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We show that average excess returns during the last two years of the presidential cycle are significantly higher than during the first two years: 9.8 percent over the period 1948 – 2008. This pattern in returns cannot be explained by business-cycle variables capturing time-varying risk premia, differences in risk levels, or by consumer and investor sentiment. In this paper, we formally test the presidential election cycle (PEC) hypothesis as the alternative explanation found in the literature for explaining the presidential cycle anomaly. PEC states that incumbent parties and presidents have an incentive to manipulate the economy (via budget expansions and taxes) to remain in power. We formulate eight empirically testable propositions relating to the fiscal, monetary, tax, unexpected inflation and political implications of the PEC hypothesis. We do not find statistically significant evidence confirming the PEC hypothesis as a plausible explanation for the presidential cycle effect. The existence of the presidential cycle effect in U.S. financial markets thus remains a puzzle that cannot be easily explained by politicians employing their economic influence to remain in power. JEL Classification: E32; G14; P16 Keywords: Political Economy, Market Efficiency, Anomalies, Calendar Effects
Ziel dieser Präsentation (anlässlich des Seminars „Die Auswirkungen von Asset Securitisation auf die Stabilität des Finanzmarktes“ Österreichische Nationalbank (ÖNB), Wien 1. Oktober 2003) ist es, eine Verbindung zwischen Verbriefung und Finanzmarkstabilität unter Berücksichtigung veränderter Finanzintermediation herzustellen. In der folgenden Abhandlung soll nun zunächst auf die Natur der Verbriefung per se eingegangen werden, um sodann anhand theoretischer Überlegungen und empirischer Beobachtungen mögliche Quelle systemischen Risikos in der Kreditverbriefung aufzuzeigen. In diesem Fall handelt es sich um die Informationsasymmetrien und die durch Handelbarkeit von Kreditrisiko bestimmte Transaktionsstruktur („security design“), die bei regulatorischer Nichtberücksichtigung eine destabilisierende Wirkung nicht nur im Bereich der Verbriefung, sondern auch hinsichtlich der gegenseitigen Zahlungsverpflichtungen von Finanzintermediären begründen könnte.
This paper examines empirically the question whether the presence of foreign banks and a liberal trade regime with regard to financial services can contribute to a stabilization of capital flows to emerging markets. Since foreign banks, so the argument goes, provide better information to foreign investors and increase transparency, the danger of herding is reduced. Previous findings by Kono and Schuknecht (1998) confirmed empirically that such an effect does exist. This study expands their data set with respect to the length of the time period and the number of countries. Contrary to Kono and Schuknecht, it is found that foreign bank penetration tends to rather increase the volatility of capital flows. The trade regime variables are not significant in explaining cross-country variations in the volatility of capital flows. This result does not change significantly when alternative measures of volatility are considered. This paper was presented at the conference ''Financial crisis in transition countries: recent lessons and problems yet to solve'' on 13-14 July 2000 at the Institute for Economic Research (IWH) in Halle, Germany.
The risk of deflation
(2009)
This paper was prepared for the meeting on Financial Regulation and Macroeconomic Stability: Key issues for the G20, organised by the CEPR and the Reinventing Bretton Woods Committee, London, 31 January 2009. Introduction: The onset of financial instability in August 2007, which quickly spread across the world, raises a number of questions for policy makers. First, what are the roots of the crisis? Many factors have been emphasized in the debate, including the opacity of complex financial products; the excessive confidence in ratings; weak risk management by financial institutions; massive reliance on wholesale funding; and the presumption that markets would always be liquid. Furthermore, poorly understood incentive effects – arising from the originate-to-distribute-model, remuneration policies and the period of low interest rates – are also widely seen as having played a role. Second, how can a repetition of the crisis can be avoided? Much attention is being focused on regulation and supervision of financial intermediaries. The G-20, at its summit in November 2008, noted that measures need to be taken in five areas: (i) financial market transparency and disclosure by firms need to be strengthened; (ii) regulation needs to be enhanced to ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate; (iii) the integrity of financial markets should be improved by bolstering investor and consumer protection, avoiding conflicts of interest, and by promoting information sharing; (iv) international cooperation among regulators must be enhanced; and (v) international financial institutions must be reformed to reflect changing economic weights in the world economy better in order to increase the legitimacy and effectiveness of these institutions. Third, how can the consequences for economic activity be minimized? Many of the adverse developments in financial markets – in particular the collapse of term interbank markets – reflect deeply entrenched perceptions of counterparty risk. Prompt and far-reaching action to support the financial system, in particular the infusion of equity capital in financial institutions to reduce counter-party risk and get credit to flow again, is essential in order to restore market functioning. A particular risk at present is that the rapid decline in inflation in many countries in recent months will turn into deflation with highly adverse real economic developments. This background paper considers how large the risk of deflation may be and discusses what policy can do to reduce it. It is organized as follows. Section 2 defines deflation and discusses downward nominal wage rigidities and the zero lower bound on interest rates. While these factors are frequently seen as two reasons why deflation can be associated with very poor economic outcomes, they should not be overemphasized. Section 3 looks at the current situation. Inflation expectations and forecasts in the subset of economies we look at (the euro area, the UK and the US) are positive, indicating that deflation is not expected. This does not imply that the current concerns of deflation are unwarranted, only that the public expects the central bank to be successful in avoiding deflation. The section also looks at the evolution of headline and “core” inflation, focusing on data from the US and the euro area. Section 4 reviews how monetary and fiscal policy can be conducted to ensure that deflation is avoided. Section 5 briefly discusses special issues arising in emerging market economies. Finally, Section 6 offers some conclusions. An Appendix discusses deflation episodes in the period 1882-1939.
