In this paper, we consider replication pricing of derivatives that are partially collateralized by cash. We let issuer replicate the derivatives payout using shares and cash, and let buyer replicate the loss given the counterparty default using credit default swaps. The costs of funding for replication and collateral posting are taken into account in the pricing process. A partial differential equation (PDE) for the derivatives price is established, and its solution is provided in a Feynman–Kac formula, which decomposes the derivatives value into the risk-free value of the derivative plus credit valuation adjustment (CVA) and funding valuation adjustment (FVA). For most derivatives, we show that CVAs can be evaluated analytically or semi-analytically, while FVAs as well as the derivatives values can be solved recursively through numerical procedures due to their interdependence. In numerical demonstrations, continuous and discrete margin revisions are considered, respectively, for an equity call option and a vanilla interest-rate swap.
{"title":"CVA and FVA to Derivatives Trades Collateralized by Cash","authors":"Lixin Wu","doi":"10.2139/ssrn.2211347","DOIUrl":"https://doi.org/10.2139/ssrn.2211347","url":null,"abstract":"In this paper, we consider replication pricing of derivatives that are partially collateralized by cash. We let issuer replicate the derivatives payout using shares and cash, and let buyer replicate the loss given the counterparty default using credit default swaps. The costs of funding for replication and collateral posting are taken into account in the pricing process. A partial differential equation (PDE) for the derivatives price is established, and its solution is provided in a Feynman–Kac formula, which decomposes the derivatives value into the risk-free value of the derivative plus credit valuation adjustment (CVA) and funding valuation adjustment (FVA). For most derivatives, we show that CVAs can be evaluated analytically or semi-analytically, while FVAs as well as the derivatives values can be solved recursively through numerical procedures due to their interdependence. In numerical demonstrations, continuous and discrete margin revisions are considered, respectively, for an equity call option and a vanilla interest-rate swap.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"283 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-02-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131852863","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}
J. Braswell, L. Lannom, A. Milne, Jim Northey, N. Paskin, K. Traub
This paper is a joint response on the part of the authors to a request from the G-20 Financial Stability Board (FSB) for an engineering study to determine which scheme for the management of ISO 17442-compliant Legal Entity Identifiers (LEIs) best serves the purposes of the global LEI system that is being developed under the auspices of the G-20 FSB with the active contributions and participation of the Private Sector Preparatory Group (PSPG). While there are a range of different schemes to manage the issue of identifiers that fit the characteristics of the 18 digit number (plus two check digits) approach outlined in the ISO 17442 standard, for simplicity the representative schemes considered and evaluated were categorized into two general groups: -- An unstructured numbering system – an 18 character random unique identifier fills the whole numbering spectrum; -- A structured number – one where subsets of the spectrum are partitioned according to a structural guideline; for instance, an N digit prefix. Each subset is assigned to a different LEI "Local Operating Unit" (LOU, or LEI Registrar) for exclusive use. The consensus view of the joint authors is that a structured identification number is crucial for supporting decentralized local decision‐making and hence maximum adoption of the standard. This view is supported by actual practice in the management of existing global identity standards. All the existing federated global identification standards of which the authors are aware (e.g., DOI, GS1, Media Access Control [MAC address], Internet Protocol [IP and IPv6], EIDR ) , use a structured solution in order to allow maximum possible flexibility of local members in the allocation of identities. The authors have not, in contrast, been able to find any examples of unstructured global federated identifiers. Successful federated global identification standards have found it necessary to adopt a structured numbering system, and this paper supports that view and recommends that a domain-partitioned scheme for the management and issuance of ISO 17442-compliant Legal Entity Identifiers by a globally federated network of LEI registrars (a.k.a. Local Operating Units, or LOUs) be adopted.
