Predatory cells and puzzling financial crises: Are toxic products good for the financial markets?

We advance the idea that the predator-prey dynamics that take place among key market agents play an important role in explaining financial crises. As such, we posit that financial markets evolve through fault lines involving toxic behaviors (such as deceit), toxic products (such as predatory mortgages) and inefficient regulations. We provide data to show that the puzzle of the lack of congruence between the market behaviors and what some economic models predict at times of financial crises may be the result of predator-prey interplays, and of so-called “predatory cells”, which are under the influence of financial accelerators.     

Are debt repayment incentives undermined by foreign aid?

This paper investigates the effects of inflows of foreign aid on the debt repayment behavior of developing countries. The paper first delineates the overall incentives to committing to timely debt repayment in a war of attrition-type model. A set of panel estimates including 93 developing countries shows that foreign aid is strongly negatively associated with repayment incentives. The findings pertain to both total debt service and service on publically guaranteed debt. A set of conditional estimates suggest that the main findings generalize to the majority of developing countries.     

Are all financial crises created equal? Wholesale funding and two financial crises

We use financial information on banks from Asia, Europe, North America and Oceania to examine the role of wholesale funding on the transmission of financial crises to bank lending, as well as to study the response of financial institutions in different regions during the crises. We consider the role of wholesale funding during the Global Financial Crisis (GFC) and Asian Financial Crisis (AFC). Our results suggest that during the GFC, wholesale funding dependence had a negative effect on loans growth across regions, but with substantial regional heterogeneity. The growth of loans from financial institutions in Asia and Europe was consistently sensitive to wholesale funding dependence. Although wholesale funding did not play a significant role in the transmission mechanism of the AFC, a subsample of financial institutions in Asia, who depended more heavily on wholesale funding, experienced a faster loan growth and may have been able to better withstand the crisis.     

Does financial intermediation matter for macroeconomic performance?

This paper investigates whether financial intermediary development influences macroeconomic technical efficiency on a sample of 47 countries, both developed and developing, over 1980–1995. We do so by applying Battese and Coelli (1995)'s method at the aggregate level. It is found that financial intermediary development, except financial depth, is on average associated with more efficiency. However we find strong evidence that this relationship is conditional on the level of economic development. The lower the economic development the weaker is the impact of financial development on efficiency. That impact can even become negative in the poorest countries.     

Are financial development and corruption control substitutes in promoting growth?

While financial development and corruption control have been studied extensively, their interaction has not. We develop a simple model in which low corruption and financial development both facilitate the undertaking of productive projects, but act as substitutes in doing so. The substitutability arises because corruption raises the need for liquidity and thus makes financial improvements more potent; conversely, financial underdevelopment makes corruption more onerous and thus raises the gains from reducing it. We test this substitutability by predicting growth, of countries and industries, using measures of financial development, lack of corruption, and a key interaction term. Both approaches point to positive effects from improving either factor, as well as to a substitutability between them. The growth gain associated with moving from the 25th to the 75th percentile in one factor is 0.63–1.68 percentage points higher if the second factor is at the 25th percentile rather than the 75th. The results show robustness to different measures of corruption and financial development and do not appear to be driven by outliers, omitted variables, or other theories of growth and convergence.     

The condition of the Turking class: Are online employers fair and honest?

Critics of online labor markets claim that employer abuses are endemic in these markets. Surveying a sample of workers, I find that, on average, workers perceive online employers to be slightly fairer and more honest than offline employers.     

Does international integration matter for financial development in Africa?

This article analyses the links between international financial and trade integration and financial development in sub-Saharan African (SSA) countries. It is based on a panel data set using methods that tackle slope heterogeneity, cross-sectional dependence and nonstationarity. The results do not point to a general direct robust link between trade and financial integration and financial development in SSA, once we control for other factors such as GDP per capita and inflation. The findings may be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision. We find some indication that financial integration is more important for financial development in countries with better institutional quality. Stronger scores in some measures of the quality of banking regulation and supervision are also linked to a positive association between integration and financial development in some of our results. Thus, African policy-makers should be cautious about expectations regarding immediate gains for financial development from greater international integration. Such gains are more likely to occur slowly and through indirect channels.     

Do mispricing and financial constraints matter for investment decisions?

This study investigates how mispricing and financing constraints affect ?rms’ future capital investments. We find that when the financing constraints are high, overpriced (underpriced) firms invest more (less) subsequently under previous non-optimal investments. The overpriced (underpriced) firms with precautionary motives invest significantly less subsequently when they are financially constrained. The overall evidence suggests that share mispricing, financial constraints and precautionary motives play a critical role that enables investors to less effectively monitor managers’ real decisions, thus limiting firms’ capital investments.     