The execution, clearing, and settlement of financial transactions are all subject to substantial scale and scope economies which make each of these complementary functions a natural monopoly. Integration of trade, execution, and settlement in an exchange improves efficiency by economizing on transactions costs. When scope economies in clearing are more extensive than those in execution, integration is more costly, and efficient organization involves a trade-off of scope economies and transactions costs. A properly organized clearing cooperative can eliminate double marginalization problems and exploit scope economies, but can result in opportunism and underinvestment. Moreover, a clearing cooperative may exercise market power. Vertical integration and tying can foreclose entry, but foreclosure can be efficient because market power rents attract excessive entry. Integration of trading and post-trade services is the modal form of organization in financial markets, which is consistent with the hypothesis that transactional efficiencies explain organizational arrangements in these markets.
This paper documents the methodology underlying the construction of a global database of gross foreign asset and liability positions for 153 countries over the period 1970 to 2004 and illustrates some key data characteristics. The data cover both inflows and outflows of capital and thus allow for an assessment of the degree of international financial integration. In addition to net foreign asset stocks, we also provide details on the composition of the main asset and liability categories, namely the foreign direct investment, equity investment and debt components. Finally, we report on valuation changes as one of the main sources of discrepancy between transaction-based capital flow data and stock values of investment positions. The dataset is available for download at www.ifk-cfs.de/fileadmin/downloads/data/cfs-icfd.zip. or http://publikationen.ub.uni-frankfurt.de/volltexte/2007/4855/original/cfs-icfd.zip JEL Classification: F21; F34; F32
In this study the firms' choice of the number of bank relationships is analyzed with respect to influential factors like borrower quality, size and the existence of a close housebank relationship. Then, the number of bank relationships is used as a proxy to examine if bank competition is reflected in loan terms. It is shown that the number of bank relationships is foremost determined by borrower size and the existence of a housebank relationship. Loan rate spreads are not effected by the number of bank relationships. However, borrowers with a small number of bank relationships provide more collateral and get more credit. These effects are amplified by a housebank relationship. Housebanks get more collateral and are ready to take a larger stake in the financing of their customers.
The paper is a follow-up to an article published in Technique Financière et Developpement in 2000 (see the appendix to the hardcopy version), which portrayed the first results of a new strategy in the field of development finance implemented in South-East Europe. This strategy consists in creating microfinance banks as greenfield investments, that is, of building up new banks which specialise in providing credit and other financial services to micro and small enterprises, instead of transforming existing credit-granting NGOs into formal banks, which had been the dominant approach in the 1990s. The present paper shows that this strategy has, in the course of the last five years, led to the emergence of a network of microfinance banks operating in several parts of the world. After discussing why financial sector development is a crucial determinant of general social and economic development and contrasting the new strategy to former approaches in the area of development finance, the paper provides information about the shareholder composition and the investment portfolio of what is at present the world's largest and most successful network of microfinance banks. This network is a good example of a well-functioning "private public partnership". The paper then provides performance figures and discusses why the creation of such a network seems to be a particularly promising approach to the creation of financially self-sustaining financial institutions with a clear developmental objective.