{"title":"Response to the Financial Stability Board's Request for an Engineering Study on the Best Approach to Managing the Structure and Issuance of Legal Entity Identifiers (LEIs)","authors":"J. Braswell, L. Lannom, A. Milne, Jim Northey, N. Paskin, K. Traub","doi":"10.2139/ssrn.2197269","DOIUrl":"https://doi.org/10.2139/ssrn.2197269","url":null,"abstract":"This paper is a joint response on the part of the authors to a request from the G-20 Financial Stability Board (FSB) for an engineering study to determine which scheme for the management of ISO 17442-compliant Legal Entity Identifiers (LEIs) best serves the purposes of the global LEI system that is being developed under the auspices of the G-20 FSB with the active contributions and participation of the Private Sector Preparatory Group (PSPG). While there are a range of different schemes to manage the issue of identifiers that fit the characteristics of the 18 digit number (plus two check digits) approach outlined in the ISO 17442 standard, for simplicity the representative schemes considered and evaluated were categorized into two general groups: -- An unstructured numbering system – an 18 character random unique identifier fills the whole numbering spectrum; -- A structured number – one where subsets of the spectrum are partitioned according to a structural guideline; for instance, an N digit prefix. Each subset is assigned to a different LEI \"Local Operating Unit\" (LOU, or LEI Registrar) for exclusive use. The consensus view of the joint authors is that a structured identification number is crucial for supporting decentralized local decision‐making and hence maximum adoption of the standard. This view is supported by actual practice in the management of existing global identity standards. All the existing federated global identification standards of which the authors are aware (e.g., DOI, GS1, Media Access Control [MAC address], Internet Protocol [IP and IPv6], EIDR ) , use a structured solution in order to allow maximum possible flexibility of local members in the allocation of identities. The authors have not, in contrast, been able to find any examples of unstructured global federated identifiers. Successful federated global identification standards have found it necessary to adopt a structured numbering system, and this paper supports that view and recommends that a domain-partitioned scheme for the management and issuance of ISO 17442-compliant Legal Entity Identifiers by a globally federated network of LEI registrars (a.k.a. Local Operating Units, or LOUs) be adopted.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"53 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126523349","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}
type="main"> Over-the-counter (OTC) markets dominate trading in many asset classes. Will electronic trading displace traditional OTC “voice” trading? Can electronic and voice systems coexist? What types of securities and trades are best suited for electronic trading? We study these questions by focusing on an innovation in electronic trading technology that enables investors to simultaneously search many bond dealers. We show that periodic one-sided electronic auctions are a viable and important source of liquidity even in inactively traded instruments. These mechanisms are a natural compromise between bilateral search in OTC markets and continuous double auctions in electronic limit order books.
{"title":"Click or Call? Auction Versus Search in the Over-the-Counter Market","authors":"T. Hendershott, Ananth Madhavan","doi":"10.2139/ssrn.1961350","DOIUrl":"https://doi.org/10.2139/ssrn.1961350","url":null,"abstract":"type=\"main\"> Over-the-counter (OTC) markets dominate trading in many asset classes. Will electronic trading displace traditional OTC “voice” trading? Can electronic and voice systems coexist? What types of securities and trades are best suited for electronic trading? We study these questions by focusing on an innovation in electronic trading technology that enables investors to simultaneously search many bond dealers. We show that periodic one-sided electronic auctions are a viable and important source of liquidity even in inactively traded instruments. These mechanisms are a natural compromise between bilateral search in OTC markets and continuous double auctions in electronic limit order books.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125523804","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 analyse time series of CDS spreads for a set of major US and European institutions on a pe- riod overlapping the recent financial crisis. We extend the existing methodology of {epsilon}-drawdowns to the one of joint {epsilon}-drawups, in order to estimate the conditional probabilities of abrupt co-movements among spreads. We correct for randomness and for finite size effects and we find significant prob- ability of joint drawups for certain pairs of CDS. We also find significant probability of trend rein- forcement, i.e. drawups in a given CDS followed by drawups in the same CDS. Finally, we take the matrix of probability of joint drawups as an estimate of the network of financial dependencies among institutions. We then carry out a network analysis that provides insights into the role of systemically important financial institutions.
{"title":"Credit Default Swaps Drawup Networks: Too Tied to Be Stable?","authors":"Rahul Kaushik, S. Battiston","doi":"10.2139/ssrn.2198947","DOIUrl":"https://doi.org/10.2139/ssrn.2198947","url":null,"abstract":"We analyse time series of CDS spreads for a set of major US and European institutions on a pe- riod overlapping the recent financial crisis. We extend the existing methodology of {epsilon}-drawdowns to the one of joint {epsilon}-drawups, in order to estimate the conditional probabilities of abrupt co-movements among spreads. We correct for randomness and for finite size effects and we find significant prob- ability of joint drawups for certain pairs of CDS. We also find significant probability of trend rein- forcement, i.e. drawups in a given CDS followed by drawups in the same CDS. Finally, we take the matrix of probability of joint drawups as an estimate of the network of financial dependencies among institutions. We then carry out a network analysis that provides insights into the role of systemically important financial institutions.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114573808","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}
S. Chava, Alexander Oettl, Ajay Subramanian, K. Subramanian
We show that finance influences innovation by young private firms, an important source of long-term economic growth. We develop a simple theoretical model that predicts that a decrease (increase) in banks' bargaining power vis-a-vis entrepreneurs increases (decreases) both the volume and riskiness of innovation. Using staggered banking deregulation by U.S. states as shocks to the bargaining power of banks, we find that, consistent with our hypotheses, inter-state banking deregulation increased both the level and riskiness of innovation by young private firms while intra-state deregulation decreased them. Further, banking deregulation primarily impacted riskier explorative innovation by young private firms than the less risky exploitative innovation. In contrast, banking deregulation did not affect public firms and mature private firms that are relatively less dependent on bank financing. These results have important policy implications by demonstrating how financial development, through its impact on innovation by young private firms, can have a first order impact on economic growth.
