Italian Treasury Research Articles

The Valuation of Puttable Bonds: An Application of the Cox, Ingersoll and Ross Model to Italian Treasury Option Certificates

The Italian Treasury's puttable bonds (Certificati del Tesoro con opzione di rimborso anticipato - CTOs) are the first example in Italy of retractable/extendible bonds, which have been used on the Canadian market for some time and recently been adopted on the Euromarket. In this paper the single-factor version of the Cox, Ingersoll and Ross model is used to determine the equilibrium value of CTOs at issue. The simulation of the effects of changes in their features provides useful information on the optimal design of CTOs.

The Term Structure of Interest Rates: A Test of the Cox, Ingersoll and Ross Model on Italian Treasury Bonds

This paper tests the Cox, Ingersoll and Ross model using the prices of Italian Treasury bonds in the secondary market. The model is estimated daily for the period 30 December 1983 to 13 March 1989. The resulting term structures of interest rates are compared with those obtained using interpolation techniques (the cubic splines method). The daily estimation of the yield curves also makes it possible to analyze the changes in Treasury bond prices, determine the turning points and obtain useful indications regarding the efficiency of the secondary market and the consistency between the primary and the secondary markets.

Managing a public sector project: the case of the Italian Treasury Ministry

Project management strategy in the public sector has attracted the interest of many scholars since the late 1980s, following the growing pressure on governments to abandon bureaucratic organisations in favour of leaner structures. Though Italy is considered a late developer in this movement, its scope, speed and consistency of reforms is considered remarkable [OECD, (2001), Reviews of Regulatory Reform in Italy]. Within this context many projects have been undertaken trying to implement the ideas of New Public Management (NPM) [Public Administration (1991) 69:3; Accounting, Organizations and Society (1995) 20:93]. This paper reports on a reengineering project carried out at the Italian Ministry of Treasury which tested a methodology drawn from the literature of process engineering. Multiple dimensions and actions proved to be crucial in managing the project: the paper discusses them and their relative importance over the life of the reengineering project.

Price Manipulation in Parallel Markets with Different Transparency

We study how dealers behave when there exist parallel markets for the same asset that are characterized by very different degrees of transparency. We show that the optimal trading strategy, depending on the features of the less transparent market and on the informational uncertainty in the more transparent one, may involve price manipulation. Specifically, informed dealers may refrain from trading in the more transparent market in order to exploit their informational advantage in the less transparent one, or they may use the more transparent market in order to manipulate prices. We show that both strategies (hiding and price manipulation) increase market depth in the more transparent market. We test the empirical implications of our model on the Italian Treasury bond market. We estimate dealers's strategies on both the primary and the secondary markets. We find that informed dealers place sell orders with other dealers at the time they have higher informational advantage and, at the same time, aggressively place bids in the primary market. This strategy generates losses in the more transparent market (secondary market) for the period during which the less transparent market (primary market) is open and then produces gains once the possibility of affecting the primary market is over. We find that, consistent with our model, market depth in the more transparent market increases as a result of these trading strategies. This supports the findings of Bloomfield and O'Hara (1999 and 2000) and shows how the existence of a less transparent market, far from reducing the liquidity of the more transparent market, may actually increase it.

Asymmetric Information and Trading Strategies: Testing Behavior on the Primary and Secondary T-Bond Markets around Auction Days

We study how dealers behave when there exist parallel markets for the same asset that are characterized by very different degrees of transparency. We show that the optimal trading strategy, depending on the features of the less transparent market, may involve price manipulation. Informed dealers may refrain from trading in the more transparent market in order to exploit their informational advantage in the less transparent one, or they may use the more transparent market in order to manipulate prices. We prove that both strategies (hiding and price manipulation) increase market depth in the more transparent market. We empirically test these conclusions on the Italian Treasury bond market. We estimate dealers strategies jointly on both the primary and the secondary markets. We show that informed dealers place sell orders with other dealers at the time they have higher informational advantage. At the same time they aggressively place bids in the primary market and buy back when the primary market closes. This strategy generates losses in the more transparent market (secondary market) for the period when the less transparent market (primary market) is open and then produces gains once the possibility of affecting the primary market is over. We show that market depth in the more transparent market increases as a results of these strategies.

