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In a model with multiple Pareto-ranked equilibria we add trade in assets that pay based on the realization of a sunspot. Asset trading restricts the equilibrium set in a way that raises welfare by eliminating equilibria with a high likelihood of disasters. When the probability of a disaster is high enough, the coordination game becomes like a prisoner’s dilemma situation in which the high-output equilibrium disappears because the portfolios that agents choose induce them to produce less. We derive an upper bound on the disaster probability, we derive asset pricing implications including the disaster premium, and we study the effect on stock prices of news shocks to beliefs.

A safe asset’s real value is insulated from shocks, including declines in GDP from rare macroeconomic disasters. However, in a Lucas-tree world, the aggregate risk is given by the process for GDP and cannot be altered by the creation of safe assets. Therefore, in the equilibrium of a representative-agent version of this economy, the quantity of safe assets will be nil. With heterogeneity in coefficients of relative risk aversion, safe assets can take the form of private bond issues from low-risk-aversion to high-risk-aversion agents. The model assumes Epstein-Zin/Weil preferences with common values of the intertemporal elasticity of substitution and the rate of time preference. The model achieves stationarity by allowing for random shifts in coefficients of relative risk aversion. We derive the equilibrium values of the ratio of safe to total assets, the shares of each agent in equity ownership and wealth, and the rates of return on safe and risky assets. In a baseline case, the steady-state risk-free rate is 1.0% per year, the unlevered equity premium is 4.2%, and the quantity of safe assets ranges up to 15% of economy-wide assets (comprising the capitalized value of GDP). A disaster shock leads to an extended period in which the share of wealth held by the low-risk-averse agent and the risk-free rate are low but rising, and the ratio of safe to total assets is high but falling. In the baseline model, Ricardian Equivalence holds in that added government bonds have no effect on rates of return and the net quantity of safe assets. Surprisingly, the crowding-out coefficient for private bonds with respect to public bonds is not 0 or -1 but around -0.5, a value found in some existing empirical studies.

In statistics, samples are drawn from a population in a data- generating process (DGP). Standard errors measure the uncer- tainty in sample estimates of population parameters. In sci- ence, evidence is generated to test hypotheses in an evidence- generating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sam- ple. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants.

Many financial instruments are designed with embedded leverage, such as options and leveraged exchange-traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints, and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find empirically that options and leveraged ETFs provide significant amounts of embedded leverage; this embedded leverage increases return volatility in proportion to the embedded leverage; and higher embedded leverage is associated with lower risk-adjusted returns. The results are statistically and economically significant, and we provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics. (JEL G02, G11, G12, G13, G14, G20)

We model the term structure of interest rates that results from the interaction between investors with preferences for specific maturities and risk‐averse arbitrageurs. Shocks to the short rate are transmitted to long rates through arbitrageurs' carry trades. Arbitrageurs earn rents from transmitting the shocks through bond risk premia that relate positively to the slope of the term structure. When the short rate is the only risk factor, changes in investor demand have the same relative effect on interest rates across maturities regardless of the maturities where they originate. When investor demand is also stochastic, demand effects become more localized. A calibration indicates that long rates underreact to forward‐guidance announcements about short rates. Large‐scale asset purchases can be more effective in moving long rates, especially if they are concentrated at long maturities.

In this paper, we examine the pricing determinants in the systemically important tri-party repo market. Taking advantage of the recently available N-MFP reports filed by money market funds, we construct a novel dataset that contains tri-party repo transactions between money market funds and dealer banks. We find a large cross-sectional heterogeneity in repo pricing, reflected most significantly in the haircuts of repos backed by equity and corporate bonds. Surprisingly, it is the fund families, not bank dealers, who are the dominant factor in determining the pricing. Moreover, the repo market exhibits significant segmentation, with fund families adopting three different pricing schemes: counter-party sensitive, counter-party and collateral sensitive, and uniform. Most fund families use uniform haircuts by fixing a constant haircut, which itself varies across families, for all repos within each asset class, regardless of the quality of collateral or counter-party. Investigating further on the lending/borrowing relationship between fund families and dealers, we find that, when faced with such a rich pricing pattern, dealers do not shop around for a better haircut and are inclined to maintain a stable relationship with their lenders. Finally, for repos backed by Treasury securities, there is little variation in both haircuts and spreads, regardless of the fund family.