{"title":"Banking Deregulation, Bargaining Power and Innovation","authors":"S. Chava, Alexander Oettl, Ajay Subramanian, K. Subramanian","doi":"10.2139/ssrn.2110455","DOIUrl":"https://doi.org/10.2139/ssrn.2110455","url":null,"abstract":"We show that finance influences innovation by young private firms, an important source of long-term economic growth. We develop a simple theoretical model that predicts that a decrease (increase) in banks' bargaining power vis-a-vis entrepreneurs increases (decreases) both the volume and riskiness of innovation. Using staggered banking deregulation by U.S. states as shocks to the bargaining power of banks, we find that, consistent with our hypotheses, inter-state banking deregulation increased both the level and riskiness of innovation by young private firms while intra-state deregulation decreased them. Further, banking deregulation primarily impacted riskier explorative innovation by young private firms than the less risky exploitative innovation. In contrast, banking deregulation did not affect public firms and mature private firms that are relatively less dependent on bank financing. These results have important policy implications by demonstrating how financial development, through its impact on innovation by young private firms, can have a first order impact on economic growth.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125590835","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 the role of algorithmic trading in modern financial markets. Additionally, order types, characteristics, and special features of algorithmic trading are described under the lens provided by the large development of high frequency trading technology. Special order types are examined together with an intuitive description of the implied dynamics of the order book conditional to special orders (iceberg and hidden). The chapter provides an analysis of the transaction costs associated with trading activity and examines the most common trading strategy employed in the market. It also examines optimal execution strategy with the description of the Efficient Trading Frontier. These concepts represent the tools needed to understand the most recent innovations in financial markets and the most recent advances in microstructures research.
{"title":"Effective Trade Execution","authors":"Riccardo Cesari, Massimiliano Marzo, P. Zagaglia","doi":"10.2139/ssrn.2088800","DOIUrl":"https://doi.org/10.2139/ssrn.2088800","url":null,"abstract":"This paper examines the role of algorithmic trading in modern financial markets. Additionally, order types, characteristics, and special features of algorithmic trading are described under the lens provided by the large development of high frequency trading technology. Special order types are examined together with an intuitive description of the implied dynamics of the order book conditional to special orders (iceberg and hidden). The chapter provides an analysis of the transaction costs associated with trading activity and examines the most common trading strategy employed in the market. It also examines optimal execution strategy with the description of the Efficient Trading Frontier. These concepts represent the tools needed to understand the most recent innovations in financial markets and the most recent advances in microstructures research.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114334793","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 propose a discrete-time multivariate model where lagged levels of the process enter both the conditional mean and the conditional variance. This way we allow for the empirically observed persistence in time series such as interest rates, often implying unit-roots, while at the same time maintain stationarity despite such unit-roots. Specifically, the model bridges vector autoregressions and multivariate ARCH models in which residuals are replaced by levels lagged. An empirical illustration using recent US term structure data is given in which the individual interest rates are found to have unit roots, have no finite first-order moments, but remain strictly stationary and ergodic. Moreover, they co-move in the sense that their spread has no unit root. The model thus allows for volatility induced stationarity, and the paper shows conditions under which the multivariate process is strictly stationary and geometrically ergodic. Interestingly, these conditions include the case of unit roots and a reduced rank structure in the conditional mean, known from linear co-integration. Asymptotic theory of the maximum likelihood estimators for a particular structured case (so-called self-exciting) is provided, and it is shown that T-convergence to Gaussian distributions apply despite unit roots as well as absence of finite first and higher order moments. Monte Carlo simulations illustrate the asymptotic theory.
