Refine
Year of publication
Document Type
- Working Paper (1308)
- Part of Periodical (281)
- Article (162)
- Report (96)
- Doctoral Thesis (34)
- Conference Proceeding (14)
- Part of a Book (7)
- Book (5)
- Periodical (4)
- Preprint (4)
Language
- English (1921) (remove)
Is part of the Bibliography
- no (1921)
Keywords
- Deutschland (58)
- Financial Institutions (48)
- ECB (42)
- Capital Markets Union (37)
- monetary policy (34)
- Financial Markets (33)
- Banking Union (32)
- Banking Regulation (30)
- Monetary Policy (28)
- Household Finance (27)
Institute
- Wirtschaftswissenschaften (1921) (remove)
This paper determines the cost of employee stock options (ESOs) to shareholders. I present a pricing method that seeks to replicate the empirics of exercise and cancellation as good as possible. In a first step, an intensity-based pricing model of El Karoui and Martellini is adapted to the needs of ESOs. In a second step, I calibrate the model with a regression analysis of exercise rates from the empirical work of Heath, Huddart and Lang. The pricing model thus takes account for all effects captured in the regression. Separate regressions enable me to compare options for top executives with those for subordinates. I find no price differences. The model is also applied to test the precision of the fair value accounting method for ESOs, SFAS 123. Using my model as a reference, the SFAS method results in surprisingly accurate prices.
JEL classification: G13; J33; M41; M52
This paper uses the co-incidence of extreme shocks to banks’ risk to examine within country and across country contagion among large EU banks. Banks’ risk is measured by the first difference of weekly distances to default and abnormal returns. Using Monte Carlo simulations, the paper examines whether the observed frequency of large shocks experienced by two or more banks simultaneously is consistent with the assumption of a multivariate normal or a student t distribution. Further, the paper proposes a simple metric, which is used to identify contagion from one bank to another and identify “systemically important” banks in the EU.
This paper analyses the long-term effects of improved small-scale lending, often provided by microfinance institutions set up with the support of development aid. The analysis shows that some common assumptions about microfinance are not true at all: First, it shows that the impact on income will accrue not to the microenterprises themselves, but rather to the consumers of their products. Second, microfinance will have a significant positive effect on the wage levels of employees in the informal sector. Third, microfinance will cause high growth rates in the informal production sector, whereas the trade sector will either contract or at best grow very little.
The theoretical derivation of credit market segmentation as the result of a free market process
(2003)
Information asymmetries make it difficult for banks to assess accurately whether specific entrepreneurs are able and/or willing to repay their loans. This leads to implicit interest rate ceilings, i.e. banks "refuse" to increase their interest rates beyond this ceiling as this would lower their net returns. Although the maximum interest rate increases as the size of enterprises decreases, such ceilings nonetheless constrain the banks’ ability to set interest rates at a level that would enable them to cover costs. If transaction costs are high, the total costs associated with granting small and medium-sized loans will exceed the maximum average return which the banks can earn by issuing such loans. For this reason, banks do not lend to small and medium-sized enterprises, and, as a consequence, these businesses have no access to formal sector loans. Because micro and small enterprises have a very high RoI, it is worthwhile for them to rely on expensive informal loans to finance their operations, at least until they reach a certain size. Once they have reached this size, however, it does not make economic sense for them to continue taking out informal credits, and thus they face a growth constraint imposed by the credit market. Medium-sized enterprises earn a lower RoI than small ones, which is why borrowing in the informal credit market is not a worthwhile option for them. Moreover, they do not have access to credit from formal financial institutions, and are thus excluded from obtaining any kind of financing in either of the two credit markets. As the result of free, unregulated market forces we get a stable equilibrium in which the credit market is segmented into an informal (small loan) segment, a formal (large loan) segment and, in between, a "non-market" (medium loan) segment.
