Private Governance of Financial Markets: the US Regulatory Regime on Hedge Funds

The article investigates the private governance of financial markets by looking at the evolution of the regulatory debate on hedge funds in the US market. It starts from the premise that the privatization of regulation is always the result of a political decision and analyzes how this decision came about and was implemented in the case of hedge funds. The starting point is the failure of two initiatives on hedge funds that US regulators launched between 1999 an 2004, which the analysis explains by elaborating the concept of self-capture. Facing a trade off between the need to tackle publicly demonized issues and the difficulty of monitoring increasingly sophisticated and powerful private markets, regulators purposefully designed initiatives that were not meant to succeed, that is, they “self-captured” their own activity. By formulating initiatives that were inherently flawed, regulators saved their public role and at the same time paved the way for the privatization of hedge fund regulation. This explanation identifies a link between the failure of public initiatives and the success of private ones. It illustrates a specific case of formation of private authority in financial markets that points to a more general practice emerging in the regulation of finance.

The Generational contract in the family : explaining regime differences in financial transfers from parents to children in Europe

The exchange of social and economic support between the generationsis one of the main pillars of both family life and welfare systems. Thedebate on how to reform the generational contract is still truncated, however, by focusing on its public dimension only, especially on pensions and health care provisions. For a full account, the transfer of resources between adult generations in the family needs to be included as well. In our previous research we have shown that intergenerationalexchange is more likely to take place but less intense in the Nordicwelfare regime than in the Continental and Southern ones. In thepresent paper we analyze the social mechanisms that create and explain this nexus between patterns of intergenerational transfers and welfare regimes. The notion that Southern European family support networksare stronger and more effective than those of Continental and Northern European countries is only partially confirmed. In Southern (and partly in Continental) countries, children are mostly supported by means of co-residence with their parents till their complete economicindependence. However, once they have left the parental home thereare fewer transfers; support tends to be restricted to children who have special needs (such as for the formation of their own family), and depends more on their parents’ resources. In the Nordic countries, in contrast, transfers are less driven by children’s needs and parentalresources.

Productivity growth and the exchange rate regime: The role of financial development

This paper offers empirical evidence that a country's choice of exchange rate regime can have a signifficant impact on its medium-term rate of productivity growth. Moreover, the impact depends critically on the country's level of financial development, its degree of market regulation, and its distance from the global technology frontier. We illustrate how each of these channels may operate in a simple stylized growth model in which real exchange rate uncertainty exacerbates the negative investment e¤ects of domestic credit market constraints. The empirical analysis is based on an 83 country data set spanning the years 1960-2000. Our approach delivers results that are in striking contrast to the vast existing empirical exchange rate literature, which largely finds the effects of exchange rate volatility on real activity to be relatively small and insignificant.

Endogenous Credit Cycles and Financial Dampening in an Adverse Selection Economy

We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection.

Financial development, labor and market regulations and growth

This paper investigates the importance that market regulation and financial imperfections have on firm growth. We analyse institutions af- fecting labor market as Employment Protection Laws (EP) and Product Market Regulation (PM). We show that together with the beneficial effects of financial development, a firm will get less financing, and thus investless, in a weak financial market (finance effect), the strictness of product and labor market regulations also affect firm growth (labor effect). In particular, we show that the stricter the rules the more detrimental the influence on growth in sectoral value added for a large number of countries. We also show that the labor effect overcomes the positive finance effect.

Governance mechanisms in Spanish financial intermediaries

This paper examines the governance of Spanish Banks around two main issues. First, does a poor economic performance activate those governance interventions that favor the removal of executive directors and the merger of non-performing banks? And second, does the relationship between governance intervention and economic performance vary with the ownership form of the bank? Our results show that a bad performance does activate governance mechanisms in banks, although for the case of Savings Banks intervention is confined to a merger or acquisition. Nevertheless, the distinct ownership structure of Savings Banks does not fully protect non-performing banks from disappearing. Product-market competition compensates for those weak internal governance mechanisms that result from an ownership form which gives voice to several stakeholder groups.

Are one factor logarithmic volatility models useful to fit the features of financial data? An application to microsoft data.

This paper provides empirical evidence that continuous time models with one factor of volatility, in some conditions, are able to fit the main characteristics of financial data. It also reports the importance of the feedback factor in capturing the strong volatility clustering of data, caused by a possible change in the pattern of volatility in the last part of the sample. We use the Efficient Method of Moments (EMM) by Gallant and Tauchen (1996) to estimate logarithmic models with one and two stochastic volatility factors (with and without feedback) and to select among them.

