Government guarantees of bank liabilities have a long-standing history and are now ubiquitous. We study a model where financial sophistication enhances banks’ ability to exploit government guarantees ...and fuels inefficient economic booms. Driven by financial engineering, bank rent extraction creates a disconnect between lending decisions and borrower repayment prospects: In equilibrium, banks over-lend and only break-even courtesy of trading book profit. Exploitability is affected not only by financial sophistication but also by regulation. Given the pattern for regulatory changes in the last few decades, we posit that the Great Recession, partly, reversed a Great Distortion.
•Government guarantees of bank debt are widespread around the world.•These guarantees can be exploited but, in a simple world, the effect is relatively mild.•We show that financial sophistication enhances banks’ ability to exploit guarantees.•Such exploitation fuels inefficient economic booms and distorts economic activity.
Codes of finance Lepinay, Vincent Antonin
2011., 20110808, 2011, 2011-08-08, 20110101, 2011-08
eBook, Book
The financial industry's invention of complex products such as credit default swaps and other derivatives has been widely blamed for triggering the global financial crisis of 2008. Codes of Finance ...takes readers behind the scenes of the equity derivatives business at one of the world's leading investment banks before the crisis, providing a detailed firsthand account of the creation, marketing, selling, accounting, and management of these financial instruments--and of how they ultimately created havoc inside and outside the bank.
"The last three decades have witnessed substantial changes in the foreign exchange markets in Africa, with moves towards liberalisation and flexible exchange rate regimes. This has increased the ...influence of financial market conditions and heightened the risk of exchange rate volatility and large and sudden exchange rate movements. This paper investigates the determinants of nominal exchange rates, their volatility, and crash risk in African lower and lower-middle income countries. It combines macro-panel estimations for 15 such countries with insights from interviews with market participants. It shows the importance of these countries' distinctive export structure, concentrated in a few agricultural and mineral-based commodities, as well as recent financial integration, for exchange rate determination. It finds that terms of trade, export concentration, and export prices have a significant impact on the exchange rate level and volatility. By contrast, financial factors including the interest rate differential, international market conditions, and short-term financial flows, influence the likelihood of sudden and large exchange rate movements."
"Many countries in Sub-Saharan Africa have liberalised their foreign exchange markets and capital accounts, and have moved to more flexible exchange rates, in recent decades. In this context, the ...interaction between non-resident investors and export structures centred on primary commodities create a risk of destabilising exchange rate dynamics and further complications for macroeconomic management. This paper presents detailed insights into the micro-characteristics of several African Lower and Lower-Middle Income Countries' foreign exchange markets and the implications of these characteristics for macroeconomic management. It draws on interviews with foreign exchange experts in central banks, banks, non-bank financial institutions, and research institutions in Ghana, Kenya, Malawi, Sierra Leone, Uganda, and Zambia, as well as the City of London. The results show that whilst most of these countries have functioning foreign exchange interbank markets, these markets are often characterised by low, volatile and “lumpy” liquidity. These liquidity dynamics and uncertainty about future foreign exchange flows can lead to foreign exchange hoarding by market participants, further depriving the market of liquidity. Those with access to foreign exchange liquidity can gain significant market power and the potential to affect price dynamics, which has meant that central banks in these countries have remained key agents in foreign exchange markets, to manage scarce and volatile liquidity patterns. Overall, the results show the difficulties of moving towards floating exchange rates, for African countries characterised by concentrated export structures, low trust in their currencies, and shallow domestic financial markets."
The Ascent of Market Efficiency weaves together historical narrative and quantitative bibliometric data to detail the path financial economists took in order to form one of the central theories of ...financial economics—the influential efficient-market hypothesis—which states that the behavior of financial markets is unpredictable. As the notorious quip goes, a blindfolded monkey would do better than a group of experts in selecting a portfolio of securities, simply by throwing darts at the financial pages of a newspaper. How did such a hypothesis come to be so influential in the field of financial economics? How did financial economists turn a lack of evidence about systematic patterns in the behavior of financial markets into a foundational approach to the study of finance? Each chapter in Simone Polillo's fascinating meld of economics, science, and sociology focuses on these questions, as well as on collaborative academic networks, and on the values and affects that kept the networks together as they struggled to define what the new field of financial economics should be about. In doing so, he introduces a new dimension—data analysis—to our understanding of the ways knowledge advances. There are patterns in the ways knowledge is produced, and The Ascent of Market Efficiency helps us make sense of these patterns by providing a general framework that can be applied equally to other social and human sciences.
"Banks in Africa are weathering the COVID-19 pandemic well and showing a lot of creativity to overcome the crisis’s problems. But the war in Ukraine is causing new concerns. With interest rates ...rising in many countries and bond funding becoming more expensive, a significant number of banks are worried about rising financing costs. These issues and more are covered in the new Finance in Africa report, based on an annual survey of banks across the continent and supported by Making Finance Work for Africa, an initiative helping more people get loans across the continent. We surveyed 70 banks in sub-Saharan Africa from April to June in 2022 to find out if the war is hurting their business and to learn their views on climate lending, access to finance for women and the accelerating digitisation of the financial sector."
We propose a new portfolio optimization framework, partially egalitarian portfolio selection (PEPS). Inspired by the celebrated LASSO regression and its recent variant partially egalitarian LASSO ...(PELASSO) developed in 1 in the context of the forecast combinations problem in econometrics in 1, we regularize the mean-variance portfolio optimization of Markowitz by adding two regularizing terms that essentially zero out portfolio weights of some of the assets in the portfolio and select and shrink portfolio weights of the remaining assets towards equal weights to hedge against parameter estimation risk. We solve our PEPS formulations by applying Gurobi 9.0 mixed integer optimization (MIO) solver that allow us to tackle large-scale portfolio problems. We test our PEPS portfolios against an array of classical portfolio optimization strategies on a number of datasets in the US equity markets. The PEPS portfolios exhibit the highest out-of-sample Sharpe ratios in all instances considered.
In this paper, we present a review of deterministic software for solving convex MINLP problems as well as a comprehensive comparison of a large selection of commonly available solvers. As a test set, ...we have used all MINLP instances classified as convex in the problem library MINLPLib, resulting in a test set of 335 convex MINLP instances. A summary of the most common methods for solving convex MINLP problems is given to better highlight the differences between the solvers. To show how the solvers perform on problems with different properties, we have divided the test set into subsets based on the continuous relaxation gap, the degree of nonlinearity, and the relative number of discrete variables. The results also provide guidelines on how well suited a specific solver or method is for particular types of MINLP problems.
Does Algorithmic Trading Improve Liquidity? HENDERSHOTT, TERRENCE; JONES, CHARLES M.; MENKVELD, ALBERT J.
The Journal of finance (New York),
February 2011, Volume:
66, Issue:
1
Journal Article
Peer reviewed
Open access
Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock ...Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.
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