Despite the apparent stability of the wage bargaining institutions in West Germany, aggregate union membership has been declining dramatically since the early 90's. However, aggregate gross membership numbers do not distinguish by employment status and it is impossible to disaggregate these sufficiently. This paper uses four waves of the German Socioeconomic Panel in 1985, 1989, 1993, and 1998 to perform a panel analysis of net union membership among employees. We estimate a correlated random effects probit model suggested in Chamberlain (1984) to take proper account of individual specfic effects. Our results suggest that at the individual level the propensity to be a union member has not changed considerably over time. Thus, the aggregate decline in membership is due to composition effects. We also use the estimates to predict net union density at the industry level based on the IAB employment subsample for the time period 1985 to 1997. JEL - Klassifikation: J5
A distinguishing feature of the ECB’s monetary policy setup is the preannouncement of a minimum bid rate in its weekly repo auctions. However, whenever interest rates are expected to decline, the minimum bid rate is viewed as too high and banks refrain from bidding, severely impeding the ECB’s money market management. To shed more light on banks’ underbidding, we perform a panel analysis of the bidder behavior in the repo auctions of the Bundesbank where no minimum bid rate was set. Our results indicate that neither bank’s participation nor the submitted bid amount is significantly affected by an expected rate cut. This suggests that abandoning the minimum bid rate might increase the efficiency of the ECB’s money market management.
This paper investigates various theories explaining banks´ overbidding in the fixed rate tenders of the European Central Bank (ECB). Using auction data from both the Bundesbank and the ECB, we show that none of the theories can on its own explain the observed overbidding. This implies that the proposed new rules by the ECB, aimed at neutralizing interest rate expectations, would not eliminate overbidding if the rationing rule in the fixed rate tenders remains unchanged. JEL - Klassifikation: D44 , E32
This investigation of the wealth of private households as a possible indicator for the prosperity of a society indicated a strong increase in wealth for the Federal Republic of Germany since 1970. This applies both to the macro-economic results of the financial accounting of the Deutsche Bundesbank and to the micro-economic results of the Income and Consumption Surveys of the Federal Statistical Office. However, substantial differences become clear in the content expressed by these two different sets of data. While the financial accounting of the Deutsche Bundesbank shows an increase of net assets of around 808 per cent over 27 years (from 1.3 trillion DM in the year 1970 to 12.1 trillion DM in 1997), calculations on the basis of the Income and Consumption Surveys yield a corresponding value of only 280 per cent in a 25-year period, with a substantially lower overall magnitude in later investigations (from 2.2 trillion DM in 1973 to only 8.3 trillion DM in 1998). Investigation of the EVS data pointed out the great importance of property for the wealth situation of private households. However, not every household has property in the form of housing and real estate. In West Germany, ownership rates have increased substantially since 1962. However, since 1993 these rates have stagnated at about 50 per cent. The analysis of the distribution of wealth for West German households yielded a decline in the concentration of wealth in the period from 1973 to 1993, both in terms of the shares of total wealth held by individual quintiles of households, and as expressed by the Gini coefficients. However, this trend did not continue in the years between 1993 and 1998. For the year 1998 it can be determined that the lowest 40 per cent of households in West Germany had practically no wealth, while the highest quintile claimed over 60 per cent of total assets. For East Germany, strong tendencies are established toward adapting to the values in the West German Länder. This concerns first the absolute level of net assets, even though in 1998 these amounted to just 38 per cent of the analogous value in West German households, in terms of the average value per household. Similarly, the ownership rates of housing and real estate also rose dramatically after reunification. The inequality of the distribution of wealth in East Germany was reduced somewhat by this broader basis of real-estate ownership over the course of time, such that the Gini coefficient decreased slightly in the period from 1993 to 1998. However, it is also true for the new Länder in the Federal Republic that the lowest 40 per cent of households have practically no wealth, while the highest quintile of East German households claim over 70 per cent of total assets, even higher than its share in West Germany. Furthermore, the distribution of wealth is remarkably congruous in East and West Germany. Both the distribution of wealth as expressed by the quintile values and the results of the Gini coefficients yield similar results, whereby the trend in both regions is toward convergence. The similarity of these results must be regarded as nothing less than amazing, considering that the two regions followed different economic models for over forty years: the social free-market economy (Soziale Marktwirtschaft) in the Federal Republic of Germany, and the socialist planned economy (Sozialistische Planwirtschaft) in the German Democratic Republic.
Who knows what when? : The information content of pre-IPO market prices : [Version March/June 2002]
(2002)
To resolve the IPO underpricing puzzle it is essential to analyze who knows what when during the issuing process. In Germany, broker-dealers make a market in IPOs during the subscription period. We examine these pre-issue prices and find that they are highly informative. They are closer to the first price subsequently established on the exchange than both the midpoint of the bookbuilding range and the offer price. The pre-issue prices explain a large part of the underpricing left unexplained by other variables. The results imply that information asymmetries are much lower than the observed variance of underpricing suggests.
