The recent development of indexed catastrophe (CAT) securities is a concern in the insurance literature. We refer to the two existing prominent explanations as the systematic risk approach and the moral hazard approach. Under the systematic risk approach, the systematic risk portion is hedged by index-triggered securities, and the remaining nonsystematic risk is hedged through indemnity-triggered vehicles including traditional insurance. Under the moral hazard approach, indexing protects firms from losses without incurring moral hazard problems. We argue that indexing is at most supplementary in both approaches. We suggest two alternative rationales for indexing CAT securities. First, if firms are concerned with downside risks rather than variation, then indexing is optimal, since indexing can remove downside risks without incurring costs for upside risks. The amount of proceeds is determined by balancing financing costs and costs of downside risks. Second, the observability of loss is another key factor for indexing, even when firms are concerned with variability. We identify the important sources of high observation costs as (i) the inherent difficulty in identifying CAT losses; (ii) the impossibility of taking over the firm by the bondholders under a CAT event; and (iii) the non-separability of cash flows between from a CAT event and from other operations of the firm.
{"title":"Indexing Catastrophe Securities","authors":"S. H. Seog, Jangkoo Kang","doi":"10.2139/ssrn.1083854","DOIUrl":"https://doi.org/10.2139/ssrn.1083854","url":null,"abstract":"The recent development of indexed catastrophe (CAT) securities is a concern in the insurance literature. We refer to the two existing prominent explanations as the systematic risk approach and the moral hazard approach. Under the systematic risk approach, the systematic risk portion is hedged by index-triggered securities, and the remaining nonsystematic risk is hedged through indemnity-triggered vehicles including traditional insurance. Under the moral hazard approach, indexing protects firms from losses without incurring moral hazard problems. We argue that indexing is at most supplementary in both approaches. We suggest two alternative rationales for indexing CAT securities. First, if firms are concerned with downside risks rather than variation, then indexing is optimal, since indexing can remove downside risks without incurring costs for upside risks. The amount of proceeds is determined by balancing financing costs and costs of downside risks. Second, the observability of loss is another key factor for indexing, even when firms are concerned with variability. We identify the important sources of high observation costs as (i) the inherent difficulty in identifying CAT losses; (ii) the impossibility of taking over the firm by the bondholders under a CAT event; and (iii) the non-separability of cash flows between from a CAT event and from other operations of the firm.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"299 2","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113986532","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 paper examines cyclical variation in the effect of Fed policy on the stock market. We find a much stronger response of stock returns to unexpected changes in the federal funds target rate in recession and in tight credit market conditions. Using firm-level data, we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms. Overall, the results are consistent with the credit channel of monetary policy transmission.
{"title":"Macroeconomic Cycles and the Stock Market's Reaction to Monetary Policy","authors":"Arabinda Basistha, A. Kurov","doi":"10.2139/ssrn.1092246","DOIUrl":"https://doi.org/10.2139/ssrn.1092246","url":null,"abstract":"This paper examines cyclical variation in the effect of Fed policy on the stock market. We find a much stronger response of stock returns to unexpected changes in the federal funds target rate in recession and in tight credit market conditions. Using firm-level data, we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms. Overall, the results are consistent with the credit channel of monetary policy transmission.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131870068","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}
Pub Date : 2007-12-30DOI: 10.3126/nrber.v19i1.52988
Nayan Krishna Joshi, Ram Chandra Bhattarai
This article investigates whether or not the Nepalese stock market is efficient in weak form with respect to economically neutral behavioural variables. Simple OLS technique with White’s heteroskedasticity-corrected standard errors is used to test the relationship between stock returns and economically neutral behavioural variables represented by weather (cloud cover and temperature) and biorhythms (seasonal affective disorder). The findings indicate the existence of weak-form efficiency in the market for “temperature” and “seasonal affective disorder” but not for the “cloud cover”. These findings are not consistent to those of results documented for developed and emerging stock markets.
