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Dear Members, Colleagues and Interested Parties,

During the last three years the Center for FinancialStudies (CFS) has continuously increased its activity spectrumby organising a number of lecture series, academic conferencesand executive education programmes in Frankfurt. Amongst ourprevious institutional partners in hosting academic conferenceswere the Deutsche Bundesbank and the European Central Bank(ECB) in Frankfurt.We have also on some occasions collaboratedwith both institutions in organising a seminar. Since January2001 the ECB, the Deutsche Bundesbank and the CFS havehosted a weekly Joint Lunchtime Seminar series, which takesplace on Wednesdays from 12 noon until 1 p.m. at the ECB'sEurotower in Frankfurt.These seminars regularly bring togetheracademics and practitioners from the three institutions to discusswith invited speakers the most recent theoretical and empiricalresearch in monetary economics and finance. Our aim with theseregular joint meetings is to provide a platform in Frankfurt forcritical debate on top level research.

A second new CFS initiative in 2001 is the CFS SummerSchool in Money and Finance, which will take place in Eltvilleat the Management Education Centre of Deutsche Bundesbank

Gesellschaft für Kapitalmarktforschung e.V.: Chairman Managing Board: Dr. Rolf-E. Breuer (Deutsche Bank) · Chairman Board of Trustees: Karl Otto Pöhl (Sal. Oppenheim) · Center for Financial Studies:President: Karl Otto Pöhl (Sal. Oppenheim) · Directors: Prof. Dr. Jan Pieter Krahnen, Prof. Dr. Axel A. Weber (both Johann Wolfgang Goethe-Universität, Frankfurt/M.) · General Manager: Dr. Antje Becker

during August 2001. The Summer School willbring together an internationally-renownedfaculty of lecturers, Ph.D. students from various

European universities and doctoral students from the newlyestablished Graduate Program of the J.W. Goethe-University inFrankfurt for a one-week intensive teaching programme. CFSaims at establishing this Graduate School as a regular annualacademic event.

Another new CFS initiative is the building-up of a networkof affiliated researchers who, jointly with permanent CFS staffand visiting academics, will carry out a number of research pro-jects organised around several topics. Four such projects arebriefly outlined in this newsletter, a more complete list of topicsis available from our web-site at www.ifk-cfs.de.

We hope that these new initiatives find your interest andwe shall look forward to welcoming you to some of the futureevents, which we are currently in the process of planning in thiscontext.

Best greetings,

Jan Pieter Krahnen Antje Becker Axel A.Weber

Contents

Events:reports on lectures and conferences 2

Research Activities:reports on current research projects 16

Executive Development:reports on conferences and the agendafor forthcoming seminars 19

Special:Labour, land…capital? CFS in the early eraof capital market research 22

Dates:dates of events on separate insert.

Conference“FinanzmarktDeutschland” on22th February 2001

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E-Finance – Making Use of the Opportunities,Controlling the Risks

merce.This combination also characterises the multi-channelcomplete banking concept of Bank 24, where the consumeris looked after not only through personal contact at thebranch but also via telephone and the online Internet ser-vice. Moreover, the traditional self-service machines willalso remain in tact.The range of services provided by Bank24 extends from the basic banking services (within theoperating area of Banking 24) to supporting private custo-mers in the building up and optimisation of their wealth(Investment 24) and the supervising of business clients(Business 24) to the provision of direct access to first-callcapital market products (Online Brokerage).With its asset-gathering strategy Bank 24 is targeting a clientele charac-terised by Walter by the term “babyboomer”, that is, agroup of young, well-educated and therefore high earningprofessionals, which in West Europe alone includes 60million people. Walter is confident that Bank 24 with thisclientele will continue to be successful in increasing andimproving profits.

Anke Leiser

On 31st January, 2001 within the framework of thecolloquia series on “Financial Markets and E-Commerce” atalk was given by Andrew Crockett, General Managerof the Bank for International Settlements, on “FinancialStability in the Light of the Increasing Importanceof Online-Banking and E-Commerce”. He began bydiscussing the salient features of e-finance, that is, the largepotential for innovation, the accompanying uncertaintywith respect to evaluating the quality of such innovationsowing to lack of experience, and the inherent risk ofundermining financial systems. E-finance has the potentialto transform the financial landscape fundamentally. Giventhe unrestricted access via the Internet e-finance is in aposition to introduce new business models, change financialstructures and drive financial consolidation. However, theprecise nature of e-finance development cannot be predictedand would appear to differ across sectors.

The main focus of Crockett’s lecture was on theimplications of some specific effects of e-finance develop-ment for banks and other financial institutions, for marketsand for the official sector. One such implication is the factthat lower cost barriers to entry for e-financial institutions,

Colloquia

Online Banking and Consumer

Advisory Services:Banking of the Future

The colloquia series “Financial Markets and E-Commerce” continued on 17th January, 2001 witha lecture by Herbert Walter.Walter, who since

1998 has been head supervisor of the Deutsche Bank 24 AGproject and on 1st September, 1999 was made companyspokesman for the Deutsche Bank 24 AG, talked about“The Potential of E-Commerce from the Banks' Pointof View”.The starting point for Walter's talk was an analysisof purely online financial services managers, whose situationis still characterised by a closely-defined range of products.Given the rapid innovation rate, they find themselves facingan aggressive pricing policy on the part of fellow managerswith strong marketing pressure typical for the branch. Aclear tendency can, however, be discerned towards increa-singly integrated products. Similarly, new market entrantsmust face up to challenging conditions.They find themselvesconfronted with a difficult market structure and decreasingconsumer loyalty. Being able to guarantee a high standardof service and processing quality is deemed essential, as isthe ability to meet high demands of consumers with respectto the product portfolio (brokerage, insurance, constructionfinancing, investment banking etc.). Particularly important,according to Walter, is the growing number of requests forconsumer advisory services, which go beyond the onlineprovision and are clearly becoming more and more com-plex. During the further course of his presentation,Walterlooked at business practices in the online world within thecontext of competition to win and keep customers. Theestablished top banks, for example, offer a high standard ofadvisory services but lack accessibility in comparison to thepurely online banks, whereas the purely online banks areonly able to offer a comparatively small range of advisoryservices.Walter foresees the convergence of these differentbusiness practice models giving rise to the “bank of thefuture”. This should combine first-class access with a highstandard of advisory services. Walter went on to depict avery detailed picture of his “bank of the future” with itsmost notable feature being the combination of personaladvisory services at the branches and online banking com-

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owing to lower physical start-up costs for these institutionsby comparison to those of traditional institutions, mightintensify competition and increase the threat of disinter-mediation of existing institutions. E-finance is also blurringthe barriers between banks, brokers and insurers. Theincreasing consumer demand for personalised moneymanagement services is pushing this integration of financialservices.The lack of success to date of pure internet banksshows that public trust is still very important and whilstexisting banks are not necessarily favoured, those banksthat over the years have built up a degree of customer trustand acquired a high level of name recognition in other linesof business may command more confidence. Another con-sequence of e-finance is the increased likelihood of entryby non-financial institutions into the financial arena, whichwould represent a major challenge to supervisory bodies.E-finance also facilitates cross-border and cross-sector con-solidation.

The final implication, mentioned by Crockett, is thepotential of e-finance for creating new and radically diffe-rent business models as, for example, that of the so-called“aggregators”. From the markets' point of view, an impor-tant issue arising from the growing reliance on electronictrading is the impact it has on market liquidity.This mightbe reduced, for example, by the entry of new tradingsystems, none of which are particularly liquid, in currentlycentralised markets. A second factor likely to decreaseliquidity might be the diminished profitability of activemarket-making (owing to reduced bid-ask spreads causedby electronic trading), causing financial institutions to scaleback this activity. The key risks in these developments,according to Crockett, are the risk of strategic and businessmisjudgements, the operational risk resulting from thereliance on complex technology, the risk arising from legaland regulatory uncertainty and the systematic risk.Crockett proposed the following agenda for the officialsector. Firstly, the official sector should think about how e-finance could change the structure of the financial industry.Secondly, e-finance blurring the barriers between banksand other institutions, implies a greater need for consulta-tion and co-ordination among regulators. Thirdly, the oldregulatory mind-set is no longer appropriate. A flexibleand adaptive regulatory approach becomes vital. Fourthly,there may be cases where additional prudential buffers forrisk-seeking institutions are needed. As a final point,Crockett stated that it is important to make sure that thecurrent levels of market and operational integrity are notundermined by the development of e-finance. Crockettended his talk by pointing out that “we all have much to

AndrewCrockett

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gain from the existing developments that are under way,but only if we monitor and control the associated risks”.

Anke Leiser

We asked Andrew Crockett about:

the biggest plus point of Germany as a financialcentre:And he answered: “As plus points, Germany has severalof the world's largest and best-managed banks, insur-ance and reinsurance companies. It is the home of theECB, and has the largest domestic economy in Europe,with an enviable tradition of monetary and financialstability.”

the biggest minus point of Germany as a financialcentre:And he answered: “On the less positive side, Germanystill needs to develop some of the infrastructure elements

of other financial centres, .i.e. greaterdepth in the accounting,legal, informationtechnology and other professions neededto support financial activity. Doubtless,

any deficiencies in these areas will berectified.”

On 15th February, 2001 as part of the “Financialmarkets and E-Commerce” series Reto Francioni gave apresentation on the subject of “Online-Brokers betweenStock Exchanges and Banks – How Much IntegrationCan be Expected?” Francioni, formerly Member of theBoard of the Deutsche Börse AG and now spokesman of theBoard of the Consors Discount-Broker AG, Nuremberg,reaffirmed support for the concept of the Berlin StockExchange. Despite describing the attempt by the BerlinStock Exchange to build up a retail platform as beingextremely complicated, he confirmed Consors continuinginterest. He emphasised within this context, however, thatConsors was still in a position to make optimal choices onthe behalf of customers since “the online broker must leavethe choice of stock exchange location to the client”.Participation in the Berlin stock exchange continued to bea goal, but not with the intention of assuming any domi-

Consors Continues toSupport Participation in

the Berlin Stock Exchange

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“Investment Banking in the New Europe” that the con-solidation process within the European financial sector is byno means nearly completed. However, he also noted thatpositive impulses deriving from the consolidation of thesimilarly affected investment banking sector as well as fromthat of other branches could indeed be detected.Accordingto Walker, we face the prospect in Europe of building acapital market comparable to that of the UnitedStates.This will bring huge benefits in termsof flexible access to capital at a reasonablecost as well as an array of investmentopportunities and taken together,this will contribute significantly towealth and employment in Europe. There are many stepson the way, including appropriate regulation, and there isan urgent need to create a pan-European market infra-structure with respect to the clearing and settlement ofsecurities transactions. But in all of this, the role of theinvestment bank as analyst, adviser and means of executionseems likely to continue to be of critical importance.Despite the slower pace in many revenue areas in the pre-sent business environment, the prospect in the medium-term and beyond for the talented investment banker andfor the well-organised investment bank continues to beextremely attractive, nowhere more so than in Europe.

