Book Review on: Ahmed Bahagat, Fostering the use of Financial Risk Management Products in Developing Countries, 2002, Economic Research Papers No. 69, Abidjan: African Development Bank
Tobias Knedlik
African Development Perspectives Yearbook: Private and Public Sectors: Towards a Balance,
2004
Abstract
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The ADR Shadow Exchange Rate as an Early Warning Indicator for Currency Crises
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Journal of Banking and Finance,
Nr. 11,
2009
Abstract
We develop an indicator for currency crisis risk using price spreads between American Depositary Receipts (ADRs) and their underlyings. This risk measure represents the mean exchange rate ADR investors expect after a potential currency crisis or realignment. It makes crisis prediction possible on a daily basis as depreciation expectations are reflected in ADR market prices. Using daily data, we analyze the impact of several risk drivers related to standard currency crisis theories and find that ADR investors perceive higher currency crisis risk when export commodity prices fall, trading partners’ currencies depreciate, sovereign yield spreads increase, or interest rate spreads widen.
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Inflation Expectations: Does the Market Beat Professional Forecasts?
Makram El-Shagi
IWH Discussion Papers,
Nr. 16,
2009
Abstract
The present paper compares expected inflation to (econometric) inflation forecasts
based on a number of forecasting techniques from the literature using a panel of
ten industrialized countries during the period of 1988 to 2007. To capture expected
inflation we develop a recursive filtering algorithm which extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell-Tobin-effect.
The extracted unexpected inflation is compared to the forecasting errors of ten
econometric forecasts. Beside the standard AR(p) and ARMA(1,1) models, which
are known to perform best on average, we also employ several Phillips curve based approaches, VAR, dynamic factor models and two simple model avering approaches.
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The Identification of Technology Regimes in Banking: Implications for the Market Power-Fragility Nexus
Michael Koetter, Tigran Poghosyan
Journal of Banking and Finance,
Nr. 8,
2009
Abstract
Neglecting the existence of different technologies in banking can contaminate efficiency, market power, and other performance measures. By simultaneously estimating (i) technology regimes conditional on exogenous factors, (ii) efficiency conditional on risk management, and (iii) Lerner indices of German banks, we identify three distinct technology regimes: Public & Retail, Small & Specialized, and Universal & Relationship. System estimation at the regional level reveals that greater bank market power increases bank profitability but also fosters corporate defaults. Corporate defaults, in turn, lead to higher probabilities of bank distress, which supports the market power-fragility hypothesis.
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Low Skill but High Volatility?
Claudia M. Buch
CESifo Working Paper No. 2665,
2009
Abstract
Globalization may impose a double-burden on low-skilled workers. On the one hand, the relative supply of low-skilled labor increases. This suppresses wages of low-skilled workers and/or increases their unemployment rates. On the other hand, low-skilled workers typically face more limited access to financial markets than high-skilled workers. This limits their ability to smooth shocks to income intertemporally and to share risks across borders. Using cross-country, industry-level data for the years 1970 - 2004, we document how the volatility of hours worked and of wages of workers at different skill levels has changed over time. We develop a stylized theoretical model that is consistent with the empirical evidence, and we test the predictions of the model. Our results show that greater financial globalization and development increases the volatility of employment, and this effect is strongest for low-skilled workers. A higher share of low-skilled employment has a dampening impact.
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Does Export Openness Increase Firm-level Output Volatility?
Claudia M. Buch, Jörg Döpke, H. Strotmann
World Economy,
Nr. 4,
2009
Abstract
There is a widespread concern that increased trade may lead to increased instability and thus risk at the firm level. Greater export openness can indeed affect firm-level volatility by changing the exposure and the reaction of firms to macroeconomic developments. The net effect is ambiguous from a theoretical point of view. This paper provides firm-level evidence on the link between openness and volatility. Using comprehensive data on more than 21,000 German manufacturing firms for the period 1980–2001, we analyse the evolution of firm-level output volatility and the link between volatility and export openness. Our paper has three main findings. First, firm-level output volatility is significantly higher than the level of aggregate volatility, but it displays similar patterns. Second, increased export openness lowers firm-level output volatility. This effect is primarily driven by variations along the extensive margin, i.e. by the distinction between exporters and non-exporters. Variations along the intensive margin, i.e. the volume of exports, tend to have a dampening impact on volatility as well. Third, small firms are more volatile than large firms.
