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2002, 13
The following descriptive paper surveys the various types of loan securitisation and provides a working definition of so-called collateralised loan obligations (CLOs). Free of the common rhetoric and slogans, which sometimes substitute for understanding of the complex nature of structured finance, this paper describes the theoretical foundations of this specialised form of loan securitisation. Not only the distinctive properties of CLOs, but also the information economics inherent in the transfer of credit risk will be considered, so that we can equally privilege the critical aspects of security design in the structuring of CLO transactions.
2002, 11
Since the second half of the nineties the euro area has been subject to a considerable accumulation of temporary and idiosyncratic price shocks. Core inflation indicators for the euro area are thus of utmost interest. Based on euro area-wide data core inflation in this paper is analyzed by means of an indicator derived from the generalized dynamic factor model. This indicator reveals that HICP inflation strongly exaggerated both the decline as well as the increase in the price trend in 1999 and 2000/2001. Our results reinforce those achieved by Cristadoro, Forni, Reichlin and Versonese (2001) based on euro area country data which indicates the robustness of the indicator. Klassifikation: C33, E31
2002, 12
In this paper we assess the implications of sunk costs and product differentiation on the pricing decisions of the multinational firms. For this purpose we use a modified version of Salop's spatial competition. The model yields clear-cut predictions regarding the effects of exchange rate shocks on the market structure and on pass-through. The main results are following: shocks within the band of inaction do not affect market structure. The upper bound of this range rises as the industry ratio of sunk- to fixed costs increases. As fixed costs and product heterogeneity jointly increase, the lower bound drops. Outside of the range, depreciations cause one or several of those foreign brands closest to the home brand to leave. This decreases the overall responsiveness of prices to exchange rate shocks. Large appreciations induce entry and increase the elasticity of prices. This asymmetry implies larger positive than negative PPP deviations. When accounting for price changes in foreign markets, strategic pricing behaviour is no longer sufficient to generate real exchange rate variability. Incomplete pass-through obtains if and only if the domestic firms have a smaller market share abroad. With large nominal exchange rate shocks a hysteresis result obtains if and only if sunk costs are non-zero. Klassifikation: C33, E31
2002, 09
In this paper, we present a monetary policy game in which the central bank has a private forecast of supply and demand shocks. The public needs to form its inflationary expectations and can make use of central bank announcements. However, because of the credibility problem that the central bank faces, the public will not believe a precise announcement. By extending the arrangement proposed by Garfinkel and Oh (1995) to a model that includes private information about both demand and supply shocks, we investigate the feasibility of making imprecise credible announcements concerning the rate of inflation. Klassifikation:E52;E58
2002, 05
Within a two step GARCH framework we estimate the time-varying spillover effects from European and US return innovations to 10 economic sectors within the euro area, the United States, and the United Kingdom. We use daily data from January 1988 - March 2002. At the beginning of our sample sectors in all three currency areas/blocks formed a quite homogeneous group exhibiting only minor sector-specific characteristics. However, over time sectors became more heterogeneous, that is the response to aggregate shocks increasingly varies across sectors. This provides evidence that sector-specific effects gained in importance. European industries show increased heterogeneity simultaneously with the start of the European Monetary Union, whereas in the US this trend started in the early 1990's. Information technology and non-cyclical services (including telecommunication services) became the most integrated sectors worldwide, which are most affected by aggregate European and US shocks. On the other hand, basic industries, non-cyclical consumer goods, resources, and utilities became less affected by aggregate shocks. Volatility spillovers proved to be small and volatile. JEL_Klassifikation: G1, F36
2002, 02 r
Why borrowers pay premiums to larger lenders : empirical evidence from sovereign syndicated loans
(2003)
All other terms being equal (e.g. seniority), syndicated loan contracts provide larger lending compensations (in percentage points) to institutions funding larger amounts. This paper explores empirically the motivation for such a price design on a sample of sovereign syndicated loans in the period 1990-1997. I find strong evidence that a larger premium is associated with higher renegotiation probability and information asymmetries. It hardly has any impact on the number of lenders though. This is consistent with the hypothesis that larger lenders act as main lenders, namely help reduce information asymmetries and provide services in situations of liquidity shortage. This constitutes new evidence of the existence of compensations for such unique services. Moreover, larger payment discrepancies are also associated with larger syndicated loan amounts. This provides further new evidence that larger borrowers bear additional borrowing costs.