Anja Wodrich

On 16th May, 2001 Klaus-Peter Müller, a memberof the board of the Commerzbank AG, opened the colloquiaseries entitled “Cross Border Financial Integration –Trends, Strategies and Lessons Learned” with his talk on“Relationship Lending and Corporate Bonds: New Tasksfor Company Customer Business?”. This presentationattracted a large audience not least owing to its topicalityin view of the impending Basle consultation deadline.

There is no future for company customer business!Klaus-Peter Müller spoke out strongly against this hypo-thesis deriving from the structural change currently takingplace in the banking industry and was not of the opinionthat traditional credit transactions would be pushed out byalternative capital market models.The clear increase in theissue of securities by West European, in particular German,firms for outside financing via capital markets can be tra-

Sir DavidWalker

Is there a Future forCompany Customer

Business?

nant position.The decision by all the other online brokersto forgo any participation in the Berlin retail initiative is,according to Francioni, a lost historic chance to create inEurope the biggest online stock exchange. And in thisconnection he was convinced that in the long term thetrend towards more transparency was unstoppable.

Anja Wodrich

We asked Reto Francioni about:

the biggest plus point of Germany as a financialcentre:And he answered: “There is a good mixture of qualitieslike political stability and reliability, people have goodskills, the scientific education is widespread and pro-duces solid results, the financial centre is disciplinedand well organised. On top of that the pure size of theGerman financial market gives Germany a clear scaleadvantage on a financial centre in Europe.The biggeststrength in my opinion is the ability to accelerate,which often results in breathtaking speed to catch upand win the race. And when the finance professionalsin Germany begin to be convinced of an opportunitythey get there faster than any other financial centre inthe world.”

the biggest minus point of Germany as a financialcentre:And he answered: “The biggest minuspoints are the still complex andexpensive tax structure especially inthe financial sector and the inabilityof German regulations to accommodateinnovations efficiently in terms offinancial products, market struc-tures or online access.”

The Consolidation Processof the European Market

Continues to Make ProgressOn 29th March, 2001 the final talk in the CFS collo-

quia series “Financial markets and E-Commerce” was givenby Sir David Walker, Chairman of Morgan Stanley DeanWitter (Europe) Ltd., London. Just as the recent talksbetween the Allianz insurance group and the DresdnerBank go to show,Walker pointed out in his lecture entitled

RetoFrancioni

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On 19th June, 2001 the colloquia series “Cross-Border Financial Integration – Trends, Strategies andLessons Learned” was continued with a talk on the subjectof “MEAG – The Global Asset Manager of the MunichRe-Group” given by Thomas Kabisch, who since 1999 hasbeen the Chairman of the board of executives of MEAGMunich ERGO AssetManagement GmbH. This companyhas an administrative volume of more than Euro 140 billionand is thus one of the largest asset managers.

Kabisch began his presentation with a survey of thestructure of the Munich Re-Group which can be dividedinto three areas of activity relating to reinsurance, primaryinsurance and asset management. MEAG was established in1999 as the latest asset management subsidiary of the

ced backed to just a few large companies from specific sec-tors and thus does not imply the existence of an alternativeto bank loans for any contingent outside financing for themajority of companies.

Even those companies with direct access to the capitalmarket cannot dispense with bank loans. By way of example,Müller mentioned in this context those loans used for plantengineering and construction or bidding procedures aswell as bridging loans in the course of a stock exchangeflotation or bond issue and stand-by credit lines for com-mercial paper programmes. Bank loans in the context ofcompany purchases also have a comparative edge over capitalmarket financing owing to their flexibility, short term acces-sibility and the fact that they can be dealt with discretely.

The specific advantages enjoyed by banks with respectto the capital market and the financing of loans predestinethem to link both forms of financing in a way which makessense. On the basis of their long-term customer relation-ships they possess specialised knowledge on companies andtheir (regional) environment and as capital market investorsthey are better able to count on receiving detailed infor-mation from companies; they are so to speak the “naturalrating specialists” for financial risk taking. Since banks arein a position officially to convert into security form out-standing accounts via asset-backed securities or syntheti-cally to convert the risks associated with debt claims via so-called guarantee provisions, they are able to make thesecredit risks tradable on the capital market (and releaseregulated shareholders' equity).

Müller places his hopes for the safeguarding of loans asa method of financing in favourable decisions on the part ofthe legislative and supervisory authorities. In this contexthe was particularly critical of the current distortion ofcompetition deriving from the advantages currently enjoyedby Sparkassen (savings banks) and Volks- und Raiffeisen-banks (co-operative banks) in refinancing and the hithertoproscribed across-the-board calculation of the regulatoryshareholders' equity.With respect to the Basle II proposals,Müller called for amendments to the surcharge factorsaffecting the credit period (long-term loans are at a disad-vantage) and the computational formula (disadvantageousto small and medium-sized businesses owing to potentiallyhigher shareholders' equity requirements).

Müller introduced the Commerzbank's strategicanswer to the challenges arising from structural changes inthe banking industry in the form of the company project

Exogeneity andEndogeneity ofMoney in the

History of

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“CB21”, as a result of which on 1st January of this year anew format for the company departments (“private custom-ers and asset management” as well as “business clients andinvestment banking”) was implemented focussing oncustomer requirements rather than product lines. It is thegoal of this project to realise an integrated supervision con-cept for company clients along the lines of “relationshipbanking”. Anke Leiser

We asked Klaus-Peter Müller about:

the biggest plus point of Germany as a financialcentre:And he answered: “The long-term approach to financ-ing and the existence of a strong SME sector (the “Mit-telstand”). In their combination of relationship-basedcorporate finance and transaction-based capital mar-ket business they both offer enormous potential forintegrated banks.”

the biggest minus point of Germany as a financialcentre:And he answered: “The distorted terms ofcompetition on the German bankingmarket, since they are an obstacle to fairmarket conditions and thus a threat tothe flexibility of a financial centre.”

Klaus-PeterMüller

Centralising AssetManagement Makes Sense

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Munich Re-Group and is responsible world-wide for alarge proportion of capital investments of the entire Re-Group. Kabisch confirmed that the MEAG in its capacity asthe financial services provider of the group is pursuing thegoal of being a successful global player in asset manage-ment and aims to increase significantly the group's totalreturn. He went on to name the arguments which supporta centralisation of asset management, that is, know-howand the fact that the procedures and systems of currentasset management units do not conform to global stand-ards, capital investment activities are still too stronglyanchored in the insurers' way of thinking, entering a newor more complex asset class is only worth it for largerunits, many small asset management units drive up costs,and fragmented asset management offers no opportunitiesfor conquering new fields of business.

Kabisch explained that MEAG supports clients indrawing up a framework plan and that an optimal mandatefulfilment is achieved via a concentration of the entireknow-how. He discussed the clear responsibilities in theasset allocation process and emphasised the relevance oftimely reporting in the back as well as in the front office.MEAG manages centrally all important asset classes and isstationed globally via locations in three time zones, that is,MEAG in Munich (shares, fixed income securities, foreignexchange, property), MRACM in Hong Kong (shares) andMRCM in New York (shares, fixed income securities).Kabisch described how MEAG has developed into an activeprovider of financial services in several fields and emphasisedin particular the high rate of growth for many years now inthe German retail funds market. Moreover, through ERGO,MEAG has a powerful marketing agent and enjoys settle-ment certainty having set up its own FondsServiceBank.

Kabisch discussed in detail the types of risk insuredthrough securitisation and their transfer to financial mar-kets. In particular as part of a market survey he focussed onthe demand and supply sides and presented an outlook forthe future, emphasising that the further development ofrisk transfers on capital markets is still uncertain. Finally,

he presented the business strategy of theMunich Re-Group and described activi-ties and tasks in detail. He emphasisedthat the Munich Re-Group would like tobring together the interests of all in-

volved by combining the differentgoals and perspectives of insurers,reinsurers and investors.

Roman Kräussl

Venture Capital – Quo Vadis?

Exogeneity andEndogeneity of Money inthe History of Economic

Thought and Today

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ThomasKabisch

We asked Thomas Kabisch about:

the biggest plus point of Germany as a financialcentre:And he answered:• largest single economy in Europe• located in the centre of Europe with a large airport

(Frankfurt) and very good infrastructure• proximity to Eastern Europe and Russia• very well educated population

the biggest minus point of Germany as a financialcentre:And he answered:• strongly regulated and inflexible labour market• only loose ties to the Anglo-Saxon financial markets

(unlike UK)

On 1st March, 2001 as part of the CFSforum HolgerFrommann, Managing Director of the BundesverbandDeutscher Kapitalbeteiligungsgesellschaften – GermanVenture Capital Association e. V. presented a survey on“Venture Capital – The Product and Market in theNational Trend”. Venture capital (VC) is shareholders'equity which is placed at the disposal of innovative andpotentially expanding small and medium-sized businessesand entrepreneurs for the realisation of planned projects.This is frequently accompanied by management consultingand supervision of the equity investors, for example in theform of a seat on the company's supervisory board.Frommann underlined that the investment companies areneutral partners with no aspirations for acquiring thecasting vote or make a bit for leadership, rather the aim isto realise large profits through the sale of equity holdingsbased on the increased value of the company. It is conceiv-able that such sales of holdings be made on the one hand toexisting stockholders, to industrial or financial investors,but can also be effected via the stock exchange. Frommannspecified as a peg for the expectations of investors a yieldof at least 15% after deducting management fees and theprofit share of the management company. With respect to

CFSforum

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It is now up to Junichiro Koizumi,Japan’s new prime minister, to bring hiscountry back on to the path of economicprosperity. So far he has announced hiscommitment to far-reaching structuralreforms.The kind of legal action takenin the past was the topic of the lecture given by HiroshiNakaso (Visiting Senior Advisor at the Bank forInternational Settlements, Basle) on “The Financial Crisisin Japan During the 1990's – How the Bank of JapanResponded and What are the Lessons to be Learned?”on 1st March, 2001. After reviewing the history of thefinancial crisis in Japan, which started after the sharp de-cline in share and property prices in the early 1990’s andcontinued on to the banking crisis in 1997, he focussed onthe legal measures taken by officials to ensure the func-tioning of the financial markets in Japan and to strengthenfinancial stability in order to return to economic growth.

Bernd Kaltenhäuser

On 22nd March, 2001 Allan Meltzer (CarnegieMellon University, Pittsburgh), Chairman of the Inter-national Financial Institutions Advisory Commission(IFIAC) appointed by the US Congress to recommendchanges in all major international financial institutions,gave a talk on “The Reform Agenda for InternationalFinancial Institutions”. Before presenting the medicinerecommended by the IFIAC report, Meltzer discussedsome facts of recent financial crises and the response tothem by the International Monetary Fund. He also provideda sketch of the longer term problems in fighting povertyand the related actions by the World Bank. He describedthe severe incentive problems associated with the currentpractice of the international financial institutions (moralhazard, overlending because of the anticipation of bail-outs, slow institutional reforms). Among the prescriptionsof the IFIAC are prerequisites for access to internationally-provided funds, such as an open banking system (to adoptinternational banking practices) and the adoption of theWTO standards. Further, the IFIAC suggests that WorldBank loans should be transformed into grants conditionedon appreciable institutional improvements in the receivingcountry.

