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Hackethal and Schmidt (2003) criticize a large body of literature on the financing of corporate sectors in different countries that questions some of the distinctions conventionally drawn between financial systems. Their criticism is directed against the use of net flows of finance and they propose alternative measures based on gross flows which they claim re-establish conventional distinctions. This paper argues that their criticism is invalid and that their alternative measures are misleading. There are real issues raised by the use of aggregate data but they are not the ones discussed in Hackethal and Schmidt’s paper. JEL Classification: G30
In contrast to the United States and the United Kingdom, little empirical work exists about the distributional characteristics of appraisalbased real estate returns outside these countries. The purpose of this study is to fill this gap by focusing on Germany. In line with other studies, this paper offers an extensive investigation into the distribution of German real estate returns and compares them with and U.S. and U.K. data in the same period. Furthermore, the comovements with bonds and stocks are also examined. In the core, the distributional characteristics for German real estate are comparable to that for the U.S. and U.K.
Open source projects produce goods or standards that do not allow for the appropriation of private returns by those who contribute to their production. In this paper we analyze why programmers will nevertheless invest their time and effort to code open source software. We argue that the particular way in which open source projects are managed and especially how contributions are attributed to individual agents, allows the best programmers to create a signal that more mediocre programmers cannot achieve. Through setting themselves apart they can turn this signal into monetary rewards that correspond to their superior capabilities. With this incentive they will forgo the immediate rewards they could earn in software companies producing proprietary software by restricting the access to the source code of their product. Whenever institutional arrangements are in place that enable the acquisition of such a signal and the subsequent substitution into monetary rewards, the contribution to open source projects and the resulting public good is a feasible outcome that can be explained by standard economic theory.
In this paper, we calculate a transaction–based price index for apartments in Paris (France). The heterogeneous character of real estate is taken into account using an hedonic model. The functional form is specified using a general Box–Cox function. The data basis covers 84 686 transactions of the housing market in 1990:01–1999:12, which is one of the largest samples ever used in comparable studies. Low correlations of the price index with stock and bond indices (first differences) indicate diversification benefits from the inclusion of real estate in a mixed asset portfolio. JEL C43, C51, O18, R20.
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.
This paper provides an in-depth analysis of the properties of popular tests for the existence and the sign of the market price of volatility risk. These tests are frequently based on the fact that for some option pricing models under continuous hedging the sign of the market price of volatility risk coincides with the sign of the mean hedging error. Empirically, however, these tests suffer from both discretization error and model mis-specification. We show that these two problems may cause the test to be either no longer able to detect additional priced risk factors or to be unable to identify the sign of their market prices of risk correctly. Our analysis is performed for the model of Black and Scholes (1973) (BS) and the stochastic volatility (SV) model of Heston (1993). In the model of BS, the expected hedging error for a discrete hedge is positive, leading to the wrong conclusion that the stock is not the only priced risk factor. In the model of Heston, the expected hedging error for a hedge in discrete time is positive when the true market price of volatility risk is zero, leading to the wrong conclusion that the market price of volatility risk is positive. If we further introduce model mis-specification by using the BS delta in a Heston world we find that the mean hedging error also depends on the slope of the implied volatility curve and on the equity risk premium. Under parameter scenarios which are similar to those reported in many empirical studies the test statistics tend to be biased upwards. The test often does not detect negative volatility risk premia, or it signals a positive risk premium when it is truly zero. The properties of this test furthermore strongly depend on the location of current volatility relative to its long-term mean, and on the degree of moneyness of the option. As a consequence tests reported in the literature may suffer from the problem that in a time-series framework the researcher cannot draw the hedging errors from the same distribution repeatedly. This implies that there is no guarantee that the empirically computed t-statistic has the assumed distribution. JEL: G12, G13 Keywords: Stochastic Volatility, Volatility Risk Premium, Discretization Error, Model Error
In a framework closely related to Diamond and Rajan (2001) we characterize different financial systems and analyze the welfare implications of different LOLR-policies in these financial systems. We show that in a bank-dominated financial system it is less likely that a LOLR-policy that follows the Bagehot rules is preferable. In financial systems with rather illiquid assets a discretionary individual liquidity assistance might be welfare improving, while in market-based financial systems, with rather liquid assets in the banks' balance sheets, emergency liquidity assistance provided freely to the market at a penalty rate is likely to be efficient. Thus, a "one size fits all"-approach that does not take the differences of financial systems into account is misguiding. JEL - Klassifikation: D52 , E44 , G21 , E52 , E58
When options are traded, one can use their prices and price changes to draw inference about the set of risk factors and their risk premia. We analyze tests for the existence and the sign of the market prices of jump risk that are based on option hedging errors. We derive a closed-form solution for the option hedging error and its expectation in a stochastic jump model under continuous trading and correct model specification. Jump risk is structurally different from, e.g., stochastic volatility: there is one market price of risk for each jump size (and not just \emph{the} market price of jump risk). Thus, the expected hedging error cannot identify the exact structure of the compensation for jump risk. Furthermore, we derive closed form solutions for the expected option hedging error under discrete trading and model mis-specification. Compared to the ideal case, the sign of the expected hedging error can change, so that empirical tests based on simplifying assumptions about trading frequency and the model may lead to incorrect conclusions.