On the choice of an exchange rate regime: target zones revisited

From the classical gold standard up to the current ERM2 arrangement of the European Union, target zones have been a widely used exchange regime in contemporary history. This paper presents a benchmark model that rationalizes the choice of target zones over the rest of regimes: the fixed rate, the free float and the managed float. It is shown that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature that previous models were not able to produce, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.

Financial intermediation in a model of growth through creative destruction

This paper presents an endogenous growth model in which the research activity is financed by intermediaries that are able to reduce the incidence of researcher's moral hazard. It is shown that financial activity is growth promoting because it increases research productivity. It is also found that a subsidy to the financial sector may have larger growth effects than a direct subsidy to research. Moreover, due to the presence of moral hazard, increasing the subsidy rate to R\&D may reduce the growth rate. I show that there exists a negative relation between the financing of innovation and the process of capital accumulation. Concerning welfare, the presence of two externalities of opposite sign steaming from financial activity may cause that the no-tax equilibrium provides an inefficient level of financial services. Thus, policies oriented to balance the effects of the two externalities will be welfare improving.

Financial integration, productivity and capital accumulation

Understanding the mechanism through which financial globalization affects economic performance is crucial for evaluating the costs and benefits of opening financial markets. This paper is a first attempt at disentangling the effects of financial integration on the two main determinants of economic performance: productivity (TFP) and investments. I provide empirical evidence from a sample of 93 countries observed between 1975 and 1999. The results suggest that financial integration has a positive direct effect on productivity, while it spurs capital accumulation only with some delay and indirectly, since capital follows the rise in productivity. I control for indirect effects of financial globalization through banking crises. Such episodes depress both investments and TFP, though they are triggered by financial integration only to a minor extent.

Financial incentives in academia: research versus development

This paper investigates the effects of monetary rewards on the pattern of research. We build a simple repeated model of a researcher capable to obtain innovative ideas. We analyse how the legal environment affects the allocation of researcher's time between research and development. Although technology transfer objectives reduce the time spent in research, they might also induce researchers to conduct research that is more basic in nature, contrary to what the skewing problem would presage. We also show that our results hold even if development delays publication.

Co-movements between US and UK stock prices: the roles of macroeconomic information and time-series varying conditional correlations

This paper provides evidence on the sources of co-movement in monthly US and UK stock price movements by investigating the role of macroeconomic and financial variables in a bivariate system with time-varying conditional correlations. Crosscountry communality in response is uncovered, with changes in the US Federal Funds rate, UK bond yields and oil prices having similar negative effects in both markets. Other variables also play a role, especially for the UK market. These effects do not, however, explain the marked increase in cross-market correlations observed from around 2000, which we attribute to time variation in the correlations of shocks to these markets. A regime-switching smooth transition model captures this time variation well and shows the correlations increase dramatically around 1999-2000. JEL classifications: C32, C51, G15 Keywords: international stock returns, DCC-GARCH model, smooth transition conditional correlation GARCH model, model evaluation.

Small firms, growth and financial constraints

This paper analyses the impact of different sources of finance on the growth of firms. Using panel data from Spanish manufacturing firms for the period 2000-2006, we investigate the effects of internal and external finances on firm growth. In particular, we examine three dimensions of these financial sources: a) the performance of the firms’ capital structure in accordance with firm size; b) the effects of internal and external financial sources on growth performance; c) the combined effect of equity, external debt and cash flow on firm growth. We find that low-growth firms are sensitive to cash flow and short-term bank debt, while high-growth firms are more sensitive to long-term debt. Furthermore, equity capital seems to reduce barriers to external finance. Our main conclusion is that during the start-up phase, firms are unable to increase their financial leverage and so their capital structure fails to promote correct investment strategies. However, as their equity capital increases, alternative financial mechanisms, in particular long-term debt, become available, which have a positive impact on firm growth.

The Evolution of the Climate Change Regime: Beyond a North-South Divide?

This research primarily analyses relevant climate bargaining dynamics that have been informed by a North-South impasse. This working paper argues that the first stage of negotiations for a climate convention indeed witnessed a North-South divide which became institutionalized in the Framework Convention on Climate Change. However, in subsequent negotiation rounds the key loci of bargaining struggles was centered between developed countries, in which relevant North-South cooperation dynamics were also present. Finally, this paper assesses the unfinished post-Kyoto bargaining process in which two trends are already being observed: both the emergence of a new geopolitics between the United States and major developing countries, and a fragmentation process within the South, in which the Copenhagen Accord itself has begun to institutionalize such fragmentation.