In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, and eliciting responses from financial intermediaries who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos - the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index VIX index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.
{"title":"Liquidity and Leverage","authors":"T. Adrian, H. Shin","doi":"10.2139/ssrn.1139857","DOIUrl":"https://doi.org/10.2139/ssrn.1139857","url":null,"abstract":"In a financial system in which balance sheets are continuously marked to market, asset price changes appear immediately as changes in net worth, and eliciting responses from financial intermediaries who adjust the size of their balance sheets. We document evidence that marked-to-market leverage is strongly procyclical. Such behavior has aggregate consequences. Changes in dealer repos - the primary margin of adjustment for the aggregate balance sheets of intermediaries - forecast changes in financial market risk as measured by the innovations in the Chicago Board Options Exchange Volatility Index VIX index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128541810","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We employ a time series econometric framework to explore the structural determinants of the spread between the European Overnight Rate and the ECB’s Policy Rate (EONIA spread) aiming to explain the widening of the EONIA spread from mid-2004 to mid-2006. In particular, we estimate a model on the EONIA spread since the introduction of the new operational framework in March 2004 until August 2006. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks’ liquidity uncertainty lead to a significant upward pressure on the spread. The ECB’s liquidity policy only reduces the spread if a loose policy is conducted during the last week of a maintenance period. Interestingly, interest rate expectations have not been found to have an important influence. JEL Classification: E43, E52, C22
{"title":"What Explains the Spread between the Euro Overnight Rate and the ECB's Policy Rate?","authors":"Tobias Linzert, S. Schmidt","doi":"10.2139/ssrn.1080533","DOIUrl":"https://doi.org/10.2139/ssrn.1080533","url":null,"abstract":"We employ a time series econometric framework to explore the structural determinants of the spread between the European Overnight Rate and the ECB’s Policy Rate (EONIA spread) aiming to explain the widening of the EONIA spread from mid-2004 to mid-2006. In particular, we estimate a model on the EONIA spread since the introduction of the new operational framework in March 2004 until August 2006. We show that the increase in the EONIA spread can for the largest part be explained by the current liquidity deficit. Moreover, tight liquidity conditions as well as an increase in banks’ liquidity uncertainty lead to a significant upward pressure on the spread. The ECB’s liquidity policy only reduces the spread if a loose policy is conducted during the last week of a maintenance period. Interestingly, interest rate expectations have not been found to have an important influence. JEL Classification: E43, E52, C22","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"289 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-12-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121080648","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michele Braun, James McAndrews, W. Roberds, Richard J. Sullivan
New technologies used in payment methods can reduce risk, but they can also lead to new risks. Emerging retail payments are prone to operational and fraud risks, especially security breaches and potential use in illicit transactions. This article describes an economic framework for understanding risk control in retail payments. Risk control is a special type of good because it can protect one payment participant without diminishing the protection of other participants. As a result, the authors' economic framework emphasizes risk containment, primarily through the establishment and enforcement of risk management policies. Application of the framework to three types of emerging payments suggests that a payments system can successfully manage risk if it quickly recognizes problems, encourages commitment from all participants to control risk, and uses an appropriate mix of market and public policy mechanisms to align risk management incentives. The authors conclude that providers of emerging payment methods must mitigate risk effectively or face rejection in the payment market.
{"title":"Understanding Risk Management in Emerging Retail Payments","authors":"Michele Braun, James McAndrews, W. Roberds, Richard J. Sullivan","doi":"10.2139/ssrn.1072914","DOIUrl":"https://doi.org/10.2139/ssrn.1072914","url":null,"abstract":"New technologies used in payment methods can reduce risk, but they can also lead to new risks. Emerging retail payments are prone to operational and fraud risks, especially security breaches and potential use in illicit transactions. This article describes an economic framework for understanding risk control in retail payments. Risk control is a special type of good because it can protect one payment participant without diminishing the protection of other participants. As a result, the authors' economic framework emphasizes risk containment, primarily through the establishment and enforcement of risk management policies. Application of the framework to three types of emerging payments suggests that a payments system can successfully manage risk if it quickly recognizes problems, encourages commitment from all participants to control risk, and uses an appropriate mix of market and public policy mechanisms to align risk management incentives. The authors conclude that providers of emerging payment methods must mitigate risk effectively or face rejection in the payment market.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115114051","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
T. Breuer, M. Jandacka, K. Rheinberger, Martin Summer
We introduce the technique of worst case search to macro stress testing. Among the macroeconomic scenarios satisfying some plausibility constraint we determine the worst case scenario which causes the most harmful loss in loan portfolios. This method has three advantages over traditional macro stress testing: First, it ensures that no harmful scenarios are missed and therefore prevents a false illusion of safety which may result when considering only standard stress scenarios. Second, it does not analyse scenarios which are too implausible and would therefore jeopardize the credibility of stress analysis. Third, it allows for a portfolio specific identification of key risk factors. Another lesson from this paper relates to the use of partial stress scenarios specifying the values of some but not all risk factors: The plausibility of partial scenarios is maximised if we set the remaining risk factors to their conditional expected values.
