- About us
- IMC
- How to join
- CFA Support
- Events
- Careers support
- Professional Development
- Volunteering
- Publications
- Research
- Members Area
- Shop
- Contact us
Saïd Business School
Established in 1996, Oxford University’s Saïd Business School is Europe’s fastest-growing business school, with a reputation for innovative business education. The School combines the highest standards of academic rigour with a practical understanding of business and wealth creation. Our faculty are engaged in boundary-extending research on key management issues, in dialogue with the wider intellectual community and with practitioners.
If you would like more information about the Saïd Business School , please contact josie.powell@sbs.ox.ac.uk or call 01865 288800
Towards a measure of financial fragility
Dimitrios P. Tsomocos (Sa ï d Business School, University of Oxford), Oriol Aspachs (London School of Economics), Charles A.E. Goodhart (London School of Economics), Lea Zicchino (Bank of England)FEATURED IN PROFESSIONAL INVESTOR [WINTER 2007]
Abstract
In this paper the authors propose a definition of financial fragility as a combination of high probability of default (PD) and low bank profitability. This definition is modelbased in the sense that in an economy with maximising agents and banks as described in Goodhart et al (2004, 2005 and 2006 a) when, following a shock to an exogenous variable, aggregate endogenous default increases and banks’ profits decrease, agents’ welfare falls. An economy is, therefore, more financially fragile (or equivalently less financially stable) if agents’ welfare decreases following an exogenous shock that induces distress in the financial system. The authors run comparative statics exercises based on a simplified version of the model. Specifically, they introduce a set of reduced-form equations describing households’ behaviour to be able to calibrate the model against UK data. They use output as a proxy for agents’ welfare and simulate a series of shocks to the economy under two alternative assumptions: (1) banks are constrained by capital adequacy requirements (2) they are not. When banks do not have to comply with CARs, shocks that induce a decline in banks profits and an increase in banks’ default rates also produce a fall in GDP. Under the assumption of capital adequacy constraints, most shocks do not result in a fall in bank profits. The reason for this is that banks need to maintain or top up their capital, and they do this by choosing (riskier) investments that raise their profits. Finally, the authors investigate whether data support our claim that banking sector’s distress induces welfare losses (i.e. a drop in GDP). Shocks to banks’ probability of default and equity values have a impact on output that is significant and has the expected sign.
To read the paper, click HERE.
IPO pricing and allocation: a survey of the views of institutional investors
Tim Jenkinson
Howard Jones
Abstract
Despite the central importance of investors to all IPO theories, relatively little is known about their role in practice. This paper surveys institutional investors about how they assess IPOs, what information they provide to the investment banking syndicate, and the factors they believe influence allocations. Although the theoretical IPO literature has tended to focus on information revelation, the survey raises doubts as to the extent of incremental information production and whether bookrunners are, in practice, able to infer investors' valuations from their bids. The paper finds that investor characteristics, in particular broking relationships with the bookrunner, are perceived to be the most important factors influencing allocations, which supports the view that IPO allocations are part of implicit quid pro quo deals with investment banks.
Towards a measure of financial fragility
Oriol Aspachs
Charles A.E. Goodhart
Dimitrios P.
Tsomocos
Lea Zicchino
Abstract
This paper proposes a measure of financial fragility that is based on economic welfare in a general equilibrium model calibrated against UK data. The model comprises a household sector, three active heterogeneous banks, a central bank/regulator, incomplete markets, and endogenous default. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors and how the response of the economy to shocks relates to our measure of financial fragility. Finally, panel VAR techniques are used to investigate the relationships between the factors that characterise financial fragility in our mode, i.e. banks' probabilities of default and banks' profits - to a proxy of welfare.
http://www.finance.ox.ac.uk/file_links/finecon_papers/2006fe04.pdf
Devaluation without common knowledge
Cline Rochon
Abstract
In an economy with a fixed exchange rate regime that suffers a random adverse shock, we study the strategies of imperfectly and sequentially informed speculators that may trigger an endogenous devaluation before it occurs exogenously. The game played by the speculators has a unique symmetric Nash equilibrium which is a strongly rational expectation equilibrium in the set of all strategies with delay. Uncertainty about the extent to which the Central Bank is ready to defend the peg extends the ex ante mean delay between the exogenous shock and the devaluation. We determine endogenously the rate of devaluation.
http://www.finance.ox.ac.uk/file_links/finecon_papers/2006fe03.pdf
Evaluation of macroeconomic models for financial stability analysis
Gunnar BardsenKjersti-Gro Lindquist
Dimitrios P. Tsomocos
Abstract
As financial stability has gained focus in economic policymaking, the demand for analyses of financial stability and the consequences of economic policy have increased. Alternative macroeconomic models are available for policy analyses and this paper evaluates the usefulness of some models form the perspective of financial stability. Financial stability analyses are complicated by the lack of a clear and commonly agreed definition of 'financial stability', and the paper concludes that operational definitions of this term must be expected to vary across alternative models. Furthermore, since assessment of financial stability in general is based on a wide range of risk factors one can not expect one single model to capture all the risk factors satisfactorily rather; a suite of models is needed. This is particularly true for the evaluation of risk factors originating and developing, inside and outside, the financial system respectively.
http://www.finance.ox.ac.uk/file_links/finecon_papers/2006fe01.pdf
Dynamic matching and bargaining: the role of deadlines.
Sjaak HurkensNir Vukan
Abstract
A dynamic model where traders in each period are matched randomly into pairs who then bargain about the division of a fixed surplus is considered. When agreement is reached the traders leave the market. Traders who do not come to an agreement return in the next period when they are matched again, as long as their deadline has not expired. New traders enter exogenously in each period. We assume that traders within a pair know each other's deadlines. We define and characterise the stationary equilibrium configurations. Traders with longer deadlines fare better than traders with short deadlines. It is shown that the heterogeneity of deadlines may cause delay. Even though this efficient centralised mechanism is not as good for traders with long deadlines, it is shown that in a model where all traders can choose which mechanism to use, no delay will be observed.
http://www.finance.ox.ac.uk/file_links/finecon_papers/2006fe02.pdf
The economics of the EU's corporate insolvency law and the quest for harmonisation by market forces
Oren Sussman
Abstract
In 2002, new legislation that harmonises insolvency laws within the EU came into effect. There are reasons - both theoretical and empirical - to doubt whether the new law has achieved the goal of decreasing the cost of cross-border insolvency and borrowing. An alternative approach to the problem, which is based, to a larger extent, on market forces rather than on political or bureaucratic initiative is suggested.
http://www.finance.ox.ac.uk/file_links/finecon_papers/2005fe16.pdf
Commitment to overinvest and price informativeness
James DowItay Goldstein
Alexander Guembel
Abstract
A Fundamental role of financial markets is to gather information on firms' investment opportunities and so help guide investment decisions in the real sector. This paper argues that firms. Overinvestment is sometimes necessary to induce speculators in financial markets to produce information. If firms always cancel planned investments following poor stock market response, the value of their shares will become insensitive to information on investment opportunities, so that speculators will be deterred form producing information. Several commitment devices firms can use to facilitate information production are discussed and that the mechanism studied in the paper amplifies shocks to fundamentals across stages of the business cycle.
http://www.finance.ox.ac.uk/file_links/finecon_papers/2005fe18.pdf<< BACK