Portfolio choice with high frequency data: CRRA preferences and the liquidity effect

This paper suggests a new approach for portfolio choice. In this framework, the investor, with CRRA preferences, has two objectives: the maximization of the expected utility and the minimization of the portfolio expected illiquidity. The CRRA utility is measured using the portfolio realized volatility, realized skewness and realized kurtosis, while the portfolio illiquidity is measured using the well-known Amihud illiquidity ratio. Therefore, the investor is able to make her choices directly in the expected utility/liquidity (EU/L) bi-dimensional space. We conduct an empirical analysis in a set of fourteen stocks of the CAC 40 stock market index, using high frequency data for the time span from January 1999 to December 2005 (seven years). The robustness of the proposed model is checked according to the out-of-sample performance of different EU/L portfolios relative to the minimum variance and equally weighted portfolios. For different risk aversion levels, the EU/L portfolios are quite competitive and in several cases consistently outperform those benchmarks, in terms of utility, liquidity and certainty equivalent.     

Financial constraints and firm post-entry performance

Firms finance production by internally generated funds and external loans. The benefits of leverage, however, come with a cost. This cost is related to the uncertainty banks face about the firm's quality and output price. As time evolves banks learn about the firm and adjust the terms of the loan contract. Because of this, firms do not have equal access to credit: small, young firms face greater binding debt constraints than more mature firms with well-known prospects. The firm survival rate, as well as the firm rate of growth, are, therefore, important issues in analyzing firm post-entry performance.     

Defaults in bank loans to SMEs during the financial crisis

We investigate the role of (business) collateral and (personal) guarantees alongside small and medium enterprise (SME), lending bank and loan characteristics, macroeconomic conditions, sectors, and geographic locations while controlling for unobserved time effects in predicting default at the peak of the financial crisis. First, we find a positive relation between collateral and default, and a negative relation between guarantees and default. Second, we find a negative relation between the joint influence of collateral and high credit score, and a positive relation between the joint influence of collateral and low credit score and default. We also find a negative relation between the joint influence of guarantees and high credit score. These findings are relevant for SME policies aimed at facilitating access to credit, reducing the cost of borrowing, and decreasing default; risk management of banks; and the application of theories of financial economics in the context of a financial crisis.     

The economy of Portugal and the European Union: From high growth prospects to the debt crisis

This paper documents some of the recent economic history of Portugal, since its accession to the EEC, to the adoption of the Euro and more recently to the financial and economic crisis. In the first part of the paper we show the economic performance of Portugal during the last 25 years till now, from the fast growth of the late 1980s and early 1990s to the current recession. We point out some of the reasons for this trajectory – slow productivity growth, disconnection between productivity and wages, continued external and public deficits – and choose three areas that must be improved in order to reverse the current downward spiral – justice needs to be more effective and faster, education needs to improve its quality and distribution across the population, and the public administration must become more efficient.     

The dynamic effects of shocks to wages and prices in the United States and the Euro Area

This article investigates the dynamics of aggregate wages and prices in the United States (US) and the Euro Area (EA) with a special focus on persistence of real wages, wage and price inflation. The analysis is conducted within a structural vector error-correction model, where the structural shocks are identified using the long-run properties of the theoretical model, as well as the cointegrating properties of the estimated system. Overall, in the long run, wage and price inflation emerge as more persistent in the EA than in the US in the face of import price, unemployment, or permanent technology shocks. This finding is robust to the changes in the sample period and in the models’ specifications entertained in the article.     

Looking backward to look forward: water use and economic growth from a long-term perspective

Recent research has examined the relationship between natural resources and economic growth. Considered vitally important, not only for humanity’s well-being but also for the integrity of the ecosystem, the relationship between water use and economic growth has nevertheless traditionally attracted little attention by analysts. This article studies water use trends from 1900 to 2000 throughout the world and their relationship to the main determinants of economic growth. To do this, we first analyse water use trajectories. Second, to proceed with the determinants of water use, we reformulate the Ehrlich and Holdren’s impact, population, affluence, technology (IPAT) equation (1971), decomposing water use trends into changes in economic demands and in water use intensity on the basis of a decomposition analysis. Finally, a simple scenario analysis is conducted, to project future water use trends under different economic, demographic and technological assumptions.

?The empirical evidence shows that economic and population growth have been crucial in explaining the increase in water use over the past 100 years, with significant regional differences. Nevertheless, the decline in water use intensity has been responsible for a significant reduction in the growth of total water use.     

Why is PIN priced?

Recent empirical work suggests that a proxy for the probability of informed trading (PIN) is an important determinant of the cross-section of average returns. This paper examines whether PIN is priced because of information asymmetry or because of other liquidity effects that are unrelated to information asymmetry. Our starting point is a model that decomposes PIN into two components, one related to asymmetric information and one related to illiquidity. In a two-pass Fama-MacBeth [1973. Risk, return, and equilibrium: empirical tests. Journal of Political Economy 81, 607–636] regression, we show that the PIN component related to asymmetric information is not priced, while the PIN component related to illiquidity is priced. We conclude, therefore, that liquidity effects unrelated to information asymmetry explain the relation between PIN and the cross-section of expected returns.     

Residential Mortgage Credit Derivatives

As the fallout from subprime losses clearly demonstrates, the credit risk in residential mortgages is large and economically significant. To manage this risk, this article proposes the creation of derivative instruments based on the credit losses of a reference mortgage pool. We argue that these derivatives would enable banks to retain whole loans while also enjoying the capital benefits of hedging the credit risk in their mortgage portfolios. In comparisons of hedging effectiveness, the analysis shows that instruments based on credit losses outperform contracts based on house price appreciation.     

The Economic Impacts of Newly Irrigated Areas in the Ebro Valley

This paper uses regional input-output tables to analyse the long-term impact resulting from the implementation of the newly irrigated areas provided for under the terms of the Ebro Basin Hydrological Plan. We have described the whole process by way of two consecutive stages. In the first, where the final demand is fixed, we use a demand-driven input-output model and we incorporate technical change through the reduction of the coefficients. In the second, the output of all sectors increases, with the increases in the vector of output being proportional to the forward linkages vector of the Agriculture sector. In this stage, our objective is to obtain a final demand vector that ensures that the agricultural value added increases to a prescribed value of v 1 *. Whilst the results demonstrate the positive effects of the transformation, they also reveal effects of a very different character in each sector. Thus, the Agriculture, Livestock and Agri-food industry sectors show significant increases in their gross outputs caused by the forward effects, whilst the Energy, Metal and Chemicals sectors reduce their outputs. These results shed light on the contradictory nature of the processes of development and technical change.