Does illiquidity matter in residential properties?

No, it does not, despite the general perception that illiquidity matters in real estate. As expected, our evidence shows that the illiquidity costs for the U.S. residential properties are large. The costs are equivalent to 12% of the total property returns on average, ranging from 9.5% to 29.5% of property prices depending on the illiquidity level and market conditions. However, when amortized by holding periods, monthly illiquidity costs are on average 0.08%, and illiquidity risk does not appear to be priced in residential properties; illiquid properties do not show higher returns than liquid properties. On the contrary, we find evidence of flight-to-quality in bull markets, that is, high-quality illiquid properties are preferred to low-quality liquid properties in buoyant markets. These results are in sharp contrast with those in equities and bonds where flight-to-liquidity has been reported when markets are in stress.     

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.     

Opening up for foreign banks: How Central and Eastern Europe can benefit1

This paper analyses the role of foreign banks in the Czech Republic, Estonia, Hungary, and Poland. With respect to their planned EU membership, these countries have to consider the full implementation of free trade in financial services. Generally, liberalizing the market access of foreign banks allows the production of financial services according to comparative advantage, it fosters competition, it promotes bank privatization, and it facilitates a transfer of know-how into the emerging financial systems. The most important sequencing issue that arises is that the incumbent banks should have been recapitalized for their truly inherited bad loans before markets are opened up. In view of the reform progress that has already been made in the countries under review, abolishing remaining entry barriers is unlikely to put the stability of banking systems at risk while allowing the benefits of open markets to be exploited.     

A novel measure of liquidity premium: application to the Korean stock market

This study proposes a novel measure for an asset’s liquidity premium. Applying Brownian first-passage time distribution properties, we derive an explicit form of liquidity premium embedded in the asset price. Our liquidity premium measure is intuitive because it assesses the extent to which the value of the asset should be increased from the current market price if investors were allowed to retain the asset until they achieve an investment goal. This measure is readily available for assessing an asset’s liquidity because it does not require information on the asset’s transactional characteristics. Our empirical experiment using Korean stock market data suggests that the liquidity premium in this study is inversely related to Amihud’s (2002) illiquidity ratio, which is commonly used to measure stocks’ illiquidity.     

A new approach to measuring competition in the loan markets of the euro area

This article is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Our findings indicate that over the period 1994–2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive.     

Hot air for sale: a quantitative assessment of Russia’s near-term climate policy options

Since January 2005 the European Union has launched an EU-internal emissions trading scheme (EU ETS) for emission-intensive installations as the central pillar to comply with the Kyoto Protocol. The EU ETS will be linked to a Kyoto emissions market where greenhouse gas emission allowances of signatory Kyoto countries can be traded. In this paper we investigate the implications of Russian market power for environmental effectiveness and regional compliance costs to the Kyoto Protocol taking into account potential linkages between the Kyoto emissions market and the EU ETS. We find that Russia may have incentives to join the EU ETS as long as the latter remains relatively separated from the Kyoto international emissions market. In this case, Russia can exert monopolistic price discrimination between two separated markets thereby maximizing revenues from hot air sales. The EU will be able to substantially reduce compliance costs if it does not restrain itself to EU-internal emission regulation schemes. However, part of the gains from extra-EU emissions trading will come at the expense of environmental effectiveness as (more) hot air will be drawn in.      

银行间和交易所债券市场信息溢出效应研究

本文采用VAR模型研究了我国交易所和银行间国债市场的信息溢出效应。笔者提出以往文献对两个国债市场信息溢出的结论过于简单化,实证验证了两个市场信息溢出时既具有差异性又具有同质性,哪种性质占主导取决于新信息的来源。笔者发现当新信息来源于国债市场内部,两个国债市场会表现出差异性,溢出效应为负向,即银行间国债市场的上升预示着交易所国债市场的下降。当信息来源于国债市场外部,两个国债市场之间则先表现出同质性,溢出效应为正向;随后差异性占主导,两个国债市场之间发生信息负向溢出或资本的流动。     

EU Emission Allowances and the stock market: Evidence from the electricity industry

This paper constitutes - to our best knowledge - the first econometric analysis on stock market effects of the EU Emission Trading Scheme (EU ETS). Our results suggest that EU Emission Allowance (EUA) price developments matter to the stock performance of electricity firms: EUA price changes and stock returns of the most important European electricity corporations are shown to be positively related. This effect does not work asymmetrically, so that stock markets do not seem to react differently to EUA appreciations in comparison to depreciations. The carbon market effect is shown to be both time- and country-specific: It is particularly strong for the period of EUA market shock in early 2006, and differs with respect to the countries where the electricity corporations analysed are headquartered. Stock market reactions to EUA volatility could not be shown.     

