WTO financial services commitments: Determinants and impact on financial stability

The paper investigates the factors that have influenced WTO members to take on their chosen level of liberalization commitments in the framework of liberalization of trade in financial services and the impact of such commitments on financial sector stability. The most important factors are economic growth, current account, trends in banking sector development, policy restrictiveness, and peer-group effects. The econometric evidence suggests that more liberal commitments may be associated with greater vulnerability to currency and banking crises—most likely a short-term effect, which should be mitigated with time through increased market efficiency and better resource allocation.     

Modeling Asset Premiums and the Riskfree Rate in General Equilibrium CCAPM

We elaborate on the consumption capital asset pricing model (CCAPM) to reveal a set of underlying forces that determine asset returns. We use generalized preferences, allow for labor-leisure choice, a broad asset portfolio, and holding international claims. A calibration of the model with US data learns that excess stock and bond returns can be replicated. At the same time, however, the riskfree interest rate generally appears to be mispriced, consistent with Weil (1989). Additional results show that in general two optimal values of the intertemporal substitution parameter correspond with a specified coefficient of risk aversion. Tests that assess the dynamic properties of the model yield mixed results, but are most favorable when home bias is allowed.     

The decomposition of US and Euro area stock and bond returns and their sensitivity to economic state variables

This paper decomposes US and Euro area excess stock and bond return innovations into news factors using the Campbell–Schiller methodology. The results indicate that stock return volatility is mostly due to volatility of future excess return news. Inflation news plays a minor role although it is significantly correlated with excess return innovations. For the bond market too, it is future return news—not inflation news—that moves bond returns most. For finite investment horizons, however, asset market movements give a differential importance to the various news components. Results are comparable for the US and the Euro area, but differ in terms of magnitudes. In addition, sensitivities (‘betas’) to a set of state variables are estimated, yielding high interest rate betas and low money growth betas. Generally, inflation, unemployment and leading indicator betas are significant. Asset market exposures to oil and exchange rate changes are more significant for the Euro area than in the US.