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Volume 38 - Numéro 1

June 2017

Competition in Exchanges and Reputational Concerns - 15 June 2017


This paper proposes a theoretical model to analyse the effect of competition on the quality of the certification process offered by stock exchanges. If the stock exchange truthfully certifies the quality of a new issue, then it would list only the good projects, which would alleviate information asymmetries and generate gains from trade. However, it may be more protable for the listing requirements of exchanges to be too lax. The trade-off between short-term profits and reputation effects induces strategic behaviour. The results show that overestimating the quality of a project is an equilibrium despite the presence of reputation costs. Counterintuitively, introducing competition leads to more lax requirements than in the monopolistic case and reduces welfare as long as the reputation of the competitor is higher than that of the monopolistic stock exchange.

Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing - 15 June 2017


We explicitly solve for aggregate asset prices in a discrete-time general- equilibrium endowment economy with two agents who differ with respect to their preferences for risk aversion and sensitivity to additive habit, either internal or external. We generalize an algorithm of Dumas and Lyasoff (2012) for the case of utility functions with time nonseparability that is induced by habit preferences. In the internal habit case, we find that the equilibrium equity premium, equity return volatility, Sharpe ratio, and risk-free rate and its volatility are more consistent with historically observed aggregate prices relative to the external habit case (“catching up with the Joneses”).

Bank Deregulation, Consolidation and Stability: Evidence on U.S. M&A Centric Activity - 15 June 2017

Saqib AZIZ, Jean-Jacques LILTI

Employing a difference-in-difference estimation over a sample of 3,447 M&A deals of U.S. banks from 1990 to 2009, we examine the relation between U.S. bank deregulation, M&A centric consolidation and bank stability. Bank deregulation, in terms of its entirety, positively relate with M&A centric consolidation in U.S. However, the evidence on functional- and geographic-diversity aimed deregulatory acts is mixed. Our findings predominantly hold in the pre-crisis period analysis and disappear when the period extends to financial crisis. Lastly, deregulation and consolidation jointly cast negative effects over the stability of U.S. banks. Our findings broadly support the narrative that holds deregulation partly responsible for the 2007 financial calamity.