Research projects 2014

1. Capital Flows and Macroprudential Regulation

In the the current Eurozone, Germany is not prepared to allow for inflation; and labour markets in the Mediterranean periphery are not sufficiently flexible.  But could there be a third way, alternative to the Eurozone either becoming a single, federal country, with a centralised fiscal system, or breaking up?  If so, it would have to involve some combination of controls over capital mobility with some restoration of partial national monetary autonomy.

This project aims to study the proposals for regulation of cross border capital flows through taxation. We consider a dynamic stochastic monetary world economy where default on cross border loans is possible.

The project will involve considering two classes of models, one being a linearized Dynamic Stochastic General Equilibrium model while the second will be the full un-approximated solution. The two methodologies reflect the dual purpose of the project to target both policy and academic circles.

2. Idiosyncratic risk and indirect transaction costs

A popular estimation of liquidity, an indirect indicator of the total transaction costs proposed by Lesmond et al. (1999), is known as significantly overstated. We intend to show that the bias is due to misinterpretation of countercyclical idiosyncratic shocks in stock returns. We provide a modification that uses the Generalized Extreme Value distribution for the description of such shocks. With the help of the Monte Carlo method, we show that our approach eliminates the estimation bias in transaction costs for a normal distribution of returns, and significantly reduces the bias in a distribution of the yield with heavy tails. Using a sample of the S&P 500 stocks, we plan to demonstrate that our modified estimate is more accurate than the estimate of Lesmond et al. (1999). Further, by using our measure of liquidity for several emerging stock markets, we expect to demonstrate that the risk premium for liquidity, resulting in a number of previously published studies, is partially due to idiosyncratic volatility.

3. Institutional Determinants of Acquisition Strategies

We extend the existing research on institutional determinants of firm behavior and the importance of informal institutions for stability and predictability when businesses have to cope with institutional voids. The relevance of informal practices in the political and regulatory governance of business transactions is an underexplored area. In addition, our paper contributes to a small but growing literature on the role of the regional sub-national context for firm behavior in emerging countries.

We aim at understanding in how and to what degree the institutions forming the local political governance regime, affect firms’ acquisition activities in an emerging economy, acknowledging the existence of polycentric institutions within an economy (Ostrom, 2005). In particular, we are interested in gaining a better understanding of those structures and activities that allow for informal rule-making, thereby filling formal institutional voids at the local level. We want to examine the relevance of illicit practices by businesses to capture regional state authorities, hereafter called state capture, in this context.

4. Corporate Governance and Performance in Russian Non-Listed Firms

The quality of corporate governance is an important factor for the return on investments of shareholders, in particular in emerging markets. This paper investigates the effect of corporate governance on performance and survival of non-listed Russian firms for the period 2006-2011. In emerging market economies with less developed financial markets non-listed firms typically represent a large part of the economy. As there are no readily available corporate governance indicators for such firms, we develop an original corporate governance index based on survey questions on shareholder rights, work and composition of the board of directors, and corporate disclosure. This index of corporate governance is then related to investment, leverage, operating performance and survival of firms.