Folk Music on Records: The Alan Lomax Collection. Italian Treasury: Italian Sampler; The Trallaleri of Genoa; Calabria

Folk Music on Records: The Alan Lomax Collection. Italian Treasury: Italian Sampler; The Trallaleri of Genoa; Calabria

The Quality of the Italian Treasury Bond Market, Asymmetric Information and Transaction Costs

This paper analyzes the microstructure of the Italian secondary bond market and of the effects of the 1994 reform and of the introduction of anonymity in 1997. Based on a microstructure model of price formation, we evaluate the relevance of asymmetric information and other microstructure effects, by estimating the VAR representation of the model. We find that market quality improves over time, which we interpret as resul ting from the 1994 reform. This is captured both by decreased first order return autocorrelation and by improvement of our market quality indicators. The introduction of anonymity substantially reduces order fragmentation by investors trying to avoid free-riding by less sophisticated traders. No signifi cant evidence of asymmetric information is found.

Periodic Information Asymmetry and Intraday Market Behaviour: An Empirical Analysis

The model of Foster-Viswanathan (1990, FV) predicts that information heterogeneity among market participants generates patterns in volume, trading costs and volatility. In the Italian Treasury bond market, periodic information asymmetry is related to the arrival of block orders from international investors, which cluster soon after the opening of the market and, respectively, of the US market. Our evidence is that volume is lower and trading costs are higher after the two openings, consistent with FV. We find only weak evidence that volatility behaves as implied by the model. JEL Classification: D82; G14

The exchange rate crisis of September 1992 and the pricing of Italian financial futures

The futures contracts on long term bonds issued by the Italian Treasury and the futures contracts on Eurolira deposits traded in the LIFFE have reacted in a specular way to the exchange rate crisis of September 1992. The pricing of the Italian Government Bonds (BTP) futures becomes more volatile and seems to be affected by a time-varying risk premium. The pricing of Eurolira futures becomes more efficient after the crisis and its volatility declines. These results indicate that the credibility crisis of the Italian Government bonds does not spill over to the off-shore Eurolira assets. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:827–849, 1998

The exchange rate crisis of September 1992 and the pricing of Italian financial futures

The futures contracts on long term bonds issued by the Italian Treasury and the futures contracts on Eurolira deposits traded in the LIFFE have reacted in a specular way to the exchange rate crisis of September 1992. The pricing of the Italian Government Bonds (BTP) futures becomes more volatile and seems to be affected by a time-varying risk premium. The pricing of Eurolira futures becomes more efficient after the crisis and its volatility declines. These results indicate that the credibility crisis of the Italian Government bonds does not spill over to the off-shore Eurolira assets. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:827–849, 1998

Information transmission and causality in the Italian Treasury bond market

We examine causality and efficiency in the Italian T-bond market, where cash trades take place on the domestic Mercato Telematico dei Titoli di Stato, while futures trading is based on the London International Financial Futures Exchange. We find evidence that causality in prices runs in both directions, and that the cash lead is almost comparable in size and extension to the futures lead. We then try to assess whether the cash market is weak-form efficient with respect to LIFFE prices. Using a simple trading rule with a variety of time and price filters, we conclude that the observed lead cannot be exploited to make a profit after transaction costs.

Bidder Profitability Under Uniform Price Auctions and Systematic Reopenings

This paper analyzes the uniform price auctions for Italian Treasury securities in 1995-1996 and examines the revenue-efficiency of the auction mechanism, employing an extremely detailed dataset which includes all transactions made by the 41 primary dealers on the screen-based secondary market with their identity. The main findings are that initial auction discounts are negligible and not statistically different from zero. The feature of systematic reopening of a security significantly reduces the variance of price bids between the first and the following auctions, due to the information aggregation function of secondary market trading. Using various trading strategies, market-average price discounts in the reopenings are not statistically different from zero. Price discounts are affected inversely by auction participation, bidders’ competition and information dispersion. Finally, no individual primary dealer is able to capture a positive and significant price discount. From a policy viewpoint our evidence shows that, following the market reform of 1994 and the increase in competition caused by the entry of new international dealers, the uniform price auction mechanism together with systematic reopening has become an efficient selling technique for the Italian Treasury.

Information Transmission and Causality in the Italian Treasury Bond Market

I examine causality and efficiency in the Italian Treasury bond market, where cash trades take place on the domestic Mercato dei Titoli di Stato, while futures trading is based on the London International Financial Futures Exchange. I find evidence that causality in prices runs in both directions, and that the cash lead is almost comparable in size and extension to the futures lead. I then try to assess whether the cash market is weak-form efficient with respect to LIFFE prices. Using a simple trading rule with a variety of time and price filters, I conclude that the observed lead cannot be exploited to make a profit after accounting for transaction costs.

Estimating the Cox, ingersoll and Ross model of the term structure: a multivariate approach

In this paper we suggest a new methodology to estimate the Cox, Ingersoll and Ross model of the term structure. The approach is based on a multivariate non-linear least squares procedure, which allows us to simultaneously take into account the cross-sectional relations which exist among bond prices at each instant of time and the dynamics of each bond price over time. The methodology involves the use of a fairly simple econometric specification and is developed to deal with both the case of independently and identically distributed error terms and the case of autocorrelated error terms. We estimate and test the model using nominal prices of Italian Treasury bonds.

Preliminary evidence on a new market: The futures on the Italian treasury bonds

Preliminary evidence on a new market: The futures on the Italian treasury bonds

Italian Treasury Credit Certificates (CCTs): theory, practice and quirks

CCTs (Italian Treasury credit certificates) were first introduced in 1977 in order to meet the need for more effective management of the public debt. The CCT was accepted in the market as a `centaur': a short-term security in its yield and risk features, but with a long maturity. However, in terms of techniques of financial analysis and portfolio management, the methodological approach to CCTs appears to be generally confused. JEL: G20

Italian Treasury Bills: Optimal Diversification of Auction Bids

The paper describes a method for selecting prices and quantities at auctions of government securities, with special reference to Italian Treasury bill auctions. As suggested by portfolio selection theory, there are three logically distinct steps: in the first, the joint distribution of stop-out and average auction prices are estimated; in the second, the efficient frontier of price/quantity combinations is obtained; and in the third, the combination of bids that maximizes the individual utility function is chosen. The paper concentrates on the first two steps and, in particular, on the estimation of the inputs needed to identify efficient corner portfolios using the critical-line algorithm proposed by Markowitz. To this end, the predictability of the supply of Italian Treasury bills and of the relationship between the primary and secondary markets for Treasury bills have been assessed. In addition, the information content of yields and implied volatilities in the secondary market for Italian Treasury bonds has been tested. Finally, the diversification procedure has been simulated and an example is given in the Appendix.

State, Market and Social Regulation: New Perspectives on Italy, by Peter Lange and Mario Regini

List of Contributors Preface Introduction: interests and institutions - forms of social regulation and public policy-making Peter Lange and Marino Regini Part I. Models of Regulations: 1. Unregulated regulators: parties and party government Gianfranco Pasquino 2. Politics and policies in Italy Bruno Dente and Gloria Regonini 3. Protest and regulation: the interaction of state and society in the cycle of 1965-74 Sonia Stefanizzi and Sidney Tarrow Part II. Regulation of the Economy: 4. Politics, institutional features, and the government of industry Maurizio Ferrera 5. The Italian labor market: between state control and social regulation Emilio Reyneri 6. The divorce of the Banca d'Italia and the Italian treasury: a case study of central bank independence Gerald A. Epstein and Juliet B. Schor Part III. Industrial Relations and its Actors: 7. Criteria of regulation in Italian industrial relations: a case of weak institutions Gianprimo Cella 8. The representation of business interests as a mechanism of social regulation Antonio Chiesi and Alberto Martinelli Part IV. The Welfare State: 9. Public and private in the Italian welfare system Massimo Paci 10. Public intervention and health policy: an analysis of tendencies in progress Elena Granaglia Conclusion: the Italian case between continuity and change Peter Lange and Marino Regini Bibliography Index.

Il Mezzogiorno italiano: forze di mercato o politiche economiche?

Two authoritative institutions, the Italian Treasury and the OECD, have recently joined the debate on how best to promote the development of Southern Italy. While the former argued for a multi-faceted strategy emphasising the importance of increasing capital, the latter maintained that governments should refrain from policy activism and instead limit public intervention to infrastructure and public goods. The issue at stake, however, is not the crude one of whether development is best promoted by laissez faire or by intervention, but the much subtler one of the right proportions in which policies and market forces should be combined. The purpose of this brief note is to look at which of the two approaches is, in the light of past evidence, the one most likely to further Southern development. JEL Codes: O20, O52 Keywords: Southern Italy, Development, Capital, Infrastructure, Public goods

Towards a public debt policy in Italy

This paper represents the full report of a committee chaired by Luigi Spaventa, prepared for and presented to the Italian Treasury ministry in July 1989. The report falls into five chapters: the reasons for a public debt management policy in Italy; debt management policy and monetary policy - some institutional changes; types of securities; the working of the markets; institutional and organisational aspects of debt management.