Executive Stock Option Programs (SOPs) have become the dominant compensation instrument for top-management in recent years. The incentive effects of an SOP both with respect to corporate investment and financing decisions critically depend on the design of the SOP. A specific problem in designing SOPs concerns dividend protection. Usually, SOPs are not dividend protected, i.e. any dividend payout decreases the value of a manager’s options. Empirical evidence shows that this results in a significant decrease in the level of corporate dividends and, at the same time, into an increase in share repurchases. Yet, few suggestions have been made on how to account for dividends in SOPs. This paper applies arguments from principal-agent-theory and from the theory of finance to analyze different forms of dividend protection, and to address the relevance of dividend protection in SOPs. Finally, the paper relates the theoretical analysis to empirical work on the link between share repurchases and SOPs.
We propose a new framework for modelling time dependence in duration processes on financial markets. The well known autoregressive conditional duration (ACD) approach introduced by Engle and Russell (1998) will be extended in a way that allows the conditional expectation of the duration process to depend on an unobservable stochastic process, which is modelled via a Markov chain. The Markov switching ACD model (MSACD) is a very flexible tool for description and forecasting of financial duration processes. In addition the introduction of an unobservable, discrete valued regime variable can be justified in the light of recent market microstructure theories. In an empirical application we show, that the MSACD approach is able to capture several specific characteristics of inter trade durations while alternative ACD models fail. Furthermore, we use the MSACD to test implications of a sequential trade model.
For the Neuer Markt year 2001 is not considered as one of its best, compared to its prior performance. Investors who once piled into the Neuer Markt have now become wary of the exchange, which was launched in 1997 as Europe’s leading growth market and answer to the U.S.‘s Nasdaq Stock Market. The Neuer Markt’s reputation has been marred by the misleading information policy from several Neuer Markt companies, publishing false annual and quarterly data. Some of these companies are responsible for having misinformed investors of their pending bankruptcies. Under these circumstances, it is time to find an explanation for the dramatic loss of credibility in Neuer Markt enterprises. Finding an answer, two aspects come under consideration: • What type of information (annual versus quarterly reports) was available for investors and • of what quality were these provided data. Interim reports can be seen as important instrument in the reporting system to inform all kinds of investors. For this reason we examine the quality of Neuer Markt quarterly reports by concentrating on the disclosure level of 52 Neuer Markt companies‘ reports for the third quarter 1999 and 2000. To enable comparison we establish four disclosure indexes that measure the report’s compliance with the Neuer Markt Rules and Regulations as well as with IAS and US GAAP interim reporting standards. The results demonstrate that the level of disclosure has increased over time. Then we aim to find typical attributes of Neuer Markt enterprises that provide high or low level of accounting information in their quarterly reports. Nevertheless the study also shows that there is not any correlation between market capitalization and the quality of interim reports. However, it can be suggested that an additional enforcement mechanism could improve quality and lure investors back. A step towards this aim is the standardization project of quarterly reports of Deutsche Boerse AG.
This paper examines the provision of managerial investment incentives by an accounting based incentive scheme in a multiperiod agency setting in which an impatient manager has to choose between mutually exclusive investment projects. We study the properties of accounting rules that motivate an impatient manager to exert unobservable effort and to make optimal investment decisions. In this analysis, a realized cash flow constitutes a noisy signal that contains information about the unknown profitability of the investment project. By observing these signals a principal is able to revise his prior beliefs about the agent´s investment decision. The revision of the principal´s prior beliefs leads to a trade off between the provision of efficient investment incentives and intertemporalsharing of output.
Substantial research attention has been devoted to the pension accumulation process, whereby employees and those advising them work to accumulate funds for retirement. Until recently, less analysis has been devoted to the pension decumulation process – the process by which retirees finance their consumption during retirement. This gap has recently begun to be filled by an active group of researchers examining key aspects of the pension payout market. One of the areas of most interesting investigation has been in the area of annuities, which are financial products intended to cover the risk of retirees outliving their assets. This paper reviews and extends recent research examining the role of annuities in helping finance retirement consumption. We also examine key market and regulatory factors.
Rating agencies state that they take a rating action only when it is unlikely to be reversed shortly afterwards. Based on a formal representation of the rating process, I show that such a policy provides a good explanation for the empirical evidence: Rating changes occur relatively seldom, exhibit serial dependence, and lag changes in the issuers’ default risk. In terms of informational losses, avoiding rating reversals can be more harmful than monitoring credit quality only twice per year.
