Elementary multivariate rearrangements and stochastic dominance on a Fréchet class

A Fréchet class collects all multivariate joint distribution functions that have the same marginals. Members of a Fréchet class only differ with respect to the interdependence between their marginals. In this paper, I study orders of interdependence on a Fréchet class using two multivariate generalizations of the bivariate rearrangement proposed by Epstein and Tanny (1980) [4] and Tchen (1980) [16]. I show how these multivariate rearrangements are underlying multivariate first order stochastic dominance in terms of the joint distribution function and the survival function. A combination of both rearrangements is shown to be equivalent to the concordance order proposed by Joe (1990) [9].     

Are Public and Private Social Expenditures Complementary?

Most analyses of social protection are focussed on public arrangements. However, social effort is not restricted to the public domain; all kinds of private arrangements can be substitutes to public programs. OECD data indicate that accounting for private social benefits has an equalising effect on levels of social effort across a number of countries. This suggests complementarity between public and private social expenditures. But their distributional effects differ. Using cross-country data, we find a negative relationship between net public social expenditures and income inequality, but a positive relationship between net private social expenditures and income inequality. We conclude that changes in the public/private mix in the provision of social protection may affect the redistributive impact of the welfare state.Part of Leiden Social Security Incidence Project. Revised version of a paper presented at the 57th International Atlantic Economic Conference, Lisbon, Portugal (March 10–14, 2004), and at the 60th Congress of the International Institute of Public Finance, Milan, Italy (August 23–26, 2004). The usual disclaimer applies.     

Time-varying integration,interdependence and contagion

Bekaert et al. (2005) define contagion as “correlation over and above what one would expect from economic fundamentals”. Based on a two-factor asset pricing specification to model fundamentally-driven linkages between markets, they define contagion as correlation among the model residuals, and develop a corresponding test procedure. In this paper, we investigate to what extent conclusions from this contagion test depend upon the specification of the time-varying factor exposures. We develop a two-factor model with global and regional market shocks as factors. We make the global and regional market exposures conditional upon both a latent regime variable and three structural instruments, and find that, for a set of 14 European countries, this model outperforms more restricted versions. The structurally-driven increase in global (regional) market exposures and correlations suggest that market integration has increased substantially over the last three decades. Using our optimal model, we do not find evidence that further integration has come at the cost of contagion. We do find evidence for contagion, however, when more restricted versions of the factor specifications are used. We conclude that the specification of the global and regional market exposures is an important issue in any test for contagion.     

How Do Investment Banks Value Initial Public Offerings (IPOs)?

Abstract:  We investigate the valuation and the pricing of initial public offerings (IPOs) by investment banks for a unique dataset of 49 IPOs on Euronext Brussels in the 1993–2001 period. We find that for each IPO several valuation methods are used, of which Discounted Free Cash Flow (DFCF) is the most popular. The offer price is mainly based on DFCF valuation, to which a discount is applied. Our results suggest that DDM tends to underestimate value, while DFCF produces unbiased value estimates. When using multiples, investment banks rely mostly on future earnings and cash flows. Multiples based on post-IPO forecasted earnings and cash flows result in more accurate valuations.     

Should the Central and Eastern European Accession Countries Adopt the EURO Before or After Accession?

I analyse the option of unilateral euroisation for Central and Eastern Europe. The thorny questions of losing seigniorage and losing the lender of last resort are explicitly addressed. It is found that the option of unilateral euroisation might be quite inviting for some countries. This is certainly the case if one takes into account the difficulties thrown up by the Maastricht–criteria. It is argued that unilateral euroisation provides an elegant way out of the catch of the official EMU-accession path. The EU has, however, expressed explicitly its enmity against euroisation. I think this is a policy error. It should be at least a genuine policy option for all countries concerned. At best the EU should stimulate euroisation by embedding it in a broader and more embracing framework that would support integration and ultimately accession to the EU of the whole of Central and Eastern Europe.     

International Trends in Income Inequality and Social Policy

In most OECD-countries income inequality has increased during the last two decades. In this paper, we investigate whether changes in the overall distribution of income can be attributed to social policy measures. For most (but not all) countries we find a possible relationship between changing welfare state policies (as measured by expenditure ratios and replacement rates) and changing income inequality. Especially the United Kingdom and the Netherlands combined an above-average rise in inequality with a reduction in the generosity of the welfare system.A more elaborate budget incidence analysis for the Netherlands indicates that in the period 1981–1997 inequality of disposable household income increased sharply. The two main forces behind this phenomenon were a more unequal distribution of market incomes and changes in social transfers. Fundamental social security reforms in the Netherlands indeed seem to have made the income distribution less equal. However, income inequality in the Netherlands is still below the OECD average at the end of the observed period.