HolgerFrommann

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the individual equity holding, this would correspond to atarget yield of approx. 30%. In reality a 20-60-20 structureusually emerges from the performance of equity fund port-folios since only 20% of the equity holdings overshootexpectations (sometimes by much more than 30%), 60%of expectations are not fulfilled but nevertheless generate apositive yield, and 20% of holdings lead to a negative yieldor even result in a total loss. Overall, according toFrommann, the VC market, particularly during the last fiveyears, has exhibited an extraordinarily positive develop-ment owing to changes in the investment milieu (i.e., thesetting up of the New Market and the development of ashareholders' equity culture) and climate (e.g., improve-ments in the image of entrepreneurship). Whereas thoseinvestment companies participating in the German VCmarket could report in 1985 for the first time a portfolioholding of approximately DM 1 billion, by 1996 this hadrisen to DM 6.1 billion and by the year 2000 according topreliminary results to circa DM 18.9 billion. Frommannsaid that the newly invested capital during the past year hasflown predominantly into early stage investments, whereasshares in other market sectors, in particular expansionfinance have by comparison been strongly modified. Howdid Frommann evaluate the current situation? The volumeof investment is lower because of lower valuations and arelative decline in the start-up field can also be discerned.Given the current slump in share prices, exits from thecapital market are hardly feasible; fund raising has becomeconsiderably more difficult. A consolidation in the marketwill go hand in hand with an adjustment. However,Frommann said he is optimistic for the coming future andin particular he expects to see a buy-out boom from 2002onwards. Stefanie Franzke

We asked Holger Frommann about:

the biggest plus point of Germany as a financialcentre:

And he answered:“The will to turn Germany into a recognised interna-tional financial centre.”

the biggest minus point of Germanyas a financial centre:And he answered:“The still widely-adhered thinking in terms of outside capital.”

Japan – Turning Around?

HiroshiNakaso

Medicine for theInternational Financial

System

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sent their findings. The Joint Lunchtime Seminars takeplace weekly and presentations, which last about one hour,are typically followed by a general discussion. To date theseminars have mainly covered topics from the fields ofinternational macroeconomics and monetary economics,but occasionally papers on financial economics, econo-metric methods, and public finance have also been presented.On 23rd May, 2001 Philip Lane (Trinity College, Dublin)discussed his research in the field of international macro-economics on “External Wealth, the Trade Balance,and the Real Exchange Rate”. Lane broke down theimpact of a country’s net foreign asset position on its realexchange rate into two mechanisms, that is, the relationbetween external wealth and the trade balance; and therelation between the trade balance and the real exchangerate. A net international creditor position, through theresulting capital inflow of dividend and interest payments,allows a current account deficit to be sustained. Lane foundempirical evidence for this negative link of external wealthand the trade balance. With respect to the second mecha-nism, a more depreciated real exchange rate should sup-port a more positive trade balance and Lane found empiri-cal support that this is the case. Putting the pieces togetheragain then results in a positive relation between the level ofexternal wealth and the real exchange rate. Accordingly,the growing net external liability position of the USimplies pressure on the dollar to depreciate.

On 21st March, 2001 in a seminar from thefield of monetary economicsYunus Aksoy (KU

Leuven and J. W. Goethe-University, Frank-furt) talked about “Foreign Holdings of

US Dollar and Information Value of US MonetaryAggregates”, a paper which was jointly written withTomasz Piskorski. In the context of the information valueapproach adopted by B. Friedman and Kuttner (1992), thevanishing role of monetary aggregates in helping to predictfuture fluctuations in US macroeconomic fundamentalswas re-evaluated. Using the official US data constructed byPorter and Judson (1996), it was found that the currencycomponent of M1 corrected for the foreign holdings ofdollars contains valuable information on US macroeco-nomic fundamentals. Correcting monetary aggregates inthis way proves to be necessary since the role for foreignholdings in total money creation is large and unstable.

On 7th March, 2001 Simone Manganelli (ECB)presented joint work with Robert F. Engle (New YorkUniversity and UCSD) in the field of financial economicson “Value at Risk Models in Finance”.The main objective

The New Joint Lunchtime Seminars

Exogeneity andEndogeneity of

Money in theHistory of

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Because the US reform agenda will be of primeimportance in the process of shaping the future of theinternational financial system, it is vital for European deci-sion makers to critically debate the IFIAC recommenda-tions. During his visit to CFS Allan Meltzer held a numberof informal meetings, amongst others with State SecretaryKoch-Weser at the Ministry of Finance in Berlin and withboard members of the ECB and the Deutsche Bundesbank.

Bernd Kaltenhäuser

We asked Allan Meltzer about:

the biggest plus point of Germany as a financialcentre:

And he answered:“It has stable political,economic and financial arrange-ments. The rule of law prevails. Property rights areprotected reasonably well.In addition,Germans have ahigh saving rate and are educated.”

the biggest minus point of Germany as a financialcentre:

And he answered:“The financial system is not open andcompetitive to anything like the degree

that is found in New York or London.Also,Germany has a long tradition of cartelisedbanking and weak financial markets.

This is changing, but it takes timeto overcome history.”

The start of 2001 saw the launch of a new researchseminar series, the Joint Lunchtime Seminars.As the namesuggests, the seminars are jointly hosted by the ECB, theDeutsche Bundesbank, and the CFS. The organisers areFrank Smets (ECB), Heinz Herrmann (Deutsche Bundes-bank) and Axel Weber (CFS).

The seminar series aims at promoting discussions ontop quality research, which is of key interest to centralbanks. Primarily young, promising academics and econo-mists from policy-making institutions are invited to pre-

AllanMeltzer

CFSresearch lectures

YunusAksoy

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Elke Hahn / Bernd Kaltenhäuser / Roman Kräussl

At a research seminar on 17th April, 2001 organisedjointly by the ECB and the CFS, Richard Clarida(Professor of Economics and International Affairs,Columbia University) presented his paper “OptimalMonetary Policy in Open versus Closed Economies:An Integrated Approach”, which he wrote with JordiGali and Mark Gertler. An open economy framework bycomparison to that of the closed economy framework com-plicates the problem of monetary management to theextent that the central bank has to take into account theimpact of the exchange rate on real activity and inflation.Consequently the question of how to factor the exchangerate into the overall design of monetary policy becomes acentral consideration. In their analysis the authors showthat under certain conditions the monetary policy designproblem is isomorphic to the problem of the closed eco-nomy. Openness does affect the parameters of the model,suggesting quantitative implications, although the general

Optimal Monetary Policyin Open versus Closed

Economies

of this paper was to survey and evaluate theperformance of the most popular Value at Risk(VaR) methodologies, paying particular atten-tion to the underlying assumptions. VaR has become thestandard measure that financial analysts use to quantifymarket risk and is defined as the maximum potential changein value of a portfolio of financial instruments with a givenprobability over a certain horizon. VaR measures can havemany applications, for example, in risk management toevaluate the performance of risk takers and for regulatoryrequirements.Thus it is very important that methodologiesbe developed which provide accurate estimates. Manganellishowed that the Historical Simulation method and its vari-ants can be considered as special cases of the CAViaRframework developed by Engle and Maganelli in 1999.Manganelli also offered two original methodological con-tributions. The first one introduces the extreme valuetheory into the CaViaR.The second one concerns the esti-mation of the expected shortfall, that is, the expected loss,given that the return exceeds the VaR, using a simple regres-sion technique.The performance of the models surveyed inthe paper was evaluated using a Monte Carlo simulation.Data was generated using GARCH processes with differentdistributions and the estimated quantiles were compared tothe actual quantiles.The results obtained show that CAViaRmodels are the best performers with heavy-tailed DGP.

International Macroeconomics

16 Jan 01

14 Feb 01

21 Feb 01

18 Apr 01

23 May 01

31 Jan 01

7 Feb 01

21 Mar 01

28 Mar 01

Michael Moore (School of Management and Economics,Queens University, Belfast) and Harald Hau (INSEAD,Fontainebleau): “The Euro as an International Currency:Explaining Puzzling first Evidence.”

Mathias Hoffmann (University of Southampton):“International Risk Sharing in the Short Run and in theLong Run.”

Robert Kollmann (Université Paris XII,Vale de Marne):“Macroeconomic Effects of Exchange Rate Volatility.”

Nick Bloom (The Institute for Fiscal Studies, London):“The Dynamics of Investment under Uncertainty.”

Philip Lane (Trinity College, Dublin): “External Wealth,the Trade Balance, and the Real Exchange Rate.”

Christian Upper (Deutsche Bundesbank) and AndreasWorms (Deutsche Bundesbank): “Estimating BilateralExposures in the German Interbank Market: Is there aDanger of Contagion?”

Elena Bisagni (University of California, San Diego):“The Microstructure of the Federal Funds Market.”

Yunus Aksoy (KU Leuven and J.W. Goethe-University,Frankfurt): “Foreign Holdings of US Dollar and Infor-mation Value of US Monetary Aggregates.”

Andreas Worms (Deutsche Bundesbank) and MichaelEhrmann (ECB): “Interbank Lending and Monetary Policyin Germany.”

Monetary Economics

2 May 01

16 May 01

30 May 01

23 Jan 01

28 Feb 01

7 Mar 01

14 Mar 01

4 Apr 01

11 Apr 01

25 Apr 01

Alexander Wolman (Federal Reserve Bank of Rich-mond): “Discretionary Monetary Policy and EndogenousFluctuations.”

Peter Brandner (Österreichisches Institut für Wirt-schaftsforschung,Wien) and Helmut Stix (ÖsterreichischeNationalbank,Wien): “The Effectiveness of Central BankInterventions in the EMS:The post 1993 Experience.”

Hans-Eggert Reimers (Hochschule Wismar): “World-wide Evidence on the Money-Price-Link.”

Ronnie Schöb (University of Western Ontario):“Optimal Factor Income Taxation in the Presence ofInvoluntary Unemployment.”

Manuel Moreno Fuentes (Universita Pompeu Fabra,Barcelona): “Decomposing Interest Rates in Level andSlope: Derivative Pricing, Empirical Behaviour and RiskManagement.”

Simone Manganelli (ECB): “Value at Risk Models inFinance.”

Jörg Breitung and Bertrand Candelon (HumboldtUniversity, Berlin): “Common Cycles: A FrequencyDomain Approach.”

Hans Martin Krolzig (University of Oxford):“Computer-automated empirical modeling.”

Sylvia Kaufmann (Oesterreichische Nationalbank,Wien): “The volatility of stock market returns: A MarkovChain Monte Carlo analysis of a switching ARCH model.”

Peter Winker (International University in Germany,Bruchsal): “Indirect Estimation of the Parameters ofAgent based Models of Financial Markets.”

