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.

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.

Extreme times in financial markets.

We apply the theory of continuous time random walks (CTRWs) to study some aspects involving extreme events in financial time series. We focus our attention on the mean exit time (MET). We derive a general equation for this average and compare it with empirical results coming from high-frequency data of the U.S. dollar and Deutsche mark futures market. The empirical MET follows a quadratic law in the return length interval which is consistent with the CTRW formalism.

Random diffusion and leverage effect in financial markets

We prove that Brownian market models with random diffusion coefficients provide an exact measure of the leverage effect [J-P. Bouchaud et al., Phys. Rev. Lett. 87, 228701 (2001)]. This empirical fact asserts that past returns are anticorrelated with future diffusion coefficient. Several models with random diffusion have been suggested but without a quantitative study of the leverage effect. Our analysis lets us to fully estimate all parameters involved and allows a deeper study of correlated random diffusion models that may have practical implications for many aspects of financial markets.

A dilution cost approach to financial intermediation and securities markets

This paper proposes a model of financial markets and corporate finance,with asymmetric information and no taxes, where equity issues, Bankdebt and Bond financing may all co-exist in equilibrium. The paperemphasizes the relationship Banking aspect of financial intermediation:firms turn to banks as a source of investment mainly because banks aregood at helping them through times of financial distress. The debtrestructuring service that banks may offer, however, is costly. Therefore,the firms which do not expect to be financially distressed prefer toobtain a cheaper market source of funding through bond or equity issues.This explains why bank lending and bond financing may co-exist inequilibrium. The reason why firms or banks also issue equity in our modelis simply to avoid bankruptcy. Banks have the additional motive that theyneed to satisfy minimum capital adequacy requeriments. Several types ofequilibria are possible, one of which has all the main characteristics ofa "credit crunch". This multiplicity implies that the channels of monetarypolicy may depend on the type of equilibrium that prevails, leadingsometimes to support a "credit view" and other times the classical "moneyview".

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.

Misallocation of capital in a model of endogenous financial intermediation and insurance

In this paper we analyze productivity and welfare losses from capital misallocation in a general equilibrium model of occupational choice and endogenous financial intermediation. We study the effects of borrowing and lending, insurance, and risk sharing on the optimal allocation of resources. We find that financial markets together with general equilibrium effects have large impact on entrepreneurs' entry and firm-size decisions. Efficiency gains are increasing in the quality of financial markets, particularly in their ability to alleviate a financing constraint by providing insurance against idiosyncratic risk.

Stochastic optimal bid to electricity markets with environmental risk constraints

There are many factors that influence the day-ahead market bidding strategies of a generation company (GenCo) in the current energy market framework. Environmental policy issues have become more and more important for fossil-fuelled power plants and they have to be considered in their management, giving rise to emission limitations. This work allows to investigate the influence of both the allowances and emission reduction plan, and the incorporation of the derivatives medium-term commitments in the optimal generation bidding strategy to the day-ahead electricity market. Two different technologies have been considered: the coal thermal units, high-emission technology, and the combined cycle gas turbine units, low-emission technology. The Iberian Electricity Market and the Spanish National Emissions and Allocation Plans are the framework to deal with the environmental issues in the day-ahead market bidding strategies. To address emission limitations, some of the standard risk management methodologies developed for financial markets, such as Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR), have been extended. This study offers to electricity generation utilities a mathematical model to determinate the individual optimal generation bid to the wholesale electricity market, for each one of their generation units that maximizes the long-run profits of the utility abiding by the Iberian Electricity Market rules, the environmental restrictions set by the EU Emission Trading Scheme, as well as the restrictions set by the Spanish National Emissions Reduction Plan. The economic implications for a GenCo of including the environmental restrictions of these National Plans are analyzed and the most remarkable results will be presented.

Behavioral aspects of investment fund's markets: are good managers lucky or skilled?

It is generally accepted that financial markets are efficient in the long run a lthough there may be some deviations in the short run. It is also accepted that a good portfolio manager is the one who beats the market persistently along time, this type of manager could not exist if markets were perfectly efficient According to this in a pure efficient market we should find that managers know that they can not beat the market so they would undertake only pure passive management strategies. Assuming a certain degree of inefficiency in the short run, a market may show some managers who tr y to beat the market by undertaking active strategies. From Fama’s efficient markets theory we can state that these active managers may beat the market occasionally although they will not be able to enhance significantly their performance in the long run. On the other hand, in an inefficient market it would be expected to find a higher level of activity related with the higher probability of beating the market. In this paper we follow two objectives: first, we set a basis to analyse the level of efficiency in an asset invest- ment funds market by measuring performance, strategies activity and it’s persistence for a certain group of funds during the period of study. Second, we analyse individual performance persistence in order to determine the existence of skilled managers. The CAPM model is taken as theoretical background and the use of the Sharpe’s ratio as a suitable performance measure in a limited information environment leads to a group performance measurement proposal. The empiri- cal study takes quarterly data from 1999-2007 period, for the whole population of the Spanish asset investment funds market, provided by the CNMV (Comisión Nacional del Mercado de Valores). This period of study has been chosen to ensure a wide enough range of efficient market observation so it would allow us to set a proper basis to compare with the following period. As a result we develop a model that allows us to measure efficiency in a given asset mutual funds market, based on the level of strategy’s activity undertaken by managers. We also observe persistence in individual performance for a certain group of funds

How did the Financial Crisis affect the Real Interest Rate Dynamics in Europe?

