Trade Transaction Costs Research Articles

Implications of the introduction of the Euro for the Mediterranean countries

AbstractThe Mediterranean peripheral countries cannot afford to be passive viewers of the fundamental changes that are taking place in Europe after the introduction of the Euro. The new developments pose formidable challenges and opportunities. It will be argued that no single group of developing countries will be more affected by these changes than the Mediterranean countries given their geographical proximity to the region and their long historical record of extensive and large economic interactions (trade, finance, and migration). This article examines the implications of the introduction of the single currency in Europe on Mediterranean central bank reserves and foreign external liabilities, trade and capital flow, and exchange rate policies. It is shown that since most Mediterranean trade is with the EU, Mediterranean central banks will be necessitated to hold major portions of their foreign exchange reserves in Euros. Also, a Mediterranean currency peg to the Euro, or to a basket of currencies where the Euro is allocated, will be important in reducing financial and trade transaction costs. It will also be hypothesized that Mediterranean foreign debts will eventually have to be converted to Euros. Finally, parallels between this region and the U.S–Caribbean region will be drawn to reinforce the argument that trade and capital dependence will eventually lead to a pegging of the Mediterranean currencies to the Euro. © 2003 Wiley Periodicals, Inc.

How Well Can Options Complete Markets?

An interesting and important question about options is how much they expand the range of investment opportunities in the market. In the Black-Scholes framework, the market is already “dynamically complete”: options are redundant assets because any option payoff can be replicated by dynamically trading the underlying asset and riskless bonds. But in the real world, options do expand investment opportunities, because the replication strategy entails infinite trading and infinite transaction costs. The next question is whether options can make the market statically complete, in that any possible contingency can be perfectly hedged by a static portfolio of options. Theory shows that this is true, but that it requires an infinite number of options with a continuum of different strikes. In this article, Cassano considers how close one can get to the ideal of static completeness using just a small number of options. Since not all risk can be hedged, how close is “close” depends on the investor’s utility function. But Cassano shows that under standard assumptions with risk aversion in a range that is commonly assumed, it only takes a handful of different options, say four or five, to achieve such near-completeness that it would only be worth a few pennies per hundred dollars of wealth to a typical investor to go the rest of the way to a fully complete market.

Explaining the Discount to NAV in REIT Pricing: Noise or Information?

This paper explores the determinants of both the level of and changes in premiums to NAV in REIT pricing over the 1996-1999 period. The first part of the paper specifies and estimates a model of cross-sectional and time variation in premiums to NAV using a sample of individual REITs. We find that the level of premium to NAV is positively related to REIT size (market capitalization), debt to equity ratio and the level of REIT liquidity as measured by the relative effective spread. Changes in premiums to NAV over time have a strong common element across REITs, which is related to but not entirely explained by a common element in REIT liquidity. The common, sector effect is stronger in the 1998-99 down-market. The second part of the paper aims to determine if the common effect in REIT pricing relative to NAV reflects informed trading or noise. We examine changes in REIT spreads in relation to fluctuations in the average REIT sector premium to NAV and show that the transaction costs of trading in REITs increase when REIT prices are getting closer to NAVs. This holds when controlling for changes in volume and changes in volatility. This result is consistent with a higher proportion of uninformed traders being in the market when REIT prices are diverging from NAV, which in turn is consistent with the noise theory of departures from NAV.

Disintegration of Russian Grain Markets in Transition: Political and Economic Dimensions

Between 1990 and 1996 the share of interregionally traded grain in the total amount of grain domestically available in the Russian Federation was reduced significantly. Much evidence indicates that the decline of the domestic grain trade has mainly been the result of strict control by regional authorities following their own agricultural market policy, of a lack of market institutions, and of uncertain macroeconomic conditions, thus creating a favourable environment only for increasing barter trade. In addition to the weakness of the federal government, which has not been able to enforce the basic rules necessary for the development of a functioning domestic market, the outcome of privatisation of state grain marketing organisations has accelerated the emergence of fragmented Russian grain markets. Regional authorities have managed to gain control over the newly privatised enterprises. This has facilitated the creation of regional monopolies and the isolation of local markets. In addition, increasing transaction costs in interregional trade due to the rise of barter trade have led to a contraction of the trade volume. After the financial crisis of 1998 these disintegrative tendencies have been strengthened further. In this difficult situation only close cooperation between reform-oriented regions can help to create conditions which facilitate the emergence of a domestic grain market in the long run.

