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Recherche
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The endogenous dynamics of markets: price impact and feedback loops
Jean-Philippe Bouchaud (2010)
(source: RePEc) 2010
| We review the evidence that the erratic dynamics of markets is to a large extent of endogenous origin, i.e. determined by the trading activity itself and not due to the rational processing of exogenous news. In order to understand why and how prices move, the joint fluctuations of order flow and liquidity - and the way these impact prices - become the key ingredients. Impact is necessary for private information to be reflected in prices, but by the same token, random fluctuations in order flow necessarily contribute to the volatility of markets. Our thesis is that the latter contribution is in fact dominant, resulting in a decoupling between prices and fundamental values, at least on short to medium time scales. We argue that markets operate in a regime of vanishing revealed liquidity, but large latent liquidity, which would explain their hyper-sensitivity to fluctuations. More precisely, we identify a dangerous feedback loop between bid-ask spread and volatility that may lead to micro-liquidity |
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The Credit Default Swap Market and the Settlement of Large Defaults
Virginie Coudert & Mathieu Gex (2010)
(source: RePEc) 2010
| The huge positions on the credit default swaps (CDS) have raised concerns about the ability of the market to settle major entities--defaults. The near-failure of AIG and the bankruptcy of Lehman Brothers in 2008 have revealed the exposure of CDS-- buyers to counterparty risk and hence highlighted the necessity of organizing the market, which triggered a large reform process. First we analyse the vulnerabilities of the market at the bursting of this crisis. Second, to understand its resilience to major credit events, we unravel the auction process implemented to settle defaults, the strategies of buyers and sellers and the links with the bond market. We then study the way it worked for key defaults, such as Lehman Brothers, Washington Mutual, CIT and Thomson, as well as, for the Government Sponsored Enterprises. Third, we discuss the ongoing reforms aimed at strengthening the market resilience. |
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Excess Volatility and Herding in an Artificial Financial Market: Analytical Approach and Estimation
Alfarano, Simone & Lux, Thomas & Wagner, Friedrich (2010)
(source: RePEc) 2010
| Several agent-based models have been proposed in the economic literature to explain the key stylized facts of financial data: heteroscedasticity, fat tails of returns and long-range dependence of volatility. Agentbased models view these empirical regularities as emerging properties of interacting groups of boundedly rational agents in financial markets. The complexity of these interacting agent models has largely constrained their analytical treatment, limiting their analysis mainly to Monte Carlo simulations. In order to overcome this limitation, we introduce a --inimalist--model of an artificial financial market, along the lines of our previous contributions, based on herding behavior among two types of traders. The simplicity of the model allows for an almost complete analytical characterization of both conditional and unconditional statistical properties of prices and returns. Moreover, the underlying parameters of the model can be estimated directly, which permits an assessment of its g |
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International Policy Coordination and Simple Monetary Policy Rules
Wolfram Berger (2010)
(source: RePEc) 2010
| This paper studies monetary policy in an optimizing two-country model. We suppose a two-step production process that is associated with vertical trade. Prices of final consumption goods are sticky and pass-through can be incomplete. Monetary authorities should respond to both home and foreign shocks in this set-up. Which simple, i.e. non-optimal, targeting rule best supports the welfare maximizing policy hinges critically on the degree of the cross-country interdependence in production and the relative importance of productivity and cost-push shocks. We argue that the relative volatility of productivity and cost-push shocks determines whether the monetary authority should follow a price targeting rule whereas the degree of vertical integration determines which simple price targeting rule (producer or consumer price index targeting) is best. |
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Contrôle de gestion et gouvernance cognitive:le cas d--ne banque mutualiste Management accounting and cognitive governance:co
Christine Marsal (2010)
(source: RePEc) 2010
| (VF)La place du contrôle de gestion dans les mécanismes internes de gouvernance est encore peu étudiée. L--mploi de la grille cognitive de la gouvernance permet d--ntégrer ces outils. L---ude d--ne banque mutuelle montre une très forte dimension interactive de ce contrôle et une participation importante de l--nsemble des parties prenantes : dirigeants, salariés et élus.(VA)Study of management accounting in corporate governance field is poorly represented in academic research. The use of cognitive theory allows us to integrate management accounting tools in internal corporate governance mechanism. The case study in a cooperative bank shows interactive control and involvement of all stakeholders, and more particularly banks holders. |
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La comptabilité de couverture en juste valuer sous IAS 39 : Quelles conséquences pour les fonds propres prudentiels dans le se
Bahaji, Hamza (2010)
(source: RePEc) 2010
| Nous avons essayé à travers ce travail de vérifier dans le cadre du modèle de la juste valeur, la compatibilité de la comptabilité de couverture préconisée par la norme IAS 39 aux objectifs de la réglementation prudentielle sur les fonds propres bancaires. Nos conclusions soutiennent que la macro-couverture est l--pproche la plus adéquate à l--ctivité d--ntermédiation de la banque commerciale et celle qui correspond le mieux aux objectifs de la réglementation prudentielle. |