Financial Economics, Econometrics, and others

SimoneManganelli

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form of the optimal interest rate feedback rule remains thesame as in the closed economy case. In addition, opennessgives rise to an important distinction between domesticinflation and consumer price inflation. To the extent thatthere is perfect exchange rate pass through, Clarida foundthat the central bank should target domestic inflation andallow the exchange rate to float, despite the impact of theresulting exchange rate variability on the consumer priceinflation. Elke Hahn

From 14th to 20th May, 2001 James Angel (George-town University) was a visitor to the Faculty of Economicsat the J. W. Goethe-University. Supported by the CFS, hegave two lectures during his stay. As part of the course on“International Banking” held by Reinhard H. Schmidt hegave a paper on 15th May, 2001 about “The Structure ofthe World Equity Market: Past, Present, and Future”,in which he provided a look into the future of stock mar-kets in the face of globalisation and technological progress.The most important message of his paper was that “marketsare networks”. Angel did not believe that the Europeanstock exchanges will merge to form one “super stockexchange”. He regards as being more realistic a “Hubmodel”, which is comparable to a co-operation such as thatpractised by airline alliances, in order to be able to meetthe needs of their customers world-wide, without havingto give up their independence.

James Angel presented another paper to an acade-mic audience as part of a special CFS Brown Bagseminar on 17th May, 2001 on the subject of

“Calling the Open: Price Discovery Evidence fromNasdaq”. In this study he looked at the question whether auniform opening price at Nasdaq would be more advanta-geous with respect to price discovery than the currentlypractised decentral opening mechanism. He came, how-ever, to the (surprising) conclusion that the decentral open-ing mechanism, which has been sharply (and unjustly) cri-ticised by the banks is more beneficial from a liquiditypoint of view. A centralised “single opening price” proce-dure would more tend to result in a disequilibrium be-tween supply and demand. Eric Nowak

An important role of banks is to make relationshiplending services available that help resolve problems inproviding external finance to informationally opaque small

businesses. However, according to Allen N. Berger thebanking system’s ability to provide credit to relationship-dependent borrowers might in the future be affected by theconsolidation of the banking industry. On 1st June, 2001Allen N. Berger, member of the Board of Governors of theFederal Reserve System, Washington, gave a talk at theJoint ECB/CFS research seminar. He presented a paperdealing with “The Ability of Banks to Lend to Infor-mationally Opaque Small Businesses”.

Berger explained that the current consolidation of thebanking industry creates large banks with headquarters fre-quently located a long distance away from small businesscustomers. In this context these institutions may have diffi-culties processing locally-based, and often less quantitative,relationship information.

Analysing a rich data set on Argentinean banks, firms,and loans, strong evidence was found that informationallyopaque small businesses tend to receive less credit fromlarge banks and foreign banks. Berger mentioned that thiseffect is magnified for small businesses, which tend to delayin repaying their loans. In addition he found that informa-tionally opaque small businesses are more likely to have asingle lender than other firms. This is because for thesebusinesses the benefits associated with the acquisition andpossession of proprietary information by a single lendertends to outweigh the potential costs of exploiting marketpower in an exclusive relationship. Stefanie Franzke

On 22nd February, 2001 the final conference for theresearch programme financed by the German ResearchCouncil (DFG) focussing on “The Efficient Organisa-tion of Financial Markets and Financial Institutions”took place at the J.W. Goethe-University of Frankfurt.Theconference was hosted jointly by the German ResearchCouncil and CFS. The majority of German Chairs forFinancial Studies were involved.The aim of the conferencewas not only to present the research results to business prac-

Markets are Networks

No More Relationship Credit?

JamesAngel

CFSresearch conferences

The German FinancialMarket – Research and

Practice in Dialogue withOne Another

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titioners but also to promote a dialogue on theseresults. Wolfgang Bühler began the presentationof scientific contributions to the research pro-gramme in the auditorium of the J.W. Goethe-University by reporting on the progress and mistakes madein the evaluation of fixed-interest bearing investments.Afterwards there were several sessions on different subjects.

Bernd Rudolph (as well as Tanja Dresel and MarkusKern, University of Munich) presented the project “TheControlling of Market and Credit Risks in Banks”.According to the authors, it is important that the risk limitsset should be fully utilised. Owing to the various correla-

tions between risk positions the individual riskscontribute to the total risk in very differing

ways. The authors presented the results of theirsimulation analysis in which various scenarios

for organising a system of limits within atrading area were considered. Usually there is a moderateutilisation of the available Value-at-Risk (VaR) limits. As asolution to this problem the authors suggested the intro-duction of a treasurer, as well as a dynamic limit allocation.

In the discussion Gerhard Stahl (German FederalBanking Supervisory Office (Bundesaufsichtsamt für dasKreditwesen)) questioned whether the VaR-risk approach isat all suitable for a uniform limits system or whether tradersat the operative level should not be controlled by means ofother criteria. Furthermore, he pointed out that a daily limitallocation was not feasible since traders in practice requirea constant limits notion. Stahl, however, perceived theessential function of VaR limits to be that they should con-form to regulatory requirements and apply to numeroustraders with complex products.

The paper by Ekkehard Wenger (together withRenate Hecker, Jochen Knoesel and Martin Ahlers, Uni-versity of Würzburg) entitled “Takeover and IndemnityPayment Regulations for Listed Companies as Elementsof Minority Shareholder Protection” illuminatedfrom a conservative, theoretical and empirical point ofview the position of minority shareholders in Germanyduring changes in the circle of shareholders and companylaw procedures.These changes lead to, or at least suggest,claims for indemnity payments. The authors showed theconditions under which small shareholders must still look

to their rights with respect to structural measures in com-pany law. Indemnity payments made during the conclusionof profit transfer agreements to date have been, on average,lower than the officially-quoted stock exchange price.According to the authors, the same also holds true for inte-grations and mergers to the extent that the votes of wide-spread shareholdings are not required for the adoption ofthe relevant resolution.The discussion paper was given by Christian Strenger(Deutsche Gesellschaft für Wertpapiersparen mbH).

Günther Gebhardt (J. W. Goethe-Universityof Frankfurt) talked about “Announcement

Effects of Financing Decisions by Ger-man Companies: Synthesis of an Empirical

Research Program”. In analysing the announcementeffects on the financing and dividend payout policies ofGerman companies, the author found significant differencesto studies from the USA.These differences can be explainedon the grounds of institutional conditions.

In his discussion of the paper Jan van Nieuwen-huizen (Morgan Stanley Bank AG) voiced the opinion thatthe advantages of broadening the investor base were gainedat the cost of disadvantages for the existing shareholders(redistribution of wealth). Significant capital market reac-tions could in addition be detected during the preliminarystages of capital stock increases. Capital stock increasescould often be recorded at the end of a period of excessyields (timing hypothesis) and a further phenomenon is tobe found in the so-called “ex-day effects”.

Hans Peter Möller (and Bernd Hüfner, RWTHAachen) analysed in their project on “The Relevance ofCompany Information in the German Capital Market”whether the rendering of accounts is actually important forthe German stock market.The study showed that a varietyof correlations exist between the rendering of accounts andthe stock market. Thus the rendering of accounts can beobserved to influence forecasts, decisions and evaluationsalbeit to varying degrees. According to the authors, theresults showed that it would be advisable from a stock mar-ket point of view to conduct fundamental equity analysis.However, a definite recommendation would require amore in-depth analysis of the effects of the rendering ofaccounts with respect to other groups of persons.

Session: “RegulatingFinancial Markets”

WolfgangBühler

Session: “CorporateFinance”

Bernd Rudolph

GüntherGebhardt

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Peter Anker (RWTH Aachen) presented in his study“Monetary Policy and Financial Markets”. He estab-lished that an underlying uncertainty in financial marketswith respect to the future money market conditions wouldappear to be unavoidable.The announcement effects of anoperative course of action would appear more importantwith respect to money market control.

Hermann Remsperger (Deutsche Bundesbank) didnot believe that there is any compelling reason for such aserious reorganisation at the operative level along the linesof the American central bank.The interest rate corridor ofthe ECB has proved its worth, since firstly the ECB has onthe whole made successful use of its policy instruments incorrectly signalling the course of monetary policy. Second-ly, the principles used to guide the Eurosystem whilst theset of monetary policy instruments was being establishedhave retained their validity. Thirdly, considerations areafoot within American monetary policy which would resultat least partially in a move towards the operative model ofthe ECB.

Wolfgang Gerke (University of Erlangen-Nürnberg)looked at “The Role Played by Privileges in Organ-ising Stock Exchanges” and came to the conclusion that“privileges for brokers are indispensable”. In experimentsit was shown that privileged market participants increasemarket efficiency, place more liquidity in the hands of in-vestors and reduce the volatility of prices. Using empiricaldata from the German stock exchanges, it was demonstratedthat the designated sponsors open up trading opportunitiesfor investors – particularly during periods of low turnover.These market makers are especially active in situationswhere they are most urgently needed. This can be seen inthe commitment of designated sponsors with respect toless liquid securities. In the organisation of ECN's and theXetra trading platform Gerke thus recommended that pri-vileges be accorded to specialised market participants, whomake a commitment to the current market quotation.

Frank Gerstenschläger (Deutsche Börse SystemsAG) believed that in the case of fundamental questionsrelating to the organisation of stock exchange systems simi-lar consideration should be given on the stock exchange tothe optimal use of privileges. Amongst others, so-calledhybrid systems in which privileged market participantscompete with the limited order book are to be examined.

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Franz Schmidt (Trinkaus & Burkhardt KgaA) statedin his discussion that he viewed as necessary further regularinvestigations of the forecasting quality of profit estimatesfrom the viewpoint of analysts, banks, investors, and thecompanies involved, since all concerned would stand togain. It would make sense to continue pursuing empiricalresearch on the subject of accounting policy.The practicalside of company analysis demonstrated time and again thatthe published year-end accounts were consciously carriedout. In anticipation that the wave of consolidation and take-overs will persist further empirical studies in this fieldwould be worthwhile.

Reinhard H. Schmidt (together with AndreasHackethal and Marcel Tyrell, J. W. Goethe-University ofFrankfurt) took an essentially empirical approach to ana-lysing “The Alignment of Financial Systems in Europe”.According to the authors the expectations regarding har-monisation within the EC, at least until the start of mone-tary union, had quite clearly not been met. The Germanfinancial system still appeared to be dominated by thebanks and its British counterpart by the capital market.TheFrench system during the sample period from 1980-1998was subject to the greatest changes and cannot easily beclassified today.The authors forecasted two likely develop-ments: either the financial systems will permanently main-tain their differences or – possibly as a result of crises with-in the systems – an international model will prevail.

Norbert Walter (Deutsche Bank AG) saidin this context that the discussion about the opti-mality of financial systems reminded him ofthe debate on exchange rate regimes. Amiddle course through the various keysystems must be rejected on theoretical grounds. In fact,however, just such a middle course had proved successful inthe form of the EMS. More recently it has been observedthat a fundamental change has taken place within the finan-cial systems of continental Europe.The study did not incor-porate these changes because they had largely occurred inthe smaller EC countries. Furthermore, the Germansystem during recent years has also changed significantlywith respect to certain system characteristics movingtowards the Anglo-American system, without howeverbecoming completely the same.

Session: “Financial Market Trends andMonetary Policy”

NorbertWalter

Session: “Stock Exchange Organisation”

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According to Gerstenschläger Gerke's results are in linewith actual stock exchange observations. Gerke's researchprovides endorsement for the German Stock Exchange forthe New Market. The practical discussion, however, wasmore concerned with the acceptance of privileges sincethese frequently did not meet with the approval of othermarket participants.

