FACTOR ENDOWMENTS, TRADE LIBERALIZATION, AND THE FUTURE OF APEC TRADE PATTERNS

The heads of state of Asia-Pacific Economic Cooperation (APEC) nations have committed member nations to remove all barriers to trade both among themselves and with respect to the rest of the world by 2020. The present paper uses a simple econometric model of bilateral trade flows based on country size, relative factor endowments, and trade barriers of importing as well as exporting countries to estimate the shares by country of origin in imports of each of the 16 major APEC countries and the rest of the world for each of 45 commodity groups comprising world trade in commodities. The estimates reveal that APEC trade would be expanded by 13% with complete liberalization of tariff barriers, by an additional 5% if nontariff barriers are also removed, and by another 4% if the rest of the world would also remove all barriers to trade. Variants on this base scenario show that such trade expansion could be substantially reduced were trade liberalization, capital growth, or both to be reduced in the countries affected by the Asian financial crisis. ( JEL Fl, F17)     

What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide

We examine how mutual funds from 26 developed and developing countries allocate their investment between domestic and foreign equity markets and what factors determine their asset allocations worldwide. We find robust evidence that these funds, in aggregate, allocate a disproportionately larger fraction of investment to domestic stocks. Results indicate that the stock market development and familiarity variables have significant, but asymmetric, effects on the domestic bias (domestic investors overweighting the local markets) and foreign bias (foreign investors under or overweighting the overseas markets), and that economic development, capital controls, and withholding tax variables have significant effects only on the foreign bias.     

Binding Rulings

After a period of consultation, it has been decided that the Revenue should be empowered to issue legally-binding rulings in favour of taxpayers only where the relevant transaction has already taken place. This paper considers the reasons for having binding rulings, and argues that those reasons justify implementing pre- as well as post-transaction rulings. Additionally, it is contended that many of the more detailed aspects of the proposal warrant reconsideration in light of those underlying rationales. JEL classification: H20, K34.     

Asset Revaluations and the Mitigation of Underinvestment

Asset write-ups or revaluations are a common feature of Australian accounting and reporting practice. This paper adopts the perspective that efficiency rather than opportunism is the reason for revaluations. It argues asset revaluations are a low-cost mechanism for mitigating underinvestment problems induced by the presence of risky debt and exacerbated by the manner in which conventional borrowing limitations are written. It is hypothesized that revaluation should be positively related to the presence of growth opportunities, financial leverage and the presence of borrowing limitations; and negatively related to a firm's ability to finance growth internally. The empirical results generally support the hypothesized relationships.     

Is Fairly Priced Deposit Insurance Possible?

We analyze risk-sensitive, incentive-compatible deposit insurance in the presence of private information and moral hazard. Without deposit-linked subsidies it is impossible to implement risk-sensitive, incentive-compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk-sensitive deposit insurance.     

An Unconditional Asset-Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk

In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size-portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm-size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size-ranked portfolios.     

Imperfect Information and Cross-Autocorrelation among Stock Prices

I develop a model to explain why stock returns are positively cross-autocorrelated. When market makers observe noisy signals about the value of their stocks but cannot instantaneously condition prices on the signals of other stocks, which contain marketwide information, the pricing error of one stock is correlated with the other signals. As market makers adjust prices after observing true values or previous price changes of other stocks, stock returns become positively cross-autocorrelated. If the signal quality differs among stocks, the cross-autocorrelation pattern is asymmetric. I show that both own- and cross-autocorrelations are higher when market movements are larger.     

Determinants of Mortgage Default and Consumer Credit Use: The Effects of Foreclosure Laws and Foreclosure Delays

The mortgage default decision is part of a complex household credit management problem. We examine how factors affecting mortgage default spill over to other credit markets. As home equity turns negative, homeowners default on mortgages and home equity lines of credit at higher rates, whereas they prioritize repaying credit cards and auto loans. Larger unused credit card limits intensify the preservation of credit cards over housing debt. Although mortgage nonrecourse statutes increase default on all types of housing debt, they reduce credit card defaults. Foreclosure delays increase default rates for housing and nonhousing debts. Our analysis highlights the interconnectedness of debt repayment decisions.