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Inclusive transverse momentum distributions of charged hadrons within 0.2<pT<6.0 GeV/c have been measured over a broad range of centrality for Au+Au collisions at sqrt[sNN]=130 GeV. Hadron yields are suppressed at high pT in central collisions relative to peripheral collisions and to a nucleon-nucleon reference scaled for collision geometry. Peripheral collisions are not suppressed relative to the nucleon-nucleon reference. The suppression varies continuously at intermediate centralities. The results indicate significant nuclear medium effects on high-pT hadron production in heavy-ion collisions at high energy.
We report STAR results on the azimuthal anisotropy parameter v2 for strange particles K0S, Lambda , and Lambda -bar at midrapidity in Au+Au collisions at sqrt[sNN]=130 GeV at the Relativistic Heavy Ion Collider. The value of v2 as a function of transverse momentum, pt, of the produced particle and collision centrality is presented for both particles up to pt~3.0 GeV/c. A strong pt dependence in v2 is observed up to 2.0 GeV/c. The v2 measurement is compared with hydrodynamic model calculations. The physics implications of the pt integrated v2 magnitude as a function of particle mass are also discussed.
We report the first measurement of strange ( Lambda ) and antistrange ( Lambda -bar) baryon production from sqrt[sNN]=130 GeV Au+Au collisions at the Relativistic Heavy Ion Collider (RHIC). Rapidity density and transverse mass distributions at midrapidity are presented as a function of centrality. The yield of Lambda and Lambda -bar hyperons is found to be approximately proportional to the number of negative hadrons. The production of Lambda -bar hyperons relative to negative hadrons increases very rapidly with transverse momentum. The magnitude of the increase cannot be described by existing hadronic string fragmentation models alone.
We report the first observation of K*(892)0--> pi K in relativistic heavy ion collisions. The transverse momentum spectrum of (K*0+K*0)/2 from central Au+Au collisions at sqrt[sNN]=130 GeV is presented. The ratios of the K*0 yield derived from these data to the yields of negative hadrons, charged kaons, and phi mesons have been measured in central and minimum bias collisions and compared with model predictions and comparable e+e-, pp, and p-barp results. The data indicate no dramatic reduction of K*0 production in relativistic heavy ion collisions despite expected losses due to rescattering effects.
Elliptic flow holds much promise for studying the early-time thermalization attained in ultrarelativistic nuclear collisions. Flow measurements also provide a means of distinguishing between hydrodynamic models and calculations which approach the low density (dilute gas) limit. Among the effects that can complicate the interpretation of elliptic flow measurements are azimuthal correlations that are unrelated to the reaction plane (nonflow correlations). Using data for Au + Au collisions at sqrt[sNN]=130 GeV from the STAR time projection chamber, it is found that four-particle correlation analyses can reliably separate flow and nonflow correlation signals. The latter account for on average about 15% of the observed second-harmonic azimuthal correlation, with the largest relative contribution for the most peripheral and the most central collisions. The results are also corrected for the effect of flow variations within centrality bins. This effect is negligible for all but the most central bin, where the correction to the elliptic flow is about a factor of 2. A simple new method for two-particle flow analysis based on scalar products is described. An analysis based on the distribution of the magnitude of the flow vector is also described.
We present the first measurement of midrapidity vector meson phi production in Au+Au collisions at RHIC (sqrt[sNN]=130 GeV) from the STAR detector. For the 11% highest multiplicity collisions, the slope parameter from an exponential fit to the transverse mass distribution is T=379±50(stat)±45(syst) MeV, the yield dN/dy=5.73±0.37(stat)±0.69(syst) per event, and the ratio N phi /Nh- is found to be 0.021±0.001(stat)±0.004(syst). The measured ratio N phi /Nh- and T for the phi meson at midrapidity do not change for the selected multiplicity bins.
We report the first measurement of inclusive antiproton production at midrapidity in Au+Au collisions at sqrt[sNN] = 130 GeV by the STAR experiment at RHIC. The antiproton transverse mass distributions in the measured transverse momentum range of 0.25<pperp<0.95 GeV/c are found to fall less steeply for more central collisions. The extrapolated antiproton rapidity density is found to scale approximately with the negative hadron multiplicity density.
