http://repub.eur.nl/res/concept/jel-G01/ Recent publications classified by JEL Code G01 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38949/ 2012-11-01T00:00:00Z The effectiveness of any sanction depends on the costs of avoiding its restrictions. We examine whether bearish option strategies were substitutes for short sales during the September 2008 short-sale ban. We find a significant diminution in option volumes and a significant increase in option bid-ask spreads for banned stock relative to unbanned stock during the ban period. Apparent violations of the put-call parity bound became significantly more frequent for banned stocks during the ban period. We conclude that the ban acted as an effective restriction on trading in options. Grundy, B.D. Lim, B. Verwijmeren, P. http://repub.eur.nl/res/pub/34943/ 2011-05-01T00:00:00Z Abstract: This paper is one chapter of the volume “Regulation and Economics” of the second edition of the Encyclopedia of Law and Economics. The authors review the economics of banking and financial markets and the regulatory response to market failure. Market failure in finance depends on problems of information and externalities. Regulation addresses these problems through conduct of business rules and prudential requirements. This approach has recently proved insufficient to prevent financial crises. Governments and central banks had to step in with massive safety nets in order to prevent financial meltdown. Although the appropriate regulatory response to the global financial crisis is still to be discovered, this chapter tries to draw a few lessons for financial regulation and supervision. First, prudential regulation and supervision should monitor, and possibly limit, competition between banks and non-banks in order to identify timely new sources of systemic risk. Second, financial stability policies need to strike a difficult balance between ex-ante strictness and ex-post leniency in order to deal with non-quantifiable risks. Moral hazard is not the only determinants of systemic instability; knightian uncertainty also determines instability by suddenly curtailing market and funding liquidity. Third, all financial institutions falling within the regulatory perimeter should have good corporate governance. However, what is good governance for non-financial firms is not necessarily efficient for financial firms due to the quality and quantity of externalities involved. Finally, because systemic externalities are cross-jurisdictional in modern financial markets, at least coordination among monetary and supervisory authorities of different countries is warranted. Pacces, A.M. Heremans, D. http://repub.eur.nl/res/pub/23435/ 2010-09-01T00:00:00Z We examine the effects of terrorist attacks on stock markets, using a dataset that covers all significant events and that directly relate to the major economies of the world. Our event study suggests that terrorist attacks produce mildly negative price effects. We compare these price reactions to those from an alternative type of unanticipated disaster, earthquakes, and find that price declines following terror attacks are more pronounced. However, in both cases prices rebound within the first week of the aftermath. We also compare price responses internationally and for separate industries, and find that reactions are strongest for local markets and for industries that are directly affected by the attack. Our results suggest that financial markets react strongly to terror events but then recover swiftly and soon return to business as usual. The September 11th attacks turn out to be the only event that caused long-term effects on financial markets, especially in terms of industries' systematic risk. Brounen, D. Derwall, J.M.M. http://repub.eur.nl/res/pub/34945/ 2010-01-01T00:00:00Z Abstract This article analyzes the last financial crisis focussing on the recurrent dynamics of externalities in banking. It shows that two major determinants of the crisis were the uncertainty of a new form of financial intermediation and the failure of regulation to cope with its externalities. Differently from more standard explanations, which are based on opportunism and/or irrationality of financial institutions, this analysis suggests that regulation has not just been insufficient. Regulation has contributed to financial instability too, supporting fragile conventions to handle uncertainty and encouraging regulatory arbitrage through financial innovation. Three implications are derived from this analysis and contrasted with the ongoing reforms of financial regulation in the US and in the EU. First, regulatory arbitrage is better dealt with by protecting banking from disintermediation than by extending prudential regulation to non-banks. Maturity transformation should be defined functionally and reserved to banks. Second, a major danger with ratings is that they support false conventions of safety. To avoid this outcome, the relevance of ratings for regulatory purposes should be reduced and rating agencies should be deterred from rating without firm knowledge. Third, in order to reduce short-termism, regulation of banks’ corporate governance should rather question than reinforce managerial accountability to shareholders. Pacces, A.M. http://repub.eur.nl/res/pub/17165/ 2009-11-01T00:00:00Z We examine the relationship between financial crisis exchange rate variability and equity return volatility for US multinationals. Empirical analysis of the major financial crises of the last decades reveals that stock return variability increases significantly in the aftermath of a crisis, even relative to the increase in stock return volatility for other firms belonging to the same industry and market capitalization class. In conjunction with this increase in total volatility, there is also an increase in stock market risk (β) for multinational firms. Moreover, trade and service oriented industries appear to be particularly sensitive to these changing exchange rate conditions. Muller, A. Verschoor, W.F.C. http://repub.eur.nl/res/pub/18717/ 2009-08-01T00:00:00Z The paper puts the collapse of the world trade volume in 2009 into two historic perspectives. First, the paper analyses 18 major post-1980 / pre-2007 financial crises and uses these observations as a basis to critically evaluate presently available projections for world trade. Second, the paper takes into account the developments in the world's trade volume and openness since 1880. Next to the direct impact of the present financial crisis on trade, potential second order effects on economic growth and international political relations are identified. Bergeijk, P.A.G. van http://repub.eur.nl/res/pub/18287/ 2009-01-01T00:00:00Z The paper puts the collapse of the world trade volume in 2009 into two historic perspectives. First, the paper analyses 18 major post-1980/pre-2007 financial crises and uses these observations as a basis to critically evaluate presently available projections for world trade. Second, the paper takes into account the developments in the world's trade volume and openness since 1880. Next to the direct impact of the present financial crisis on trade, potential second order effects on economic growth and international political relations are identified. Bergeijk, P.A.G. van http://repub.eur.nl/res/pub/7829/ 2006-06-23T00:00:00Z Crises and crashes in financial markets are investors’ worst fear. The combination of large losses, a persistent increase of price fluctuations, and a strengthening of comovements in prices causes investors great harm. While the severe consequences of crises and crashes are intuitively clear, many essential questions regarding the magnitude of the effects on specific fields in finance and the precise impact of the different factors have yet to be resolved. This dissertation provides answers to these questions from an investor’s perspective. Its main conclusion reads that the tendency of crises and crashes to spread to other assets and markets as well as over time is of crucial importance for determining their impact. Traditional models for comovements underestimate the risk of joint downward movements. Persistence exacerbates the effects of a crisis and increases the costs of ignoring its possibility beforehand. Moreover, this thesis concludes that investors can expect a compensation for the grave consequences of a crash that they are unable to evade. The size of this compensation indicates that crash risk may be equally important as the traditional risk in the normal fluctuations of asset prices. Furthermore, predictions on the likelihood of a crash can be improved by studying past returns. Besides these empirical contributions, this dissertation shows how various econometric techniques, including copulas and regime-switching models, can be used innovatively for the examination of crises, crashes and comovements. Kole, H.J.W.G. http://repub.eur.nl/res/pub/1270/ 2004-04-17T00:00:00Z Systemic crises can largely affect asset allocations due to the rapid deterioration of the risk-return trade-off. We investigate the effects of systemic crises, interpreted as global simultaneous shocks to financial markets, by introducing an investor adopting a crisis ignorant or crisis conscious strategy. Including the possibility of a systemic crisis is a substantial improvement. Investments in risky assets fall, while allocations to countries less sensitive to a crisis grow relatively. An increasing probability of a crisis exacerbates these effects. The certainty equivalent costs of ignoring systemic crises are large, ranging from 0.65% per year unconditionally, to over 5% per month conditionally on a high probability for the occurrence of a crisis. Kole, H.J.W.G. Koedijk, C.G. Verbeek, M.J.C.M.