Abstract: A definition of contagion between financial markets based on local correlation was introduced in Bradley and Taqqu (2004) and a test for contagion was proposed. For the test to be implemented, local correlation must be estimated. This paper describes an estimation procedure based on nonparametric local polynomial regression. The procedure is illustrated on the US and French equity market data.

Abstract: New regulations are imbedding operational risk concepts and the provisioning of operational risk capital in the risk management considerations of globally active financial enterprises. Inherent in new capital calculations is the effect of losses due to faulty reference data, data which is costly to acquire and maintain, duplicative across the industry and of no strategic value, and which comprises 70% of the data content of financial transactions. Faulty reference data has been a persistent impediment to systemic risk mitigation across the global capital and investment markets. Reference data electronically represents financial products and their changing specifications, counterparties, financial intermediaries, corporations, issuers, financial markets, currencies, valuation and market prices, and associated referential information such as credit ratings and fundamental data. This paper attempts to illuminate the effect of faulty data on operating costs, operational risk and economic capital. It also points toward applying solutions that have proven to reduce costs and risk in other industries and in other segments of the financial industry. Standards for product and supply chain participants, long a staple in the retail industry, are long overdue in the financial services industry. Financial industry-wide cost sharing and risk mitigating approaches have long been organized around shared infrastructure entities but, to date, have only been applied to the value portion of transactions (principally quantities, transaction prices and amounts). This paper argues for these same techniques to be applied to the matching and "clearing" of the reference data components of these transactions. The authors conclude that data and its management is costly, averaging $740 million each for the largest financial enterprises, and that faulty data is at the core of significant components of operational losses. Finally, the authors believe that industry-wide collaborative initiatives can reduce data costs significantly, lower capital requirements and mitigate risk.

Abstract: A computer simulation study is conducted to explore the interaction of alternative segmentation strategies and the competitiveness of the market environment, a goal that can neither be tackled by purely analytic approaches as there is neither sufficient and undistorted real market data available to deduct findings in an empirical manner. The fundamental idea of the simulation is to increase competition in the artificial marketplace and to study the influence of segmentation strategy and varying market conditions on organisational success. Success/failure is measured using two performance criteria: number of units sold and survival of organisations over 36 periods of time. Three central findings emerge: (1) the more competitive a market environment, the more successful the concentrated market segmentation strategy; (2) increased levels of marketing budgets do not favour organisations following a concentrated segmentation strategy; and (3) frequent rethinking and strategy modification impairs organisations that concentrate on target segments.

Abstract: This paper discusses the principal reasons for, and prospective opportunities of, simulating financial markets using an architecture based on artificial agents. The paper then discusses in detail the design and architecture of a simulator for financial markets. The Gaia methodology was employed in the development of MAFiMSi (Multi-Agent Finanacial Market Simulator), a general-purpose finacial market simulator of a dealer-type market. MAFiMSi is implemented as a library of C++ classes that currently support a stand-alone market simulation.

Abstract: The United States needs to consolidate the over 115 existing state and federal agencies that regulate banking, securities and insurance firms and their products and services into a single financial services regulator, a U.S. Financial Services Agency (US FSA). The US FSA would be able to regulate more effectively the U.S. financial services industry than the existing regulatory regime. The current U.S. financial regulatory regime suffers from a range of problems, including an inability to anticipate and plan for future financial crises, an inability by regulators to quickly adapt to market innovations and developments, inconsistent regulations for financial products and firms that are competitors in the market, and the capture of agencies focused on a single sector of the financial services industry by the firms that they regulate. In addition, the U.S. financial regulatory regime is one of the most expensive in the world, costing 12 times more than the United Kingdom's regime and 86 times more than Germany's regime. The US FSA would eliminate or significantly reduce these problems as well as provide more cost effective and transparent regulation of the financial services industry than is available under the current system.

Abstract: Real time or near real time assessment of the quality of securities transactions is accomplished by intercepting order and execution communications between trader and broker, comparing the execution data with contemporaneous market data relative to the transaction or transactions involved, and informing the trader of that comparison. This is accomplished without interrupting or impeding the trader-broker communications, except that a broker-trader communication may, if desired, be interrupted and relevant data aggregated until the aggregate reaches a desired value. It is preferred that the comparison be between the volume-weighted average price of the securities transaction and the volume-weighted average price of the market data for that security, over the life of the order. A particular effective way to communicate the quality evaluation to the trader is disclosed.