Housing market transactions are a matter of public record and thus provide a rare opportunity to analyze the behavior, performance, and strategies of individual investors. Using data for all housing transactions in the Los Angeles area from 1988-2009, this paper provides empirical evidence on investor behavior that is consistent with several rationales for speculative investment in the finance literature, including the roles of middlemen and naïve speculators. Speculative activity by novice investors increased sharply in the recent housing boom. These investors earned little more than the market rate of appreciation and demonstrated no ability to foresee market price movements.

Using comprehensive data on bank lending and establishment-level outcomes from 1997–2010, this paper finds that small business lending is an unimportant determinant of small business and overall economic activity. A shift-share style research design is implemented to predict county-level lending shocks using variation in preexisting bank market shares and bank supply shifts. Counties with negative predicted lending shocks experienced declines in small business loan originations, indicating that it is costly to switch lenders. However, small business loan originations have an economically insignificant and generally statistically insignificant impact on both small firm and overall employment during the Great Recession and normal times. (JEL E32, E44, E52, G21, G32, L25)

Heightened counterparty risk during the recent financial crisis has raised questions about the role clearinghouses play in global financial stability. Empirical identification of the effect of centralized clearing on counterparty risk is challenging because of the co-incidence of macro-economic turbulence and the introduction of clearinghouses. We overcome these concerns by examining a novel historical experiment, the establishment of a clearinghouse on the New York Stock Exchange (NYSE) in 1892. During this period the largest NYSE stocks were also listed on the Consolidated Stock Exchange (CSE), which already had a clearinghouse. Using identical securities on the CSE as a control, we find that the introduction of clearing reduced annualized volatility of NYSE returns by 90-173bps and increased asset values. Prior to clearing, shocks to overnight lending rates reduced the value of stocks on the NYSE, relative to identical stocks on the CSE, but this was no longer true after the establishment of clearing. We also show that at least ½ of the average reduction in counterparty risk on the NYSE is driven by a reduction in contagion risk - the risk of a cascade of broker defaults. Our results indicate that clearing can cause a significant improvement in market stability and value through a reduction in network contagion and counterparty risk.

We study the design features of disclosure regulations that seek to trigger the green transition of the global economy and ask whether such regulatory interventions are likely to bring about sufficient market discipline to achieve socially optimal climate targets. We categorize the transparency obligations stipulated in green finance regulation as either compelling the standardized disclosure of raw data, or providing quality labels that signal desirable green characteristics of investment products based on a uniform methodology. Both categories of transparency requirements can be imposed at activity, issuer, and portfolio level. Finance theory and empirical evidence suggest that investors may prefer “green” over “dirty” assets for both financial and non-financial reasons and may thus demand higher returns from environmentally-harmful investment opportunities. However, the market discipline that this negative cost of capital effect exerts on “dirty” issuers is potentially attenuated by countervailing investor interests and does not automatically lead to socially optimal outcomes. Mandatory disclosure obligations and their (public) enforcement can play an important role in green finance strategies. They prevent an underproduction of the standardized high-quality information that investors need in order to allocate capital according to their preferences. However, the rationale behind regulatory intervention is not equally strong for all categories and all levels of “green” disclosure obligations. Corporate governance problems and other agency conflicts in intermediated investment chains do not represent a categorical impediment for green finance strategies. However, the many forces that may prevent markets from achieving socially optimal equilibria render disclosure-centered green finance legislation a second best to more direct forms of regulatory intervention like global carbon taxation and emissions trading schemes. Inherently transnational market-based green finance concepts can play a supporting role in sustainable transition, which is particularly important as long as first-best solutions remain politically unavailable.

This paper provides a set of benchmark estimates of the private sector's income and price elasticities of demand for the asset market components of this class of AGE models calibrated for low-income developing economies. The results presented in this paper are based on the estimation of a cointegrated asset demand system for Kenya, where the private sector is assumed to hold its wealth in terms of five assets and one liability. The estimating model is based on the almost-ideal demand system developed by Deaton and Muellbauer (1980) and is estimated on quarterly data for the period from 1970 to 1990.

We analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent-based model populated by heterogeneous, interacting firms. Agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change, imperfect information and coordination hurdles. In these circumstances, we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naïve learning rules. In fact, more sophisticated, e.g. recursive least squares (RLS) expectations produce less accurate individual forecasts and also considerably worsen the performance of the economy. Finally, we experiment with agents that adjust simply to technological shocks, and we show that individual and aggregate performances dramatically degrade. Our results suggest that fast and frugal robust heuristics are not a second-best option: rather they are “rational” in macroeconomic environments with heterogeneous, interacting agents and changing “fundamentals”.