Eine Beteiligung des Managements an Gewinngrößen spielt eine wichtige Rolle bei der Ausrichtung von Managemententscheidungen auf die Ziele der Unternehmenseigentümer. Dieser Beitrag zeigt auf, unter welchen Gewinnermittlungsregeln ein Agent zu optimalen Investitionsentscheidungen motiviert wird, wenn er an den Residualgewinnen beteiligt wird. Dieser Beitrag beschäftigt sich insbesondere mit der Frage, ob zum Zwecke einer optimalen Investitionssteuerung, Fertigerzeugnisse zu Vollkosten oder zu Teilkosten bewertet werden sollen. Vor diesem Hintergrund werden ebenfalls verschiedene Wertansätze für Forderungen auf ihre Anreizwirkungen untersucht.
Most evaluation studies of active labour market policies (ALMP) focus on the microeconometric evaluation approach using individual data. However, as the microeconometric approach usually ignores impacts on the non-participants, it should be seen as a first step to a complete evaluation which has to be followed by an analysis on the macroeconomic level. As a starting point for our analysis we discuss the effects of ALMP in a theoretical labour market framework augmented by ALMP. We estimate the impacts of ALMP in Germany for the time period 1999-2001 with regional data of 175 labour office districts. Due to the high persistence of German labour market data the application of a dynamic model is crucial. Furthermore our analysis accounts especially for the inherent simultaneity problem of ALMP. For West Germany we find positive effects of vocational training and job creation schemes on the labour market situation, whereas the results for East Germany do not allow profound statements. JEL Classification: C33, E24, H43, J64, J68.
Recent changes in accounting regulation for financial instruments (SFAS 133, IAS 39) have been heavily criticized by representatives from the banking industry. They argue for retaining a historical cost based "mixed model" where accounting for financial instruments depends on their designation to either trading or nontrading activities. In order to demonstrate the impact of different accounting models for financial instruments on the financial statements of banks, we develop a bank simulation model capturing the essential characteristics of a modern universal bank with investment banking and commercial banking activities. In our simulations we look at different scenarios with periods of increasing/decreasing interest rates using historical data and with different banking strategies (fully hedged; partially hedged). The financial statements of our model bank are prepared under different accounting rules ("Old" IAS before implementation of IAS 39; current IAS) with and without hedge accounting as offered by the respective sets of rules. The paper identifies critical issues of applying the different accounting rules for financial instruments to the activities of a universal bank. It demonstrates important shortcomings of the "Old" IAS rules (before IAS 39), and of the current IAS rules. Under the current IAS rules the results of a fully hedged bank may have to show volatility in income statements due to changes in market interest rates. Accounting results of a partially hedged bank in the same scenario may be less affected even though there are economic gains or losses.
Portfolio choice and estimation risk : a comparison of Bayesian approaches to resampled efficiency
(2002)
Estimation risk is known to have a huge impact on mean/variance (MV) optimized portfolios, which is one of the primary reasons to make standard Markowitz optimization unfeasible in practice. Several approaches to incorporate estimation risk into portfolio selection are suggested in the earlier literature. These papers regularly discuss heuristic approaches (e.g., placing restrictions on portfolio weights) and Bayesian estimators. Among the Bayesian class of estimators, we will focus in this paper on the Bayes/Stein estimator developed by Jorion (1985, 1986), which is probably the most popular estimator. We will show that optimal portfolios based on the Bayes/Stein estimator correspond to portfolios on the original mean-variance efficient frontier with a higher risk aversion. We quantify this increase in risk aversion. Furthermore, we review a relatively new approach introduced by Michaud (1998), resampling efficiency. Michaud argues that the limitations of MV efficiency in practice generally derive from a lack of statistical understanding of MV optimization. He advocates a statistical view of MV optimization that leads to new procedures that can reduce estimation risk. Resampling efficiency has been contrasted to standard Markowitz portfolios until now, but not to other approaches which explicitly incorporate estimation risk. This paper attempts to fill this gap. Optimal portfolios based on the Bayes/Stein estimator and resampling efficiency are compared in an empirical out-of-sample study in terms of their Sharpe ratio and in terms of stochastic dominance.
