The current account as a dynamic portfolio choice problem

The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into portfolio rebalancing and portfolio growth components, as highlighted by theoretical models. The empirical literature draws attention to the relative importance of portfolio rebalancing to explain fluctuations in capital flows, although they do not shed light on the mechanisms behind these rebalancing effects. In this paper, we provide empirical evidence of the importance of portfolio rebalancing driven by changes in investment opportunities for the dynamics of the current account. In particular, we evaluate the predictions of a partial-equilibrium model of the current account with dynamic portfolio choices, in which portfolio rebalancing is driven by changes in expected asset returns. Focusing on the dynamics of the current account between Japan and the US, we find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.     

The US 2000‐2002 market descent: How much longer and deeper?

Abstract

A remarkable similarity in the behaviour of the US S&P500 index from 1996 to August 2002 and of the Japanese Nikkei index from 1985 to 1992 (11 year shift) is presented, with particular emphasis on the structure of the bearish phases. Extending a previous analysis of Johansen and Sornette on the Nikkei index ‘antibubble’ based on a theory of cooperative herding and imitation working both in bullish as well as in bearish regimes, we demonstrate the existence of a clear signature of herding in the decay of the S&P500 index since August 2000 with high statistical significance, in the form of strong log‐periodic components. In the next two years, we predict an overall continuation of the bearish phase, punctuated by local rallies; we predict an overall increasing market until the end of the year 2002 or until the first quarter of 2003; we predict a severe following descent (with maybe one or two severe ups and downs in the middle) which stops during the first semester of 2004. Beyond this, we cannot be very certain due to the possible effect of additional nonlinear collective effects and of a real departure from the antibubble regime. The similarities between the two stock market indices may reflect deeper similarities between the fundamentals of the two economies which both went through over‐valuation with strong speculative phases preceding the transition to bearish phases characterized by a surprising number of bad surprises (bad loans for Japan and accounting frauds for the US) sapping investors’ confidence.     

Risk assessment and risk decision-making process related to hazardous installation in France

The chemical process industry gathers critical infrastructures since chemical plants represent for the society both an instrument to generate activity and benefits (production of goods, employment, services …), and an instrument that can harm people and the environment. This paper describes the risk assessment approach need in France for licensing hazardous installations, in particular those covered by the Seveso II Directive and the implication for land-use planning. The first part explains why the French risk assessment procedure is based on the quantitative evaluation of major accident scenarios with explicit criteria, and only on qualitative analysis of the risk reducing measures without explicit criteria. The second part shows some on-going evolutions in the risk assessment process in particular for the analysis of the safety barriers. In the third part, the authors share some thoughts on the risk decision-making process.     

The impact of development of customer online banking skills on customer adviser skills

The object of this article is the development of customer banking skills as a result of using online banking and its impact on the competence of customer advisers in face‐to‐face customer contacts. The main results show that online banking enables customers to develop a range of banking skills.     

Fixed-price equilibria in a two-country model of trade: Existence and comparative statics

The Barro-Grossman-Malinvaud model of fixed-price equilibrium is extended to a two-country model of trade with a fixed exchange rate. There are various possible types of fixed-price equilibria for the international economy, depending on the structure of rationing. The existence and uniqueness of one type of fixed-price equilibrium are proved. Indeed the extension of ‘the simple macroeconomic model’ to a two-country economy allows a new treatment of the problem of uniqueness of the type of fixed-price equilibrium. At last, some comparative statics results are derived. Among others the model allows to meet on new grounds (i.e., with some microfoundations) some well known results of the conventional Keynesian approach. But much more general results can be derived, applying to a class of market states not already dealt with in international-trade theory.     

The Cost Factor in Patent Systems

The objective of this paper is to assess to what extent the cost of patenting affects the demand for patents. The empirical analysis, which focuses on the patent systems of the USA, Japan, and Europe in 2003, leads to the following methodological and empirical conclusions: (1) for a proper international comparison, the size of the market and the average number of claims included in a patent must be accounted for; (2) when the cost per claim per capita (the 3C-index) is considered, a negative linear relationship appears between the cost of patenting and the number of claims that are filed; (3) after the grant of a patent by the EPO, the translation, validation and transaction costs induced by an effective protection in several European countries witness a highly fragmented and very expensive European market for intellectual property; (4) for a patent designating 13 European countries, the 3C-index is about ten (two) times higher than in the US (Japanese) system (for process and translation costs up to the grant); (5) The European market being more than twice as large as the US market in terms of inhabitants, the 3C-index suggests that there would be a clear justification for higher nominal examination fees at the EPO, that would ensure the pursuit of a rigorous granting process.     

Disentangling managerial incentives from a dynamic perspective: The role of stock grants

We analyse the optimal contract between a risk‐averse manager and the initial shareholders in a two‐period model where the manager's investment effort, carried out in period 1, and his or her current effort, carried out in period 2, both impact the second‐period profit, so that it may be difficult to disentangle the incentives for these two types of effort. We show that stock grants play different roles according to whether the signal of investment effort is less noisy, or noisier, than that of current effort. We determine simultaneously the optimal stock grants and the optimal restrictions on sales of shares.     

Building and Interpreting Macro/Micro Estimates of Accrued‐to‐Date Pension Liabilities: French Reforms as a Case Study

Estimates of accrued‐to‐date pension liabilities (ADL) should become more widely accessible to statisticians and decision makers in the near future, in application of new SNA requirements. This raises two questions: how can such estimates be routinely produced, and what for? Microsimulation helps in answering the first question of the “how.” It allows ADL computations that take into account the complexity of pension rules. Concerning the “what for” question, it is known that ADL are not an indicator of global financial sustainability. Messages they convey are more interesting at the micro level, from a household perspective. This fosters the case for microsimulation which spontaneously generates consistent micro/macro results. We illustrate these points using the French situation as a case study. We emphasize one aspect of French reforms that may concern other countries as well: the move to price indexation and the connection it creates between sustainability and growth assumptions.     

A Structural Analysis of Credit Risk With Risky Collateral: A Methodology for Haircut Determination

Although many credit risk pricing models exist in the academic literature, very little attention has been paid to the impact of risky collateral on credit risk. It is nonetheless well known that practitioners often mitigate credit risk with collateral, using so–called haircuts for collateral level determination. The presence of collateral has a complex effect that can not be analysed simply with existing models. We analyse the value of credit risk when there is collateral in a range of different situations, including dual–default in a simple setting, stochastic collateral, stochastic bond collateral with stochastic interest rates, continuous and discrete marking–to–market and margin calls. The models confirm many practical intuitions, such as the impact on the haircut level required of the risks of the collateral asset and of the underlying asset to the forward as well as the impact of their correlation. Moreover, the model supports the intuition that the frequency of marking–to–market and collateral are substitutes. The models also stress the possibly unexpected magnitude of these factors. More importantly, they give actual solutions to determining the value of the credit risk depending on the haircut chosen and the frequency of marking–to–markets, results not presented before in the literature. The models are also a good basis to understand the portfolio effect of collateral management. Finally, they illustrate how differences in prices may arise from pure differences of credit risk management, as illustrated here in the case of futures and forwards.
(J.E.L.: G13).     

Agent-based model generating stylized facts of fixed income markets

Journal of Economic Interaction and Coordination - We develop an agent-based model (ABM) of a financial market with multiple assets belonging either to the fixed income or equity asset classes. The...