| 761 - Firms' Dynamic Adjustment to Target Capital Structures in Transition Economies |
June 2004
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R.T.A. de Haas and H.M.M. Peeters
We study the capital structure dynamics of Central and Eastern European firms in order to get a better
understanding of the quantitative and qualitative development of the financial systems in this region.
The dynamic model we use endogenizes the target leverage as well as the adjustment speed and is
applied to microeconomic data for ten countries. We find that during the transition process firms
generally increased their leverage, lowering the gap between actual and target leverage. Profitability
and age are the most robust determinants of capital structure targets. Older firms attract more bank
debt, whereas profitability decreases firms’ leverage targets. While banking system development has
in general enabled firms to get closer to their leverage targets, information asymmetries between firms
and banks are still important. As a result, firms prefer internal finance to bank debt (pecking order
behaviour) and adjust leverage only slowly.
Keywords: capital structure dynamics, transition economies, financial system development
JEL codes: C23, G32, O57
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| 760 - A Pension ASSET and Liability Model for the Netherlands |
June 2004
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M.C.J. van Rooij, A.H. Siegmann and P.J.G. Vlaar
This study presents a pension model geared to the typical pension contract in the Netherlands. It is
based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and
indexation is intended. The model provides a framework for analysing adjustments to such factors as
the asset mix, retirement age, returns and the method of discounting, premium setting and indexation.
The importance of uncertainty over interest rate movements and returns on shares is made explicit by
means of stochastic and historical simulations. In this, PALMNET differs from existing, often
deterministic pension models. The main findings are, first, a wage -indexed defined benefit pension is
still affordable despite the current shortfall of wealth of pension funds. Second, fair value accounting
considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset
mix towards more bonds is costly in terms of average premiums, but reduces the volatility. These
conclusions are based on realistic to conservative assumptions regarding returns and risks.
Keywords: Actuarial pension model; Monte Carlo simulation; historical simulation
J.E.L. Code: C15, C59, G23, J18
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| 759 - Rational Ambiguity and Monitoring the Central |
June 2004
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Maria Demertzis and Andrew Hughes Hallet
In this paper we examine the consequences of having a Central Bank whose preferences are state contingent. This has been identified in the literature as a Central Bank that is ‘rationally inattentive’ or ‘constructively ambiguous’. The new feature in this paper is that we show how the private sector is likely to react. There are two possibilities: the public can form rational expectations and internalise the uncertainty about the Central Bank’s preferences in full. lternatively, and if this process of internalisation is costly, it can form a ‘best’ guess regarding those preferences and use that. This implies an equivalence strategy applied to the preference parameters. As those parameters enter the decisions nonlinearly, a systematc error emerges. We examine the magnitude of the resulting error in inflation and output, following the assumption of certainty equivalence. Under all reasonable levels of uncertainty this error turns out to be small but it involves trading a deflation bias against the cost of gathering the information needed for the full rational expectations solution. JEL Classification: E52, E58 Keywords: Central Bank Transparency, Certainty Equivalence, Rational Expectations, Ambiguity and Rational Inattention
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| 758 - Nonlinear monetary policy in Europe: fact or myth? |
June 2004
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W.A. Bruinshoofd and B. Candelon
We hold the fort for linear specification of monetary policy and economic activity in Europe. Using
data on the last two and a half decades we cannot reject the hypothesis that monetary policy is a linear
process and we find mixed results regarding economic activity.
JEL Code: C51
Key words: Time series model specification; Linearity tests; Nonlinear models
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| 757 - An Anatomy of Futures Returns: Risk Premiums and Trading Strategies |
June 2004
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Frans A. de Roon, Rob W. J. van den Goorbergh and Theo E. Nijman
This paper analyzes trading strategies which capture the various risk premiums that have been distinguished in futures markets. On the basis of a simple decomposition of futures returns, we show that the return on a short-term futures contract measures the spot-futures premium, while spreading strategies isolate the term premiums. Using a broad cross-section of futures markets and delivery horizons, we examine the components of futures risk premiums by means of passive trading strategies and active trading strategies which intend to exploit the predictable variation in futures returns. We find that passive strategies which capture the spot-futures premium do not yield abnormal returns, in contrast to passive spreading strategies which isolate the term premiums. The term structure of futures yields has strong
explanatory power for both spot and term premiums, which can be exploited using active trading strategies that go long in low-yield markets and short in high-yield markets. The profitability of these yield-based trading strategies is not due to systematic risk. Furthermore, we find that spreading returns are predictable by net hedge demand observed in the past, which can be exploited by active trading. Finally, there is momentum in futures markets, but momentum strategies do not outperform benchmark portfolios.
