G18 - General Financial Markets: Government Policy and RegulationReturn

This study investigates whether the response of stock returns to economic policy uncertainty de- pends on the level of government size in the economy. Although there is a consensus in the liter- ature that stock markets react negatively to policy-related uncertainties, the factors that determine the magnitude of this effect have been ignored. This study is the first to demonstrate that the magnitude of this effect depends on the size of the government in the economy. In the study, data for the period 1997Q1-2021Q4 pertaining to 18 countries are used. According to results of fixed-effects estimations with Driscoll-Kraay robust standard errors, economic policy uncer- tainty affects stock returns negatively. In addition, the coefficient of interaction term formed by the variables of policy uncertainty and government size is also negative and significant. These results indicate that the negative response of stock returns to policy uncertainty grows as gov- ernment size increases. The sensitivity analysis results show that the findings are not sensitive to the estimations made by alternative approaches and are therefore robust. The findings of the study contain important implications for policymakers. Investors can also benefit from the results at the point of international asset allocation against future policy-related uncertainties.

The aim of the presented research is to quantify the costs of unemployment in the Czech Republic in the years before start of the 2020 exogenous crisis. The costs of unemployment are quantified as direct costs and induced costs. The research method is based on the con- struction of the average unemployed. I identify his/her average income level, length of unemployment and age, as well as level of education. The analysis also quantifies the economic effectiveness of hypothetical economic policy measures in maintaining employment.

The paper deals with the agent-principal problem (adverse selection) in the distribution of investment products. Utilising data from the Czech financial market, a linear model with mixed effects was constructed, evaluating the relationship between remuneration of individual agents and quality-costs of the products they recommend. The results were structured for different organisational setups. We have found that in some less important environments from the market perspective (small and medium multi-level marketing networks, small and big pools, medium and big flat firms), there is a negative association between quality-cost of the contracted product and the amount of commission paid out to the agent. This indicates potential consumer detriment. In the majority of organisations dominating the industry, however, the direction of this relationship is positive in nature or statistically insignificant. Hence, the systemic potential for instigating the adverse selection was not detected in a major part of the market, bringing up regulatory implications in the conflict of interest and inducements area.

Basel III responded to the financial crisis among other by redefining and expanding the capital requirements and by introduction of the liquidity requirements in the banking sector. Since banks' liquidity and capital positions influence each other through assets structure channel, asset quality channel and profitability channel, there exists a significant relationship among capital and liquidity regulatory tools. A bank can improve its capital and liquidity ratios by lowering risk-weighted assets (assets structure channel), but with the negative impact on the interest profit (profitability channel). We therefore aim to test the functionality of these two channels in relation to capital and liquidity positions in the Czech banking sector. We document the effect of the assets structure channel in case of liquidity and capital positions and effect of the profitability channel for the large banks. However, low profitability and introduction of a leverage ratio can limit the effect of assets structure channel on banks´ capital positions.

This article proposes an approach to an interest rate analysis for purposes of risk management.of fi nancial portfolio consisting of assets or liabilities linked to interest rates and held to maturity in the Czech environment. Czech fi nancial market is characterized by relative underdevelopment and relatively low liquidity, and in an environment of high uncertainty due to interventions and regulations of central banks and other authorities. This article fi rst describes the volatility of the Czech koruna and euro interest rates using the GARCH model. Based on this description, relationships between levels of koruna and euro swaptions volatilities are determined. After obtaining estimates of koruna swaptions implied volatilities, the BGM interest rate model is applied to Czech koruna and euro interest rate simulations. They are then compared with the real development of given interest rates. It turns out that although the BGM model was developed for the purpose fi nancial derivatives valuation in the environment of developed and liquid fi nancial markets without signifi - cant distortions, resulting simulations are relatively good, and their use can improve interest rate risk management even in the Czech environment.

In this paper, we employ the high-frequency data from Prague Stock Exchange (PSE) and New York Stock Exchange (NYSE) to analyse the variation in extreme price movements and market volatility around the period of fall of Lehman Brothers. The sample ranges from January 2008 to July 2009. We employ the price jump indicators optimal with respect to Type-I and Type-II errors. The former one shows an increase in market volatility and extreme price movements during financial distress, while the later one distinguishes extreme price movements and shows that they do not react in the long-run to fi nancial distress at PSE, while for the matured US market suggests a company/sector-specific reaction. We analyse behaviour of extreme price movements with respect to CDS. Our results suggest that both markets are different - extreme price movements at PSE are independent of CDS movements, while those at NYSE show a sector/company specific reactions to CDS.

There are currently held tough discussions among economists and policy makers on the most appropriate form of taxation that would be fair, simple, enough incentive to wage work and entrepreneurship and withal also providing sufficient revenue for the state to fund the services provided to citizens. In this debate two opposing views on the basic form of this system stand against each other, namely, whether it should tax the income in a progressive manner, as is the case with tax systems applied today in most countries, or in a proportional manner, which has been introduced in a limited extent in several countries, especially in Central and Eastern Europe. This article provides a brief description of the basic characteristics of both these approaches and summarizes the main arguments presented by their proponents and opponents. The next section describes the different variants of a proportional system, also known as a flat tax system, some of which currently exist only in the yet unrealized proposals, and in the end, then compare their pros and cons.

The paper deals with a wide-spread myth that a switch from a PAYG to a funded pension system might solve adverse consequences of the population aging. It is shown, that under additional assumptions the pension debt (which is created during the process of the switch) is exactly equal to the value of assets that the pension funds accumulate. These additional assumptions are following: government imposes additional taxes, which are equal to the difference between the contributions to the former PAYG system and the contributions to the pension funds. Therefore workers contribute less to the pension funds but if the additional taxes are taken into account, they continue paying the same amount. It is shown, that if the additional taxes were permanently lower than what is supposed, the pension debt would grow beyond any limits. The other additional assumption made is that the interest rate paid by government from its pension debt is the same as the interest rate reached by the funds. If this assumption is relaxed, the qualitative conclusions do not change. Hence, demographic development cannot be used as an argument in favour of a switch of the pension system.

This essay focuses on the pension system and highlights some of its key elements. The first part deals with the economic principles connected with the social security system. Eatwell's model is utilized to give some basic intuition of terms and concepts used in the pension reform discussion. The second part classifies pension systems from different perspectives and discusses some of the factors relevant for the Czech reform effort. The last part brings the main arguments of the pay-as-you-go supporters that seem to be missing in the current Czech debate. The aim of the authors is to show that a pension reform is a rather complex problem where no fast, simple and impartial view solutions exist. Rather than giving any particular recommendations, the authors try to stimulate the current pension reform debate by stating some controversial issues.