Friday, January 17

Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe

An interesting article. I am very jaundiced towards the European Politicians and assorted people who drive their economic future. its a mess, to put it bluntly.

I quote the abstract:

Exploiting cross-sectional and time-series variations in European regulations during the July 2008–June 2009 period, we show that: 1) Prohibition on covered short selling raises bid-ask spread and reduces trading volume, 2) Prohibition on naked short selling raises both volatility and bid-ask spread, 3) Disclosure requirements raise volatility and reduce trading volume, and 4) No regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.

This is the idiocy behind the governments and economics people who try to ban short selling. The evidence that banning short selling introduces inefficiencies into the market is clear and incontrovertible. Where they aren't banned, the markets work better, absorb information faster and generally are good eggs. This exacerbates the insider outsider issue. If the idea behind the European Regulators and Politicians was to improve their markets, then this failed miserably. Spreads become wider. Trade volumes reduce. not good.

Thursday, January 16

Economic Freedom and the Stability of Stock Prices: A Cross-Country Analysis

A common sense result but a valuable one indeed. I quote the highlights and abstracts from this paper.

  • ADR volatility is inversely related to the economic freedom of the home country.

  • ADR volatility is decreasing in home-country, property-right protection.
  • ADR volatility is decreasing in the level of home country free trade agreements.
  • ADR volatility is increasing in the level of regulation in the home country.

This paper investigates the link between economic freedom and the price stability of individual securities in a unique setting. Using a sample of 327 American Depositary Receipts (ADRs), we find an inverse relation between the economic freedom of a ADRs’ home country and the price volatility of the ADR. This negative correlation is driven primarily by certain components of economic freedom, such as property right protection, the soundness of the money, and the level of free trade in the home country. Further, we find evidence that less regulation and less government control of markets in the home country leads to more stable ADR prices.

If one wants to find out what the broader public and market thinks about your country and the changes its going through, just look at the volatility of your ADRs. A simple way of judging how stable and future proof people think your country is going to be. ADR’s are a way of you and your country’s firms to raise international funds, its a positive cycle, improve your economic freedom, property rights, free trade and regulation and watch the price and risk of your international fund raising efforts improve.

Tuesday, January 14

Look before you leap: Why politicians may have a point to be hesitant about the gains from trade

this was a good point to be made. Speaking as an economist, I am always in favour of trade liberalisation. Same with being a banker. Anything that facilitates trade is something that I love because that helps my clients. But politicians are different and I quote the highlights from this paper.

• economists focus on overall welfare, politicians on the income distribution.
• market liberalization increases welfare and changes the income distribution.
• politicians implement distortionary policies to mitigate the distributional effects.
• with inaccurate information, ambiguous net welfare effects may result.
• politicians may have a point when being hesitant about market liberalization.

the abstract:

Economists emphasize the welfare gains of unrestricted trade, but politicians worry about the income distribution effects of increased competition. We show that the welfare gains of a trade shock become ambiguous if inaccurate information hinders optimal income redistribution with distortionary policy instruments. To be sure about the net welfare outcome of a compensated trade shock, the government must know the size of the trade shock and the corresponding size of the policy instrument that is needed to generate a balanced budget. If this is not the case, politicians may have a point when being hesitant about the gains from trade.

So when making arguments about free trade and trade liberalisation, one has to ensure that economists are speaking the same language..I believe that one of the reasons why the WTO deals are so difficult to achieve (besides needing the approval of all the 190 odd countries) is that the WTO is mainly run by economists while the decision makers are mainly politicians who will need to ratify the deal back home. And they are talking different language.

Monday, January 13

Loopholes Undermine Donation: An Experiment Motivated by an Organ Donation Priority Loophole in Israel

Organ donation is a curious beast and I have spoken about it before on this blog (see here, here). So it was of interest that I found this article. I quote the abstract:

Giving registered organ donors priority on organ waiting lists, as has been implemented in Israel and Singapore, provides an incentive for registration and has the potential to increase the pool of deceased donor organs. However, the implementation of a priority rule might allow for loopholes—as is the case in Israel—in which an individual can register to receive priority but avoid ever being in a position to donate organs. We experimentally investigate how such a loophole affects donation and find that the majority of subjects use the loophole when available. The existence of a loophole completely eliminates the increase in donation generated by the priority rule. When information about loophole use is made public, subjects respond to others’ use of the loophole by withholding donation such that the priority system with a loophole generates fewer donations than an allocation system without priority.

Its usually bloody moronic religious reasons why people don't like doing this. I quote this time from Judaism

While the Israeli legislation mitigated this particular type of gaming, it introduced a different loophole in the organ allocation system. One of the reported motivations for implementing the priority allocation legislation in Israel was widespread concern over free riding by ultraorthodox religious groups. These groups generally do not recognize brain death (i.e. when the brain ceases to function) as a valid form of death and consequently oppose providing deceased donor organs.5 Members of these religious groups do not oppose receiving organs, however, even those recovered from brain dead donors. It has been argued that this group of explicit free riders—those who will accept organs but not provide them—is a major factor for the historically low rates of organ donation in Israel (Lavee et al. 2010, Lavee and Brock 2012). The priority allocation system was meant to minimize this free riding by rewarding registered donors and giving free riders lower priority on waiting lists.

Nevertheless, the implementation of the Israeli priority legislation created a loophole that may allow this type of free riding to continue. The Israeli donor card gives a registrant the option to check a box requesting that a clergyman be consulted before organ donation occurs (see Figure 1).6 An individual who wants priority but does not want to be a donor could check that box with the implicit or explicit understanding that his clergyman would refuse donation if the supposed “donor” were to die and be in a position to have his organs recovered.

Ridiculous and because of these loopholes, the rate of organ donation is seriously low in Israel.