contagion during the greek sovereign debt crisis abstract we examine the impact of news about greece and news about a greek bailout on bank stock prices in 2010 using data for 48 european banks we identify the twenty days with extreme returns on greek sovereign bonds and categorise the news events during those days into news about greece and news about the prospects of a greek bailout we find that except for greek banks news about greece does not lead to abnormal returns while news about a bailout does even for banks without any exposure to greece or other highly indebted euro countries this finding suggests that markets consider news about the bailout to be a signal of european governments willingness in general to use public funds to combat the financial crisis sovereign bond prices of portugal ireland and spain respond to both news about greece and news about a greek bailout

securitized markets international capital flows and global welfare we study the effect of collateralized lending and securitization on the global supply of securitized assets welfare and international net and gross capital flows in a two country general equilibrium model with idiosyncratic investment risk the financial sectors in the two countries home and foreign differ by the collateral requirement for investment loans with home requiring lower margins in autarky home endogenously supplies more assets and enables more risk sharing upon financial integration capital flows from foreign to home leading to lower interest rates and an increase in the global supply of assets foreign enjoys substantial welfare gains through better risk sharing and portfolio reallocation while the welfare experience for home is ambiguous gross capital flows arise when agents face aggregate shocks to the expected payoff to investment projects but can collapse when shocks concern the variance of returns

biased signaling and yardstick comparisons in a sovereign debt market abstract this paper develops a sovereign debt model in which governments are privately informed about their likelihood of default but can themselves have a biased perception of this likelihood i show that in this setup government borrowing acts as a signal that is only partially informative about fundamental default probabilities and bond prices do not necessarily reflect true credit risk i also show that in a two country version of the model correlations between the two countries induces yardstick comparisons and the borrowing decision of one government affects the bond price received by the other whether the information spillover increases or decreases the distortion created by the bias depends on the extent to which borrowing signals reinforce each other

bad investments and missed opportunities postwar capital flows to asia and latin america since 1950 the economies of east asia grew rapidly but received little inter national capital while latin america received considerable international capitaleven as their economies stagnated the literature typically explains the failureof capital to flow to high growth regions as resulting from international capitalmarket imperfections this paper proposes a broader thesis that country specificdistortions such as domestic labor and capital market distortions also impactcapital flows we develop a dsge model of asia latin america and the rest ofthe world that features an open economy business cycle accounting framework tomeasure these domestic and international distortions and to quantify their con tributions to international capital flows we find that domestic distortions havebeen the predominant drivers of international capital flows and that the generalequilibrium effects of these distortions are very large international capital market distortions also matter but less

belief disagreements and collateral constraints belief disagreements have been suggested as a major contributing factor to the recent subprime mortgage crisis this paper theoretically evaluates this hypothesis i assume that optimists have limited wealth and take on leverage so as to take positions in line with their beliefs to have a significant effect on asset prices they need to borrow from traders with pessimistic beliefs using loans collateralized by the asset itself since pessimists do not value the collateral as much as optimists do they are reluctant to lend which provides an endogenous constraint on optimists ability to borrow and to influence asset prices i demonstrate that the tightness of this constraint depends on the nature of belief disagreements optimism concerning the probability of downside states has no or little effect on asset prices because these types of optimism are disciplined by this constraint instead optimism concerning the relative probability of upside states could have significant effects on asset prices this asymmetric disciplining effect is robust to allowing for short selling because pessimists that borrow the asset face a similar endogenous constraint these results emphasize that what investors disagree about matters for asset prices to a greater extent than the level of disagreements when richer contracts are available relatively complex contracts that resemble some of the recent financial innovations in the mortgage market endogenously emerge to facilitate betting

