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Risk Transfer and the insurance industry
This paper focuses on risk transfer and discusses the insurance sector, particularly life insurers. It expands on issues raised in previous Global Financial Stability Reports by asking whether financial stability has benefited or could benefit from insurers’ broader participation in credit markets, including credit derivatives. The paper assesses the impact on financial stability of life insurers’ investment behavior and risk management in the largest mature markets. It highlights that the policy implications differ from market to market, and may offer useful lessons to emerging market countries with developing capital markets.
Internal Capital Markets and Investment
Lament (1997) claims to find evidence of credit market imperfections that distort financing and investment decisions of a sample of oil-dependent firms, as investment by nonoil units fell when oil cash flow dropped. However, a simple test reveals that few of these firms behaved in a fashion consistent with binding cashflow constraints. In addition, most were cash rich. The data provide strong evidence against the hypothesis that investment decisions by nonoil units were significantly affected by oil cash flow, or that credit market imperfections are an important factor for this set of firms.
Boom-Bust Cycles in Housing: The Changing Role of Financial Structure
Why are housing markets so prone to boom-bust cycles? The mortgage market structure prior to the Savings and Loan crisis contributed to the volatility in real housing activity which, in turn, amplified the volatility in housing prices. The subsequent development of a national, market-based system of securitized mortgage finance has damped this boom-bust cycle. We test whether deviations of actual housing prices from values forecast by a model based on economic fundamentals have responded to the change in financial structure, and find that pricing errors have fallen significantly since the mid-1980s. Tests of the relative importance of the change in financial market structure versus the reduction of inflation over this period indicate a primary role for market structure in improving pricing efficiency.
Lessons from the Financial Crisis
The world's best financial minds help us understand today's financial crisis With so much information saturating the market for the everyday investor, trying to understand why the economic crisis happened and what needs to be done to fix it can be daunting. There is a real need, and demand, from both investors and the financial community to obtain answers as to what really happened and why. Lessons from the Financial Crisis brings together the leading minds in the worlds of finance and academia to dissect the crisis. Divided into three comprehensive sections-The Subprime Crisis; The Global Financial Crisis; and Law, Regulation, the Financial Crisis, and The Future-this book puts the events t...
Debt Maturity Choice and Risk-Free Assets
This paper models a firm's issuance of commercial paper (CP) as a strategy to lower its borrowing costs by taking advantage of a quot;clientele effectquot; in the demand for safe assets. The firm is willing to expose itself to liquidity risk in order to enjoy the savings on borrowing costs. A primary feature of the model is that the CP market is driven by public information because of the need to make the securities attractive to a cash management clientele. We examine characteristics of both issuers and purchasers of CP that lend support to the clientele hypothesis.
On the Determinants of First-Time Sovereign Bond Issues
In recent years, the number of countries which have borrowed in international capital markets by issuing sovereign bonds has increased substantially. For these countries, capital market access meant a de facto acknowledgement of their policy successes and improvements in their creditworthiness that enabled them to graduate from the group of official financing recipients into a more advanced group of emerging market economies. The paper looks at the determinants of sovereign bond issuances and derives the relationship between internal and external factors and market access using a simple macro model. The market access condition is then translated into a simple rule that requires an excess demand for the sovereign bonds in question. Regression results based on this model offer some insights into peculiarities of first-time sovereign bond issues that could be used in policy deliberations.