Labour market implications of EU product market integration

European labour markets are in a state of flux due to the changing market situation induced by international integration. This process affects wage formation through more fierce product market competition and increased mobility of jobs. This development is by some observers taken to enforce labour market flexibility, while for others it signals an erosion of social standards and in turn possibly the welfare society. Since labour is not very mobile in Europe, the effects of international integration on labour markets are mostly indirect via product market integration. We review the channels through which product market integration affects labour markets and perform an empirical analysis of the convergence and interdependencies in wage formation among EU countries. We find that integration is changing labour market structures and inducing wage convergences as well as stronger wage interdependencies, but it is a gradual process. Moreover, the present study does not support the view that international integration will lead to a 'race to the bottom' and rapidly erode domestic labour markets standards, nor that it will relieve politicians of the need to consider labour market reforms to improve labour market performance.     

Patterns of Corporate Financing and Financial System Convergence in Europe

The paper investigates the possibility of convergence in the European Union (EU) in terms of the patterns of corporate financing by banks, bond markets, and stock markets; and in the context of whether the economies are converging towards an Anglo‐Saxon (capital‐market‐oriented) or a continental (bank‐oriented) financial system. GMM estimation of a dynamic fixed‐effects model is implemented to test for conditional and unconditional convergence using a panel of flow of funds data for the period 1972–1996 for seven EU member countries. It is found that the pattern of corporate financing is consistent with the pecking order theory of financing choices. Overall, the evidence suggests convergence of the EU financial systems on a variant of the Anglo‐Saxon model, depicting heavy reliance on internal financing as well as direct financing via equity and bond markets, while bank debt is becoming relatively less important.     

Kosovo – EU trade relations: a dynamic panel poisson approach

To inform policymaking following trade liberalization between Kosovo and the EU within the framework of the Stabilisation and Association Agreement (SAA), we specify a gravity model to investigate Kosovo’s trade in goods with 28 EU countries over the period 2005–2013. We reconcile competing methodological requirements by using a dynamic Poisson approach to estimation. Together, persistent trade patterns and an unfavourable combination of demand and supply elasticities suggest that trade liberalization in isolation is not sufficient to promote exports but may need to be incorporated within a wider policy and institutional framework. In addition, our findings suggest that trade costs should be a particular focus for policy: distance has a big negative influence on Kosovo’s exports to EU countries; while diaspora communities promote Kosovo’s exports to EU markets, most likely because they offset trade costs.     

International emission permit markets with refunding

We propose a blueprint for an international emission permit market such as the EU trading scheme. Each country decides on the amount of permits it wants to offer. A fraction of these permits is freely allocated, the remainder is auctioned. Revenues from the auction are collected in a global fund and reimbursed to member countries in fixed proportions. We show that international permit markets with refunding lead to outcomes in which all countries tighten the issuance of permits and are better off compared to standard international permit markets. If the share of freely allocated permits is sufficiently small, we obtain approximately socially optimal emission reductions.     

Foreign News and Spillovers in Emerging European Stock Markets

We analyze foreign news and spillovers in the emerging EU stock markets (the Czech Republic, Hungary, and Poland). We employ high‐frequency five‐minute intraday data on stock market index returns and four classes of EU and US macroeconomic announcements during 2004–07. We account for the difference of each announcement from its market expectation and we jointly model the volatility of the returns accounting for intraday movements and day‐of‐the‐week effects. Our findings show that intraday interactions on the new EU markets are strongly determined by mature stock markets as well as the macroeconomic news originating thereby. We show that strong contemporaneous links across markets are present even after controlling for macroeconomic announcements. Finally, in terms of specific announcements, we are able to show the exact sources of macro news spillovers from the developed foreign markets to the three new EU markets under research.     