2002, 04
Forecasting stock market volatility and the informational efficiency of the DAX-index options market
(2002)
Alternative strategies for predicting stock market volatility are examined. In out-of-sample forecasting experiments implied-volatility information, derived from contemporaneously observed option prices or history-based volatility predictors, such as GARCH models, are investigated, to determine if they are more appropriate for predicting future return volatility. Employing German DAX-index return data it is found that past returns do not contain useful information beyond the volatility expectations already reflected in option prices. This supports the efficient market hypothesis for the DAX-index options market.
2002, 03
Money-back guarantees in individual pension accounts : evidence from the German pension reform
(2002)
The German Retirement Saving Act instituted a new funded system of supplementary pensions coupled with a general reduction in the level of state pay-as-you-go old-age pensions. In order to qualify for tax relief, the providers of supplementary savings products must offer a guarantee of the nominal value at retirement of contributions paid into these saving accounts. This paper explores how this "money-back" guarantee works and evaluates alternative designs for guarantee structures, including a life cycle model (dynamic asset allocation), a plan with a pre-specified blend of equity and bond investments (static asset allocation), and some type of portfolio insurance. We use a simulation methodology to compare hedging effectiveness and hedging costs associated with the provision of the money-back guarantee. In addition, the guarantee has important implications for regulators who must find an appropriate solvency system for such saving schemes. This version June 17, 2002 . Klassifikation: G11, G23, G28
2002, 10
Both unconditional mixed-normal distributions and GARCH models with fat-tailed conditional distributions have been employed for modeling financial return data. We consider a mixed-normal distribution coupled with a GARCH-type structure which allows for conditional variance in each of the components as well as dynamic feedback between the components. Special cases and relationships with previously proposed specifications are discussed and stationarity conditions are derived. An empirical application to NASDAQ-index data indicates the appropriateness of the model class and illustrates that the approach can generate a plausible disaggregation of the conditional variance process, in which the components' volatility dynamics have a clearly distinct behavior that is, for example, compatible with the well-known leverage effect. Klassifikation: C22, C51, G10
2002, 16
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.
2002, 17
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
2001, 13 r
We use consumer price data for 205 cities/regions in 21 countries to study deviations from the law-of-one-price before, during and after the major currency crises of the 1990s. We combine data from industrialised nations in North America (Unites States, Canada, Mexico), Europe (Germany, Italy, Spain and Portugal) and Asia (Japan, Korea, New Zealand, Australia) with corresponding data from emerging market economies in the South America (Argentine, Bolivia, Brazil, Columbia) and Asia (India, Indonesia, Malaysia, Philippines, Taiwan, Thailand). We confirm previous results that both distance and border explain a significant amount of relative price variation across different locations. We also find that currency attacks had major disintegration effects by significantly increasing these border effects, and by raising within country relative price dispersion in emerging market economies. These effects are found to be quite persistent since relative price volatility across emerging markets today is still significantly larger than a decade ago. JEL classification: F40, F41
2001, 01
This paper analyzes a comprehensive data set of 108 non venture-backed, 58 venture-backed and 33 bridge financed companies going public at Germany s Neuer Markt between March 1997 and March 2000. I examine whether these three types of issues differ with regard to issuer characteristics, balance sheet data or offering characteristics. Moreover, this empirical study contributes to the underpricing literature by focusing on the complementary or rather competing role of venture capitalists and underwriters in certifying the quality of a company when going public. Companies backed by a prestigious venture capitalist and/or underwritten by a top bank are expected to show less underpricing at the initial public offering (IPO) due to a reduced ex-ante uncertainty. This study provides evidence to the contrary: VC-backed IPOs appear to be more underpriced than non VCbacked IPOs.
2001, 07
We use consumer price data for 81 European cities (in Germany, Austria, Switzerland, Italy, Spain and Portugal) to study deviations from the law-of-one-price before and during the European Economic and Monetary Union (EMU) by analysing both aggregate and disaggregate CPI data for 7 categories of goods we find that the distance between cities explains a significant amount of the variation in the prices of similar goods in different locations. We also find that the variation of the relative price is much higher for two cities located in different countries than for two equidistant cities in the same country. Under EMU, the elimination of nominal exchange rate volatility has largely reduced these border effects, but distance and border still matter for intra-European relative price volatility. JEL classification: F40, F41
2001, 01 r
This paper analyzes a comprehensive data set of 160 non venture-backed, 79 venture-backed and 61 bridge financed companies going public at Germany´s Neuer Markt between March 1997 and March 2002. I examine whether these three types of issues differ with regard to issuer characteristics, balance sheet data or offering characteristics. Moreover, this empirical study contributes to the underpricing literature by focusing on the complementary or rather competing role of venture capitalists and underwriters in certifying the quality of a company when going public. Companies backed by a prestigious venture capitalist and/or underwritten by a top bank are expected to show less underpricing at the initial public offering (IPO) due to a reduced ex-ante uncertainty. This analysis provides evidence to the contrary: VC-backed IPOs appear to be more underpriced than non VC-backed IPOs.
