Contributions published at Department of Banking and Finance (Pablo Koch Medina)

Based on a strategy that searches for target groups, the study is aimed at detecting distinct consumer segments that differ regarding personal and contextual contributions or barriers to green food purchases. The theoretical framework taken is an alternative perspective of environmental behavior which holds that behavioral choices are typically restricted by a host of constraints. The segmentation is based on dimensions that have been identified as prevalent factors of green food purchases in a survey with Swiss households. These dimensions are: 1) attitudes toward environmental protection, 2) toward fair trade and 3) toward regional production; 4) perceived time barriers; 5) action-related knowledge and 6) frequency of supermarket use to buy food products. Regarding the market segments, the results revealed between the two extreme subgroups – the anti-ecologists and the ideal ecologists – several groups that are susceptible to a mixture of barriers and contributions to green purchases. Applied implications about how to enhance consumer’s demand of green products and how sellers can adopt are discussed.

This paper reviews how long-term relationships between firms and banks shape the structure and integration of banking markets worldwide. Bank relationships arise to span informational asymmetries that are endemic in financial markets. Firm-bank relationships not only entail specific benefits and costs for both the engaged firms and banks, but also directly affect the structure of banking markets. In particular, the sunk cost of screening and monitoring activities and the 'informational capital' collected by the incumbent banks may act as a barrier to entry. The intensity of the existing firm-bank relationships will determine the height of this barrier and shape the structure of international banking markets. For example, in Scandinavia where firms maintain few and strong relationships, foreign banks may only be able to enter successfully through mergers and acquisitions. On the other hand, Southern European firms maintain many bank relationships. Therefore, banks may consider entering Southern European banking markets through direct investment.

It has been widely noted in the empirical literature that state-price densities implicit in financial asset prices are not log-normal. This paper shows that this phenomenon can be caused by heterogeneity in investors’ beliefs. It derives the state-price density under heterogeneous beliefs in closed form and demonstrates that heterogeneous beliefs can give rise to multimodal state-price densities. Consequences for the “smile effect” in implied option volatility and for measures of risk aversion inferred from empirical state-price densities are discussed.

The financial industry puts the Basle Committee under strain to align regulatory capital with economic capital. This could be reached by allowing more flexibility in the choice of risk measure for regulatory reporting. Markus Leippold and Paolo Vanini show that if banks could use the theoretically more sound risk measure of Expected Shortfall, the three cheers of Stahl (1997) would be reduced to exactly half as many cheers. This would substantially decrease the regulatory capital in most cases. There is no dispute on the necessity of regulating the financial industry. Ideally, a regulation aims at maintaining and improving the safety of the financial industry. At the root of every regulation framework lies the basic idea of calculating a capital reserve as a function of the firm’s total capital and its risk. While the calculation of the firm’s capital is tedious but feasible, the measurement of risk is a difficult task. Consequently, regulators advocate normative and simplified rules applicable to all financial institutions.

We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi-closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.

We study the relation of financial development and the pace of technological advance in a dynamic agency theoretic model. A firm which is financed by outside shareholders but run by managers has the prospect of a process innovation which arrives stochastically. Adopting the innovation requires firing old management and hiring new with skills appropriate for the new technique. We show that subgame perfect equilibria in this game can be of two types. In entrenchment equilibrium once the new techniques has been announced old style management raises their dividend payout sufficiently to pre-empt the innovation. In maximum rent extraction equilibrium managers are unable or unwilling to match the impending productivity improvement and instead respond by increasing their perquisites for the remaining time of their tenure. We show that both equilibria involve several types of inefficiencies and can result in underinvestment in positive NPV projects. We discuss the role of financial innovation in reducing the inefficiencies identified.

This paper presents a descriptive analysis of the primary and secondary market for Finnish treasury bonds. The paper focuses on three issues. First, we report basic descriptive statistics such as auction volumes and secondary market yields and volumes. Second, we estimate the revenues earned by primary dealers from the treasury bond market. Third, we analyse the development of the price of the auctioned bonds, relative to other benchmark bonds, around the time of the auction. We find evidence of a price decrease in the auctioned bond series before the auction and a price increase after the auction. This pattern is strongest for 1992-1994 when Treasury funding needs were heavy and secondary market trading volume of treasury bonds was modest.

