Knowledge that Transforms

It is generally accepted that banks offer renegotiation services to sovereign borrowers facing short-term liquidity shortages. However, the literature has yet to find evidence of such services from the pricing of sovereign bank loans. The research on the pricing of sovereign bank loans has focused on interest spreads alone, while the pricing structure typically includes an up-front fee, as well. In this paper, I explore empirically the economic motivations for such a pricing structure. I find that up-front fees are explained by the probability of renegotiation and by proxies for informational problems. My findings provide evidence that the unique pricing structure of bank loans helps banks provide sovereign borrowers with renegotiation services.

In this paper, we provide empirical evidence on the impact of institutional investors on stock market returns dynamics. The Polish pension system reform in 1999 and the associated increase in institutional ownership due to the investment activities of pension funds are used as a unique institutional characteristic. Performing a Markov-switching-GARCH analysis we find empirical evidence that the increase of institutional ownership has temporarily changed the volatility structure of aggregate stock returns. The results are interpretable in favor of a stabilizing effect on index stock returns induced by institutional investors.

This paper examines the origins of herding behavior in asset markets and its potential to produce a price bubble. I present a model which explains the emergence and the development of herding behavior via asymmetric information and Baysian learning. A corresponding price bubble is explained through herding behavior without assuming any speculative incentives on the part of the investors.