The Low Countries' Export Trade in Textiles with the Mediterranean Basin, 1200–1600: A Cost-Benefit Analysis of Comparative Advantages in Overland and Maritime Trade Routes

This paper challenges the conventional wisdom in European economic history that long-distance maritime transport was always more cost-effective than overland trade routes. Thus the majority of historians in the past century have attributed the rapid decline of the medieval Champagne Fairs, governing the textile trades between the Low Countries, northern France, and Italy, to the establishment of an effective and ‘permanent’ direct sea-route between Italy and north-west Europe from the early 14th century (though the first, a Genoese galley, can be dated to 1277). In my paper, I contend that a spreading stain of chronic, continuous warfare throughout western Europe and the Mediterranean basin from the 1290s, leading into the Hundred Years’ War (1336-1453), with a consequent sharp rise in transport and transaction costs in international trade, was instead the major factor in the decline of the Champagne Fairs, in the concomitant decline of the overland continental trade routes associated with them, and with a forced shift to the maritime trading routes between Italy and north-west Europe. During this war-torn, plague-disrupted period of economic contraction, up to the 1450s, the costs of shipping luxury woollens by the maritime route was certainly cheaper than by overland routes; but the relative cost of the maritime route was still higher than the cost of transporting cheap textiles (says) overland in the late 13th century. Indeed, this steep rise in late-medieval transaction costs in international trade had forced the north-western European textile industries to give up the export of the very cheap, light textiles and focus instead on luxury woollens that could better ‘bear the freight’. Subsequently, however, from the 1450s, with the establishment of alternative, more easterly overland routes in areas free from warfare, principally via the Rhine, then with the restoration of relative peace after the end of the Hundred Years’ War, and with the South German silver-copper mining boom, the overland continental trade routes rapidly revived, and with them a series of newer continental-trade based fairs (Antwerp, Frankfurt, Geneva, Lyons). During the later 15th and 16th centuries, these continental trade routes and their associated fair-system were virtually the sole mechanism by which textiles from north-west Europe were exported to Italy and the Mediterranean basin, because, inter alia, the overland distance from the Antwerp Fairs to Venice was only about 20% of the distance by the often hazardous sea routes. The principal textiles involved in this overland, trans-continental trade were : luxury-quality English woollens, medium-quality kerseys, and especially the very cheap, light Flemish says from the revived sayetteries, which had become the principal textile industry of the southern Low Countries. The paper concludes by examining the various factors and forces that led to a fall in transport and transaction costs in the international textile trades, via the overland routes, including river routes, between north-west Europe and the Mediterranean basin from the later 15th to early 17th centuries (i.e. to the eve of the Thirty Years War, which again seriously disrupted the overland, continental routes).

The Multinational Corporation and Social Justice: Experiments in Supranational Governance

The multinational corporation (MNC) is dichotomous in nature. While on the one hand it is a vehicle for private capital accumulation, when socially-embedded it may serve as a means to further social provisioning and social justice. A social economics approach to the MNC is developed to incorporate both private and social transaction costs in international production and trade where the divergence in these costs may require collective action to mitigate the effects of social dislocation. These issues are illustrated by experiments in corporate codes of conduct related to child labor and environmental sustainability. Since corporate codes may be insufficient to socially embed the activities of MNCs, efforts to develop supranational governance mechanisms to better achieve social justice are also considered.

Immigrant Links to the Home Country: Empirical Implications for U.S. Bilateral Trade Flows

Immigrants' ties to their home countries can play a key role in fostering bilateral trade linkages. Immigrant ties include knowledge of home-country markets, language, preferences, and business contacts that have the potential to decrease trading transaction costs. Empirical results for the United States suggest that immigrant links have historically been important in increasing bilateral trade flows with immigrants' home countries. Copyright 1994 by MIT Press.