The first measurements of light antinucleus production in Au+Au collisions at the Relativistic Heavy-Ion Collider are reported. The observed production rates for d-bar and 3He-bar are much larger than in lower energy nucleus-nucleus collisions. A coalescence model analysis of the yields indicates that there is little or no increase in the antinucleon freeze-out volume compared to collisions at CERN SPS energy. These analyses also indicate that the 3He-bar freeze-out volume is smaller than the d-bar freeze-out volume.
We report first results on elliptic flow of identified particles at midrapidity in Au+Au collisions at sqrt[sNN] = 130 GeV using the STAR TPC at RHIC. The elliptic flow as a function of transverse momentum and centrality differs significantly for particles of different masses. This dependence can be accounted for in hydrodynamic models, indicating that the system created shows a behavior consistent with collective hydrodynamical flow. The fit to the data with a simple model gives information on the temperature and flow velocities at freeze-out.
The minimum-bias multiplicity distribution and the transverse momentum and pseudorapidity distributions for central collisions have been measured for negative hadrons ( h-) in Au+Au interactions at sqrt[sNN] = 130 GeV. The multiplicity density at midrapidity for the 5% most central interactions is dNh-/d eta | eta = 0 = 280±1(stat)±20(syst), an increase per participant of 38% relative to pp-bar collisions at the same energy. The mean transverse momentum is 0.508±0.012 GeV/c and is larger than in central Pb+Pb collisions at lower energies. The scaling of the h- yield per participant is a strong function of pperp. The pseudorapidity distribution is almost constant within | eta |<1.
Two-pion correlation functions in Au+Au collisions at sqrt[sNN] = 130 GeV have been measured by the STAR (solenoidal tracker at RHIC) detector. The source size extracted by fitting the correlations grows with event multiplicity and decreases with transverse momentum. Anomalously large sizes or emission durations, which have been suggested as signals of quark-gluon plasma formation and rehadronization, are not observed. The Hanbury Brown-Twiss parameters display a weak energy dependence over a broad range in sqrt[sNN].
We report results on the ratio of midrapidity antiproton-to-proton yields in Au+Au collisions at sqrt[sNN] = 130 GeV per nucleon pair as measured by the STAR experiment at RHIC. Within the rapidity and transverse momentum range of | y|<0.5 and 0.4<pt<1.0 GeV/c, the ratio is essentially independent of either transverse momentum or rapidity, with an average of 0.65±0.01(stat)±0.07(syst) for minimum bias collisions. Within errors, no strong centrality dependence is observed. The results indicate that at this RHIC energy, although the p-p-bar pair production becomes important at midrapidity, a significant excess of baryons over antibaryons is still present.
Elliptic flow from nuclear collisions is a hadronic observable sensitive to the early stages of system evolution. We report first results on elliptic flow of charged particles at midrapidity in Au+Au collisions at sqrt[sNN] = 130 GeV using the STAR Time Projection Chamber at the Relativistic Heavy Ion Collider. The elliptic flow signal, v2, averaged over transverse momentum, reaches values of about 6% for relatively peripheral collisions and decreases for the more central collisions. This can be interpreted as the observation of a higher degree of thermalization than at lower collision energies. Pseudorapidity and transverse momentum dependence of elliptic flow are also presented.
Observation of enhanced subthreshold K+ production in central collisions between heavy nuclei
(1994)
In the very heavy collision system 197Au+197Au the K+ production process was studied as a function of impact parameter at 1 GeV/nucleon, a beam energy well below the free N-N threshold. The K+ multiplicity increases more than linearly with the number of participant nucleons and the K+/ pi + ratio rises significantly when going from peripheral to central collisions. The measured K+ double differential cross section is enhanced by a factor of 6 compared to microscopic transport calculations if secondary processes (Delta N-->K Lambda N and Delta Delta -->K Lambda N) are ignored.
The energy dependence of rapidity distributions and flow effects was studied in central Ar+Pb collisions at 400, 800, and 1800 MeV/nucleon using a streamer chamber. Rapidity distributions for proton and pions are found to have a Gaussian shape whereas those for deuterons exhibit a two-peak structure at the two higher energies. The average in-plane transverse momentum per/nucleon and per/event shows saturation of flow around 800 MeV/nucleon for this asymmetric system. The aspect ratio of the sphericity tensor is closely correlated with the flow angle. This correlation appears to be independent of beam energy. The number of participating nucleons in central collisions varies from 213 at 400 to 135 at 1800 MeV/nucleon indicating that at the lowest energy almost the entire target nucleus participates in the collision.
