Estimating the cost of U.S. indexed bonds

A presentation of an equilibrium bond-pricing model driven by two stochastic factors: the real interest rate and the expected rate of inflation. The models parameters are estimated using a maximum-likelihood technique based on a Kalman filter.Government securities ; Inflation (Finance) ; Interest rates ; Indexation (Economics)

Expansionary Fiscal Policy and the Exchange Rate: A Review (Politique budgétaire expansionniste et taux de change: une analyse) (Políticas fiscales expansionistas y el tipo de cambio: un examen de la cuestión)

This paper reviews the literature on fiscal policy and the exchange rate--focusing on an expansionary fiscal policy that does not affect market expectations about the future course of monetary policy. It is shown that a few key elements determine the sign and magnitude of the relationship between this policy and the exchange rate. An expansionary fiscal policy increases output and the price level, thus creating an excess demand for money. The excess demand raises the domestic interest rate, which, in turn, tends to appreciate the exchange rate. In the long run, the domestic interest rate is tied to the world interest rate, which has not changed. The equilibrium in the money market is then restored by a long-run appreciation of the exchange rate that causes both output and the aggregate demand deflator to decline. An expansionary fiscal policy will also cause an accumulation of debt vis-à-vis the rest of the world. To service the larger stock of debt, and eventually to repay it, private consumption must be cut back and additional resources must be allocated to the production of exports. In the long run, this process leads, by itself, to a depreciation in the real and nominal exchange rates. If expectations about future exchange rates are the main determinants of the present exchange rate, an expansionary fiscal policy can cause the exchange rate to depreciate in the short run. If financial assets are imperfect substitutes, an expansionary fiscal policy that brings about a budget deficit may also depreciate the exchange rate by creating a relative abundance of assets denominated in domestic currency. Finally, it is also shown that the structure of the real sector will influence the response of the exchange rate to the change in fiscal policy. /// Dans ce document l'auteur passe en revue les écrits consacrés à la politique budgétaire et au taux de change, en examinant tout particulièrement une politique budgétaire expansionniste qui n'influence pas les anticipations sur le marché. Il montre que quelques éléments fondamentaux déterminent le sens et l'ampleur du lien entre une telle politique et le taux de change. Une politique budgétaire expansionniste a pour effet d'accroître la production et le niveau des prix, suscitant ainsi une demande excédentaire de monnaie. La demande excédentaire provoque une hausse du taux d'intérêt intérieur, phénomène qui, à son tour, a tendance à entraîner une appréciation du taux de change. A long terme, le taux d'intérêt intérieur est lié au taux d'intérêt international, qui, lui, n'a pas changé. L'équilibre sur le marché monétaire est alors rétabli par une appréciation à long terme du taux de change, appréciation qui suscite une baisse tant de la production que du déflateur de la demande globale. Une politique budgétaire expansionniste entraînera aussi une accumulation de la dette vis-à-vis du reste du monde. Pour permettre au pays d'assurer le service du montant accru de la dette, et, plus tard, de le rembourser, la consommation privée doit être réduite et des ressources additionnelles doivent être affectées à la production de biens d'exportation. A long terme, ce processus aboutit, de lui-même, à une dépréciation des taux de change réel et nominal. Si les anticipations concernant les taux de change futurs sont le facteur principal qui détermine le taux de change actuel, une politique budgétaire expansionniste peut donner lieu à une dépréciation du taux de change à court terme. Si les actifs financiers ne peuvent pas parfaitement se substituer les uns aux autres, une politique budgétaire expansionniste qui entraîne un déficit budgétaire peut aussi provoquer une dépréciation du taux de change en créant une abondance relative d'actifs libellés en monnaie nationale. Enfin, l'auteur montre également que la structure du secteur réel influencera la manière dont le taux de change réagira à la modification de la politique budgétaire. /// Este artículo pasa revista a las publicaciones sobre política fiscal y el tipo de cambio, centrando la atención en las políticas fiscales expansivas que no afectan a las expectativas del mercado sobre el sesgo futuro de la política monetaria. Se demuestra que sólo unos cuantos elementos clave determinan el signo y la magnitud de la relación entre estas políticas y el tipo de cambio. Una política fiscal expansiva incrementa el producto y eleva el nivel de precios, creando así una demanda excesiva de dinero. Este exceso de demanda eleva el tipo de interés interno, con lo cual, a su vez, el tipo de cambio tiende a apreciarse. A largo plazo, el tipo de interés interno queda vinculado al tipo de interés mundial, que no ha cambiado. El equilibrio del mercado monetario se restablece con una apreciación a largo plazo del tipo de cambio que hace descender tanto el producto como el deflactor de la demanda agregada. Una política fiscal expansiva también producirá una acumulación de deuda frente al resto del mundo. Para atender el servicio de este mayor volumen de deuda, y en su día amortizarla, debe reducirse el consumo privado y asignarse nuevos recursos a la producción de exportaciones. A largo plazo, este proceso desemboca, por sí mismo, en una depreciación de los tipos de cambio real y nominal. Si las expectativas sobre los tipos de cambio futuros constituyen los determinantes principales del tipo de cambio presente, una política fiscal expansiva puede provocar la depreciación del tipo de cambio a corto plazo. Si los activos financieros son sustitutos imperfectos, una política fiscal expansiva que produce un déficit presupuestario puede también depreciar el tipo de cambio al crear una abundancia relativa de activos denominados en la moneda nacional. Por último, el artículo también demuestra que la estructura del sector real influirá en la reacción del tipo de cambio ante las modificaciones de la política fiscal.

