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PROGRAM REPORT

IntroductionMembers of the NBER's Asset Pricing Program produce over 100 working papers in a typical year. These papers are spread over an astonishing range of topic areas. Naming the papers written in the four and a half years since the last program report, let alone providing any sort of intelligible summary of their contents, would quickly fill the available space and exhaust the most dedicated reader's patience. Therefore, I'll describe in depth one area that strikes me as particularly interesting and that may be novel to likely readers of this report. I proceed with an apology to all the authors whose papers are thus omitted. In addition, I confine myself to papers in the NBER Working Paper series or presented at Asset Pricing Program Meetings in the last four and a half years. I apologize in advance to non-NBER authors and to authors of older papers whose work should be discussed in a comprehensive literature review.My focus here goes by a variety of names, including liquidity, trading, volume, market frictions, short-sales constraints, and limits to arbitrage. For a long time, there has been an implicit separation of effort in asset pricing: Researchers operating in the frictionless macroeconomics-based tradition study the broad level of prices, while researchers in the market microstructure tradition -- filled with non-Walrasian trading, asymmetric information, and so on -- pretty much study small (but interesting) refinements, where prices fall in the bid-ask spread rather than where the spread is in the first place.Recently, this separation has begun to erode. At one level, this erosion is the beginning of a long-expected understanding of trading and volume. The classic theory of finance has no volume at all: prices adjust until investors are happy to continue doing what they were doing all along, holding the market portfolio. Simple modifications, such as lifecycle and rebalancing motives, don't come near to explaining observed volume. Put bluntly, the classic theory of finance predicts that the NYSE and NASDAQ do not exist. Lifecycle stock trading could be handled at a retail level, like (say) life insurance. The markets exist to support high frequency trading. They are at bottom markets of information (or, some might say, opinion), not really markets for stocks and bonds.Now, perhaps prices are set as if volume is zero, and then volume and the attendant microstructure issues can be studied separately. But perhaps not; perhaps volume, trading, liquidity, and market structure effects spill over to affect the level of prices. This is the issue I focus on. I start with empirical work, and follow with economic modeling that tries to understand the emerging set of facts.Empirical Work3Com, Palm and Convenience YieldWork by Owen A. Lamont and Richard H. Thaler(2) most vividly brought this constellation of ideas to my attention. They start with the case of 3Com and Palm. On March 2, 2000, 3Com sold 5 percent of Palm in an initial public offering. 3Com retained about 95 percent of the shares, and announced that it would distribute those shares to 3Com shareholders by the end of the year at about 1.5 shares per one 3Com share. Thus, one could obtain 150 Palm shares in two ways: buy 150 Palm shares directly or buy 100 3Com shares and end up in six months with 150 Palm as well as 100 3Com.Surely the latter strategy should cost more. But in fact, the latter strategy was cheaper. Palm prices exploded, 3Com prices fell, and at the end of the first day of trading the "stub value" of 3Com shares (the value of 3Com less the embedded Palm shares) was negative $63! This violation of the law of one price lasted for quite a while, as shown in Lamont and Thaler's Figure 3. The event was not unique. Lamont and Thaler study six additional cases of persistent negative stub values in a carve-out followed by a spin-off.Lamont and Thaler carefully document that these events did not present exploitable arbitrage opportunities. Most simply, a trader might want to short Palm and buy 3Com. But the costs of shorting were so high as to make this trade unprofitable or impossible. Rationed out of the short market, a trader might try to buy put options. But this strategy did not work either. The option market became delinked from the stock market; there were wide violations of put-call parity, precisely because arbitraging between stocks and options required shorting stocks.The absence of an exploitable arbitrage is a little bit comforting, but it does not address the basic question: why were the prices so out of line in the first place? Lamont and Thaler's view is simply that there were a large number of "irrational" traders, who just did not see the chance to buy Palm embedded in 3Com, and for whom buying Palm rather than 3Com (and similar cases) was therefore "simply a mistake."Intrigued by this paper, I investigated(3) the issue a bit further. 3Com and Palm remind me of money and bonds. Just as 3Com and Palm are both claims to Palm shares in six months, so money and a six-month Treasury bill are both claims to a dollar in six months. Yet the bill is cheaper and the dollar is "overpriced."

