The effects of entry in thin markets

We consider entry of additional firms into the market for a single commodity in which both sellers and buyers are permitted to interact strategically. We show that the market is quasi-competitive, in that the inclusion of an additional seller lowers the price and increases the volume of trade, as expected. However, whilst buyers benefit from this change under reasonable conditions on preferences, we cannot conclude that sellers are always made worse off in the face of more intense competition, contrary to the conventional wisdom. We characterize the conditions under which entry by new sellers may raise the equilibrium profit of existing sellers, which will depend in an intuitive way on the elasticity of a strategic analog of demand and the market share of existing sellers, and encompass completely standard economic environments.

The response of the external finance premium in Asian corporate bond markets to financial characteristics, financial constraints and two financial crises

Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds, especially for the emerging Asian market. In this paper, we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995-2009 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity, we show that financial variables appear to be both statistically and quantitatively more important for financially constrained firms. Finally, when we examine the effects of the 1997-98 Asian crisis and the 2007-09 global financial crisis, we find that the sensitivity of the premium is greater for constrained firms during the Asian crisis compared to other times.

Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico

This paper shows that introducing weak property rights in the standard real business cycle (RBC) model can help to explain economic fluctuations. This is motivated by the empirical observation that changes in institutions in emerging markets are related to the evolution of the main macroeconomic variables. In particular, in Mexico, the movements in productivity in the data are associated with changes in institutions, so that we can explain productivity shocks to a large extent as shocks to the quality of institutions. We find that the model with shocks to the degree of protection of property rights only - without technology shocks - can match the second moments in the data for Mexico well. In particular, the fit is better than that of the standard neoclassical model with full protection of property rights regarding the auto-correlations and cross-correlations in the data, especially those related to labor. Viewing productivity shocks as shocks to institutions is also consistent with the stylized fact of falling productivity and non-decreasing labor hours in Mexico over 1980-1994, which is a feature that the neoclassical model cannot match.

Strategic investment and international outsourcing in unionised oligopoly

We critically consider the conventional belief that the attractiveness of international outsourcing lies in cheaper labour costs overseas and that it offers a means to ‘escape’ the power of unions. We develop an oligopoly model in which firms facing unionised domestic labour market choose between producing an intermediate in-house or outsourcing it to a non-unionised foreign supplier that makes a relationship specific investment in developing the intermediate. We show that outsourcing typically results in higher wages and does not always reduce marginal costs. Trade liberalisation favours outsourcing particularly for the relatively less efficient firms.

Distributional and Poverty Consequences of Globalization: A Dynamic Comparative Analysis for Developing Countries

This study examines the impact of globalization on cross-country inequality and poverty using a panel data set for 65 developing counties, over the period 1970-2008. With separate modelling for poverty and inequality, explicit control for financial intermediation, and comparative analysis for developing countries, the study attempts to provide a deeper understanding of cross country variations in income inequality and poverty. The major findings of the study are five fold. First, a non-monotonic relationship between income distribution and the level of economic development holds in all samples of countries. Second, both openness to trade and FDI do not have a favourable effect on income distribution in developing countries. Third, high financial liberalization exerts a negative and significant influence on income distribution in developing countries. Fourth, inflation seems to distort income distribution in all sets of countries. Finally, the government emerges as a major player in impacting income distribution in developing countries.

Forecasting the European Carbon Market

In an effort to meet its obligations under the Kyoto Protocol, in 2005 the European Union introduced a cap-and-trade scheme where mandated installations are allocated permits to emit CO2. Financial markets have developed that allow companies to trade these carbon permits. For the EU to achieve reductions in CO2 emissions at a minimum cost, it is necessary that companies make appropriate investments and policymakers design optimal policies. In an effort to clarify the workings of the carbon market, several recent papers have attempted to statistically model it. However, the European carbon market (EU ETS) has many institutional features that potentially impact on daily carbon prices (and associated nancial futures). As a consequence, the carbon market has properties that are quite different from conventional financial assets traded in mature markets. In this paper, we use dynamic model averaging (DMA) in order to forecast in this newly-developing market. DMA is a recently-developed statistical method which has three advantages over conventional approaches. First, it allows the coefficients on the predictors in a forecasting model to change over time. Second, it allows for the entire fore- casting model to change over time. Third, it surmounts statistical problems which arise from the large number of potential predictors that can explain carbon prices. Our empirical results indicate that there are both important policy and statistical bene ts with our approach. Statistically, we present strong evidence that there is substantial turbulence and change in the EU ETS market, and that DMA can model these features and forecast accurately compared to conventional approaches. From a policy perspective, we discuss the relative and changing role of different price drivers in the EU ETS. Finally, we document the forecast performance of DMA and discuss how this relates to the efficiency and maturity of this market.

Fact And Fiction In FX Arbitrage Processes

The efficient markets hypothesis implies that arbitrage opportunities in markets such as those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The “quant” workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in Cross, Kozyakin, O’Callaghan, Pokrovskii and Pokrovskiy (2012) is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets.

Fact And Fiction In FX Arbitrage Processes

The efficient markets hypothesis implies that arbitrage opportunities in markets such as those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The “quant” workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in Cross, Kozyakin, O’Callaghan, Pokrovskii and Pokrovskiy (2012) is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets.

Fact And Fictions In FX Arbitrage Processes

The efficient markets hypothesis implies that arbitrage opportunities in markets such as those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The “quant” workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in Cross, Kozyakin, O’Callaghan, Pokrovskii and Pokrovskiy (2012) is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets.