This paper evaluates (1) whether the exogenous component of financial intermediary development influences economic growth and (2) whether cross-country differences in legal and accounting systems (e.g., creditor rights, contract enforcement, and accounting standards) explain differences in the level of financial development. Using both traditional cross-section, instrumental variable procedures and recent dynamic panel techniques, we find that the exogenous components of financial intermediary development is positively associated with economic growth. Also, the data show that cross-country differences in legal and accounting systems help account for differences in financial development. Together, these findings suggest that legal and accounting reforms that strengthen creditor rights, contract enforcement, and accounting practices can boost financial development and accelerate economic growth.

In this paper, we characterize, interpret, and test the over-identifying restrictions imposed in affine models of the term-structure. "We begin by showing, using the classification scheme proposed by Dai, Liu, and Singleton [10] for general affine diffusions, that the family of N-factor models can be classified into N + 1 non-nested sub-families of models. For each subfamily, we derive a canonical model with the property that every admissible member of this family is equivalent to or a nested special case of our canonical model. Second, using our classification scheme and canonical models, we show that many of the three-factor models in the literature impose potentially strong over-identifying restrictions, and we completely characterize these restrictions. Finally, we compute simulated-method-of-moments estimates for several members of the sub-family of three-factor models that nest the "benchmark" model of Chen [8], and test the over-identifying restrictions on the joint distribution...

In a financially integrated global market, the conditionally expected return on a portfolio of securities from a particular country is determined by the country's world risk exposure. This paper measures the conditional risk of 17 countries. The reward per unit of risk is the world price of covariance risk. Although the tests provide evidence on the conditional mean variance efficiency of the benchmark portfolio, the results show that countries' risk exposures help explain differences in performance. Evidence is also presented which indicates that these risk exposures change through time and that the world price of covariance risk is not constant.

This paper investigates nonlinear pricing kernels in which the risk factor is endogenously determined and preferences restrict the definition of the pricing kernel. These kernels potentially generate the empirical performance of nonlinear and multifactor models, while maintaining empirical power and avoiding ad hoc specifications of factors or functional form. Our test results indicate that preferencerestricted nonlinear pricing kernels are both admissible for the cross section of returns and are able to significantly improve upon linear single- and multifactor kernels. Further, the nonlinearities in the pricing kernel drive out the importance of the factors in the linear multi-factor model. A PRINCIPAL IMPLICATION OF THE Capital Asset Pricing Model ~CAPM! is that the pricing kernel is linear in a single factor, the portfolio of aggregate wealth. Numerous studies over the past two decades have documented violations of this restriction. 1 In response, researchers have examined the performance of alternative models of asset prices. These models have generally fallen into two classes: ~1! multifactor models such as Ross ’ APT or Merton’s ICAPM, in which factors in addition to the market return determine asset prices; or ~2! nonparametric models, such as Bansal et al. ~1993!, Bansal and Viswanathan ~1993!, and Chapman ~1997!, in which the pricing kernel is not

This paper tests different models of vertical contracting between manufacturers and retailers in the supermarket industry. I estimate demand and use the estimates to compute price-cost margins for retailers and manufacturers under different supply models without observing wholesale prices. I then test which set of margins seems to be compatible with the margins obtained from direct estimates of cost and select the best among the non-nested competing models. The models considered are: (1) a double marginalization pricing model; (2) a vertically integrated model; and (3) a variety of alternative (strategic) supply scenarios, allowing for collusion, non-linear pricing and strategic behavior with respect to private label products. Using data on yogurt sold at several stores in a large urban area of the United States, I find that wholesale prices are close to marginal cost and that retailers have pricing power in the vertical chain. This is consistent with non-linear pricing by the manufacturers or with high bargaining power of the retailers.

In a competitive marketplace, the effectiveness of any element of the marketing mix is determined not only by its absolute value, but also by its relative value with respect to the competition. For example, the effectiveness of a price cut in increasing demand is critically related to competitors ’ reaction to the price change. Managers therefore need to know the nature of competitive interactions among firms. In this paper, we take a theory-driven empirical approach to gain a deeper understanding of the competitive pricing behavior in the U.S. auto market. The ability-motivation paradigm posits that a firm needs both the ability and the motivation to succeed in implementing a strategy (Boulding and Staelin 1995). We use arguments from the game-theoretic literature to understand firm motivation and abilities

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This paper explores the relationship between financial structure – the degree to which a financial system is market- or bank-based – and economic development. Cross-country regressions, industry panel estimations, and firm-level analyses provide remarkably consistent conclusions. Financial structure is not an analytically useful way to distinguish among financial systems. More precisely, countries do not grow faster, financially dependent industries do not expand at higher rates, new firms are not created more easily, firms ’ access to external finance is not easier, and firms do not grow faster in either market- or bank-based financial systems. We find that economies grow faster, industries depending heavily on external finance expand at faster rates, new firms form more easily, firms ’ access to external financing is easier, and firms grow more rapidly in economies with a higher levels of overall financial sector development. Further, we find that countries with legal systems that more effectively protect the rights of outside investors enjoy greater financial development and economic growth. Thus, it is overall financial development and not financial structure per se that is critical for economic progress.

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The term structure is modeled as a function of observable and unobservable (latent) factors. I describe how to estimate the relation between the observed factors and the term structure without specifying or estimating latent-factor dynamics. No-arbitrage requirements are imposed in the estimation procedure. I apply the methodology to the joint dynamics of inflation and the term structure. As other research has noted, both short-term and long-term bond yields adjust gradually to a change in inflation. I find that the dynamics of the price of interest rate risk needed to fit this pattern from 1983 through 2003 are implausible. An alternative interpretation is that investors were systematically surprised by the slow adjustment of short-term yields to inflation.