2001, 04
In the recent theoretical literature on lending risk, the coordination problem in multi-creditor relationships have been analyzed extensively. We address this topic empirically, relying on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on creditor pools, a legal institution aiming at coordinating lender interests in borrower distress. We report three major findings. First, the existence of creditor pools increases the probability of workout success. Second, the results are consistent with coordination costs being positively related to pool size. Third, major determinants of pool formation are found to be the number of banks, the distribution of lending shares, and the severity of the distress shock.
2001, 05
This paper uses a unique data set from credit files of six leading German banks to provide some empirical insights into their rating systems used to classify corporate borrowers. On the basis of the New Basle Capital Accord, which allows banks to use their internal rating systems to compute their minimum capital requirements, the relations between potential risk factors, rating decisions and the default probabilities are analysed to answer the question whether German banks are ready for the internal ratings-based approach. The results suggests that the answer is not affirmative at this stage. We find internal rating systems not comparable over banks and furthermore we reveal differences between credit rating determining and default probability determining factors respectively. Klassifikation: G21, G33, G38
2001, 06
This paper investigates how US and European equity markets affected the US dollar-euro rate from the introduction of the euro through April 2001. More detailed the following questions are raised: First, do movements in the stock market help to explain movements in the exchange rate? Second, how large is the impact of stock market returns on the exchange rate? And third, does the exchange rate respond differently to different equity markets? The investigation was carried out using daily data within a vector-autoregression model (VAR). Surprisingly, positive returns on US equities as well as on European stock markets had a negative impact on the US dollar-euro rate. Quantitatively, the US dollar-euro rate seems to be more influenced by European stock markets compared to US stock markets. Further, there is evidence for a somewhat weaker impact of technology stock indices on the US dollar-euro rate compared with broader market indices. Finally, the long-term interest rate differential seems to contain more information about exchange rate movements than the short-term interest rate differential. This Version: August, 2001. Klassifikation: C32, F31
2001, 07 r
We use consumer price data for 81 European cities (in Germany, Austria, Finland, Italy, Spain, Portugal and Switzerland) to study the impact of the introduction of the euro on goods market integration. Employing both aggregated and disaggregated consumer price index (CPI) data we confirm previous results which showed that the distance between European cities explains a significant amount of the variation in the prices of similar goods in different locations. We also find that the variation of relative prices is much higher for two cities located in different countries than for two equidistant cities in the same country. Under the EMU, the elimination of nominal exchange rate volatility has largely reduced these border effects, but distance and border still matter for intra-European relative price volatility.
2001, 08
Recent empirical research found that the strong short-term relationship between monetary aggregates and US real output and inflation, as outlined in the classical study by M. Friedman and Schwartz, mostly disappeared since the early 1980s. In the light of the B. Friedman and Kuttner (1992) information value approach, we reevaluate the vanishing relationship between US monetary aggregates and these macroeconomic fundamentals by taking into account the international currency feature of the US dollar. In practice, by using official US data for foreign flows constructed by Porter and Judson (1996) we find that domestic money (currency component of M1 corrected for the foreign holdings of dollars) contains valuable information about future movements of US real output and inflation. Statistical evidence here provided thus suggests that the Friedman and Schwartz's stylized facts can be reestablished once the focus of analysis is back on the domestic monetary aggregates. This Version: August, 2001. Klassifikation: E3, E4, E5
2001, 09
Against the difficult background of analysing aggregated data in this paper core inflation in the euro area is estimated by means of the structural vector autoregressive approach. We demonstrate that the HICP sometimes seems to be a misleading indicator for monetary policy in the euro area. We furthermore compare our core inflation measure to the wide-spread "ex food and energy" measure, often referred to by the ECB. In addition we provide evidence that our measure is a coincident indicator of HICP inflation. Assessing the robustness of our core inflation measure we carefully conclude that it seems to be quite reliable. This Version: April, 2002 Revised edition published in: Allgemeinenes Statistisches Archiv, Vol 87, 2003. Klassifikation: C32, E31
2001, 13
We use consumer price data for 205 cities/regions in 21 countries to study PPP deviations before, during and after the major currency crises of the 1990s. We combine data from industrialized nations in North America (Unites States, Canada and Mexico), Europe (Germany, Italy, Spain and Portugal), Asia (Japan and South Korea), and Oceania (Australia and New Zealand) with corresponding data from emerging market economies in South America (Argentina, Bolivia, Brazil, Columbia) and Asia (India, Indonesia, Malaysia, Philippines, Taiwan, Thailand). By doing so, we confirm previous results that both distance and border explain a significant amount of relative price variation across different locations. We also find that currency attacks had major disintegration effects by considerably increasing these border effects and by raising within-country relative price dispersion in emerging market economies. These effects are found to be quite persistent since relative price volatility across emerging markets today is still significantly larger than a decade ago.
