Rural development and financial markets in Romania

In the transition from a centrally planned to a market-oriented economy, such as in Romania, the domestic financial market plays two important roles. First, the financial market itself must be fundamentally restructured. Second, its efficient functioning is a crucial precondition for economic transformation. In transition economies, however, financial market institutions tend to concentrate their services on urban or larger rural enterprises. So far, small rural enterprises, even those with profitable investment plans, often do not have access to the financial market. This paper briefly characterizes the key issues of agricultural production units and their institutional environment and analyzes the depth and the efficiency of rural finance and its effect on Romania's rural economic transformation. It concludes with policy and institutional recommendations to strengthen rural finance.     

Asymmetric information and survival in financial markets

Summary. In the evolutionary setting for a financial market developed by Blume and Easley (1992), we consider an infinitely repeated version of a model á la Grossman and Stiglitz (1980) with asymmetrically informed traders. Informed traders observe the realisation of a payoff relevant signal before making their portfolio decisions. Uninformed traders do not have direct access to this kind of information, but can partially infer it from market prices. As a counterpart for their privileged information, informed traders pay a per period cost. As a result, information acquisition triggers a trade-off in our setting. We prove that, so long as information is costly, uninformed traders survive.JEL Classification Numbers: D50, D82, G14.I am deeply indebted to Luca Anderlini for his helpful guidance. I also benefited from discussion with Larry Blume, David Easley, Jayasri Dutta, Thorsten Hens, Hamid Sabourian, Klaus Reiner Schenk-Hoppé and Hyun Song Shin. Useful comments came from an anonymous referee and participants to seminars in Barcelona, Bielefeld, Cambridge, Manchester, Oxford, Rotterdam, Venice, Zurich, to the PhD Awards Italian tour in Rome, Naples, Padova and Milan, and to ESEM99 and EEA99 in Santiago de Compostela.     

Modelling price pressure in financial markets

We present experimental evidence that, unlike traditional assumptions in economic theory, security prices do not respond to pressure from their own excess demand. Instead, prices respond to excess demand of all securities, despite the absence of a direct link between markets. We propose a model of price pressure that explains these findings. In our model, agents set order prices that reflect the marginal valuation of desired future holdings, called “aspiration levels.”In the short run, as agents encounter difficulties executing their orders, they scale back their aspiration levels. Marginal valuations, order prices, and hence, transaction prices change correspondingly. The resulting price adjustment process coincides with the Global Newton Method. The assumptions of the model as well as its empirical implications are fully borne out by the data. Our model thus provides an economic foundation for why markets appear to search for equilibrium according to Newton’s procedure.     

Incomplete financial markets and differential information

We provide a model of an incomplete markets economy where private restrictions on consumption are interpreted as lack of information. We prove existence of an equilibrium where agents are unable to infer any additional information from prices. When assets are nominal, these non-enlightening equilibrium prices result in a reduction of the degree of real indeterminacy.     

Credit layering in informal financial markets

Informal lenders with access to markets or capital often find it attractive to delegate loan provision to downstream lenders who have an information or enforcement advantage in dealing with particular borrowers. In this paper we examine the conditions under which such an arrangement is preferred by two informal lenders, a landlord and a merchant, who compete in loan provision to tenant farmers differentiated by wealth. We show that credit layering is preferred only when tenants are sufficiently poor. In this case, the trader lends to tenant farmers via a contract with their landlord. Otherwise, only the trader lends. As a consequence, a pattern of borrowing emerges in which relatively wealthy tenants borrow from merchants while poor tenants borrow mainly from their landlords. Interlinkage between land and credit thus arises only for a subset of tenants and purely as a consequence of credit layering. This pattern is shown to be supported empirically.     

Innovation,growth and financial markets

We review some of the literature at the intersection of innovation, financial markets, and economic growth. We explore two key questions: (i) How financial markets interact with innovation; (ii) what type of quality transformations are brought about by innovation. A special emphasis is given to questions that stem from the 2008 economic and financial crisis, and to subjects further developed in the articles collected in this issue.     

Imperfect competition in financial markets and capital structure

We consider a model of corporate finance with imperfectly competitive financial intermediaries. Firms can finance projects either via debt or via equity. Because of asymmetric information about firms’ growth opportunities, equity financing involves a dilution cost. Nevertheless, equity emerges in equilibrium whenever financial intermediaries have sufficient market power. In the latter case, best firms issue debt while the less profitable firms are equity-financed. We also show that strategic interaction between oligopolistic intermediaries results in multiple equilibria. If one intermediary chooses to buy more debt, the price of debt decreases, so the best equity-issuing firms switch from equity to debt financing. This in turn decreases average quality of equity-financed pool, so other intermediaries also shift towards more debt.     

Asymmetric correlations in gold and other financial markets

In this article, we implement a recently developed statistical method to test asymmetries in cross-asset correlations, focusing in particular on the gold market. Our empirical results provide evidence that gold exhibits asymmetric correlations with stocks and the U.S. dollar, but not with bonds. Furthermore, splitting the sample into three characteristic periods, we find that exceedance correlations exhibit substantial time variation even in similar market tensions for same pairs of assets. Our findings imply that investors and fund managers should take into account the asymmetric dependence structure, which depends on the upside or downside of the market.     

