On the Effectiveness of the Federal Reserve's Margin Requirement

A portfolio-theoretic model of the optimal margin account is developed. It is argued that the Federal Reserve's goal in setting the margin requirement is to influence investor equity ratios. Using the average equity ratio as the dependent variable and the arguments of the model as independent variables, an empirical model is estimated. It is concluded that the margin requirement is an effective regulatory tool.     

Analysis of the seeds of the debt crisis in Europe

This paper presents an analysis of the seeds of the recent debt crisis that occurred in the Eurozone area using a variant of Fleming and Stein [2004. “Stochastic Optimal Control, International Finance and Debt.” Journal of Banking and Finance, 28: 979–996] model. This model has two risk drivers arising from uncertainties in the return on capital and the effective rate of return on net foreign assets. Given the risk drivers, we model the net worth value process of an economy under a stochastic setting and show that opening to the rest of the world by pursuing the growth maximizing leverage strategy is better than remaining closed, as that strategy enhances the growth of the net worth process. Second, we provide an extra condition to show when the excessive leverage poses a threat to the sustainable growth of an economy. In this way, we improve the model introduced by Fleming and Stein as a signal of possible debt crises. Finally, we conduct an econometric analysis for the group of countries considered under this study, and show that there is a long-run relationship between the capital stock and the total external debt justifying the use of the structural model we employ.     

Usefulness of the Information Contained in the Prediction Sample for the Spatial Error Model

A recent study proposed an estimation approach that uses data on the independent variables and location for the prediction sample, and suggested that it may improve estimation and prediction. This is an incomplete data approach following an iterative process along the lines of the EM algorithm. The present study compares this approach with a partial data approach that uses only data on the dependent and independent variables and location for the estimation sample. Our Monte Carlo experiments show that unless the estimation and prediction samples constitute the whole population and the data generating model is used as the data fitting model, the incomplete data approach is not guaranteed to be superior to the partial data approach.     

On the Interaction of Real and Financial Decisions of the Firm Under Uncertainty

This study analyzes the interaction between the optimal level of investment and debt financing. For this purpose, a model is structured in which a firm, facing an uncertain price, has to decide on its optimal level of investment and debt. The amount of investment sets a limit on output whose optimal level is determined after price is realized. The debt involved is risky (there exists a possibility of bankruptcy). The analysis proves that investment and its optimal financing have to be simultaneously determined and that a negative relationship exists between operating and financial leverage. We also demonstrate that as the tax rate increases, optimal capacity decreases and optimal leverage increases. An analysis of the impact of changes in the expected price shows that under some conditions, an increase in expected price would lead to an increase in optimal investment (firm size) and a decrease in optimal debt.     

On the bi-dimensionality of liquidity

Variations in overall liquidity can be measured by simultaneous changes in both immediacy costs and depth. Liquidity changes, however, are ambiguous whenever both liquidity dimensions do not reinforce each other. In this paper, ambiguity is characterized using an instantaneous time-varying elasticity concept. Several bi-dimensional liquidity measures that cope with the ambiguity problem are constructed. First, it is shown that bi-dimensional measures are superior since commonalities in overall liquidity cannot be fully explained by the common factors in one-dimensional proxies of liquidity. Second, it is shown that an infinitesimal variation in either market volatility or trading activity augments the probability of observing an unambiguous liquidity adjustment. Ambiguity strongly depends on the expected (deterministic) component of volatility.     

Corruption as an organizational process: Understanding the logic of the denormalization of corruption

This article discusses the basic assumptions of an individualist vision on corruption. A different argument based on “social density” of the phenomenon is proposed instead: the process of normalization of corruption. Under this umbrella, corruption is a political concept that looks to impose a particular vision on what are “right” behaviors based on a sharp and unrealistic separation of the public and private sphere. A review of the organizational literature on corruption is developed, with the aim of understanding how organizational processes of socialization triggers behaviors that make corrupt acts to appear as “normal” under the organizational logic. Persons find themselves in a “slippery slope”, generating agreements and social dynamics that are able to produce corrupt logics under the normal life of an organization. A plea for discussing the social processes needed to “un-normalize” corruption is defended a conceptualization that goes beyond an individualist and moralist vision of the phenomenon.     

Fixed costs and the behavior of the federal funds rate

This paper presents an equilibrium model of the federal funds market that ties movements in the funds rate to changes in the supply of reserves and to a fixed cost facing banks that borrow at the discount window. It is found that the existence of the fixed cost is capable of explaining a number of features of the funds market. In particular, it is critical for explaining occasional instances of extremely high funds rates. It also provides an explanation for heterogeneous behavior across banks towards the discount window and for higher average funds rates at the end of maintenance periods.     