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Danger on the Exchange: How Counterparty Risk Was Managed on the Paris Bourse in the Nineteenth Century
Angelo Riva & Eugene N. White (2010)
(source: RePEc) 2010
| Over the course of the nineteenth century, the struggles of Paris Bourse to manage counterparty risk revealed the awkward choices that face derivatives exchanges. Shortly after it was founded, the stock exchange, primarily a forward market, instituted a mutual guarantee fund to prevent broker failures from snowballing into a general liquidity crisis. The creation of the fund then forced the Bourse to search for mechanisms to control moral hazard. To study the determinants of broker failures, we collected new individual data on defaulting brokers and describe the evolving regulatory regime. To identify the factors behind the annual number of broker failures we use negative binominal regressions. To explain individual brokers--duration in office, we employ a proportional hazard model, while logit regressions examine the causes of individual broker failures. In addition to declines in asset prices and trading volume, the moral hazard from the mutual guarantee fund contributed |
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The impact of bank ownership concentration on impaired loans and capital adequacy
Shehzad, Choudhry Tanveer & de Haan, Jakob & Scholtens, Bert (2010)
(source: RePEc) 2010
| This paper examines the impact of bank ownership concentration on two indicators of bank riskiness, namely banks' non-performing loans and capital adequacy. Using balance sheet information for around 500 commercial banks from more than 50 countries averaged over 2005-2007, we find that concentrated ownership (proxied by different levels of shareholding) significantly reduces a bank's non-performing loans ratio, conditional on supervisory control and shareholders protection rights. Furthermore, ownership concentration affects the capital adequacy ratio positively conditional on shareholder protection. At low levels of shareholder protection rights and supervisory control, ownership concentration reduces bank riskiness. |
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Portfolio Insurance Strategies by a Large Player
Kalife, Aymeric (2010)
(source: RePEc) 2010
| No abstract is available for this item. |
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Efficiency and risk in european banking
Franco Fiordelisi & David Marques-Ibanez & Phil Molyneux (2010)
(source: RePEc) 2010
| We analyze the impact of efficiency on bank risk. We also consider whether bank capital has an effect on this relationship. We model the inter-temporal relationships among efficiency, capital and risk for a large sample of commercial banks operating in the European Union. We find that reductions in cost and revenue efficiencies increase banks--future risks thus supporting the bad management and efficiency version of the moral hazard hypotheses. In contrast, bank efficiency improvements contribute to shore up bank capital levels. Our findings suggest that banks lagging behind in their efficiency levels might expect higher risk and subdued capital positions in the near future. JEL Classification: G21, D24, C23, E44. |
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Scaling models for the severity and frequency of external operational loss data
Dahen, Hela & Dionne, Georges (2010)
(source: RePEc) 2010
| According to Basel II criteria, the use of external data is indispensable to the implementation of an advanced method for calculating operational risk capital. This article investigates how the severity and frequencies of external losses are scaled for integration with internal data. We set up an initial model designed to explain the loss severity by taking into account potential selection bias in the external data. Estimation results show that many variables have significant power in explaining the loss amount. We use them to develop a normalization formula. We develop a zero-inflated count-data model to scale the loss frequency. We compute an operational VaR and we conduct out-of-sample backtesting. |
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Approximation and Calibration of Short-Term Implied Volatilities under Jump-Diffusion Stochastic Volatility
Alexey Medvedev & Olivier Scaillet (2010)
(source: RePEc) 2010
| We derive a closed-form asymptotic expansion formula for option implied volatility under a two-factor jump-diffusion stochastic volatility model when time-to-maturity is small. Based on numerical experiments we describe the range of time-to-maturity and moneyness for which the approximation is accurate. We further propose a simple calibration procedure of an arbitrary parametric model to short-term near-the-money implied volatilities. An important advantage of our approximation is that it is free of the unobserved spot volatility. Therefore, the model can be calibrated on option data pooled across different calendar dates in order to extract information from the dynamics of the implied volatility smile. An example of calibration to a sample of S&P500 option prices is provided. We find that jumps are significant. The evidence also supports an affine specification for the jump intensity and Constant-Elasticity-of-Variance for the dynamics of the return volatility. |
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Asset Auctions, Information, and Liquidity
Xavier Vives (2010)
(source: RePEc) 2010
| A model is presented of a uniform price auction where bidders compete in demand schedules; the model allows for common and private values in the absence of exogenous noise. It is shown how private information yields more market power than the levels seen with full information. Results obtained here are broadly consistent with evidence from asset auctions, may help explain the response of central banks to the crisis, and suggest potential improvements in the auction formats of asset auctions. |
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What can we tell about monetary policy synchronization and interdependence over the 2007-2009 global financial crisis?