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

the seven main stylized facts of the mexican economy since trade liberalization and nafta in mexico a remarkably dynamic expansion of exports has been associated with a surprisingly poor overall growth performance moreover this collapse of the export multiplier took place in a context of both massive inflows of foreign direct investment and unrestricted market access to the us the first two items on all developing countries growth agenda today therefore the study of mexico is an ideal scenario within which to assess the impact of the new development model on growth and catching up copyright 2005 oxford university press

observing bailout expectations during a total eclipse of the sun abstract the literature has not reached a consensus yet regarding the existence of sovereign creditor moral hazard exploiting an exceptional historical example this paper proposes an original method to address this issue as the corona which is observable only during a total eclipse of the sun market specific prices of repudiated bonds are observable only when extreme conditions segment the markets such very rare events allow for isolating pure country specific bailout expectations the paper shows that bailouts do create creditor moral hazard based on an impulse response analysis the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation

vertical debt spillovers in emu countries abstract this article examines the extent to which subnational governments may drive sovereign risk premiums is subnational fiscal policy affecting the interest rates on central government bonds furthermore we focus on a number of causal mechanisms that may mitigate or reinforce these upstream vertical spillovers i e the presence of bailout expectations and subnational borrowing autonomy our findings indicate that debt accumulation by subnational governments sng spills over onto sovereign risk premiums when the restrictions on sng borrowing are weak and when investors believe that subsovereign debts are backed by the center the results suggest that spillovers may be reduced through a proper design of a country s fiscal and institutional framework countries should either bolster the sovereignty of subnational governments by increasing sng fiscal autonomy or tightening up sng borrowing constraints

standardised capital stock estimates in latin america a 1950 94 update capital stock estimates are used extensively in many areas of economic research in spite of both theoretical and practical difficulties with respect to their use estimation and meaning the lack of comparable capital stock estimates in latin america has hindered analysis of economic development in the region and comparisons with other developed and developing countries standardised gross and net fixed capital stock estimates for the 1950 94 period are presented for seven latin american countries argentina brazil chile colombia ecuador mexico and venezuela the methodology employed is the perpetual inventory method which estimates capital stocks as a weighted sum of past investment flows several methodological issues are discussed especially depreciation and service life estimation capital stocks have been disaggregated in machinery and equipment non residential and residential structures with services lives of 15 40 and 50 years respectively copyright 2000 by oxford university press

identifying booms and busts in house prices under heterogeneous expectations we introduce heterogeneous expectations in a standard housing market model linking housing rental levels to fundamental buying prices using quarterly data we estimate the model parameters for eight different countries us uk nl jp ch es se and be we find that the data support heterogeneity in expectations with temporary endogenous switching between fundamental mean reverting and trend following chartists beliefs based on their relative performance for all countries we identify temporary house price bubbles amplified by trend extrapolation and crashes reinforced by fundamentalists the qualitative predictions of such non linear models are very different from standard linear benchmarks with important policy implications the fundamental price becomes unstable e g when the interest rate is set too low or mortgage tax deductions too high giving rise to multiple non fundamental equilibria and or global instability

what drives provincial canada yield spreads although recent research has led to a deeper understanding of the factors determining yields on long term canada bonds there has been little corresponding work on provincial bonds this is despite the fact that unlike the us state bond market provincial debt represents a significant part of the canadian bond market provincial and state debt are examples of sub national debt which are backed by taxing powers similar to that of the national government but without control of the money supply which leaves them open to the possibility of default or payment rescheduling this in turn makes them similar to corporate debt by using a carefully constructed new data set we establish two important results first provincial fiscal positions debt and deficits are an important factor in determining yield spreads between provincial and canada bonds second we show that provincial bonds are a substitute for corporate debt in that during recessionary flights to quality their yields react similar to those on corporate bonds

fragmented government effects on fiscal policy new evidence most industrialized countries entered the 1980s with their public finances in disarray at the time persistent deficits pushed up public debt to gdpratios despite such similarities deficit spending varies substantially between countries and within countries over time recent theoretical and empirical research has considered how differences in political arrangements affecting national policy formation might explain variation in fiscal policies pursued using a panel of 22 oecd countries over the 1971 1996 period this paper extends previous literature on the effects of fragmented government on fiscal policy outcomes in various directions first we focus on data relating to central government instead of general government as all theories refer to central government second not only do we analyze the effect of size fragmentation of government we also examine government s position vis a vis parliament and government s political fragmentation we find evidence that more fragmented government defined in terms of the number of political parties in a coalition or the number of spending ministers have higher deficits there is also some evidence that governments that dispose of excess seats in parliament have lower deficits right wing governments appear to have been fiscally more responsible in the seventies political fragmentation does not affect government s budget deficit