Abstract: In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Abstract: In the aftermath of the California energy crisis, there has been a shift in the focus of electricity regulators away from the fostering of a competitive market structure and towards the application of regulations to specific market outcomes. Such a focus stands in marked contrast to the general principles governing competition policies in other industries. This shift is in part influenced by the clear failure of earlier attempts to establish a competitive market structure in California. But was this a failure of the policy, or of the tools that were used to implement it? In this chapter, I describe the tests historically used by regulators as screens for the potential abuse of market power by suppliers. More advanced methods, such as models of oligopoly competition, can potentially provide a much better understanding of the competitive outlook for a market. However, much uncertainty surrounds the development and application of such models. I apply an oligopoly model of the California market to actual market data to test the ability of such models to recreate true market outcomes. I also explore the potential impact of an alternative plan for the divestiture of California's thermal generation units. The results indicate that a more substantial, but still plausible, reduction in supplier concentration would have saved consumers nearly $2 billion during the summer of 2000.

Abstract: In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Abstract: A process, system and financial engine which determine portfolio’s sensitivity to market risk based on market conditions are described. In particular, with these process, system and financial engine, first data representative of time horizon information and second data representative of risk tolerance information are first received, and guidelines data based on the first and second data are established. Economic and market data underlying the quantitative indicators and factors determining the qualitative indicators are received. Market risk signals based on the indicator(s) is then established. The portfolio’s sensitivity is determined based on the established guidelines data and the market risk signal. Using these process, system and financial engine, it is possible to determine the current market risk level, and then recommend changes to (or adjust) the user’s portfolio market risk sensitivities based on the user’s time horizon (i.e., need to access their assets within a particular time) and the determined market risk level.

Abstract: This past spring, the Securities and Exchange Commission (“SEC”) adopted a comprehensive set of reforms, collectively referred to as “Regulation NMS,” that will, among other things, change how trading occurs in our national market system. The four major areas addressed in Regulation NMS are 1) trade-through protection, 2) intermarket access, 3) sub-penny pricing, and 4) market data. In this article, we have summarized the new rules relating to each of these areas and point out some of the compliance challenges facing market participants as they get ready to implement the new rules.

Abstract: The main goal of the article is to reveal the content of the so-called “double trump” decision management model in the global currency market and to present possibilities and results of its practical application. This model is developed on the basis of the author’s earlier proposed model of adequate investment decision evaluation portfolio, and it was experimentally implemented with the aid of a special currency rate change forecasting system using the FOREX global currency rate market data. The investigation was carried out using real FOREX data for the period from 11 December 2004 to 10 October 2005.The conceptual aim of the article is to broaden the discussion about financial market efficiency by testing market efficiency theory not through an attempt to defeat the market. but through proving market homogeneity, i.e. proving that there are always non-efficiency shoals in the market. when it is possible to elaborate a decision strategy allowing an advantage over the real market decisions over a rather long period of time.The pragmatic aim of the research is to find the possibilities and means of decision management in the currency market strategies advantageous over particular market decisions in general. Continuous development and practical use of such strategies should help in forming market intelligence.

Abstract: Financial market imperfections and corporate decisions: theory and evidence.- The transformation of the Hungarian financial system.- Patterns of corporate financial positions.- The determinants of corporate capital structure.- Financial constraints and investment decisions.- Conclusions.

Abstract: A method and system for facilitating trading of equity and index options is provided. The system incentivizes market makers to voluntarily agree to restrict the bid/offer spread on price quotes for options by enabling the market makers to submit batches of bids and offers simultaneously. The system also provides protection to the market makers by enabling withdrawal of certain bids and offers if a cumulative delta on traded options has been exceeded. The system also provides limits on the rates at which individual traders and the overall market submit bids and offers. The system provides summarization of market data to enable market makers to have relevant and timely data at all stages. In this manner, the system achieves increased liquidity of the equity and index options markets.

