Impact Factor: outdated artefact or stepping-stone to journal certification?

A review of Garfield's journal impact factor and its specific implementation as the Thomson Reuters Impact Factor reveals several weaknesses in this commonly-used indicator of journal standing. Key limitations include the mismatch between citing and cited documents, the deceptive display of three decimals that belies the real precision, and the absence of confidence intervals. These are minor issues that are easily amended and should be corrected, but more substantive improvements are needed. There are indications that the scientific community seeks and needs better certification of journal procedures to improve the quality of published science. Comprehensive certification of editorial and review procedures could help ensure adequate procedures to detect duplicate and fraudulent submissions.Comment: 25 pages, 12 figures, 6 table

The mechanism of derivatives market efficiency

These are not your parents’ financial markets. A generation ago, the image of Wall Street was one of floor traders and stockbrokers, of opening bells and ticker symbols, of titans of industry and barbarians at the gate. These images reflected the prevailing view in which stock markets stood at the center of the financial universe. The high point of this equity-centric view coincided with the development of a significant body of empirical literature examining the efficient market hypothesis (EMH): the prediction that prices within an efficient stock market will fully incorporate all available information. Over time, this equity-centric view became conflated with these empirical findings, transforming the EMH in the eyes of many observers from a testable prediction about how rapidly new information is incorporated into stock prices into a more general—and generally unexamined—statement about the efficiency of financial markets. In their seminal 1984 article The Mechanisms of Market Efficiency, Ron Gilson and Reinier Kraakman advanced a causal framework for understanding how new information becomes incorporated into stock prices. Gilson and Kraakman’s framework provided an institutional explanation for the empirical findings supporting the EMH. It has also played an influential role in public policy debates surrounding securities fraud litigation, mandatory disclosure requirements, and insider trading restrictions. Yet despite its enduring influence, there have been few serious attempts to extend Gilson and Kraakman’s framework beyond the relatively narrow confines in which it was originally developed: the highly regulated, order-driven, and extremely liquid markets for publicly traded stocks. This Article examines the mechanisms of derivatives market efficiency. These mechanisms respond to information and other problems not generally encountered within conventional stock markets. These problems reflect important differences in the nature of derivatives contracts, the structure of the markets in which they trade, and the sources of market liquidity. Predictably, these problems have led to the emergence of very different mechanisms of market efficiency. This Article describes these problems and evaluates the likely effectiveness of the mechanisms of derivatives market efficiency. It then explores the implications of this evaluation in terms of the current policy debates around derivatives trade reporting and disclosure, the macroprudential surveillance of derivatives markets, the push toward mandatory central clearing of derivatives, the prudential regulation of derivatives dealers, and the optimal balance between public and private ordering

Law and finance in the Chinese shadow banking system

Almost twenty years after economists Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny published their ground-breaking and controversial research examining the relationship between investor protection laws and stock market development, our understanding of the relationship between law and finance is still in its theoretical infancy. Today, few would argue that strong laws do not help generate credible commitments and thereby promote financial development. Ultimately, however, this observation is little more than a useful starting point for exploring the complex, dynamic, and structurally interdependent relationship between law and finance within modern financial markets.So where might we turn for further insights into this important relationship? One potentially useful framework is the 'Legal Theory of Finance' (LTF). At the heart of LTF are four interwoven propositions. These propositions emphasize the legal construction of financial markets, their essential hybridity and inherent hierarchy, and the role of the law as not only a mechanism for generating credible commitments, but also as a potential source of financial instability. LTF thus both complements and expands upon conventional frameworks for understanding the relationship between law and finance. This Article uses LTF to explore the emergence, growth, and risks residing within a little known but increasingly important segment of the Chinese shadow banking system: the $USD2 trillion dollar market for wealth management products (WMPs). WMPs possess a number of distinctive legal and economic features. First, despite being marketed by banks and other intermediaries as substitutes for conventional deposit accounts, the liabilities generated by the majority of these products do not reside on bank balance sheets. Second, while WMPs typically lock-in investors' capital for relatively short periods of time, this capital is often invested into less liquid, longer-term assets. The resulting maturity and liquidity mismatches thus recreate the fragile capital structure of banks. Third, WMPs have emerged largely in response to China's interventionist approach toward both banking regulation and broader macroeconomic policy. As we shall see, LTF holds out a number of important insights into the emergence of WMPs, their legal structure, their dramatic growth in the wake of the financial crisis, and the risks they may pose to financial stability. More broadly, understanding WMPs through the lens of LTF highlights the fact that, far from simply representing the 'rules of the game,' the law is also often the board, the game pieces, and the dice