The focus of this article is the analysis of the inflation risk of European real estate securities. Following both a causal and a final understanding of risk, the analysis is twofold. First, to examine the causal influence of inflation on short- and long-term asset returns, different regression approaches are employed based on the methodology of Fama and Schwert (1977). Hedging capacities against expected inflation are found only for German open-end funds. Secondly, different shortfall risk measures are used to study whether an investment in European real estate securities protects against a negative real return at the end of a given investment period.
Over-allotment arrangements are nowadays part of almost any initial public offering. The underwriting banks borrow stocks from the previous shareholders to issue more than the initially announced number of shares. This is combined with the option to cover this short position at the issue price. We present empirical evidence on the value of these arrangements to the underwriters of initial public offerings on the Neuer Markt. The over-allotment arrangement is regarded as a portfolio of a long call option and a short position in a forward contract on the stock, which is different from other approaches presented in the literature.
Given the economically substantial values for these option-like claims we try to identify benefits to previous shareholders or new investors when the company is using this instrument in the process of going public. Although we carefully control for potential endogeneity problems, we find virtually no evidence for a reduction in underpricing for firms using over-allotment arrangements. Furthermore, we do not find evidence for more pronounced price stabilization activities or better aftermarket performance for firms granting an over-allotment arrangement to the underwriting banks.
Rating agencies state that they take a rating action only when it is unlikely to be reversed shortly afterwards. Based on a formal representation of the rating process, I show that such a policy provides a good explanation for the puzzling empirical evidence: Rating changes occur relatively seldom, exhibit serial dependence, and lag changes in the issuers’ default risk. In terms of informational losses, avoiding rating reversals can be more harmful than monitoring credit quality only twice per year.
Multiple lenders and corporate distress: evidence on debt restructuring : [Version Juli 2002]
(2002)
In the recent theoretical literature on lending risk, the common pool problem in multi-bank relationships has been analyzed extensively. In this paper we address this topic empirically, relying on a unique panel data set that includes detailed credit-fie information on distressed lending relationships in Germany. In particular, it includes information on bank pools, a legal institution aimed at coordinating lender interests in borrower distress. We find that the existence of small bank pools increases the probability of workout success and that coordination costs are positively related to pool size. We identify major determinants of pool formation, in particular the distribution of lending shares among banks, the number of banks, and the severity of the distress shock to the borrower.
This paper analyses the role of collateral in loan contracting when companies are financed by multiple bank lenders and relationship lending can be present. We conjecture and empirically validate that relationship lenders, who enjoy an informational advantage over arm’s-length banks, are more senior to strengthen their bargaining power in future renegotiation if borrower’s face financial distress. This deters costly conflicts between lenders and fosters workout decisions by the best informed party. Consistent with our conjecture, we find that relationship lender in general have a higher probability to be collateralized, and a higher degree of collateralization (i.e. seniority). Furthermore, we show that seniority and the status of relationship lending increases the likelihood that a bank invests in a risky workout of distressed borrowers. Both findings support the view that collateral is a strategic instrument intended to influence the bargaining position of banks. Our result further suggest that seniority and relationship lending are complementary to each other. JEL Classification: G21
The recent success of some alternative trading systems (ATSs) has had a strong impact on the traditional stock exchange industry and many observers expect even more dramatic changes in the future. This paper investigates the nature of competition between stock exchanges and ATSs and argues that the introduction of ATSs weakens the level of competition between market-makers in the traditional exchange...
At present, the question of how national pension or retirement payment systems should be organised is being hotly debated in various countries, and opinions vary widely as to what should be regarded as the optimal design for such systems. It appears to the authors of the present paper that in this entire discussion one aspect is largely overlooked: What relationships exist between the pension system and the financial system in a given country? As such relationships might prove to be important, the present paper investigates the following questions: (1) Are there differences between the national pension systems of three major European countries – Germany, France and the U.K. – and between the financial systems of these countries? (2) And if the existence of such differences can be demonstrated, is there a correspondence between the differences with respect to the various national pension systems and the differences as regards the countries’ financial systems? (3) And if such a correspondence exists, is there any kind of interrelationship between the national financial and pension systems of the individual countries which goes beyond a mere correspondence? Looking mainly at two aspects – namely, risk allocation and the incentives to create human capital – the authors of this paper argue (1) that there are indeed considerable differences between the financial and pension systems of the three countries; (2) that in both Germany and the U.K. there are also systematic correspondences between the respective pension systems and financial systems and their economic characteristics, but that such a correspondence cannot be identified in the case of France; and (3) that these parallels are, in the final analysis, based on complementarities and are therefore likely to contribute to the efficiency of the German and the British systems. The paper concludes with a brief look at policy implications which the existence of, or the lack of, consistency between national pension systems and national financial systems might have.
