The daily market for funds in Europe: Mathematical appendix

This paper includes the derivations of the main expressions in the paper ``The Daily Market for Funds in Europe: Has Something Changed With the EMU?'' by G. Pérez Quirós and H. Rodríguez Mendizábal.

An experimental study of adaptive behavior in an oligopolistic market game

We consider an oligopolistic market game, in which the players are competing firm in the same market of a homogeneous consumption good. The consumer side is represented by a fixed demand function. The firms decide how much to produce of a perishable consumption good, and they decide upon a number of information signals to be sent into the population in order to attract customers. Due to the minimal information provided, the players do not have a well--specified model of their environment. Our main objective is to characterize the adaptive behavior of the players in such a situation.

On the impact of fundamentals, liquidity and coordination on market stability

We develop a coordination game to model interactions betweenfundamentals and liquidity during unstable periods in financial markets.We then propose a flexible econometric framework for estimationof the model and analysis of its quantitative implications. The specificempirical application is carry trades in the yen dollar market, includingthe turmoil of 1998. We find a generally very deep market, withlow information disparities amongst agents. We observe occasionallyepisodes of market fragility, or turmoil with up by the escalator, downby the elevator patterns in prices. The key role of strategic behaviorin the econometric model is also confirmed.

A comparison of stock market mechanisms

This paper studies the relationship between the amount of publicinformation that stock market prices incorporate and the equilibriumbehavior of market participants. The analysis is framed in a static, NREEsetup where traders exchange vectors of assets accessing multidimensionalinformation under two alternative market structures. In the first(the unrestricted system), both informed and uninformed speculators cancondition their demands for each traded asset on all equilibrium prices;in the second (the restricted system), they are restricted to conditiontheir demand on the price of the asset they want to trade. I show thatinformed traders incentives to exploit multidimensional privateinformation depend on the number of prices they can condition upon whensubmitting their demand schedules, and on the specific price formationprocess one considers. Building on this insight, I then give conditionsunder which the restricted system is more efficient than the unrestrictedsystem.

Adverse selection, credit and efficiency: The case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment,entrepreneurs who are privately informed about the quality of their projects need toborrow from banks. Conventional wisdom says that, in this class of economies, the competitiveequilibrium is typically inefficient.We show that this conventional wisdom rests on one implicit assumption: entrepreneurscan only borrow from banks. If an additional market is added to provide entrepreneurs withadditional funds, efficiency can be attained in equilibrium. An important characteristic of thisadditional market is that it must be non-exclusive, in the sense that entrepreneurs must be ableto simultaneously borrow from many different lenders operating in it. This makes it possible toattain efficiency by pooling all entrepreneurs in the new market while separating them in themarket for bank loans.

Product market deregulation and labor market outcomes

We consider the dynamic relationship between product market entry regulationand equilibrium unemployment. The main theoretical contribution is combininga Mortensen-Pissarides model with monopolistic competition in the goods marketand individual wage bargaining. Product market competition affects unemploymentvia two channels: the output expansion effect and a countervailing effect dueto a hiring externality. Competition is then linked to barriers to entry. Acalibrated model compares a high-regulation European regime to a low-regulationAnglo-American one. Our quantitative analysis suggests that under individualbargaining, no more than half a percentage point of European unemployment ratescan be attributed to entry regulation.

Generic entry into a regulated pharmaceutical market

The aim of this paper is to analyse empirically entry decisions by generic firms intomarkets with tough regulation. Generic drugs might be a key driver of competitionand cost containment in pharmaceutical markets. The dynamics of reforms ofpatents and pricing across drug markets in Spain are useful to identify the impact ofregulations on generic entry. Estimates from a count data model using a panel of 86active ingredients during the 1999 2005 period show that the drivers of genericentry in markets with price regulations are similar to less regulated markets: genericfirms entries are positively affected by the market size and time trend, and negativelyaffected by the number of incumbent laboratories and the number of substitutesactive ingredients. We also find that contrary to what policy makers expected, thesystem of reference pricing restrains considerably the generic entry. Short run brandname drug price reductions are obtained by governments at the cost of long runbenefits from fostering generic entry and post-patent competition into the markets.

With a bang, not a whimper: Pricking Germany's "stock market bubble" in 1927 and the slide into depression

In May 1927, the German central bank intervenedindirectly to reduce lending to equity investors.The crash that followed ended the only stockmarket boom during Germany s relative stabilization 1924-28. This paper examines thefactors that lead to the intervention as well asits consequences. We argue that genuine concernabout the exuberant level of the stock market,in addition to worries about an inflow offoreign funds, tipped the scales in favour ofintervention. The evidence strongly suggeststhat the German central bank under HjalmarSchacht was wrong to be concerned aboutstockprices-there was no bubble. Also, theReichsbank was mistaken in its belief thata fall in the market would reduce theimportance of short-term foreign borrowing,and help to ease conditions in the money market.The misguided intervention had important realeffects. Investment suffered, helping to tipGermany into depression.