We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vastmajority of OTC prices are favorable with respect to exchange quotes. This is a challenge for theories of OTC markets centered around search frictions but consistent with models of hybrid markets based on information frictions. We show empiricallythat proxies for both frictions determine variation in the discount, which is largely passed on to customers. Dealers trade on the exchange for immediacy and via brokers for opacity and anonymity, highlighting the complementary roles played by the di↵erent protocols.

Im Rahmen der Aufarbeitung des Wirecard-Skandals wird ebenfalls eine Änderung der Kriterien zur Aufnahme in den deutschen Leitindex DAX diskutiert. Die bislang von der Deutschen Börse vorgelegten Vorschläge zur Reformierung des DAX gehen in die richtige Richtung, sind aber nicht weitreichend genug. Es bedarf eines deutlichen Zeichens, dass sich künftig nur solche Unternehmen für den DAX qualifizieren können, die ein zumindest befriedigendes Maß an Nachhaltigkeit gemessen durch einen ESG (Environment, Social, Governance)-Risk-Score in ihrer Geschäftstätigkeit erreichen. Eine Simulation verdeutlicht, dass nach ESG-Kriterien seit langem kritisch betrachtete Unternehmen dem DAX nicht mehr angehören würden. Dies würde klare Anreize bei den Unternehmen setzen, Nachhaltigkeitsaspekte stärker als bisher in ihrer Strategie zu berücksichtigen. Letztlich kann eine Neugestaltung wichtiger Aktienindizes einen Beitrag dazu leisten, dass mehr Kapital in nachhaltig wirtschaftende Unternehmen und Sektoren fließt.

We aim to make two contributions to the literature on the effects of transaction costs on financial price volatility. First, by using a research design with three ingredients (a common set of companies simultaneously listed on two stock exchanges; binding capital controls; different timing of changes in transaction costs), we obtain a control group that has identical corporate fundamentals as the treatment group and is therefore far cleaner than any in the existing literature. We apply the research design to Chinese stocks that are cross-listed in Hong Kong and Mainland. Second, we entertain the possibility that a given transaction cost can have different effects in immature and mature markets. In an immature market where trading is dominated by retail investors with little knowledge of accounting and finance, a Tobin tax should have the best chance of generating its intended effect. In a more mature market, higher transaction costs may also discourage sophisticated investors, hence impeding timely incorporation of fundamental information into prices. We find a significantly negative relation in the Chinese market, on average, between stamp duty increase and price volatility. However, this average effect masks some important heterogeneity. In particular, when institutional investors have become a significant part of traders' pool, we find an opposite effect. This suggests that a Tobin tax may work in an immature market but can backfire in a more developed market.

We present a novel empirical benchmark for analyzing credit risk using “pseudo firms” that purchase traded assets financed with equity and zero-coupon bonds. By no-arbitrage, pseudo bonds are equivalent to Treasuries minus put options on pseudo firm assets. Empirically, like corporate spreads, pseudo bond spreads are large, countercyclical, and predict lower economic growth. Using this framework, we find that bond market illiquidity, investors' overestimation of default risks, and corporate frictions do not seem to explain excessive observed credit spreads but, instead, a risk premium for tail and idiosyncratic asset risks is the primary determinant of corporate spreads. (JEL E23, E32, E44, G13, G24, G32)

International audience; This paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery. The debt structure is measured as the share of bonds in the total credit to non-financial corporations for a quarterly panel of countries over the period 1989–2013. We first show that the substitution of loans for bonds in recoveries is a regular property of business cycles. Secondly, we provide evidence that economies with high bond share and important bond-loan substitution recover from the recessions faster. This identified link between corporate debt structure and business cycles is robust to the inclusion of traditional factors which shape recessions and recovery such as the size and the quality of financial markets, the occurrence of bank crisis, the dynamics of credit, and the distribution of firm size. © 2017 Elsevier B.V.

We suggest using "realized volatility" as a volatility proxy to aid in model-based multivariate bond yield density forecasting. To do so, we develop a general estimation approach to incorporate volatility proxy information into dynamic factor models with stochastic volatility. The resulting model parameter estimates are highly efficient, which one hopes would translate into superior predictive performance. We explore this conjecture in the context of density prediction of U.S. bond yields by incorporating realized volatility into a dynamic Nelson-Siegel (DNS) model with stochastic volatility. The results clearly indicate that using realized volatility improves density forecasts relative to popular specifications in the DNS literature that neglect realized volatility.