Jan P. Krahnen (together with ThorstenFreihube, CFS and J. W. Goethe-University,Frankfurt and Erik Theissen, University ofBonn) presented their project entitled“Market Organisation, Information Aggregation andthe Influence of Intermediaries in SecuritiesTrading.” Three main results obtained. Firstly, within theframework of an experimental and an empirical analysisthe advantages, in the sense of low expected transactioncosts for small investors, of an aggregated stock pricedetermination (the so-called “batched auction”) can bedemonstrated. Secondly, in the case of a market structurewith a broker as market maker relatively high transactioncosts can be observed, which do, however, fall considerablyin the face of competition.Thirdly, an empirical analysis ofthe Frankfurt Stock Exchange shows that the stock brokersthere help to reduce volatility and the price spread withouton average being able to profit from the acquisition of trad-ing positions.This speaks in favour of a positive contributionto liquidity on the part of stock brokers. The resultsemphasise the positive role of the batched auction, of com-petition amongst market makers and an integration ofstockbrokers with respect to the attractiveness of stockexchange trading, in particular in the field of relativelysmall and less liquid securities.

Kurt Bürkin (DG BANK AG) underlined in his dis-cussion the advantage of hybrid trading systems. A “Xetraspecialist”, that is, a specialist in electronic trading plat-forms would be just as feasible. In this case attention shouldfocus on performance-orientated remuneration with abuilt-in “minimum wage” and competition. The lessonslearnt in the USA should be taken to heart and a segmen-tation of markets be avoided.

The subject of the research project entitled“Financial Market Rigging and Regulation” bySiegfried Trautmann (University of Mainz) was trade-based rigging (as opposed to information or action-based

rigging) on financial markets. It was found that the struc-turing of financial contracts to be as heterogeneous as pos-sible can reduce undesirable feedback effects. Further-more, it was observed that dealer profitability does notincrease with average order magnitude. Thus, even in thereal world (or at least in the Xetra world) trade-based rig-ging is not profitable and therefore is not an issue for thefinancial market supervisory authorities.

In his discussion Christoph Gallus (Deutsche BankAG) commented that the dealer transactions analysed werenot necessarily “stand alone” transactions and this wouldreduce the informative value of the results. A quantitative,theoretical model on the influence of block traders on priceswould be desirable and he noted in addition that real mar-kets are restricted and thus hedging is not always viable.

Hartmut Schmidt (University of Hamburg) presentedthe results of his project “From Segmentation to Trans-action Controlling: Comparative Product Tests forTrading Platforms”. According to the author, the messageto investors is that transactions costs are already incorpo-rated in the invoiced price quotations. Cost differencesbetween platforms are of particular consequence whenstock portfolios are frequently switched. Schmidt proposedcomparative product tests for trading platforms. Trans-actions should flow only to those platforms with the lowestimplicit transaction costs. In this way internationalcompetition would be improved and the cost of capital tofirms be reduced.

Robert von Heusinger (Börsen-Zeitung) said thatGermany did indeed exhibit a low price spread but Xetra,for example, did badly with respect to 'market impact'. Heasked why endogenous market makers as in Paris had notbeen introduced. In addition he pointed out that a tradingperiod extension would not be solely advantageous since itwould bring with it a dissipation of liquidity. In the discus-sion the conclusion was reached that all platforms shouldprovide transparency of operations.

Walter Krämer (University of Dortmund)informed conference participants about “Sta-tistical Peculiarities of Financial MarketData”. Financial market data on interest rates,

Session: “Stock Exchange Trading”

Session: “The Analysis of Spot and Forward

Transactions”

Jan P.Krahnen

WalterKrämer

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stock prices and exchange rates and other speculative pric-es are distinguished from other economic time series byvarious peculiarities (such as excessive kurtosis, stochastictrends, ARCH and GARCH effects). The consequences ofthese peculiarities for the rational evaluation of financialinstruments and for various statistical estimation methodsand tests used in financial analysis were discussed and theimplications for trading strategies were deduced.

Andreas Sauer (DG PanAgora Asset ManagementGmbH) criticised the use of statistical propositions basedon averages. In his view forecasts in practice were impor-tant for individual firms. It is precisely with regard to thepower of forecast, however, that statistical analysis could beuseful since statistical peculiarities in economic data areespecially important. He made further suggestions forresearch with respect, for example, to the stability ofvarious phenomena and relevance in finite events.

Günter Bamberg (University of Augsburg) presented“An Empirical and Theoretical Analysis of the DAXFuture Market”. The most significant results showed,firstly, that the concentration on nearby contracts is in-herent to the system.The long-term contract can thereforebe abolished. Secondly, DAX future positions are on aver-age only held for a few days. Furthermore, it was foundthat the move to “Halbeinkünfte Verfahren” and the big taxreform lead to varying taxation of derivative and equitytrading. One modification recommendation, therefore,would be to correct this unequal treatment.

Heinz-Jürgen Schäfer (Dresdner Bank AG) con-firmed the relevance of shareholders dividends and thesupplementary taxation approach with regard to the DAXand DAX Future. He also confirmed the change in DAXregulations from 1st January, 2002 such that the cash divi-dend (gross dividend minus 25% “Definitivsteuer”) is to betaken into account as a fictive reinvestment. In addition heunderlined the significance of the DAX Future market forthe issuing activity and the hedging activities for DAXparticipating receipts.

The conference finished with a discussion lead by adistinguished panel comprising Joachim Faber (Allianz AG),Leonhard H. Fischer (Dresdner Bank AG), GünterFranke (University of Constance), Jan Pieter Krahnen(CFS and J.W. Goethe-University of Frankfurt), WernerG. Seifert (Deutsche Börse AG), and Ernst Welteke(Deutsche Bundesbank) on the agenda for Germany as afinancial centre. The main focus was on consolidation and

fragmentation of the stock exchanges, securitisation, cen-tralisation and the strengthening of financial market super-vision as well as investor protection. In this way all neces-sary reform attempts could be evaluated and are sum-marised below.

Werner G. Seifert wasconfident that the GermanStock Exchange is correctlypositioned. ECNs do notreally pose any threat sinceeconomic acceptance is de-termined as much by clear-ing and settlement as it is by technology and an establishedclientele. As long as the stock exchange guarantees thelowest transaction costs, ECNs will continue not to be aproblem.

Joachim Faber wel-comed all activities whichmade liquid funds available,however he regarded an effi-ciently functioning, price-generating stock exchangeto be indispensable.

Ernst Welteke said thatthe level of regulation withrespect to securitisationshould be kept low in orderto enable efficient changesand accordingly, conditionsshould be adapted to suitthe level of activity.To this extent the market would decidewith respect to demands for the issue of funded obligations,whether a market or bank orientation is more efficient.

Fischer pointed out that the ABS market was con-tinually expanding and frequently could be looked upon asan efficient financial instrument, however a completefinancing via ABS was not feasible. At the end of the day it

is the customer who makesthe decisions and invest-ment banking provides aservice. However, even inthis case “relationships”were becoming increasinglymore important. Moreover,

an active lending portfolio management enables the opti-misation of risk allocation even on the own balance sheet.

Werner G.Seifert

JoachimFaber

ErnstWelteke

LeonhardH. Fischer

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Fisher commented that theboundaries between prod-uct suppliers were dimin-ishing ever further and forthis reason the regulationboundaries should not beartificially upheld. Accord-

ing to him a strong centralised regulation is not necessary.

Welteke countered that harmonisation is more impor-tant since core areas of authority should be the main pointof reference. Even in the future there would be no all-round financial institutes.The banking supervisory authorityshould in the future take on a more systematic supervisionrole and the functional separation of supervision shouldcontinue to be maintained. The supervision authoritieshave difficulties in recruiting personnel and the employ-ment positions should be made more attractive to qualifiedyoung professionals.

Faber put forward the argument that in order toimprove investor protection, existing regulations should beenforced by the supervision authorities.The example of theNew Market showed that it is necessary to make clear toinvestors the relationship between risks and returns.To thisend, publicity regulations for firms must be strictly con-trolled in the event of a stock exchange flotation.

Seifert replied that the stock exchange could notafford an auditing budget and it was already the most strict-ly regimented market. The question of who was to blamewas superfluous as long as the slowly evolving equity cul-ture understood the concept of risk. Increased regulationmust be avoided in order to keep the costs of capital low.

The panel agreed that the following issues should fea-ture on an agenda for Germany as a financial centre:

• Training initiatives relating to financial market issues in theory and practice.

• Attractive jobs in supervision and regulationfields.

• Centralisation and harmonisation of supervision.• Rapid “Finanzmarktförderungsgesetz”.• Corporate control law.• Structural reform for the Deutsche Bundesbank

with an integrated position.

Thorsten Freihube

GünterFranke

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The increasing integration of internationalgoods and capital markets is driven by a decline

of natural and political barriers to trade. Thisis unambiguously true for international capi-

tal markets; trading and communication costs have beendramatically reduced by the development of modern com-munication technologies and in addition restrictions oninternational flows of capital have been abandoned or atleast considerably reduced for many capital markets. Forinternational commodity markets, however, the questionof increasing integration is not so obvious. Although a con-siderable decrease in transportation and information costsand an increasing opening of national markets can be obser-ved, the empirical (and theoretical) literature on this sub-ject still reveals strong evidence of insufficient integration.

In their seminal study of the North American goodsmarkets, Engel and Rogers (1996) – using disaggregatedprice data for 14 US and 9 Canadian cities – show thatprice dispersion within countries is significantly lower thanthat across countries. They interpret the strong impact ofthe border variable on the dispersion of international pricesas evidence of strong segmentation of the US and theCanadian commodity markets. Successive studies have con-firmed these results. Parsley and Wei (2000) and Beck andWeber (2001a) show for the US and Japan that marketsacross these two countries are even more segmented.

A recent CFS study by Beck and Weber (2001b)obtains similar results about goods market segmentationfor the European Union countries based on price data from81 European cities in six European countries prior andduring EMU (see map below for our regional coverage).

Beck and Weber show that EMU has reduced pricedispersion in Europe by roughly 80% within the first twoyears of EMU.Thus, monetary unification has contributedsignificantly to a decline in good market segmentation

within Europe. But markets are far from being perfectlyintegrated yet. Beck and Weber (2001b) also confirm forEurope the finding of Cecchetti, Mark and Sonora (1999),who discover a large degree of persistence in inflation dif-ferentials across US cities. Owing to such inflation dif-ferentials, national governments in the Euro zone face dif-ferential real interest rates (under equalised nominal inte-rest rates) and therefore will have differential real taxliabilities in the servicing of the respective national debts.This may cause problems for the policy of the ECB since itwill result in different national demands concerning mone-tary policy (Does One Size Fit All?).

Whilst for the US many of the issues discussed aboveare analysed as part of a large NBER project, research withEuropean data is still in its infancy.The CFS research pro-ject briefly described here aims at pushing this researchforward.These CFS research activities are conducted with-in a pan-European Research and Training Network (RTN)funded by the European Union.After completing an exten-sive data gathering exercise, a number of research papersare now in the process of being written.Two such papers,already referred to above, will be appearing as CFSDiscussion Papers shortly. The research results have beensubmitted and accepted for presentation at large con-ferences, such as the Annual Congress of the EuropeanEconomic Association in Geneva or the Annual Meeting ofthe German Society for Economic and Social Policy(Verein für Socialpolitik).The authors were also invited toconduct some further research on inflation diversity inEurope as visiting research fellows at the ECB and theypresented some of the above findings in an ECB seminar inMarch 2001. A proposal for studying the “DisintegrationEffects of Currency Crises” has been submitted to theInternational Monetary Fund and there are plans to extendthis line of research to emerging market economies in Asia,Southern America and south-east Europe.

