Carbon Financial Instruments, thin trading, and volatility: Evidence from the Chicago Climate Exchange

We provide the first econometric investigation of volatility dynamics for the Carbon Financial Instrument (CFI) traded on the Chicago Climate Exchange (CCX). A CFI is a financial contract with the right to emit 100 metric tons of CO₂ equivalent. In this study, we present evidence of infrequent trading in the CCX, consistent with emerging markets that are inhabited by non-competitive agents trading permits. We explore the relationship between the observed thin trading effects and GARCH model testing and estimation, concluding with some implications for volatility-based Value-at-Risk forecasts. Our results are important for traders of Carbon Financial Instruments and for policy makers seeking to improve the design of the Chicago Climate Exchange.     

Trade credit versus bank credit: Evidence from corporate inventory financing

In this study, I introduce capital market imperfections into a structure framework of inventory investments and investigate impacts of trade credit on firms’ inventory dynamics and analyze the relationship between trade credit and bank loans. As a result, firms end up using a mix of trade credit and bank loans. I find that the use of trade credit and bank credit can be either complements or substitutes. During tight monetary periods, trade credit operates mainly as a substitute for bank borrowing while during looser monetary episodes even when the economy is weak, trade credit and bank loans are dominated by a complementary effect.     

Technology and endowments as determinants of comparative advantage: Evidence from Mexico

We analyze whether the pattern of Mexico's comparative advantages in manufacturing trade flows, vis-à-vis its closest competitors, are related with productivity differentials (Ricardian hypothesis) or with differences in factor endowments (Heckscher–Ohlin hypothesis). The results suggest that Heckscher–Ohlin determinants tend to be more relevant than labor productivity differentials to explain the differences in the export patterns between Mexico and its competitors. This result holds even when we restrict the analysis to Mexico and other countries with relatively small differences in factor endowments, although in this case Ricardian comparative advantages gain some relevance.     

Emerging market mutual fund performance: Evidence for Poland

This paper provides evidence on the performance of mutual funds in a prominent emerging market; Poland. Studying an emerging market provides an excellent opportunity to test whether the consensus on the inability of mutual funds in developed and highly efficient markets to beat the market, also holds in less efficient markets. While the weaknesses of legal institutions and underdeveloped capital markets in emerging countries could negatively contribute to performance, a certain level of market inefficiency might also enable fund managers to successfully apply security selection and therefore beat the market. This paper presents an overview of the Polish mutual fund industry and investigates mutual fund performance using a survivorship bias controlled sample of 140 funds. The latter is done using the Carhart (1997) 4-factor asset-pricing model. In addition, we investigate whether Polish fund managers exhibit “hot hands”, persistence in performance. Finally the influence of fund characteristics on risk-adjusted performance is considered. Our overall results suggest that Polish mutual funds on average are not able to add value, as indicated by their negative net alphas. Interestingly, domestic funds outperform internationally investing funds, which points at informational advantages of local over foreign investors. Finally, we detect strong persistence in mean returns up to 1 year. It is striking that “winning” funds are able to significantly beat the market, based on their significantly positive alpha's. These results deviate from studies on developed markets that conclude that even past winners are not able to significantly beat the market.     

Order aggressiveness, pre-trade transparency, and long memory in an order-driven market

Recent empirical research has documented that the state of the limit order book influences stock investors' strategies. Investors place more aggressive orders when the same side of the order book is thicker, and less aggressive orders when it is thinner. We conjecture and demonstrate that this behavior is related to long memories of trading volume, volatility, and order signs in stock markets. We investigate our conjecture in two types of artificial stock markets: a transparent market, in which agents observe all limit orders on both sides of the book and order volumes at those prices before they trade; and a less transparent market, in which agents observe only the best five bid and ask quotes with the depth available at these limit prices. The first market structure resembles certain actual stock exchanges in the level of pre-trade transparency, such as the Australian Stock Exchange, NYSE OpenBook, and the London Stock Exchange, whereas the second market structure is consistent with stock exchanges such as Euronext Paris, the Toronto Stock Exchange, the Tokyo Stock Exchange, and Hong Kong Exchanges and Clearing. We demonstrate that our long memory results are robust with different levels of pre-trade transparency, implying that the strategy constructed by the state of the order book is key for explaining long memories in many actual stock exchanges.     

Asymmetric convergence in US financial credit default swap sector index markets

This study examines the asymmetric adjustments to the long-run equilibrium for credit default swap (CDS) sector indexes of three financial sectors – banking, financial services and insurance – in the presence of a threshold effect. The results of the momentum-threshold autoregression (M-TAR) models demonstrate that asymmetric cointegration exists for all pairs comprised of those three CDS indexes. The speeds of adjustment in the long-run are much higher in the case of adjustments from below the threshold than from above for all the pairs. The estimates of The MTAR-VEC models suggest that the dual CDS index return in each sector pair participates in the adjustment to equilibrium in the short- and long-run taken together. But in the long-run alone, only one of the two spreads in each pair participates. Policy implications are also provided.     

The effect of raising deposit insurance coverage in times of financial crisis – Evidence from Croatian microdata

Typically, depositors in transition countries react very sensitively to the safety of deposits. Faced with rising deposit outflows in October 2008, many transition countries were forced to extend the limits of deposit insurance coverage. Has this calmed private agents? Or has it caused more uncertainty? We analyze these questions by employing household survey data for Croatia from exactly the time deposit insurance was extended. First, we provide evidence how the financial crisis has affected trust in banks and trust in the local currency. Then, we show that the increase in deposit insurance coverage had an immediate and positive impact on how people perceived the safety of deposits and the credibility of the local currency. Therefore, our results suggest that this policy measure helped to prevent a more serious and dangerous meltdown of deposits and a further shift towards foreign currency denominated assets. However, despite this effect the perceived safety of deposits remained lower than it was before the financial crisis. We also consider this finding to be of relevance for other countries of Central, Eastern and Southeastern Europe.     

Curbing cream-skimming: Evidence on enrolment incentives

Using data from a large, U.S. federal job training program, we investigate whether enrolment incentives that exogenously vary the ‘shadow prices’ for serving different demographic subgroups of clients influence case workers' intake decisions. We show that case workers enroll more clients from subgroups whose shadow prices increase but select at the margin weaker-performing members from those subgroups. We conclude that enrolment incentives curb cream-skimming across subgroups leaving a residual potential for cream-skimming within a subgroup.     

Functional data analysis for volatility

We introduce a functional volatility process for modeling volatility trajectories for high frequency observations in financial markets and describe functional representations and data-based recovery of the process from repeated observations. A study of its asymptotic properties, as the frequency of observed trades increases, is complemented by simulations and an application to the analysis of intra-day volatility patterns of the S&P 500 index. The proposed volatility model is found to be useful to identify recurring patterns of volatility and for successful prediction of future volatility, through the application of functional regression and prediction techniques.     

Should the government directly intervene in stock market during a crisis?

Unlike foreign exchange markets where central banks frequently intervene, the governments strive not to intervene in the stock markets since intervention transmit negative signals and carry market-related side effects. The main reasons often cited in support of intervention are to bring price stability and to restore investors’ confidence. During the recent economic turmoil, opportunities for the governments to intervene in the stock markets were mainly exploited in emerging and developing countries. We study the outcome of the Russian government's intervention in its major stock market between September and October 2008. This intervention was intended to reverse the sudden and swift declining trend in traded security prices by altering the market's expectations. By using a combination of event study and a multivariate GARCH model, our findings does not support direct government intervention in the stock market during a crisis.     

Financial reforms and money demand: Evidence from 20 developing countries

The effects of financial reforms on money demand (M1) are analysed with estimates for two sets of sub-samples and two break dates for twenty developing Asian and African countries. In all cases, the magnitude of income elasticity does not change significantly when compared with sub-samples and whole sample periods. Using CUSUM and CUSUMSQ tests, we find that the demand for money functions in our selected countries are temporally stable and therefore the respective monetary authorities may target money supply as the conduct of monetary policy.     

Unemployment risk, house price risk and the transition into home ownership in the United Kingdom

Using household panel data, this paper examines the impact of income uncertainty, in the form of unemployment risk, on home ownership in the United Kingdom. The existing literature based on cross-sectional studies finds a negative relationship between income uncertainty and home ownership. This paper utilises data on transitions into home ownership and exogenous variation in unemployment risk, avoiding the endogeneity of employment to home ownership status. It also conditions the empirical estimates on a measure of house price volatility utilising a local-level house price index to control house price risk, which might also discourage home ownership. Results show a strong role for unemployment risk in lowering the likelihood of house purchase, but no statistically significant role for house price risk.     

A sight for sore eyes: Assessing the value of view and land use in the housing market

We apply a hedonic model to the Geneva–Switzerland rental market to assess the value of view from dwellings and of land uses around buildings. Using a geographic information system, we calculate three-dimensional view variables, accessibility and land use variables. To our knowledge, this is the first paper to develop precise view measures at the dwelling level, considering surrounding land uses, in an urban context and with a large sample of 13,000 observations. The results show that view of various environmental amenities and its size has a significant impact on rents. The estimated rent premium for a dwelling located in a neighbourhood with an extended surface of water can be as high as 3%, and a view of water-covered area can raise rent up to 57%.     

Regulatory risk, market uncertainties, and firm financing choices: Evidence from U.S. Electricity Market Restructuring

Based on the universe of rate-regulated electric utilities in the U.S., we examine why firms alter their financing decisions when transitioning from a regulated to a competitive market regime. We find that the significant increase in regulatory risk after the passage of the Energy Policy Act, state-level restructuring legislations, and divestiture policies have reduced leverage by 15 percent. Policies that encouraged competition, and hence increased market uncertainty, lowered leverage by another 13 percent on average. The ability to exercise market power allowed some firms to counter this competitive threat. In aggregate, regulatory risk and market uncertainty variables reduce leverage between 24.6 and 26.7 percent. We also confirm findings in the literature that firms with higher profitability and higher asset growth have lower leverage, and those with more tangible assets are more levered. Firms with greater access to internal capital markets and those with a footloose customer segment use less debt, while those actively involved in trading power in the wholesale market use more debt.     

Arbitrage, equilibrium, and gains from trade: A counterexample

We present a counterexample to a theorem due to Chichilnisky (Bulletin of the American Mathematical Society, 1993, 29, 189–207; American Economic Review, 1994, 84, 427–434). Chichilnisky's theorem states that her condition of limited arbitrage is necessary and sufficient for the existence of an equilibrium in an economy with unbounded short sales. Our counterexample shows that the condition defined by Chichilnisky is not sufficient for existence of equilibrium. We also discuss difficulties in Chichilnisky (Economic Theory, 1995, 5, 79–107).     

Social Security and elderly labor supply: Evidence from the Health and Retirement Study

This study uses panel data from the Health and Retirement Study (HRS) to estimate the effects of Social Security income on elderly labor supply in the 1990s and early 2000s. The identification strategy takes advantage of the 1977 amendments to the Social Security Act, which led to a large, unanticipated reduction in Social Security benefits for those born after January 1, 1917. Despite the advanced age of the notch cohorts, there is a significant, negative and surprisingly elastic relationship between Social Security income and hours of work. This suggests that currently proposed reductions in benefits would induce Social Security recipients to work more hours in retirement, even through their 70s and early 80s.