{"title":"Unit Root Vector Autoregression with Volatility Induced Stationarity","authors":"Anders Rahbek, Heino Bohn Nielsen","doi":"10.2139/ssrn.2083452","DOIUrl":"https://doi.org/10.2139/ssrn.2083452","url":null,"abstract":"We propose a discrete-time multivariate model where lagged levels of the process enter both the conditional mean and the conditional variance. This way we allow for the empirically observed persistence in time series such as interest rates, often implying unit-roots, while at the same time maintain stationarity despite such unit-roots. Specifically, the model bridges vector autoregressions and multivariate ARCH models in which residuals are replaced by levels lagged. An empirical illustration using recent US term structure data is given in which the individual interest rates are found to have unit roots, have no finite first-order moments, but remain strictly stationary and ergodic. Moreover, they co-move in the sense that their spread has no unit root. The model thus allows for volatility induced stationarity, and the paper shows conditions under which the multivariate process is strictly stationary and geometrically ergodic. Interestingly, these conditions include the case of unit roots and a reduced rank structure in the conditional mean, known from linear co-integration. Asymptotic theory of the maximum likelihood estimators for a particular structured case (so-called self-exciting) is provided, and it is shown that T-convergence to Gaussian distributions apply despite unit roots as well as absence of finite first and higher order moments. Monte Carlo simulations illustrate the asymptotic theory.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-06-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130881591","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 financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for insurance than for gambling. Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial gambling before deregulation in the 1990s.
{"title":"An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets","authors":"E. Posner, E. Weyl","doi":"10.2139/ssrn.2010606","DOIUrl":"https://doi.org/10.2139/ssrn.2010606","url":null,"abstract":"The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for insurance than for gambling. Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial gambling before deregulation in the 1990s.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"76 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-06-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121737013","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}
N. Ṣabrī, Diama Khaled Abu Laban, Dima Walid Hanyia
This research aims to point out to what extent internet-banking, ATMs and other electronic money instruments are used in the Palestinian economy based on multi currencies. It used multi research instruments including: Examining the related laws, rules and regulations regarding the issue, structured interviews and relevant questionnaires were articulated and conducted to selected samples of bankers and banks’ clients from 12 banks. The study found that all Palestinian banks have ATM machines, which deals with three currencies including JD, NIS, and USD with various transactions, while about a half of the banks issue credit cards to their clients, and offer internet inquires and internet transactions. With the exception of ATM, the majority of the banking clients don’t know about the existing possibilities of E- banking channels available in their banks and/ or how to use it. The banking directors and staff do not see much increase in using the E- banking transactions by their clients, in spite of the new adopted electronic instruments by the majority of banks in the last decade.
{"title":"Internet Banking and ATMs Applications: In Context of Multi Currencies Economy","authors":"N. Ṣabrī, Diama Khaled Abu Laban, Dima Walid Hanyia","doi":"10.2139/SSRN.2038738","DOIUrl":"https://doi.org/10.2139/SSRN.2038738","url":null,"abstract":"This research aims to point out to what extent internet-banking, ATMs and other electronic money instruments are used in the Palestinian economy based on multi currencies. It used multi research instruments including: Examining the related laws, rules and regulations regarding the issue, structured interviews and relevant questionnaires were articulated and conducted to selected samples of bankers and banks’ clients from 12 banks. The study found that all Palestinian banks have ATM machines, which deals with three currencies including JD, NIS, and USD with various transactions, while about a half of the banks issue credit cards to their clients, and offer internet inquires and internet transactions. With the exception of ATM, the majority of the banking clients don’t know about the existing possibilities of E- banking channels available in their banks and/ or how to use it. The banking directors and staff do not see much increase in using the E- banking transactions by their clients, in spite of the new adopted electronic instruments by the majority of banks in the last decade.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114464810","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}
Microcredit is an innovative financial tool designed to reduce poverty and fix credit market imperfections. We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit. Conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Microcredit contracts require loan repayments in regular, fixed installments and they harness peer pressure to encourage discipline. These innovations mirror mechanisms highlighted in behavioral approaches to saving, suggesting that microcredit's popularity stems partly from modes of encouragement and self-discipline absent in typical lending mechanisms.
{"title":"Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India","authors":"Michal Bauer, Julie Chytilová, J. Morduch","doi":"10.1257/AER.102.2.1118","DOIUrl":"https://doi.org/10.1257/AER.102.2.1118","url":null,"abstract":"Microcredit is an innovative financial tool designed to reduce poverty and fix credit market imperfections. We use experimental measures of time discounting and risk aversion for villagers in south India to highlight behavioral features of microcredit. Conditional on borrowing from any source, women with present-biased preferences are more likely than others to borrow through microcredit institutions. Microcredit contracts require loan repayments in regular, fixed installments and they harness peer pressure to encourage discipline. These innovations mirror mechanisms highlighted in behavioral approaches to saving, suggesting that microcredit's popularity stems partly from modes of encouragement and self-discipline absent in typical lending mechanisms.","PeriodicalId":414983,"journal":{"name":"IRPN: Innovation & Finance (Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115577293","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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