Financial leverage and market volatility with diverse beliefs

We study a general equilibrium model of asset trading with financial leverage, where the investors can engage in speculative trading with diverse beliefs about the asset??s fundamental value. We show that an increase in the leverage ratio causes the stock price to rise in the current period through a ??leverage effect??, and will result in more borrowing and more stock purchase that pumps the stock price higher in the subsequent period, known as the ??pyramiding effect??. There can also be a ??depyramiding effect?? when the price falls because lenders issue margin calls and force stock sales, contributing to further stock price plummeting. Price changes from depyramiding effect, however, may not take effect when margin calls are not triggered. We demonstrate that, under certain conditions, decreasing leverage ratios leads to lower stock price volatility, measured by the variation of prices caused by an exogenous shock, when the shock is unanticipated. The influences of dispersion of beliefs and available investment funds on the relation between financial leverage and market volatility are also examined. When the shock is anticipated, we demonstrate that reducing leverage ratios may not lower stock price volatility, which poses an important challenge to future studies on this issue.     

A Model of Outsourcing and Foreign Direct Investment

This paper presents a model in which two firms may use foreign direct investment or outsourcing in order to reduce the production cost of an intermediate input. Outsourcing requires training which is costly and creates a positive spillover. The paper shows that the equilibrium depends on the level of training costs. If they are high, only bilateral outsourcing is possible in equilibrium. If bilateral outsourcing is incomplete, it will not change prices compared to no outsourcing. If they are low, only complete outsourcing is possible. If complete outsourcing is unilateral (bilateral), the price increases (decreases) with the degree of spillovers.     

Commodity price cycles and heterogeneous speculators: a STAR–GARCH model

We propose an empirical commodity market model with heterogeneous speculators. While the power of trend-extrapolating chartists is constant over time, the symmetric impact of stabilizing fundamentalists adjusts endogenously according to market circumstances: Using monthly data for various commodities such as cotton, sugar or zinc, our STAR–GARCH model indicates that their influence positively depends on the distance between the commodity price and its long-run equilibrium value. Fundamentalists seem to become more and more convinced that mean reversion will set in as the mispricing enlarges. Commodity price cycles may thus emerge due to the nonlinear interplay between different trader types. The paper represents the authors’ personal opinion and does not necessarily reflect the views of the Deutsche Bundesbank.     

Persistence, The Transmission Mechanism And Robust Monetary Policy

In this paper we first explore the impact of nominal and real persistence on the transmission process of various shocks in an estimated DSGE model of the euro area. We then analyse its impact on optimal monetary policy and investigate the performance of various monetary policies when the policy maker is uncertain about the degree of nominal and real persistence.     

When do we really need interpersonal trust in globally dispersed new product development teams?

Interpersonal trust refers to the willingness to make oneself vulnerable to the actions of another party. Trust is generally acknowledged as fostering knowledge exchange and thus contributing to new product development (NPD) team effectiveness. However, the conditions under which NPD teams come to rely more heavily on trust to facilitate effectiveness remain unclear. With burgeoning global collaboration on new product development, we analyze how the characteristics of global NPD teams, i.e., geographic dispersion, computer‐mediated communication (e.g., e‐mail, video‐conferencing), team membership flexibility, and national diversity moderate the trust–effectiveness relationship. Our results show that trust is more important under the condition of geographic dispersion, computer‐mediated communication, and national diversity. By specifying when trust influences NPD team effectiveness in globally dispersed teams, we discuss the theoretical implications and provide recommendations for management.     

Value and risk in business-to-business e-banking

The purpose of this paper is to examine the role of risk in the formation of perceptions of value in the b2b domain, specifically within e-banking. The functional relationships between three types of risk (performance, financial and psychological) and the benefits and sacrifices components of value are tested within a broader nomological network that includes e-service quality (as an antecedent of value) and satisfaction, word-of-mouth and intention to switch (as outcomes of value). The hypothesised relationships are tested, using Partial Least Squares, on data collected through a postal survey from 167 UK-based SME organisations. The results confirm the significant but differential impact of the three types of risk on the two value components. Specifically performance risk and financial risk are found to be significant determinants of benefits, while psychological risk impacts on perceptions of sacrifices. We also provide evidence of the differential impact of the benefits and sacrifices components of value on satisfaction, and the existence of both direct and indirect (through satisfaction) impact of these components on word-of-mouth and intention to switch. This is the first documented empirical investigation of the impact of perceptions of risk in the study of perceptions of value within the domain of b2b marketing and consequently offers new insights into the subject matter. The theoretical and managerial implications of the findings are discussed and the manner in which the identified relationships can aid future research are explicated.     

Incentives and targets in hospital care: Evidence from a natural experiment

Performance targets are commonly used in the public sector, despite their well known problems when organisations have multiple objectives and performance is difficult to measure. It is possible that such targets may work where there is considerable consensus that performance needs to be improved. We investigate this possibility by examining the response of the English National Health Service to high profile waiting time targets. We exploit a natural policy experiment between two countries of the UK (England and Scotland) to establish the global effectiveness of the targets. We then use a within-England hospital analysis to confirm that responses vary by treatment intensity and to control for differences in resources which may accompany targets. We find that targets met their goals of reducing waiting times without diverting activity from other less well monitored aspects of health care and without decreasing patient health on exit from hospital.     

Investment and the soft budget constraint in China

This paper examines the incentive effects of the soft budget constraint on the investment behavior of firms in general and on the investment-cash flow sensitivity in particular. To this end, we develop a simple model of moral hazard that takes the soft budget constraint into account. Within this moral hazard environment, we show that investment is positively related to the amount of internal funds. We further show that the presence of the soft budget constraint deteriorates the moral hazard problem, thereby making the investment level less sensitive to the amount of internal funds. This is the case irrespective of whether the soft budget constraint renders the firm more or less liquidity constrained. To test the model's empirical implications, we employ data of China's listed companies for the period from 1997 to 2003. We use the share of state ownership as a proxy for the severity of the soft budget constraint. We find strong evidence that firms with larger shares of state ownership exhibit lower investment-cash flow sensitivities than firms with smaller shares of state ownership.