Derivative Pricing with Liquidity Risk: Theory and Evidence from the Credit Default Swap Market

We derive an equilibrium asset pricing model incorporating liquidity risk, derivatives, and short‐selling due to hedging of nontraded risk. We show that illiquid assets can have lower expected returns if the short‐sellers have more wealth, lower risk aversion, or shorter horizon. The pricing of liquidity risk is different for derivatives than for positive‐net‐supply assets, and depends on investors' net nontraded risk exposure. We estimate this model for the credit default swap market. We find strong evidence for an expected liquidity premium earned by the credit protection seller. The effect of liquidity risk is significant but economically small.     

Countries' creditworthiness: An indicator from a probit analysis

Summary This article discusses the results of an emperical analysis of developing countries' creditworthiness using data for 32 countries over the sample period 1983–1993, and presents a country risk indicator on the basis of a probit model. In this model the occurrence of payment arrears is related to a set of explanatory variables, which include policy-related and global determinants, next to general macroeconomic and financial variables. The new indicator has a rank correlation of about 0.8 with often used measures provided by rating agencies. Nevertheless, several remarkable differences are present. For Mexico, for instance, our indicator points towards declining creditworthiness since 1989, whereas other ratings show Mexico's creditworthiness to be increasing steadily.Helpful comments by two anonymous referees are gratefully acknowledged.     

Towards A Synthesis of Transaction Cost Economics and a Feminist Oriented Network Analysis

A bstract This paper suggests the possibility of an interdisciplinary, tripartite merger of transaction cost economics and the concept of embeddedness, with feminist insights. It demonstrates that in isolation, a simple application of transaction cost analysis can offer an adequate explanation of economic activity. The explanatory power of this approach however, is enhanced when complemented by greater recognition of the importance of the social context in which economic activity occurs. This paper uses research from New Zealand's largest street market to examine women's work in street commerce, a sub-sector of the informal sector. Aspects of transaction cost analysis are applied to activities of women market vendors. It is proposed however, that the approach we take which considers the embeddedness of economic activity in ongoing networks of social relations, and the intertwining of economic with non-economic goals, is compatible with aspects of feminism. Novel features of the analysis include the application of transaction cost analysis to informal sector activity and a synthesis of this approach with a feminist oriented network analysis.     

CAPITAL MOBILITY IN SUB-SAHARAN AFRICA: A PANEL DATA APPROACH

In this paper we are primarily concerned with assessing the degree of capital mobility in sub‐Saharan Africa. Using the methodology as proposed by Feldstein and Horioka (1980)—later termed the “Feldstein‐Horioka puzzle”—we test the hypothesis of perfect capital mobility against the alternative of imperfect capital mobility. Following Vamvakidis and Wacziarg (1998) and Isaksson (2000), provision is made in our model to show the dependency of the lesserdeveloped countries on international finance and aid and how a more open economy contributes towards improving the level of capital movement in these countries. We also assess the change in the degree of capital mobility over the time period in an effort to see whether institutional and political changes have been successful. We show that, compared to the region, South Africa is, to a large extent, more developed and should therefore play a leading role in the “African Renaissance”. Stationary panel data estimation techniques are applied to a sample of 36 sub‐Saharan African countries over the time period 1980–2000. The benefits of using one‐way error component models are derived from simultaneously employing time and cross‐section dimensions of the data, resulting in a substantial increase in the degrees of freedom. The fixed and random effects models enable us to acknowledge country heterogeneity within the panel, making provision for differences across countries like capital control policies, financial and capital market structures and exchange rate regimes.     

Households' Decisions on Savings Accounts After Negative Experiences with Banks During the Financial Crisis

During the 2007–2008 financial crisis, consumers in many countries were suddenly confronted with the fact that their bank needed government support or had even failed. Using a detailed survey among households in the Netherlands, we show how these unexpected negative experiences have changed consumers' handling of their savings accounts. Our findings suggest that respondents who were customers of troubled banking institutions were subsequently more likely to spread their savings across accounts at several banks. They were also more likely to move funds across banks. Our results also suggest that the size of the shock is important as the strongest effects are found for respondents who experienced both a bank bailout and a bankruptcy.