In this paper, we estimate the demand for homeowner insurance in Florida. Since we are interested in a number of factors influencing demand, we approach the problem from two directions. We first estimate two hedonic equations representing the premium per contract and the price mark-up. We analyze how the contracts are bundled and how contract provisions, insurer characteristics and insured risk characteristics and demographics influence the premium per contract and the price mark-up. Second, we estimate the demand for homeowners insurance using two-stage least squares regression. We employ ISO's indicated loss costs as our proxy for real insurance services demanded. We assume that the demand for coverage is essentially a joint demand and thus we can estimate the demand for catastrophe coverage separately from the demand for noncatastrophe coverage. We determine that price elasticities are less elastic for catastrophic coverage than for non-catastrophic coverage. Further estimated income elasticities suggest that homeowners insurance is an inferior good. Finally, we conclude based on the results of a selection model that our sample of ISO reporting companies well represents the demand for insurance in the Florida market as a whole.
Since the beginning of the 1990s, it has been widely expected that the implementation of the European Single Market would lead to a rapid convergence of Europe’s financial systems. In the present paper we will show that at least in the period prior to the introduction of the common currency this expected convergence did not materialise. Our empirical studies on the significance of various institutions within the financial sectors, on the financing patterns of firms in various countries and on the predominant mechanisms of corporate governance, which are summarised and placed in a broader context in this paper, point to few, if any, signs of a convergence at a fundamental or structural level between the German, British and French financial systems. The German financial system continues to appear to be bank-dominated, while the British system still appears to be capital market-dominated. During the period covered by the research, i.e. 1980 – 1998, the French system underwent the most far-reaching changes, and today it is difficult to classify. In our opinion, these findings can be attributed to the effects of strong path dependencies, which are in turn an outgrowth of relationships of complementarity between the individual system components. Projecting what we have observed into the future, the results of our research indicate that one of two alternative paths of development is most likely to materialise: either the differences between the national financial systems will persist, or – possibly as a result of systemic crises – one financial system type will become the dominant model internationally. And if this second path emerges, the Anglo-American, capital market-dominated system could turn out to be the “winner”, because it is better able to withstand and weather crises, but not necessarily because it is more efficient.
Real options theory applies techniques known from finance theory to the valuation of capital investments. The present paper investigates further into this analogy, considering the case of a portfolio of real options. An implementation of real option models in practice will mostly be concerned with a portfolio of real options, so the analysis of portfolio aspects is of both academic and practical interest. Is a portfolio of real options special? In order to shed some light on this question, the present paper will outline the relevant features of a portfolio of real options. It will show that the analogy to financial options remains great if compound option models are applied. As a result, a portfolio of real options, and therefore the firm as such, generally is to be understood as one single compound, real option.
Banking and markets
(2001)
This paper integrates a number of recent themes in the literature in banking and asset markets–optimal risk sharing, limited market participation, asset-price volatility, market liquidity, and financial crises–in a general-equilibrium theory of the financial system. A complex financial system comprises both financial markets financial institutions. Financial institutions can take the form of intermediaries or banks. Banks, inlike intermediaries, are subject to runs, but crises do not imply market failure. We show that a sophisticated financiel system–a system with complete markets for aggregate risk and limited market participation–is incentive-efficient, if the institutions take the form of intermediaries, or else constrained-efficient, of they take the form of banks. We also consider an economy in which the markets for aggregate risks are incomplete. In this context, there is a rolefpr prudential regulation: regulating liquidity can improve welfare.
Competition for order flow can be characterized as a coordination game with multiple equilibria. Analyzing competition between dealer markets and a crossing network, we show that the crossing network is more stable for lower traders’ disutilities from unexecuted orders. By introducing private information, we prove existence of a unique equilibrium with market consolidation. Assets with low volatility and large volumes are traded on crossing networks, others on dealer markets. Efficiency requires more assets to be traded on crossing networks. If traders’ disutilities differ sufficiently, a unique equilibrium with market fragmentation exists. Low disutility traders use the crossing network while high disutility traders use the dealer market. The crossing network’s market share is inefficiently small.