This paper examines the relation between competitive pressure and financial constraints\ud using firm-level survey data from 27 emerging economies of Eastern Europe and Central\ud Asia for the years 2005 and 2009. In the empirical analysis, we disentangle the impact of\ud product market competition on the demand and supply of credit. Our results support the\ud hypothesis that competitive pressure on borrowers affects both sides of the credit market. We\ud find that in industries with greater competitive pressure firms’ demand for credit is typically\ud higher but a greater proportion of firms are discouraged from loan application due to greater\ud cost of credit. Interestingly, we find the detrimental effect of competitive pressure on credit\ud access breaks down when firms are audited, when they can pledge collateral and when they\ud engage in export activities. These results point to the role of competitive pressure in the\ud lenders’ information set when limited information is available

This article presents an overview of research on the Microstructure of Foreign Exchange Markets. We begin by summarizing the institutional features of FX trading and describe how they have evolved since the 1980s. We then explain how these features are represented in microstructure models of FX trading. Next, we describe the links between microstructure and traditional macro exchange-rate models and summarize how these links have been explored in recent empirical research. Finally, we provide a microstructure perspective on two recent areas of interest in exchange-rate economics: the behavior of returns on currency portfolios, and questions of competition and regulation.

The long-run risks (LRR) asset pricing model emphasizes the role of low-frequency movements in expected growth and economic uncertainty, along with investor preferences for early resolution of uncertainty, as an important economic-channel that determines asset prices. In this paper, we estimate the LRR model. To accomplish this we develop a method that allows us to estimate models with recursive preferences, latent state variables, and time-aggregated data. Time-aggregation makes the decision interval of the agent an important parameter to estimate. We find that time-aggregation can significantly affect parameter estimates and statistical inference. Imposing the pricing restrictions and explicitly accounting for time-aggregation, we show that the estimated LRR model can account for the joint dynamics of aggregate consumption, asset cash flows and prices, including the equity premia, risk-free rate and volatility puzzles.

This contribution studies the role of the size of mutual funds in the evaluation of the fund performance with a data envelopment analysis (DEA) approach, with the aim of studying the issue from different angles and with different statistical tools and investigating the presence of a positive or negative size effect in mutual funds market. Firstly, we discuss the role of fund size in the performance evaluation and wonder whether it is appropriate to include size information among the variables of DEA models. Secondly, we analyse the presence of a relationship between the performance scores and the size of mutual funds using different statistical tests and carry out an empirical investigation on a set of European equity mutual funds. Thirdly, we study scale efficiency and investigate whether the European mutual funds analysed exhibit constant, increasing or decreasing returns to scale.

Stock prices are more informative when the information has less social value. Speculators with limited resources making costly (private) information production decisions must decide to produce information about some firms and not others. We show that producing and trading on private information is most profitable in the stocks of firms with poor corporate governance -- precisely because it will not be acted upon -- and less profitable at firms with better corporate governance. To the extent that the information in the stock price is used for disciplining the CEO by the board of directors, the informed trader has a reduced incentive to produce the information in the first place. We test our model using the probability of informed trading (PIN) and the probability of forced CEO turnover in a simultaneous-equation system. The empirical results support the model predictions. Stock prices are efficient, but there is a limit to the disciplining role they can fulfill. We apply the model to evaluate the effects of the Sarbanes-Oxley Act of 2002.

We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is mean-reverting, then the equilibrium price follows a multivariate 'stochastic bridge' process, which displays stochastic volatility. This is because insiders choose to optimally wait to trade more aggressively when noise trading activity is higher. In equilibrium, market makers anticipate this, and adjust prices accordingly. More private information is revealed when volatility is higher. In time series, insiders trade more aggressively, when measured price impact is lower. Therefore, execution costs to uninformed traders can be higher when price impact is lower.