Mohamed El Hedi Arouri & Duc Khuong Nguyen & Fredj Jawadi (2010)
(source: RePEc) 2010
| We investigate the synchronization and nonlinear adjustment dynamics of short-term interest rates for France, the UK and the US using the bi-directional feedback measures proposed by Geweke (1982) and appropriate smooth transition error-correction models (STECM). We find strong evidence of continual increases in bilateral synchroni-zation of these rates from 2005 to 2009 as well as of their lead-lag causal interactions with a slight dominance of the US rate. Our results also indicate that short-term interest rates converge towards a common long-run equilibrium in a nonlinear manner and their time dynamics exhibit regime-switching behavior. |
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Monetary cycles, financial cycles, and the business cycle
Tobias Adrian & Arturo Estrella & Hyun Song Shin (2010)
(source: RePEc) 2010
| One of the most robust stylized facts in macroeconomics is the forecasting power of the term spread for future real activity. The economic rationale for this forecasting power usually appeals to expectations of future interest rates, which affect the slope of the term structure. In this paper, we propose a possible causal mechanism for the forecasting power of the term spread, deriving from the balance sheet management of financial intermediaries. When monetary tightening is associated with a flattening of the term spread, it reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit. We provide empirical support for this hypothesis, thereby linking monetary cycles, financial cycles, and the business cycle. |
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Financial intermediation and the post-crisis financial system
Hyun Song Shin (2010)
(source: RePEc) 2010
| Securitization was meant to disperse credit risk to those who were better able to bear it. In practice, securitization appears to have concentrated the risks in the financial intermediary sector itself. This paper outlines an accounting framework for the financial system for assessing the impact of securitization on financial stability. If securitization leads to the lengthening of intermediation chains, then risks becomes concentrated in the intermediary sector with damaging consequences for financial stability. Covered bonds are one form of securitization that do not fall foul of this principle. I discuss the role of countercyclial capital requirements and the Spanish-style statistical provisioning in mitigating the harmful effects of lengthening intermediation chains. |
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Financial intermediation, asset prices, and macroeconomic dynamics
Tobias Adrian & Emanuel Moench & Hyun Song Shin (2010)
(source: RePEc) 2010
| Fluctuations in the aggregate balance sheets of financial intermediaries provide a window on the joint determination of asset prices and macroeconomic aggregates. We document that financial intermediary balance sheets contain strong predictive power for future excess returns on a broad set of equity, corporate, and Treasury bond portfolios. We also show that the same intermediary variables that predict excess returns forecast real economic activity and various measures of inflation. Our findings point to the importance of financing frictions in macroeconomic dynamics and provide quantitative guidance for preemptive macroprudential and monetary policies. |
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How may the New Architecture of Financial Regulations develop?
Charles Goodhart (2010)
(source: RePEc) 2010
| Professor Charles Goodhart CBE, FBA, is the 2010 Professorial Fellow in Monetary and Financial Economics at the Reserve Bank and Victoria University of Wellington. He is a member of the Financial Markets Group at the London School of Economics, having previously been its Deputy Director. Until his retirement in 2002, he had been the Norman Sosnow Professor of Banking and Finance at the London School of Economics. As part of his Professorial visit, he gave a public lecture on the new architecture of financial regulations at Victoria University of Wellington. This provides a transcription of his comments on this occasion. |
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EU Banks Rating Assignments: Is there Heterogeneity between New and Old Member Countries?
