optimal pricing of intraday liquidity abstract this paper presents a general equilibrium model where intraday liquidity is needed because the timing of payments is uncertain a necessary and sufficient condition for an equilibrium to be efficient is that the nominal intraday interest rate be zero even when the overnight rate is strictly positive because a market for liquidity may not achieve efficiency this creates a role for the central bank i allow for the possibility of moral hazard and study policies commonly used by central banks to reduce their exposure to risk i show collateralized lending achieves the efficient allocation while for certain parameters caps cannot prevent moral hazard

equity returns and integration is europe changing this paper analyses the consequences of the process of financial and economic integration on european equity markets it documents significant changes in fundamentals notably an increased synchronization of macroeconomic activities and a non negligible evolution in pricing with a decrease in the cost of capital and converging equity premiums as to equity returns themselves in the face of what could turn out to be long run upward trends in the correlations among both country and sector returns and a narrowing of the superiority of country factors the benefits to be gained from finding diversification opportunities at a more disaggregated level appear to be higher than ever copyright 2004 oxford university press

controlling risk in payment systems over the past twenty years the growing integration of financial markets the development of new financial instruments and the advance of computer technology have all contributed to a remarkable growth of financial activity in the main industrialized countries one of the most significant consequences of this growth has been the unprecedented increase in the volume of trade on the largevalue interbank payment systems see table 1 which itself has resulted in a massive increase in intraday overdrafts on those systems see table 2 the central banks of the large industrialized countries concerned with the risks that this growth was creating for their banking systems have been studying the risks on interbank payment systems work that has borne fruit with the angell report bank for international settlements bis 1989 and the lamfalussy report bis 1990 both under the aegis of the bis and the padoa schioppa report european community 1992 under the aegis of the eec of particular concern is the organization of interbank large value transfer systems banks have traditionally concluded among themselves multilateral netting arrangements which settle at discrete time intervals this is the modern form of clearinghouses which still operate for small value transfers these arrangements

clearinghouse banks and banknote over issue abstract the paper presents a model of banks as clearinghouses of private debt where money is used as the means of payment implications of the model include i the private provision of banknotes or a discount window may be needed to avoid the insufficient debt clearing that results from an inflexible currency stock and ii an uncontrolled total money stock may result in a multiplicity of equilibria including an inflationary banknote over issue

global pricing of equity global equity management has historically been structured around country asset allocation this approach was supported by the observations that the country factor is the major source of influence on stock price behavior and that the correlation between equity and currency is close to zero and unstable if a corporation is regarded as a portfolio of international activities however its stock price should be influenced by international factors in relation to the geographical breakdown of its activities rather than where its headquarters is located or its stock is traded we examined a large cross section of security prices and found that regional factors and currency factors have a strong influence on asset returns beyond that of domestic factors moreover the sensitivity of individual company returns to nondomestic factors is closely related to the extent of their international activities as proxied by the relative importance of foreign sales to total sales we review the implications of these findings

comovement in international equity markets a sectoral view abstract we investigate shifts in correlation patterns among international equity returns at the market level as well as the industry level we develop a novel bivariate garch model for equity returns with a smoothly time varying correlation and then derive a lagrange multiplier statistic to test the constant correlation hypothesis directly applying the test to weekly data from germany japan the uk and the us in the period 1980 2000 we find that correlations among the german uk and us stock markets have doubled whereas japanese correlations have remained the same both dates of change and speeds of adjustment vary widely across countries and sectors

controlling risk in global multimanager portfolios the issue of country and sector effects is important for portfolio construction and risk management unlike the many studies that have addressed the issue by analyzing individual stocks this article focuses on analyzing managed portfolios using global data on manager excess returns and portfolio characteristics i examined the relative effects of country versus sector bets on excess return variations i then evaluated alternative portfolio construction strategies by using optimization and simulation methods i found that active country exposure is a larger driver of variations in individual managers excess returns than is active sector exposure using this information money managers can learn current investment industry trends in country and sector selection and fund managers can construct their multimanager portfolios to reduce tracking error by weighting individual managers to limit country exposure in an overall portfolio

optimal redistribution with productive social services publicly provided private goods are conventionally considered consumer goods departing from this perspective we analyze the public provision of inputs that improve household productivity e g education and childcare in a two class economy with distorting taxation public provision is always welfare improving with respect to pure taxation given that the public input directly affects household productivity moreover the case for public provision strengthens as households heterogeneity in input demand fades out contrary to consolidated results in the literature the features of optimal provision schemes depend on the nature of publicly provided input namely if it substitutes household productive capacity or just helps households to exploit it