{"title":"Macroeconomic Stress and Worst Case Analysis of Loan Portfolios","authors":"T. Breuer, M. Jandacka, K. Rheinberger, Martin Summer","doi":"10.2139/ssrn.1149952","DOIUrl":"https://doi.org/10.2139/ssrn.1149952","url":null,"abstract":"We introduce the technique of worst case search to macro stress testing. Among the macroeconomic scenarios satisfying some plausibility constraint we determine the worst case scenario which causes the most harmful loss in loan portfolios. This method has three advantages over traditional macro stress testing: First, it ensures that no harmful scenarios are missed and therefore prevents a false illusion of safety which may result when considering only standard stress scenarios. Second, it does not analyse scenarios which are too implausible and would therefore jeopardize the credibility of stress analysis. Third, it allows for a portfolio specific identification of key risk factors. Another lesson from this paper relates to the use of partial stress scenarios specifying the values of some but not all risk factors: The plausibility of partial scenarios is maximised if we set the remaining risk factors to their conditional expected values.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114626191","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The convergence features of an Endogenous Growth model with Physical capital, Human Capital and R&D have been studied. We add an erosion effect (supported by empirical evidence) to this model, and fully characterize its convergence properties. The dynamics is described by a fourth-order system of differential equations. We show that the model converges along a one-dimensional stable manifold and that its equilibrium is saddle-path stable. We also argue that one of the implications of considering this “erosion effect” is the increase in the adherence of the model to data.
{"title":"Transitional Dynamics of an Endogenous Growth Model with an Erosion Effect","authors":"T. Sequeira","doi":"10.2139/ssrn.999628","DOIUrl":"https://doi.org/10.2139/ssrn.999628","url":null,"abstract":"The convergence features of an Endogenous Growth model with Physical capital, Human Capital and R&D have been studied. We add an erosion effect (supported by empirical evidence) to this model, and fully characterize its convergence properties. The dynamics is described by a fourth-order system of differential equations. We show that the model converges along a one-dimensional stable manifold and that its equilibrium is saddle-path stable. We also argue that one of the implications of considering this “erosion effect” is the increase in the adherence of the model to data.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"282 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116080941","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines life-cycle optimal consumption and asset allocation in the presence of human capital. Labor income seems like a "money market mutual fund" whose balance in one or two years is predictable but a wide dispersion results after many years, reflecting fluctuations in economic conditions. We use the Martingale method to derive an analytical solution, finding that Merton's well-known " constant-mix strategy" is still true after incorporating human capital from the perspective of "total wealth" management. Moreover, the proportion in risky assets implicit in the agent's human capital is the main factor determining the optimal investment strategy. The numerical examples suggest that young investors should short stocks because their human capital has large market exposure. As they age, however, their human capital becomes "bond-like", and thus they have to hold stocks to achieve optimal overall risk exposure.
{"title":"Human Capital as an Asset Mix and Optimal Life-Cycle Portfolio: An Analytical Solution","authors":"Takao Kobayashi, R. Sai, K. Shibata","doi":"10.2139/ssrn.1142151","DOIUrl":"https://doi.org/10.2139/ssrn.1142151","url":null,"abstract":"This study examines life-cycle optimal consumption and asset allocation in the presence of human capital. Labor income seems like a \"money market mutual fund\" whose balance in one or two years is predictable but a wide dispersion results after many years, reflecting fluctuations in economic conditions. We use the Martingale method to derive an analytical solution, finding that Merton's well-known \" constant-mix strategy\" is still true after incorporating human capital from the perspective of \"total wealth\" management. Moreover, the proportion in risky assets implicit in the agent's human capital is the main factor determining the optimal investment strategy. The numerical examples suggest that young investors should short stocks because their human capital has large market exposure. As they age, however, their human capital becomes \"bond-like\", and thus they have to hold stocks to achieve optimal overall risk exposure.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"90 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123925120","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate whether rising oil prices have resulted in over-rating of oil-producing countries by rating agencies, after controlling for fundamentals. Based on a large dataset of countries from Standard and Poor's and Moody's, we find strong statistical evidence of a large ratings premium-nearly two notches-for those oil-producing countries with a large share of net oil revenue to gross domestic product, relative to countries with similar economic fundamentals. We have some limited forecast information from the rating agencies and the effect increases when we include this information, providing further evidence that this ratings premium is not driven by expected improvements in fundamentals. This finding has significant implications for asset prices in oil-producing countries and highlights the risk that in the event of a sharp unanticipated drop in oil prices, sovereign rating downgrades of oil-producing countries could be sharper than the deterioration in their economic fundamentals.