Transaction Costs of Trade: Some Partial Equilibrium Results

There exist now several quite elegant attempts to integrate transport costs into the standard general equilibrium analysis of trade [2; 3; 4; 6]. But progress on this front does not appear to have been matched by interest in working out the implications of trade-related transaction costs (TTCs) in a partial equilibrium framework; this analysis remains where it was left by Kindleberger [7] and Scammel [9].1 I will try to show that the incorporation of TTCs into a partial equilibrium framework can be accomplished with few complications leading to a more realistic analysis of several trade issues. First, I will analyse the conditions of free-trade equilibrium in the presence of TTCs both when the domestic market is characterized by perfect competition and monopoly. This framework is then applied to several issues including tariffs, tariff-redundancy, export and production subsidies, and cartelization of domestic markets. A final section summarizes the results of the paper.

The Transactions Cost Theory of Insurance: Contracting Impediments and Costs

The Transactions Cost Theory of Insurance: Contracting Impediments and Costs Introduction It is well known that the insurance-as-pooling-of-risks paradigm, valuable as it is, cannot explain all demand for insurance. In the risk-management literature, for instance, it is often argued that large profit-maximizing firms should self-insure minor losses in order to avoid the loading costs of insurance. However, property and liabilities of relatively low value are often insured. Another phenomenon that is difficult to understand as pure risk pooling is the purchase of insurance policies that cover the replacement of buildings when replacement costs exceed expected flows of future returns (Doherty 1985, p. 277). Individuals also tend to over-insure. With loading charges of 20 to 40 percent of premiums, one would expect less insurance and larger deductibles than observed (Friedman, 1974, Pashingian, Schkade, and Menefee 1966, and Stuart 1983). Smith and Warner (1979), Mayers and Smith (1981, 1982, 1987), and Main (1982, 1983) argue that individuals in frictionless capital markets would adjust their portfolios so that there would be no demand for a resource-consuming insurance industry. They also argue that with well-functioning capital markets, insurers would have no obvious comparative advantage over banks or corporate firms in diversifying risks. Following Modigliani and Miller (1958), Mayers and Smith (1987) argue that, if corporate insurance purchases affect the value of the firm, they must do so via taxes, contracting costs or the impact of financial policy on the firm's investment decision. Mayers and Smith (1987) conclude that the corporate insurance purchases are motivated by: low-cost claims administration services provided by insurers, assistance by insurers in assessing the value of safety and maintenance projects, improvements in the incentives to undertake investments in safety and maintenance projects resulting from insurance, increased efficiency in the allocation of risk-bearing among the corporations' claimholders brought about by insurance, and a reduction in the firm's expected tax liability. This article is based on these seminal contributions to a new theory of insurance. If focuses on the contracting costs problem, which appears to be fundamental to an understanding of insurance. It is argued that insurance may be purchased by all agents (including widely held firms and risk neutral individuals) because of the impossibility of complete contingent claim contracts. The theory is outlined first, several examples are discussed, then conclusions are drawn. Insurance and the Costs of Contingent-Claim Contracting The general proposition here is that the insurance industry supplies services that reduce transaction costs in trade. Traders faced with the problems of contracting realize that a complete contingent claim contract that regulates all possible outcomes is infeasible because of the costs of identifying all events, negotiating, pricing, documenting that contracted liabilities have occurred, and enforcing the contract. The presence of these costs means that contingent-claims contracts are subject to a credibility problem: the parties cannot take for granted that the obligations of the contract will be fulfilled. Contingencies that are too costly to regulate contractually may be insured. When the risk is insured, it is sold (at a negative price) to a third party, the insurer. (1) To illustrate, assume that a manufacturer and a shipper enter into a contract for the transport of the manufacturer's machinery. Their contract specifies the price and date of delivery as well as some other basis details. However, the contract does not cover contingencies such as fire, storm, and explosion risks because they have too little knowledge of the risks to be able to price liability and precautions and because the liable party may not be financially able to fulfill the agreement if a serious accident occurs. …