2001, 12
We investigate into the role of the trade channel as important determinant of a country's current account position and the degree of business cycle synchronization with the rest of the world by comparing the predictions of two types of DGE models. It is shown that the behavior of a country's external balance and the international transmission of shocks depends amongst other things on two factors: i) the magnitude of trade interdependence, ii) the degree of substitutability between importable and domestically-produced goods. Using time series data on bilateral trade flows, we estimate the magnitude of trade interdependence and the elasticity of substitution between importable and domestic goods for the G7 countries. Given these estimates, idiosyncratic supply shocks potentially induce changes in the current account and foreign output that vary in direction and magnitude across G7 countries. The relationship between the magnitude of foreign trade and the import substitutability with various correlation measures is examined empirically in a cross-sectional dimension. First Draft, July 2001. Final Draft, November 2001. Klassifikation: E32, F41
2001, 11
Industrial production in G7 countries is assumed to be driven by two exogenous disturbances. Those disturbances are identified in a VAR model so they can be interpreted as country-specific and global supply shocks. The dynamic properties of the model are analyzed and the relative importance of each shock is measured. It is shown that the VAR model matches most of the theoretical predictions of standard intertemporal open-economy models. The identified structural disturbances are analyzed with regard to their impact on the current account and investment. First Draft, October 2000. Final Draft, January 2001. This paper is based on the second chapter of my doctoral dissertation at the University of Frankfurt. Klassifikation: E32, F41
2001, 10
Our study examines the existence and the nature of private benefits of control in Germany. We do this by analyzing initial public offerings of founding-family owned firms and tracking their fate up to ten years following the IPO. Our sample includes a uniquely rich data set of 105 IPOs of family-owned firms floated from 1970 to 1991 on German stock exchanges. We find that, first, even ten years after the IPO, family owners, in the cross section, continue to exercise considerable control. Second, we show that there exist substantial private benefits of control in these firms and - to our understanding for the first time - we empirically measure what the nature of these private benefits really is. We also show that the separation of cash flow rights and voting rights via the issuance of dual-class shares is used to create controlling shareholder structures in order to preserve these private benefits. Third, we find a puzzling and significant underperformance of dual-class share IPOs, which can be explained by ex ante unanticipated expropriation of minority shareholders due to poor investor protection in Germany. This Version: 4th draft, November 2001 This paper has been presented at the European Financial Management Association 2001 Meeting in Lugano, the CEPR Conference "The Firm and its Stakeholders" in Courmayeur, the Fall 2000 WAFA Conference in Washington, D.C., the European Economic Association 2000 Conference in Bozen, the ABN AMRO International Conference on IPOs in Amsterdam, the SIRIF Conference on Corporate Governance in Edinburgh, the Financial Center Seminar at the Tinbergen Institute Rotterdam, and the G-Forum on Entrepreneurship Research in Vienna. Klassifikation: G14, G32, G15
2001, 02
This paper shows that emerging market eurobond spreads after the Asian crisis can be almost completely explained by market expectations about macroeconomic fundamentals and international interest rates. Contrary to the claim that emerging market bond spreads are driven by market variables such as stock market volatility in the developed countries, it is found that this did not play a significant role after the Asian crisis. Using panel data techniques, it is shown that the determinants of bond spreads can be divided into long-term structural variables and medium-term variables which explain month-to-month changes in bond spreads. As relevant medium-term variables, ''consensus forecasts'' of real GDP growth and inflation, and international interest rates are identified. The long-term structural factors do not explicitly enter the model and show up as fixed or random country-specific effects. These intercepts are highly correlated with the countries' credit rating.
2001, 03
In recent years new methods and models have been developed to quantify credit risk on a portfolio basis. CreditMetrics (tm), CreditRisk+, CreditPortfolio (tm) are among the best known and many others are similar to them. At first glance they are quite different in their approaches and methodologies. A comparison of these models especially with regard to their applicability on typical middle market loan portfolios is in the focus of this study. The analysis shows that differences in the results of an application of the models on a certain loan portfolio is mainly due to different approaches in approximating default correlations. That is especially true for typically non-rated medium-sized counterparties. On the other hand distributional assumptions or different solution techniques in the models are more or less compatible.