changing risks in global equity portfolios given recent changes in sector and style risk and in manager betting behavior in the global equity markets we analyzed the relative importance of the major active risk drivers and the implications of their relative importance for global multimanager portfolio construction using cross sectional regressions and multimanager portfolio simulations we found that the effect of style and sector bets on active manager risk increased after 1998 and that using style balanced portfolios could have substantially reduced active risk during the 1998 2002 period most of the risk reduction however would have come from the diversification of stock sector selection risk because growth and value managers make different bets on certain sectors common bets on major countries such as japan or the united states persisted during this period but their importance decreased because of smaller benchmark relative bets and country risk in light of the changes using multiple risk control strategies to construct multimanage

dynamic stock market covariances in the eurozone abstract this paper examines the short term dynamics macroeconomic sensitivities and longer term trends in the variances and covariances of national equity market index daily returns for eleven countries in the euro currency zone we modify colacito engle and ghysel s mixed data sampling dynamic conditional correlation garch model to include a new scalar measure for the degree of correlatedness in time varying correlation matrices we also explore the robustness of the findings with a less model dependent realized covariance estimator we find a secular trend toward higher correlation during our sample period and significant linkages between macroeconomic and market wide variables and dynamic correlation one notable finding is that average correlation between these markets is lower when their average gdp growth rate is lower or when more of them have negative gdp growth

does institutional ownership matter for international stock return comovement funding portuguese foundation for science and technology fct uid ges 00407 2013 ptdc iim fin 2977 2014 and european research council

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

the bullionist controversy theory and new evidence the bullionist controversy in the united kingdom is one of the first debates about the determination of the price level and the exchange rate under a paper money standard despite the importance of the debate in the development of monetary theory there remains little empirical evidence that uses modern multivariate time series techniques the evidence that does exist provides support for the anti bullionist position the purpose of this paper is to review the debate and develop a dynamic general equilibrium model that is capable of capturing key features of the 19th century british financial system the model is estimated using bayesian procedures to test the competing hypotheses the paper provides support for the bullionist position

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

transferability finality and debt settlement abstract payment fundamental to exchange in a decentralized economy often takes the form of transfers of inside money i e specialized forms of debt associated with each type of inside money is a set of rules that governs both the legitimacy of such transfers as means of extinguishing other debts and the allocation of the ensuing risks in this paper we develop a model of debt as inside money in a simple mechanism design framework we show that transferable debt that can be used to settle other debt obligations with finality can be a welfare improving arrangement in the presence of limited enforcement powers transferable debt has two advantages over simple chains of credit it allows for removal of less than perfectly reliable agents from the chain in a timely fashion and it allows agents to direct payments to the proper party without direct communication with other members of the credit chain

country v sector effects in equity returns and the roles of geographical and firm size coverage since roll the journal of finance 47 1 3 41 1992 and heston and rouwenhorst journal of financial economics 36 3 27 1994 there has been a debate whether country factors in international stock returns are typically more variable than sector factors the addition of emerging markets ems does boost the ratio of country factor variance relative to industry factor variance these markets have a higher variability but are also less related to global factors investigating to what extent this phenomenon can be tracked down to the impact of adding more small firms we find the following 1 small firms do have higher volatility but only after controlling for country and sector affiliation 2 small firms do have weaker sector affinity as expected 3 small firms unexpectedly have weaker local market sensitivities than large firms facts 2 and 3 mean that adding more small firms to the data base has a diversifying effect on both the sector and country factor variance while the impact on sector variance is larger the net effect turns out to be tiny 4 adding emerging markets has a very marked impact on the variance ratio in fact the addition of small stocks to the sample hardly dents the effect of adding ems thus the role of ems cannot be reduced to just a small firm phenomenon

payments systems design in deterministic and private information environments abstract the first setup we study is a deterministic model with spatial separation where we consider alternative payments systems institutions and their implications for allocation and welfare a payments system with period by period settlement in outside money improves on decentralized exchange an efficient allocation is supported by a payments system where settlement is not imposed in the second model there is random matching and unobserved productivity shocks and preference shocks we explore how risk should be shared optimally in this economy and interpret the results in terms of how actual payments systems should operate journal of economic literature classification numbers e4 e5

the rise of sector effects in major equity markets historically country effects have been dominant in explaining variations in global stock returns even in the developed markets and investors have segmented their allocations accordingly we set out to investigate whether this situation still prevails we found a significant shift in the relative importance of national and economic influences in the stock returns of the world s largest equity markets in these markets the impact of industrial sector effects is now roughly equal to that of country effects in addition to supporting the notion of increasing global capital market integration these findings suggest that country based approaches to global investment management may be losing their effectiveness