Research Project“National and RegionalPrice Developments inMonetary Unions: How

Far Can We Push theLaw-of-One Price?”

Axel A.Weber

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After completing this initial set ofCFS studies outlined above, the nextstep will be to make the spatial pricedata bank available on the Internet andto involve other researchers from out-side CFS in these projects.Also, gather-ing additional European regional dataon prices, interest rates, wages, output,employment and fiscal data will enableus to extend our research to studyingthe regional impact of monetary andfiscal policy in Europe in more detailthan national data typically allow.

Axel A.Weber

Participants: Antje Brunner (CFS and Humboldt-Uni-versity, Berlin), Jan Pieter Krahnen (CFS and J.W. Goethe-University, Frankfurt)Project duration: 1998 - 2001.

Content:Within the framework of the project the factorsof success for a workout in corporate crises are to be iden-tified using a detailed database. To date special attentionwas given to the question how the danger of a corporaterun can be prevented during a crisis.This refers to prema-ture and more or less simultaneous loan repaymentdemands by lenders, in particular by the banks. Using asample from the nineties, our study provides an insight intothe measures by which banks in Germany influence thesuccess of reorganisation within affected firms. Particularsignificance is attached here to the readiness of banks in theface of a corporate crisis, typically one accompanied for thefirst time by a negative rating, to subordinate the individualinterests of the financing bank to some group interest. Tothis end so-called creditor pools are often set up. Thesepools co-ordinate the creditor bank actions and achieve asignificantly higher degree of success in reorganisation.Thecreation of such pools is made easier when there is a smallnumber of banks involved with approximately equal shares

in funding. A comparison with banking behaviour in othercountries shows that the readiness of banks to support co-ordinated action aimed at reorganisation is particularlyinfluenced by the structure of insolvency laws.

Jan Pieter Krahnen

Under the supervision of Mark Wahrenburg (J.W.Goethe-University, Frankfurt) researchers from the J. W.Goethe-University, Frankfurt (Stefan Feinendegen, EricNowak, Daniel Schmidt) and CFS (Stefanie Franzke)are working together on the CFSresearch project “Venture Capitaland the New Markets in Europe”.The joint aim is to gain a deeperinsight using primarily empiricalanalysis into the funding of growingcompanies or the institutionalisedpre- and after-IPO venture capitalmarkets respectively. In this contextit is above all the venture capital(VC) companies as well as the newmarkets in Europe in their function as an exit channel thatprovide the focus of attention.

By way of example, the current CFS subproject entit-led “The Analysis of Contractual Relations betweenVC Funds and Fund Investors” is presented here.The aimof the project is to analyse the relation between firm-speci-fic and macroeconomic factors and the organisation of con-tractual relations between investors and venture capitalists.The key questions looked at in this analysis are the follow-ing: what contracts are concluded? What arrangements aremade regarding incentives and the sharing of risk? To whatextent are investors protected through the funds via co-venants on moral hazard behaviour? Has the typical form ofcontract changed during the period from 1979 until today?What parallels and what differences do European contractsexhibit in comparison with those from the US?

A comprehensive compilation of the relevant datarequired for the empirical analysis is currently in progress.First results from this analysis are planned for Autumn.

References

Beck, Günter and Axel A.Weber (2001a), “How Wide isthe Pacific?”, mimeo.

Beck, Günter and Axel A.Weber (2001b), “How wide areEuropean borders? – On theIntegration Effects of MonetaryUnions,” mimeo.

Engel, Charles, and John H.Rogers (1996), “How Wide Isthe Border?” AmericanEconomic Review, 86,(December), pp. 1112-1125.

Cecchetti, S.G., C.M. Nelsonand R. Sonora (1999), “PriceLevel Convergence Among United States Cities: Lessonsfor the European CentralBank,” mimeo.

MarkWahrenburg

Research Project“Corporate Finance

when Cash is Scarce:Bank Behaviour in

Distress and WorkoutSituations”

Research Project“Venture Capital andthe New Markets in

Europe”

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During the course of last year studies were completedbased on the extensive data set of the New Market. Theyinclude studies on ad hoc publicity, price behaviour inconnection with the lock up deadlines as well as an analysisof IPO companies financed with and without venture capi-tal. These papers have in part already been published orpresented at big conferences or plans for their disseminationare in the pipeline, for example, at the annual meeting ofthe Verein für Socialpolitik (Society for Economic andSocial Policy): Papers can be downloaded at http://www.ifk-cfs.de.

Further on-going projects are looking at amongstother things the governance structure of companies on theNew Market and the costs of a stock exchange flotation forexpanding companies. Mark Wahrenburg

Due to the well-known problems of public pay-as-you-go pension systems the practical importance and thusalso the economic relevance of funded systems keepincreasing. In addition to traditional products (such asmutual funds, life insurance contracts, savings plans offeredby banks, real estate property) innovative instruments(such as ‘Altersvorsorge-Sondervermögen’, index-linkedlife insurance contracts, and others) are offered in increas-ing number for the purpose of retirement saving.The prob-lem for the private investor now is to select from this richspectrum of products an investment program that optimal-ly meets his individual preferences. Safety and return ofthese products are important quality aspects, which have asignificant impact on the investor’s decisions. Besides insti-tutional factors, like tax laws, the design of mutual funds iscrucial for their risk and return characteristics. Further-more the suppliers of mutual fund products must promisea certain minimum return to the investor, as stated in thecurrent version of the ‘Altersvermögensgesetz’ (Retire-ment Savings Act). This means that the investor will nothave to suffer from shortfall risks caused by adverse move-ments on the capital markets. On the other hand, themutual fund companies now face market risks, since in the

case of a shortfall equity has to be used to fill the gap.Theproblem for them is to ensure the credibility of these prom-ises by taking appropriate safety measures as well as toallow for sufficient up-side potential in scenarios of positivecapital market movements. Besides the question of howmuch equity a mutual fund firm should have these twoaspects are primarily related to an adequate individualproduct design.

It is the aim of the research project on“Institutional Investors: BehavioralPatterns and Market Impact” to analysethe long-run risk and return charac-teristics of alternative fund productsfrom a finance perspective. Under thesupervision of Raimond Maurer andChristian Schlag (both J. W. Goethe-University, Frank-furt) the view of the investor on the one hand and that of amutual fund firm which has firmly promised to deliver acertain minimum return will be analysed in different sub-projects. Raimond Maurer

Since January 2001, the following contributions havebeen published in the CFS Working Paper series. They areavailable for downloading from the CFS homepage viahttp://www.ifk-cfs.de.

2001/01 Stefanie FranzkeUnderpricing of Venture-Backed and Non Venture-Backed IPOs: Germany’s Neuer Markt

2001/02 Roland BeckDo Country Fundamentals Explain Emerging Market Bond Spreads?

2001/03 Markus Kern / Bernd RudolphComparative Analysis of Alternative Credit RiskModels – an Application on German Middle Market Loan Portfolios

2001/04 Antje Brunner / Jan Pieter KrahnenCorporate Debt Restructuring: Evidence on Lender Coordination in Financial Distress

2001/05 Ralf Ewert / Andrea SzczesnyCountdown for the New Basle Capital Accord.Are German Banks Ready for the Internal Ratings-Based Approach?

RaimondMaurer

CFS Working Papers

Research Project“Institutional

Investors: BehavioralPatterns and Market

Impact”

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Psychology and economics – a contradiction in terms?Not necessarily for a comparatively young research disci-pline called “Behavioral Finance”. Insights from psychology

are used in order to be able to understand betterthe behavior on financial markets. The mostrecent research results and their

implementation in practice werethe subject of a CFS conference,which took place on 26th

March, 2001 in co-operation with JoachimGoldberg (cognitrend GmbH) and MartinWeber (University of Mannheim).

The meeting was opened by Josef Ackermann(Deutsche Bank AG), who pointed out that factors, refer-red to simply in the terminology of traditional theory offinance as anomalies, play a far greater role on the marketsthan is allowed for in the traditional theory of finance. It is,however, the understanding of what drives the marketwhich puts us in the position of being able to assess thesituation and the risks, and to make use of investmentopportunities.

“Risk Perception and Portfolio Structure” wasthe subject of the first paper. That defined risk often doesnot coincide with perceived risk was the first hypothesisput forward by Martin Weber. Portfolio decisions arethus not influenced by mathematical measures of risk butare instead driven by subjective factors. Hence, studies onrisk perception show that the means of diversification areunderestimated since people find it difficult to think interms of correlations. Moreover, even when market parti-cipants are in the position of being able to estimate cor-relations correctly, they are still frequently not taken intoaccount in diversification decisions. Also the risk attachedto foreign equity is estimated to be higher than that ofdomestic equity, an effect referred to as “home bias”. Long-term risks are believed to be lower than short-term risksand market participants have greater faith in mean reversionas historical prices series show. Weber's advice to invest-ment consultants is thus as follows: clients should be warnedof the danger of biased risk perception so that they neithermiss opportunities nor unintentionally take risks.

CFSexecutive conference“Taming the Devil on your Shoulder – Trading

Models to eliminate the Biases” was the title of thepaper presented by Herman Brodie (cognitrend GmbH).People are their own worst enemies.They have a distortedperception towards increasing prices (selective percepti-on), tend to be overconfident and become attached to sunkcosts. The biggest problem, however, is that losses are leftto run and profits realised too early (disposition effect),instead of realising small losses and letting profits run awhile.The solution to all these human weaknesses, accord-ing to Brodie, is to be found in a computer-assisted tradingmodel, which on the one hand does not of course exhibitthese human behavioural patterns, but on the other handuses knowledge about them and attempts to exploit themin a profitable manner. A trading model has the advantagethat it is testable and consistent and has no memory. Thedevelopment of such trading models is a service whichcognitrend offer to their customers.

“Home Sweet Home. No Happiness Alone! On theSubject of Home Sentiments, Competence and Port-folio Structure”– under this heading Dirk Schiereck(University of Witten-Herdeke) analysed the effect knownas home bias. Investors only buy what they think they knowand therefore prefer to invest in the domestic market, thatis, they do not diversify enough. Moreover, the extent ofhome bias can also not be explained by factors such as trans-action costs, legal regulations or inflation hedging. Studiesshow that investors seem to be generally optimistic withrespect to the performance of the domestic market andthey also have a more strongly subjective perception ofcompetence. This increased feeling of competence goeshand in hand with a subjective probability distribution forfuture yields on shares, which for domestic shares exhibit alower diversification.

