Ebook Credit Constraints and the Yield Curve

Incomplete markets are a potential explanation for the failure of standard asset pricing models based on complete markets (Heaton and Lucas, 1995). When markets are incomplete, agents need to self-insure against uninsurable risks and therefore buy securities in addition to the standard smoothing motives. Uninsurable idiosyncratic risks do not affect uniformly assets with different risks or maturities. In particular, incomplete market models have been used to analyze the yield curve as a simple departure from the standard Cox, Ingersoll, and Ross (1986) complete market model. But due to the heterogeneous agents structure, only few analytical results have been proposed in such frameworks. Seppala (2000) studies an endowment economy with credit constraints and relies heavily on simulations. Heaton and Lucas (1992) who study a three period economy follow another approach.

In this paper, we present a model with a production economy and heterogeneous agents, incomplete markets and credit constraints. In this economy, agents face both an uninsurable employment risk (they switch between an employed and an unemployed status on the labor market) and an aggregate risk, which affect their wages when they are employed. We are able to derive analytical solutions for the zero-coupon bond prices, whatever the maturity, and to investigate the effect of the idiosyncratic risk on the level and the slope of the yield curve. These solutions allow us to exhibit new effects, which have not been put forward in the literature yet. In particular, we show that the volume of titles affect the level and the slope of the yield curve because of credit constraints.

We obtain analytical solutions because we make two assumptions used in the Bewley-Hugget types of models with incomplete markets, which have not been used together yet. These assumptions are useful to decrease the heterogeneity between agents. The first one is that the labor supply is infinitely elastic. Sheinkman and Weiss (1986) make this assumption in a monetary economy. They obtain that all agents for which the credit constraint does not bind, hold the same quantity of titles. The second is made by Kehoe, Levine and Woodford (1991). In their model, agents with low income are credit constrained and sell all their titles. As a consequence, they do not decumulate progressively their assets to smooth consumption. With these two assumptions, we can reduce the heterogeneity of agents to only four different types. This insures tractability and analytical solutions, even when there are an arbitrarily large number of titles of different maturities, which are not perfect substitutes. The contribution of this paper is thus the derivation of this reduced heterogeneous equilibrium and its application to the yield curve.

Read more...

Ebook Credit Market Shocks, Monetary Policy, and Economic Fluctuations

The current financial crisis and the contemporaneous contractions in output, investment, and employment indicate that credit markets disruptions have important effects on economic activity. Central banks round the world have responded with aggressive reductions in their interest rates what suggests that monetary authorities believe that they can partially offset these negative credit market shocks. In this paper I explore the importance of credit market shocks for economic fluctuations and I asses if monetary policy could stabilize shocks that originate in credit markets. To provide quantitative answers for the U.S. economy I use Bayesian maximum likelihood methods to estimate an extended version of the Bernanke, Gertler, Gilchrist (1999) (henceforth BGG) financial accelerator model using real and financial data.

Gilchrist, Yankov, and Zakrajmsek (2008) show that corporate bond spreads have significant predictive power for economic activity, which suggests important linkages between financial conditions and macroeconomic outcomes. In order to quantify these linkages a structural macroeconomic model that distinguishes between changes in credit supply and demand and that can account for general equilibrium feedback effects between developments in the financial and real sectors of the economy is required. Recent work by Elekdag, Justiniano, and Tchakarov (2006), Tovar (2006), Christiano, Motto, and Rostagno (2007), Christensen and Dib (2008), De Graeve (2008), and Queijo von Heideken (2008) seeks to quantify these mechanisms by estimating dynamic stochastic general equilibrium (DSGE) models that incorporate credit market imperfections through the financial accelerator mechanism described in Carlstrom and Fuerst (1997) and BGG.

Although details differ in terms of model estimation and shocks specification, all of these papers document an important role for financial factors in business cycles fluctuations. Queijo von Heideken (2008) for example, shows that the ability of a model with a rich array of real and nominal rigidities to fit both U.S. and the Euro area data improves significantly if one allows for the presence of a financial accelerator mechanism; and Christiano, Motto, and Rostagno (2007) demonstrate that shocks to the financial sector have played and important role in economic fluctuations over the past two decades, both in the United States and Europe. Queijo von Heideken (2008), however, estimate a structural model that is identified without reliance on financial data and that does not allow for shocks to the financial sector, whereas Christiano, Motto, and Rostagno (2007), though allowing for a wide variety of shocks to the financial sector, do not estimate the parameters governing the strength of the financial accelerator mechanism. To date, we are aware of no empirical work that seeks to estimate simultaneously the key parameters of the financial accelerator mechanism along with the shocks to the financial sector using financial market data. The present work fills this gap.

