A subsampling approach to estimating the distribution of diversing statistics with application to assessing financial market risks

In this paper we propose a subsampling estimator for the distribution ofstatistics diverging at either known rates when the underlying timeseries in strictly stationary abd strong mixing. Based on our results weprovide a detailed discussion how to estimate extreme order statisticswith dependent data and present two applications to assessing financialmarket risk. Our method performs well in estimating Value at Risk andprovides a superior alternative to Hill's estimator in operationalizingSafety First portofolio selection.

The monetary pillar and the great financial crisis

Since its inception, a most distinctive (and controversial) feature of the ECB monetary policy strategy has been its emphasis on money and monetary analysis, which constitute the basis of the so-called monetary pillar. The present paper examines the performance of the monetary pillar around the recent financial crisis episode, and discusses its prospects in light of the renewed emphasis on financial stability and the need for enhanced macro-prudential policies.

International business cycles, financial markets and household production

This paper investigates the properties of an international real business cycle model with household production. We show that a model with disturbances to both market and household technologies reproduces the main regularities of the data and improves existing models in matching international consumption, investment and output correlations without irrealistic assumptions on the structure of international financial markets. Sensitivity analysis shows the robustness of the results to alternative specifications of the stochastic processes for the disturbances and to variations of unmeasured parameters within a reasonable range.

Taming SIFIs

We model a Systemically Important Financial Institution (SIFI) that is too big(or too interconnected) to fail. Without credible regulation and strong supervision,the shareholders of this institution might deliberately let its managers take excessiverisk. We propose a solution to this problem, showing how insurance againstsystemic shocks can be provided without generating moral hazard. The solutioninvolves levying a systemic tax needed to cover the costs of future crises and moreimportantly establishing a Systemic Risk Authority endowed with special resolutionpowers, including the control of bankers' compensation packages during crisisperiods.

Contractual resolutions of financial distress

In a financial contracting model, we study the optimal debt structure to resolve financial distress. Weshow that a debt structure where two distinct debt classes co-exist - one class fully concentrated andwith control rights upon default, the other dispersed and without control rights - removes the controllingcreditor's liquidation bias when investor protection is strong. These results rationalize the use and theperformance of floating charge financing, debt financing where the controlling creditor takes the entirebusiness as collateral, in countries with strong investor protection. Our theory predicts that the efficiency ofcontractual resolutions of financial distress should increase with investor protection.

High-growth cooperatives: Financial profile and key factors for competitiveness

Given the current economic environment, high-growth companies are particularly relevant for their contribution to employment generation and wealth.This paper discusses the results of a survey that was conducted in order to gain a deeper understanding of high-growth cooperatives through analyzing their financial profiles and then identifying key contributing factors to their growth. To do this, we compared this particular sample with other cooperatives and other high-growth mercantile companies.The results show the main drivers related to high-growth companies success. They are the competitive advantages based on the surveyed group, modern management techniques, quality and productivity, innovation and internationalization. Additionally, we have observed some financial strengths and weaknesses. In this sense, they are under capitalized companies with an unbalanced growth.

Determining underlying macroeconomic fundamentals during emerging market crises: Are conditions as bad as they seem?

Emerging market crises are characterized by large swings in both macroeconomic fundamentalsand asset prices. The economic significance of observed movements in macroeconomicvariables is obscured by the brief and extreme nature of crises. In this paper we propose to study the macroeconomic consequences of crises by studying the behavior of effective fundamentals, constructed by studying the relative movements of stock prices during crises. We find that these effective fundamentals provide a different picture than that implied by observed fundamentals. First, asset prices often reflect expectations of improvement in fundamentals after the initial devaluations; specifically, effective depreciations are positive but not as large as the observed ones. Second, crises vary in their effect on credit market conditions, with investors expecting tightening of credit in some cases (Mexico 1994, Philippines 1997), but loosening of credit in others (Sweden 1992, Korea 1997, Brazil 1999).

Discrete devaluations and multiple equilibria in a first generation model of currency crises

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.

Adoption of financial technologies: Implications for money demand and monetary policy

In this paper we argue that inventory models are probably not usefulmodels of household money demand because the majority of households does nothold any interest bearing assets. The relevant decision for most people is notthe fraction of assets to be held in interest bearing form, but whether to holdany of such assets at all. The implications of this realization are interesting and important. We find that(a) the elasticity of money demand is very small when the interest rate is small,(b) the probability that a household holds any amount of interest bearing assetsis positively related to the level of financial assets, and (c) the cost ofadopting financial technologies is positively related to age and negatively relatedto the level of education. Unlike the traditional methods of money demand estimation, our methodology allowsfor the estimation of the interest--elasticity at low values of the nominalinterest rate. The finding that the elasticity is very small for interest ratesbelow 5 percent suggests that the welfare costs of inflation are small. At interest rates of 6 percent, the elasticity is close to 0.5. We find thatroughly one half of this elasticity can be attributed to the Baumol--Tobin orintensive margin and half of it can be attributed to the new adopters or extensivemargin. The intensive margin is less important at lower interest rates and moreimportant at higher interest rates.

Resolving identities: Successive crises in a trading room after 9/11

How do organizations cope with extreme uncertainty? The existing literatureis divided on this issue: some argue that organizations deal best withuncertainty in the environment by reproducing it in the organization, whereasothers contend that the orga nization should be protected from theenvironment. In this paper we study the case of a Wall Street investment bankthat lost its entire office and trading technology in the terrorist attack ofSeptember 11 th. The traders survived, but were forced to relocate to amakeshift trading room in New Jersey. During the six months the traders spentoutside New York City, they had to deal with fears and insecurities insidethe company as well as outside it: anxiety about additional attacks,questions of professional identity, doubts about the future of the firm, andambiguities about the future re-location of the trading room. The firmovercame these uncertainties by protecting the traders identities and theirability to engage in sensemaking. The organization held together through aleadership style that managed ambiguities and created the conditions for newsolutions to emerge.

Regulating financial conglomerates

We investigate the optimal regulation of financial conglomerates which combinea bank and a non-bank financial institution. The conglomerate s risk-taking incentivesdepend upon the level of market discipline it faces, which in turn isdetermined by the conglomerate s liability strucure. We examine optimal capitalrequirements for standalone institutions, for integrated financial conglomerates,and for financial conglomerates that are structured as holding companies.For a given risk profile, integrated conglomerates have a lower probability offailure than either their standalone or decentralised equivalent. However, whenrisk profiles are endogenously selected conglomeration may extend the reachof the deposit insurance safety net and hence provide incentives for increasedrisk-taking. As a result, integrated conglomerates may optimally attract highercapital requirements. In contrast, decentralised conglomerates are able to holdassets in the socially most efficient place. Their optimal capital requirementsencourage this. Hence, the practice of regulatory arbitrage , or of transferingassets from one balance sheet to another, is welfare-increasing. We discuss thepolicy implications of our finding in the context not only of the present debateon the regulation of financial conglomerates but also in the light of existingUS bank holding company regulation.