Emptying the future: On the environmental politics of anticipation

Anticipation may be seen as structured by images and representations, an approach that has informed recent work in science and technology studies on the sociology of expectations. But anticipation, as a capacity or characteristic, is not solely manifested in the form of representations, even where such representations of the ‘not yet’ are performative in nature. It also comprises material capacities, technological, biophysical and affective in nature. The politics of anticipation is shaped by how these symbolic and material capacities, and the forms of agency they make possible, are distributed. As anticipation is an environmentally distributed capacity, it is suggested that the politics of anticipation is also an environmental politics. A conceptual framework for analysing anticipation as comprised of environmental capabilities is introduced, and fleshed out using a case study of energy infrastructure planning from the UK. Key elements of this framework include the concepts of anticipatory assemblages and future horizons or ‘styles’ of anticipation. Working through the case study as an empirical example of a conflict concerning the politics of anticipation and of ‘environments’, it is demonstrated how the relationships between styles of anticipation are materially constitutive of such conflicts.     

Case of the disputed dismissal

Managers in the United States, acting in anger, indignation, frustration, or even error, fire many capable employees every year. In some of these cases, the managers act unfairly. Perplexing questions arise when the story of an unjustified discharge catches the public's eye. Does an organization have an obligation to manage equitably as well as efficiently? It is conceivable that every man and woman has a right to a job, and, if so, is this right a factor that managers must weigh in deciding to lay off an employee who doesn't "fit in"? The employee in this case "Adrian Reese," is an outspoken health official who irritates the city manager and members of the "Marshall City" board of health. Like most HBR cases, this is based on a real situation. As the problem unfolds, readers may find the circumstances and the characters familiar. And yet they may be surprised at the outcome, as truth is stranger than fiction.     

双边税收协定与CFC税制关系探讨——兼谈《中华人民共和国企业所得税法》第58条

长期以来,双边税收协定与CFC税制关系问题存在争议。一般认为,受控外国公司税制作为一种重要的反避税措施,它与双边税收协定是兼容的。但是,从一些欧盟国家的实践来看,观点并非一致。由于《中华人民共和国企业所得税法》中规定了该项税制,因此,解决两者的兼容性也是将要面临的问题。在我国《宪法》没有对条约在国内法中地位进行规定之前,《中华人民共和国企业所得税法》第58条应予以完善。     

On the marketing of IPOs

Derrien [2005. Journal of Finance 60, 487–521] and Ljungqvist et al. [2006. Journal of Business] build upon the work of Miller [1977. Journal of Finance 32, 1151–1168] and claim that issuers and the regular customers of investment bankers benefit from the presence of sentiment investors (noise traders) in the market for an initial public offering (IPO). Thus we argue that investment bankers have an incentive to promote an IPO to induce sentiment investors into the market for it. Consistent with this motivation and these models, we expect that the promotional efforts of investment bankers should influence the compensation of investment bankers, the valuation of an IPO, its initial returns and trading, the wealth gains of insider shareholders, and the likelihood that an issuer switches investment bankers for a subsequent seasoned equity offering. Examining data for a sample of IPOs from 1993 through 2000, we find evidence consistent with these predictions and so with the proposition that an investment banker's ability to market an IPO to sentiment investors is important.     

Motives underlying the method of payment by UK acquirers: the influence of goodwill

The treatment of goodwill in the UK has been the subject of a recent contentious Financial Reporting Standard, FRS 10. It is shown that goodwill write-off considerations appear to have an influence on the form of payment used in the acquisition, and that this influence is associated with the relative portion of the acquirer's net worth which is available for write-offs and the ratio of goodwill to target asset value. These findings are robust to controlling for factors shown to have influenced the choice of acquisition financing by Martin (1996), and to additional controls for any over-valuation of equity. The result that the accounting treatment of goodwill is associated with the financing decision in an acquisition is one that may have important policy implications for UK accounting.     

On the accuracy of the local linear approximation for the term structure of interest rates

We examine by numerical experiments the accuracy of an analytical approximation for the nonlinear term structure of interest rates, which is obtained by applying the local linear approximation to a generally specified process of the short rate. Under various short-rate models, we compare discount-bond prices computed by the approximation with those calculated by the Monte Carlo method as the benchmark, which shows that deviations are small. Also in this paper, we show that the approximation originally derived in single-factor framework can be easily extended to a multifactor counterpart. We examine the accuracy using an illustrative two-factor model, which also shows the approximation is accurate.     