The Dynamics of OTC Derivatives Regulation: Bridging the Public-Private Divide

Over-the-counter (OTC) derivatives have emerged as a global behemoth-the 800 pound gorilla of modern financial markets. In the wake of both their precipitous growth and prominence in the thick of the current global financial crisis, financial market regulators have found themselves under pressure to enhance their regulation of OTC derivatives markets. This paper explores both the private and social costs and benefits of OTC derivatives and the respective strengths and weaknesses of public and private systems of ordering in pursuit of the optimal mode of regulating OTC derivatives markets. On the basis of this exploration, this paper advocates employing modes of regulation which abandon the largely artificial distinction between public and private ordering, align the incentives of public and private actors and facilitate the long-term transfer of information and expertise between these actors in order to generate more nuanced and responsive regulation and thereby enhance social welfare. © 2010 T.M.C. Asser Press

The limits of private ordering within modern financial markets

From standardized contracts for loans, repurchase agreements, and derivatives, to stock exchanges and alternative trading platforms, to benchmark interest and foreign exchange rates, private market structures play a number of important roles within modern financial markets. These market structures hold out a number of significant benefits. Specifically, by harnessing the powerful incentives of market participants, these market structures can help lower information, agency, coordination, and other transaction costs; enhance the process of price discovery, and promote greater market liquidity. Simultaneously, however, successful market structures are the source of significant and often overlooked market distortions. These distortions – or limits of private ordering – stem from positive network externalities, path dependency, and power imbalances between market participants at the core of these market structures and those at the periphery. Somewhat paradoxically, these limits can erect substantial barriers to entry, insulate incumbents from vigorous competition, and undermine the emergence of new and potentially more desirable substitutes: thus entrenching less efficient market structures. Using the London Interbank Offered Rate (Libor) and the International Swaps and Derivatives Association determination committee (DC) mechanism as case studies, this paper seeks to better understand the limits of private ordering. It also explores how relatively modest changes to the public regulatory regimes governing these market structures could, in some cases, yield significant improvements

The Dynamics of OTC Derivatives Regulation: Bridging the Public-Private Divide

Over-the-counter (OTC) derivatives have emerged as a global behemoth-the 800 pound gorilla of modern financial markets. In the wake of both their precipitous growth and prominence in the thick of the current global financial crisis, financial market regulators have found themselves under pressure to enhance their regulation of OTC derivatives markets. This paper explores both the private and social costs and benefits of OTC derivatives and the respective strengths and weaknesses of public and private systems of ordering in pursuit of the optimal mode of regulating OTC derivatives markets. On the basis of this exploration, this paper advocates employing modes of regulation which abandon the largely artificial distinction between public and private ordering, align the incentives of public and private actors and facilitate the long-term transfer of information and expertise between these actors in order to generate more nuanced and responsive regulation and thereby enhance social welfare. © 2010 T.M.C. Asser Press

Toward a supply-side theory of financial innovation

Innovation. The word is evocative of ideas, products and processes which have somehow made the world a better place. Prior to the global financial crisis, many viewed financial innovation as unequivocally falling into this category. Underpinning this view was a pervasive belief in the self-correcting nature of markets and their consequent optimality as mechanisms for allocating society’s resources. This belief exerted a profound influence on how we regulated financial markets and institutions

The mechanism of derivatives market efficiency

These are not your parents’ financial markets. A generation ago, the image of Wall Street was one of floor traders and stockbrokers, of opening bells and ticker symbols, of titans of industry and barbarians at the gate. These images reflected the prevailing view in which stock markets stood at the center of the financial universe. The high point of this equity-centric view coincided with the development of a significant body of empirical literature examining the efficient market hypothesis (EMH): the prediction that prices within an efficient stock market will fully incorporate all available information. Over time, this equity-centric view became conflated with these empirical findings, transforming the EMH in the eyes of many observers from a testable prediction about how rapidly new information is incorporated into stock prices into a more general—and generally unexamined—statement about the efficiency of financial markets. In their seminal 1984 article The Mechanisms of Market Efficiency, Ron Gilson and Reinier Kraakman advanced a causal framework for understanding how new information becomes incorporated into stock prices. Gilson and Kraakman’s framework provided an institutional explanation for the empirical findings supporting the EMH. It has also played an influential role in public policy debates surrounding securities fraud litigation, mandatory disclosure requirements, and insider trading restrictions. Yet despite its enduring influence, there have been few serious attempts to extend Gilson and Kraakman’s framework beyond the relatively narrow confines in which it was originally developed: the highly regulated, order-driven, and extremely liquid markets for publicly traded stocks. This Article examines the mechanisms of derivatives market efficiency. These mechanisms respond to information and other problems not generally encountered within conventional stock markets. These problems reflect important differences in the nature of derivatives contracts, the structure of the markets in which they trade, and the sources of market liquidity. Predictably, these problems have led to the emergence of very different mechanisms of market efficiency. This Article describes these problems and evaluates the likely effectiveness of the mechanisms of derivatives market efficiency. It then explores the implications of this evaluation in terms of the current policy debates around derivatives trade reporting and disclosure, the macroprudential surveillance of derivatives markets, the push toward mandatory central clearing of derivatives, the prudential regulation of derivatives dealers, and the optimal balance between public and private ordering