Informed and Uninformed Investment in Housing: The Downside of Diversification
Elena Loutskina, Philip E. Strahan
Review of Financial Studies,
No. 5,
2011
Abstract
Mortgage lenders that concentrate in a few markets invest more in information collection than diversified lenders. Concentrated lenders focus on the information-intensive jumbo market and on high-risk borrowers. They are better positioned to price risks and, thus, ration credit less. Adverse selection, however, leads to higher retention of mortgages relative to diversified lenders. Finally, concentrated lenders have higher profits than diversified lenders, their profits vary less systematically, and their stock prices fell less during the 2007—2008 credit crisis. The results imply that geographic diversification led to a decline in screening by lenders, which likely played a role in the 2007–2008 crisis.
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Extreme Risks in Financial Markets and Monetary Policies of the Euro-candidates
Hubert Gabrisch, Lucjan T. Orlowski
Comparative Economic Studies,
No. 4,
2011
Abstract
This study investigates extreme tail risks in financial markets of the euro-candidate countries and their implications for monetary policies. Our empirical tests show the prevalence of extreme risks in the conditional volatility series of selected financial variables, that is, interbank rates, equity market indexes and exchange rates. We argue that excessive instability of key target and instrument variables should be mitigated by monetary policies. Central banks in these countries will be well-advised to use both standard and unorthodox (discretionary) tools of monetary policy while steering their economies out of the financial crisis and through the euro-convergence process.
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Stock Market-Induced Currency Crises: A New Type of Twins
Stefan Eichler, Dominik Maltritz
Review of Development Economics,
No. 2,
2011
Abstract
This paper explores the link between currency crises and the stock market in emerging economies. By integrating foreign stock market investors in a currency crisis model, we reveal a new fundamental inconsistency as a potential crisis trigger: since emerging economies' stock markets often have high returns, whereas central bank reserves grow slowly or decline, the amount of reserves foreign investors can deplete when selling their stocks and repatriating the proceeds grows over time and is considerably higher than funds that have been invested in the stock market. Capital withdrawals of foreign stock market investors can trigger currency crises by depleting central bank reserves, particularly in successful countries with booming stock markets and large foreign investment.
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Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis?
Diemo Dietrich, Tobias Knedlik, Axel Lindner
Post-Communist Economies,
No. 4,
2011
Abstract
This paper shows that during the Great Recession, banking and currency crises occurred simultaneously in Central and Eastern Europe. Events, however, differed widely from what happened during the Asian crisis that usually serves as the model case for the concept of twin crises. We look at three elements that help explaining the nature of events in Central and Eastern Europe: the problem of currency mismatches, the relation between currency and banking crises, and the importance of multinational banks for financial stability. It is shown that theoretical considerations concerning internal capital markets of multinational banks help understand what happened on capital markets and in the financial sector of the region. We discuss opposing effects of multinational banking on financial stability and find that institutional differences are the key to understand differing effects of the global financial crisis. In particular, we argue that it matters if international activities are organized by subsidiaries or by cross-border financial services, how large the share of foreign currency-denominated credit is and whether the exchange rate is fixed or flexible. Based on these three criteria we give an explanation why the pattern of the crisis in the Baltic States differed markedly from that in Poland and the Czech Republic, the two largest countries of the region.
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What Drives FDI in Central-eastern Europe? Evidence from the IWH-FDI-Micro Database
Andrea Gauselmann, Mark Knell, Johannes Stephan
Post-Communist Economies,
No. 3,
2011
Abstract
The focus of this paper is on the match between strategic motives of foreign investments into Central-Eastern Europe and locational advantages offered by these countries. Our analysis makes use of the IWH-FDI-Micro Database, a unique dataset that contains information from 2009 about the determinants of locational factors, technological activity of the subsidiaries, and the potentials for knowledge spillovers in the Czech Republic, Hungary, Poland, Romania, and Slovakia. The analysis suggests that investors in these countries are mainly interested in low (unit) labour costs coupled with a well-trained and educated workforce and an expanding market with the high growth rates in the purchasing power of potential buyers. It also suggests that the financial crisis reduced the attractiveness of the region as a source for localised knowledge and technology. There appears to be a match between investors’ expectations and the quantitative supply of unqualified labour, not however for the supply of medium qualified workers. But the analysis suggests that it is not technology-seeking investments that are particularly content with the capabilities of their host economies in terms of technological cooperation. Finally, technological cooperation within the local host economy is assessed more favourably with domestic firms than with local scientific institutions – an important message for domestic economic policy.
