Arie Melnik

Short-term reaction of stock markets in stressful circumstances

We document stock price behaviour in the period following a stock market stress. We focus on price behaviour using daily market indexes from 39 stock exchanges. Our results are not consistent with the overreaction hypothesis. We find positive (negative) abnormal price performance in the short-term windows (up to 10 days) following positive (negative) price shocks. The analysis also highlights some differences across markets classified as either developed and emerging. The post-shock abnormal performances are significantly larger for our sample of emerging markets. We find that the incidence of price shocks in both developed and emerging markets are not year- or month-dependent. In general, the quantitative impact of the after shock tremors is related to various measures of market liquidity. That is, the after shock price changes are stronger in illiquid markets. Major liquid markets behave in the same direction, but the post-shock price movements are milder. Finally, in many cases a cross market impact is identified. Its direction is usually from large markets to smaller ones. That is, extreme shocks in major markets are likely to impact strongly the price behavior in smaller markets.

Debt Issue Costs and Issue Characteristics in the Market for U.S. Dollar Denominated International Bonds

This paper analyzes the issue costs and initial pricing of bonds in the international market. In particular, we investigate the determinants of three components of issue costs: underwriter fee, underwriter spread (the difference between the offering price and the guaranteed price to the issuer), and underpricing (the difference between the market price and the offering price). Total underwriter compensation increases with the bonds’ credit risk and maturity, but it is insignificantly related to issue size. Interestingly, underwriters appear to price some issue characteristics directly (by adjusting the fee) and other characteristics indirectly (by setting the guaranteed price). The two compensation components (fee and spread) are negatively related to each other. We provide evidence that this trade-off is consistent with income tax considerations, as well as with two-tier pricing by underwriters. We find no evidence of underpricing. JEL classification codes: G12; G15; G24; G30

Performance of disabled persons on a chordic keyboard.

Fourteen disabled persons used a one-hand chordic device for typing. This keyboard was designed to minimize physical exertion and to inhibit unwanted psychomotor reactions so as to facilitate its use by persons with cerebral palsy, muscular dystrophy, and related disorders. The keyboard fits the fingers of one hand. A character is typed by pressing a combination of fingers corresponding to a typing code developed earlier. Typing rates of text transcription ranged from 8 to 14 words/min after 5 h of practice. These results indicated that the physical configuration and cognitive operation of a chordic keyboard would permit disabled persons to use computers.

Industrial structure in the Eurocredit underwriting market

Abstract While the complexity of underwriting syndicates is well-known there has been very little empirical analysis of syndicate structure. The short-term Eurocredit market is a promising market for the analysis of industrial structure because underwriting syndicates generally come in a two-tier structure. The structures of syndicates in this market are analyzed here empirically. Our evidence suggests that the lead managers in these syndicates seem to be recruited primarily for paycosts of risk bearing and sharing, while the regular managers appear to be recruited primarily for the purpose of dealing with expanded underwriting distribution, risks held constant. Contract parameters that affect syndicate size and structure are examined in detail for various instruments.

International institutional lending arrangements to sovereign borrowers

Abstract Recent financial crises in east Asia and elsewhere have illustrated the problems that plague emergency liquidity arrangements and the ‘lender of last resort’ role of the International Monetary Fund and other international institutions. In particular, these act under conditions of extreme uncertainty, where potential sovereign borrowers, as well as private financial institutions, are ‘kept in the dark’ regarding the intentions of the emergency lenders and the amounts and terms of emergency liquidity that can be tapped. From April 1999, longer-term credit lines are being offered by the IMF, designed to be awarded to ‘healthy’ countries before they experience contagion or distress. The paper evaluates the advantages of this form of IMF lending and this new trend in IMF operations. It is argued that provision of IMF financing through such long-term lending facilities is better in some senses than shorter-term lending. Long-term contracts reduce the uncertainty with respect to IMF intentions. Moral hazard problems are reduced for the borrowing country and financial markets know the future level and terms of IMF support. Another advantage is that long-term loan contracts improve the allocation of resources within the borrowing country. Much as private-sector facility lending is the dominant mode of finance in many markets, so facility lending has efficiency advantages when it is provided by the IMF. This efficiency advantage is derived formally. It is shown that sovereign borrowers are actually better off when utilizing these as backup lines of credit, instead of emergency borrowing that is conducted after distress occurs. Facility lending by international institutions can lead to a welfare improvement and superior resource allocation for sovereign borrowers. The intuition for this is that when financial distress drives these borrowers to increase their debt, risk premia in borrowing rates would not rise, at least up to the limits established by the size of the facility.