Read more...

Ebook Market microstructure and market liquidity

In this paper we review the factors which affect market liquidity and present a framework which measures such effects quantitatively. This framework enables us to clarify the logic behind recent market reforms and the introduction of rules (e.g. the introduction of electronic trading, the development of disclosure of trade information for market participants, and the prevalence of computerised bilateral transactions). Market liquidity has long been implicitly assumed to exist when market participants evaluate the prices of financial products and manage their portfolios and when central banks implement monetary policy. Since the cost of losing market liquidity is large despite its implicit nature, the improvement and stability of market liquidity is not only important for market participants, but also serves as a way to enhance financial market stability.

This paper is composed of two major parts: a survey of the concepts relating to the factors which affect market liquidity and verification by simulation. In the conceptual summary part, we first summarise the definition of market liquidity and the relationship between market liquidity and market efficiency or stability. Based on the summary, we consider the price discovery mechanism, in which potential trade needs are actually realised in the market as order flows and prices are discovered by matching such orders, and we clarify our direction toward simulation model construction. In the simulation, we assume a certain market structure and focus on the parameters which affect an individual market participant’s ordering decision, such as expectation of the asset price, confidence in such expectation, the extent of risk aversion, sensitivity to various kinds of market information. These parameters determine the realisation process of potential trade needs of market participants according to the market structure.

Therefore, through the simulation we observe, as a mechanism in which market structure affects the state of market liquidity, how the above parameters affect market behaviour. Recently, simulation techniques have been widely used in the area of economics, and are useful in analysing an economic mechanism, which is an aggregate of complex individual behaviours. In our analysis, we do not deal with actual markets which trade specific goods such as foreign exchange, stocks, or government bonds, but assume a market in which hypothetical assets or securities are traded. Although some studies have dealt with the foreign exchange market or analyses of government bond markets, many studies have focused mainly on the New York Stock Exchange. In our analysis, instead of recognising the difference between markets by the character of the goods traded, we regard the difference as a difference of market microstructure or trading rules, and try to capture their general effects on market liquidity.

Read more...

Ebook Catastrophe Bonds and Reinsurance: The Competitive Effect of Information-Insensitive Triggers

Catastrophic events, such as hurricanes and earthquakes are one of the main risks that insurers and reinsurers face. These hazards can result in huge losses and financing problems. For a long time reinsurance contracts have been the only way to hedge against these losses. However, since the early 1990s, new risk transfer instruments have emerged as an alternative to traditional reinsurance contracts. The emergence of the new instruments came along with the availability of new triggers that determine the contract’s payoff. Traditional reinsurance contracts’ payoffs are based on the policyholder’s realized loss (indemnity payment or indemnity trigger). As an alternative, new risk transfer instruments have evolved where the payoff is often based on index or parametric triggers. A prominent example for such contracts are catastrophe (cat) bonds.

One of the characteristics of index triggers is that the contract’s payoff is largely, and in the case of a parametric trigger, completely, independent of the insurer’s realized loss. For that reason, a main advantage of index or parametric triggers is their positive effect on moral hazard (e.g., Niehaus and Mann, 1992, and Doherty, 1997). We provide a new argument in favor of such triggers: information insensitive triggers help to overcome the potential problems of adverse selection in the reinsurance market due to asymmetric information between reinsurers about an insurer’s risk.

Asymmetric information in the reinsurance market. Reinsurers typically have a close and long-term relation to their insurers. In the course of the business relation, reinsurers acquire information that helps to assess the insurer’s risk and to price non-proportional reinsurance policies. For example, they obtain inside information about an insurer’s business model, underwriting and reserving policy, book of business, internal decision processes, ability to screen policies (applicants) and efficiency in claims settlement. A large part of this information is “soft” and cannot easily and credibly be conveyed to third parties.

Read more...

Environmental Accounting an Essential Component of Business Strategy

Environmental accounting is on an expansion path. With increasing social focus on the environment, accounting ?lls an expectation role, to measure environmental performance. The status of environmental awareness provides a dynamic for business reporting its environmental performance. Examining the integration of environmental policy with business policy is the focus of this research. The business ?rm’s strategy includes responding to capital and operating costs of pollution control equipment. This is caused by increasing public concerns over environmental issues, and by a recent government ledtrend to incentive based regulation. This paper describes the environmental component of the business strategy, producing the required performance reports and recognizing the multiple skills required to measure, compile andanalyze the requisite data.

Environmental Accounting: An essential component of business strategy, environmental accounting pdf, the components of business strategy, environment accounting : an essential component of business strategy, What is social & environmental accounting pdf, environmental accounting an essential component of business strategy, Does Honda use environmental accounting?, business strategy pdf], Environment Accounting: An essential component of business strategy, environmental accounting ;an essential component of business strategy, Environmental accounting: an essential component of business strategy, essential component of business strategy

Read more...

Business Ethics - A Manual for Managing a Responsible Business Enterprise in Emerging Market Economics

This manual is available free thru International Trade Administration US Department of Commerce.

Purpose of This manual (taken from foreword page xi): This manual is intended to aid enterprises in designing and implementing a business ethics program that meets emerging global standards of responsible business conduct. Owners and managers can explore the substantial body of global standards, procedures, and expectations described here. They can adopt or adapt them on a sector-by-sector and enterprise-by-enterprise basis, taking into account their particular circumstances, such as applicable laws and regulations, the size of the enterprise, and the enterprise’s purpose.

This manual explores how a business ethics program helps owners, managers, and their professional advisers build an enterprise to meet these standards. It builds on three essential concepts to help busy owners and managers design and implement business ethics programs for their unique enterprises.

* Responsible business conduct: the choices and actions of employees and agents that foster and meet the reasonable expectations of enterprise stakeholders.
* Responsible business enterprise: an enterprise characterized by good governance policies and management practices as well as by a culture of responsible business conduct. It is adept at dealing with the challenges and complexities of its business environment, but holds closely to its purpose, core values, and vision.
* Business ethics program: a tool that owners and managers use to inspire, encourage, and support responsible business conduct, by engaging enterprise stakeholders in order to foster and meet their reasonable expectations, and designing structures and systems to guide and support employees and agents.

Contents

* Part I - The Responsible Business Enterprise
o Chapter 1 Responsible Business Conduct in an Emerging Economy
o Chapter 2 Responsible Management and the Responsible Business Enterprise
* Part II - The Business Ethics Program
o Chapter 3 Responsible Business Conduct as Strategy
o Chapter 4 Creation of a Business Ethics Program
* Part III - Structuring the Business Ethics Program
o Chapter 5 Standards, Procedures, and Expectations for the Responsible Business Enterprise
o Chapter 6 Business Ethics Infrastructure
o Chapter 7 Business Ethics Communications and Feedback
* Part IV - Putting Business Ethics into Practice
o Chapter 8 Aligning the Responsible Business Enterprise
o Chapter 9 Responsible Business Conduct and Practices
* Part V - Achieving Responsible Business Conduct
o Chapter 10 Program Evaluation and Organizational Learning

http://www.trade.gov/goodgovernance/adobe/bem_manual.pdf

Read more...

Business Ethics and Intercultural Communication: Exploring the overlap between two academic Fields

Taken from Abstract: The paper offers a brief presentation of business ethics as an academic field, and of how it has approached the moral dimension of cross-cultural business activity, i.e. when companies operate in different countries, where stakeholders live in different societies and where norms and values reflect and are affected by cultural differences. Introductory definitions are illustrated by classic case examples and important issues addressed in this field. In a next step, cultural and ethical relativism are discussed, with reference to a four-fold table with combinations of both relativisms and to a process model. This model departs from cultural and moral relativism and outlines how one could transcend such relativism. Among several concluding theses the most important one is a claim that intercultural communication as an academic field can profit from using highly controversial business ethics cases for testing its competence (and for staying humble).

http://www.immi.se/intercultural/nr5/brinkmann.pdf

Read more...

Business Ethics and Social Responsibility Education: Shifting the Worldview

Taken from the first page: Business educators walk a road where ethical signposts are unclear, new scandals lead to new laws, and society’s increased expectations change the parameters for what we teach. In this environment, how we sensitize our students (i.e., how we teach our students about business ethics and social responsibility) becomes central to the influence we might have in shaping their thinking. As the basic pedagogical approaches we use are retooled, the premises of our instruction are reconsidered, and the sources of our assumptions are questioned (see, e.g., Koehn, 2005). Helping students become more socially responsible and ethically sensitive is a substantive part of our responsibility as we prepare a new generation of business practitioners. We face a difficult struggle, for even as we offer new approaches for dealing with changing business environments, less responsible individuals and businesses learn new ways to prosper through immoral means (Callahan, 2004).

http://www.temple.edu/tlc/research/publications/Giacalone_2006.pdf

Read more...