{"title":"Stock Returns and Economically Neutral Behavioural Variables: Evidence from the Nepalese Stock Market","authors":"Nayan Krishna Joshi, Ram Chandra Bhattarai","doi":"10.3126/nrber.v19i1.52988","DOIUrl":"https://doi.org/10.3126/nrber.v19i1.52988","url":null,"abstract":"This article investigates whether or not the Nepalese stock market is efficient in weak form with respect to economically neutral behavioural variables. Simple OLS technique with White’s heteroskedasticity-corrected standard errors is used to test the relationship between stock returns and economically neutral behavioural variables represented by weather (cloud cover and temperature) and biorhythms (seasonal affective disorder). The findings indicate the existence of weak-form efficiency in the market for “temperature” and “seasonal affective disorder” but not for the “cloud cover”. These findings are not consistent to those of results documented for developed and emerging stock markets.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124586278","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}
Paper deals with elements of financial markets' infrastructure. Several cases were chosen for analysis. They are: lease services, business valuation and appraisal, unit investment trusts, banking. Each case is studies as a separate industrial market. Special methodology of market structure analysis is suggested and applied under research. Selected examples don't pretend to represent the complete picture of Russian financial markets' infrastructure. They represent different types of such infrastructure elements. The effectiveness and general state of infrastructure are influenced by them. The results show that controversial tendencies could be observed in Russian economy.
{"title":"Elements of Financial Markets' Infrastructure Development in Russia: Empirical Research","authors":"A. Yusupova","doi":"10.2139/ssrn.1078814","DOIUrl":"https://doi.org/10.2139/ssrn.1078814","url":null,"abstract":"Paper deals with elements of financial markets' infrastructure. Several cases were chosen for analysis. They are: lease services, business valuation and appraisal, unit investment trusts, banking. Each case is studies as a separate industrial market. Special methodology of market structure analysis is suggested and applied under research. Selected examples don't pretend to represent the complete picture of Russian financial markets' infrastructure. They represent different types of such infrastructure elements. The effectiveness and general state of infrastructure are influenced by them. The results show that controversial tendencies could be observed in Russian economy.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115278361","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 ability of central banks to differentiate between permanent and transitory price movements is critical for the conduct of monetary policy. The importance of gauging the persistence of price changes in a timely manner has led to the development of measures of underlying, or “core,” inflation that are designed to remove transitory price changes from aggregate inflation data. Given the usefulness of this information to policymakers, there is a surprising lack of consensus on a preferred measure of U.S. core inflation. This article examines several proposed measures of core inflation—the popular ex food and energy series, an ex energy series, a weighted median series, and an exponentially smoothed series—to identify a “best” measure. The authors evaluate the measures’ performance according to criteria such as ease of design and accuracy in tracking trend inflation, as well as explanatory content for within-sample and out-of-sample movements in aggregate CPI and PCE inflation. The study reveals that the candidate series perform very differently across aggregate inflation measures, criteria, and sample periods. The authors therefore find no compelling evidence to focus on one particular measure of core inflation, including the series that excludes food and energy prices. They attribute their results to the design of the individual measures and the measures’ inability to account for variability in the nature and sources of transitory price movements.
