Discussion Papers

Papers from 1998 onwards are available on-line as .PDF files.


10 Most Recent Papers

15/25 Heather D. Gibson, Stephen G. Hall, George S. Tavlas

Adobe Acrobat (PDF) 15/25 How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

15/24 Heather D. Gibson, Stephen G. Hall, George S. Tavlas

Adobe Acrobat (PDF) 15/24 The Effectiveness of the ECB’s Asset Purchase Programs of 2009 to 2012

We examine the impact of the ECB’s Securities Market Program (SMP) and the ECB’s two Covered Bond Purchase Programs (CBPPs) on sovereign bond spreads and covered-bond prices, respectively, for five euro-area stressed countries -- Greece, Ireland, Italy, Portugal, and Spain. Our data are monthly and cover the period from 2004M01 through 2014M07. In contrast to previous studies, we use actual, confidential, intervention data. Our results indicate that the respective asset purchase programs reduced sovereign spreads and raised covered bond prices. The quantitative effects of the programs were modest in magnitude, but nevertheless significant. We also provide a simple theoretical model that explains why official asset purchases can reduce a country’s default-risk spreads.

15/23 Jochen O. Mierau, James Rockey

Adobe Acrobat (PDF) 15/23 Inequality in an Equal Society: Theory and Evidence

We consider empirically the degree of wealth and income inequality that would prevail in a society in which, other than differences in age, everyone was equal. Theory suggests that life-cycle factors will still lead to substantial ‘natural’ inequality. Analysing cross-national data from the recently collected National Transfer Accounts we find that societies with no other source of inequality will exhibit substantial concentrations of income and wealth – Gini coefficients of circa 0.45 are common for income, purely due to these life-cycle effects. Using a modified Gini coefficient we find a substantial fraction of extant inequality can be attributed to this natural inequality. Finally, we show that if relative cohort sizes were equal to their long run values inequality would increase further.

15/22 Ali al-Nowaihi, Sanjit Dhami, Jia Zhu

Adobe Acrobat (PDF) 15/22 Rank dependent expected utility theory explains the St. Petersburg paradox

We show that rank dependent expected utility theory can explain the St. Petersburg paradox. This complements recent work by Blavatskyy (2005), Camerer (2005), Rieger and Wang (2006) and Pfiffelmann (2011).

15/21 Ali al-Nowaihi, Sanjit Dhami

Adobe Acrobat (PDF) 15/21 Evidential equilibria: Heuristics and biases in static games of complete information Working Paper Version

Standard equilibrium concepts in game theory find it difficult to explain the empirical evidence from a large number of static games including the prisoners dilemma game, the hawk-dove game, voting games, public goods games and oligopoly games. Under uncertainty about what others will do in one-shot games, evidence suggests that people often use evidential reasoning (ER), i.e., they assign diagnostic significance to their own actions in forming beliefs about the actions of other like-minded players. This is best viewed as a heuristic or bias relative to the standard approach. We provide a formal theoretical framework that incorporates ER into static games by proposing evidential games and the relevant solution concept: evidential equilibrium (EE). We derive the relation between a Nash equilibrium and an EE. We illustrate these concepts in the context of the prisoners dilemma game.

15/20 Panicos O. Demetriades, Peter L. Rousseau

Adobe Acrobat (PDF) 15/20 The Changing Face of Financial Development

We provide evidence from a large number of countries which demonstrates the changing nature of the finance-growth nexus. Specifically, we show that financial depth is no longer a significant determinant of long-run growth. Instead we find evidence to suggest that certain financial reforms have sizeable growth effects, which can be positive or negative depending on how well banks are regulated and supervised.

15/19 Heinrich H. Nax, Alexandros Rigos

Adobe Acrobat (PDF) 15/19 Assortativity evolving from social dilemmas

Assortative mechanisms can overcome tragedies of the commons that otherwise result in dilemma situations. Assortativity criteria include genetics (e.g. kin selection), preferences (e.g. homophily), locations (e.g. spatial interaction) and actions (e.g. meritocracy), usually presuming an exogenously fixed matching mechanism. Here, we endogenize the matching process with the aim of investigating how assortativity itself, jointly with cooperation, is driven by evolution. Our main finding is that only full-or-null assortativities turn out to be long-run stable, their relative stabilities depending on the exact incentive structure of the underlying social dilemma. The resulting social loss is evaluated for general classes of dilemma games, thus quantifying to what extent tragedy of the commons may be endogenously overcome.

15/18 Svetlana Andrianova, Badi Baltagi, Thorsten Beck, Panicos Demetriades, David Fielding, Stephen Hall, Steven Koch, Robert Lensink, Johan Rewilak and Peter Rousseau

Adobe Acrobat (PDF) 15/18 A New International Database on Financial Fragility

We present a new database on financial fragility for 124 countries over 1998 to 2012. In addition to commercial banks, our database incorporates investment banks and real estate and mortgage banks, which are thought to have played a central role in the recent financial crisis. Furthermore, it also includes cooperative banks, savings banks and Islamic banks, that are often thought to have different risk appetites than do commercial banks. As a result, the total value of financial assets in our database is around 50% higher than that accounted for by commercial banks alone. We provide eight different measures of financial fragility, each focussing on a different aspect of vulnerability in the financial system. Alternative selection rules for our variables distinguish between institutions with different levels of reporting frequency.

15/17 Asako Ohinata and Matteo Picchio

Adobe Acrobat (PDF) 15/17 The financial support for long-term elderly care and household savings behaviour

We analyse how the financial support for long-term elderly care affects the level of household savings. Using a difference-in-differences estimator, we investigate the 2002 Scottish reform, which introduced free formal personal care for all the elderly aged 65 and above residing in Scotland. Our semiparametric estimation technique allows the policy effects to be flexibly estimated across age groups. We find that the Scottish policy reduced the average household saving by about £7,200. Moreover, the estimated effects are heterogeneous across age groups of the head of household: these effects are particularly strong among those aged between 40 and 60. The largest effect is observed at age 49 with the reduction in the average household saving by £12,764.

15/16 Martin Kaae Jensen

Adobe Acrobat (PDF) 15/16 Existence, Uniqueness and Comparative Statics in Contests

Many important games are aggregative allowing for robust comparative statics analysis even when a game does not exhibit strategic complements or substitutes (Acemoglu and Jensen (2013)). This paper establishes such comparative statics results for contests improving upon existing results by (i) allowing payoff functions to be discontinuous at the origin, and (ii) allowing for asymmetric rent-seeking contests and patent races. A leading example where (i) is relevant is the classical Tullock contest (Tullock (1980)). The paper also studies existence and uniqueness of equilibria extending the results of Szidarovszky and Okuguchi (1997) and Cornes and Hartley (2005) to patent races.


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