“Too Many Heads spoil the Price – Group Deci-sions on Financial Markets” was the title of the presen-tation given by Joachim Goldberg (cognitrend GmbH).Goldberg discussed group dynamics, which suggest on theone hand that groups are very popular but on the otherhand make it more difficult to arrive at efficient decisions.A group provides security, it socialises failure and allowssuccess to be shared. But there is no room in a group forminority opinions or doubters. There is pressure to con-form. If there is a leader in the group then other groupmembers tend to accept her opinion. Groups also exhibitthe tendency to make risky investment decisions; the wil-lingness to take on risks is often admired and a failure isshared by the whole group. Goldberg therefore recom-

Advances in Behavioral Finance

MartinWeber

JoachimGoldberg

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mends to groups that the person with the least experienceshould voice her opinion first and the leader of the grouplast. It is the task of group leaders to question opinions.They should not in the first instance just try to find supportfor their own ideas. And not only losses should be analysedbut also profits: “Could we have made more?” Finally, listento the “court jester”, to loners and take their opinionsseriously.

Bruno Biais (University of Toulouse) talked about“Psychological Traits and Trading Strategies”. Bymeans of an experiment involving conference participantsthemselves, Bruno Biais demonstrated the effects of over-confidence. He asked the participants questions such as“What was the stock price of Deutsche Post on 15thMarch, 2001 and on 22nd March, 2001” and “How manypeople worked in the construction industry in 1998?” Theparticipants had to choose a 5% confidence interval such

that there was only a 5% chance that the correctanswer lay outside this confidence interval.Theinteresting result showed that the more confi-

dent some one feels about an answer thesmaller the confidence interval that is chosen

and thus the chances of being wrong are often higher thanwith somebody who has no knowledge of the subject. Inother words, overconfidence leads to wrong decisions, thatis, to a greater number of unprofitable decisions. Biais'advice was to recognise your own cognitive biases, correctthem and thus improve the effectiveness of your tradingdecisions!Imke von Königsmarck

“Financial markets – life in a time-lapse.”(Joachim Goldberg)“Be loyal to the problem and not to the group.”(Hanspeter Stücheli)“Behavioral finance – a chance for the financialsector.” (Bruno Biais)“Subjective risk is not measured in volatility.”(Martin Weber)

Being well qualified can only be achieved by ensuringa continual update of knowledge. The CFS seminars forspecialist and executive personnel as well as interestedresearchers provide an important basis for efficiently put-ting into practice at work what has been learnt and theyalso cover many fields ranging from equity research and thebalancing of financial instruments to the evaluation ofinterest rate products or derivatives. Owing to the closelinks between research and executive development at CFSand the intensive collaboration with researchers fromhome and abroad, the most recent insights from financialmarket research are incorporated directly in the seminars.These seminars take place under ideal conditions at thetraining centre of the Commerzbank in Glashütten-Oberems (Taunus) as well as at the training centre of theDeutsche Bundesbank in Eltville with the supervision ofacademic experts and leading practitioners. Special termsare available for all participants from member firms.

During the second half of 2001 CFS is offering amongstother things the opportunity to acquire qualifications in thefollowing subjects (a complete timetable is included in theNewsletter):

Successful strategies for stock market portfoliomanagement require a sound knowledge of stock marketresearch as well as a realistic evaluation of the opportuni-ties available for obtaining excess yields through styleinvesting.The evaluation instruments largely used hithertowill not be sufficient in the future because investors areplacing higher demands on professional financial analysisand investment consulting. The competent approach todealing with cash-flow and option-based evaluationmethods is rapidly becoming an important factor for the

Bruno Biais

CFSseminars

Moving Ahead withKnowledge

Forthcoming Seminars

Aktienbewertung und Style-Investing

(Seminar in German language)

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success of asset management. CFS acknowled-ges the resulting demands for qualificationtraining by imparting the required knowledge

in the seminar on “Stock Market Analysis andStyle Investing”. This seminar will be leadby Manfred Steiner (University of

Augsburg), who is a certified expert in the field of capitalmarket research and portfolio management.Date: 14th/15th September, 2001.

In this CFS seminar insights from current researchinto the intersection of corporate finance, mar-keting and IT will be analysed using concreteexamples from business practice. Under thesupervision of Hans Ulrich Buhl (Univer-sity of Augsburg) and Andreas Will (Uni-

versity of Magdeburg) fundamental and com-prehensive knowledge will be imparted aboutmodern and functional concepts relating to theorganisation of customer relations in multi-channel banking.

Date: 19th/20th October, 2001.

Understanding emerging financial markets is increas-ingly important for a successful banking and investmentstrategy.A balanced judgement is required of both the risksand opportunities for investing in these markets, since thehigh returns have to be weighted against the potentiallyhigher risks. What are those risks, and do market spreadsadequately price them? What alternative risk indicators areavailable? Can the analysis of the history of financial crisesin emerging market economies help to predict future cris-es? How do policymakers react to such crises and how doesofficial intervention in the markets affect investors andfinancial institutions? What have international financialinstitutions learnt from the events in Mexico, Asia and

Russia, and, more recently, in Argentina and Turkey? Theseare only a few questions that will be analysed extensively inthis seminar by an experienced practitioner,Harald Eggerstedt (Commerzbank AG),and an academic expert, Axel A.Weber (CFSand J.W. Goethe-University).Their in-depthcoverage of theories, facts and empiricalinsights combined with a hands-on case-studies approachwill provide a unique account of our current understandingof the causes and consequences of financial crises in emer-

ging market economies.The number of parti-cipants is limited thus creating an ideal frame-

work for an intense learning experience. Thecourse language will be either English orGerman depending on the majority of parti-

cipants.Date: 23rd/24th November, 2001.

More information on this and other events can be found underwww.ifk-cfs.de or call us and speak to either Christiane Bauder orBarbara Kleiner,Tel.: +49-(0)69-242941-30 or -25, Fax: +49-(0)69-242941-33, Email: bauder@ifk-cfs.de and kleiner@ifk-cfs.de.

Customer RelationshipManagement im Multi-

Channel Banking (Seminar in German language)

Emerging MarketsEconomies: Risks and

Opportunities for Banksand Investors

ManfredSteiner

Andreas Will

Hans UlrichBuhl

HaraldEggerstedt

Axel A.Weber

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CFS: The Center for FinancialStudies was founded in 1967 as theInstitut für Kapitalmarktforschung.Why was there a call for a researchinstitute which dealt with capital mar-ket issues?

Karl Häuser: Capital marketswere still unknown territory inthe sixties. Of the three factorsof production both labour andland were analysed in economictheory and empirical researchbut this was rarely the case withrespect to the factor capital orcapital markets. Through the2nd World War and its after-math, such as the currencyreform of 1948, practically allmonetary capital was destroyedand Germany – West Germany,that is – had to start fromscratch. It was nearly a decadeafter the 1948 currency reformbefore the capital market slowlybegan to revive and the greaterpart of capital resources was nolonger controlled by the govern-ment budget and firms no lon-ger had to finance investmentsall by themselves, or at the out-side with a bank loan. At anyrate the equity ratio fell duringthe course of the fifties from 50to 40%. Until that point and forsome time afterwards the notionof an optimal use of the factorcapital with the interest rateserving as a control instru-ment was scarcely envisaged.However, it could not beignored that countrieswhich were rich in thesupply of land and labour

were still not becomingaffluent. The key must

22

therefore rest with the third,hitherto neglected, factor capi-tal. Thus it was deemed neces-sary to research the insti-tutional and legal conditionswhich would lead to the opti-mal employment of capital. Theactual idea of founding an insti-tute stemmed from world ofpractice, that is, the banks,above all the private bankersand the Frankfurt stock ex-change.

CFS: Today it is hard to imagine thatthere was a time when the factor capi-tal received scarcely any attention,especially when that time was only 34years ago.

Karl Häuser: Germany was along way behind other coun-tries such as the UK, USA andFrance in the field of banking,stock exchanges and monetarysystems. This was not only truein practice but also with respectto economic research. If youwere to carry out a test and taketo hand a textbook on econo-mics from the sixties then youwould look in vain both in theindex and in the page of con-tents for the key words “stockexchange”, “dividend”, “capitalmarket” or “long-term interestrate”.They were still not part ofthe academic consciousness letalone that of public authoritiesor indeed the general public. Asavings account was kept for “arainy day” or to put towardsbuying a house, but by no meansin order to invest money. Onlyabout 3% of the populationowned shares and they were

Labour, Land....Capital? CFS in the E

Interview withProfessor emeritus

Dr. Karl Häuser

• Graduate in economics.• Born on 21.10.1920 in Ober-

mühle/ Württemberg.• Married to Jutta Häuser, one

son, Christoph.• 1958-1962: Professor for public

finance at the University of Kiel.1962-1986: Professor for public sector economics at the J.W. Goethe University,Frankfurt am Main.1986 Professor emeritus.

• 1968-1992: Director of the Institut für Kapitalmarkt-forschung (now Center for Financial Studies).

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e Early Era of Capital Market Research.

usually inherited. I can recall anunusual incident which hap-pened at that time. It must havebeen 1957. A woman stopped infront of the Frankfurt Effekten-und Wechselbank on Kaiser-straße in order to look moreclosely at a list of quotationshanging there.This was quite anunbelievable sight at the timenot least because there was noofficial interest shown in thecapital market in those days.Shares were something for spec-ulators and not for normal citi-zens. Also the interested personwas a woman and this made thewhole situation even more un-usual.

CFS: Public interest in the capitalmarket was thus very low in the six-ties but academic interest was slowlydeveloping. In what state was thecapital market itself at that time?

Karl Häuser:The founding phaseof the Institut für Kapitalmarkt-forschung coincided with a cri-tical period for the capital mar-ket. The capital market was stillsomewhat shaky on its feet andneeded crutches, for example,in the form of a central capitalmarket committee deemed tobe necessary even by that archliberal minister for economics,Ludwig Erhard, in order to sta-bilise the market and the inte-rest rate. In 1965 a coupon taxwas introduced. This chargedforeigners with 25% tax at sourceon interest accrued on domesticsecurities. The aim was to stemthe growing flow of foreignmoney, which made the domes-

tic money supply expand andforced the Bundesbank to pur-sue continually restrictive poli-cies. The Germany currency,which had been avoided inter-nationally for nearly three dec-ades now had to be protectedfrom too high a demand fromabroad. However the coupon taxdid not scare off foreign consu-mers, but severely affected thedomestic stock exchange climateinstead. The total volume ofissues shrank in 1966 to less thanhalf of the previous year's vol-ume. The minister of financeowing to the low market pro-ductivity renounced any fur-ther borrowing and the “roundtable” – that is the coalition ofpublic borrowers – recom-mended that he should do so.Share prices fell in 1969 to theirlowest level since 1959. Banks,stock exchanges and financialmanagers were looking for aca-demic counsel.

CFS: Until 1992, that is for 25 years,you were Director of the Institut fürKapitalmarktforschung.Were you ableto realise your personal goal of pro-moting the capital market?

Karl Häuser: Does anyone everreach a state of knowledge thatmight be called sufficient? Inthose days we had to start bylaying the foundations beforebeing able to erect a scientificbuilding and perhaps even layone or two tiles on the roof.

CFS: One final question. Last yearyou celebrated your eightieth birth-day yet you are still very active in

capital market research and act as aconsultant on many committees. Howdo you manage it?

