The recourse rule,regulatory arbitrage,and the financial crisis

In November 2001, regulators finalized the “Recourse Rule.” The rule lowered risk weights, and therefore commercial bank holding company capital requirements, to 0.2 for holdings of AAA- and AA-rated “private label” securitization tranches, created by investment banks and securitizing commercial bank holding company subsidiaries; risk weights for A-rated holdings equaled 0.5. The rule’s aim was to encourage securitization, but not risk-taking. Regulators indicated that the rule would apply to larger holding companies, without identifying them. Using bank holding companies with subsidiaries that commented on the proposed rule-makings as a treatment variable, average treatment effects from a fully flexible difference-in-differences model indicate that treated banks increased their holdings of the highly rated tranches relative to total assets, while other holding companies, on average, did not. Holding companies with greater highly rated tranche holdings also experienced greater increases in risk after Q1 2008, which suggests that poor performance may have been unanticipated.     

Intellectual property rights,imitation, and development. The effect on cross-border mergers and acquisitions

In this paper, we analyze whether the recent global process of strengthening and harmonization of intellectual property rights (IPRs) affects decisions of cross-border mergers and acquisitions (M&As). We investigate if IPRs have a differential effect across sectors of different technology content and for countries of different development level. Also, we study how imitation abilities of target countries interact with the tightening of IPRs. Using data for the post-TRIPS period (1995–2010), we estimate an extended gravity model to study the bilateral number of M&As, including a measure of the strength of IPRs systems on target countries and a set of control variables usually considered as determinants of M&As. The estimation results verify the gravity structure for M&As and show that IPRs –and enforcement– influence decisions of cross-border M&As in all sectors regardless of their technological content. However, IPRs are more important in countries with high imitation abilities and in sectors of high-technology content. Furthermore, a strengthening of IPRs leads to a larger increase of M&As in developing countries than in developed countries. These results call the attention on the possible implications for least developed economies and challenge the adequacy of a globally harmonized IPRs systems.     

Capabilities and Functionings: The Role of Social Capital for Accessing New Capabilities

This paper connects two relatively recent streams of research in social science: the capabilities approach and the literature on social capital. The aim is to show that these are strictly connected in a dynamic process linking functionings and capabilities through social capital. The ability to attain new capabilities is enhanced by the possession of social capital; hence investing in its accumulation allows individuals to improve their welfare. Furthermore, new capabilities allow the individual to create new connections and access new networks, accruing his or her stock of social capital and opening the door to the possibility of attaining new capabilities. The paper hypothesizes that a dynamic spiral interweaves social capital, capabilities and functionings.     

Supporting the free and competitive market in China and India: Differences and evolution over time

This paper analyzes the support to market competition by Indian and Chinese citizens. In particular, I study the individual preferences with respect to some characteristics of a free and competitive market. The paper aims at establishing whether preferences in these countries are different and their evolution over the time. This is an important issue, as the economic literature shows that people's preferences and policies tend to go hand in hand. This means that the analysis of today's preferences and their evolution over time can be useful to forecast tomorrow's policies. The main findings of this paper are that Indians and Chinese are different in supporting competition. The Chinese express preferences that are more in line with a free and competitive market than Indians do. The detected time path reveals that this support has been decreasing over time during the last two decades. The two populations appear to be in favour of a capitalistic, but strictly regulated market. This can mean that the future economic policies of these Asian giants will tend to this direction. Apparently there are no risks for some form of capitalism, but it is likely the two countries will not adopt completely free and competitive market institutions.     

Non‐Fundamentalness in Structural Econometric Models: A Review

Current economic theory typically assumes that all the macroeconomic variables belonging to a given economy are driven by a small number of structural shocks. As recently argued, apart from negligible cases, the structural shocks can be recovered if the information set contains current and past values of a large, potentially infinite, set of macroeconomic variables. However, the usual practice of estimating small size causal Vector AutoRegressions can be extremely misleading as in many cases such models could fully recover the structural shocks only if future values of the few variables considered were observable. In other words, the structural shocks may be non‐fundamental with respect to the small dimensional vector used in current macroeconomic practice. By reviewing a recent strand of econometric literature, we show that, as a solution, econometricians should enlarge the space of observations, and thus consider models able to handle very large panels of related time series. Among several alternatives, we review dynamic factor models together with their economic interpretation, and we show how non‐fundamentalness is non‐generic in this framework. Finally, using a factor model, we provide new empirical evidence on the effect of technology shocks on labour productivity and hours worked.     

Fiscal Foresight,Limited Information and the Effects of Government Spending Shocks

We quantify the impact of government spending shocks in the US. Thereby, we control for fiscal foresight, a specific limited information problem (LIP) by utilizing the narrative approach. Moreover, we surmount the generic LIP inherent in vector autoregressions (VARs) by a factor‐augmented VAR (FAVAR) approach. We find that a positive deficit‐financed defence shock raises output by more than in a VAR (e.g. 2.61 vs. 2.04 for peak multipliers). Furthermore, our evidence suggests that consumption is crowded in. These results are robust to variants of controlling for fiscal foresight and reveal the crucial role of the LIP in fiscal VARs.     

How can biases affect entrepreneurial decision making? toward a behavioral approach to unicorns

International Entrepreneurship and Management Journal - How can cognitive biases affect the birth and evolution of entrepreneurial ventures? In Entrepreneurial Decision Making (EDM), this lively...     

Identifying the Independent Sources of Consumption Variation

By representing a system of budget shares as an approximate factor model we determine its rank, i.e. the number of common functional forms or factors, and we estimate a base of the factor space by means of approximate principal components. We assume that the extracted factors span the same space of basic Engel curves representing the fundamental forces driving consumers' behaviour. We identify these curves by imposing statistical independence and by studying their dependence on total expenditure using local linear regressions. We prove consistency of the estimates. Using data from the UK Family Expenditure Survey from 1977 to 2006, we find strong evidence of two common factors and mixed evidence of a third factor. These are identified as decreasing, increasing, and almost constant Engel curves. The household consumption behaviour is therefore driven by two factors respectively related to necessities (e.g. food), luxuries (e.g. vehicles), and in some cases by a third factor related to goods to which is allocated the same percentage of total budget both by rich and poor households (e.g. housing). Copyright © 2015 John Wiley & Sons, Ltd.     

The theory of storage in the crude oil futures market,the role of financial conditions

This study examines the impacts of inventory and financial instability on the basis of the crude oil market. The results show that, first, the basis rises with inventory, and this effect is higher during low inventory regimes. This validates the theory of storage in the crude oil market. Second, the basis rises with financial instability, and this effect is higher during turbulent regimes. These results warn the oil market participants that, to make decisions based on the basis variation, traditionally known as a signal of scarcity or abundance, the underlying cause of the variation has to be considered.     

Robust martingale selection problem and its connections to the no‐arbitrage theory

We analyze the martingale selection problem of Rokhlin in a pointwise (robust) setting. We derive conditions for solvability of this problem and show how it is related to the classical no‐arbitrage deliberations. We obtain versions of the Fundamental Theorem of Asset Pricing in models spanning frictionless markets, models with proportional transaction costs, and models for illiquid markets. In all these models, we also incorporate trading constraints.