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Ambiguity and Asset Markets. Annual Review of Financial Economics. Vol. (Volume publication date December ) First published online as a.
Table of contents

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Evidence from patent collateral by Mann, William Micro structure before macro? The telling story of shareholder approval around the world by Holderness, Clifford G. How well do funds of funds perform? A natural experiment testing the legal bonding hypothesis by Licht, Amir N. Evidence from a structural estimation by Page, T.

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  • Good and bad uncertainty: Macroeconomic and financial market implications;
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Macroeconomic and financial market implications. Does macroeconomic uncertainty increase or decrease aggregate growth and asset prices? We document that in line with our theoretical framework, these two uncertainties have opposite impact on aggregate growth and asset prices. Good uncertainty predicts an increase in future economic activity, such as consumption, output, and investment, and is positively related to valuation ratios, while bad uncertainty forecasts a decline in economic growth and depresses asset prices.

Further, the market price of risk and equity beta of good uncertainty are positive, while negative for bad uncertainty. Hence, both uncertainty risks contribute positively to risk premia, and help explain the cross-section of expected returns beyond cash flow risk.

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  • Good and bad uncertainty: Macroeconomic and financial market implications?

Macroeconomic and financial market implications ," Journal of Financial Economics , Elsevier, vol. Download full text from publisher File URL: Full text for ScienceDirect subscribers only As the access to this document is restricted, you may want to search for a different version of it. Corrections All material on this site has been provided by the respective publishers and authors.

Ambiguity and the Historical Equity Premium

Help us Corrections Found an error or omission? Equity financing is particularly advantageous for these companies and their investors given the uncertainties of the economic return. As the term "shares" suggests, with equity financing you get your share of the outcome, whether it is positive or negative. Banks, on the other hand, may be reluctant to provide loans owing to the risk profile of these firms, and the greater exposure to a negative result in a loan contract. Total market capitalisation of the new markets in five euro area countries grew from EUR 7 billion at the beginning of to EUR billion in December While some of this increase can be attributed to the overall rise in share prices during this period, it is important to note that the number of listed companies continued to increase in almost every month.

The total number of companies listed on these new markets in the euro area increased from 63 at the beginning of January to at the end of Developments over the last year have admittedly been dismal. However, it is the nature of new markets, given the uncertainties attached to future developments for the companies listed on these markets, to exhibit more volatility than established markets. Bank-based finance has a special role to play for many companies in need of funds, and thus helps to ensure a well-balanced growth process.

The role of financial markets for economic growth

The economic literature on "relationship banking" has demonstrated that banks can contribute to alleviating the impact of sudden economic shocks on their clients. Banks stand ready to provide many customers with funds even in adverse circumstances, e. The banking sector also has an essential role to play with respect to the allocation of funds to the most profitable investment opportunities. Banks are, as mentioned before, financial intermediaries that by nature add cost to the allocation of capital. Thus in order for banks to survive in a market economy they need to provide added benefits.


It is difficult to compete with the debt securities market, if a bank loan is of a size where the fixed costs of accessing debt markets become negligible. However, securities markets are not always sufficiently liquid and some, especially small and medium, enterprises cannot cover their liquidity needs via securities markets owing to significant fixed costs of access. An additional benefit of bank-based finance relates to the intrinsic nature of the banking business: Banks can bridge this gap thanks to their comparative advantages in the assessment and monitoring of investment projects, which contributes to overcoming information asymmetries.

Let me now turn to the major changes of the financial system in the euro area after two years with the euro. The launch of the euro on 1 January was a historic event. Eleven national currencies were converted into one single currency overnight. The newly created currency area of the twelve participating European Union Member States has a considerable weight in the world economy. The successful launch of the euro, which is a key element in the creation of a stable and prosperous Europe, has boosted the integration of financial markets in the euro area.

This process of integration in European financial markets coincided with the trends towards globalisation and securitisation. Other factors, among a wide range, which shape the financial system are historically determined characteristics, technological innovations, monetary and fiscal policies and specific legal and accounting systems that differ from country to country.

Evidence of integration can be found, to varying degrees, in all parts of the financial system. The euro area money market is among the most integrated parts of the financial system. The conduct of one common monetary policy in the euro area brought about immediate integration of the unsecured segments of the money market, mainly the interbank market and the short-term derivatives market. The secured segments of the money market, that is the repo market and the markets for short-term securities, are also increasingly integrated, but they still suffer from underlying problems with the management of collateral.

Nonetheless, the outlook is promising. The euro area bond market has also developed rapidly. Notably, the private segments of the euro area bond market have flourished since the introduction of the euro.

Journal of Financial Economics, Elsevier | IDEAS/RePEc

Probably the most significant development has been the rapid growth in the euro-denominated corporate bond market, which has increased several-fold in size since the launch of the euro and is now characterised by issues of above EUR 1 billion. EMU has also stimulated integration in the stock markets in the euro area, where structural developments have been dominated by a series of high-profile mergers and attempted mergers. The rapid growth achieved by European securities markets has taken place notwithstanding remaining regulatory obstacles to their integration.

The European authorities are fully aware of the need to address this problem. Several obstacles have been identified in the recent Report of the Committee of Wise Men, chaired by Alexandre Lamfalussy. The Committee proposes to speed up the removal of impediments through the institutionalisation of two new regulatory committees for securities markets, which should allow for an increased harmonisation of securities regulation and less burdensome procedures for adapting Community rules to rapidly changing financial markets.

Another essential European initiative was the adoption by the Commission, in May , of a programme for the completion of the Single Market for financial services. This programme, the Financial Services Action Plan, lists a series of measures with indicative priorities and timetables.

The project considered as a whole and its inherent philosophy are capable of enhancing economic growth. In this perspective, a handful of specific initiatives deserve a particular mention. A first initiative is the adoption of the European Company Statutes, which is essential to enhance the level-playing field between European firms and to provide a suitable legal framework for transnational conglomerates. A second important aspect is the Risk Capital Action Plan, which would help redirect financial flows towards fast-growing small and medium-sized enterprises.

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Let me also mention the last four initiatives, namely the e-commerce policy for financial services; the harmonisation of rules on the accounting requirements for European companies; the takeover bids Directive; and finally the removal of accounting, legal and fiscal discrepancies hindering the cross-border use of collateral. A European Directive on this subject should be adopted in Many of these initiatives may appear to be unimportant and somewhat "esoteric" regulatory changes.

However, they can provide a real boost to the smooth operation of markets and, therefore, to economic growth. For example, obstacles to the cross-border use of collateral prevent the further cross-border integration and consolidation of clearing and settlement infrastructures, thus hindering the integration of European money, bond and equity markets. A smooth electronic integration of trading, clearing and settlement operations would help reduce transaction costs substantially.

The gradual dismantling of regulatory obstacles to remaining market integration in Europe will contribute to enhancing their depth and efficiency, in turn contributing to an improved allocation of funds to the most profitable investment opportunities, and thus supporting economic growth. The interaction between financial markets, economic growth and monetary policy is by no means a new issue for central bankers. However, financial market developments have brought the question to the forefront of the policy debate.

The continued integration and deepening of financial markets is a significant issue for policy-makers, and particularly for central bankers, since smoothly functioning and efficient financial markets are crucial in ensuring a smooth transmission of monetary impulses.