Efficiency and Distribution in Financial Restructuring: The Case of the Ferruzzi Group

This paper analyzes the efficiency and distributional consequences of the largest out-of-court restructuring ever ($20 billion of debt). The restructuring was engineered by a five-bank committee composed of the largest creditors, which took effective control of the company at the onset of financial distress. We compare the payoffs obtained by creditors under the restructuring plan with those they would have obtained in the absence of it. We show that the plan implied a large redistribution among creditors with equal priority. This redistribution occurred without generating any apparent efficiency gain. When we factor in the value of control, we find that the restructuring plan favored the Restructuring Committee, at the expense of other banks. Our analysis shows the importance of the allocation of control in financial restructuring and the possible efficiency costs of debt for equity swaps in restructurings. We discuss the implications of these findings for the debate on the optimal bankruptcy procedures

European financial markets integration and the risk premium on Italian government debt

The objective of the paper is that of disentangling, in the eve of the Euro, the exchange rate risk induced spread in the european government bond from the credit/default risk induced spread. spread. Paradoxically, if the main risk component were that induced by the exchange rate risk, it would be optimal to have countries enter the Euro even if they do not satisfy the Maastricht constraints, as it would be more difficult to satisfy these just due to the exchange risk. However if, on the contrary, spreads are due to credibility problems, the convergence game could induce investors from more "virtuous" Euro countries to invest in high Yield bonds with t he view to a convergence only to realize, afterward, that such investments would create a systemic risk factor for the Euro area if credibility of less "virtuous" countries is not restored

Long-run equity risk and dynamic trading strategies: a simulation exercise for the Italian stock market

The paper develops a simulation approach capable of reproducing the high frequency characteristics of Italian stock market prices, without assuming any specific form for their stochastic process. The approach is then used to verify the capability of dynamic trading strategies to protect against downside risk in the long run. Because a fully funded capitalized retirement system will develop in Italy in the near future, dynamic trading strategies might become a widely used tool among Italian portfolio managers to hedge long-run equity risk, especially in view of the poor risk–return trade off that the stock market has historically provided. Both option replicating strategies and constant proportion strategies are simulated. The impact of transaction costs, non stationary return variances, alternative portfolio rebalancing schemes and various implementation constraints on the strategies cost are examined. For the option replicating strategies, ex post effective costs turn out to be close to ex ante theoretical expected cost. The crucial element in the strategy appears the decisions about the length of the option strategy and the rule to reset the floor at the end of it. Constant proportion strategies are cheaper and easier to implement, but their effectiveness depends too on the way in which the floor is adjusted as a function of the stock price movements. Broadly speaking, the simulations confirm that dynamic strategies are capable of delivering what they are supposed to achieve. All types of strategies are relatively straightforward and can be used with an acceptable margin of uncertainty