Abstract: We discuss the theoretical machinery involved in predicting financial market movements using an artificial market model which has been trained on real financial data. This approach to market prediction - in particular, forecasting financial time-series by training a third-party or 'black box' game on the financial data itself -- was discussed by Johnson et al. in cond-mat/0105303 and cond-mat/0105258 and was based on some encouraging preliminary investigations of the dollar-yen exchange rate, various individual stocks, and stock market indices. However, the initial attempts lacked a clear formal methodology. Here we present a detailed methodology, using optimization techniques to build an estimate of the strategy distribution across the multi-trader population. In contrast to earlier attempts, we are able to present a systematic method for identifying 'pockets of predictability' in real-world markets. We find that as each pocket closes up, the black-box system needs to be 'reset' - which is equivalent to saying that the current probability estimates of the strategy allocation across the multi-trader population are no longer accurate. Instead, new probability estimates need to be obtained by iterative updating, until a new 'pocket of predictability' emerges and reliable prediction can resume.

Abstract: The massive use of derivatives and securitisation by sovereign States for public debt and deficit management is a growing phenomenon in financial markets. Financial innovation can modify risks effectively run and alter the stability of the public sector finance. The experience of some developed and developing countries is surveyed to look at main instruments used and aims of public finance. Financial stability of the public sector is analysed considering financial innovation use. The case of Italy and its scarce disclosure of information are presented. An IS-LM model is used to capture the effect of financial innovation on fiscal policy for high indebted (European) industrialised countries, with deficit constraints, starting from Blanchard (1981). The use of financial innovation can have various effects over debt and deficit management, given binding external burden (like the European criteria) as far as risks are properly considered, expectations of fiscal policy are coherent with that of markets, and no exogenous shock occurs.

Abstract: An important issue in UK pension accounting is whether employer sponsored pension schemes are to be effectively treated as financial subsidiaries of the sponsoring firm or as distinct separate entities. This paper tests alternative integration and separation explanations of the impact of switching towards market-based actuarial assumptions on the propensity to terminate under-funded defined benefit pension plans. Evidence is based on accounting, actuarial and share market data for an industry-matched pair sample of 90 UK firms during a period of regulatory uncertainty over the development of pension accounting and funding rules. Consistent with the integration hypothesis, financial characteristics of both the corporate sponsor and the prior switching decision appear to explain the termination decision, even after controlling for other factors posited by alternative explanations for the termination of pension plans.

Abstract: This paper aims to determine whether an adaptive agent population performs better than a static population. A static population is evolved on historical equity market data from the DAX-30, split into training and testing segments. An adaptive population is retrained continuously over the most recent available data that becomes available with each passing day. For comparison their performance over the out-of-sample test data is measured. Results obtained indicate a clear superiority of the adaptive over the static approach.

Abstract: In that process, the volume of transportation activity increased very substantially. Over time, people became almost entirely complacent about the safety of the transportation arrangements on which they relied. Large sectors of the economy came to be organized in reliance on the capacity of planes to fly and trains to move. The degree of dependence on individual hubs—like O’Hare Airport—increased substantially. The worst accidents came to be substantially greater conflagrations than they had ever been in an earlier era. Chair: Malcolm D. Knight General Discussion: Has Financial Development Made the World Riskier?

Abstract: A liquidity analysis system and method are disclosed for monitoring, analyzing and reporting on liquidity generated in a market or in a market center. The reports generated by the liquidity engine may be used for many differing purposes, including analyzing the effectiveness of market makers, the proportionate re-distribution of market data fees or as the basis for a liquidity generation financial incentive program.

Abstract: In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.

Abstract: According to experience gained by valuers operating in mature markets uncertainty is the immanent feature of valuation. Its source should be sought in the unreliability of the input data used to value a single property, which makes the resulting value ambiguous. Another type of uncertainty is represented by the variability of valuation that is differences between valuations of the same property appraised at the same time and for the same purpose. The uncertainty of valuation (arising from uncertain data and variations in the appraised values) is definitely larger in the emerging markets in transition from a central command economy toward a market economy, whose economic structures, as well as political, legal and institutional environment is being profoundly modified. In those markets, it is much more difficult to find the market value. One reason for this is low activity in many property segments and geographical markets, their changeability and low reliability of the market data, which factors seriously impede market objectivization in the process of valuation. The diversity of understanding of the general valuation rules can play an important part as well. The paper discusses the uncertainty of valuation in Poland. It purposes to indicate the range of variations in the valuation results and their causes.

