Are bank shareholders enemies of regulators or a potential source of market discipline?

In moral hazard models, bank shareholders have incentives to transfer wealth from the deposit insurer – that is, maximize put option value – by pursuing riskier strategies. For safe banks with large charter value, however, the risk-taking incentive is outweighed by the possibility of losing charter value. Focusing on the relationship between Tobin’s q and an ex ante measure of the failure probability, this paper develops a semi-parametric model for estimating the critical level of bank risk at which put option value starts outweighing charter value. From these estimates, we infer the prevalence of moral hazard. Examining publicly held bank holding companies (BHC) during the tumultuous 1986–1992 period, we find that shareholders’ risk-taking incentives were confined to a small fraction of highly risky institutions. Furthermore, our analysis shows that the inflection point at which banks begin to tilt in favor of moral hazard increased substantially in 1993–2005. These findings are encouraging to bank regulators and legislators because they indicate that tighter capital rules and more rigorous supervision introduced by several legislative initiatives in the 1990s have helped squeeze a lot of the moral hazard incentives out of the banking system.     

Implied Mortgage Refinancing Thresholds

The optimal prepayment model asserts that rational homeowners will refinance if they can reduce the current value of their liabilities by an amount greater than the refinancing threshold, defined as the cost of carrying the transaction plus the time value of the embedded call option. To compute the notional value of the refinancing threshold, researchers have traditionally relied on discrete- or continuous-time option-pricing models. Using a unique loan level database that links homeowner attributes with property and loan characteristics, this study proposes an alternative approach for estimating the implied value of the refinancing threshold. This empirical method enables us to measure the minimum interest-rate differential needed to justify refinancing conditional on the borrower's creditworthiness, loan-to-value ratio and other observable characteristics.     

On universal admissibility of scale parameter estimators

A characterization result of Kushary (1998) regarding universal admissibility of equivariant estimators in the one parameter gamma distribution is generalized to a scale family of distributions with monotone likelihood ratio. New examples are given, among them the F-distribution with a scale parameter. In particular, universal admissibility is characterized within the class of location-scale equivariant estimators of the ratio of the variances of two normal distributions with unknown means. In this context the maximum likelihood estimator is shown to be universally inadmissible by virtue of a general sufficient condition for universal inadmissibility of a scale equivariant estimator. Received: January 2000     

Orders and Organizations:

A BSTRACT . We explore the relevance to the theory of economic organization of the distinction introduced by Hayek between two kinds of social order: spontaneous orders and organizations. We argue that Hayek's ideas lead to an understanding of the business firm as a process, which comes very close to some of the core notions of the evolutionary theory of the firm, while they still view the firm as the outcome of a contract among asset owners. First of all, we put forth a simple conceptual schema in order to differentiate between contracts that lead to the formation of an organization and ordinary market contracts. We then explore the conditions for an understanding of the firm as a set of interconnected processes, rather than as an end state. Finally, we introduce the concept of purposeful direction as an important condition for the existence of the firm and we show the history-contingent character of the firm's growth.     

Business Cycle Synchronization in EU: A Time‐Varying Approach

This article investigates the time‐varying correlation between the EU12‐wide business cycle and the initial EU12 member‐countries based on Scalar‐BEKK and multivariate Riskmetrics model frameworks for the period 1980–2012. The paper provides evidence that changes in the business cycle synchronization correspond to major economic events that have taken place at a European level. In the main, business cycle synchronization until 2007 had moved in a direction positive for the operation of a single currency, suggesting that the common monetary policy was less costly in terms of lost flexibility at the national level. However, as a result of the Great Recession of 2007 and the subsequent Eurozone Crisis, a number of periphery countries, most notably Greece, have experienced desynchronization of their business cycles with the EU12‐wide cycle. Nevertheless, for most countries, any questions regarding the optimality and sustainability of the common currency area in Europe should not be attributed to a lack of cyclical synchronization.     

Corporate lobbying in the UK: an analysis of attitudes towards the ASB's 1995 deferred taxation proposals

This paper models corporate lobbying behaviour with respect to the ASB's 1995 discussion paper on deferred taxation. The study makes improvements to the methodology applied in prior studies. It expands the definition of lobbying beyond the submission of comment letters. It extends the analysis to control for past lobbying behaviour. It uses multinomial logistic regression to consider those companies lobbying in favour, those lobbying against, and those that did not lobby. The findings suggest that size and past lobbying behaviour are key determinants of the decision to lobby. In addition, companies that lobbied against the proposals were more likely to have debt covenants than were those that lobbied in favour. Debt covenants, however, did not explain the difference between non-lobbyists and lobbyists against. Companies that lobbied in favour were more likely to experience incentive compensation effects than were those that lobbied against. There was some evidence of the influence of US listing.     

Rolling-sampled parameters of ARCH and Levy-stable models

In this article an asymmetric autoregressive conditional heteroskedasticity (ARCH) model is applied to some well-known financial indices (DAX30, FTSE20, FTSE100 and SP500), using a rolling sample of constant size, in order to investigate whether the values of the estimated parameters of the model change over time. Although, there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time, the ARCH model adequately forecasts the one-day-ahead volatility. A simulation study has been carried out to investigate whether the time-variant attitude holds in the case of a generated ARCH data process revealing that either in that case the rolling-sampled parameters are time varying. The rolling analysis is also applied to estimate the parameters of a Levy-stable distribution. The empirical findings support that the stable parameters are also time variant.     

Herding,anti-herding behaviour in metal commodities futures: a novel portfolio-based approach

The purpose of this article is twofold. Motivated by the heated debate on the financialization of commodities, we examine the existence of herding behaviour in metal commodities futures. In order to identify any time-dependent properties reflected in time-varying parameters, we employ the overlapping rolling window regression technique. The empirical evidence confirms a time-varying anti-herding behaviour before the global financial crisis and the absence of herding or anti-herding behaviour during the crisis. Next we attempt to formally establish the link between the documented anti-herding behaviour and portfolio management with the use of dynamic conditional correlations via the DCC-GARCH family multivariate modelling. After specifying the correlations, an in-sample recursive dynamic Markowitz portfolio is constructed and monitored. By doing so, we attribute the anti-herding behaviour to different portfolio positioning and rebalancing. On the other hand, in the absence of herding or anti-herding behaviour, we document a shift in the correlations and covariances of the commodity futures especially during the crisis, resulting in a decrease of the portfolio weights together with a substantial cash flow towards the risk-free asset.     

Austrian Economics,Socialism and Impure Forms of Economic Organisation

Modern supporters of the Austrian school of economics maintain that their critical stance towards impure forms of economic organisation - such as the mixed economy - grew out of the arguments of Mises and Hayek during the socialist calculation debate of the 1930s. The paper assesses the two theorists, contributions in the debate and argues that their ideas cannot provide the basis for a general rejection of impure forms of economic organisation. First of all, and contrary to most modern Austrians, who consider the contributions of Mises and Hayek as essentially consistent, it is argued that Hayek's critique of socialism is much more effective than Mises' as it rests on his concept of tacit knowldge and on an evolutionary account of the emergence of capitalist institutions. However, the paper goes on to argue that, if Hayek's critique of state intervention is to have any relevance for contemporary capitalist economies, it must be in a position to show the non-viability not only of a fully centrally planned economy of the Soviet type but also of the mixed economy. It is argued that it is precisely in this that Hayek's evolutionism fails, for his teleological approach is not persuasive in ruling out the possibility of impure forms of capitalism in a manner that is consistent with truly evolutionary - i.e. non-teleological - ideas.