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Stages of the 2007/2008 Global Financial Crisis: Is there a Wandering Asset Price Bubble?
Lucjan T. Orlowski
Economics E-Journal 43. Munich Personal RePEc Archive 2008,
2009
Abstract
This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble“. Unstable allocations elevate market, credit, and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed.
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Berücksichtigung von Schätzunsicherheit bei der Kreditrisikobewertung: Vergleich des Value at Risk der Verlustverteilung des Kreditrisikos bei Verwendung von Bootstrapping und einem asymptotischen Ansatz
Henry Dannenberg
IWH Discussion Papers,
Nr. 3,
2009
Abstract
Bei der Kreditrisikobewertung müssen die Parameter Ausfallwahrscheinlichkeit und
-korrelation geschätzt werden. Diese Schätzung erfolgt unter Unsicherheit. In der Literatur werden asymptotische Konfidenzregionen diskutiert, um diese Unsicherheit bei der simultanen Schätzung beider Parameter zu bewerten. Diese Regionen setzen allerdings eine sehr lange Datenhistorie für eine genaue Bewertung voraus. Als Alternative bietet sich bei kurzen Datenhistorien Bootstrapping an. Diese Methode ist allerdings deutlich rechenintensiver. Im vorliegenden Beitrag wird untersucht, ab welcher Anzahl historisch verfügbarer Perioden Bootstrapping und eine Wald-Konfidenzregion zu einer vergleichbaren Bewertung des Kreditrisikos gelangen. Die hier genutzten Methoden führen zu ähnlichen Ergebnissen, wenn über 100 historische Perioden zur Verfügung stehen.
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The Great Risk Shift? Income Volatility in an International Perspective
Claudia M. Buch
CESifo Working Paper No. 2465,
2008
Abstract
Weakening bargaining power of unions and the increasing integration of the world economy may affect the volatility of capital and labor incomes. This paper documents and explains changes in income volatility. Using a theoretical framework which builds distribution risk into a real business cycle model, hypotheses on the determinants of the relative volatility of capital and labor are derived. The model is tested using industry-level data. The data cover 11 industrialized countries, 22 manufacturing and services industries, and a maximum of 35 years. The paper has four main findings. First, the unconditional volatility of labor and capital incomes has declined, reflecting the decline in macroeconomic volatility. Second, the idiosyncratic component of income volatility has hardly changed over time. Third, crosssectional heterogeneity in the evolution of relative income volatilities is substantial. If anything, the labor incomes of high- and low-skilled workers have become more volatile in relative terms. Fourth, income volatility is related to variables measuring the bargaining power of workers. Trade openness has no significant impact.
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Do Weak Supervisory Systems Encourage Bank Risk-taking?
Claudia M. Buch, G. DeLong
Journal of Financial Stability,
2008
Abstract
Weak bank supervision could give banks the ability to shift risk from themselves to supervisors. We use cross-border bank mergers as a natural experiment to test changes in risk and the impact of supervision. We examine cross-border bank mergers and find that the supervisory structures of the partners’ countries influence changes in post-merger total risk. An acquirer from a country with strong supervision lowers total risk after a cross-border merger. However, total risk increases when the target bank is located in a country with relatively strong supervision. This result is consistent with strong host regulators limiting the risky activities of their local banks. Foreign-owned competitors could then engage in the risky projects, especially if the foreign banks’ supervisors are not strong. An acquirer entering a country with strong supervision appears to shift risk back to its home country. The results suggest that bank supervisors can reduce total banking risk in their countries by being strong.
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