Abstract: In recent years, several European Union member states have modified the institutional design of financial supervision. These reforms pose the question which considerations have led to the different models chosen in these countries. We analyse the considerations in the Netherlands leading to the choice in 2002 of the twin -peaks model of financial supervision. The new model is based on the objectives of supervision. Thus, a separate authority is responsible for conduct-ofbusiness supervision, whereas a merged central bank and pensions and insurance board take care of prudential supervision. The authorities share responsibility for financial integrity issues. The main conclusion of this paper is that the size, composition and structure of the financial sector in the Netherlands constitute the main rationale behind the choice for a twin-peaks model of financial supervision.

Abstract: More and more data, greatly increased computing power, a rising number of research enthusiasts, an increased number of finance journals, and sophisticated techniques have been the characteristics of empirical finance in the past 30 years. Topics of current interest relate to conditional means, conditional variances, and conditional distributions. These topics will remain in the forefront for years to come and perhaps be joined by questions that will shake the foundations of finance theory. For example, will we find that market data are characterized by jump diffusions—that is, diffusions with breaks—rather than standard diffusions?

Abstract: Of particular concern to monetary policy-makers is the considerable unreliability of financial variables for predicting GDP growth and inflation.

Abstract: The focus of this paper is on the bankruptcy prediction of small firms. Specifically, two successful bankruptcy prediction models, Ohlson's model (1980) and Shumway's model (2001), are re-estimated with the data of a sample of firms traded on the over-the-counter (OTC) market in a recent period in the 1990s. While Ohlson's model relies strictly on accounting ratios, Shumway's model combines market measures with the accounting ratios. Both models are then validated by a classification test and a more rigorous prediction test to predict the bankruptcy probability of the holdout samples. The results indicate that both the classification accuracy and the prediction accuracy are impressive with these two models for predicting bankruptcy up to three years before their actual demise, while Shumway's model performs marginally better than Ohlson's model. INTRODUCTION Business failures are considered both unfortunate and costly at least by the owners, creditors, employees, suppliers and customers of the failed firms. Even the ardent admirers of the market mechanisms' ability to increase efficiency through its "survival of the fittest" principle find the social and economic consequences of business failures rather unpleasant in the short run. Accordingly, for over thirty years, academic researchers and practitioners in the fields of accounting, economics and finance have shown a strong and determined interest in developing and testing business failure prediction models. The literature on bankruptcy prediction models is rich and it demonstrates numerous strides made over the years since the pioneering research by Beaver (1966) and Altman (1968). For the most part however, prior research has concentrated on firm samples made up of the largest of the corporations traded on the New York Stock Exchange (NYSE) and/or the American Stock Exchange (AMSE). (1) Yet in reality, the small firms are more vulnerable to business failure than their larger counterparts. (2) According to the Small Business Administration (SBA, 1999), over 99 percent of business closures are small firms. Moreover, small businesses are the backbone of the U.S. economy. They produce 39 percent of the GNP and make 47 percent of all sales within the U.S. (SBA, 1999). Small firms also account for about half of the private sector employment and create two of every three new jobs. The crucial importance of small firms in the American business frontier provides partial impetus for this study. The relative paucity of studies focusing on small business failure provides additional motivation for the present study. The objective of the empirical investigation in this study is to examine the effectiveness of two highly successful bankruptcy prediction models, namely, Ohlson's model (1980) and Shumway's model (2001) in predicting bankruptcy of small firms. Specifically, this study applies the two models for predicting bankruptcy of a sample of over-the-counter (OTC) traded firms during a period of the 1990s. While Ohlson's model relies strictly on accounting data, Shumway's model combines market information with the accounting data. The distinguishing features of this study, which are summarized next, make strong attempts to overcome some of the glaring voids in the literature. First, this study addresses the issue of business failures specifically to the OTC traded small firms. Only firms with assets less than $130 million are considered in this investigation. About 75 percent of the sample firms had assets of less than $50 million one year prior to bankruptcy. Second, this paper analyzes the data from a large sample of 316 OTC firms, consisting of 158 bankrupt firms during the 1990s and 158 matched nonbankrupt firms by size, industry and the timing of the financial reports during the same period. Third, by using all the data, the financial as well as the market data, from the most recent decade, the problem of pooling the data from 2 or 3 decades in the previous studies is mitigated. …