Knowledge that Transforms

In this paper we decompose the interest rate swap yield curves of 10 major currencies into their common factors and find that the first two factors, interpreted as parallel shift and rotation, explain between 97.1% and 98.6% of the variation in the interest rate swap rates across all 10 currencies. The main contribution of the paper however is that we then model these two factors as simplified synthetic factors so that they may be used to develop an innovative approach to the computation of Value-at-Risk (VaR) for a portfolio of interest rate swaps.

This paper extends previous research by considering three pricing factors for American Depository Receipts (ADRs): the price of the underlying shares in the local currency, the relevant exchange rate, and the US market index. Using both a vector autoregressive (VAR) model with a cointegration constraint and a seemingly-unrelated regression (SUR) approach, we examine the relative importance of, and the speed of adjustment of ADR prices to, these underlying factors. Our results show that while the price of the underlying shares is most important, the exchange rate and the US market also have an impact on ADR prices. While the bulk of the shocks to the pricing factors are reflected in the ADRs within the same calendar day, there are indications that the adjustments are not completed until the following day. Curiously, the ADRs appear to initially overreact to the US market index but underreact to changes in underlying share prices and exchange rates.

At the beginning of the transition, advice to Central European countries with respect to how to set up their financial systems was based on models used in western economies. This paper analyzes the experiences to set up a financial system in Central Europe. The experience in the first transition years (1990–1996) with financial system architecture shows that changes are slow but that the Central European countries tend to catch up more quickly with the western ones in the case of their banking systems than with respect to their stock markets.

This note validates the key results of prior studies of bank loan announcement effects using a common data set drawn from the Canadian capital market. Announcements of bank loans are associated with positive abnormal returns significantly higher than for private placements and loan syndications. Announcement effects are most pronounced when monitoring is most intense and when an announcement signals that the bank's private information is favorable. Conclusions of prior studies on bank loan announcements, conducted exclusively on US data, are robust for a different banking system.

This paper provides an empirical description of the relationship between the trading system operated by a stock exchange and the trading behaviour of heterogeneous investors who use the exchange. The recent introduction of SETS in the London Stock Exchange provides an excellent opportunity to study the impact of an electronic trading system upon traders who use the exchange. Using the cost-of-carry model of futures prices we estimate (non-linearly) the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of FTSE100 futures contracts relative to the spot prices of the stocks that make up the FTSE100 stock index. We divide the sample period into pre-SETS and post-SETS sample periods and conduct a comparative study of arbitrager behaviour under different trading systems. The results indicate that there has been a significant reduction in the level of transaction costs faced by arbitragers and in the degree of transaction cost heterogeneity. Finally, generalised impulse response functions show that both spot and futures prices adjust more quickly in the post-SETS period. These results suggest that both spot and futures markets have become more efficient under SETS.

This paper examines how corporate control is exerted in companies listed on the Brussels Stock Exchange. There are several alternative corporate governance mechanisms which may play a role in disciplining poorly performing management: blockholders (holding companies, industrial companies, families and institutions), the market for partial control, debt policy, and board composition. Even if there is redundancy of substitute forms of discipline, some mechanisms may dominate. We find that top managerial turnover is strongly related to poor performance measured by stock returns, accounting earnings in relation to industry peers and dividend cuts and omissions. Tobit models reveal that there is little relation between ownership and managerial replacement, although industrial companies resort to disciplinary actions when performance is poor. When industrial companies increase their share stake or acquire a new stake in a poorly performing company, there is evidence of an increase in executive board turnover, which suggests a partial market for control. There is little relation between changes in ownership concentration held by institutions and holding companies, and disciplining. Still, high leverage and decreasing solvency and liquidity variables are also followed by increased disciplining, as are a high proportion of non-executive directors and the separation of the functions of CEO and chairman.

In a model of oligopolistic competition in the banking sector, we analyse how the monetary policy rule chosen by the Central Bank can influence the incentive of banks to set high interest rates on loans over the business cycle. We exploit the basic model to investigate the potential impact of EMU implementation on collusion among banks. In particular, we consider the possible effects of the European Central Bank's policy criteria with regard to the cost of credit in national markets.

The microstructure of the Saudi Stock Market (SSM) under the new computerized trading system, ESIS, is described, and order and other generated data sets are used to examine the patterns in the order book, the dynamics of order flow, and the probability of executing limit orders. Although the SSM has a distinct structure, its intraday patterns are surprisingly similar to those found in other markets with different structures. We find that liquidity, as commonly measured by width and depth, is relatively low on the SSM. However, liquidity is exceptionally high when measured by immediacy. Limit orders that are priced reasonably, on average, have a short duration before being executed, and have a high probability of subsequent execution.