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Monetary Policy Surprise and Commercial Banks

The Federal Reserve, through its monetary policy, controls federal funds rate by making changes reserve balances available to the banking system. Thus change in monetary policy most directly influences day to day operations of banks. In a recent study Bernanke and Kuttner (2005) examine monetary policy effect on equity prices. They show that equity market reaction comes from the unanticipated component of the monetary policy action. Bernanke and Kuttner (2005) argue that policy makers try to modify economic behavior by affecting the asset prices.

The Arbitrage Pricing Theory and Multifactor Models of Asset Returns

The Arbitrage Pricing Theory (APT) of Ross (1976, 1977), and extensions of that theory, constitute an important branch of asset pricing theory and one of the primary alternatives to the Capital Asset Pricing Model (CAPM). In this chapter we survey the theoretical underpinnings, econometric testing, and applications of the APT. We aim for variety in viewpoint without attempting to be all-inclusive. Where necessary, we refer the reader to the primary literature for more complete treatments of the various research areas we discuss.

International Capital Flows, Returns and World Financial Integration

International capital flows have increased dramatically since the 1980s. During the 1990s gross capital flows between industrial countries rose by 300 per cent, while trade flows increased by 63 percent and real GDP by a comparatively modest 26 percent. Much of the increase in capital flows is due to trade in equity and debt markets, with the result that the international pattern of asset ownership looks very different today than it did a decade ago.

Dynamic Asset Allocation with Stochastic Income and Interest Rates

The household participation in financial markets creates a demand and a need for competent investment advice. The optimal investment strategy for a given individual will depend both on market characteristics, such as the dynamics of asset prices and interest rates, and on personal characteristics, such as risk aversion, time preference, and labor income. In this paper we will study the optimal strategies when both interest rates and the labor income rate of the individual are stochastic.

Cointegration and Long-Run Asset Allocation

Risks facing a short-run and long-run investor can be quite different. While at very short horizons, the contribution of cash-flow news to the variance of return may be small, as the investment horizon increases, cash-flow fluctuations become the dominant source of return variability. Hence, understanding and modeling the behavior of asset returns, especially at long horizons, depend critically on understanding and modeling the dynamics of their cash flows. In this paper we argue that deviations between cash-flow levels and aggregate consumption (the error-correction term) contain important information about means and variances of future cash-flow growth rates and, consequently, returns.

Predictable returns and asset allocation: Should a skeptical investor time the market?

Are excess returns predictable, and if so, what does this mean for investors? In classic studies of rational valuation (e.g. Samuelson (1965, 1973), Shiller (1981)), risk premia are constant over time and thus excess returns are unpredictable. However, an extensive empirical literature has found evidence for predictability in returns on stocks and bonds by scaled-price ratios and interest rates.

Asset Allocation in Finance: A Bayesian Perspective

Bayesian methods have long played a role in finance and asset allocation since the seminal work of de Finetti (1941) and Markowitz (2006). In this paper, we show how the principle of maximum expected utility (MEU) (Ramsey, 1926, Savage, 1956, Bernardo and Smith, 2000) together with Stein's lemma for stochastic volatility distributions (Gron, Jorgensen and Polson, 2011) solves for the optimal asset allocation. Stein's lemma provides the solution to the first order condition that accompanies MEU. The optimal asset allocation problem couched in equilibrium then leads to models such as the Capital Asset Pricing Model (CAPM) or Merton's inter-temporal asset pricing model (ICAPM).

Management of Overweight and Obesity in Children and Adolescents

There is evidence that the prevalence of overweight and obesity in children and adolescents in Australia has increased in the last 15 years: an estimated 20 to 25 per cent of children and adolescents are now overweight or obese. The trend is similar in other developed and developing countries.

Joint Hypermobility And Fibromyalgia

During the last decade, the medical condition known as joint hypermobility syndrome (JHS) has captured the interest of a rising number of researchers and clinicians. It is not just JHS alone that is of interest, however, but its overlap and interrelationship with other maladies which fall under the heading of “soft tissue rheumatism”, including epicondylitis, tenosynovitis, bursitis, and fibromyalgia (FM).

Sovereign Debt Distress and Corporate Spillover Impacts

At a time when rising sovereign credit risk in highly indebted developed economies represents a major source of policy concern and market anxiety, drawing attention to the corporate debt problems that may loom ahead is not only a call for a more systematic approach to debt management, but an opportunity to highlight the hidden dynamics between sovereign and corporate debt that could create a negative feedback loop if investors lose confidence in the government’s ability to use public finances to stabilize the economy or provide a safety net for corporations in distress.