We examine the public debt management problem with respect to the maturity mix of new issues in a mean-variance framework. After identifying the main determinants of the long-run target (strategy), we focus on which interest rate conditions allow for a temporary deviation (tactics). The study is partly motivated by the apparent ‘window of opportunity’ to issue more heavily at longer maturities given the recent historically low yields. We show that the room for long tactical positions on the long-term bond is actually narrower than predicted by rules of thumb based on Sharpe-like ratios. Once the model is augmented to embed real world features such as no price-taking and transaction costs, the scope for tactical position shrinks further. We discuss the model results and its implications in terms of the principal-agent dilemma (government vs. debt manager); the paper also explores the financial stability implications arising from public debt issuance choices. All in all, our findings provide a rationale for the degree of caution often shown by many public debt managers in fulfilling their mandate.

We introduce a macroeconomic model with heterogeneous households and an aggregate banking sector in order to analyze the impact of rising income inequality under different credit scenarios. Growing inequality produces debt‐led consumption boom dynamics when the banking sector is characterized by a lower capital requirement and a higher willingness to lend. Instead, when inequality rises but the banking sector is highly regulated, aggregate demand and output fall. Our results also yield new insights on the appropriate fiscal policy reaction to stabilize the economy: acting on the progressivity of the tax system seems more effective than a proactive countercyclical fiscal policy. (JEL C63, D31, E62, G01)

The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.Presentation slides: https://ssrn.com/abstract=3181614.

We study how network structure affects the dynamics of collateral in presence of rehypothecation. We build a simple model wherein banks interact via chains of repo contracts and use their proprietary collateral or re-use the collateral obtained by other banks via reverse repos. In this framework, we show that total collateral volume and its velocity are affected by characteristics of the network like the length of rehypothecation chains, the presence or not of chains having a cyclic structure, the direction of collateral flows, the density of the network. In addition, we show that structures where collateral flows are concentrated among few nodes (like in core-periphery networks) allow large increases in collateral volumes already with small network density. Furthermore, we introduce in the model collateral hoarding rates determined according to a Value-at-Risk (VaR) criterion, and we then study the emergence of collateral hoarding cascades in different networks. Our results highlight that network structures with highly concentrated collateral flows are also more exposed to large collateral hoarding cascades following local shocks. These networks are therefore characterized by a trade-off between liquidity and systemic risk.

The purpose of this paper is to examine the volatility relationship that exists between emerging and developed markets in normal times and in times of financial crises. The Vector Autoregressive methodology and the Bai and Perron, 2003a , Bai and Perron, 2003b 's technique are used. The paper results lead to very interesting conclusions. First, it has been found that volatility spillovers are effective across financial markets. Second, it has been proven that geographical proximity is of great importance in amplifying the volatility transmission. Finally, it has been shown that financial liberalization contributes significantly in amplifying the international transmission of volatility and the risk of contagion.

In this paper, we empirically investigate the impact of the credit risk of Eurozone member countries on the stability of the Euro. In the absence of a common euro bond, euro-area credit risk is induced though the credit default swaps of the member countries. The stability of the euro is examined by decomposing dollar-euro exchange rate options into the moments of the risk-neutral distribution. We document that during the sovereign debt crisis changes in the creditworthiness of member countries have significant impact on the stability of the euro. In particular, an increase in member countries’ credit risk results in an increase of volatility of the dollar-euro exchange rate along with soaring tail risk induced through the risk-neutral kurtosis. We find that member countries’ credit risk is a major determinant of the euro crash risk as measured by the risk-neutral skewness. We propose a new indicator for currency stability by combining the risk-neutral moments into an aggregated risk measure and show that our results are robust to this change in measure. Noticeable is the fact that during the sovereign debt crisis, the creditworthiness of countries with vulnerable fiscal positions is the main risk-endangering factor of the euro-stability.

This paper draws on network theory to investigate European banks’ sovereign debt exposures. Banks’ holdings of sovereign debt build a network of financial linkages with European countries that exhibits a long-tail distribution of node degrees. A highly connected network core of 15 banks is identified. These banks accounted for the majority of sovereign debt investments between December 2010 and December 2013 but exhibited only average and sometimes even below average capitalizations. Consequently, they constituted a potential source and transmission channel of systemic risk, especially due to their proneness to portfolio contagion. In a complementary regression analysis, the effect of counterparty risk on Credit Default Swap (CDS) spreads of 15 EU sovereigns is investigated. Among the banks exposed to the debt of a particular issuer, the biggest institutions in terms of their own asset sizes are identified and some of their balance sheet characteristics included into the regression. The analysis finds that the banks’ implied volatilities had a significant and increasing effect on CDS spreads during the recent crisis years, providing evidence of the presence of counterparty risk and its effect on EU sovereign debt pricing. Furthermore, the role of the domestic financial sectors is assessed and found to have affected the CDS spreads.