Guglielmo Maria Caporale & Roman Matousek & Chris Stewart (2010)
(source: RePEc) 2010
| We model EU countries' bank ratings using financial variables and allowing for intercept and slope heterogeneity. Our aim is to assess whether "old" and "new" EU countries are rated differently and to determine whether "new" ones are assigned lower ratings, ceteris paribus, than "old" ones. We find that country-specific factors (in the form of heterogeneous intercepts) are a crucial determinant of ratings. Whilst "new" EU countries typically have lower ratings than "old" ones, after controlling for financial variables we also discover that all countries have significantly different intercepts, confirming our prior belief. This intercept heterogeneity suggests that each country's rating is assigned uniquely, after controlling for differences in financial factors, which may reflect differences in country risk and the legal and regulatory framework that banks face (such as foreclosure laws). In addition, we find that ratings may respond differently to |
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Josh Lerner: Recipient of the 2010 Global Award for Entrepreneurship Research
Braunerhjelm, Pontus & Parker, Simon (2010)
(source: RePEc) 2010
| This article describes the academic contributions of the 2010 recipient of the Global Award for Entrepreneurship Research, Professor Josh Lerner of the Harvard Business School. Lerner-- empirical research on the inter-relationship between venture capital, innovation and entrepreneurship has greatly extended and improved our understanding of one of the major drivers of growth in modern economies. The first part of this article explains Lerner-- contributions as regards the structure and organization of the venture capital industry. Later, his most important publications on entrepreneurship, innovation and intellectual property rights are surveyed. Several aspects of Lerner-- policy-oriented work are then outlined, before the article closes with a brief conclusion. |
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On Dividend Restrictions and the Collapse of the Interbank Market
Dimitrios Tsomocos & Charles Goodhart & M.U. Peiris & Alexandros Vardoulakis (2010)
(source: RePEc) 2010
| Until recently, financial services regulation remained largely segmented along national lines. The integration of financial markets, however, calls for a systematic and coherent approach to regulation. This paper studies the effect of market based regulation on the proper functioning of the interbank market. Specifically, we argue that restrictions on the payout of dividends by banks can reduce their expected default on (interbank) loans, stimulate trade in this market and improve the welfare of consumers. |
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Rating systems, procyclicality and Basel II: an evaluation in a general equilibrium framework
Chiara Pederzoli & Costanza Torricelli & Dimitrios Tsomocos (2010)
(source: RePEc) 2010
| No abstract is available for this item. |
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A New Auction for Substitutes: Central-Bank Liquidity Auctions, --oxic Assetµ Auctions, and Variable Product-Mix Auctions.
Klemperer, Paul (2010)
(source: RePEc) 2010
| I describe a new static (sealed-bid) auction for differentiated goods--he --roduct-Mix Auctionµ. Bidders bid on multiple assets simultaneously, and bidtakers choose supply functions across assets. The auction yields greater efficiency, revenue, information, and trade than running multiple separate auctions. It is also often simpler to use and understand, and less vulnerable to collusion, than a simultaneous multiple round auction. I designed it after the 2007 Northern Rock bank-run to help the Bank of England fight the credit crunch; in 2008 the U.S. Treasury planned using a related design to buy --oxic assetsµ; it may be used to purchase electricity. |
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Borrow Cheap, Buy High? The Determinants of Leverage and Pricing in Buyouts
Axelson, Ulf & Jenkinson, Tim & Stromberg, Per & Weisbach, Michael S. (2010)
(source: RePEc) 2010
| This paper provides an empirical analysis of the financial structure of large buyouts. We collect detailed information on the financing of 1157 worldwide private equity deals from 1980 to 2008. Buyout leverage is cross-sectionally unrelated to the leverage of matched public firms, and is largely driven by factors other than what explains leverage in public firms. In particular, the economy-wide cost of borrowing is the main driver of both the quantity and the composition of debt in these buyouts. Credit conditions also have a strong effect on prices paid in buyouts, even after controlling for prices of equivalent public market companies. Finally, the use of high leverage in transactions negatively affects fund performance, controlling for fund vintage and other relevant characteristics. The results are consistent with the view that the availability of financing impacts booms and busts in the private equity market, and that agency problems between private equity funds and their investors can affe |
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Corporate Taxation and the Size of New Firms: Evidence from Europe
Marco Da Rin & Marina Di Giacomo & Alessandro Sembenelli (2010)
(source: RePEc) 2010