A Macroeconomic Model with a Financial Sector

Economists such as Fisher (1933), Keynes (1936) and Minsky (1986) have attributed the economic downturn of the Great Depression to the failure of financial markets. Kindleberger (1993) documents that financial crises are common in history having occurred at roughly 10-year intervals in Western Europe over the past four centuries. The current financial crisis has underscored once again the importance of the financial frictions for the business cycles.

Macroeconomic Impact on Expected Default Frequency

Operations of banks are typically dominated by the granting of credit and therefore, credit risk is the largest individual risk in the banking system by far. In recent years, central banks and commercial banks have begun to use models that make it possible to more coherently probe the development of the banks’ credit risks on basis of different assumptions and events.

Capital Market, Severity of Business Cycle, and Probability of an Economic Downturn

Alan Greenspan, former chairman of the Federal Reserves, had placed capital market development as a central factor in determining severity of output contraction during an Asian financial crisis. In his speech, Greenspan (2000) argued forcefully that countries that have a strong banking system plus robust capital markets can better withstand financial crises than those countries that have only one or the other.

Low-Carbohydrate Weight-Loss Diets Effects on Cognition and Mood

To examine how a low-carbohydrate diet affects cognitive performance, women participated in one of two weight-loss diet regimens. Participants self-selected a low-carbohydrate (n = 9) or a reduced-calorie balanced diet similar to that recommended by the American Dietetic Association (ADA diet) (n = 10). Seventy-two hours before beginning their diets and then 48 h, 1, 2, and 3 weeks after starting, participants completed a battery of cognitive tasks assessing visuospatial memory, vigilance attention, memory span, a food-related paired-associates a food Stroop, and the Profile of Moods Scale (POMS) to assess subjective mood. Results showed that during complete withdrawal of dietary carbohydrate, low carbohydrate dieters performed worse on memory-based tasks than ADA dieters.

Acute Infectious Diarrhea

Despite reductions in mortality worldwide, diarrhea still accounts for more than 2 million deaths annually 1 and is associated with impaired physical and cognitive development in resource-limited countries. 2 In the United States, an estimated 211 million to 375 million episodes of acute diarrhea occur each year (1.4 episodes per person per year); such episodes are responsible for more than 900,000 hospitalizations and 6000 deaths annually.

Your Guide to Healthy Sleep

Think of your daily activities. Which activity is so important you should devote one-third of your time to doing it? Probably the first things that come to mind are working, spending time with your family, or doing leisure activities. But there’s something else you should be doing about one-third of your time—sleeping.

Healthy Diet

The goal of this publication is to promote a healthy diet, improve the health status of the population and prevent chronic non-communicable diseases that are related to unhealthy diet. Diet plays an important role in coronary heart disease, cancers, diabetes mellitus, hypertension, cerebrovascular disease and obesity.

Bank Incentives, Economic Specialization, and Financial Crises in Emerging Economies

A significant body of literature has emerged on financial crises in emerging markets. This literature focuses primarily on macro explanations for the onset and propagation of a financial crisis. For example, in a recent paper, Francis, Hasan and Hunter (2002) provide evidence that liberalization of emerging financial markets has resulted in the integration of developing countries’ capital markets into global capital markets, thereby resulting in a higher likelihood of financial crises in emerging markets.

Accounting for Derivatives in Emerging Market Economies

Capital markets across the globe have grown dramatically over the past several decades. This growth was spearheaded by derivative financial instruments that have undergone a stunning transformation over the past 30 years. A wide variety of derivatives trades nowadays alongside stocks and bonds on a number of centralized exchanges as well as on the over-the counter market via dealer networks.

Sovereign Risk Premiums in the European Government Bond Market

The potential effect of public debt on government bond yields is an important issue for economists and policy makers. If government bond yields include risk premiums, increasing indebtedness may cause bond yields to go up, thus raising the cost of borrowing and imposing discipline on governments. Market discipline of this kind may be especially relevant and important in a monetary union, such as the US or the new European Monetary Union (EMU), in which the governments of the member states can issue debt, but do not have the possibility to monetize and inflate away excessive debts.

Government Bonds in Domestic and Foreign Currency: The Role of Institutional and Macroeconomic Factors

During the last two decades, capital markets around the world have experienced rapid growth and have become increasingly more integrated. These trends are reflected in the growth of domestic public bond markets and the government participation in international capital markets. At the same time, there have been many financial crises, especially in emerging markets, a phenomenon that has been partly attributed to the increase in debt burdens, particularly in foreign currency. These factors have led to a growing interest regarding the determinants of government bond market development and the currency composition of government bonds.