This paper deals with the superhedging of derivatives and with the corresponding price bounds. A static superhedge results in trivial and fully nonparametric price bounds, which can be tightened if there exists a cheaper superhedge in the class of dynamic trading strategies. We focus on European path-independent claims and show under which conditions such an improvement is possible. For a stochastic volatility model with unbounded volatility, we show that a static superhedge is always optimal, and that, additionally, there may be infinitely many dynamic superhedges with the same initial capital. The trivial price bounds are thus the tightest ones. In a model with stochastic jumps or non-negative stochastic interest rates either a static or a dynamic superhedge is optimal. Finally, in a model with unbounded short rates, only a static superhedge is possible.
Empirical evidence suggests that even those firms presumably most in need of monitoringintensive financing (young, small, and innovative firms) have a multitude of bank lenders, where one may be special in the sense of relationship lending. However, theory does not tell us a lot about the economic rationale for relationship lending in the context of multiple bank financing. To fill this gap, we analyze the optimal debt structure in a model that allows for multiple but asymmetric bank financing. The optimal debt structure balances the risk of lender coordination failure from multiple lending and the bargaining power of a pivotal relationship bank. We show that firms with low expected cash-flows or low interim liquidation values of assets prefer asymmetric financing, while firms with high expected cash-flow or high interim liquidation values of assets tend to finance without a relationship bank. JEL - Klassifikation: G21 , G78 , G33
This paper suggests a motive for bank mergers that goes beyond alleged and typically unverifiable scale economies: preemtive resolution of banks´ financial distress. Such "distress mergers" can be a significant motivation for mergers because they can foster reorganizations, realize diversification gains, and avoid public attention. However, since none of these potential benefits comes without a cost, the overall assessment of distress mergers is unclear. We conduct an empirical analysis to provide evidence on consequences of distress mergers. The analysis is based on comprehensive data from Germany´s savings and cooperatives banks sectors over the period 1993 to 2001. During this period both sectors faced significant structural problems and superordinate institutions (associations) presumably have engaged in coordinated actions to manage distress mergers. The data comprise 3640 banks and 1484 mergers. Our results suggest that bank mergers as a means of preemtive distress resolution have moderate costs in terms of the economic impact on performance. We do find strong evidence consistent with diversification gains. Thus, distress mergers seem to have benefits without affecting systematic stability adversely.
Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging error for a large class of stochastic volatility option pricing models. We show, however, that the problems of discrete trading and model mis-specification, which are necessarily present in any empirical study, may cause the standard test to yield unreliable results.
The question whether the adoption of International Financial Reporting Standards (IFRS) will result in measurable economic benefits is of special policy relevance in particular given the European Union’s decision to require the application of IFRS by listed companies from 2005/2007. In this paper, I investigate the common con-jecture that internationally recognized high quality reporting standards (IAS/IFRS or US-GAAP) reduce the cost of capital of adopting firms (e.g. Levitt 1998; IASB 2002). Building on Leuz/Verrecchia (2000), I use a set of German firms which pre-adopted such standards before 2005, but investigate the potential economic benefits by analyzing their expected cost of equity capital utilizing and customizing avail-able implied estimation methods (e.g. Gebhardt/Lee/Swaminathan 2001, Easton/Taylor/Shroff/Sougiannis 2002, Easton 2004). Evidence from a sample of about 13,000 HGB, 4,500 IAS/IFRS and 3,000 US-GAAP firm-month observations in the period 1993-2002 generally fails to document lower expected cost of equity capital and therefore measurable economic benefits for firms applying IAS/IFRS or US-GAAP. Accordingly, I caution to state that reporting under internationally accepted standards, per se, lowers the cost of equity capital of adopting firms.
In this study, we develop a technique for estimating a firm’s expected cost of equity capital derived from analyst consensus forecasts and stock prices. Building on the work of Gebhardt/Lee/-Swaminathan (2001) and Easton/Taylor/Shroff/Sougiannis (2002), our approach allows daily estimation, using only publicly available information at that date. We then estimate the expected cost of equity capital at the market, industry and individual firm level using historical German data from 1989-2002 and examine firm characteristics which are systematically related to these estimates. Finally, we demonstrate the applicability of the concept in a contemporary case study for DaimlerChrysler and the European automobile industry.
