This paper explores the implications for investment firms and clients that arise out of an interpretation of the Market in Financial Instruments Directive (MiFID) best execution requirements from a law and economics perspective. While best execution is often framed as a matter of investor protection, research on market microstructure suggests that there is, in fact, an efficiency rationale (and not only a distributional rationale) for having some degree of best execution regulation. In terms of the specific rules of MiFID, the analysis reveals that an investment firm’s best execution policy will play a central role. MiFID’s best execution concept is process- based, ie investment firms need to show that they took measures leading to best execution in expectation; actual best execution is not required. The paper also discusses current issues such as the form of the execution policy and the appropriate number of execution venues.
This article suggests a reform of the organisation of money markets that would largely eliminate the risk
of contagion. The notion of “systemically important institution” would be replaced by that of systemically
important platform”. Such platforms would only be directly accessible to a group of “offi cially recognised
fi nancial institutions” that would have to comply with special regulatory requirements and would be directly
supervised by the central bank. The status of “offi cially recognised fi nancial institution” could be revoked by
the central bank if these special regulatory requirements are not satisfi ed. A special resolution procedure
would be created for these institutions, so that the central bank has the legal powers to close it down, or
at least restrict its activities before it is too late. OTC markets would still be active but, since they would
be penalised by regulation, it is likely that they would become small, and therefore not in a position to
jeopardise the entire system.
We describe a sparse-grid collocation method to compute recursive solutions of dynamic economies with a sizable number of state variables. We show how powerful this method can be in applications by computing the non-linear recursive solution of an international real business cycle model with a substantial number of countries, complete insurance markets and frictions that impede frictionless international capital flows. In this economy, the aggregate state vector includes the distribution of world capital across different countries as well as the exogenous country-specific technology shocks. We use the algorithm to efficiently solve models with up to 10 countries (i.e., up to 20 continuous-valued state variables).
We build a model of credit card pricing that explicitly takes into account credit functionality. In the model a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. This always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus.
The financial crisis that began in 2007 in the United States swept the world, producing substantial bank failures and forcing unprecedented state aid for the crippled global financial system. Bringing together three leading financial economists to provide an international perspective, Balancing the Banks draws critical lessons from the causes of the crisis and proposes important regulatory reforms, including sound guidelines for the ways in which distressed banks might be dealt with in the future.
While some recent policy moves go in the right direction, others, the book argues, are not sufficient to prevent another crisis. The authors show the necessity of an adaptive prudential regulatory system that can better address financial innovation. Stressing the numerous and complex challenges faced by politicians, finance professionals, and regulators, and calling for reinforced international coordination (for example, in the treatment of distressed banks), the authors put forth a number of principles to deal with issues regarding the economic incentives of financial institutions, the impact of economic shocks, and the role of political constraints.
Offering a global perspective, Balancing the Banks should be read by anyone concerned with solving the current crisis and preventing another such calamity in the future.
The development of unit root tests continues unabated, with many recent contributions using techniques such as generalized least squares (GLS) detrending and recursive detrending to improve the power of the test. In this article, the relation between the seemingly disparate tests is demonstrated by algebraically nesting all of them as ratios of quadratic forms in normal variables. By doing so, and using the exact sampling distribution of the ratio, it is straightforward to compute, examine, and compare the test' critical values and power functions. It is shown that use of GLS detrending parameters other than those recommended in the literature can lead to substantial power improvements. The open and important question regarding the nature of the first observation is addressed. Tests with high power are proposed irrespective of the distribution of the initial observation, which should be of great use in practical applications.
This paper shows how independent component analysis can be used to estimate the generalized orthogonal GARCH model in a fraction of the time otherwise required. The proposed method is a two-step procedure, separating the estimation of the correlation structure from that of the univariate dynamics, thus facilitating the incorporation of non-Gaussian innovations distributions in a straightforward manner. The generalized hyperbolic distribution provides an excellent parametric description of financial returns data and is used for the univariate fits, but its convolutions, necessary for portfolio risk calculations, are intractable. This restriction is overcome by saddlepoint approximations for the Value at Risk and expected shortfall, which are computationally cheap and retain excellent accuracy far into the tails. It is further shown that the mean-expected shortfall portfolio optimization problem can be solved efficiently in the context of the model. A simulation study and an application to stock returns demonstrate the validity of the procedure.
Pension plans in Switzerland favor active management over indexing to implement their strategic asset allocation. Empirical surveys show, however, that their success has been below expectations, as the median performance of Swiss pension plans in domestic and international equities is below market indices even gross of fees. The results of this paper's survey across decisionmakers of Swiss pension plans sheds some light on why active management is still so popular across Swiss pension plans. On average the participants in the sample are prone to the better-than-average-effect. A majority expects their managers and their overall pension plan to outperform the other survey participants in the future. The subjective perceptions of the own skill level relative to the competitors can explain the popularity of active management across Swiss pension plans.
In this paper I employ a dynamic general equilibrium model to study macroe-conomic e®ects and welfare implications of alternative reforms to the U.S. health insurance system. In particular, I focus on expanding Medicare to the entire population, extending Medicaid, and having an individual mandate as well as other related medical reforms. All these reforms can be ¯nanced in several ways. I consider a stochastic OLG framework with heterogeneous agents facing uncertain health shocks. Individuals make optimal decisions on labor supply, health insurance, and medical services. As the amount of optimal medical consumption and hours worked are endogenous, this environment captures general equilibrium
effects. The model is calibrated to the U.S. data. Numerical simulations indicate that reforming the health insurance system has several important macroeconomic
effects on health expenditures, hours worked, and welfare.