Building Customer Value And Profitability With Business Ethics

Due to constantly changing competitive environments, business organizations must find new methods to meet competition other than the traditional ways of better products (most consumers believe that competitive products are fairly equal in terms of quality), more services associated with a sell (more companies are finding that providing more and more services negatively affect profitability), or lower prices (competing on price results in erratic market share and unstable profits). Business organizations are responding to these challenges today by establishing partnerships and more collaborative relationships with their customers (Dertouzos, Lester and Solow 1989).

Valuation, Liquidity and Risk in Government Bond Markets

As soon as the European Monetary Union (EMU) took place in 1999, an integrated market for fixed-income securities came to life in the Euro-area. EMU eliminated currency risk within this area, and standardization of bond conventions by Euro-area sovereign issuers made public bonds more easily comparable.

Banking and Sovereign Risk in the Euro Area

Much attention has been focussed on the recent surge in sovereign bond yields in the euro area. While the spread of ten-year bond yields against Germany averaged 15 basis points between the introduction of the euro in January 1999 and August 2008, they rose sharply in the financial crisis. Here, Irish and Greek government bonds traded with particularly high premia above the German Bund. Such levels have previously been associated with emerging market debt.

Liquidity Interactions in Credit Markets: An Analysis of The Eurozone Sovereign Debt Crisis

In early 2010, fears of a sovereign debt crisis, the 2010 euro crisis (also known as the Aegean Contagion) developed concerning some European nations, including European Union (EU) members Greece, Spain, and Portugal. This led to a crisis of con fidence as well as the widening of bond yield spreads and risk insurance on CDS between these countries and other EU members, most importantly Germany.

Pricing Cross-Currency Derivatives in a Libor Market Model

The Libor market model, developed in a series of papers (Brace et al., 1997; Miltersen et al., 1997; Jamshidian, 1997), is one of the most used interest rate model by both practitioners and academics. The model has some appealing features such as the use of an observable underlying, the forward Libor rate, and the assumption that the underlying follows a geometric Brownian motion. Actually, the latter has considerable implication with respect to the implementation and calibration of the model since it meets market practice which relies on the (Black, 1976) model to price the most important over-the-counter interest rate derivatives, i.e. caps and swaptions. The Libor market model has been extended to a multicurrency framework by Schlögl (2002) and Mikkelsen (2002).

Dynamic Sources of Sovereign Bond Market Liquidity

Recent studies on the US corporate and emerging market sovereign bond market show that a sizable component of emerging market sovereign yield spreads is due to factors other than default risk (Chen, Lesmond, and Wei (2007), Collin-Dufresne and Martin (2001), Huang and Huang (2003), Kucuk (2008)). Liquidity, the ability of investors to buy or sell large quantities of securities quickly at low cost and without substantially influencing the price, is found to be a plausible explanation for the variations in yield spreads across di erent bonds (Kucuk (2008), Ferrucci (2003), Duffie, Pedersen, and Singleton (2003), and Beber, Brandt, and Kavajecz (2006)).

Stock Exchange Liquidity, Bank Credit, and Economic Growth

The impact of banking development and stock market liquidity on economic growth is well documented in the “finance and growth” literature (Levine and Zervos, 1998; Beck and Levine, 2003; Rajan and Zingales, 1998). However, the results are inconclusive with regard to which is more important, if the impact of one subsumes the other, and the relevance of banks and stock markets in the context of legal and institutional development of different countries.

Bank Capital, Liquidity and Systemic Risk

The policy discussion about banking regulation during the past two decades has been mainly concerned with capital adequacy. This focus was reinforced by the refinement of existing capital adequacy rules by the Basel Committee which forms the core of the regulatory reform known as “Basel II”. In the debate about how to reform the existing framework questions concerning the general rationale of capital adequacy have been moved to the background. Moreover, whether such regulation can actually serve as a safeguard against financial crises as it is often claimed in policy debates has perhaps received insufficient attention.

Emerging Project Bond Market: Covenant Provisions and Credit Spreads

The emergence in the 1990s of a nascent project bond market to fund long-term infrastructure projects in developing countries, such as electric power plants, roads, ports, airports, telecommunications networks, and water and waste water facilities, merits attention for several reasons. First, they highlight the attractiveness of such investment opportunities that are traditionally the preserve of the public sector for private sources of capital.

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