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

how do official bailouts affect the risk of investing in emerging markets we analyze the effects of bailout expectations on sovereign bond spreads in emerging markets the non bailout of russia in august 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets if official rescues are expected to mitigate the losses of investors in the event of a crisis such an event should raise the cross country dispersion of spreads because investors pay more attention to differences in risk characteristics across countries we find strong evidence for such an effect this is consistent with the existence of investor moral hazard at least prior to 1998

adverse effects of leverage and short selling constraints in a financial market model with heterogeneous agents this paper investigates the impact of leverage and short selling constraints on financial market stability investors demand is modelled in a well known asset pricing model with heterogeneous beliefs in particular i generalise the heterogeneous agents model of brock and hommes 1998 and anufriev and tuinstra 2013 to allow for leverage constraints as well as a short selling tax i consider two examples of adaptive belief systems describing the coevolution of prices and investors beliefs first if the market is inhabited by fundamentalist and chartist traders demand constraints have potential adverse effects and may restrict the stabilising fundamentalist strategy such that mispricing and price volatility increase second if the market is inhabited by fundamentalists optimists and pessimists with fixed beliefs demand constraints drive down price volatility but mispricing remains the results suggest the stabilising effects of demand constraints in financial markets are limited only if asset prices are too high compared to fundamentals policy makers should consider constraining leverage ratios in order to deflate financial bubbles

securitization bubbles structured finance with disagreement about default risk abstract an additional reason for the structured finance boom of the 2000s may have been disagreement about default risk of collateral assets when risk neutral investors disagree about average default probabilities structuring collateral cash flow raises prices by concentrating optimists demand on risky tranches with disagreement about default correlation low correlation investors believe in diversification and pay high prices for senior tranches they deem riskless high correlation investors value junior tranches they expect to pay whenever aggregate conditions are good risk aversion and short selling through credit default swaps reduce the prices of both pass through and structured securitizations but may increase the return to tranching

trading in derivatives when the underlying is scarce abstract regulatory restrictions and market frictions can constrain the aggregate quantity of long and short positions in a security when these constraints bind we refer to the security as scarce and its price becomes distorted relative to its value in a frictionless market we show that an otherwise redundant derivative can reduce the price distortion of the underlying security by relaxing its scarcity we also show that it is especially important to analyze the underlying and derivative markets jointly when evaluating the impact of regulation such as short sales bans and position limits in derivatives that restricts trade

do credit markets discipline sovereign borrowers evidence from u s states the degree to which credit markets discipline sovereign borrowers is investigated by estimating the supply curve for debt faced by u s states the results generally support an optimistic view of the market discipline hypothesis with credit markets providing incentives for sovereign borrowers to restrain borrowing while the risk premium on bond yields is estimated to increase only gradually at low levels of debt this effect appears to become much larger as debt rises there is also some evidence that credit markets may withhold access to credit at very high levels of debt copyright 1995 by ohio state university press

imf bailouts and moral hazard this paper empirically investigates the extent of investor moral hazard associated with imf bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of imf bailouts of countries undergoing financial crisis we do not find strong evidence that the extent of investor moral hazard changed after the non bailout of russia in august 1998 that signaled a modification to imf intervention policy in contrast we find evidence that investor moral hazard is intensified for those countries that have stronger political connections to the imf and that are thereby more likely to be bailed out by the imf this pattern prevailed even after the russian crisis

debt financing in asset markets short term debt such as overnight repurchase agreements and commercial paper was heavily used by financial institutions to fund their investment positions during the asset market boom preceding the financial crisis of 2007 2008 and later played a major role in leading to the distress of these institutions during the crisis what explains the popularity of short term debt in financing asset market investments geanakoplos 2010 presents a dynamic model of the joint equilibrium of asset markets and credit markets in which optimistic buyers of a risky asset use the asset as collateral to raise debt financing from less optimistic creditors the asset s collateral value depends on the marginal creditor s asset valuation and determines the buyers purchasing capacity to bid up the asset price geanakoplos posits that short term debt allows the asset buyers to maximize riskless leverage 1 short term debt however exposes the asset buyers to rollover risk e g acharya gale and yorulmaker 2011 and he and xiong 2012 forthcoming which is reflected in the fact that the asset buyers in geanakoplos model may not be able to obtain refinancing after a negative fundamental shock as a result they are forced to transfer their asset holdings to the