2001, 04 [Juni 2002]
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.
2001, 04 [Juni 2006]
Multiple lenders and corporate distress: evidence on debt restructuring : [Version Juni 2006]
(2006)
In the recent theoretical literature on lending risk, the coordination problem in multi-creditor relationships have been analyzed extensively. We address this topic empirically, relying on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on creditor pools, a legal institution aiming at coordinating lender interests in borrower distress. We report three major findings. First, the existence of creditor pools increases the probability of workout success. Second, the results are consistent with coordination costs being positively related to pool size. Third, major determinants of pool formation are found to be the number of banks, the distribution of lending shares, and the severity of the distress shock.
2000, 09
This paper provides a broad empirical examination of the major currencies' roles in international capital markets, with a special emphasis on the first year of the euro. A contribution is made as to how to measure these roles, both for international financing as well as for international investment. The times series collected for these measures allow for the identification of changes in the role of the euro during 1999 compared to the aggregate of euro predecessor currencies, net of intra -euro area assets/liabilities, before stage 3 of EMU. A number of key factors determining the currency distribution of international portfolio investments, such as relative market liquidity and relative risk characteristics of assets, are also examined empirically. It turns out that for almost all important market segments for which data are available, the euro immediately became the second most widely used currency for international financing and investment. For the flow of international bond and note issuance it experienced significant growth in 1999 even slightly overtaking the US dollar in the second half of the year. The euro's international investment role appears more static though, since most of the early external asset supply in euro is actually absorbed by euro area residents.
2000, 11
This paper examines empirically the question whether the presence of foreign banks and a liberal trade regime with regard to financial services can contribute to a stabilization of capital flows to emerging markets. Since foreign banks, so the argument goes, provide better information to foreign investors and increase transparency, the danger of herding is reduced. Previous findings by Kono and Schuknecht (1998) confirmed empirically that such an effect does exist. This study expands their data set with respect to the length of the time period and the number of countries. Contrary to Kono and Schuknecht, it is found that foreign bank penetration tends to rather increase the volatility of capital flows. The trade regime variables are not significant in explaining cross-country variations in the volatility of capital flows. This result does not change significantly when alternative measures of volatility are considered. This paper was presented at the conference ''Financial crisis in transition countries: recent lessons and problems yet to solve'' on 13-14 July 2000 at the Institute for Economic Research (IWH) in Halle, Germany.
2000, 01
This paper measures the economy-wide impact of bank distress on the loss of relationship benefits. We use the near-collapse of the Norwegian banking system during the period 1988 to 1991 to measure the impact of bank distress announcements on the stock prices of firms maintaining a relationship with a distressed bank. We find that although banks experience large and permanent downward revisions in their equity value during the event period, firms maintaining relationships with these banks face only small and temporary changes, on average, in stock price. In other words, the aggregate impact of bank distress on the real economy appears small. We analyze the cross-sectional variation in firm abnormal returns and find that firms that maintain international bank relationships suffer more upon announcement of bank distress.
2000, 02
Bank internal ratings of corporate clients are intended to quantify the expected likelihood of future borrower defaults. This paper develops a comprehensive framework for evaluating the quality of standard rating systems. We suggest a number of principles that ought to be met by 'good rating practice'. These 'generally accepted rating principles' are potentially relevant for the improvement of existing rating systems. They are also relevant for the development of certification standards for internal rating systems, as currently discussed in a consultative paper issued by the Bank for International Settlement in Basle, entitled 'A new capital adequacy framework'. We would very much appreciate any comments by readers that help to develop these rating standards further. Simply send us an E-mail, or give us a call.
2000, 04
This paper discusses the role of the credit rating agencies during the recent financial crises. In particular, it examines whether the agencies can add to the dynamics of emerging market crises. Academics and investors often argue that sovereign credit ratings are responsible for pronounced boom-bust cycles in emerging-markets lending. Using a vector autoregressive system this paper examines how US dollar bond yield spreads and the short-term international liquidity position react to an unexpected sovereign credit rating change. Contrary to common belief and previous studies, the empirical results suggest that an abrupt downgrade does not necessarily intensify a financial crisis.
