Financial Economics

Britain's income distribution is like a multi-story apartment building with the numbers of residents on the different floors corresponding to the concentration of people at different income levels in any particular year. The poorest are in the basement, the richest are in the penthouse, and the majority somewhere in between. But what are the dynamics of occupancy patterns? Snapshots of the building register at different times tell us nothing about these. Over time, how much movement between floors is there, and has the frequency of moves or the distance travelled been changing over the last two decades? In particular, is there much turnover in the basement, and do basement dwellers ever reach the penthouse? Who moves the most and how far? What are the factors associated with movements up and down the income tower over time? This book addresses such questions with extensive new analysis based on data from the British Household Panel Survey (BHPS) covering 1991–2006, providing a comprehensive and original study of income mobility and poverty dynamics. There is detailed discussion of why longitudinal perspectives on the income distribution are of interest, and of the relevant concepts and measures. There is in-depth discussion of the BHPS and its household income data, and comparisons with other national and international longitudinal data sources. The book shows that patterns of income mobility in Britain have not changed over the last two decades but fewer people are persistently poor, and it discusses the reasons for these trends.

In a non-technical language, the book provides an overview of the history of ratings, the role of rating agencies, the industry, the uses of ratings and the rating process. The US subprime crisis that highlighted relevant deficiencies in the rating agencies’ activities and their systemic relevance, led to an international consensus to establish public oversight and regulation of the rating business. The book explains the global initiatives undertaken by the G-20, the Financial Stability Board, and IOSCO to address those failures and the European implementation of such a consensus. It also provides an overview of the new European System of Financial Supervisors implemented as a reaction to the crisis and examines the supervisory and enforcement powers of ESMA, the new authority in charge of the registration and oversight of rating agencies. Through an in-depth analysis of the European Regulation’s requirements on governance, conflicts of interest, methodologies, disclosures, and transparency, the book provides a clear explanation of how rating agencies operate and how the identified failures have been addressed. The explanation of all these aspects is complemented with an analysis of guidance from supervisors (ESMA and EBA), IOSCO’s recommendations, and US legislation. Finally, the book discusses possible new regulatory developments in areas such as the agencies’ business model, competition, civil liability, and ratings of sovereign debt. It concludes with the authors’ support for an enhanced regulatory and oversight coordination at global level, a reduction of the existing over-reliance on ratings, and a concentration of resources on the enforcement of the current regulatory regime.

This book, which is part of the distinguished Clarendon Lectures in Economics series, puts forward a unique and authoritative set of detailed proposals for establishing new markets for the management of the biggest economic risks facing governments and society. Robert Shiller argues that we have largely the wrong financial markets, and that establishing new ones may fundamentally alter and diminish international economic fluctuations (and thus enable better risk management) and reduce the inequality of incomes. Shiller argues that although some risks, such as natural disaster or temporary unemployment, are shared by society, most risks are borne by the individual, and standards of living are determined by luck. He investigates whether a new technology of markets could make risk sharing possible and shows how new contracts could be designed to hedge all manner of risks to the individual's living standards. He proposes new international markets for perpetual claims on national incomes, and on components and aggregates of national incomes, concluding that these markets may well dwarf our stock markets in their activity and significance. He also argues for new liquid international markets for residential and commercial property. Establishing such unprecedented new markets presents some important technical problems that Shiller attempts to solve with proposals for implementing futures markets on perpetual claims on incomes, and for the construction of index numbers for cash settlement of risk management contracts. These new markets could fundamentally alter and diminish international economic fluctuations, and reduce the inequality of incomes around the world. Much of the book is technical, and it is intended mostly for economists, contract designers at futures and options exchanges, originators of swaps and other financial deals, and designers of retail products associated with risk management (such as insurance, pension plans, and mortgages). However, the material within the book is mostly arranged so that a non‐technical reader can follow the broad themes, and until Ch. 6, most of the technical material is relegated to appendices.

The book describes the developments that caused mutual funds to go from a virtually unknown financial product in the 1920s to the largest financial industry in the world today. It covers the formation of the first mutual funds in the roaring ’20s; how the 1929 stock market crash, a disaster for most financial institutions, spurred the growth of mutual funds; the establishment in 1934, over FDR's objection, of the Securities and Exchange Commission, the federal agency that regulates mutual funds; enactment of the Revenue Act of 1936, the tax law that saved mutual funds from extinction; passage of the Investment Company Act of 1940, the constitution of the mutual fund industry; creation of money market funds, which totally transformed the U.S. financial system; the accidental development of 401(k) plans, which revolutionized the way Americans save for retirement; and the late trading and market timing abuses, the greatest scandal ever in the history of the fund industry. The author was personally involved in developments over the past forty years, and much of the book is a personal narrative regarding the people and events that have shaped the mutual fund industry.