Standards for risk assessment of standards: how the international community is starting to address the risk of the wrong standards

Technical standards pervade commerce and society and allow the complexity of modern life to operate at all levels, global included. They also provide protection against many risks, whether from food, from dangerous products or from fraud. They are so self-evidently worthy that they are rarely challenged, yet anything as powerful and pervasive as the web of standards needs some element of oversight and quality assurance. There is a danger of over-regulating and the placing of unnecessary constraints on the market and, cumulatively, a constraint on liberties. Technical standards are derived from many sources and for many reasons. The oversight function may need to relate to these reasons, such as the World Trade Organisation controls on damage to trade through protectionist standards. A very common reason for standards is safety, which tends to be treated as an absolute, as an objective technical matter, and there is less oversight or quality assurance of standards set for safety reasons. But safety is a relative term and increases in safety will usually have costs. Judgement needs to be applied in a risk assessment but that raises institutional issues as to who is qualified to apply that judgement. There are also issues of the accountability of those who increase the safety ratchet, which are also related to the institutional issue. This paper explores a case study of one draft standard as an illustration of the need for oversight and then goes on to consider methods of managing the risks inherent in standardisation and technical regulation. It looks in particular at two recent initiatives from within the standards community itself. One is a broad-based proposal for the community to focus on risk management and the other is an instance where a technical regulator has commissioned and designed an impact assessment system in order to provide that quality assurance and accountability.     

Rethinking the role of NCBs in the EMU

Five years after the introduction of unified monetary policy in the EMU, some member countries are wondering whether they have ceded too much of their policy-making powers. The fact that National Central Banks no longer carry out sizable expansionary open market or foreign exchange market operations suggests that they face substantially reduced abilities to set economic policy.This paper demonstrates that, in fact, very little power has been yielded: on the fiscal front, the force of such policy initiatives is enhanced by the fixity of the exchange rate. On the monetary front, we show that there is an observational equivalence between all Central Bank actions under fixed exchange rates. This implies that the authorities retain the same amount of policy flexibility as before. So long as they use an alternative form of policy initiative, carrying out what previously would have been characterized as sterilized foreign exchange market operations, their ability to influence the macro performance of their economy is undiminished.     

A functional approach to the price impact of stock trades and the implied true price

We propose a functional approach to estimate the instantaneous price impact of a trade and to infer an implied true price. Our model expresses price impact as an S-shaped function of signed volume. It has two parameters, one for price impact and one for liquidity depth. The latter measures the differential impact of small and large trades. The price impact is instantaneous, that is, it occurs at the instant of trade execution. Our specification also permits the price impact of buys and sells to be asymmetric. We compute an implied true price from our model, and we find that it is closer than the quote midpoint to the unobservable true price. Our empirical analysis also shows that the effective spread, which is computed using the midpoint, has an upward bias, and that the implicit transaction costs may be lower than previous estimates.     

On the Optimality of Portfolio Insurance

This paper examines the optimality of an insurance strategy in which an investor buys a risky asset and a put on that asset. The put's striking price serves as the insurance level. In complete markets, it is highly unlikely that an investor would utilize such a strategy. However, in some types of less complete markets, an investor may wish to purchase a put on the risky asset. Given only a risky asset, a put, and noncontinuous trading, an investor would purchase a put as a way of introducing a risk-free asset into the portfolio. If, in addition, there is a risk-free asset and the investor's utility function displays constant proportional risk-aversion, then the investor would buy the risk-free asset directly and not buy a put. In sum, only under the most incomplete markets would an investor find an insurance strategy optimal.     

Matters of the athletic heart

Frequently an underwriter or medical director will question whether an increase in left ventricular mass represents pathologic left ventricular hypertrophy (LVH) or physiologic changes related to exercise. The LVH condition reflects end-organ damage related to abnormal hemodynamic stresses and confers an increased morbidity and mortality risk. When left ventricular mass is increased because of exercise, measured changes represent a normal, healthy cardiovascular system responding to the demands of that exercise. This article summarizes medical findings that distinguish pathologic LVH from an "athletic heart."     

On Testing the Assumptions of the Cash Recovery Rate Approach to the Estimation of Economic Performance

The first purpose of this paper is to investigate the necessary (as opposed to sufficient) assumptions underlying the CRR approach to the estimation of corporate economic performance. By so doing, the general circumstances in which an estimate of corporate economic performance based on CRRs will exactly equal a firm's IRR are identified. It is pointed out that these necessary assumptions are related to the concept of corporate economic performance being invoked (within the general idea that we are trying to estimate a firm's internal rate of return). Second, there is a drawing out of the empirical implications, as to the behaviour of corporate cash flows and CRRs, of the necessary assumptions for the CRR approach to produce an estimate of economic performance equal to a firm's IRR for each of these definitions of corporate economic performance. In particular, it is argued that these empirical implications depend upon the specific manner in which the CRR approach is applied in practice. A third purpose of the paper is to provide some empirical evidence as to whether an example of the practice of using the CRR approach employs data consistent with the necessary assumptions for this particular approach to be valid outlined in the paper. In fact, it turns out that this might not be the case. The evidence casts light on the extent to which CRR-based estimates of corporate economic performance are likely to be reasonable proxies of firms' IRRs.