Are Islamic finance innovations enough for investors to escape from a financial downturn? Further evidence from portfolio simulations

Does Islamic finance constitute a promising solution for the current global financial crisis and are Islamic financial innovations enough to reassure investors, stabilize financial systems and provide them with a means of escaping from financial downturns? This article addresses these questions while investigating the dynamics of Islamic and conventional stock prices over the last few years. In particular, we apply Multivariate Vector Autoregressive (VAR) tools to test the interaction between conventional and Islamic financial products, and implement the Granger causality test to specify the dependence orientation of feedback between Islamic and conventional stock prices. Our article differs from previous work on the topic in that it develops portfolio simulations to determine whether Islamic finance can supplant conventional finance by generating investment and diversification opportunities during periods of crisis. In addition, we develop optimal portfolio strategies and investment proportions for conventional and Islamic funds to ensure the best resource allocation. Our main findings are: (i) the impact of the current crisis on the Islamic finance industry is less marked than on conventional finance, (ii) investment in Islamic products generates high returns, (iii) portfolios that include Islamic products reduce systemic risk and generate significant diversification benefits, (iv) the US crisis has led to significant changes in resource allocation through changes in investment choices.     

How financial intermediation impacts on financial stability?

The great financial crisis widened the role of financial intermediation in financial stability. This study develops a new financial intermediation variable, credit cash flow (CCF), which enables measurement of the net financial flow resulting from loan activity. An analysis provides evidence that CCF affects the capital buffer via credit gap behaviour, thus indicating the existence of a channel between the CCF and the capital buffer. Such a link offers the policy-maker the possibility to monitor the behaviour of financial intermediation carried out by banks, in order to avoid the outbreak of financial instability events.     

Are the new rules relating to disclosures of derivative financial instruments workable?

Accounting for derivatives has created uncertainties for preparers, auditors, regulators, and users of financial statements alike. The complexity and variety of instruments as well as hedging and risk management techniques make derivatives reporting a difficult subject. Developing consistent accounting rules in this area is made even more challenging since derivatives are used in conjunction with assets and liabilities that, under the current accounting system, may be carried at historical cost, fair value, or some hybrid of fair value and historical cost. Further, derivatives are used in connection with portfolios of items as well as with economic assets and exposures that may not be recorded in financial statements under the current model.     

Do financial indicators have directional predictability for US home sales?

This study investigates the directional predictability of financial indicators for home sales across tranquil (1984–2005) and volatile (1972–1983 and 2006–2013) periods. We find that the mortgage rate has directional predictability for both existing and newly built home sales for up to 2005. The federal funds rate generally has directional predictability for existing (newly built) home sales in 1984–2005 (1972–1983). The term spread has directional predictability for home sales in 1972–1983 but generally not in the tranquil period of 1984–2005. Further, unlike mortgage and federal funds rates, the term spread has directional predictability for home sales in 2006–2013 and thus can help the Fed with useful information (assuming that this trend continues).     

Can fiscal rules improve financial market access for developing countries?

A number of countries have introduced fiscal rules to deter fiscal profligacy, enhance the credibility of fiscal policy, and reduce borrowing costs. In this paper, we examine the outcome of fiscal rules in terms of improving financial market access for developing countries. We use entropy balancing and various propensity score matching. We find that the adoption of fiscal rules reduces sovereign bond spreads and increases sovereign debt ratings for a sample of 36 developing countries, which are part of the JP Morgan Emerging Markets Bond Index Global (EMBIG), for the period 1993-2014. We explain this finding by the effect of fiscal rules on the credibility of a country's fiscal policy: more credible governments are rewarded in the international financial markets by low sovereign bond spreads and high sovereign debt ratings. These results are robust to a wide set of alternative specifications. We also show that this favorable effect is sensitive to several country structural characteristics. Our findings confirm that the adoption and sound implementation of fiscal rules is an instrument for policy makers to improve developing countries’ financial market access.     

Are financial returns really predictable out-of-sample?: Evidence from a new bootstrap test

Testing the out-of-sample return predictability is of great interest among academics. A wide range of studies have shown the predictability of stock returns, but fail to test the statistical significance of economic gains from the predictability. In this paper, we develop a new statistical test for the directional accuracy of stock returns. Monte Carlo experiments reveal that our bootstrap-based tests have more correct size and better power than the existing tests. We use the forecast combinations and find that the stock return predictability is statistically significant in terms of reduction of mean squared predictive error relative to the benchmark of historical average forecasts. However, the results from our tests show that the predictability is not economically significant. We conclude that there will be still a long way to go for forecasting stock returns for market participants.     

Agricultural landowners⿿ response to incentives for afforestation

Previous research has shown that afforestation of agricultural land is a relatively low-cost option compared to energy-based approaches for mitigating net carbon dioxide emissions, and that financial incentives affect landowner behavior and can be used to increase carbon sequestration on private land. In this paper we use stated preference data from private landowners in the Pacific Northwest region of the U.S. to examine the key factors affecting participation in an incentive program for carbon sequestration through afforestation. We also estimate the corresponding potential for carbon sequestration and its cost. Our results suggest that incentive payments would significantly and positively affect landowners⿿ level of enrollment in a tree planting program.