• A
  • A
  • A
  • ABC
  • ABC
  • ABC
  • А
  • А
  • А
  • А
  • А
Regular version of the site

Developing Financial Markets: Their Effectiveness, Corporate Management Development, and Macroeconomic Dynamics

Priority areas of development: economics
2011
The project has been carried out as part of the HSE Program of Fundamental Studies.

This project is represented by 9 subprojects in the 3 directions of research.

In the first direction we study financial markets, banking sector and an influence of their development on macroeconomic indicators. This direction is represented by first 3 subprojects: “The effect of foreign debt on financial constraints in the Russian banking”, “The impact of social structure on bank-runs” and “Regional Patterns of House Prices in Russia and their Determinants”.

In the second direction we study problems of financial markets efficiency. This direction covers 4th and 5th subprojects: “Transaction costs, liquidity, and asset pricing in emerging markets – the case of Russia”, “Optimal Capital Allocation: VaR, C-VaR, Spectral Measures and Beyond in Russian Markets”.

In the third direction we look at problems of corporate government, it covers 6th, 7th, 8th, and 9th subprojects: “А Calibrated Model of Executive”, “Investment and Financing Decisions of an Intrinsically Motivated Entrepreneur”, “Performance of domestic and cross-border acquisitions: Empirical evidence from Russian Acquirers”, “Premiums and long-term performance of emerging market M&As”.

All main characteristics of all subprojects are presented below:

The object

In the first subproject are looking at Russian banks that were affected by the sudden stop of external financing caused by the Lehman Brothers' collapse. In the second subproject we look at social network effects.In the third subproject we study dynamics of prices for housing across Russian regions in the past ten years. The 4th subprojectwe analyze the drivers of liquidity on emerging markets, with main focus on Russia. The 5th subproject examine the problem of selecting the optimal capital allocation with Russian stocks. The 6th subprojectanalyzes CEO optimal pay in a principal-agent model of hidden effort, where aggregate shocks affect technology, borrowing limits, and outside options. The 7th subproject focuses on disagreement between entrepreneurs and (potential) financiers of their business, which may arise for various reasons. In this part, we consider an entrepreneur's intrinsic rewards from his business project as the source of such disagreement. The 8th subproject is focused on domestic and international acquisitions, initiated by Russian firms, on their operating performance. The last 9th subproject is studying the premiums and long-term performance of emerging market M&As.

The aim

In the first subproject we compare banks that were affected and not affected by the sudden stop in external liquidity in 2009. In the second subproject want to specify who can observe whom, by considering underlying network of social contacts. Also we want to allow depositors to re-decide upon observing the actions of their neighbors and effectively study multistage game. In the third subproject we want to find factors that influence house prices on Russian market. In the 4th subproject we want to explore the influence of liquidity on asset pricing.In the 5th subproject we are making comparison of several volatility measures is performed to assess their ability to describe and forecast the conditional variance and to provide the best capital allocation.In the 6th subproject the main aim isoptimal to understand what is the optimal pay in a principal-agent model of hidden effort. In the 7th subproject we want to compare the financial performance, capital and ownership structure choices of businesses of intrinsically motivated entrepreneurs to the ones of entrepreneurs that receive utility only from the financial returns of the business. The 8th subproject investigates the long-term impact of domestic and international acquisitions, initiated by Russian firms, on their operating performance.The 9th subproject  adds to the existing literature by analyzing if acquirers overpay in cross-border transactions.

Empirical base

In all subprojects we use a wide range of data, which includes the following: CBR, Cbonds, different game theory approaches, Rosstat, Datastream, Bloomberg, CRSP 1925 Stock Database, Compustat North America, S&P ExecuComp, the Panel Study of Entrepreneurial Dynamics of the University of Michigan, Bureau Van Dijk’s Zephyr and Ruslana databases, ThomsonOne Deals, Ownership and Financial modules.

Main results

In the first subproject tracing the impact of the CBR's liquidity infusions on banks' portfolio allocation decisions, we find that banks used CBR funds not only to pay out foreign debt, but also to accumulate cash deposits in non-resident banks, and also find that affected banks increased their holdings of market securities significantly more than unaffected ones, which suggests that the CBR's bailout policies impacted their risk-taking strategies. In the third subproject we present econometric evidence on the driving forces behind house price formation in the regions of Russia. We find that higher income per capita and a lower unemployment rate in a region increase house prices. We also find a negative impact of real interest rates, which mostly comes from the time series dimension since the cross-sectional variation only comes from variation in regional inflation rates. An index that captures the investment risk of regions has a significant negative impact on house prices. Our first results in the 4th subprojects show rather weak dependence of asset pricing from market depth. This finding to a certain extent opposes the results, obtained in Bekaert et al. (2007) and Lee (2011) for “tightness”. The 5th project- linear models for predicting volatility (HAR-RV, ARFIMA(p,d,q)-RV) are the most effective for Russian market.The 6th subproject have the following results.  Pro-cyclical borrowing results in a asymmetric RPE for wealthier CEOs. Filtering of aggregate shocks out of CEO continuation utilities decreases RPE in current wages. We further show that pro-cyclical outside options result in counter-cyclical CEO effort for a wide class of utility functions, which can play a stabilizing role in the business cycle. In the 7th subproject we confront the empirical predictions of the model to data on nascent entrepreneurs from the Panel Study of Entrepreneurial Dynamics of the University of Michigan and find confirmation for various predictions of the model. In the 8th subproject our results suggest that Russian acquirers suffer from the inability to leverage value due to low M&A experience and capability, especially when making international acquisitions. In the 9th subproject analyzing the short-term and long-term stock returns of a global sample of 214 firms that have carried out 215 domestic and 314 cross-border deals, we confirm the finding in the existing literature, that, on average, firms do not tend to overpay. Also, we show that foreign acquirers do not overpay. Rather, we find a positive moderating role of the cross-border nature of a deal. Hence, either information asymmetries exist in favor of the foreign acquirer or synergy expectations as expressed in the premium paid are more likely to get realized in international than in domestic transactions.

Field of application

The results of the projects can be widely used not only for the academic purposes but also in practice.

In terms of the academic field, all projects have wide perspectives for future research. In the third subproject the future research is necessary to understand the type of relationships between the size of the mortgage and development of the prices. In the fourth subproject we need future research to cover all the steps to understand the problem. The results of the 5th subproject can be done only at the end of the following research.

In practice the results can be widely used in such fields as portfolio decisions of banks (1st subproject), the optimal decisions of depositors to withdraw deposits from the bank (2nd subproject); the 3rd subproject can help to understand reasons behind the house prices in Russia. Results of the fourth subproject will help to understand the driving force of liquidity in the Russian market, which is important in a market economy. The fifth subproject can be used for optimal allocation of capital to the Russian market. Results of the sixth subproject will be useful for the analysis of payments to executives, the seventh - to understand the business dynamics. The eighth and ninth subprojects will be useful for members of mergers and acquisitions.

Foreign partners

The research has been conducted under scientific cooperation with London School of Economics (LSE), represented by Christian Julliard,  Belgrade University, represented by Branko Urosevic, Oxford University, represented by Dimitros Tsomocos, among others.