rediscounting under aggregate risk abstract this paper compares three institutions that offer an elastic currency open market operations a discount window and a private banknote issuing clearinghouse in an economy with financial markets otherwise hampered by a lack of liquidity when this economy is subject to aggregate financial shocks these alternative forms of central banking are shown to differ in their implications for risk sharing interesting implications include i central bank losses and monetary innovations that are part of an efficient equilibrium and ii desirable quantity restrictions at the discount window

a global stock and bond model six fundamental risk factors four for stocks and two for bonds explain most of the common volatility of individual stocks and bonds worldwide some of the risk factors have a strong international component and others are more purely national the cross national component of the risk factors tends to be stronger within the european union than worldwide the model proposed in this article can be used for integration of worldwide asset selection and asset allocation decisions

rediscounting under aggregate risk with moral hazard freeman 1999 proposes a model in which discount window lending and open market operations have different effects this is important because in most of the literature these policies are indistinguishable

real time gross settlement and the costs of immediacy abstract using a neoclassical monetary model we investigate the welfare cost of a payment system that operates as a real time gross settlement rtgs system we illustrate how the cost of such systems ultimately derives from the credit constraints imposed by rtgs the effects of these constraints can be undone if the central bank makes intraday credit freely available if intraday credit is only available on a collateralized basis however rtgs will always impose a liquidity cost

national versus global influences on equity returns simple factor models of worldwide equity returns are used to explore the level and trend in international capital market integration global influences and national influences are of roughly equal importance in explaining the common movements in equity returns significant evidence indicates a trend toward increasing integration within the european union but not worldwide

economic integration and country allocation in europe the impact of european integration at the company and macro levels on correlations between stock market returns is analyzed a new procedure based on randomization methodology is introduced to test for the absence of country systematic differences in the return patterns of two stock markets the results indicate that stock market integration in europe is not yet complete but the comovement of european markets has increased substantially and is likely to continue to grow therefore top down managers of european equity portfolios need to look for a new strategy other than country based allocation

monetary stability and liquidity crises the role of the lender of last resort we study an economy where agents are subject to liquidity demand shocks and banks arise endogenously to insure consumers against these shocks in this environment we evaluate the desirability of a lender of last resort who can provide liquidity loans to banks in distress in the absence of a lender of last resort the economy has a unique stationary equilibrium the introduction of unlimited and costless lender of last resort services allows the economy to achieve a steady state allocation that is pareto optimal however this economy also displays a continuum of hyperin ationary equilibria we then explore restrictions on the provision of lender of last resort services that rule out such monetary instability while preserving some of the e ciency obtained by unrestricted lender of last resort services when the lender of last resort charges an interest rate on liquidity loans the economy has a unique steady state equilibrium and when the interest rate charged is high enough no hyperin ationary equilibria arise finally when the lender of last resort faces an upper bound on loanable funds there is again a unique long run equilibrium and when the upper bound on loanable funds is small enough hyperin ationary equilibria are ruled out

pricing of domestic versus multinational companies world financial markets are becoming integrated hence global factors rather than domestic factors should dominate the pricing of stocks all the empirical studies published until the mid 1990s however reported that stock prices respond primarily to domestic factors in other words the pricing of a company s stock is driven predominantly by the primary location of its stock listing rather than by the nature and geographical breakdown of its activities we challenge this vision of international market pricing we have found that stock pricing at least for non u s companies is strongly influenced by the extent of the company s nondomestic activities this finding has implications for the organization of global equity research departments and for the structure of the investment process

the payments system liquidity and rediscounting in an economy where fiat money serves both as a medium of exchange and the means by which debts are cleared it is shown that nonoptimal equilibria of constrained liquidity may arise optimality may be restored by temporary expansions of the monetary base e g an active central bank discount window copyright 1996 by american economic association

the relative importance of common factors across the european equity markets abstract in this paper we try to shed additional light on the question of integration or segmentation of european equity markets by studying the statistical relevance of some intuitively appealing international factors of return the relevance of these factors is also investigated through time in order to evaluate a possible increase in market integration over the recent past

production hidden action and the payment system abstract using a modified version of freeman s 1996 payment system model the optimal intraday rate is examined the production set is modified to account for a non degenerate distribution of settlements within a day in addition to the modified production set the consumption set is modified a positive intraday interest rate may be able to implement the planner s allocation

financial crises payment system problems and discount window lending in a developed economy financial crises are rapidly conveyed to the payment system which tends to rely on private credit extensions in most countries while many authors recommend that the central bank do no more than provide adequate aggregate liquidity during a crisis this policy requires well functioning private credit markets to channel liquidity to solvent but illiquid firms this paper presents a model of private lending which defines a crisis as a time when lenders become uncertain about how to assess financial risks and therefore rationally withdraw from making new loans in such an environment a government lender of last resort can improve social welfare copyright 1996 by ohio state university press