The impact of product market regulation on productivity through firm churning: Evidence from European countries

Productivity performance in European countries has been a policy concern for several decades. This paper shows that productivity can be enhanced by product market policies which, by increasing competition and efficiency, facilitate higher rates of firms’ entry and exit (i.e. firm churning). Drawing on annual country-sector data for the period 2000–2014 across the EU countries, we find that: (i) competition-enhancing regulation is associated with a higher rate of firm churning; (ii) firm churning, in turn, appears to be positively related to higher total factor productivity at the sector level by facilitating the entry of new competitive firms and the exit of less productive ones. Overall, we conclude that stringent product market regulation can be indirectly associated, via its impact on business dynamism, with the somewhat weak productivity performance in a number of EU countries. Thus, our results point towards substantial productivity gains that could follow from the introduction of further competition-enhancing measures in product markets.     

Growth,unemployment and labour market institutions: evidence from a cross-section of EU regions

The responsiveness of unemployment to growth is an issue of ongoing political and academic interest. Economic growth is supposed to be the key to increase labour demand and reduce unemployment. Departing from Okun's law, most research on the unemployment intensity of growth has focused on national disparities and the role of labour market institutions. Empirical evidence at the regional level is scarce. We investigate differences in regional labour market responsiveness and their potential determinants for a cross section of European regions. The data set covers the NUTS 2 regions in the EU15 for the period 1980 to 2002. Following a spatial modelling approach interaction among neighbouring labour markets is taken into account. Our findings point to substantial differences in labour market effects of output growth among European countries and regions. Both national labour market institutions and regional characteristics, such as structural change explain a significant part of these disparities.     

The effect of immigration on unemployment in Europe: Does the core-periphery dualism matter?

The migrant crisis is one of the most challenging tasks the EU has ever faced. This paper uses a Panel Error Correction Model to assess the direction of the impact of immigration on domestic unemployment, in the short and in the long run, for a sample of 15 EU countries between 1997 and 2016. We test for different effects in core and periphery countries based on differences in macroeconomic fundamentals and labor market characteristics. In the long run, immigration is found to reduce unemployment in peripheral countries only, whereas in the short run, we find that immigration reduces unemployment for the whole sample. However, country-specific coefficients based on interactions with labour market characteristics indicate that short-run impacts are larger in Scandinavian and Anglo-Saxon countries. Conversely, Italy, Greece and Portugal show the smallest impacts. Our results suggest that negative sentiments toward immigration due to labour market competition are mostly unjustified.     

A first look at Brexit and global equity markets

Global equity markets fell by nearly 5% overall on 24 June 2016 following news of the Brexit referendum result. Although nearly all EU stock market indices experienced additional significantly negative abnormal returns, especially poor performance was registered by the debt-ridden PIIGS group (Portugal, Ireland, Italy, Greece and Spain). In this article, we identify a systematic tendency for more severe stock market responses to be concentrated amongst countries with higher debt to GDP ratios. This effect endures even after controlling for the degree of openness, EU membership and for being part of the PIIGS group.     

FDI into transition economies

The article explores the determination of foreign direct investment (FDI) into the Balkan transition economies – Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Montenegro, Romania and Serbia. Detailed FDI inflows to Southeast Europe are analysed to determine the main differences in the volume, timing and sectoral structure of FDI within the region and in comparison to the Central East European countries. A gravity model for all transition economies during 1990–2011 is then estimated to assess whether the factors driving FDI to the Western Balkans are different. They are found to be so; even when the size of their economies, distance from the source economies, institutional quality and prospects of EU membership are taken into account, Western Balkans countries receive less FDI than other transition countries. These issues are of policy relevance for the Balkan economies and ought to contribute to the current debate on the ‘new growth model’.     

Pricing-to-Market Behavior: Japanese Exports to the US, Asia, and the EU

The paper examines the pricing-to-market (PTM) behavior of Japanese exporters in the US, Asian, and EU markets. Empirical evidence shows that PTM elasticity is highest to the US market. This matches the in-tuitive reasoning that the US market is more competitive than the EU and Asian markets for Japanese exporters. Furthermore, PTM elasticities estimated in this paper using expected exchange rates are positive but their amounts are smaller than PTM elasticities estimated by previous studies with actual exchange rates. The difference may be due to the fact that the invoice currency for most Japanese exports is the US dollar.     

Capital Market Openness and Output Volatility

In this paper, using data from 21 advanced and 81 developing countries during 1971–2010, we empirically examine the impact of capital market openness on output volatility. We find that opening of capital markets increases the output volatility of developing countries. Furthermore, we find that the main channel through which capital market openness increases volatility is currency and external‐debt crisis. Finally, we find that while Asian countries are less likely to experience a crisis, they become even more unstable than other developing countries once a crisis occurs. Our evidence strengthens the case for caution in developing countries' opening up of their capital markets.