on the complicated price dynamics of a simple one dimensional discontinuous financial market model with heterogeneous interacting traders abstract we develop a financial market model with heterogeneous interacting agents market makers adjust prices with respect to excess demand chartists believe in the persistence of bull and bear markets and fundamentalists bet on mean reversion moreover speculators trade asymmetrically in over and undervalued markets and while some of them determine the size of their orders via linear trading rules others always trade the same amount of assets the dynamics of our model is driven by a one dimensional discontinuous map despite the simplicity of our model analytical graphical and numerical analysis reveals a surprisingly rich set of interesting dynamical behaviors

fiscal policy and interest rates in europe the appetite for fiscal discipline has been steadily declining among most industrial countries in the past fiscal profligacy would have been punished by markets with higher interest rates and in some cases also exchange rate depreciation however in post emu europe exchange rate markets no longer discipline the fiscal behaviour of national governments perhaps more crucially even the interest rate punishment to fiscal indiscipline is highly uncertain with academic opinions being quite divided on this issue this paper takes a close look at the link between fiscal policy and interest rates in the european context the key finding is that an expansionary fiscal policy in one emu member will have an effect both on its spreads and on the overall level of interest rates for the currency union as a whole with the second effect however being quantitatively much more significant this suggests that there are indeed substantial spillovers through the interest rate channel among fiscal policies of member countries to limit countries incentive to run expansionary fiscal policies a set of rules like those embedded in the stability and growth pact is then needed some weak evidence is also found that after emu interest rate spillovers seem to be more significant for high debt countries with unsustainable fiscal policies reflecting perhaps market concerns about a possible sovereign bail out or the impact of financial distress there may be a case then for imposing tighter rules on high debt countries riccardo faini

sub nationals risk premia in fiscal federations fiscal performance and institutional design the recent debt crisis in europe highlighted the importance of institutional design and in particular bail out clauses in determining states risk premia in fiscal or quasi fiscal federations this paper examines the determinants of sub national governments risk premia in fiscal federations using secondary market data for the usa canada australia and germany it finds that as for central governments fiscal fundamentals matter in the pricing of risk and sub national governments with higher public debt and larger deficits pay higher premia however this relationship is not uniform across federations and it differs with institutional arrangements in particular market pricing mechanisms are less effective in presence of explicit or implicit guarantees from the central government we show that when sub national governments depend on high transfers from the central government i e when there is some form of implicit guarantee from the center markets are less responsive to sub national governments fiscal fundamentals using primary market data the paper also shows that high transfer dependency lowers the probability of sub national governments to borrow on capital markets

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

house price beliefs and mortgage leverage choice we study the relationship between homebuyers beliefs about future house price changes and their mortgage leverage choices whether more pessimistic homebuyers choose higher or lower leverage depends on their willingness and ability to reduce the size of their housing market investments when households primarily maximize the levered return of their property investments more pessimistic homebuyers reduce their leverage to purchase smaller houses on the other hand when considerations such as family size pin down the desired property size pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly sized homes to determine which scenario better describes the data we investigate the cross sectional relationship between house price beliefs and mortgage leverage choices in the u s housing market we use plausibly exogenous variation in house price beliefs to show that more pessimistic homebuyers make smaller downpayments and choose higher leverage in particular in states where default costs are relatively low as well as during periods when house prices are expected to fall on average our results highlight the important role of heterogeneous beliefs in explaining households financial decisions

sovereign bond market reactions to no bailout clauses and fiscal rules the swiss experience abstract we analyse the effects of a credible no bailout policy and stringent sub national fiscal rules on the risk premia of swiss sub national government bonds in the period from 1981 to 2007 in july 2003 the swiss supreme court decided that the canton of valais is not liable for municipal debt this landmark decision reduced cantonal risk premia by about 26 basis points and cut the link between cantonal risk premia and the financial situation of the municipalities that existed before the result demonstrates that a not fully credible no bailout commitment can entail high costs for the potential guarantor additionally strong and credible balanced budget rules reduce risk premia

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio