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Institute
- Center for Financial Studies (CFS) (39) (remove)
Venture capital exit rights
(2009)
Theorists argue that exit rights can mitigate hold-up problems in venture capital. Using a hand-collected data-set of venture capital contracts from Germany we show that exit rights are included more frequently in venture capital contracts when a hold-up problem associated with the venture capitalist's exit decision is likely. Examples include drag-along and tag-along rights. Additionally, we find that almost all exit rights are allocated to the venture capitalist rather than to the entrepreneur. In addition, we show that besides the basic hold-up mechanism there are other mechanisms such as ex-ante bargaining power and the degree of pledgeable income that drive the allocation of exit rights. JEL Classification: G24, G34, D80
We investigate the effects of both trust and sociability for stock market participation, the role of which has been examined separately by existing finance literature. We use internationally comparable household data from the Survey of Health, Ageing and Retirement in Europe supplemented with regional information on generalized trust from the World Value Survey and on specific trust to financial institutions from Eurobarometer. We show that trust and sociability have distinct and sizeable positive effects on stock market participation and that sociability is likely to partly balance the discouragement effect on stockholding induced by low generalized trust in the region of residence. We also show that specific trust in advice given by financial institutions represents a prominent factor for stock investing, compared to other tangible features of the banking environment. Probing further into various groups of households, we find that sociability can induce stockholding among the less well off in Sweden, Denmark, and Switzerland where stock market participation is widespread. On the other hand, the effect of generalized trust is strong in countries with limited participation and low average trust like Austria, Spain, and Italy, offering an explanation for the remarkably low participation rates of the wealthy living therein.
Despite their importance in modern electronic trading, virtually no systematic empirical evidence on the market impact of incoming orders is existing. We quantify the short-run and long-run price effect of posting a limit order by proposing a high-frequency cointegrated VAR model for ask and bid quotes and several levels of order book depth. Price impacts are estimated by means of appropriate impulse response functions. Analyzing order book data of 30 stocks traded at Euronext Amsterdam, we show that limit orders have significant market impacts and cause a dynamic (and typically asymmetric) rebalancing of the book. The strength and direction of quote and spread responses depend on the incoming orders’ aggressiveness, their size and the state of the book. We show that the effects are qualitatively quite stable across the market. Cross-sectional variations in the magnitudes of price impacts are well explained by the underlying trading frequency and relative tick size.
Suppliers play a major role in innovation processes. We analyze ownership allocations and the choice of R&D technology in vertical R&D cooperations. Given incomplete contracts on the R&D outcome, there is a tradeoff between R&D specifically designed towards a manufacturer (increasing investment productivity) and a general technology (hold-up reduction). We find that the market solution yields the specific technology in too few cases. More intense product market competition shifts optimal ownership towards the supplier. The use of exit clauses increases the gains from the collaboration. JEL Classification: L22, L24, O31, O32
The recent financial crisis has led to a vigorous debate about the pros and cons of fair-value accounting (FVA). This debate presents a major challenge for FVA going forward and standard setters’ push to extend FVA into other areas. In this article, we highlight four important issues as an attempt to make sense of the debate. First, much of the controversy results from confusion about what is new and different about FVA. Second, while there are legitimate concerns about marking to market (or pure FVA) in times of financial crisis, it is less clear that these problems apply to FVA as stipulated by the accounting standards, be it IFRS or U.S. GAAP. Third, historical cost accounting (HCA) is unlikely to be the remedy. There are a number of concerns about HCA as well and these problems could be larger than those with FVA. Fourth, although it is difficult to fault the FVA standards per se, implementation issues are a potential concern, especially with respect to litigation. Finally, we identify several avenues for future research. JEL Classification: G14, G15, G30, K22, M41, M42
American households have received a triple dose of bad news since the beginning of the current recession: The greatest collapse in asset values since the Great Depression, a sharp tightening in credit availability, and a large increase in unemployment risk. We present measures of the size of these shocks and discuss what a benchmark theory says about their immediate and ultimate consequences. We then provide a forecast based on a simple empirical model that captures the effects of wealth shocks and unemployment fears. Our short-term forecast calls for somewhat weaker spending, and somewhat higher saving rates, than the Consensus survey of macroeconomic forecasters. Over the longer term, our best guess is that the personal saving rate will eventually approach the levels that preceded period of financial liberalization that began in the late 1970s. Classification: C61, D11, E24
In this paper we investigate the comparative properties of empirically-estimated monetary models of the U.S. economy. We make use of a new data base of models designed for such investigations. We focus on three representative models: the Christiano, Eichenbaum, Evans (2005) model, the Smets and Wouters (2007) model, and the Taylor (1993a) model. Although the three models differ in terms of structure, estimation method, sample period, and data vintage, we find surprisingly similar economic impacts of unanticipated changes in the federal funds rate. However, the optimal monetary policy responses to other sources of economic fluctuations are widely different in the different models. We show that simple optimal policy rules that respond to the growth rate of output and smooth the interest rate are not robust. In contrast, policy rules with no interest rate smoothing and no response to the growth rate, as distinct from the level, of output are more robust. Robustness can be improved further by optimizing rules with respect to the average loss across the three models.
This paper provides a joint analysis of household stockholding participation, stock location among stockholding modes, and participation spillovers, using data from the US Survey of Consumer Finances. Our multivariate choice model matches observed participation rates, conditional and unconditional, and asset location patterns. Financial education and sophistication strongly affect direct stockholding and mutual fund participation, while social interactions affect stockholding through retirement accounts only. Household characteristics influence stockholding through retirement accounts conditional on owning retirement accounts, unlike what happens with stockholding through mutual funds. Although stockholding is more common among retirement account owners, this fact is mainly due to their characteristics that led them to buy retirement accounts in the first place rather than to any informational advantages gained through retirement account ownership itself. Finally, our results suggest that, taking stockholding as given, stock location is not arbitrary but crucially depends on investor characteristics. JEL Classification: G11, E21, D14, C35
This paper reviews the rationale for quantitative easing when central bank policy rates reach near zero levels in light of recent announcements regarding direct asset purchases by the Bank of England, the Bank of Japan, the U.S. Federal Reserve and the European Central Bank. Empirical evidence from the previous period of quantitative easing in Japan between 2001 and 2006 is presented. During this earlier period the Bank of Japan was able to expand the monetary base very quickly and significantly. Quantitative easing translated into a greater and more lasting expansion of M1 relative to nominal GDP. Deflation subsided by 2005. As soon as inflation appeared to stabilize near a rate of zero, the Bank of Japan rapidly reduced the monetary base as a share of nominal income as it had announced in 2001. The Bank was able to exit from extensive quantitative easing within less than a year. Some implications for the current situation in Europe and the United States are discussed.
We examine intra-day market reactions to news in stock-specific sentiment disclosures. Using pre-processed data from an automated news analytics tool based on linguistic pattern recognition we extract information on the relevance as well as the direction of company-specific news. Information-implied reactions in returns, volatility as well as liquidity demand and supply are quantified by a high-frequency VAR model using 20 second intervals. Analyzing a cross-section of stocks traded at the London Stock Exchange (LSE), we find market-wide robust news-dependent responses in volatility and trading volume. However, this is only true if news items are classified as highly relevant. Liquidity supply reacts less distinctly due to a stronger influence of idiosyncratic noise. Furthermore, evidence for abnormal highfrequency returns after news in sentiments is shown. JEL-Classification: G14, C32
We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage operations to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that the futures market leads in the process of price discovery. The lead of the futures market is more pronounced in the presence of arbitrage signals. Thus, when the deviation between the spot and the futures market is large, the spot market tends to adjust to the futures market.
The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving. Keywords: Risk, Uncertainty, Consumption, Precautionary Saving, Buffer Stock Saving, Permanent Income Hypothesis.
Opting out of the great inflation: German monetary policy after the break down of Bretton Woods
(2009)
During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank´s monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank´s policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time. JEL Classification: E31, E32, E41, E52, E58
We use a novel disaggregate sectoral euro area dataset with a regional breakdown that allows explicit estimation of the sectoral component of price changes (rather than interpreting the idiosyncratic component as sectoral as done in other papers). Employing a new method to extract factors from over-lapping data blocks, we find for our euro area data set that the sectoral component explains much less of the variation in sectoral regional inflation rates and exhibits much less volatility than previous findings for the US indicate. Country- and region-specific factors play an important role in addition to the sector-specific factors. We conclude that sectoral price changes have a “geographical” dimension, as yet unexplored in the literature, that might lead to new insights regarding the properties of sectoral price changes.
Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modeling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large.
Content New Financial Architecture (Short Version) 1. Purpose of the paper – causes of the crisis 2. Recommendations 2.1. Incentives 2.2. Transparency 2.3. Regulation and Supervision 2.4. International Institutions 3. Concluding remarks Appendix (Full text) A 1. Causes of the crisis A 2. Improving the Framework A 2.1. Incentives A 2.2. Transparency A 2.3. Regulation and Supervision A 2.4. International Institutions A 3. Concluding remarks