NBER INFORMATION

HISTORY OF THE NBERFounded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.Over the years the Bureau's research agenda has encompassed a wide variety of issues that confront our society. The Bureau's early research focused on the aggregate economy, examining in detail the business cycle and long-term economic growth. Simon Kuznets' pioneering work on national income accounting, Wesley Mitchell's influential study of the business cycle, and Milton Friedman's research on the demand for money and the determinants of consumer spending were among the early studies done at the NBER.THE NBER TODAYThe NBER is the nation's leading nonprofit economic research organization. Sixteen of the 31 American Nobel Prize winners in Economics and six of the past Chairmen of the President's Council of Economic Advisers have been researchers at the NBER. The more than 1,000 professors of economics and business now teaching at universities around the country who are NBER researchers are the leading scholars in their fields. These Bureau associates concentrate on four types of empirical research: developing new statistical measurements, estimating quantitative models of economic behavior, assessing the effects of public policies on the U.S. economy, and projecting the effects of alternative policy proposals.ORGANIZATION OF THE NBERThe NBER is governed by a Board of Directors with representatives from the leading U.S. research universities and major national economics organizations. Other prominent economists from business, trade unions, and academe also sit on the Bureau's Board. Martin Feldstein is the NBER's President and Chief Executive Officer. In addition to the Research Associates and Faculty Research Fellows, the Bureau employs a support staff of 45. The Bureau's main office is in Cambridge, Massachusetts, with additional offices in Palo Alto, California, and New York City.

Alessandra Dal Colle Stievano :

Abstract : This paper offers a contribution to the empirical literature on the links between financial and economic development. In the investigation of the finance-growth nexus for 18 non-OECD countrie splus Mexico and Korea, the paper firstly introduces an indicator of restrictions on the establishment of foreign banks. Secondly, it links financial development to the capital–output ratio rather to the level of income per se, implicitly assuming that a sound financial development has to be relatively capital-intensive. A new procedure is systematically applied to take proper consideration of crisis periods through the use of dummies. The paper finds that in the long run most countries support the capital-out put ratio specification for the financial development relationship. Also, ”fairlyliberal” countries show a negative contribution of financial openness to financial development. The non-linearity between finance and growth seems to be confirmed by the growing elasticity of the capital output ratio in relatively developed countries. Finally, some large countries seem to support the endogenous growth hypotheses while most African countries turnout as ”cursed”, since neither accumulation nor openness can explain their growth (or, rather, lack thereof).

Research

CeFiMS faculty members have a strong commitment to academic research and publication.Our research interests, publications, and expertise are wide-ranging. Our current, active research interests lie within five main areas:Corporate governance: finance, law, and regulation (in developed and developing countries)Corporate finance: determinants of firms' capital structureFinance and economic growthFinancial regulation, central banking and bank supervisionManagement in China; Management in Japan; and Management in the Middle East and North AfricaConferencesCeFiMS faculty members and PhD students present their research at international conferences.CeFiMS itself organises research conferences.PublicationsThe output of CeFiMS research is accessible from this site as CeFiMS Discussion Papers (downloadable as pdf documents) and Recent PublicationsResearch studentsThe PhD program at CeFiMS is designed to ensure PhD students are an integral part of CeFiMS research activity.

ICICI Home Finance sees credit growth to fall in FY08

NEW DELHI: ICICI Home Finance, a unit of the country's biggest private bank, expects its credit growth to decline by almost half this fiscal after higher interest rates forced people to defer purchase of houses. "The credit growth for the (current) fiscal is likely to be in the range of 10-15 per cent as against 20-25 per cent growth attained in the previous fiscal," Sunil Rohokale, ICICI Home Finance's Managing Director and CEO said. The company had achieved a credit growth close to 25 per cent in the past fiscal, Rohokale said, adding that a likely slowdown in the country's credit market might reflect in the bank's credit growth as well. "We expect a margin in line with the industrial growth," he said on the sidelines of a seminar. Many people have postponed their decision to buy a house as almost all banks kept interest rates high throughout 2007 after the Reserve Bank increased benchmark rates to tighten money supply to check inflation and prevent overheating. Rohokale said interest rates were likely to remain steady in the months ahead. "It looks like rates will remain steady in the current fiscal. It may even go downward," he said. Started in 1999, ICICI Home Finance is a wholly-owned subsidiary of ICICI Bank and has clients in over 150 cities. Earlier, while speaking at the seminar, Rohokale welcomed National Housing Bank's efforts to create Residex, an index of residential property prices in the country. NHB had launched Residex last year, comprising data related to prices in Delhi, Bangalore, Bhopal, Kolkata and Mumbai.

