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Margin Requirements, Asset Pricing and Welfare Implications

Margin loans climbed from $32 billion in 1990 to a historically high level of $278 billion (2.9% of market capitalization) in 2000. The large increase in margin loans, both in aggregate value and in its relative size to market capitalization rekindled the debate about using margin requirements as an instrument for moderating the common stock price fluctuations and reducing market volatility. Economists agree that stricter margin requirements would restrict margin credit and stock trading.

Agency Conflicts, Investment, and Asset Pricing

Separation of corporate control from ownership is one of the main features of modern capital markets. Among its many virtues, it allows for the participation of small investors in the equity market, thereby increasing the supply of funds, dissipating risks across the economy, and lowering the cost of capital for firms. Its major drawback is the agency conflict that arises between corporate insiders who run the firm and can extract private benefits of control, and outside minority investors who have cash flow rights on the firm, but no control rights (e.g., Berleand Means (1932) and Jensenand Meckling (1976)).

Business Cycles in Emerging Economies: The Role of Interest Rates

In recent years a large number of emerging economies have faced frequent and large changes in the real interest rates they face in international financial markets; these changes have usually been associated with large business cycle swings. The virulence of these crises has prompted proposals to enact policies that would stabilize international credit conditions for emerging markets. This paper is motivated by this observation and has two objectives. The first is to systematically document the relation between real interest rates and business cycles in emerging economies and to contrast it with the relation we observe for developed countries.

Credit Constraints and Self-Fulfulling Business Cycles

In the presence of credit constraints, financial factors can play an important role in macroeconomic fluctuations. For instance, if it is costly to enforce loan contracts or monitor project outcomes, then borrowing capacity will be limited by the value of the borrower'scollateral assets or net worth. When credit constraints are binding, an increase in asset prices eases the constraints and thus helps expand production and investment. Expanded production and investment in turn raise the borrower's collateral value and net worth, further easing the constraints.

The design of bank loan syndicates in Emerging Markets Economies

What are the determinants of bank loan syndicates design in emerging markets economies (EME)? The syndicate design might be different in EME than in developed countries and can therefore have important implications for the functioning and the development of syndicated loan markets, and more broadly for the financial and economic development of EME.

Liquidity and Market Crashes

Market crashes refer to large, sudden drops in asset prices in the absence of big news on the fundamentals—such as future asset payoffs. They exhibit some distinct features. Crashes are one-sidedthere are no sudden market surges. They are typically accompanied by large selling pressures in the market. Moreover, the drop in prices occurs quickly but the recovery is much slower.

Bank Regulatory Reform in the Wake of the Financial Crisis

Financial crises not only impose short-term economic costs, they also create enormous regulatory risks. The financial crisis that is currently gripping the global economy is already producing voluminous proposals for regulatory reform coming from all quarters. Previous financial crises most obviously the Great Depression brought significant financial regulatory changes in their wake, most of which were subsequently discredited by economists and economic historians as counterproductive.

How Committed Are Bank Lines of Credit? Evidence from the Subprime Mortgage Crisis

Why does a CFO need to worry about her company's access to a legally-binding bank line of credit? Maybe bank lines of credit are not as committed as they seem, and maybe there are times when a borrower needs to worry about its lender's credit rating. A formal credit line (sometimes known as a revolving credit facility or a loan commitment), is a legally binding commitment for which a bank has charged a fee, which allows the borrowers to take down funds at a certain spread over a base rate.

Optimal Fiscal Policy in a Monetary Union

The creation of the European Monetary Union (EMU) has led to an array of new challenges for policy makers. Those challenges have been reflected most visibly in the controversies surrounding the implementation (and violation) of the Stability and Growth Pact (SGP), as well as in the frequent criticisms regarding the suitability of the interest rate decisions (or lack thereof) made by the European Central Bank (ECB) since its inception. From the perspective of macroeconomic theory, the issues raised by EMU have created an urgent need for an analytical framework that would allow us to evaluate alternative monetary and fiscal policy arrangements for EMU and other monetary unions that may arise in the future.

Bank Governance, Regulation, and Risk Taking

In this paper, we analyze relationships among risk taking by banks, their ownership structures, and national bank regulations. We focus on the potential conflicts between bank managers and owners over risk, and assess whether bank risk taking varies with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we examine whether the relation between national regulations and bank risk depends on each bank's ownership structure.

Bank Leverage Regulation and Macroeconomic Dynamics

The regulatory response to the crisis of 2007-08 has been sweeping and important changes in global bank regulation will become efiective over the next few years. Most notably, a set of new macroprudential policies will both strengthen regulatory constraints on bank leverage and balance sheets and also make such regulation more responsive to cyclical developments. The most prominent example of the latter is the countercyclical bank capital bufierintroduced as part of the Basel III banking reforms.