JEL classification: G13.
Keywords: Predictability, futures term structure, hedging pressure.
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| 64 - Investors psychology: a behavioural explanation of six finance puzzles |
April 2004
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Henriëtte Prast
This paper surveys the behavioural finance explanation of six puzzles of finance. These puzzles are: stock price under- and overreactions, excessive trading and the gender puzzle, financial hypes and panic, the equity premium puzzle, the winner/loser puzzle and the dividend puzzle. After an introduction of prospect theory and a description of heuristics and biases in the judgment of information, the paper applies behavioural insights to explain the puzzles.
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| 02 - On the Emergence of a Binding Zero Lower Bound |
March 2004
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C.A. Ullersma
Overoptimism regarding productivity developments is often seen as the root of the worldwide cyclical downturn at the beginning of the 21st century. This paper develops a New Keynesian model with credit market imperfections that shows how overly positive productivity expectations initially drive the interest rate risk premium below its
equilibrium value, boosting real economic growth. When a downward correction of the outlook appears inevitable, collateral value shrinks and the interest rate risk premium rises sharply. Given this risk premium, a substantially lower (risk free) policy rate is required in order to reduce market rates. In such a situation a binding zero lower bound
can emerge.
JEL codes: E31, E32, E52
Key words: zero lower bound, financial accelerator, technology shocks
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| 01 - The effects of Learning in Interactive Monetary Policy Committees |
February 2004
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Jan Marc Berk and Beata K. Bierut
We develop a theoretical framework for studying the effects of interaction on the quality of decision-making by monetary policy committees. We show that interaction, is increasing one’s expertise through an exchange of views, is most likely not to result in interdependent voting behaviour. Therefore, and in contrast to earlier literature, we find that interaction is beneficial for the collective outcome.
Jel Codes: E52, E58, D83, D71
Key Words: Monetary policy, interest rates, learning
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| 03: Investor Psychology: A Behavioural Explanation of Six Finance Puzzles |
February 2004
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Henriëtte Prast
This paper surveys the behavioural finance explanation of six puzzles of finance. These puzzles are: stock price under- and overreactions, excessive trading and the gender puzzle, financial hypes and panic, the equity premium puzzle, the winner/loser puzzle and the dividend puzzle. After an introduction of prospect theory and a description of heuristics and biases in the judgment of information, the paper applies behavioural insights to explain the puzzles.
Key words: psychology, behavioural finance
JEL codes: G1, D 80
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| 756 - Dutch Corporate Liquidity Management: New Evidence on Aggregationgatie |
February 2004
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W.A. Bruinshoofd and C.J.M. Kool
In this paper we investigate Dutch corporate liquidity management in general, and target adjustment
behaviour in particular. To this purpose, we use a simple error correction model of corporate liquidity
holdings applied to firm-level data for the period 1977-1997. We confirm the existence of long-run
liquidity targets at the firm level. We also find that changes in liquidity holdings are driven by shortrun
shocks as well as the urge to converge towards targeted liquidity levels. The rate of target
convergence is higher when we include more firm-specific information in the target. This result
supports the idea that the degree of error in defining liquidity targets associates negatively with the
observed rate of target convergence. It also suggests that the slow speeds of adjustment obtained in
many macro studies on money demand are artefacts of aggregation bias.
Keywords: Corporate liquidity demand; Precautionary liquidity
JEL Classification: C33; C43; E41; G3
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| 20- Structural convergence and monetary integration in Europe |
December 2003
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Clement van de Coevering
In the run-up to EMU, academic economists generally concluded the EU as a whole was not an optimum currency area (OCA). An important reason was the lack of structural convergence between the potential members of the monetary union. Nevertheless, the euro area currently consists of twelve countries. In the near to medium future, twelve additional countries will become EU Members; most of these countries have announced they want swift euro area entry. This paper reviews the literature on optimum currency areas to clarify the concept of structural convergence in the context of monetary integration. In addition, we operationalise OCA theory to assess structural convergence within Europe. The available evidence indicates considerable divergence within the current euro area and a generally slow process of convergence. In contrast, a number of new EU entrants have converged significantly in recent years towards levels of at least some existing members.
