Matthias Bank

The Use of Weather Derivatives by Small- and Medium-Sized Enterprises: Reasons and Obstacles

Abstract Weather events have a strong influence on the operating figures of small- and medium-sized enterprises (SMEs). The emergence of weather derivatives offers opportunities to manage these weather-related risks. General pricing and valuation issues of weather derivatives have already been widely discussed in the literature, but, so far, no research has been undertaken to examine the reasons and obstacles regarding the usage of weather derivatives within a SME context. The present paper fills this research gap. It introduces the fundamental characteristics of weather derivatives and reviews the theoretical hedging rationales of SMEs. Above all, this paper presents and discusses obstacles that may impede the application of weather derivatives by SMEs. According to results of a survey conducted among 215 Austrian SMEs, the primary obstacles are the lack of expertise and awareness regarding weather risk management.

Deposit finance as a commitment device and the optimal debt structure of commercial banks

We consider a regulated bank with access to bond and insured deposit financing. Bank manager-owners have specific abilities, which allows them to extract rents. We show that deposit finance acts as a commitment device, that has the potential to raise the overall debt capacity of the bank and increases pledgable assets. Our focus is on the optimal mix of bond and deposit financing. We find that in the optimum, the bank chooses a debt structure so as to align internal incentives with external constraints. The model predicts that banks with more risky assets or with more specific abilities use deposit financing to a lesser extent.

Public Attention, Adverse Selection, and the Pricing of Stocks

We hypothesize that the degree of public attention influences the price level of stocks in a systematic way. We employ a simple discounted cash flow model with adverse selection and fixed transaction costs that determine an endogenous bid-ask-spread. In the model, rational and risk neutral investors incorporate future trading conditions into their price setting behavior. These trading conditions are driven by the degree of public attention and entail an attention-dependent impact of the bid-ask-spread on required gross returns. Specifically, given a high level of public attention a higher bid-ask-spread may negatively affect required asset returns. We argue that the model implications are consistent with empirical findings, i.e. size, book-to-market, and the momentum effect.

Financing New Economy Firms

Risk capital is of unique importance for young and innovative firms because of the high initial and ongoing sunk cost investments to create innovative products or processes and a relatively long waiting time for highly uncertain returns. This paper’s focus is on financing knowledge-based firms, which are the core of the socalled New Economy or Internet Economy (see AUDRETSCH, 2001). These New Economy Firms (NEFs) use specialized knowledge as their main productive factor. Knowledge refers to a complex set of information needed to create innovative products or processes, which is not easily transferable. Moreover, knowledge belongs to a great extent to individuals, so firms have the problem of providing incentives for their employees to use their personalized knowledge efficiently. There is also the danger that employees will leave and use their experience to set up their own NEFs.