At least in the past, banking in continental Europe has been characterised by a number of features that are quite specific to the region. They include the following: (1) banks play a strong role in their respective financial systems; (2) universal banking is prevalent; (3) not strictly profit-oriented banks play a significant role; and (4) there are considerable differences between national banking systems. It can be safely assumed that the future of banking in Europe will be shaped by three major external developments: deregulation and liberalisation; advances in information technology; and economic, financial and monetary integration. The overall consequences of these developments would be much too vast a topic to be addressed in one short paper. Therefore the present paper concentrates on the following question: Are the traditional peculiarities of the banking and financial systems of continental Europe likely to disappear as a consequence of the aforementioned external developments or are they more likely to remain in spite of these developments? The external developments affect the features specific to banking in continental Europe only indirectly and only via the strategies selected and pursued by the various players in the financial systems, notably the banks themselves, and in ways which strongly depend on the structure of the banking industry and the level of competition between banks and other providers of financial services. The paper develops an informal model of the relationships between (1) external developments, (2) bank strategies and the structure of the banking industry, and (3) the peculiarities of banking in Europe, and derives a hypothesis predicting which of the traditional peculiarities are likely to disappear and which are likely to remain. It argues that, overall, the peculiarities are not likely to disappear in the short or the medium term. First version June 2000. This version March 2001.
Evaluating the quality of credit portfolio risk models is an important issue for both banks and regulators. Lopez and Saidenberg (2000) suggest cross-sectional resampling techniques in order to make efficient use of available data. We show that their proposal disregards cross-sectional dependence in resampled portfolios, which renders standard statistical inference invalid. We proceed by suggesting the Berkowitz (1999) procedure, which relies on standard likelihood ratio tests performed on transformed default data. We simulate the power of this approach in various settings including one in which the test is extended to incorporate cross-sectional information. To compare the predictive ability of alternative models, we propose to use either Bonferroni bounds or the likelihood-ratio of the two models. Monte Carlo simulations show that a default history of ten years can be sufficient to resolve uncertainties currently present in credit risk modeling.
Evaluating the quality of credit portfolio risk models is an important question for both banks and regulators. Lopez and Saidenberg (2000) suggest cross-sectional resampling techniques in order to make efficient use of available data and to produce measures of forecast accuracy. We first show that their proposal disregards crosssectional dependence in simulated subportfolios, which renders standard statistical inference invalid. We proceed by suggesting another evaluation methodology which draws on the concept of likelihood ratio tests. Specifically, we compare the predictive quality of alternative models by comparing the probabilities that observed data have been generated by these models. The distribution of the test statistic can be derived through Monte Carlo simulation. To exploit differences in cross-sectional predictions of alternative models, the test can be based on a linear combination of subportfolio statistics. In the construction of the test, the weight of a subportfolio depends on the difference in the loss distributions which alternative models predict for this particular portfolio. This makes efficient use of the data, and reduces computational burden. Monte Carlo simulations suggest that the power of the tests is satisfactory.
JEL classification: G2; G28; C52
Our study provides evidence on the share price reactions to the announcement of equity issues in Germany, where capital market is characterized by institutional features distinct from the U.S. market. German seasoned equity issues yield a positive market reaction which contrasts to the significant negative abnormal returns reported for the U.S. We provide evidence that these results are due to differences in both issuing characteristics and floatation methods, and in the corporate governance and ownership structures of the two countries. Our study explains much of the empirical puzzle of different market reactions to seemingly similar events across financial markets.
The structure of the compulsory pension system (CPS) in the Federal Republic of Germany has been changed fundamentally. The federal government has decided to introduce a private pension system on a voluntary basis. The payments to this voluntary system are to constitute a capital stock to supplement the payments of the compulsory pension system. Comprehensive fiscal subsidies will be introduced to support this change to the pension system. This paper discusses the special situation of families with children. The second section investigates the extent to which families with children were able to accumulate private wealth in the last ten years in Germany. In the third section the main features of the intended changes to the compulsory pension system are described, and an overview of the planned fiscal subsidies is provided. In the fourth and final section we attempt to evaluate the changes with particular attention to the situation of families.