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Upswing Continues - European Debt Crisis still Unresolved: Joint Economic Forecast Spring 2011
Dienstleistungsauftrag des Bundesministeriums für Wirtschaft und Technologie,
2011
Abstract
In spring 2011 the world economy is in an upswing phase, especially due to the momentum in the emerging economies. Germany too is experiencing a strong upturn. The institutes expect that German GDP will increase this year by 2.8% and by 2.0% next year. For 2011 and 2012, an unemployment rate of 6.9% and 6.5%, respectively, is forecast. Growth forces will gradually shift towards domestic demand. Wages will increase in the wake of the upswing, and the inflation rate will be relatively high at 2.4% in 2011 and 2.0% in 2012. Government net borrowing will amount to 1.7% in 2011 and in 2012 will decline to 0.9%, in relation to nominal GDP. The greatest forecast risks are international. If a reduction in the oil supply were to come about because of increasing unrest in the Arab world or if the European debt and confidence crisis were to worsen, this would have a clear effect on the economy. German economic policy is well-advised to maintain its consolidation course and to work for amendments to the European Stability Mechanism.
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The Term Structure of Banking Crisis Risk in the United States: A Market Data Based Compound Option Approach
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Journal of Banking and Finance,
No. 4,
2011
Abstract
We use a compound option-based structural credit risk model to estimate banking crisis risk for the United States based on market data on bank stocks on a daily frequency. We contribute to the literature by providing separate information on short-term, long-term and total crisis risk instead of a single-maturity risk measure usually inferred by Merton-type models or barrier models. We estimate the model by applying the Duan (1994) maximum-likelihood approach. A strongly increasing total crisis risk estimated from early July 2007 onwards is driven mainly by short-term crisis risk. Banks that defaulted or were overtaken during the crisis have a considerably higher crisis risk (especially higher long-term risk) than banks that survived the crisis.
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Vigorous upswing continues
Wirtschaft im Wandel,
No. 3,
2011
Abstract
The worldwide upswing has gained momentum since last autumn. The main cause for the high growth dynamics is a monetary policy that is very expansive not only in advanced economies, where the utilization rates for production capacities are mostly still low, but also in emerging market economies that in general have already recovered from the Great Recession.
The German economy participates in the worldwide upswing. Here the recovery is ahead of those in most other advanced economies. Both exports and domestic demand are strongly expanding. One reason for the high growth dynamics is that key interest rates are particularly low for Germany, as the ECB has to take into account that many euro area economies are much more fragile. In addition, Germany still benefits from the wage moderation and the labour market reforms in the past decade: employment is expanding strongly, and firms find many profitable investment projects.
Major risks for this forecast are structural problems of some advanced economies that had become visible during the Great Recession and are still unresolved (concerning the US housing market and the crisis of confidence in the fiscal sustainability of some euro area countries in particular). A further risk is the possibility of further oil price hikes due to political instability in North Africa and the Middle East.
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Prävention und Management von Staatsinsolvenzen in der Europäischen Währungsunion
Oliver Holtemöller, Tobias Knedlik
Wirtschaftsdienst,
2011
Abstract
EU institutions are currently dealing with the management of debt crises in European countries. The instruments of crisis management are, however, timely restricted and expire in 2013. It is planned to install a permanent crisis prevention and resolution mechanism for the time after. In this contribution the authors develop such a permanent crisis prevention and resolution mechanism.
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