在控制基本面因素后，我们调查了油价上涨是否导致评级机构对石油生产国的高估。根据标准普尔(Standard and Poor's)和穆迪(Moody's)的大型国家数据集，我们发现强有力的统计证据表明，相对于经济基本面相似的国家，那些净石油收入占国内生产总值(gdp)比重较大的产油国的评级溢价高达近两个等级。我们从评级机构获得了一些有限的预测信息，当我们纳入这些信息时，效果会增加，这进一步证明了评级溢价不是由预期的基本面改善驱动的。这一发现对石油生产国的资产价格具有重要意义，并突出了这样一种风险，即在油价出现意外大幅下跌的情况下，石油生产国主权评级的下调可能比其经济基本面的恶化更为严重。
{"title":"Sovereign Ratings and Oil-Producing Countries: Have Sovereign Ratings Run Ahead of Fundamentals?","authors":"Robert V. Breunig, Tse Chern Chia","doi":"10.2139/ssrn.1138494","DOIUrl":"https://doi.org/10.2139/ssrn.1138494","url":null,"abstract":"We investigate whether rising oil prices have resulted in over-rating of oil-producing countries by rating agencies, after controlling for fundamentals. Based on a large dataset of countries from Standard and Poor's and Moody's, we find strong statistical evidence of a large ratings premium-nearly two notches-for those oil-producing countries with a large share of net oil revenue to gross domestic product, relative to countries with similar economic fundamentals. We have some limited forecast information from the rating agencies and the effect increases when we include this information, providing further evidence that this ratings premium is not driven by expected improvements in fundamentals. This finding has significant implications for asset prices in oil-producing countries and highlights the risk that in the event of a sharp unanticipated drop in oil prices, sovereign rating downgrades of oil-producing countries could be sharper than the deterioration in their economic fundamentals.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121910448","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.
{"title":"On the Welfare Cost of Inflation and the Recent Behavior of Money Demand","authors":"P. Ireland","doi":"10.1257/AER.99.3.1040","DOIUrl":"https://doi.org/10.1257/AER.99.3.1040","url":null,"abstract":"Post-1980 U.S. data trace out a stable long-run money demand relationship of Cagan's semi-log form between the M1-income ratio and the nominal interest rate, with an interest semi-elasticity below 2. Integrating under this money demand curve yields estimates of the welfare costs of modest departures from Friedman's zero nominal interest rate rule for the optimum quantity of money that are quite small. The results suggest that the Federal Reserve's current policy, which generates low but still positive rates of inflation, provides an adequate approximation in welfare terms to the alternative of moving all the way to the Friedman rule.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131373790","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Large publicly-held pools of assets are playing an increasingly prominent role in the global investment arena. We compare three distinct forms of such public funds, namely foreign exchange reserve funds, sovereign wealth funds, and public pension funds, to highlight their differences and similarities. We review previous studies on ways to better secure prudent and economically sound public fund management practices in these funds, as well as how to evaluate their governance and investment policies and how to better protect the assets from political interference. Drawing from the pension and corporate finance literature, we also link their management to governance practices and country-specific characteristics, and contrast those with empirical findings on linkages with corporate governance.
{"title":"Managing Public Investment Funds: Best Practices and New Challenges","authors":"O. Mitchell, J. Piggott, C. Kumru","doi":"10.3386/W14078","DOIUrl":"https://doi.org/10.3386/W14078","url":null,"abstract":"Large publicly-held pools of assets are playing an increasingly prominent role in the global investment arena. We compare three distinct forms of such public funds, namely foreign exchange reserve funds, sovereign wealth funds, and public pension funds, to highlight their differences and similarities. We review previous studies on ways to better secure prudent and economically sound public fund management practices in these funds, as well as how to evaluate their governance and investment policies and how to better protect the assets from political interference. Drawing from the pension and corporate finance literature, we also link their management to governance practices and country-specific characteristics, and contrast those with empirical findings on linkages with corporate governance.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"35 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132518034","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been faster to develop attractive alternatives, notably Europe's monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility.
{"title":"Exchange Rate Regimes and Capital Mobility: How Much of the Swoboda Thesis Survives?","authors":"Barry Eichengreen","doi":"10.3386/W14100","DOIUrl":"https://doi.org/10.3386/W14100","url":null,"abstract":"Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been faster to develop attractive alternatives, notably Europe's monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"13 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129154118","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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