JEL Classification numbers: F15, F33, O52.
Keywords: accession countries, euro area, OCA theory, structural convergence.
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| 19- A survey of inflation measures in use at central banks |
December 2003
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Teunis Brosens
Abstract: The headline inflation rate is subject to unpredictable, temporary, sector-specific shocks. Therefore, various measures of core inflation have been proposed to isolate the underlying or permanent inflation component. In this paper, a number of criteria are used to evaluate several statistical measures, and the performance of these measures is analysed for the euro area and the Netherlands. It turns out that none of the measures meets all the criteria. Core inflation measures can however serve very well as an analytical tool. A survey of inflation measures in use at central banks in the OECD area confirms that core inflation measures mostly serve as analytical tool only.
Keywords: core inflation, trimmed mean
JEL classification: E31, E52
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| 18- Pensions and public opinion: a survey among Dutch households |
December 2003
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P.J.A. van Els, W.A. van den End and M.C.J. van Rooij
This paper reports on the findings of a survey among Dutch households (as part of the DNB Household Survey in 2003) about many aspects (expectations, concerns, attitude and preferences) of their pensions and the old-age-arrangements in the Netherlands. We explore whether the outcomes are related to specific financial and non-financial household or personal characteristics. A clear majority of the Dutch public expects public pension schemes to be retrenched and rejects reforms that infringe on what they regard as acquired rights. One would rather like to pay higher contributions until the age of 65. The divergence in preferences towards retrenchment measures across generations indicates that intergenerational risk sharing is not something natural. The public prefers to have their pension build-up managed by pension funds and would accept having to pay higher contributions in exchange for guaranteed benefits. Yet, a substantial minority advocates a greater freedom of choice. Surprisingly, this preference for freedom is not linked to particular household characteristics, nor does it reflect the particular interest of those who already have third pillar pension provisions. Many, however, are as yet not concerned about their pension rights, adopting a “we’ll see about that when we come to that” attitude. This manifests itself in a substantial lack of knowledge about one’s own personal pension arrangements, notably for young generations, women, low-skilled workers and people out of work.
Key words: public pensions, second pillar pensions, household survey, risk attitude and preferences
JEL codes: D12, J26, G23, H55
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| 15- Does stock market uncertainty impair the use of monetary indicators in the euro area? |
December 2003
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Robert-Paul Berben.
The relationship between monetary indicators and inflation is ussually assumed to be linear, implying that looser monetary conditions always signal an increase in in.ation. Recently, money growth in the euro area surged while inflation remained comparatively subdued. This seems at variance with linearity. At the same time, stock market uncertainty peaked, suggesting that part of the money growth resulted from portfolio adjustment and was hence non-inflationary. We employ a threshold regression model to verify the claim that the impact of monetary indicators on future inflation varies conditional on stock price volatility. We show that there is limited evidence to support this claim. On the other hand, our results indicate that stock market data may contain useful information regarding future inflation.
JEL classification: C22, E31, E41
Keywords: inflation, money, threshold regression
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| 17- Systemic Risk in the Dutch Financial Sector |
November 2003
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Koen Minderhoud
Abstract: This paper investigates systemic risk in the Dutch financial sector by focusing on extreme returns of the major financial institutions. Our measure of systemic risk is the number of coincidences of extreme returns that cannot be explained by a linear model of constant correlation. By using a Monte Carlo simulation, we find strong evidence of correlation breakdown among the major Dutch financials. This indicates that systemic risk is significant, which has implications for effective prudential supervision. In addition, our results indicate that insurance activities of banks may increase systemic risk.
JEL Classification: C15, C35, G12, G21, G22.
Keywords: banks, correlation breakdown, extreme co-movements, financial institutions, insurance companies, extreme stock returns, systemic risk.
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