Estimating volatility clustering and variance risk premium effects on bank default indicators

Review of Quantitative Finance and Accounting - Default risk increases substantially during financial stress times due to mainly the two reasons: volatility clustering and investors’ desire...     

The influence of firms' financial policy on tax reform

The effectiveness of proposed reforms to the tax system intendedto stimulate investment depends on how capital structure affectscorporate behaviour. A dynamic general equilibrium model, calibratedfor the UK, is used to investigate the difference between threemodels of financial structure, including one of endogenous structuremotivated by agency theory. It is shown that the differencein predicted effects can be significant, and that the impactof the reform on the marginal source of funds is crucial.     

The spirit of capitalism, asset pricing and growth in a small open economy

Conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics. This may be due to preference specifications in conventional models. In this paper, we consider preferences with the “spirit of capitalism” (the desire to accumulate wealth as a way of acquiring status). We analyze a number of potential effects of international catching-up and the spirit of capitalism on savings, growth, portfolio allocation and asset pricing. Moreover, we obtain a multi-factor Capital Asset Pricing Model (CAPM). Our results show that status concerns have non-trivial effects on savings, growth, portfolio allocation, asset prices and the foreign exchange risk premium.     

Do retail gasoline prices rise more readily than they fall?: A threshold cointegration approach

This paper revisits the controversy over whether retail gasoline prices respond to increases in upstream prices more rapidly than decreases. Using threshold and momentum models of cointegration and daily data at different stages in the distribution chain, we find that transmission between upstream and downstream prices is mostly asymmetric in the momentum model: increases in upstream prices are passed on to downstream prices more quickly than decreases. We distinguish between small and large shocks and show that the asymmetry is more pronounced for small shocks, which may be due to consumer search costs.     

The 2007–2009 financial crisis,global imbalances and capital flows: Implications for reform

The paper discusses the currents that led to the 2007–2009 financial crisis. We discuss the crisis in a historical context and present evidence regarding the incidence and unit price of risk. Our results show that the unit price of risk prior to the subprime crisis is comparable to the price of risk prior to the great depression and similar to the price of risk at onset of the technology bubble. We then discuss global imbalances, the associated risks with regard to international optimal allocation of capital, and arrangements to minimize problems of global imbalances.     

Corporate bankruptcies and official bail-outs: A cost–benefit analysis

The existence of government guarantees to bail out investors and the use of official support to prevent corporate bankruptcies are commonly viewed to have largely contributed to the financial fragilities of many emerging market economies during the 1990s. This paper attempts to rationalize the existence and the duration of such policies. By using a simple model of the economy, we formalize governments’ decision on how long to provide resources to bridge the gap between the corporate sector's earnings and obligations. By considering both the costs and benefits of bail-outs in an environment where there are unfavorable productivity shocks, we show that the bail-out policy ends sooner; the higher the initial level of foreign borrowing, the lower the productivity, the lower the rate of time preference, and the higher the world interest rate. We also show that given any set of fundamentals, an unfavorable shift in market sentiments may end such policies sooner than otherwise.     

Welfare cost of inflation in a stochastic balanced growth model

There is a large and growing literature on the welfare cost of inflation. However, work in this area tend to find moderate estimates of welfare gains. In this paper we reexamine welfare costs of inflation within a stochastic general equilibrium balanced growth model paying a particular attention to recursive utility, portfolio balance effects, and monetary volatility and monetary policy uncertainty. Our numerical analysis shows that a monetary policy that brings down inflation to the optimum level can have substantial welfare effects. Portfolio adjustment effects seem to be the dominant factor behind the welfare gains.