Nuclear resonance fluorescence experiments have been performed on the deformed actinide nucleus 236U. Bremsstrahlung of 3.9 MeV endpoint energy has been used as the photon source. The scattered photons were detected by three high resolution Ge- gamma -spectrometers installed at scattering angles of 92°, 128°, and 150°, respectively. Precise excitation energies, decay branching ratios, and ground state decay widths of numerous previously unknown spin 1 states in the excitation energy range 1.8-3.2 MeV have been extracted. The dipole strength has been found to be concentrated in the energy range 2.1-2.5 MeV. The systematics of the so-called scissors mode observed as a result of the previous ( gamma , gamma ') and (e,e') experiments on 232Th and 238U and, in particular, their combined analysis suggests likewise to attribute these new dipole excitations in 236U to the orbital M1 scissors mode.
Semicentral Ar+KCl, La+La, and Ar+Pb collisions at 800 MeV/nucleon were studied using a streamer chamber. The results are analyzed in the framework of the transverse momentum analysis and in terms of the average sphericity matrix. A critical examination of the analysis procedures, both experimental and theoretical, is given. New procedures are described to account for overall momentum conservation in the reaction, and to correct for azimuthal variations in the detection efficiency. Average transverse momenta per nucleon in the reaction plane are presented for deuterons emitted in the forward hemisphere, as these provide the most reliable information. A Vlasov-Uehling-Uhlenbeck calculation with a stiff equation of state gives a good fit to the momenta in the Ar+Pb reaction. Flow effects parametrized further using the sphericity tensor are found stronger than in the cascade model and consistently weaker than predicted by hydrodynamics. Parameters from the sphericity tensor exhibit a larger variation as a function of multiplicity than do the average momenta per nucleon.
The challenging intricacies of strongly correlated electronic systems necessitate the use of a variety of complementary theoretical approaches. In this thesis, we analyze two distinct aspects of strong correlations and develop further or adapt suitable techniques. First, we discuss magnetization transport in insulating one-dimensional spin rings described by a Heisenberg model in an inhomogeneous magnetic field. Due to quantum mechanical interference of magnon wave functions, persistent magnetization currents are shown to exist in such a geometry in analogy to persistent charge currents in mesoscopic normal metal rings. The second, longer part is dedicated to a new aspect of the functional renormalization group technique for fermions. By decoupling the interaction via a Hubbard-Stratonovich transformation, we introduce collective bosonic variables from the beginning and analyze the hierarchy of flow equations for the coupled field theory. The possibility of a cutoff in the momentum transfer of the interaction leads to a new flow scheme, which we will refer to as the interaction cutoff scheme. Within this approach, Ward identities for forward scattering problems are conserved at every instant of the flow leading to an exact solution of a whole hierarchy of flow equations. This way the known exact result for the single-particle Green's function of the Tomonaga-Luttinger model is recovered.
Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we generalize the results of Morris and Shin to a broader class of probability distributions and show - using the technique of iterated elimination of dominated strategies - that uniqueness will hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyse the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks. JEL Classification F 31, D 82
During the last decade, there has been a significant bias towards bond financing on emerging markets, with private investors relying on a bail-out of bonds by the international community. The bias has been a main cause for recent excessive fragility of international capital markets. The paper shows how collective action clauses in bonds contracts help to involve the private sector in risk sharing. It argues that such clauses, as a market based instrument, will raise spreads for emerging market debt and so help to correct a market failure towards excessive bond finance. Recent pressure by the IMF to involve the private sector is facing a conflict between the principle to honour existing contracts and the principle of equal treatment of bondholders.