Equilibrium Asset Pricing Under Heterogeneous Information

The theory of financial markets under homogeneous information has generated a rich body of predictions, extensively used in the financial industry, such as the optimality of indexing, the nature of arbitrage, and equilibrium-based pricing relations, as illustrated by the CAPM. In contrast, the theory of capital markets under heterogeneous information has not been used much to guide asset pricing and portfolio allocation decisions. The goal of the present paper is to derive some of the implications of partially revealing (noisy) rational expectations equilibria for asset pricing and asset allocation, and to test their empirical relevance.

Estimating Market-implied Recovery Rates from Credit Default Swap Premia

Research on the determinants of historical recovery rates shows that there is a systematic component in recovery risk and that the market practice of assuming constant recovery rates results in a significant underestimation of economic capital (cf. Hu and Perraudin (2002), Altman et al. (2004, 2005) and Rösch and Scheule (2005)). Understanding the dynamics of implied recovery rates is thus of relevance for regulators, risk managers and developers of forward-looking credit risk models.

Ebook Portfolio Credit Risk Models with Interacting Default Intensities: a Markovian Approach

A major cause of concern in the pricing and management of the credit risk in a given loan or bond portfolio is the occurrence of disproportionately many defaults of different counterparties in the portfolio, a risk which is directly linked to the structure of the dependence between default events. Dependence between defaults stems from at least two non­exclusive sources. First the financial health of a firm varies with randomly fluctuating macroeconomic factors such changes in economic growth.

Dealing With Bronchitis: Overcoming Bronchitis And Its Health Effects

Bronchitis is something you are likely to have in your lifetime at least once. Since it usually follows a cold or other respiratory condition, most people will develop it in the course of their lifetime. Your chest is throbbing in pain. You are coughing and it hurts to do so. These are the first symptoms of bronchitis. Although it is a common condition that many face, for some it is even worse. That's because for some people bronchitis is disabling and more frequent. If you fall in this category, then you are looking for a way to gain back your strength and to get your life back on track.

Acute Bronchitis

Acute bronchitis is a common respiratory tract infection usually caused by viruses and encountered often by family doctors. Diagnosis is usually made on clinical symptoms, as findings on physical examination are usually limited and investigations give non-specific results. Numerous studies have shown that antimicrobial agents are useless in acute bronchitis, and have a negligible effect on symptoms. The use of other medications such as ? 2 -agonists and cough suppressants has also been questioned and these medications are usually reserved for patients suffering from chronic lung conditions. Delayed prescription has been considered as a means of reducing antibiotic overprescribing in respiratory tract infections, however, the effect of such measures on antibiotic use and resolution of symptoms is questionable, as are studies on the patients' satisfaction with delayed prescribing.

Policy Coordination and Risk Premium in Foreign Exchange Markets for Major EU Currencies

The relationships among spot exchange rates have been of considerable interest to researchers, policymakers, and foreign exchange market participants. The majority of prior studies (e.g., MacDonald and Taylor, 1989; Lajuanie and Naka, 1992; Rapp and Sharma, 1999) find no evidence of long-run equilibrium relationships, as measured by cointegrating relationships, among spot exchange rates of various currencies over the modern float.

Liquidity Risk and Contagion

Prudential regulations in the form of liquidity or capital requirements are designed to enhance the resilience to shocks of financial systems by requiring institutions to maintain prudent levels of liquidity and capital under abroad range of market conditions. However, at times of market turbulence the remedial actions prescribed by these regulations may have perverse effects on systemic stability. Forced sales of assets may feedback on market volatility and produce a downward spiral in asset prices, which inturn may affect adversely other financial institutions. This paper investigates these issues. In particular, it looks at the consequences of combining liquidity risk with externally imposed regulatory solvency requirements, when mark-to-market accounting of firms assets are also in place.

Wage Flexibility and Unemployment: The Keynesian Perspective Revisited

Neo-classical and new-keynesian economics a like have in common to explain involuntary unemployment as the result of real wage rigidity. The neo-classical analysis also postulatesa positive correlation between nominal and real wages (generally confirmed by empirical observations) so that any cutin money wages should result inacutinreal wages. As a consequence, money wage rigidities as sociated with some specific bargaining arrangements on the labour market would be responsible for involuntary unemployment.

Sterilization, Monetary Policy, and Global Financial Integration

In the late 1980s and early 1990s, emerging market countries embraced growing financial liberalization and openness. However, by also trying to maintain some degree of both exchange rate stability and monetary independence, many of these countries experienced severe financial crises. In the aftermath of these crises, many emerging markets have adopted a policy configuration involving greater, though still managed, exchange rate flexibility, together with ongoing financial integration and some degree of domestic monetary independence.

Financial Globalization and Monetary Policy

The growth in the size and complexity of international financial markets has been one of the most striking aspects of the world economy over the last decade. Lane and Milesi-Ferretti (2001,2006) document the increase in gross holdings of cross country bond and equities fora large group of countries. They describe this as a process of financial globalization.