The value of information regarding risk class for a monopoly insurer and its customers is examined in both symmetric and asymmetric information environments. A monopolist always prefers contracting with uninformed customers as this maximizes the rent extracted under symmetric information while also avoiding the cost of adverse selection when information is held asymmetrically. Although customers are indifferent to symmetric information when they are initially uninformed, they prefer contracting with hidden knowledge rather than symmetric information since the monopoly responds to adverse selection by sharing gains from trade with high-risk customers when low risks are predominant in the insurance pool. However, utilitarian social welfare is highest when customers are uninformed, and is higher when information is symmetric rather than asymmetric.

In this short paper, we study the asymptotics for the price of call options for very large strikes and put options for very small strikes. The stock price is assumed to follow the Black-Scholes models. We analyze European, Asian, American, Parisian and perpetual options and conclude that the tail asymptotics for these option types fall into four scenarios.

Using a two-account model with event risk, we model life insurance contracts taking into account both guaranteed and non-guaranteed payments in participating life insurance as well as in unit-linked insurance. Here, event risk is used as a generic term for life insurance events, such as death, disability, etc. In our treatment of participating life insurance, we have special focus on the bonus schemes “consolidation” and “additional benefits”, and one goal is to formalize how these work and interact. Another goal is to describe similarities and differences between participating life insurance and unit-linked insurance. By use of a two-account model, we are able to illustrate general concepts without making the model too abstract. To allow for complicated financial markets without dramatically increasing the mathematical complexity, we focus on economic scenarios. We illustrate the use of our model by conducting scenario analysis based on Monte Carlo simulation, but the model applies to scenarios in general and to worst-case and best-estimate scenarios in particular. In addition to easy computations, our model offers a common framework for the valuation of life insurance payments across product types. This enables comparison of participating life insurance products and unit-linked insurance products, thus building a bridge between the two different ways of formalizing life insurance products. Finally, our model distinguishes itself from the existing literature by taking into account the Markov model for the state of the policyholder and, hereby, facilitating event risk.

Due to the strong complexity of financial markets, economics does not have a unified theory of price formation in financial markets. The most common assumption is the Efficient-Market Hypothesis, which has been attacked by a number of researchers, using different tools. There were varying degrees to which these tools complied with the formal definitions of efficiency and predictability. In our earlier work, we analysed the predictability of stock returns at two time scales using the entropy rate, which can be directly linked to the mathematical definition of predictability. Nonetheless, none of the above-mentioned studies allow any general understanding of how the financial markets work, beyond disproving the Efficient-Market Hypothesis. In our previous study, we proposed the Maximum Entropy Production Principle, which uses the entropy rate to create a general principle underlying the price formation processes. Both of these studies show that the predictability of price changes is higher at the transaction level intraday scale than the scale of daily returns, but ignore all scales in between. In this study we extend these ideas using the multiscale entropy analysis framework to enhance our understanding of the predictability of price formation processes at various time scales.

New risk-based solvency requirements for insurance companies across European markets have been introduced by Solvency II and will come in force from 1 January 2016. These requirements, derived by a Standard Formula or an Internal Model, will be by far more risk-sensitive than the required solvency margin provided by the current legislation. In this regard, a Partial Internal Model for Premium Risk is developed here for a multi-line Non-Life insurer. We follow a classical approach based on a Collective Risk Model properly extended in order to consider not only the volatility of aggregate claim amounts but also expense volatility. To measure the effect of risk mitigation, suitable reinsurance strategies are pursued. We analyze how naïve coverage as conventional Quota Share and Excess of Loss reinsurance may modify the exact moments of the distribution of technical results. Furthermore, we investigate how alternative choices of commission rates in proportional treaties may affect the variability of distribution. Numerical results are also figured out in the last part of the paper with evidence of different effects for small and large companies. The main reasons for these differences are pointed out.

Using data from England and Wales, we analyze the relationship between house prices and transaction volume (number of houses sold) and find that there is a negative relationship. When we decompose price changes into anticipated and unanticipated components we find that while anticipated house price changes positively affect transaction volume, unanticipated price changes have a negative effect. These findings give insights for the theories which try to explain the relationship between house prices and transaction volume. Our findings are inconsistent with the 'down-payment effect' approach developed by Stein (1995) and Ortalo-Magne and Rady (2006), and with the 'loss aversion behavior' approach discussed by Genesove and Mayer (2001). However, our results support the evidence of asymmetric decisions on the buyer and seller side documented in Case and Shiller (1988) and partially support the mechanisms in search and matching models.

