Keith Pilbeam

Private lending to sovereign states : a theoretical autopsy

By the end of the 1980s the total debt of developing countries had passed the trillion-dollar mark. What should be done when the debt is heavily discounted, and countries pass the point at which they decide to default rather than service the debt in full?In this illuminating work on external debt, Daniel Cohen explodes many myths currently popular among economists, bankers, and journalists about the nature of the debt problem, its origins, and its cure. He skillfully brings complex theoretical issues to bear on the analysis of practical questions of economic policy. What is needed, he proposes, are clear rules that acknowledge the market price of the debt and deflate the fiction that a highly indebted country is solvent. Using clear, simple analytical models to illustrate his points, Cohen offers a realistic measure of national solvency in an international context. He then applies the framework to an analysis of the major debtor countries and discusses budget constraints, debt repudiation, and the economic fragility of heavily indebted nations.Contents: Intertemporal Budget Constraints. Can a Nation Escape Its Budget Constraint? Capacity versus Willingness to Pay. Voluntary and Involuntary Lending. A Solvency Index - Theory. Empirical Evaluation of the Solvency Index. Domestic and External Debt Constraints. The Fragility of Heavily Indebted Nations - Large Debt and Slow Growth.

Exchange rate models and exchange rate expectations: an empirical investigation

A non parametrictest of popular modern exchange rate models under alternative expectation specifications is presented. It is found that there is little difference in the predictive success of the alternative exchange rate models, however, there are significant differences in the performance of a model depending upon the expectations mechanism specified. Our most important finding is that the flexible price monetary model, the portfolio balance model and a hybrid model under extrapolative and adaptive expectations mechanisms provide statistically significant information about the direction of exchange rate movements. By contrast, the same models when employing static, regressive and rational expectation mechanisms do not provideany satistically significant information.

The East Asian financial crisis: getting to the heart of the issues

Gives and overview of the East Asian financial crisis, focusing on the seven countries most directly involved, and the underlying reasons for its magnitude. Examines the 1991‐1999 economic growth rates, inflation rates and current account positions in the area and asserts that the deterioration of macroeconomic fundamentals was insufficient to explain it. Relates a number of external factors in the crisis to some research models and argues that the poor regulation and control of the banking system, coupled with an inflow of foreign investment, which investors wrongly believed to be government guaranteed, caused a “bubble” in share and property prices. Describes the collapse of companies, currency values and share/property prices which followed, exacerbated by a panicky withdrawal of foreign funds, speculative activity and government policy errors. Lists the objectives of and instruments used by the IMF programme and asks if it was too harsh e.g. on bank closures. Considers the lessons of the crisis and its implications for the Basle capital adequacy rules and the imposition of capital controls.

Finance & financial markets

The World of Finance Financial Intermediation and Financial Markets Financial Institutions Monetary Policy and Interest Rate Determination Domestic and International Money Markets The Domestic and International Bond Market Portfolio Analysis: Risk and Return in Financial Markets The Capital Asset Pricing Model Stockmarkets and Equities The Efficiency of Financial Markets The Foreign Exchange Market Theories of Exchange Rate Determination Financial Futures Options Option Pricing Swap Markets Financial Innovation and the Credit Crunch Regulation of the Financial Sector

The Efficiency of Financial Markets

One of the largest areas of research and interest in finance concerns the efficiency of financial markets. There have been studies of the efficiency of bond markets, the foreign exchange market, the stockmarket and more recently of derivative markets such as the options and futures market. In this chapter we restrict ourselves to examining the efficiency of stockmarkets.

The profitability of central bank foreign exchange market intervention

Abstract This paper assesses the profitability of foreign exchange market intervention by the Bank of England for the period 1973–1995. Profitability appears to an objective measure of the success of intervention policy, but we show that the tendency of the central bank to “lean against the wind” in its foreign exchange interventions means that profitability calculations will be heavily biased by the amount of cumulative intervention arbitrarily considered. It follows that profitability calculations will be strongly affected by the start–end dates used for calculation purposes. This cumulative intervention bias undermines the usefulness of using the profitability criterion as the sole measure for evaluating intervention policy. Nonetheless, the large sums of public money that can be staked on foreign exchange market interventions suggests the need for open reporting of the profits/losses involved.

Economic Fundamentals and Exchange Rate Movements

This paper provides a non-parametric test of modern exchange rate models that is an alternative to econometric methods. The economic fundamentals from three well-known exchange rate theories are used to devise quarterly net predictions for the movement of sterling against four major currencies over the period 1973-98. Each model is examined under six expectations mechanisms. Although the test can lead to very diverse predictions from different models, it is shown that there is very little difference in the predictive success of rival exchange rate theories. The paper shows that the role assigned to market expectations is more crucial to the success of the models than the particular specification of the fundamental variables.We find some weak evidence to suggest that extrapolative and adaptive expectations mechanisms seem to offer a better specification of exchange rate expectations as compared to regressive and rational expectation mechanisms. One significant advantage of the test is that it can readily deal with hybrid models and heterogeneous expectations; however, neither route seems to improve exchange rate forecasts.

Macroeconomic Policy in an Open Economy

In Chapter 3 we looked at some of the fundamental identities for an open economy and considered the possible effect of devaluation on the current account. It was noted that the ultimate impact of a devaluation will in large part be dependent upon the economic policies that accompany the devaluation. In this chapter we shall be examining how both exchange-rate changes and macroeconomic policies impact upon an open economy. A fundamental difference between an open economy and a closed economy is that over time a country has to ensure that there is an approximate balance in its current account. This is because no country can continuously build up a stock of net liabilities to the rest of the world by running a continuous current account deficit. Conversely, it does not make sense for a surplus country to continuously build up a stock of net claims on the rest of the world; eventually it will wish to spend those claims.

High-tech IPOs in the USA, UK and Europe after the dot-com bubble

From 1998 to 2001, the high-tech industry saw a dramatic increase and subsequent sharp decline in market capitalisation during a phenomenon known as the dot-com bubble. During this time there were a large number of private companies that made the decision to go public via an Initial Public Offering (IPO) of stock on the general equities market. After the dot-com crash of 2001, the IPO market for high-tech companies changed dramatically. Far fewer companies went public, and they had much lower first-day returns than those during the bubble. This paper explores the first-day returns of high-tech IPOs in the USA and Europe in the post-bubble era. We compare the results of the 2002–2005 post-bubble period with those of the 1998–2001 dot-com bubble period. We find that the high-tech IPO market was dramatically affected by the dot-com crash and that, after the crash, the number of high-tech IPOs dropped considerably, as did the average first-day returns of these IPOs. Finally, we find that the European high-tech IPO market was not as adversely affected by the dot-com crash as the American market.

Risk budgeting and Value-at-Risk

Value-at-Risk (VaR) is a popular risk-metric for reporting financial exposure, for evaluating fund/manager performance and for regulatory disclosures. Yet, VaR is not a coherent risk measure because it is not sub-additive. This paper applies the methodology of risk budgeting to determine if VaR qualifies as a coherent risk measure. We show that the tools of risk budgeting allow VaR to be treated as a coherent risk measure, even though it does not restore sub-additivity. The main finding is that the additional analysis provided by risk budgeting means that VaR is a useful tool even if it is not sub-additive.