{"title":"A Comparison of Measures of Core Inflation","authors":"Robert W. Rich, C. Steindel","doi":"10.2139/ssrn.1072923","DOIUrl":"https://doi.org/10.2139/ssrn.1072923","url":null,"abstract":"The ability of central banks to differentiate between permanent and transitory price movements is critical for the conduct of monetary policy. The importance of gauging the persistence of price changes in a timely manner has led to the development of measures of underlying, or “core,” inflation that are designed to remove transitory price changes from aggregate inflation data. Given the usefulness of this information to policymakers, there is a surprising lack of consensus on a preferred measure of U.S. core inflation. This article examines several proposed measures of core inflation—the popular ex food and energy series, an ex energy series, a weighted median series, and an exponentially smoothed series—to identify a “best” measure. The authors evaluate the measures’ performance according to criteria such as ease of design and accuracy in tracking trend inflation, as well as explanatory content for within-sample and out-of-sample movements in aggregate CPI and PCE inflation. The study reveals that the candidate series perform very differently across aggregate inflation measures, criteria, and sample periods. The authors therefore find no compelling evidence to focus on one particular measure of core inflation, including the series that excludes food and energy prices. They attribute their results to the design of the individual measures and the measures’ inability to account for variability in the nature and sources of transitory price movements.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121468477","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}
Evidence indicates that people fear change and the unknown. We offer a model of familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains the endowment effect, portfolio underdiversification, home and local biases. Equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model implies that the absolute pricing error of the standard CAPM is positively correlated with the amount of home bias. It also predicts that a modified CAPM holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias.
{"title":"Fear of the Unknown: Familiarity and Economic Decisions","authors":"H. Cao, Bing Han, Harold H. Zhang, D. Hirshleifer","doi":"10.2139/ssrn.985381","DOIUrl":"https://doi.org/10.2139/ssrn.985381","url":null,"abstract":"Evidence indicates that people fear change and the unknown. We offer a model of familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains the endowment effect, portfolio underdiversification, home and local biases. Equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model implies that the absolute pricing error of the standard CAPM is positively correlated with the amount of home bias. It also predicts that a modified CAPM holds wherein the market portfolio is replaced with a portfolio of the stock holdings of investors not subject to familiarity bias.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"238 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132626808","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}
I quantify the effects of alternative student loan policies on college enrollment, borrowing behavior, and default rates in a heterogeneous model of life-cycle earnings and human capital accumulation. I find that the combination of learning ability and initial human capital stock drives the decision to enroll in college while parental wealth has minimal effects on enrollment. Repayment flexibility increases enrollment significantly, whereas relaxation of eligibility requirements has little effect on enrollment or default rates. The former policy induces substantial welfare gains for bottom income quantiles, while the latter implies minimal welfare gains for bottom income quantiles.
{"title":"Federal Student Loan Program: Quantitative Implications for College Enrollment and Default Rates","authors":"Anamaria Felicia Ionescu","doi":"10.2139/ssrn.976709","DOIUrl":"https://doi.org/10.2139/ssrn.976709","url":null,"abstract":"I quantify the effects of alternative student loan policies on college enrollment, borrowing behavior, and default rates in a heterogeneous model of life-cycle earnings and human capital accumulation. I find that the combination of learning ability and initial human capital stock drives the decision to enroll in college while parental wealth has minimal effects on enrollment. Repayment flexibility increases enrollment significantly, whereas relaxation of eligibility requirements has little effect on enrollment or default rates. The former policy induces substantial welfare gains for bottom income quantiles, while the latter implies minimal welfare gains for bottom income quantiles.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128263452","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 paper evaluates the extent of downward nominal and real wage rigidity for different categories of workers and firms using the methodology recently developed by the International Wage Flexibility Project (Dickens and Goette, 2006). The analysis is based on an administrative data set on individual earnings, covering one-third of employees of the private sector in Belgium over the period 1990-2002. Our results show that Belgium is characterised by strong real wage rigidity and very low nominal wage rigidity, consistent with the Belgian wage formation system of full indexation. Real rigidity is stronger for white-collar workers than for blue-collar workers. Real rigidity decreases with age and wage level. Wage rigidity appears to be lower in firms experiencing downturns. Finally, smaller firms and firms with lower job quit rates appear to have more rigid wages. Our results are robust to alternative measures of rigidity. JEL Classification: J31