2000, 06
In this study the firms' choice of the number of bank relationships is analyzed with respect to influential factors like borrower quality, size and the existence of a close housebank relationship. Then, the number of bank relationships is used as a proxy to examine if bank competition is reflected in loan terms. It is shown that the number of bank relationships is foremost determined by borrower size and the existence of a housebank relationship. Loan rate spreads are not effected by the number of bank relationships. However, borrowers with a small number of bank relationships provide more collateral and get more credit. These effects are amplified by a housebank relationship. Housebanks get more collateral and are ready to take a larger stake in the financing of their customers.
2000, 08
This paper examines the interaction of G7 real exchange rates with real output and interest rate differentials. Using cointegration methods, we generally find a link between the real exchange rate and the real interest differential. This finding contrasts with the majority of the extant research on the real exchange rate - real interest rate link. We identify a new measure of the equilibrium exchange rate in terms of the permanent component of the real exchange rate that is consistent with the dynamic equilibrium given by the cointegration relation. Furthermore, the presence of cointegration also allows us to identify real, nominal and transitory disturbances with only minimal identifying restrictions. Our findings suggest that persistent deviations of real exchange rates from their equilibrium value can have feedback effects on the underlying fundamentals, hence altering the equilibrium exchange rate itself. This has important implications for the persistence measures of real exchange rates that are reported elsewhere in the literature.
2000, 05
The globalization of markets and companies has increased the demand for internationally comparable high quality accounting information resulting from a common set of accounting rules. Despite remarkable efforts of international harmonization for more than 25 years, accounting regulation is still the domain of national legislators or delegated standard setters. The paper starts by outlining the reasons for this state of affairs and by characterizing the different institutional backgrounds of accounting standard setting in four selected countries as well as on the international level. This is followed by a summary of important international differences in accounting rules and a summary of the empirical evidence of the impact of different rules on the resulting numbers and their relevance to users. It is argued that neither a priori theoretical reasoning nor the evidence from empirical studies provides a convincing basis for choices between accounting regimes and even less so between specific accounting rules. As there is a broad consensus that there is a need for one set of global accounting standards the final sections of the paper discuss currently existing and proposed structures of international accounting standard setting. The evolving new IASC structure is critically evaluated.
2000, 13
This paper examines thoroughly the Chilean Pension Reform, giving first an overview of the mandatory saving plan, the relevant institutions, and the rules for transition from the old to the new system. The main part of the paper contains a critical evaluation of the reform, in particular the macroeconomic performance with respect to capital formation and growth, and the effects on the savings rate as well as on the rates of return and labor market are discussed. Furthermore, the development of capital markets is reviewed. A short critique is presented with respect to intergenerational distribution and risk sharing as well as with respect to the social consequences. This paper is the result of a CFS sponsored research project. A preliminary version was presented at the meeting of the committee of Social Policy of the Verein fuer Socialpolitik, May 1999 and at the 55th Congress of IIPF, 23-26 August 1999, in Moskow.
2000, 12
This paper provides empirical evidence on initial public offerings (IPOs) by investigating the pricing and long-run performance of IPOs using a unique data set collected on the German capital market before World War I. Our findings indicate that underpricing of IPOs has existed, but has significantly decreased over time in our sample. Employing a mixture of distributions approach we also find evidence of price stabilization of IPOs. Concerning long-run performance, investors who bought their shares in the early after-market and held them for more than three years experienced significantly lower returns than the respective industry as a whole. Earlier versions of this paper were presented at the ABN-AMRO Conference on IPOs in Amsterdam, the Annual Meetings of the European Finance Association, the Annual Meetings of the Verein für Socialpolitik, the IX Tor Vergata International Conference on Banking and Finance in Rome, and at Johann Wolfgang Goethe-University in Frankfurt.
2000, 10
This paper discusses the role of internal corporate ratings as a means by which commercial banks condense their informational advantage and preserve it vis-à-vis a competitive lending market. In drawing on a unique data set collected from leading universal banks in Germany, we are able to evaluate the extent to which non-public information determines corporate ratings. As a point of departure, the paper describes a sample of rating systems currently in use, and points at methodological differences between them. Relying on a probit analysis, we are able to show that the set of qualitative, or soft, factors is not simply redundant with respect to publicly available accounting data. Rather, qualitative information tends to be decisive in at least one third of cases. It tends to improve the firms' overall corporate rating. In the case of conflicting rating changes, i.e. when qualitative and quantitative rating changes have opposing signs, quantitative criteria dominate the overall rating change. Furthermore, the more restrictive the weighting scheme as part of the rating methodology is, the stronger is the impact of qualitative information on the firms' overall rating. The implications of our results underline the need to define stringent rating standards, from both a risk management and a regulatory point of view. Revised edition published in: ZEW Wirtschaftsanalysen 2001, Bd 54, Baden-Baden, Nomos
1999, 02
In this speech (given at the CFSresearch conference on the Implementation of Price Stability held at the Bundesbank Frankfurt am Main, 10. - 12. Sept 1998), John Vickers discusses theoretical and practical issues relating to inflation targeting as used in the United Kingdom doing the past six years. After outlining the role of the Bank s Monetary Policy Committee, he considers the Committee s task from a theoretical perspective, beforediscussing the concept and measurement of domestically generated inflation.