| Using a novel country-industry level panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004, we study how taxation of corporate income affects the size of entrants at the country-industry level. Our results, which are robust to changes in several assumptions, suggest that a one-unit reduction in the effective corporate income tax rate leads to a reduction of entrants' capital size that ranges from 2.7% to 14.4%. Results on labor size are more mixed in terms of both sign and size. These findings imply that a reduction in corporate taxation reduces the capital to labor ratio. (JEL: C23, H32, L26, L51, M13) (c) 2010 by the European Economic Association. |
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Multinational Banking in Europe: Financial Stability and Regulatory Implications. Lessons from the Financial Crisis
Giorgio Barba Navaretti & Giacomo Calzolari & Alberto Franco Pozzolo & Micol Levi (2010)
(source: RePEc) 2010
| This paper examines whether multinational banks have a stabilising or a destabilising role during times of financial distress. With a focus on Europe, it looks at how these banks foreign affiliates have been faring during the recent financial crisis. It finds that retail and corporate lending of these foreign affiliates have been stable and even increasing between 2007 and 2009. This pattern is related to the functioning of the internal capital market through which these banks funnel funds across their units. The internal capital market has been an effective tool to support foreign affiliates in distress and to isolate their lending from the local availability of financial resources, notwithstanding the systemic nature of the recent crisis. This effect has been particularly large within the EU integrated financial market and for the EMU countries, thus showing complementarity between economic integration and multinational banks internal capital markets. In light of these findings, this paper sup |
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Model risk and capital reserves
Kerkhof, Jeroen & Melenberg, Bertrand & Schumacher, Hans (2010)
(source: RePEc) 2010
| We propose a procedure to take model risk into account in the computation of capital reserves. This addresses the need to make the allocation of capital reserves to positions in given markets dependent on the extent to which reliable models are available. The proposed procedure can be used in combination with any of the standard risk measures, such as Value-at-Risk and expected shortfall. We assume that models are obtained by usual econometric methods, which allows us to distinguish between estimation risk and misspecification risk. We discuss an additional source of risk which we refer to as identification risk. By way of illustration, we carry out calculations for equity and FX data sets. In both markets, estimation risk and misspecification risk together explain about half of the multiplication factors employed by the Bank for International Settlements (BIS). |
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Stress Testing Credit Risk: The Great Depression Scenario
Simone Varotto (2010)
(source: RePEc) 2010
| By using Moody's historical corporate default histories we explore the implications of scenarios based on the Great Depression for banks' economic capital and for existing and proposed regulatory capital requirements. By assuming different degrees of portfolio illiquidity, we then investigate the relationship between liquidity and credit risk and employ our findings to estimate the Incremental Risk Charge (IRC), the new credit risk capital add-on introduced by the Basel Committee for the trading book. Finally, we compare our IRC estimates with stressed market risk measures derived from a sample of corporate bond indices encompassing the recent financial crisis. This allows us to determine the extent to which trading book capital would change in stress conditions under newly proposed rules. We find that, typically, banking book regulation leads to minimum capital levels that would enable banks to withstand Great Depression-like events, except when their portfolios have long average maturity. We a |
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Integration and efficiency convergence in EU banking markets
Casu, Barbara & Girardone, Claudia (2010)
(source: RePEc) 2010
| Evidence of financial integration and convergence are considered of importance in assessing the outcome of EU deregulation policies aimed at improving the efficiency and performance of banking sectors. This paper evaluates the recent dynamics of bank cost efficiency by means of data envelopment analysis (DEA). Borrowing from the growth literature, we apply dynamic panel data models (GMM) to the concepts of [beta]-convergence and [sigma]-convergence to assess the speed at which banking markets are integrating. We also employ a partial adjustment model to evaluate convergence towards best practice. Results seem to provide supporting evidence of convergence of efficiency levels towards an EU average. Nevertheless, there is no evidence of an overall improvement of efficiency levels towards best practice. |
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In the Quest of Systemic Externalities: A Review of the Literature
Wolf Wagner (2010)
(source: RePEc) 2010
| We review the banking literature with the view of identifying systemic externalities arising from bank failures. We are particularly interested in how such externalities may depend on the characteristics of the financial system at the time of failure, and on the characteristics of the failing bank itself. We conclude that the majority of the mechanisms in the literature suggest that externalities are higher at times when other banks are failing as well or are close to failure. We discuss the implications for optimal capital requirements. (JEL codes: G01, G21, G28) Copyright The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press. |
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