Stock price related financial fragility and growth patterns

Aßmuth P. Stock price related financial fragility and growth patterns. Center for Mathematical Economics Working Papers. Vol 539 Reviewed version June 18, 2015. Bielefeld: Center for Mathematical Economics; 2015.The total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. We examine trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm’s creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. We ask to which extent a channel may contribute to the stock price - output relation when there is mutual feedback. A model `a la Delli Gatti et al. (2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank’s equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners’ influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision of managers they act more prudently and this fosters growth

Speculation and the economy

Aßmuth P. Speculation and the economy. Bielefeld: Universität Bielefeld; 2016.This dissertation deals with the impact of speculative behaviour on output patterns of the real economy. The impact may be twofold. Speculative behaviour occurs due to positive developments at the real economy and optimistic outlooks. Also, speculative behaviour may occur at other markets, like the stock market. We address both, a spill-over effect and the build up of speculation due to economic activity. Therefore, we implement realistic behaviour in an evolutionary framework and use emerging heterogeneity for the impact assessment. Inspired by the dotcom-bubble we focus on technological advancement as possible factor of growing optimism. In the first part of this thesis we introduce feedback from stock prices into a model of economic growth determined by financing constraints. We focus on three known feedback channels: stock market information for the assessment of creditworthiness, stock market value as determinant in determining bankruptcy of a firm and performance based compensation of the firm management. The second part introduces financing constraints into an evolutionary framework and tackles determinants of credit supply for their impact on the occurrence of innovation. Those determinants are market based and also behavioural in nature. The third part provides a more detailed bank behaviour and two industrial sectors competing for credit. Therefore, the third part is a refinement of the second one