Cross-selling,switching costs and imperfect competition in British banks

This paper attempts to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993–2008. It presents estimates of a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model indicates that the consumer faced high switching costs in the loan market in the latter part of the sample period, as a result of weaker competitiveness in the loan market. Additionally, the weaker competitiveness in the loan market appears to facilitate the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during the last two decades.     

Is Country Diversification better than Industry Diversification?

In this paper, we develop a framework in which one can examine the source of industry and country diversification by examining their underlying return components. We find that the global cash flow factor explains on average 39% of the variation of country cash flows and global discount rates explain 55% of the variation of country discount rates. These are much less than the explanatory power of the two factors over industry cash flow and discount rate variations, which are 72% and 78% respectively. This suggests that global factors are much less important for return components at country level than at the industry level. As a result, both better diversification of expected returns and cash flows across countries determine the larger benefits of country diversification versus industry diversification. Moreover, emerging markets tend to have much smaller co‐movements of both dividends and expected returns with those of the world, suggesting a lower degree of integration with the world goods and financial markets. Our results cast doubt on the prevailing wisdom that country diversification should be replaced by industry diversification.     

Moral Hazard in Reinsurance Markets

This article attempts to identify moral hazard in the traditional reinsurance market. We build a multiperiod principal–agent model of the reinsurance transaction from which we derive predictions on premium design, monitoring, loss control, and insurer risk retention. We then use panel data on U.S. property liability reinsurance to test the model. The empirical results are consistent with the model's predictions. In particular, we find evidence for the use of loss‐sensitive premiums when the insurer and reinsurer are not affiliates (i.e., not part of the same financial group), but little or no use of monitoring. In contrast, we find evidence for the extensive use of monitoring when the insurer and reinsurer are affiliates, where monitoring costs are lower.     

THE INTRADAY INTERDEPENDENCE STRUCTURE BETWEEN U.S. AND JAPANESE EQUITY MARKETS

Contrary to the efficient market hypothesis, previous research documents a significant correlation between lagged U.S. close-to-close stock market returns and current open-to-close Japanese equity market returns. We find that the significant correlation is limited to the first hour of Japanese trading, with subsequent hourly returns independent of lagged U.S. returns. This evidence suggests that the documented significant correlation is attributable to a sticky Japanese opening value associated with the use of nonsynchronous index data.     

The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes

When the exchange rate is flexible, and thus responds to market forces, it provides agents with useful information, while when it is fixed (by a feedback rule) it does not. The implications of this asymmetry for the stability of real output under the two regimes is discussed. It is shown that whenever shocks are predominantly of one variety, or when domestic monetary shocks accompanied by one real shock, a flexible exchange rate does a better job of stabilizing real output than does a fixed exchange rate. These results undermine arguments favoring fixed exchange rates because they ‘discipline’ monetary policy. In addition, it is demonstrated that managed floating rules and exchange rate feedback rules are irrelevant for the distribution of real output.