We investigate the effects of the financial crisis on the stationarity of real interest rates in the Euro Area. We use a new unit root test developed by Peseran et al. (2013) that allows for multiple unobserved factors in a panel set up. Our results suggest that while short-term and long-term real interest rates were stationary before the financial crisis, they became nonstationary during the crisis period likely due to persistent risk that characterized financial markets during that time. JEL codes: E43, C23. Keywords: Real interest rates, Euro Area, financial crisis, panel unit root tests, cross-sectional dependence.

Sovereign Risk, Anonymous Markets, and the Effects of Globalization

The goal of this paper is to study the e¤ects of globalization on the workings of financial markets. We adopt a "technological" view of globalization, which consists of an exogenous reduction in the cost of shipping goods across di¤erent regions of the world. We model financial markets where agents anonymously trade securities issued by every other agent in the world. In the absence of frictions, we show how globalization creates trade opportunities among residents of different regions of the world, thereby raising welfare. In the presence of sovereign risk, however, there emerge two crucial interactions between trade among residents within a region and trade among residents of di¤erent regions. First, the more residents within a region trade with each other, the more they can trade with residents of other regions. Second, the possibility of trade with residents of other regions sometimes leads a government to not enforce payments by its residents, destroying trade opportunities among residents within the region. The net effect on welfare of this process of creation and destruction of trade opportunities is ambiguous. We argue that there are no policies governments can take to avoid the negative effects of globalization on trade among domestic residents. In a dynamic extension, we analyze how our results are a¤ected by reputational considerations.

Rethinking the effects of financial liberalization

During the last few decades, many emerging markets have lifted restrictions on cross-borderfinancial transactions. The conventional view was that this would allow these countries to: (i)receive capital inflows from advanced countries that would finance higher investment and growth;(ii) insure against aggregate shocks and reduce consumption volatility; and (iii) accelerate thedevelopment of domestic financial markets and achieve a more efficient domestic allocationof capital and better sharing of individual risks. However, the evidence suggests that thisconventional view was wrong.In this paper, we present a simple model that can account for the observed effects of financialliberalization. The model emphasizes the role of imperfect enforcement of domestic debts and theinteractions between domestic and international financial transactions. In the model, financialliberalization might lead to different outcomes: (i) domestic capital flight and ambiguous effectson net capital flows, investment, and growth; (ii) large capital inflows and higher investmentand growth; or (iii) volatile capital flows and unstable domestic financial markets. The modelshows how these outcomes depend on the level of development, the depth of domestic financialmarkets, and the quality of institutions.

Financial integration, productivity and capital accumulation

Understanding the mechanism through which financial globalization affect 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. The paper also provides a discussion of a simple model on the effects of financial integration, and shows additional empirical evidence supporting it.

Financial crisis: theory and practice

In the last 50 years, we have had approximately 40 events with characteristics related to financial crisis. The most severe crisis was in 1929, when the financial markets plummet and the US gross domestic product decline in more than 30 percent. Recently some years ago, a new crisis developed in the United States, but instantly caused consequences and effects in the rest of the world.This new economic and financial crisis has increased the interest and motivation for the academic community, professors and researchers, to understand the causes and effects of the crisis, to learn from it. This is the one of the main reasons for the compilation of this book, which begins with a meeting of a group of IAFI researchers from the University of Barcelona, where researchers form Mexico and Spain, explain causes and consequences of the crisis of 2007.For that reason, we believed this set of chapters related to methodologies, applications and theories, would conveniently explained the characteristics and events of the past and future financial crisisThis book consists in 3 main sections, the first one called "State of the Art and current situation", the second named "Econometric applications to estimate crisis time periods" , and the third one "Solutions to diminish the effects of the crisis". The first section explains the current point of view of many research papers related to financial crisis, it has 2 chapters. In the first one, it describe and analyzes the models that historically have been used to explain financial crisis, furthermore, it proposes to used alternative methodologies such as Fuzzy Cognitive Maps. On the other hand , Chapter 2 , explains the characteristics and details of the 2007 crisis from the US perspective and its comparison to 1929 crisis, presenting some effects in Mexico and Latin America.The second section presents two econometric applications to estimate possible crisis periods. For this matter, Chapter 3, studies 3 Latin-American countries: Argentina, Brazil and Peru in the 1994 crisis and estimates the multifractal characteristics to identify financial and economic distress.Chapter 4 explains the crisis situations in Argentina (2001), Mexico (1994) and the recent one in the United States (2007) and its effects in other countries through a financial series methodology related to the stock market.The last section shows an alternative to prevent the effects of the crisis. The first chapter explains the financial stability effects through the financial system regulation and some globalization standards. Chapter 6, study the benefits of the Investor activism and a way to protect personal and national wealth to face the financial crisis risks.