Euro conversion and return dynamics of European financial markets: a frequency domain approach

Using a frequency domain approach, we compare the spectra of equity market index returns for the 12 Euro-zone countries, the UK, the US, and Japan, over several time frames before and after the introduction of the Euro. In the immediate aftermath of the Euro-introduction, we find a reduced volatility over all frequencies, in which no strong cyclical components are present. However, in the long run, equity markets exhibit a volatility increase: the larger European equity markets develop dynamics that exhibit strikingly similar patterns, while the smaller European equity markets appear to follow dynamics closely resembling white noise. The similarity in dynamics is a likely candidate to explain the increase in correlation among the European markets. Furthermore, the European equity markets initially exhibited dynamics that resembled those of the US, while after the introduction of the Euro, the dynamics of the European Markets exhibits patterns similar to those found the UK. This suggests a change in the dynamic interdependency between the UK and the European markets and an increased convergence of UK market behavior with that behavior dominant in the Euro-zone. The findings may provide important implications for investors seeking to take advantage of international diversification.     

Low interest rate policy and the use of reserve requirements in emerging markets

This paper sheds light on the link between the interest rate policy in large advanced economies with international funding and reserve currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012, we provide evidence that emerging market central banks tend to raise reserve requirements when interest rates in international funding markets decline or financial inflows accelerate, most likely to preserve financial stability. In contrast, when global liquidity risk rises and funding from the large advanced economies dries up, emerging markets lower reserve requirements.     

Do trade and investment agreements lead to more FDI? Accounting for key provisions inside the black box

The previous literature provides a highly ambiguous picture on the impact of trade and investment agreements on FDI. Most empirical studies ignore the actual content of BITs and RTAs, treating them as “black boxes”, despite the diversity of investment provisions constituting the essence of these agreements. We overcome this serious limitation by analyzing the impact of modalities on the admission of FDI and dispute settlement mechanisms in both RTAs and BITs on bilateral FDI flows between 1978 and 2004. We find that FDI reacts positively to RTAs only if they offer liberal admission rules. Dispute settlement provisions play a minor role. While RTAs without strong investment provisions may even discourage FDI, the reactions to BITs are less discriminate with foreign investors responding favourably to the mere existence of BITs.     

Strommarktdesign: Zur Ausgestaltung der Auktionsregeln an der EEX

This paper studies the design of power exchanges in liberalized electricty markets. We analyze several pricing rules for day ahead trading and show that a uniform price mechanism has quite desirable properties as compared to its alternatives. We then discuss how the particular cost structure of electricity generation can be accounted for by appropriate bid formats. We moreover analyze the effects of bid caps and price floors in electricity auctions on market performance, as well as several other aspects of electricity market design. In particular, we discuss linkage of independently operating markets for electricity, reserve energy and transmission capacities, coupling of national power exchanges, and the effects of transparency on the outcome of electricity markets.     

Ein Vergleich ausgewählter europäischer Strombörsen

We study the rules of selected european energy exchanges and compare their institutional design. In most countries (except for the UK) a uniform price mechanism is used. The rules differ, however, in the possibilities to express complementary cost components in the bids. Also the degree of international coupling of markets is very different across countries. Our comparison of the markets allows to identify attractive trading rules and yields insights on an effective electricity market design.     

Aging, Asset Markets, and Asset Returns: A View From Europe to Asia

The extent of the demographic changes is dramatic especially in some Asian and European countries. This paper investigates the effect of aging on global asset markets and asset returns, focusing on markets for productive capital, and especially on interactions between European and Asian economic development. Aging has complex effects on the markets for real capital. If elderly people save less than younger people, interest rates will increase. At the same time, however, the younger generation becomes smaller, which reduces the demand for new investment. The equilibrium effect is thus uncertain. Our multicountry computational equilibrium model delivers a subtle picture: there will be some decline in the return from productive capital, but it is relatively small. We find noticeable interaction effects between labor market and pension reforms in Europe on the one hand, and the demographic and economic developments in Asia, especially India and China, on the other hand.     

Would you like to shrink the welfare state? A survey of European citizens

The fundamental problems facing European welfare states – high unemployment and unsustainable public pensions plans in particular – have been in the political debate for years, so why have we seen so little reform? To find out, we surveyed the opinions of citizens in France, Germany, Italy and Spain on their welfare states and on various reform options. This is what we found. First, most workers underestimate the costs of public pensions, though they are aware of their unsustainability. Second, the status quo is a majoritarian outcome: a majority of citizens opposes cuts to social security and welfare spending, but also opposes further increases. Since population ageing without reform implies an automatic expansion, our results suggest that most citizens would favour reforms that stabilize but do not shrink the current welfare states. Third, many would welcome changes in the allocation of benefits. A large number of workers in Italy and Germany would be willing to opt out of public pensions and replace them with private pensions, though the details of how this scheme is formulated matter for its popularity. And many Italians and Spaniards would welcome an extension of the coverage of unemployment insurance. Fourth, conflicts over the welfare state are mainly shaped by the economic situation of the respondent, while political ideology plays a limited role. Disagreements are found along three dimensions: young versus old, rich versus poor, and 'outsider' versus 'insider' in terms of labour market status. From a practical point of view, this suggests that there is scope to bundle reforms strategically in order to build a large and mixed coalition of supporters.
— Tito Boeri, Axel Börsch-Supan and Guido Tabellini     

Issues affecting the development of an international accounting standard on financial instruments

While the global convergence of accounting standards is making steady progress, certain issues stand out as challenges. A major area where an international accounting standard has not gained universal acceptance is that of financial instruments. The European Union's refusal to adopt all of International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, highlights that fact. The International Accounting Standards Board continues to address financial instruments in efforts to remedy this situation. Thus, it is important to better understand issues affecting the development of an international financial instruments accounting standard. The purpose of this study is to find out what issues are important to respondents in their comment letters regarding the Financial Instruments Discussion Paper (FIDP), and whether stakeholder groups differ in positions and the reasons given to support their views. The FIDP represented a major step toward approval of IAS 39 and proposed fair value accounting for all financial instruments. Over 1500 pages of comment letters were generated by the 168 respondents, who represented over 20 countries and several different stakeholder groups. While most respondents disagreed with the FIDP, differences in support and the specific issues used to support those positions were found by stakeholder interest group (accounting profession, regulators, standard-setters, financial analysts, and preparers) and by stakeholder nationality.     

Exit as governance: do blockholders affect corporate innovation in large US firms?

Using a sample of large US firms, this study shows that blockholders in combination with liquidity can contribute positively to innovation (R&D investments). We contribute to the literature on managerial myopia that has focused mainly on large owners and their type (short-term/long-term). Our results are in line with recent theoretical studies arguing that blockholders in combination with market liquidity can mitigate managerial myopia, as suggested by the exit model of governance. The results indicate that blockholders can be efficient in resolving agency problems and that they can enhance long-term prosperity, even when the individual blockholder investment horizon may not be long.     

For how long do IMF forecasts of world economic growth stay up-to-date?

This study analyses the performance of the International Monetary Fund (IMF) World Economic Outlook output forecasts for the world and for both the advanced economies and the emerging and developing economies. With a focus on the forecast for the current year and the next year, we examine the durability of IMF forecasts, looking at how much time has to pass so that IMF forecasts can be improved by using leading indicators with monthly updates. Using a real-time data set for GDP and for indicators, we find that some simple single-indicator forecasts on the basis of data that are available at higher frequency can significantly outperform the IMF forecasts as soon as the publication of the IMF’s Outlook is only a few months old. In particular, there is an obvious gain using leading indicators from January to March for the forecast of the current year.