In 1940 few Americans had heard of mutual funds. Today, US mutual funds are the largest financial industry in the world, with over 88 million shareholders and over $11 trillion in assets. This book describes the developments that have produced mutual funds' long history of success. Among these are: the formation of the first mutual funds in the 1920s; how the 1929 stock market crash, a disaster for most financial institutions, spurred the growth of mutual funds; the establishment in 1934, over FDR's objection, of the United States Securities and Exchange Commission, the federal agency that regulates mutual funds; and the enactment of the Revenue Act of 1936, the tax law that saved mutual funds from extinction. In addition the book details the passage of the Investment Company Act of 1940, the “constitution” of the mutual fund industry; the creation in 1972 of money market funds, which totally changed the mutual fund industry and the entire US financial system; the enactment of the Employee Retirement Income Security Act of 1974, which created Individual Retirement Accounts; the accidental development of 401(k) plans, which have revolutionized the way Americans save for retirement; and the 2003 trading abuses, the greatest scandal ever in the history of the mutual fund industry. Many events have never been discussed in detail; others have been discussed in works on other subjects.

The financial crisis, which originated in developed country financial markets, has spread to developing countries and has turned into a global financial meltdown. Governments and Central Banks—though taking many and costly measures—seem powerless to stop the crisis. In light of this major global crisis that is hurting economies across the globe, this highly topical book will focus on a) the transparency and regulatory measures that become desirable after the current crisis; b) the implications of both the crisis and regulatory discussions for developing and developed economies; and c) reforms in the global financial architecture that might make the global financial system more stable and more equitable. Given the depth of the current financial crisis, the world economy is in unchartered territory. As a consequence, this book aims to systematically understand current major problems, both in the financial system, its governance, and in its links to global economic imbalances. It will try to explain how both market actors and regulators behave, as well as the prevailing ideology of extreme financial liberalization without sufficient regulation that contributed to the financial crisis. The book will present radical, but specific and hopefully politically feasible, proposals to try to ensure a more stable, equitable and growing world economy.

The current financial crisis has caused many of us to question the motives and actions that drive the business world. Even the basic notion that firms should be run so as to maximize shareholder value has come under increasing scrutiny. Simply put, the failures of some of our nation's most venerable financial institutions have called into question the very premise of value-based management (VBM). Moreover, by being paid out at a time when rank-and-file employees, suppliers, and other corporate stakeholders are suffering, excessive CEO compensation has produced public outrage. This book provides an up-to-date look at value-based management and finds that the underlying concept is as sound today as ever. One finding, however, is that, as initially practiced, VBM was often short sighted and thus needs to evolve if it is to continue to flourish. In particular, this book promotes a marriage of traditional VBM with the growing trend toward corporate social responsibility (CSR), a combination termed value(s)-based management. The case is made that CSR is much more than a feel-good concept; rather, it can make good business sense if practiced in a strategic manner. Ultimately, the book concludes that evidence supports the finding that, by embracing a program of corporate social responsibility, a firm can make the pie bigger, thus providing a win-win situation in which both the shareholders and other stakeholders benefit.

More than three billion people in the world—half of humankind—live on less than two-and-a-half US dollars per person per day. Excellent books can be found on ending world poverty. These books go into depth on many important aspects of economic development but do not focus on employment and self-employment, work and nonwork. The present volume fills in where these others leave off. For the last several decades, Gary Fields has been teaching, conducting research, and working as a policy advisor on labor market issues. Policy makers, businesspeople, and researchers know a great deal about how the world's poor work and what has improved conditions for them. We know how the poor have managed to invest in improving their own self-employment earning opportunities. We know what it takes for the private sector to want to set up operations in a developing country, thereby creating jobs and paying the taxes that can be used to build roads and schools and fund social programs. We know how poor-country governments can stimulate economic growth and make that growth more inclusive of the poor. And we know how the development banks, the rich-country governments, and other development organizations can help poor-country governments and other organizations do what they do not have the means to do on their own: create more good jobs, improve earnings levels in the poorer jobs, and enhance the skills and productivity of their working people. This book shares those lessons with you.