1999, 03
From the mid-seventies on, the central banks of most major industrial countries switched to monetary targeting. The Bundesbank was the first central bank to take this step, making the switch at the end of 1974. This changeover to monetary targeting was due to the difficulties which the Bundesbank - like other central banks - was facing in pursuing its original strategy, and whichcame to a head in the early seventies, when inflation escalated. A second factor was the collapse of the Bretton Woods system of fixed exchange rates, which created the necessary scope for national monetary targeting. Finally, the advance of monetarist ideas fostered the explicit turn towards monetary targets, although the Bundesbank did not implement these in a mechanistic way. Whereas the Bundesbank has adhered to its policy of monetary targeting up to the present, nowadays monetary targeting plays only a minor role worldwide. Many central banks have switched to the strategy of direct inflation targeting. Others favour a more discretionary approach or a policy which is geared to the exchange rate. In the academic debate, monetary targeting is often presented as an outdated approach which has long since lost its basis of stable money demand. These findings give riseto a number of questions: Has monetary targeting actually become outdated? Which role is played by the concrete design of this strategy, and, against this background, how easily can it be transferred to European monetary union? This paper aims to answer these questions, drawing on the particular experience which the Bundesbank has gained of monetary targeting. It seems appropriate to discuss monetary targeting by using a specific example, since this notion is not very precise. This applies, for example, to the money definition used, the way the target is derived, the stringency applied in pursuing the target and the monetary management procedure.
1999, 09
This paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions. It shows, in the context of a simple model of optimizing private-sector behavior, that such inertial behavior on the part of the central bank may indeed be optimal, in the sense of minimizing a loss function that penalizes inflation variations, deviations of output from potential, and interest-rate variability. Sluggish adjustment characterizes an optimal policy commitment, even though no such inertia would be present in the case of a reputationless (Markovian) equilibrium under discretion. Optimal interest-rate feedback rules are also characterized, and shown to involve substantial positive coefficients on lagged interest rates. This provides a theoretical explanation for the numerical results obtained by Rotemberg and Woodford (1998) in their quantitative model of the U.S. economy.
1999, 11
We analyze the role of different kinds of primary and secondary market interventions for the government's goal to maximize its revenues from public bond issuances. Some of these interventions can be thought of as characteristics of a "primary dealer system". After all, we see that a primary dealer system with a restricted number of participants may be useful in case of only restricted competition among sufficiently heterogeneous market makers. We further show that minimum secondary market turnover requirements for primary dealers with respect to bond sales seem to be in general more adequate than the definition of maximum bid-ask-spreads or minimum turnover requirements with respect to bond purchases. Moreover, official price management operations are not able to completely substitute for a system of primary dealers. Finally it should be noted that there is in general no reason for monetary compensations to primary dealers since they already possess some privileges with respect to public bond auction.
