring assets at fire-sale prices make it attractive for banks to hold liquid assets. We show that the resulting choice of bank liquidity is counter-cyclical, inefficiently low during economic booms but excessively high during crises, and present and discuss evidence consistent with these predictions. Since inefficient users may enter asset markets when prices fall sufficiently, interventions to resolve banking crises may be desirable ex post. However, policies aimed at resolving crises affect ex-ante bank liquidity in subtle ways: while liquidity support to failed banks or unconditional support to surviving banks in acquiring failed banks give banks incentives to hold less liquidity, support to surviving banks that is conditional on their liquid asset holdings creates incentives for banks to hold more liquidity. |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15567&r=reg |
| By: | Joana Resende (CORE - Center for Operations Research and Econometrics - Université Catholique de Louvain, CETE - University of Porto); Maria Eugénia Sanin (CORE - Center for Operations Research and Econometrics - Université Catholique de Louvain, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | In this paper we account for the fact that Cournot equilibrium strategies in the sector under environmental regulation depend on firms'interaction in the permits market (and vice versa). In this context, we show that the cost-effective allocation of permits between firms must compensate the cost-rising strategies exercised by the stronger firm (in the output market). Then, taking into account the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability that serves as an indicator for the de- gree of price competition. The simulation allows us to determine how output market characteristics affect differently optimal permit allocation depending on the regulator's objective. |
| Date: | 2009–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00437645_v1&r=reg |
| By: | Michael Schuppli; Martin T. Bohl |
| Abstract: | This paper investigates the eect of foreign institutional investors on the sta- bility of Chinese stock markets. Previous literature views this investor group as destabilizing feedback traders. We use the abolition of ownership restrictions on A shares as a natural experiment. There is strong evidence that foreign in- stitutions have a stabilizing eect on Chinese stock markets and contribute to market eciency. This nding is robust across exchanges, sample periods, size quintiles and alternative model specications. By contrast, domestic investors appear to engage in positive feedback trading. Our results have important implications for market regulation. |
| Keywords: | Foreign Institutional Investors, Feedback Trading, Chinese Stock Markets, Regulation, Ownership Restrictions |
| JEL: | G14 G15 G18 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:0909&r=reg |
| By: | Akpalu, Wisdom (Department of History, Economics and Politics, State University of New York at Farmingdale); Eggert, Håkan (Department of Economics, School of Business, Economics and Law, Göteborg University); Vondolia, Godwin K. (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | Many resource users are not directly involved in the formulation and enforcement of resource management rules and regulations in developing countries. As a result, resource users do not generally accept such rules. Enforcement officers who have social ties to the resource users may encounter social disapproval and possible social exclusion from the resource users if they enforce regulations zealously. The officers, however, may avoid this social disapproval by accepting bribes. In this paper, we present a simple model that characterizes this situation and derives results for situations where officers are passively and actively involved in the bribery.<p> |
| Keywords: | Natural resource management; bribery; law enforcement; social exclusion |
| JEL: | Q20 Q28 Z13 |
| Date: | 2009–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0392&r=reg |
| By: | T.Huw Edwards (Dept of Economics, Loughborough University) |
| Abstract: | I investigate the imposition of a horizontal technical barrier to trade (HTBT) in a symmetric, cross-hauling duopoly. Tariffs and subsidies are ruled out, but, in the absence of a mutual recognition agreement, it is possible for governments to impose HTBTs, so long as firms apply different technologies. If firms are first movers, this possibility may induce them to avoid technical collaboration, in order to tempt governments into creating local monopolies, except where spillovers and R&D effects are high. This exacerbates the costs of regulatory protection, compared to standard models without R&D or spillovers. |
| Keywords: | Research and development, spillovers, trade, protection. |
| JEL: | F10 F19 L13 L50 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2009_19&r=reg |
| By: | Omar J. Casas; Rosario Romera |
| Abstract: | In this paper a stochastic dynamic game formulation of the economics of international environmental agreements on the transnational pollution control, when the environmental damage arises from stock pollutant that accumulates, for accumulating pollutants such as CO2 in the atmosphere is provided. To improve the non-cooperative equilibrium among countries, we propose a different criterion to the minimization of the expected discounted total cost. Moreover, we consider Cooperative versus Noncooperative Stochastic Dynamic Games formulated as Markov Decision Processes (MDP). We propose a new alternative where the decision-maker wants to maximize the probability that some total performance of the dynamical game does not exceed a target value during a fixed period of time. The task requirements are therefore formulated as probabilities rather than expectations. This approach is different from the standard MDP, which uses performance criteria based on the expected value of some index. We present properties of the optimal policies obtained under this new perspective. |
| Keywords: | Stochastic optimal control, Markov Decision Processes, Stochastic Dynamic Programming, Stochastic Dynamic Games, International pollutant control, Environmental economics, Sustainability, Probability criterion |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws096019&r=reg |
| By: | Arndt Wonka; Berthold Rittberger |
| Keywords: | agency theory; Council of Ministers; European Agencies; European Commission; institutionalism |
| Date: | 2009–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:erp:reconx:p0051&r=reg |
| By: | Andre A. P.; Francisco J. Nogales; Esther Ruiz |
| Abstract: | This article addresses the problem of forecasting portfolio value-at-risk (VaR) with multivariate GARCH models vis-à-vis univariate models. Existing literature has tried to answer this question by analyzing only small portfolios and using a testing framework not appropriate for ranking VaR models. In this work we provide a more comprehensive look at the problem of portfolio VaR forecasting by using more appropriate statistical tests of comparative predictive ability. Moreover, we compare univariate vs. multivariate VaR models in the context of diversified portfolios containing a large number of assets and also provide evidence based on Monte Carlo experiments. We conclude that, if the sample size is moderately large, multivariate models outperform univariate counterparts on an out-of-sample basis. |
| Keywords: | Market risk, Backtesting, Conditional predictive ability, GARCH, Volatility, Capital requirements, Basel II |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wsrepe:ws097222&r=reg |
| By: | Maria Eugénia Sanin (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, CORE - Center for Operations Research and Econometrics - Université Catholique de Louvain) |
| Abstract: | In this paper we study the determinants of the counterpart choice in the U.S. market for SO2 allowances. Counterparts can be chosen among three alternatives proved to be independent: market makers, brokers or private. Privates are mostly U.S. electricity generators. We find that the SO2 allowances market, as the electricity market, is regionalized. The national dimension only appears when there are local imbalances that give incentives to search for a better price outside of the region. Additionally, our results suggest that agents like counterpart differentiation i.e. they value positively the presence of few market makers, possibly with large stocks but they also value positively the presence of many brokers (and privates). In line with previous literature results, we also find agents prefer market makers when placing large size orders and that the preference for market makers increases on time due to the increase in the counterpart risk. Finally, we also identify the influence of the regulatory framework, i.e. the division in phases and the chosen allowance surrender date, in the counterpart choice. The previous results are robust to Enron's abnormal behavior during 2000-2001 and its posterior bankruptcy. |
| Date: | 2009–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00437636_v1&r=reg |