The paper analyses the relationship between deposit insurance, debt-holder monitoring, bank charter values, and risk taking for European banks. Utilising cross-sectional and time series variation in the existence of deposit insurance schemes in the EU, we find that the establishment of explicit deposit insurance significantly reduces the risk taking of banks. This finding stands in contrast to most of the previous empirical literature. It supports the hypothesis that in the absence of deposit insurance, European banking systems have been characterised by strong implicit insurance operating through the expectation of public intervention at times of distress. Hence the introduction of an explicit system may imply a de facto reduction in the scope of the safety net. This finding provides a new perspective on the effects of deposit insurance on risk taking. Unless the absence of any safety net is credible, the introduction of deposit insurance serves to explicitly limit the safety net and, hence, moral hazard. We also test further hypotheses regarding the interaction between deposit insurance and monitoring, charter values and "too-big-to-fail." We find that banks with lower charter values and more subordinated debt reduce risk taking more after the introduction of explicit deposit insurance, in support of the notion that charter values and subordinated debt may mitigate moral hazard. Finally, large banks (as measured in relation to the banking system as a whole) do not change their risk taking in response to the introduction of deposit insurance, which suggests that the introduction of explicit deposit insurance does not mitigate "too-big-to-fail" problems.
Structural positions are very common in investment practice. A structural position is defined as a permanent overweighting of a riskier asset class relative to a prespecified benchmark portfolio. The most prominent example for a structural position is the equity bias in a balanced fund that arises by consistently overweighting equities in tactical asset allocation. Another example is the permanent allocation of credit in a fixed income portfolio with a government benchmark. The analysis provided in this article shows that whenever possible, structural positions should be avoided. Graphical illustrations based on Pythagorean theorem are used to make a connection between the active risk/return and the total risk/return framework. Structural positions alter the risk profile of the portfolio substantially, and the appeal of active management – to provide active returns uncorrelated to benchmark returns and hence to shift the efficient frontier outwards – gets lost. The article demonstrates that the commonly used alpha – tracking error criterion is not sufficient for active management. In addition, structural positions complicate measuring managers’ skill. The paper also develops normative implications for active portfolio management. Tactical asset allocation should be based on the comparison of expected excess returns of an asset class to the equilibrium risk premium of the same asset class and not to expected excess returns of other asset classes. For the cases, where structural positions cannot be avoided, a risk budgeting approach is introduced and applied to determine the optimal position size. Finally, investors are advised not to base performance evaluation only on simple manager rankings because this encourages managers to take structural positions and does not reward efforts to produce alpha. The same holds true for comparing managers’ information ratios. Information ratios, in investment practice defined as the ratio of active return to active risk, do not uncover structural positions.
In this paper we study the benefits derived from international diversification of stock portfolios from German and Hungarian point of view. In contrast to the German capital market, which is one of the largest in the world, the Hungarian Stock Exchange is an emerging market. The Hungarian stock market is highly volatile, high returns are often accompanied by extremely large risk. Therefore, there is a good potential for Hungarian investors to realize substantial benefits in terms of risk reduction by creating multi-currency portfolios. The paper gives evidence on the above me ntioned benefits for both countries by examining the performance of several ex ante portfolio strategies. In order to control the currency risk, different types of hedging approaches are implemented.
The present paper seeks to study the possible diversification potential by the integration of indirect real estate investments in international portfolios. To this end, monthly index-return time-series in the time-period from January 1985 till December 1998 from real estate investment companies as well as common stocks and bonds in Germany, France, Switzerland, Great Britain and the USA were used. We utilize, due to the critical normal distribution assumption, a mean/lower-partial-moment framework. In order to take into account the influence of the currency risk for international investments the analyses have been undertaken both with as well as without hedging the currency risk. We take the viewpoint of a German as well as that of a US-investor to gain insight into the dependency of the diversification potential on the reference currency of the investor.
In this paper we have developed a financial model of the non-life insurer to provide assistance for the management of the insurance company in making decisions on product, investment and reinsurance mix. The model is based on portfolio theory and recognizes the stochastic nature of and the interaction between the underwriting and investment income of the insurance business. In the context of an empirical application we illustrate howa portfolio optimisation approach can be used for asset-liability management.
We analyze exchange rates along with equity quotes for 3 German firms from New York (NYSE) and Frankfurt (XETRA) during overlapping trading hours to see where price discovery occurs and how stock prices adjust to an exchange rate shock. Findings include: (a) the exchange rate is exogenous with respect to the stock prices; (b) exchange rate innovations are more important in understanding the evolution of NYSE prices than XETRA prices; and (c) most (but not all) of the fundamental or random walk component of firm value is determined in Frankfurt.