Empirical evidence suggests that even those firms presumably most in need of monitoring-intensive financing (young, small, and innovative firms) have a multitude of bank lenders, where one may be special in the sense of relationship lending. However, theory does not tell us a lot about the economic rationale for relationship lending in the context of multiple bank financing. To fill this gap, we analyze the optimal debt structure in a model that allows for multiple but asymmetric bank financing. The optimal debt structure balances the risk of lender coordination failure from multiple lending and the bargaining power of a pivotal relationship bank. We show that firms with low expected cash-flows or low interim liquidation values of assets prefer asymmetric financing, while firms with high expected cash-flow or high interim liquidation values of assets tend to finance without a relationship bank.
We investigate the connection between corporate governance system configurations and the role of intermediaries in the respective systems from a informational perspective. Building on the economics of information we show that it is meaningful to distinguish between internalisation and externalisation as two fundamentally different ways of dealing with information in corporate governance systems. This lays the groundwork for a description of two types of corporate governance systems, i.e. insider control system and outsider control system, in which we focus on the distinctive role of intermediaries in the production and use of information. It will be argued that internalisation is the prevailing mode of information processing in insider control system while externalisation dominates in outsider control system. We also discuss shortly the interrelations between the prevailing corporate governance system and types of activities or industry structures supported.
Tractable hedging - an implementation of robust hedging strategies : [This Version: March 30, 2004]
(2004)
This paper provides a theoretical and numerical analysis of robust hedging strategies in diffusion–type models including stochastic volatility models. A robust hedging strategy avoids any losses as long as the realised volatility stays within a given interval. We focus on the effects of restricting the set of admissible strategies to tractable strategies which are defined as the sum over Gaussian strategies. Although a trivial Gaussian hedge is either not robust or prohibitively expensive, this is not the case for the cheapest tractable robust hedge which consists of two Gaussian hedges for one long and one short position in convex claims which have to be chosen optimally.
The main results obtained within the energy scan program at the CERN SPS are presented. The anomalies in energy dependence of hadron production indicate that the onset of deconfinement phase transition is located at about 30 A GeV. For the first time we seem to have clear evidence for the existence of a deconfined state of matter in nature. PACS numbers: 24.85.+p
A widely recognized paper by Colin Mayer (1988) has led to a profound revision of academic thinking about financing patterns of corporations in different countries. Using flow-of-funds data instead of balance sheet data, Mayer and others who followed his lead found that internal financing is the dominant mode of financing in all countries, that financing patterns do not differ very much between countries and that those differences which still seem to exist are not at all consistent with the common conviction that financial systems can be classified as being either bank-based or capital market-based. This leads to a puzzle insofar as it calls into question the empirical foundation of the widely held belief that there is a correspondence between the financing patterns of corporations on the one side, and the structure of the financial sector and the prevailing corporate governance system in a given country on the other side. The present paper addresses this puzzle on a methodological and an empirical basis. It starts by comparing and analyzing various ways of measuring financial structure and financing patterns and by demonstrating that the surprising empirical results found by studies that relied on net flows are due to a hidden assumption. It then derives an alternative method of measuring financing patterns, which also uses flow-of-funds data, but avoids the questionable assumption. This measurement concept is then applied to patterns of corporate financing in Germany, Japan and the United States. The empirical results, which use an estimation technique for determining gross flows of funds in those cases in which empirical data are not available, are very much in line with the commonly held belief prior to Mayer’s influential contribution and indicate that the financial systems of the three countries do indeed differ from one another in a substantial way, and moreover in a way which is largely in line with the general view of the differences between the financial systems of the countries covered in the present paper.
We present a detailed study of chemical freeze-out in nucleus-nucleus collisions at beam energies of 11.6, 30, 40, 80 and 158A GeV. By analyzing hadronic multiplicities within the statistical hadronization approach, we have studied the strangeness production as a function of centre of mass energy and of the parameters of the source. We have tested and compared different versions of the statistical model, with special emphasis on possible explanations of the observed strangeness hadronic phase space under-saturation. We show that, in this energy range, the use of hadron yields at midrapidity instead of in full phase space artificially enhances strangeness production and could lead to incorrect conclusions as far as the occurrence of full chemical equilibrium is concerned. In addition to the basic model with an extra strange quark non-equilibrium parameter, we have tested three more schemes: a two-component model superimposing hadrons coming out of single nucleon-nucleon interactions to those emerging from large fireballs at equilibrium, a model with local strangeness neutrality and a model with strange and light quark non-equilibrium parameters. The behaviour of the source parameters as a function of colliding system and collision energy is studied. The description of strangeness production entails a non-monotonic energy dependence of strangeness saturation parameter gamma_S with a maximum around 30A GeV. We also present predictions of the production rates of still unmeasured hadrons including the newly discovered Theta^+(1540) pentaquark baryon.