This paper compares the “simplesum” monetary aggregates - M2) (M1 andpublished by the Saudi Arabian Monetary Agency (SAMA) with the new monetary aggregates (D1 andD2)—known as the Divisia monetary indexes. The former aggregates are constructed from a simple accounting identity, whereas the Divisia aggregates are constructed using statistical index number theory and aggregation theory. The findings suggest that both D1 and M1 are identical, given the perfect substitutab ility of the monetary components within those aggregates. For the broader monetary aggregates where perfect substitutability assumption is not realistic, the two monetary indexes differ substantially. SAMA could benefit by using both monetary indexes simultaneously to better monitor liquidity in the market. Keywords: monetary aggregation; Divisia monetary aggregates; index number theory JEL Classifications: E41; E51; E52; E58 1. Introduction Simple-sum monetary aggregates (widely denoted by M1, M2, and M3) are commonly used by central banks worldwide. Those monetary indexes are derived from a simple accounting identity. The implicit assumption made when using simple -sum monetary aggregates is that all components are perfect

Publicly provided long-term care (LTC) insurance with means-tested benefits is suspected to crowd out either private saving or informal care. This contribution predicts crowding-out effects for both private saving and informal care for policy measures designed to relieve the public purse from LTC expenditure such as more stringent means testing and increased taxation of inheritance. These effects result from the interaction of a parent who decides on the amount of saving in retirement and a caregiver who decides on the effort devoted to informal care which lowers the probability of admission to a nursing home. Double crowding-out effects are also found to be the consequence of exogenous influences, notably a higher opportunity cost of caregiving.

Insurance companies use conservative first order valuation bases to calculate insurance premiums and reserves. These valuation bases have a significant impact on the insurer’s solvency and on the premiums of the insurance products. Safety margins for systematic biometric and financial risk are in practice typically chosen as time-constant percentages on top of the best estimate transition intensities. We develop a risk-oriented method for the allocation of a total safety margin to the single safety margins at each point in time and each state. In a case study, we demonstrate the suitability of the proposed method in different frameworks. The results show that the traditional method yields an unwanted variability of the safety level with respect to time, whereas the variability can be significantly reduced by the new method. Furthermore, the case study supports the German 60 percent rule for the technical interest rate.

In this paper, we first provide an empirical evidence of the existence of intraday jumps in the crude oil price series. We then show that these jumps, in conjunction with realized volatility measures, are important in modeling the convenience yield over the 2001–2010 period. Our empirical results indicate that lagged jump mean only explains around 16% of the weekly convenience yield. Our best specification, including variation in inventories, 8-week realized variance and the 250-day jump mean is able to explain around 61% of the weekly convenience yield. Importantly, our results are not driven by the simultaneous determination of the various variables at work as we only use lagged variables in all regressions.

Over the course of February 2015, the MICEX Index continued to grow and hit its four-year record high of 1,809.6 points. The stock market’s capitalization index as of 25 February amounted to Rb 27.4 trillion (or 38.6% of GDP). As before, the situation in Russia’s domestic corporate bond market was unfavorable – mostly due to the eff ects of adverse external factors. The main negative feature of that market continued to be the high rate of weighted average effective yield on corporate bond issues, although it displayed a moderate downward trend (especially in the hi-tech sector). On the whole, the key indices of the Russian domestic corporate bond market, including the market volume and the market index, and the activity of the market’s biggest bond emitiers and investors, showed a positie trend. The emitiers were becoming less punctual in fulfi lling their obligations to their bond holders.

Studies on real estate economics neglected the relationship between hedonic prices and capitalization rate, thus considering the hedonic models and the income approach as two separate and alternative appraisal methods. In this short theoretical paper we show that integration is possible and relatively simple and the combined model allows to estimate the capitalization rate using only hedonic prices. Also, the developed model brings out a peculiarity of real estate asset, namely the negative relationship between economic life of the property and capitalization rate.