Karl Häuser: It is not quite asexciting as all that anymore. Oldage takes its toll and you have toaccept that the circle is gettingsmaller. I am extremely gratefulthat I am still able to work and itis a pleasure to note the good-will shown to me at the CFS.

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Curriculum Vitae:1966: graduated in economics at theJ.W. Goethe-University, Frankfurt amMain

1968-1971: academic staff member atthe Institut für Kapitalmarktforschung

1971: doctoral thesis on the subject of“Kapitalmarktzins – Sparen und Inves-tieren”, which was published as thefirst volume in the IfK “monograph”series

1971-1998: moved to the Internatio-nal Monetary Fund (IMF); first of allin the European and Asian depart-ment working on the stabilisation andadjustment programmes; transferredto the IMF institute to supervise themacroeconomic training of officials inmember states, first of all in Asia andthen in the Caribbean, and after thechange in the political system also inEastern Europe and the former Soviet

republics; from 1993 onwards incharge of the setting up and runningof the Pacific Financial Technical Assis-tance Centre, which supervises islandcountries from the North to theSouth Pacific through training and on-going counselling in the fields of bud-get policy, tax administration, statisticsand bank monitoring.

Since 1998 working as a photographerunder the name of Jan Savua, withexhibitions to date in America andEurope.

The first two academic staff members at tFormerly known as Institut f

• Graduate in economics.• Born on 25th January, 1939

in Nagyszékely, Hungary.• Married to Maria Somogyi,

one son, Roland.• Academic staff member at the

IfK from 1968 to 1971.

Dr. János Somogyi

“When I look back on my time spent at the IfK ....I can recall a certain

atmosphere, which was characterised by intensive efforts to uncover original

insights into economic problems and to pursue animated discussions in the

friendly circle of colleagues. It was a commonly held belief that it was vital

to come up with and make known new unbiased findings, which would then

also lead to professional success. (This experience was not always an advan-

tage in later years.The later experience that in reality conforming to expec-

tations anticipated a priori from above was more likely to provide the key

to success and the ease with which many colleagues were able to accept this

stance contributed decisively to my decision finally to leave the profession).”

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• Graduate in economics.• Born on 23rd September,

1944 in Weckbach/Unter-franken, Germany.

• Married to Christa Walter,two daughters, Christine and Jeanette.

• Academic staff member at the IfK from 1968-1971.

Curriculum Vitae:1968: graduated in economics at theJ. W. Goethe-University, Frankfurtam Main

1968-1971: academic staff member atthe Institut für Kapitalmarktforschung,Frankfurt am Main

1971: doctoral thesis on the subject of“Kapitalertragsbesteuerung und Kapi-talmarkt”

1971: Move to the Institut für Welt-wirtschaft, Kiel; firstly as a researchassistant to Professor Giersch, andlater as head of a research group;from 1975 head of the department forbusiness cycle research; from 1978Professor and Director at the Institutfür Weltwirtschaft; from 1986 head ofthe department for resource econo-mics; Summer 1986 for a year as theJohn J. McCloy Distinguished Re-search Fellow at the American Insti-tute for Contemporary German Stu-dies at the Johns Hopkins University,Washington D.C., USA

1987: Economist in the economicresearch department of the DeutscheBank AG, Frankfurt am Main; since1990 Chief Economist of the Deut-sche Bank Group; since 1992 managerof Deutsche Bank Research and Chiefeconomist of the Deutsche BankGroup, since July 2000 also a mem-ber of the Committee of Wise Men onthe Regulation of European SecuritiesMarkets at the EU Commission inBrussels.

t the Center for Financial Studies (CFS) –t für Kapitalmarktforschung (IfK)

Prof. Dr.Norbert Walter

“When I look back on my time at the IfK ....I think first of all of the col-

laboration with the Frankfurt Stock Exchange and our development work on

the setting up of the DAX. But I also recall the morning breaks with Janos

Somogyi's hot chillies, which regularly had us moved to tears!”

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The Center for Financial Studies f

To commemorate the50th anniversary of the

J.W. Goethe-University in Frankfurt,some banks, aboveall private bankersand the Frankfurtstock Exchange setup a fund for estab-lishing a research institute.

The proclamation forfounding a research in-

stitute is signed.The institute is fund-ed solely (even today) by donationsand membership fees.

The Institut für Kapital-marktforschung is estab-

lished as a research institute associat-ed with the J. W. Goethe-University.It is sponsored by the Gesellschaft fürKapitalmarktforschung e.V., whichwas founded in the same year. It is thefirst research institute in the GermanFederal Republic which is concernedsolely with issues relating to capitalmarkets.

The Institute takes up itswork. Its initial accom-

modation is in the Robert-Mayer-Str.20, from 1971 in the Sophienstr. 56and from 1989 in the Zeppelinallee29. Prof. Karl Häuser (J. W. Goethe-University, Frankfurt am Main, Chairfor public sector economics) is thehead of the Institute. In addition there

are initially two aca-demic members ofstaff, two tempo-rary employees anda part-time secre-

tary. In 1968 the lecture series on thetheme of “Current problems of thecapital market” is established. Twopublication series are introduced en-

titled “Colloquia discussions” and“Monographs”. The first researchpaper focuses on capital market de-velopment since 1957. Studies followon the taxation of capital investmentincome, the paradox of returns(stocks and shares versus annuities),on money market dependence of thecapital market, financial market issuesand many more.

Prof. Karl Häuser be-comes professor emeritus

and concentrates more on his role asthe Director of the Institute.

Prof. Karl Häuser retiresas Director of the Insti-

tute. Prof. Bernd Rudolph and Prof.Wolfgang Gebauer (both from theJ. W. Goethe-University, Frankfurtam Main) are made Directors of theInstitute. Professor Rudolph is thefirst business economist to becomejoint head of the Institute. The re-search activities can thus be moredirectly focussed on the link betweenbusiness studies (finance) and econo-mics (money and exchange rates).Thepublication series “Contributions tothe theory of capital markets” is estab-lished.

P ro f .Bernd

Rudolph moves tothe University ofMunich but remains a Director of theInstitute.

Prof. Wolfgang Gebauerresigns from the Insti-

tute. Prof. Jan Pieter Krahnen trans-fers from the University of Gießen tothe University of Frankfurt and be-comes at the same time a Director of

the Institut für Kapi-talmarktforschung.Aworking group ofeconomists is formedwho call for the

institute to be extended in the area ofexecutive development.

The Institut für Kapital-marktforschung is given

an additional name “Center for Finan-cial Studies” – re-flecting the increas-ingly internationalorientation of re-search activities.The first research conference is orga-nised and takes place. Furthermore,the CFS executive development pro-gramme comes into being. Its aim isto provide qualifications and furthertraining for specialists and executivepersonnel from the financial sector.The financial base of the Institute canbe considerably enlarged thanks tosupport from members of the Societyfor Financial Market Research. A firstnetwork programme is begun on thesubject of “Financial Risk Manage-ment in German Banks” with the co-operation of the most importantGerman commercial banks.

The CFSm o v e s

to quarters in theLandeszentralbankin Hessen, Taunus-anlage 6. Dr. Karlheinz Schwuchowbecomes Managing Director of theExecutive Development Programme.

The CFS Working Papersseries is set up.

The first edi-tion of CFS

News appears.

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es from its beginnings until today.

Prof. Rudolph resignsfrom the CFS.At the end

of 1998 Prof. AxelA. Weber from theUniversity of Bonnmoves to the Uni-versity of Frankfurtand becomes Co-director of the CFStogether with Prof. Krahnen. Thefield of research is now extended toinclude not only the area of “Financialmarkets and intermediaries” but alsomonetary economics. The lectureseries is also extended.

Dr. Antje Beckerbecomes ManagingDirector of the Exe-

cutive Development Programme.

The fields of researchand executive develop-

ment are now organised jointly underthe management of Dr. Antje Becker.CFS becomes the German partner inthe European Union's research net-work on “Understanding FinancialArchitecture: Legal and PoliticalFrameworks and Economic Efficien-cy” and “The Analysis of InternationalCapital Markets: Understanding Eu-rope’s Role in the Global Economy”.

The Center for FinancialStudies - Institut für Ka-

pitalmarktforschung is now only re-ferred to as the Center for FinancialStudies. In addition to the directorsand the managing director, there arecurrently eight academic staff mem-bers and a visiting research fellow,who is here as part of the EuropeanResearch Training Network (RTN).There are also eight administration

staff members involved in the organ-ising of lectures, conferences, semi-nars and public relations as well asfour temporary staff.

Imke von Königsmarck

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Interested? We shall look

forward to hearingfrom you!

Membership of the “Gesellschaft fürKapitalmarktforschung e.V.”

What is the“Gesellschaft für

Kapitalmarkt-forschung e.V.”?

The “Gesellschaft für Kapital-marktforschung e.V.” is the organisa-tion which sponsors the CFS. Thisorganisation was established in 1967with the aim of promoting economicresearch in the field of capital marketsand making the results known to thegeneral public. Furthermore, the or-ganisation was set the task of provid-ing education and executive develop-ment training in the field of financialmarkets. To this end in 1967 the“Gesellschaft für Kapitalmarktfor-schung e.V.” founded the “Institut fürKapitalmarktforschung”, which laterbecame the “Center for Financial Stu-dies”.

Why does the“Gesellschaft für

Kapitalmarkt-forschung e.V.” need

members?

CFS finances its research andprogramme of events via membershipfees, donations and the proceeds fromevents and publications.That is to say,CFS does not receive any public fund-ing. CFS is currently sponsored byapproximately 120 banks and insuran-ces as well as consultancy firms andbusiness enterprises. A current list ofmembers can be found on our home-pages (www.ifk-cfs.de).A wider circleof members would enable us to ex-tend and make more international ouractivities.

What advantages are there in becoming a member?

Becoming a member of the “Ge-sellschaft für Kapitalmarktforschunge. V.” means you have easy access tointernational research in the fields offinancial and monetary economics.You receive a ticket contingent free ofcharge to certain CFS events and aregiven preferential treatment with re-spect to invitations to research confe-rences as well as a 10% discount onexecutive development events. Youalso receive all CFS publications freeof charge. Furthermore, we provideassistance in researching issues relatedto capital markets and monetarypolicy. The CFS specialist library isalso open to members.

How to become amember of the

“Gesellschaft fürKapitalmarkt-

forschung e.V.”?

To become a member you cancontact Christiane Bauder (069/2429 41-30), send an e-mail (bauder @ifk-cfs.de) or complete and forward tous as a hard copy the application formfrom our homepage (www. ifk-cfs.de).The annual membership fee from theyear 2002 for individual members isEuro 100, for firm members Euro1500 and for sponsoring membersEuro 7500. Since the “Gesellschaft fürKapitalmarktforschung e.V.” is a non-profit making organisation the mem-bership fee is tax deductible.

PublisherCenter for Financial Studies an der Johann Wolfgang Goethe-Universität, FrankfurtTaunusanlage 6D-60329 Frankfurt/M.Tel: 069-242941-0Fax: 069-242941-77http://www.ifk-cfs.de

EditorDr. Imke Gräfin von Königsmarck

DesignDirk Stähling,Darmstadt

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