The paper analyzes the incentive for the ECB to establish reputation by pursuing a restrictive policy right at the start of its operation. The bank is modelled as risk averse with respect to deviations of both inflation and output from her target. The public, being imperfectly informed about the bank’s preferences uses observed inflation as (imperfect) signal for the unknown preferences. Under linear learning rules - which are commonly used in the literature - a gradual build up of reputation is the optimal response. The paper shows that such a linear learning rule is not consistent with efficient signaling. It is shown that in a game with efficient signaling, a cold turkey approach - allowing for deflation - is optimal for a strong bank - accepting high current output losses at the beginning in order to demonstrate its toughness. JEL classification: D 82, E 58
During the last years the relationship between financial development and economic growth has received widespread attention in the literature on growth and development. This paper summarises in its first part the results of this research, stressing the growth-enhancing effects of an increased interpersonal re-allocation of resources promoted by financial development. The second part of the paper seeks to identify the determinants of financial development based on Diamond's theory of financial intermediation as delegated monitoring. The analysis shows that the quality of corporate governance of banks is the key factor in financial system development. Accordingly, financial sector reforms in developing countries will only succeed if they strengthen the corporate governance of financial institutions. In this area, financial institution building has an important contribution to make. Paper presented at the First Annual Seminar on New Development Finance held at the Goethe University of Frankfurt, September 22 - October 3, 1997
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.
The extension of long-term loans, e.g. to finance housing, is adversely affected by inflation. For one thing, the higher nominal interest rates charged by the banks in response to inflation mean that borrowers have to make (nominally) higher interest payments, which unnecessarily reduces their borrowing capacity. For another, long-term loans with variable interest rates increase the probability that borrowers will become unable to meet their payment obligations. The present paper examines these two assertions in detail. At the same time, it presents a concept for substantially reducing the weaknesses of conventional lending methodologies. We start by investigating the consequences of a stable inflation rate on the borrowing capacity of credit clients, then go on to analyze the impact of fluctuating inflation rates on the risk of default.
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.
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.
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.
Although the world of banking and finance is becoming more integrated every day, in most aspects the world of financial regulation continues to be narrowly defined by national boundaries. The main players here are still national governments and governmental agencies. And until recently, they tended to follow a policy of shielding their activities from scrutiny by their peers and members of the academic community rather than inviting critical assessments and an exchange of ideas. The turbulence in international financial markets in the 1980s, and its impact on U.S. banks, gave rise to the notion that academics working in the field of banking and financial regulation might be in a position to make a contribution to the improvement of regulation in the United States, and thus ultimately to the stability of the entire financial sector. This provided the impetus for the creation of the “U.S. Shadow Financial Regulatory Committee”. In the meantime, similar shadow committees have been founded in Europe and Japan. The specific problems associated with financial regulation in Europe, as well as the specific features which distinguish the European Shadow Financial Regulatory Committee from its counterparts in the U.S. and Japan, derive from the fact that while Europe has already made substantial progress towards economic and political integration, it is still primarily a collection of distinct nation-states with differing institutional set-ups and political and economic traditions. Therefore, any attempt to work towards a European approach to financial regulation must include an effort to promote the development of a European culture of co-operation in this area, and this is precisely what the European Shadow Financial Regulatory Committee (ESFRC) seeks to do. In this paper, Harald Benink, chairman of the ESFRC, and Reinhard H. Schmidt, one of the two German members, discuss the origin, the objectives and the functioning of the committee and the thrust of its recommendations.
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 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.
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.
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.
We present an empirical study focusing on the estimation of a fundamental multi-factor model for a universe of European stocks. Following the approach of the BARRA model, we have adopted a cross-sectional methodology. The proportion of explained variance ranges from 7.3% to 66.3% in the weekly regressions with a mean of 32.9%. For the individual factors we give the percentage of the weeks when they yielded statistically significant influence on stock returns. The best explanatory power – apart from the dominant country factors – was found among the statistical constructs „success“ and „variability in markets“.
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.
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.
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.
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.
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.
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.
Financial development and financial institution building are important prerequisites for economic growth. However, both the potential and the problems of institution building are still vastly underestimated by those who design and fund institution building projects. The paper first underlines the importance of financial development for economic growth, then describes the main elements of “serious” institution building: the lending technology, the methodological approaches, and the question of internal structure and corporate governance. Finally, it discusses three problems which institution building efforts have to cope with: inappropriate expectations on the part of donor and partner institutions regarding the problems and effects of institution building efforts, the lack of awareness of the importance of governance and ownership issues, and financial regulation that is too restrictive for microfinance operations. All three problems together explain why there are so few successful micro and small business institutions operating worldwide.