As countries of the world used large amounts of public funds to manage the 2008 financial crisis, public debt has risen to a critical level in many of them. Due to the drop in real economy, several countries faced unemployment and economic fallback that are still unresolved to this day. After the crisis, many were concerned how to restore the confidence in financial institutions and how banks can better contribute to sustainable social and economic growth. This paper discusses corporate social responsibility (CSR), an attitude putting ethical norms in the spotlight. The CSR pyramid distinguishes various layers of responsibilities. The first at the bottom is economic responsibility, serving as the foundation for the pyramid, however, companies also need to comply with legal norms. Ethical responsibility is the obligation to conduct in a fair way and to do the right thing. After the crisis, central banks in many countries became responsible for sustaining financial stability. To this end, central banks have developed their own corporate social responsibility strategies. This activity is studied from the view of how CSR can contribute to financial stability.

The Internet is now one of the most popular channels for investors to acquire investment related information. It raises a question: Will Internet information richness increases mutual fund investors’ perceived quality and decreases their perceived risk, which in turn influences investors’ perceived value and purchase intention? This paper investigate the relationships between Internet information richness, perceived quality, perceived risk, perceived value, and purchase intention through a questionnaire format. Results of his study can provide a reference for Internet information providers and mutual fund investors. Limitations and suggestions for future research are also provided.

The dynamics of the MICEX Index saw no drastic movements last month1, avaraging 1650 index points, with a 1.2% fall at month’s end. The rest of the MICEX Sector Indices, except the MICEX Telecommunications Index, de monstrated negative dynamics too. The MICEX daily average turnover kept shrinking and amounted to Rb 30.4bn. The situation in the Russian domestic corporate bond market in June was relatively normalized. The key market indicators such as the market volume and the corporate bond market index saw moderately positive dynamics; investors’ activity remained high in the primary and secondary markets (particularly in the fi nancial segment). Growth in the weighted average yield rate of bond issuances was an adverse trend. The problem with the failure to meet obligations to bondholders is still there.

Среднее значение индекса ММВБ в мае было на уровне 1679 пунктов, по итогам месяца его падение составило 1,5% относительно предшествующего периода. Основное негативное влияние на индекс оказало снижение цен на нефть. Средний дневной оборот биржи сократился почти на 20% по сравне- нию с первым кварталом 2015 г. и составил 31,3 млрд руб. На внутрироссийском рынке корпоратив- ных облигаций сложилась относительно благоприятная конъюнктура рынка, несмотря на неблаго- приятный внешний фон, сложную ситуацию в экономике и традиционный сезонный спад. Позитивной динамикой отличились такие ключевые показатели рынка, как объем и индекс рынка корпоративных облигаций, ставка средневзвешенной доходности эмиссий (особенно в технологичном сегменте), ак- тивность инвесторов на первичном и вторичном рынках. Несмотря на высокие финансовые риски в последние месяцы, крупным эмитентам удается успешно размещать долгосрочные займы. Сложной остается ситуация с исполнением эмитентами своих обязательств перед держателями облигаций.

In this study, the technical indicators are used in forecasting whether stock prices will rise, fall or will be constant at the following day. The indicators are generated by taking into account the daily stock returns. If the daily stock returns are positive, the indicator is coded as “+1”; if the daily stock returns are constant, the indicator is coded as “0” and at least if the daily stock returns are negative, the indicator is coded as “-1”. These indicator values express the dependent vari-able of ordered choice models which independent variables are technical indicators. The ordered choice models are ap-plied to all of the stocks of ISE (Istanbul Stock Exchange).

Dynamic asset pricing models built within the classic CARA-Normal framework usually assume myopic traders with one-period investment horizons or infinitely lived investors for tractability. I relax this myopic assumption and show the values of more finite trading opportunities are state-contingent and arise naturally as non-central $chi^2$-distributed. The moment generating function of the non-central $chi^2$ distribution thus can be utilized to derive the traders' first order conditions and preserve closed-form solutions. The model with non-myopic traders has a modified two-period overlapping generations(OLG) interpretation in which each young generation can have multiple investment opportunities.

The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—commonly known as Fannie Mae and Freddie Mac—was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the US housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt. The two firms were often cited as shining examples of public-private partnerships—that is, the harnessing of private capital to advance the social goal of expanding homeownership. But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail at some point, owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities. We describe the financial distress experienced by the two firms, the events that led the federal government to take dramatic action in an effort to stabilize housing and financial markets, and the various resolution options available to US policymakers at the time; and we evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage supply, and on the financial position of the two firms themselves. Conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution, and more than six years later, Fannie Mae and Freddie Mac still remain in conservatorship.