The Existence of Pareto Superior Price Limits and Trading Halts

We examine the welfare effects of price limits and trading halts in a linear mean-variance model of stock and futures trading. We suppose that shocks to liquidity and fundamentals occur between the time investors decide to trade and the time their orders are executed and cannot be insured with contingent claims. This gives rise to implementation risk that is not transferred optimally among investors. Price limits (or price contingent trading halts) serve to partially insure implementation risk. We show that when price fluctuations are due solely to news about fundamentals, judiciously chosen price limits are (ex ante) pareto superior to unconstrained trade. When liquidity shocks are large, then some speculators lose, but hedgers still benefit from price limits.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/100818/1/ECON277.pd

Grey matter in shadow banking: international organizations and expert strategies in global financial governance

Who controls global policy debates on shadow banking regulation? We show how experts secured control over how issues in shadow banking regulation are treated by examining the policy recommendations of the Bank of International Settlements, the International Monetary Fund and the Financial Stability Board. The evidence suggests that IO experts embedded a bland reformism opposed to both strong and ‘light touch’ regulation at the core of the emerging regulatory regime. Technocrats reinforced each other's expertise, excluded some potential competitors (legal scholars), co-opted others (select Fed and elite academic economists), and deployed measurement, mandate, and status strategies to assert issue control. In the field of shadow banking regulation, academic economists’ influence came from their credibility as arbitrageurs between several professional fields rather than their intellectual output. The findings have important implications for how we study the relationship between IO technocrats and experts from other professional field

Does the Introduction of Futureson Emerging Market Currencies Destabilize the Underlying Currencies?

Recent interest in futures contracts on emerging market currencies has raised concerns among some central bank authorities about their ability to maintain stable currencies. This paper presents empirical results examining the influence of the Mexican peso, the Brazilian real, and the Hungarian forint futures contracts on the respective spot markets. While measures of linear dependence and feedback indicate strong connections between the respective markets, futures volatility does not significantly explain spot market volatility, nor does it increase after futures introductions. To account for the characteristics of the spot and futures returns a SWARCH model has been employed to estimate volatility.

The Existence of Pareto-Superior Price Limits.

This paper examines the welfare effects of futures price limits under a simple form of market incompleteness. When prices become volatile, shocks to liquidity and fundamentals may occur between the time investors decide to trade and the time their orders are executed. This gives rise to implementation risk that cannot be transferred with contingent claims. The authors show that price limits partially insure implementation risk. When price fluctuations are driven by news about fundamentals, judiciously chosen price limits can be (ex ante) Pareto superior to unconstrained trade. When liquidity shocks are large, price limits benefit hedgers but harm some speculators. Copyright 1994 by American Economic Association.

Emerging Market Spread Compression

Despite recent turmoil, spreads on emerging market countries'' sovereign bonds have fallen dramatically since mid-2002. Some have attributed the fall to improved economic fundamentals while others to ample global liquidity. The paper models spreads and attempts to empirically distinguish between the two factors. The results indicate that fundamentals, as embedded in credit ratings, are very important, but that expectations of future U.S. interest rates and volatility in those expectations are also a key determinant of emerging market spreads.Liquidity;Emerging markets;bond, bond spreads, market bond, emerging market bond, standard deviation, futures market, bonds, bond spread, missing observations, international country risk guide, standard error, statistics, cointegration, financial stability, constant variance, explanatory power, dummy variable, emerging market bonds, statistical significance, time series, correlation, autocorrelation, financial markets, fitted value, bond index, standard errors, forecasting, calibration, sovereign bonds, econometrics, logarithms, constant term, regression analyses, financial contagion, samples, random error, bond indices, futures contract, outliers, financial instruments, sample mean, dummy variables, deposit rate, bond market, futures markets, nonlinear relationship, surveys

Euro-Area Banking At the Crossroads

This paper analyses the process of disintermediation, the progress in consolidation, the impact of new technologies, and the role of ownership and control structures for the euro area banking sector. The impact of these trends on competition policy, "too big to fail" concerns, and financial stability is investigated. In this setting, the paper endorses stronger cross-border coordination among supervisory authorities but notes that more formal cross-border arrangements through supranational agencies seem, at this stage, premature. However, an increased capacity to perform centralized market surveillance, building on domestic supervisory information, is needed to ensure the efficiency and stability of euro-area financial markets.