Financial Intermediaries, Financial Stability and Monetary Policy

Financial intermediaries have been at the center of the credit market disruptions that began in August 2007. They have borne a large share of the credit losses from securitized subprime mortgages, even though securitization was intended to parcel out and disperse credit risk to investors who were better able to absorb losses. The capacity to lend has suffered as intermediaries have attempted to curtail their exposure to a level that can be more comfortably supported by their capital. The credit crisis has dampened real activity in sectors such as housing, and has the potential to induce further declines. The events of the last twelve months have posed challenges for monetary policy and have given renewed impetus to think about the interconnection between financial stability and monetary policy.

Asset Pricing with a Reference Level of Consumption: New Evidencefrom the Cross-Section of Stock Returns

Despite its theoretical appeal, the consumption-based asset pricing model (CCAPM) has achieved little empirical success in calibration exercises or formal econometric testing (See e.g. Hansenand Singleton 1982; Mehraand Prescott 1985; Cochrane 1996 or Lettauand Ludvigson 2001a). The empirical failure of the model has sparked a wave of research over the past 20 years aimed at improving the canonical CCAPM and making the model consistent with empirical facts.

Do Multifactor Models Explain Asset-Pricing Anomalies?

An anomaly is a pattern in average stock returns that is inconsistent with the predictions of the Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965). Over the past three decades, a large number of anomalies have been uncovered, suggesting the CAPM is failing to explain much of the cross sectional variation in average stock returns. This work has, inturn, led researchers to introduce a series of multifactor models to "explain" seemingly abnormal patterns in the cross section of stock returns. Leading examples include the Fama-French (1993) three-factor model, the Carhart (1997) four-factor model, and the recently proposed Chen-Zhang (2009) three-factor model.

The Role of Real Wage Rigidity and Labor Market Frictions for Unemployment

The New Keynesian dynamic stochastic general equilibrium model (DSGE) provides the predominant framework for current macroeconomic studies of business cycle fluctuations. However, the standard sticky price models cannot account for the relative variation of employment and hours, the low variation in real wages and the degree of persistence in inflation and output in the U.S.. To reproduce the observed large and persistent responses in hours of work and inflation the models require implausible high values for the degree of price rigidity and the elasticity of substitution between labor and leisure. This paper studies the interrelation between labor market frictions and the transmission mechanism to a monetary policy shock.

Asset specificity, labor market outcomes, and policy preferences

Does the welfare state emerge as a rational solution to collective action problems of skill formation? Or are redistributive policies rather the contingent outcome of long-term and gradual class struggle? Current research on this issue revolves around the theoretical notion of asset (or skill) specificity. This concept, emanating from the economic literature on organizations and labor markets, occupies a central place in two recent and highly influential perspectives on inequality and political economy: the Varieties of Capitalism (VoC) perspective (Hall and Soskice 2001, Estevez-Abe, Iversen and Soskice 2001) in political science and the Class as Employment Relations (CER) perspective (Goldthorpe 2000) in sociology. The latter model which provides the theoretical rationale for the major conception of class in sociological research has recently been put to empirical test and conspicuously failed (see Tåhlin 2007).

Monetary Regimes, Labour Mobility and Equilibrium Employment

Over the last decade, interest in the macroeconomic consequences of different monetary regimes has been arguably unprecedented. In addition to the debate on optimal currency areas, spurred by the launch of the Economic and Monetary Union (EMU), advocates of price stability have suggested that inflaation or price level targeting may have desirable long-run effects on the economy by promoting sustainable growth and higher employment.

Learning, Endogenous Indexation and Disinflation in the New-Keynesian Model

Developing abetter understanding of the costs of disinflation has long been an important objec-tive for macroeconomic research. Since the 1980sdisinflati on episodes and strategies have been studied extensively under the assumption of rational expectations. This assumption implies that central bank announcements regarding future policy plans can help achieve disinflation at little or no cost in terms of lost output in spite of the presence of price level rigidity.

Fiscal Policy in Unionized Labor Markets

Cross-country differences in the size and composition of the government budget have stimulated a lively debate on the effect of fiscal policy. Quite a large body of evidence has accumulated on the influence of fiscal policy instruments on the macroeconomy while less is known about the distributional effects of changes in the government budget's composition. Theoretically, macroeconomists have limited their analysis to the impact of a limited set of fiscal policy variables in economies with perfectly competitive labor markets. However, in several OECD countries (mainly continental Europe) unions are very powerful and their presence can influence the effects and the transmission mechanism of fiscal shocks.

On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework

The impact of minimum wages on the welfare of agents on the supply and demand sides of the labor market has been at the center of an age-old policy debate on the proper role of the government in the economy. The standard elementary treatment of minimum wage policy views its impact as unambiguously negative. In a competitive market in which unrestricted supply and demand forces combine to determine a unique equilibrium employment and wage level, the imposition of a minimum wage greater than the market clearing wage creates true unemployment, defined as the situation in which individuals who are willing to supply labor at the going wage rate are unable to find jobs.

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