1999, 13
Collateral, default risk, and relationship lending : an empirical study on financial contracting
(2000)
This paper provides further insights into the nature of relationship lending by analyzing the link between relationship lending, borrower quality and collateral as a key variable in loan contract design. We used a unique data set based on the examination of credit files of five leading German banks, thus relying on information actually used in the process of bank credit decision-making and contract design. In particular, bank internal borrower ratings serve to evaluate borrower quality, and the bank's own assessment of its housebank status serves to identify information-intensive relationships. Additionally, we used data on workout activities for borrowers facing financial distress. We found no significant correlation between ex ante borrower quality and the incidence or degree of collateralization. Our results indicate that the use of collateral in loan contract design is mainly driven by aspects of relationship lending and renegotiations. We found that relationship lenders or housebanks do require more collateral from their debtors, thereby increasing the borrower's lock-in and strengthening the banks' bargaining power in future renegotiation situations. This result is strongly supported by our analysis of the correlation between ex post risk, collateral and relationship lending since housebanks do more frequently engage in workout activities for distressed borrowers, and collateralization increases workout probability. First version: March 12, 1999
1999, 04
Since 1990, a number of countries have adopted inflation targeting as their declared monetary strategy. Interpretations of the significance of this movement, however, have differed widely. To some, inflation targeting mandates the single-minded, rule-like pursuit of price stability without regard for other policy objectives; to others, inflation targeting represents nothing more than the latest version of cheap talk by central banks unable to sustain monetary commitments. Advocates of inflation targeting, including the adopting central banks themselves, have expressed the view that the efforts at transparency and communication in the inflation targeting framework grant the central bank greater short-run flexibility in pursuit of its long-run inflation goal. This paper assesses whether the talk that inflation targeting central banks engage in matters to central bank behavior, and which interpretation of the strategy is consistent with that assessment. We identify five distinct interpretations of inflation targeting, consistent with various strands of the current literature, and identify those interpretations as movements between various strategies in a conventional model of time-inconsistency in monetary policy. The empirical implications of these interpretations are then compared to the response of central banks to movements in inflation of three countries that adopted inflation targets in the early 1990s: The United Kingdom, Canada, and New Zealand. For all three, the evidence shows a break in the behavior of inflation consistent with a strengthened commitment to price stability. In no case, however, is there evidence that the strategy entails a single-minded pursuit of the inflation target. For the U.K., the results are consistent with the successful implementation the optimal state-contingent rule, thereby combining flexibility and credibility; similarly, New Zealand's improved inflation performance was achieved without a discernable increase in counter-inflationary conservatism. The results for Canada are less clear, perhaps reflecting the broader fiscal and international developments affecting the Canadian economy during this period.
1999, 06
As inflation rates in the United States decline, analysts are asking if there are economic reasons to hold the rates at levels above zero. Previous studies of whether inflation "greases the wheels" of the labor market ignore inflation's potential for disrupting wage patterns in the same market. This paper outlines an institutionally-based model of wage-setting that allows the benefits of inflation (downward wage flexibility) to be separated from disruptive uncertainty about inflation rate (undue variation in relative prices). Our estimates, using a unique 40-year panel of wage changes made by large mid-western employers, suggest that low rates of inflation do help the economy to adjust to changes in labor supply and demand. However, when inflation's disruptive effects are balanced against this benefit the labor market justification for pursuing a positive long-term inflation goal effectively disappears.
1999, 01
Credit Unions are cooperative financial institutions specializing in the basic financial needs of certain groups of consumers. A distinguishing feature of credit unions is the legal requirement that members share a common bond. This organizing principle recently became the focus of national attention as the Supreme Court and the U.S. Congress took opposite sides in a controversy regarding the number of common bonds that could co-exist within the membership of a single credit union. Despite its importance, little research has been done into how common bonds affect how credit unions actually operate. We frame the issues with a simple theoretical model of credit-union formation and consolidation. To provide intuition into the flexibility of multiple-group credit unions in serving members, we simulate the model and present some comparative-static results. We then apply a semi-parametric empirical model to a large dataset drawn from federally chartered occupational credit unions in 1996 to investigate the effects of common bonds. Our results suggest that credit unions with multiple common bonds have higher participation rates than credit unions that are otherwise similar but whose membership shares a single common bond.
1999, 17
This paper presents evidence that spillovers through shifts in bank lending can help explain the pattern of contagion. To test the role of bank lending in transmitting currency crises we examine a panel of data on capital flows to 30 emerging markets disaggregated by 11 banking centers. In addition we study a cross-section of emerging markets for which we construct a number of measures of competition for bank funds. For the Mexican and Asian crises, we find that the degree to which countries compete for funds from common bank lenders is a fairly robust predictor of both disaggregated bank flows and the incidence of a currency crisis. In the Russian crisis, the common bank lender helps to predict the incidence of contagion but there is also evidence of a generalized outflow from all emerging markets. We test extensively for robustness to sample, specification and definition of the common bank lender effect. Overall our findings suggest that spillovers through banking centers may be more important in explaining contagion than similarities in macro-economic fundamentals and even than trade linkage.
1999, 16
For some time now the buzzword 'transparency' has been bandied about in the media almost daily. For example, calls were made for greater transparency in the financial system in connection with developments in the Asian financial markets. But the call for greater transparency goes far beyond the financial markets. It is now regarded as a necessary part of "good governance" demanded of all economic policy makers. As the World Bank's chief economist Joseph Stiglitz put it: 'No one would dare say that they were against transparency (....): It would be like saying you were against motherhood or apple pie.' This paper focuses on transparency in monetary policy, in particular with respect to the European System of Central Bank.