A century of global equity market correlations

In this paper, we use a unique long-run dataset of regulatory constraints on capital account openness to explain stock market correlations. Since stock returns themselves are highly volatile, any examination of what drives correlations needs to focus on long runs of data. This is particularly true since some of the short-term changes in co-movements appear to reverse themselves (Delroy Hunter 2005). We argue that changes in the co-movement of indices have not been random. Rather, they are mainly driven by greater freedom to move funds from one country to another. In related work, Geert Bekaert and Campbell Harvey (2000) show that equity correlations increase after liberalization of capital markets, using a number of case studies from emerging countries. We examine this pattern systematically for the last century, and find it to be most pronounced in the recent past. We compare the importance of capital account openness with one main alternative explanation, the growing synchronization of economic fundamentals. We conclude that greater openness has been the single most important cause of growing correlations during the last quarter of a century, though increasingly correlated economic fundamentals also matter. In the conclusion, we offer some thoughts on why the effects of greater openness appear to be so much stronger today than they were during the last era of globalization before 1914.

Judges' cognition and market order

We argue that during the crystallization of common and civil law in the 19th century, the optimal degree of discretion in judicial rulemaking, albeit influenced by the comparative advantages of both legislative and judicial rulemaking, was mainly determined by the anti-market biases of the judiciary. The different degrees of judicial discretion adopted in both legal traditions were thus optimally adapted to different circumstances, mainly rooted in the unique, market-friendly, evolutionary transition enjoyed by English common law as opposed to the revolutionary environment of the civil law. On the Continent, constraining judicial discretion was essential for enforcing freedom of contract and establishing a market economy. The ongoing debasement of pro-market fundamentals in both branches of the Western legal system is explained from this perspective as a consequence of increased perceptions of exogenous risks and changes in the political system, which favored the adoption of sharing solutions and removed the cognitive advantage of parliaments and political leaders.

Adverse selection, credit and efficiency: The case of the missing market

We analyze a standard environment of adverse selection in credit markets. In our environment,entrepreneurs who are privately informed about the quality of their projects needto borrow in order to invest. Conventional wisdom says that, in this class of economies, thecompetitive equilibrium is typically inefficient.We show that this conventional wisdom rests on one implicit assumption: entrepreneurscan only access monitored lending. If a new set of markets is added to provide entrepreneurswith additional funds, efficiency can be attained in equilibrium. An important characteristic ofthese additional markets is that lending in them must be unmonitored, in the sense that it doesnot condition total borrowing or investment by entrepreneurs. This makes it possible to attainefficiency by pooling all entrepreneurs in the new markets while separating them in the marketsfor monitored loans.

On the drivers of commodity co-movement: Evidence from biofuels

We use the recent introduction of biofuels to study the effect of industry factors on the relationshipsbetween wholesale commodity prices. Correlations between agricultural products and oilare strongest in the 2005-09 period, coinciding with the boom of biofuels, and remain substantialuntil 2011. We disentangle three possible drivers for the linkage: substitution, energy costs, andfinancialization. The timing and magnitude of the biofuels-to-oil relationships are different to thoseof other commodities, and far higher than can be justified by costs and financialization. Substitutionand costs drive the monthly correlations of long-term futures, and each of the three contributeequally to the daily co-movement of the short-term ones. The findings survive many robustnesschecks and appear in the stock market.

Iowa Leading Indicators Index Report, July 2006

The Iowa Leading Indicators Index (ILII) is a tool for monitoring the future direction of the Iowa economy and State revenues. Its eight components include an agricultural futures price index, an Iowa stock market index, average weekly manufacturing hours in Iowa, initial unemployment claims in Iowa, an Iowa new orders index, diesel fuel consumption in Iowa, residential building permits in Iowa, and the national yield spread.

Iowa Leading Indicators Index Report, August 2006

The Iowa Leading Indicators Index (ILII) is a tool for monitoring the future direction of the Iowa economy and State revenues. Its eight components include an agricultural futures price index, an Iowa stock market index, average weekly manufacturing hours in Iowa, initial unemployment claims in Iowa, an Iowa new orders index, diesel fuel consumption in Iowa, residential building permits in Iowa, and the national yield spread.