Currency swaps, hedging, and the exchange of collateral

Abstract A model of currency swaps is developed where swaps provide superior hedging capabilities. Under the swap two parties in effect ‘lease’ assets that they own to one another for use as collateral, creating supewrior loan-collateral matching. This superior matching is reflected in lower borrowing costs to both agents (creating a dominant borrowing and hedging method). The swap contract is self-enforcing due to a mutual double bonding arrangement, where each side has an interest in the continuation of the exchange relationship. (JEL G2, F3)

THE FORMATION OF FIRMS AND THE PRIOR EXPERIENCE OF NEW ENTREPRENEURSHIP

We use a simple model to analyze the founding stage of new firms. Our goal is to characterize the directional causality between the expected rewards from entrepreneurship and the length of prior labor market experience that entrepreneurs possess. We test predictions about the timing of the formation of new firms on a sample of Italian entrepreneurs who founded new firms in the period 1992-2004. We obtain three main results. First, the timing of the foundation of new firms is determined primarily by the expectation of higher income and not so much by the perception of risk. Second, earlier experience of entrepreneurs in full time employment has a positive impact on the size of newly founded firms. Third, when we separate founders who work alone from founders who work with family partners, we find that the latter establish and control larger firms.

Disclosure Costs, Regulation, and the Expansion of the Private-Placement Market:

The private-placement debt market has grown dramatically in recent years. Private placements have a “competitive advantage” over public placements in being exempt from many regulations, including disclosure procedures and auditing requirements. Here, a model is developed to explain the growth in the private-placement market. Corporate borrowers choose between public and private placement of debt so as to minimize borrowing costs. Borrowers in the public-placement market incur higher regulatory cost, but are also able to signal accurately their true risk of default. In private placements, there is an asymmetric information problem. This results in an equilibrium where the debt market gets partitioned between private and public placements. It is shown that raising regulatory costs will lead to an expansion of the market share of private placements. It will also lead to an increase in the overall default rate on corporate debt.

Determinants of the salaries of rabbis

The effect of communal internal labor markets on the generation of wage differences for prestigious occupations is examined here. We focus on the rabbi as an example of a free professional whose job opportunities are circumscribed within a communal or congregational labor market. Through an analysis of an unusual data set on rabbis in the United States, several hypotheses were tested. The dominant empirical variables explaining salary levels were found to be linked primarily to the rabbis’ communal labor market as reflected in a congregation’s size and general income level. A human capital factor, experience, proved of lesser importance. These results suggest that rewards are generated by a combination of factors allied to the socio-economic status of the local congregation. The significance of such communal labor markets in determining wages is discussed.

Interest rate indexation and the pricing of loan commitment contracts

Abstract The central question addressed in this paper is why most loan pricing agreements between banks and their commercial customers involve additive rather than multiplicative markups over the base lending rate. It is argued that banks generally prefer additive pricing because the real value of the premiums moves inversely with inflation. Therefore this pricing formula provides an automatic partial inflation hedge for banks. Most borrowers who hold long positions in nominal assets also prefer this formula for the same reason. However, some borrowers who hold net short positions in nominal assets prefer multiplicative pricing. Banks provide them with such a form of pricing in exchange for appropriate compensation. Supporting empirical evidence is provided.