Islamic finance is seeing spectacular growth.

LONDON: Even as banking segments like securitizing subprime mortgages and financing leveraged buyouts suffer from the current crisis, Islamic finance is seeing spectacular growth.Islamic law, or Shariah, prohibits the payment and receipt of interest, emphasizing profit sharing instead. It also bans investment in businesses like tobacco, alcohol and gambling.Over the past year, Shariah-compliant assets have grown almost 30 percent, to more than $500.5 billion, according to analysis of the industry on a global scale, published this month by The Banker with input from a business consultancy, Maris Strategies.That growth outstrips most other business segments in financial services and looks set to continue as banks - including Western banks like Standard Chartered and Goldman Sachs - feed increasing demand from the world's 1.6 billion Muslims.A major factor in the boom has been the high price of oil leading to increased wealth in the Gulf Cooperation Council states and Iran, among others. In addition, countries like the United Arab Emirates, Saudi Arabia and Malaysia aim to broaden government revenues and create jobs by making their capitals centers for Islamic finance.Today in Business with ReutersGoogle forces Microsoft's handChina-owned firm takes a stake in Rio TintoU.S. reports first monthly decline in labor market since 2003.

The industry is in its adolescence when it comes to issues like transparency, accounting and ratings, with very different standards being used. This also means that The Banker's analysis probably understates Shariah-compliant assets."Islamic banks in the U.K. differ in their accounting operations from banks in Bahrain, which in turn differ from banks in Malaysia and Indonesia," said Nabeel Shoaib, global head of HSBC Amanah, the Islamic finance unit of the global bank HSBC. "Standardization in Islamic finance is necessary to avoid fragmentation and to ultimately create a new asset class that can fully compete with conventional finance."Disagreements among scholars on what is Shariah-compliant and what is not impedes progress. Shariah is not a set of codified laws, but a set of interpretations based on the Koran, and it follows that rulings are affected by personal beliefs and cultural influences, noted Joe DiVanna, managing director of Maris Strategies.There is also a shortage of experienced Shariah scholars because of the huge growth in the Islamic finance industry in recent years. And those scholars need to look at ever more sophisticated products that are starting to emerge - Shariah-compliant hedge funds and equity-linked structured baskets in which the stocks selected are Shariah-compliant.The Banker study underlines that the vast majority of the uptake comes from customers under 30 who are interested in their cultural and religious identity. Yet there is often a trade-off, since in many markets, conventional savings products can provide better value. This should be less and less the case as more Islamic products are developed, providing one of the main areas of growth for the industry.In addition, growth will come from providing services to high net worth Muslims and, at the opposite end of the wealth scale, to the many Muslims who do not have access to bank accounts. A form of microcredit that avoids interest payments is an obvious area.In terms of countries, Iran has the most Islamic finance assets, with $155 billion, as all institutions must be Shariah-compliant, and it has a large population of 71 million. In Saudi Arabia and Malaysia, the banks and insurance companies can offer conventional products as well.What is surprising in terms of country rankings is that Britain, a non-Muslim country, albeit one with about two million resident Muslims, is the 10th largest measured, with $10.4 billion in Shariah-compliant assets.This is largely because HSBC Amanah, which has $9.7 billion in these assets, is headquartered in London. But it also reflects the City's role as a premier global financial services center, with the British government playing a supportive role in the development of the industry.Britain is intent on becoming the first Western government to issue Islamic bonds and has been exploring the options available, although it looks as though plans to issue them in the first half of 2008 will not be realized because of the need for complex new regulations that comply with Islamic law.Only last month, Citigroup announced a steep 57 percent drop in net earnings for the third quarter, to $2.38 billion, amid worsening problems in areas like subprime and leveraged loans and fixed-income trading. On Monday, a day after the chief executive resigned, it reduced its third-quarter earnings to $2.21 billion after correcting the value of some securities.But its Islamic finance unit is going strong: Last year, Citigroup, based in New York, was ranked ninth in underwriting Islamic bonds and loans; this year it is ranked first with a 12.5 percent market share and $4.5 billion of deals, according to Bloomberg.