We analyze incentives for loan officers in a model with hidden action, limited liability and truth-telling constraints under the assumption that the principal has private information from an automatic scoring system. First we show that the truth-telling problem reduces the bank’s expected profit whenever the loan officer cannot only conceal bad types, but can also falsely report bad types. Second, we investigate whether the bank should reveal her private information to the agent. We show that this depends on the percentage of good loans in the population and on the signal’s informativeness. Though we had to define different regions for different parameters, we concluded that it might often be favorable to not reveal the signal. This contradicts current practice.
We investigate the suggested substitutive relation between executive compensation and the disciplinary threat of takeover imposed by the market for corporate control. We complement other empirical studies on managerial compensation and corporate control mechanisms in three distinct ways. First, we concentrate on firms in the oil industry for which agency problems were especially severe in the 1980s. Due to the extensive generation of excess cash flow, product and factor market discipline was ineffective. Second, we obtain a unique data set drawn directly from proxy statements which accounts not only for salary and bonus but for the value of all stock-market based compensation held in the portfolio of a CEO. Our data set consists of 51 firms in the U.S. oil industry from 1977 to 1994. Third, we employ ex ante measures of the threat of takeover at the individual firm level which are superior to ex post measures like actual takeover occurrence or past incidence of takeovers in an industry. Results show that annual compensation and, to a much higher degree, stock-based managerial compensation increase after a firm becomes protected from a hostile takeover. However, clear-cut evidence that CEOs of protected firms receive higher compensation than those of firms considered susceptible to a takeover cannot be found.
Individual financial systems can be understood as very specific configurations of certain key elements. Often these configurations remain unchanged for decades. We hypothesize that there is a specific relationship between key elements, namely that of complementarity. Thus, complementarity seems to be an essential feature of financial systems. Intuitively speaking, complementarity exists if the elements of a (financial) system reinforce each other in terms of contributing to the functioning of the system. It is the purpose of this paper to provide an analytical clarification of the concept of complementarity. This is done by modeling financial systems as combinations of four elements: firm-specific human capital of an entrepreneur, the ability of a bank to restructure the borrower's firm in the case of distress, the possibility to appropriate private benefits from running the firm, and the bankruptcy law. A specific configuration of these elements constitutes one financial system. The bankruptcy law and the potential private benefits are treated as exogenous. They determine the bargaining power of the contracting parties in the case that recontracting occurs. In a two-stage game, the optimal values for the other elements are determined by the agents individually - by investing in human capital and restructuring skills, respectively - and jointly by writing, executing and possibly renegotiating a financing contract for the firm. The paper discusses the equilibria for different types of bankruptcy law and demonstrates that equilibria exhibit the sought-after feature of complementarity. Three particularly significant equilibria correspond to stylized accounts of the British, German and the US-American financial system, respectively.
The paper presents an empirical analysis of the alledged transformation of the financial systems in the three major European economies, France, Germany and the UK. Based on a unified data set developed on the basis of national accounts statistics, and employing a new and consistent method of measurement, the following questions are addressed: Is there a common pattern of structural change; do banks lose importance in the process of change; and are the three financial systems becoming more similar? We find that there is neither a general trend towards disintermediation, nor towards a transformation from bank-based to capital market-based financial systems, nor for a loss of importance of banks. Only in the case of France strong signs of transformation as well as signs of a general decline in the role of banks could be found. Thus the three financial systems also do not seem to become more similar. However, there is also a common pattern of change: the intermediation chains are lengthening in all three countries. Nonbank financial intermediaries are taking over a more important role as mobilizers of capital from the non-financial sectors. In combination with the trend towards securitization of bank liabilites, this change increases the funding costs of banks and may put banks under pressure. In the case of France, this change is so pronounced that it might even threaten the stability of the financial system.
Market discipline for financial institutions can be imposed not only from the liability side, as has often been stressed in the literature on the use of subordinated debt, but also from the asset side. This will be particularly true if good lending opportunities are in short supply, so that banks have to compete for projects. In such a setting, borrowers may demand that banks commit to monitoring by requiring that they use some of their own capital in lending, thus creating an asset market-based incentive for banks to hold capital. Borrowers can also provide banks with incentives to monitor by allowing them to reap some of the benefits from the loans, which accrue only if the loans are in fact paid o.. Since borrowers do not fully internalize the cost of raising capital to the banks, the level of capital demanded by market participants may be above the one chosen by a regulator, even when capital is a relatively costly source of funds. This implies that capital requirements may not be binding, as recent evidence seems to indicate. JEL Classification: G21, G38