Sebastian Schich

This article appeared in a journal published by Elsevier. The attached copy is furnished to the author for internal non-commercial research and education use, including for instruction at the authors institution and sharing with colleagues. Other uses, including reproduction and distribution, or selling or licensing copies, or posting to personal, institutional or third party websites are prohibited. In most cases authors are permitted to post their version of the article (e.g. in Word or Tex form) to their personal website or institutional repository. Authors requiring further information regarding Elsevier's archiving and manuscript policies are encouraged to visit: http://www.elsevier.com/copyright Abstract We interpret the relationship between national saving and investment in the long-run as reflecting a solvency constraint, and interpret the ease with which a country can run current account imbalances in the short run, before it has to ultimately reverse the transaction at some future date to satisfy the solvency constraint, as being positively related to the degree of international capital mobility. We apply panel error-correction techniques to data for 20 OECD countries from 1960 to 1999. We find that saving and investment display a long-run cointegration relationship that is consistent with the interpretation that a long-run solvency constraint is binding for each country. Over time, however, deviations from this long-run equilibrium relation have become more persistent, which suggests that capital mobility has increased.

India’s financial sector has become much more diversified, with capital markets playing an increasingly important role. These markets have been substantially deregulated and, recent changes notwithstanding, many restrictions on capital flows have been eased, especially with respect to equity inflows. As well, the health of the public banks, which initially had very weak balance sheets, has been restored. While India’s regulatory, supervisory and financial policy authorities have made progress, they are likely to face challenges related to several aspects characterising the country’s financial system, including its banking sector and its capital markets. Banks remain subject to government imposed constraints on their lending portfolios and the banking sector is still dominated by public institutions. Although the Indian government has intensified its efforts to develop corporate bond markets, the latter remain relatively underdeveloped. Equity markets, which have evolved considerably...

We investigate the effect of the 20 largest – in terms of insured losses – man-made or natural disasters on the insurance industry. We show via an event study that insurance markets worldwide are quite resilient to unexpected losses to capital and are even outperforming the general market subsequent to great disasters.

This article argues that the expansion of existing and the introduction of new guarantees for financial institutions has been a key element of the policy response to the recent financial crisis. Essentially, the government expanded its role as the provider of the safety net for banks by adopting the function of a guarantor of last resort. Among the various policy response measures, the expansion of guarantees has the benefit of entailing lower upfront fiscal costs relative to other options. Guarantees are not without cost however. Even if they do not generate significant upfront fiscal costs, they create contingent fiscal liabilities. Other potential costs include those arising from distortions to competition and incentives (moral hazard). For example, there may be a perception that similar guarantees will always be made available at low costs. The fact that the expansion of guarantees has not been as closely co-ordinated across borders as might have been desired has resulted in add...

ABSTRACT The present article focuses on the so-called “asset meltdown hypothesis”, which postulates a direct link between demographic developments and the level of asset prices. In particular, proponents of this hypothesis argue, when baby boomers start entering retirement they will become net sellers of financial assets to finance retirement consumption. As subsequent generations are smaller in numbers, other things equal, this would put downward pressure on financial asset prices. Revisiting this hypothesis, there is some support for a link between demographics and financial asset prices, although the link may not be strong. A number of mitigating factors exist, so that “other things” will not be equal. A major question in this context is to what extent demographic developments and their implications for other variables affecting financial asset prices are already reflected in financial asset prices and how fast any additional pressures on financial asset prices will play themselves out.

ABSTRACT The present article focuses on issues related to asset decumulation. In discussing these issues, a key proposition is that financial institutions are most willing and able to offer decumulation products with fixed payment promises to the extent they are able to invest in financial assets that allow them to hedge a considerable part of the risks associated with the payment promises they extend. Indeed, what is sometimes overlooked in discussions bout shifts from asset accumulation to decumulation is that the decumulation phase also involves investment challenges, especially if specific patterns of payouts such as regular payouts of fixed amounts are aimed at. Many writers have argued for some time now that pension fund managers will have difficulty implementing asset-liability matching because there are insufficient quantities of suitable assets. As it turns out, the shortfall in hedging instruments extends to more than just the “toxic” tail of longevity risk, as is commonly being argued. The analysis in this article shows that hedging interest rate risk is also not as straightforward as one may think.

ABSTRACT There has been rapid growth in the share of assets under control of hedge funds over the past decade and, as a result, these entities have now become firmly entrenched in the universe of investment vehicles and, in turn, have themselves become important investors. Against this background, the OECD Committee on Financial Markets (CMF) discussed specific issues related to these entities on several occasions as part of its market surveillance activity. The present article provides a summary of selected aspects of recent CMF discussions related to hedge funds, focusing in particular on the responses to a questionnaire on hedge funds that was circulated prior to the CMF meeting in May 2007 to inform the discussion at that meeting. These various discussions suggested that a consensus is emerging that the most efficient way to address any policy concerns related to the activity of hedge funds is to focus on hedge fund investors and counterparties rather than on these entities themselves. Only a minority of countries are considering policy actions in a variety of areas, but many respondents seem to underline the need for public authorities to continue monitoring developments regarding hedge funds.