We analyze a unique data set on multiunit auctions, which contains the actual demand schedules of the bidders as well as the auctionawards in over 400 Swedish Treasury auctions. First, we document that bidders vary their prices, bid dispersion, and the quantity demanded in response to increased uncertainty at the time of bidding. Second,we find that bid shading can be explained by a winner 19s curse 13driven model in which each bidder submits only one bid, despite the fact that the bidders in our data set use much richer bidding strategies.

This paper presents an application of evolutionary portfolio theory to stocks listed in the Swiss Market Index (SMI). We study numerically the long-run outcome of the competition of rebalancing rules for market shares in a stock market with actual dividends taken from firms listed in the SMI. Returns are endogenous because prices are determined by supply and demand stemming from the rebalancing rules. Our simulations show that in competition with rebalancing rules derived from Mean-Variance Optimization, Maximum Growth Theory and Behavioral Finance, the evolutionary portfolio rule discovered in Hens and Schenk-Hoppe (2001) will eventually hold total market wealth. According to this simple rule the portfolio weights should be proportional to the expected relative dividends of the assets.

The purpose of this book is to give a sound economic foundation of finance. Finance is a coherent branch of applied economics that is designed to understand financial markets in order to give advice for practical financial decisions. This book argues that for a sound economic foundation of finance the famous general equilibrium model which in its modern form emphasizes the incompleteness of financial markets is well suited. The aim of the book is to demonstrate that financial markets can be meaningfully embedded into a more general system of markets including, for example, commodity markets. The interaction of these markets can be described via the well known notion of a competitive equilibrium. We argue that for a sound foundation this competitive equilibrium should be unique. In a first step we demonstrate that this essential goal cannot of be achieved based only on the rationality principle, i. e. on the assumption utility maximization of some utility function subject to the budget constraint. In particular we show that this important lack of structure is disturbing as well for the case of mean-variance utility functions which are the basis of the Capital Asset Pricing Model, one of the cornerstones of finance. The final goal of our book is to give reasonable restrictions on the agents' utility functions which lead to a well determined financial markets model.

An Introduction to Wavelets and Other Filtering Methods in Finance and Economics presents a unified view of filtering techniques with a special focus on wavelet analysis in finance and economics. It emphasizes the methods and explanations of the theory that underlies them. It also concentrates on exactly what wavelet analysis (and filtering methods in general) can reveal about a time series. It offers testing issues which can be performed with wavelets in conjunction with the multi-resolution analysis. The descriptive focus of the book avoids proofs and provides easy access to a wide spectrum of parametric and nonparametric filtering methods. Examples and empirical applications will show readers the capabilities, advantages, and disadvantages of each method.

The paper investigates the effect of interest policy on price bubbles, trading behavior and portfolio choice in experimental stock markets. Anseries of experiments has 8 participants trade an asset over 15 periods. Alternatively, the participants can invest money in interest-bearing bonds. Treatment groups are subjected to an endogenous interest policy, while control groups experience a constant interest rate. Our stock markets are characterized by bubbles. While we observe a small positive impact of our interest policy on bubbles, the policy also strongly increases market volatility. On the other hand, concerning portfolio choice, we find evidencenfor value-driven (rational) investment behavior.

Investoren und Emittenten äussern oft und gerne Kritik an der Rolle der Emissionsbanken und am traditionellen Emissionsprozess - die Zuteilungspraxis sei intransparent, heisst es etwa, oder die enormen Kurssprünge am Emissionstag seien auf Underpricing zurückzuführen. Es scheint also, als sei der optimale Emissionsablauf noch nicht gefunden worden. Das Internet könnte nun aber Lösungen bereit halten: Direct Public Offerings, virtuelle Emissionhäuser oder Online-Auktionen. Teodoro Cocca untersucht diese neuen Angebote mit wissenschaftlicher Strenge, er sichtet aktuelle Forschungsresultate zum E-Commerce und setzt sich kritisch mit den Grenzen und Möglichkeiten der neuen Technologie auseinander.