Pareto improving financial innovation in incomplete markets

Summary. In this paper we develop a differential technique for investigating the welfare effects of financial innovation in incomplete markets. Utilizing this technique, and after parametrizing the standard competitive, pure-exchange economy by both endowments and utility functions, we establish the following (weakly) generic property: Let S be the number of states, I be the number of assets and H be the number of households, and consider a particular financial equilibrium. Then, provided that the degree of market incompleteness is sufficiently larger than the extent of household heterogeneity, S−I≥2H−1 [resp. S−I≥H+1], there is an open set of single assets [resp. pairs of assets] whose introduction can make every household better off (and, symmetrically, an open set of single assets [resp. pairs of assets] whose introduction can make them all worse off ). We also devise a very simple nonparametric procedure for reducing extensive household heterogeneity to manageable size, a procedure which not only makes our restrictions on market incompleteness more palatable, but could also prove to be quite useful in other applications involving smooth analysis. Received: August 14, 1995; revised version: April 14, 1997     

Market crashes,speculation and learning in financial markets

A natural conjecture is that if agents’ beliefs are almost correct then equilibrium prices should be close to rational expectations prices. Sandroni (J Econ Theory 82:1–18, 1998) gives a counterexample in an economy with sunspots and complete markets. We extend Sandroni’s result by showing that the conjecture is generically true for economies with complete markets. We consider a standard General Equilibrium model with large but finite horizon and complete markets. We show that, for almost every such economy, if conditional beliefs eventually become correct along a path of events then equilibrium prices of assets traded along this path converge to rational expectations equilibria in the sup-norm. Moreover, we establish that, generically, there exist along any such path local diffeomorphisms between individual beliefs and equilibrium prices. I would like to thank C. Ewerhart and A. Kirman for their comments, as well as the seminar participants at the University of Minho, the General Equilibrium Workshop 2005 in Zurich, and the 15th Asian General Equilibrium Conference 2007 in Singapore. An anonymous referee also provided very valuable comments.     

Communication in financial markets with several informed traders

This paper investigates the incentives for informed traders in financial markets to reveal their information truthfully to the public. In the model, a subset of traders receive noisy signals about the value of a risky asset. The signals are composed of a directional component (“high” vs. “low”) as well as a precision component that represents the quality of the directional component. Between trading periods, the informed agents make public announcements to the uninformed traders. With a sufficiently large number of informed traders, an equilibrium exists in which the directional components are credibly revealed, but not the precision components. Even though the informed traders retain some of their rivate information, the post-communication estimate of the asset value converges in probability to the full-information estimate as the number of informed traders increases. The paper is based on a chapter of my Ph.D. thesis at the University of Western Ontario and was circulated previously under the title “Public Communication Devices in Financial Markets.” I thank my dissertation committee Arthur Robson, Hari Govindan, and Al Slivinski for their guidance and support. I also thank Murali Agastya, Roland Benabou, Philippe Grégoire, Rick Harbaugh, Mike Peters, an anonymous referee and an associate editor, and seminar participants at various universities and conferences at which this paper was presented.     

论我国资本市场的金融抑制和金融深化

自上世纪90年代开始,我国资本市场的发展已形成了初步的规模,但到目前为止依然存在着结构不合理,政策性因素明显的问题。资本市场的发展是分化金融风险的需要,是国有企业改革的需要,是国家宏观调控和产业结构升级的需要。但在发展中必须把握系统原则、渐进原则、开放原则和创新原则。     

Information aggregation in financial markets with career concerns

What are the equilibrium features of a dynamic financial market in which traders care about their reputation for ability? We modify a standard sequential trading model to include traders with career concerns. We show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. We characterize the most revealing equilibrium of this game and show that an increase in the strength of the traders' reputational concerns has a negative effect on the extent of information that can be revealed in equilibrium but a positive effect on market liquidity.     

LDC participation in international financial markets: Debt and reserves

This paper analyzes LDC borrowing and reserve-holding behavior as part of a general equilibrium portfolio problem. Estimates of LDC debt and reserve demand and credit supply suggest that debt, along with reserves, serves a transactions role. Another finding is that most LDC borrowers are credit constrained. An analysis of LDC export behavior suggests that defaults are likely to be independent, uncorrelated phenomena.     

New financial markets: who gains and who loses

Summary. We evaluate the effects of new financial markets in a two-period incomplete markets model with heterogenous agents. For analytical tractability, we focus on the special case where utility is exponential and risks are normally distributed. We provide a complete characterization of life-cycle consumption and portfolio choice. The effect of new financial markets on individual welfare equals the sum of what we call the portfolio effect and the price effect. The portfolio effect is proportional to the square of the difference between the average exposure to the new asset in the economy and an individual investors exposure adjusted for risk aversion. The portfolio effect is always positive and measures the improved ability of investors to transfer consumption across states. The price effect captures the effect on individual welfare of changes in asset prices. We show that new financial markets drive down the prices of all assets which raises the interest rate and thus affects the ability of investors to transfer consumption across time. The price effect is positive for net savers but can be negative for net borrowers. For net borrower households, the price effect can wipe out the portfolio effect and lead to welfare reductions.Received: 24 July 2003, Revised: 22 March 2004, JEL Classification Numbers: D31, D52, G11, G12.Paul Willen: Thanks to Viral Acharaya, Alberto Bisin, Steve Davis, John Geanakoplos and a thoughtful anonymous referee for helpful comments and suggestions. Thanks also to seminar audiences at Stanford, Berkeley and at the 2001 Stony Brook workshop on incomplete markets for comments and suggestions. I gratefully acknowledge research support from the Graduate School of Business at the University of Chicago.     

The tradeoff between risk sharing and information production in financial markets

The production of information in financial markets is limited by the extent of risk sharing. The wider a stock's investor base, the smaller the risk borne by each shareholder and the less valuable information. A firm which expands its investor base without raising capital affects its information environment through three channels: (i) it induces incumbent shareholders to reduce their research effort as a result of improved risk sharing, (ii) it attracts potentially informed investors, and (iii) it may modify the composition of the base in terms of risk tolerance or liquidity trading. Implications for individual firms and the market as a whole are derived.