ABSTRACT This article studies dependencies between European stock markets when returns are unusually large 'extreme', using daily data on stock market indices for Germany, the UK, France, The Netherlands and Italy from 1973 to 2001. Dependency is measured by the conditional probability of an unusually large return in one market given an unusually large return in another and is estimated using an approach from multivariate extreme value theory. It finds the following. First, dependencies between markets in situations of unusually large returns have become closer over time. Second, they are generally higher for large negative returns than for large positive ones. Third, dependencies differ depending on the country pair considered. For example, stock markets in the Netherlands and France are more closely and those in the UK and Italy less closely linked to the German market. Fourth, overall dependencies are quite symmetric, in the sense that the conditional probability for an unusually large change given a large change in the other country is similar irrespective of which of the two countries the probability is conditioned on.

... To cite this article: SEBASTIAN T. SCHICH (1999): The information content of the German term structure regarding inflation, Applied Financial ... Any substantial or systematic reproduction, re-distribution, re-selling, loan, sub-licensing, systematic supply or distribution in any form to ...

ABSTRACT Several papers have identified that yield curves have strong predictive power for future inflation. The present paper investigates the stability of this relationship, using the example of the United States, Germany, the United Kingdom and Canada. It confirms that the yield curve contains significant information in all four countries. The relationship appears to be stable in Germany and Canada. By contrast, there is some limited evidence for structural instability in the United States and the United Kingdom, possibly reflecting changes in monetary policy regimes. Copyright 2002 by Taylor and Francis Group

Systemic financial crises are a recurrent phenomenon, and despite regulatory efforts they are likely to occur again. This report compares the ex ante funding of deposit insurance schemes in a selection of countries, highlighting the “funding gap” left by these arrangements in the recent systemic financial crisis. To fill that gap, different approaches have been adopted across countries in the recent crisis. Where support for the financial sector was provided as part of policy response to the crisis, new taxes have been adopted to generate revenues ex post, although the specific approaches have differed. While there is no single solution in this regard, this report finds that ex ante funded systemic crisis resolution funds, together with strengthened failure resolution powers, are in principle adequate to help fill the gap. JEL Classification: E44, G01, G21, G28, E61, H21. Keywords: systemic financial crisis, systemic crisis resolution fund, deposit insurance, financial activities ta...

Guarantees have become the preferred instrument to address many financial policy objectives. The incidence of financial sector guarantee arrangements that address specific policy objectives, such as supporting financial stability, protecting consumers and influencing credit allocations, has increased markedly over the past decades and additional schemes are under consideration. This report identifies considerations regarding consistency and affordability that policymakers should take into account before introducing additional guarantee arrangements. One of them is that the safety net cannot be expanded without limits. In fact, as regards the strength of the net of government-supported guarantees for financial promises, the wider that net is cast (without altering its other key parameters), the thinner it becomes.

Pension funds have become the largest class of investors in many markets and, given their size, the allocation of their assets has important implications for the relative prices of financial assets. There may be a trend shift of private (defined benefit) pension fund asset allocation strategies away from equity to bonds, especially to government bonds, given their limited credit risk. The potential demand for such bonds could, in principle, be very substantial, sufficient in fact to result in a scarcity of such bonds in circulation. Many debt managers have taken advantage of current bond market conditions and issued long-term to ultra-long-term bonds. But whether they should follow a strategy of maturity-lengthening with the express aim to facilitate the task for pension fund managers is a different matter. Most policy makers would not recommend that governments undertake to issue long-term debt with the express intent of meeting this demand, not least because they expect the price ...

– Empirical research over the last decade has uncovered predictive relationships between the slope of the yield curve and subsequent real activity and inflation. Some of these relationships are highly significant, but their theoretical motivations suggest that they may not be stable over time. We use recent econometric techniques for break testing to examine whether the empirical relationships are in fact stable. We consider continuous models, which predict either economic growth or inflation, and binary models, which predict either recessions or inflationary pressure. In each case, we draw on evidence from Germany and the United States. Models that predict real activity are somewhat more stable than those that predict inflation and binary models are more stable than continuous models. The model that predicts recessions is stable over our full sample period in both Germany and the United States.

... BUSINESS INVESTMENT RATES IN OECD COUNTRIES IN THE 1990s: HOW MUCH CAN BE EXPLAINED BY FUNDAMENTALS? ... worsened recently as a result of the shifting composition of capital towards information and communication technology (ICT) equipment -- a ...

ABSTRACT Guarantees have become the preferred instrument to address many financial policy objectives. The incidence of financial sector guarantee arrangements that address specific policy objectives, such as supporting financial stability, protecting consumers and influencing credit allocations, has increased markedly over the past decades and additional schemes are under consideration. This report identifies considerations regarding consistency and affordability that policymakers should take into account before introducing additional guarantee arrangements. One of them is that the safety net cannot be expanded without limits. In fact, as regards the strength of the net of government-supported guarantees for financial promises, the wider that net is cast (without altering its other key parameters), the thinner it becomes.