Animal spirits, margin requirements, and stock price volatility

Article Abstract:

A simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices. Investors are assumed to exhibit heterogeneous preferences for risk-bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economy-wide average risk-bearing propensity. The ambiguous effect on volatility similarly arises when the sources of heterogeneity is noise trader beliefs. (Reprinted by permission of the publisher.)

Economic aspects, Risk (Economics), Margins (Security trading), Margins (Securities trading)

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Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships

Article Abstract:

Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written, or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation. (Reprinted by permission of the publisher.)

Banking industry, Customer relations, Loans, Bank management

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The effects of market segmentation and investor recognition on asset prices: evidence from foreign stocks listing in the United States

Article Abstract:

Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis. (Reprinted by permission of the publisher.)

Securities and Commodity Exchanges, Security and commodity exchanges, Securities Exchanges, Stock-exchange, Stock exchanges, Exchanges, Market segmentation, Assets (Accounting)

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