{"title":"Downward Wage Rigidity for Different Workers and Firms: An Evaluation for Belgium Using the IWFP Procedure","authors":"Philip Du Caju, C. Fuss, L. Wintr","doi":"10.2139/ssrn.1685847","DOIUrl":"https://doi.org/10.2139/ssrn.1685847","url":null,"abstract":"This paper evaluates the extent of downward nominal and real wage rigidity for different categories of workers and firms using the methodology recently developed by the International Wage Flexibility Project (Dickens and Goette, 2006). The analysis is based on an administrative data set on individual earnings, covering one-third of employees of the private sector in Belgium over the period 1990-2002. Our results show that Belgium is characterised by strong real wage rigidity and very low nominal wage rigidity, consistent with the Belgian wage formation system of full indexation. Real rigidity is stronger for white-collar workers than for blue-collar workers. Real rigidity decreases with age and wage level. Wage rigidity appears to be lower in firms experiencing downturns. Finally, smaller firms and firms with lower job quit rates appear to have more rigid wages. Our results are robust to alternative measures of rigidity. JEL Classification: J31","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130211965","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}
Despite recent extreme fluctuations of the Middle East and North African (MENA) stock markets, we do not find strong evidence of rational speculative bubbles in the perspective of both domestic and U.S.-based investors. Fractional integration tests built on ARFIMA models do not support the possibility of bubbles in the MENA stock markets. Similarly, duration dependence tests based on nonparametric Nelson-Aalen hazard functions not only reject the existence of bubbles but also support equality of hazard functions between domestic and U.S.-based investors without regard to the rapid financial liberalization and integration in the MENA stock markets.
{"title":"Rational Speculative Bubbles: An Empirical Investigation of the Middle East and North African Stock Markets","authors":"M. Kabir Hassan, Jung-Suk Yu","doi":"10.2139/ssrn.1077135","DOIUrl":"https://doi.org/10.2139/ssrn.1077135","url":null,"abstract":"Despite recent extreme fluctuations of the Middle East and North African (MENA) stock markets, we do not find strong evidence of rational speculative bubbles in the perspective of both domestic and U.S.-based investors. Fractional integration tests built on ARFIMA models do not support the possibility of bubbles in the MENA stock markets. Similarly, duration dependence tests based on nonparametric Nelson-Aalen hazard functions not only reject the existence of bubbles but also support equality of hazard functions between domestic and U.S.-based investors without regard to the rapid financial liberalization and integration in the MENA stock markets.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129524983","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}
Pub Date : 2007-11-27DOI: 10.1111/j.1467-6281.2007.00240.x
Richard P. Brief
This note discusses basic issues related to residual income valuation (RIV) and abnormal earnings growth (AEG) models but has only scratched the surface of a complex subject. What clearly emerges from this ‘primer’ is the conclusion that AEG is a more complex valuation model than RIV. This complexity concerns both the mechanics and interpretation of AEG compared to RIV. Furthermore, a study by Penman (2005) raises a question about the usefulness of AEG compared to RIV. His comparisons between RIV and AEG are rather remarkable and suggest that RIV gives estimates of value which are more accurate and less variable than estimates based on AEG. Clearly, these results need further study.
{"title":"Accounting Valuation Models: A Short Primer","authors":"Richard P. Brief","doi":"10.1111/j.1467-6281.2007.00240.x","DOIUrl":"https://doi.org/10.1111/j.1467-6281.2007.00240.x","url":null,"abstract":"This note discusses basic issues related to residual income valuation (RIV) and abnormal earnings growth (AEG) models but has only scratched the surface of a complex subject. What clearly emerges from this ‘primer’ is the conclusion that AEG is a more complex valuation model than RIV. This complexity concerns both the mechanics and interpretation of AEG compared to RIV. Furthermore, a study by Penman (2005) raises a question about the usefulness of AEG compared to RIV. His comparisons between RIV and AEG are rather remarkable and suggest that RIV gives estimates of value which are more accurate and less variable than estimates based on AEG. Clearly, these results need further study.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"120 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2007-11-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134128871","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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