Research articles for the 2019-11-08
A Requiem for the Fiscal Theory of the Price Level
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The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
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The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
A Three-Stage Model of the Volume-Volatility Relation in the Junk Bond Market during the 2007â€"2008 Financial Crisis
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This article examines the joint dynamics of volatility-volume relation in the high-yield (junk) corporate bond market during the 2007-2008 financial crisis. I propose a new empirical model of three-stage equations to better estimate the volatility-volume relation that helps in alleviating econometric problems. My central finding is that different methodologies can easily lead to different inferences about the volatility-volume relation in the junk bond market. More specifically, conclusions about the statistical significance and/or the direction of the association between both variables is dependent on the econometric methodology used. From a practitioner perspective, it is important for professional traders holding positions in fixed income securities in their trading accounts to be aware of their asymmetric time-varying volatility-volume shifting trends. Such knowledge helps traders diversify their positions and manage their portfolios more appropriately.
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This article examines the joint dynamics of volatility-volume relation in the high-yield (junk) corporate bond market during the 2007-2008 financial crisis. I propose a new empirical model of three-stage equations to better estimate the volatility-volume relation that helps in alleviating econometric problems. My central finding is that different methodologies can easily lead to different inferences about the volatility-volume relation in the junk bond market. More specifically, conclusions about the statistical significance and/or the direction of the association between both variables is dependent on the econometric methodology used. From a practitioner perspective, it is important for professional traders holding positions in fixed income securities in their trading accounts to be aware of their asymmetric time-varying volatility-volume shifting trends. Such knowledge helps traders diversify their positions and manage their portfolios more appropriately.
An Intertemporal Preference with Risk and Loss Aversion: Equilibrium Analysis
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We study a pure exchange economy with heterogeneous agents - a loss averse agent and a non-loss averse agent. We derive the equilibrium allocations and prices in closed-form. The equilibrium consumption of the loss averse agent displays consumption ratcheting and the "catching up with Joneses effect" without having external habit formation in her preference. The model also can explain a number of stylized facts in the consumption data, including the excess smoothness and excess sensitivity of consumption, and the asymmetric sensitivities to income shocks. As for the asset pricing implications, the model generates the dynamics of the stock and bond prices consistent with those in the business cycle and asset pricing moments are well matched with reasonable parameter values. The model also generates upward sloping, flat and downward sloping yield curves for the term structure of interest rates.
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We study a pure exchange economy with heterogeneous agents - a loss averse agent and a non-loss averse agent. We derive the equilibrium allocations and prices in closed-form. The equilibrium consumption of the loss averse agent displays consumption ratcheting and the "catching up with Joneses effect" without having external habit formation in her preference. The model also can explain a number of stylized facts in the consumption data, including the excess smoothness and excess sensitivity of consumption, and the asymmetric sensitivities to income shocks. As for the asset pricing implications, the model generates the dynamics of the stock and bond prices consistent with those in the business cycle and asset pricing moments are well matched with reasonable parameter values. The model also generates upward sloping, flat and downward sloping yield curves for the term structure of interest rates.
Are Secondhand Internal Whistleblowing Reports Credible?
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This study examines the characteristics, credibility, and value of internal whistleblowing reports based on secondhand information. We analyze over two million reports submitted to over one thousand publicly traded U.S. firms between 2004 and 2017 and find that claims in secondhand reports are 47.7% more likely than firsthand reports to be substantiated by management, which suggests that management views many secondhand reports as credible. Further, we find negative associations between the number of secondhand reports and negative outcomes including lawsuits and government fines. These findings are consistent with secondhand reports providing valuable information that allows management to identify and address issues before they become more costly to the firm.
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This study examines the characteristics, credibility, and value of internal whistleblowing reports based on secondhand information. We analyze over two million reports submitted to over one thousand publicly traded U.S. firms between 2004 and 2017 and find that claims in secondhand reports are 47.7% more likely than firsthand reports to be substantiated by management, which suggests that management views many secondhand reports as credible. Further, we find negative associations between the number of secondhand reports and negative outcomes including lawsuits and government fines. These findings are consistent with secondhand reports providing valuable information that allows management to identify and address issues before they become more costly to the firm.
Bankruptcy's Home Economics
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This essay began its life as a commentary on Elizabeth Warren’s article “The New Economics of the American Family†at the American Bankruptcy Institute's 25th Anniversary Symposium of the Bankruptcy Code in 2003. (Both the Warren article and my commentary were published in the symposium in the American Bankruptcy Institute Law Review.) “The New Economics of the American Family†was drawn in many respects from then-Professor Warren’s co-authored book, The Two Income Trap. The essay refers to both, though it puts particular emphasis on the article. The essay begins by briefly describing the basic thesis of the article-- that today's two-income families are actually worse off financially than their single-income counterparts of a generation ago--and by assessing both its power and its potential limits. The essay then considers then-Professor Warren's proposals for responding to the most obvious causes of the financial predicament that so many American families find themselves in. It concludes by exploring several of the myths and morals of bankruptcy, and by outlining several of my own candidates for reform.
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This essay began its life as a commentary on Elizabeth Warren’s article “The New Economics of the American Family†at the American Bankruptcy Institute's 25th Anniversary Symposium of the Bankruptcy Code in 2003. (Both the Warren article and my commentary were published in the symposium in the American Bankruptcy Institute Law Review.) “The New Economics of the American Family†was drawn in many respects from then-Professor Warren’s co-authored book, The Two Income Trap. The essay refers to both, though it puts particular emphasis on the article. The essay begins by briefly describing the basic thesis of the article-- that today's two-income families are actually worse off financially than their single-income counterparts of a generation ago--and by assessing both its power and its potential limits. The essay then considers then-Professor Warren's proposals for responding to the most obvious causes of the financial predicament that so many American families find themselves in. It concludes by exploring several of the myths and morals of bankruptcy, and by outlining several of my own candidates for reform.
CLIMAFIN Handbook: Pricing Forward-Looking Climate Risks Under Uncertainty
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Aligning finance to sustainability requires methodologies to price forward-looking climate risks and opportunities in financial contracts and in investors’ portfolios. Traditional approaches to financial pricing models cannot incorporate the nature of climate risk (i.e. deep uncertainty, non-linearity and endogeneity), and of financial risks (interconnectedness and complexity). To fill this gap, we developed a transparent, science-based framework to assess and price climate financial risks under uncertainty, the CLIMAFIN tool. It embeds climate scenarios adjusted financial pricing models (for equity holdings, sovereign and corporate bonds), climate scenarios conditioned risk metrics (such as the Climate Spread and the Climate Value-at-Risk). These allow us to introduce forward-looking climate risk scenarios in the valuation of counterparty risk, in the probability of default and largest losses on investors’ portfolios. This handbook is intended to support investors in the assessment of forward-looking climate risks in their portfolios and in the identification of portfolios’ risk management strategies, and financial supervisors in the analysis of risk exposures that could have implications for systemic risk and in the design of prudential measures to mitigate such risk.
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Aligning finance to sustainability requires methodologies to price forward-looking climate risks and opportunities in financial contracts and in investors’ portfolios. Traditional approaches to financial pricing models cannot incorporate the nature of climate risk (i.e. deep uncertainty, non-linearity and endogeneity), and of financial risks (interconnectedness and complexity). To fill this gap, we developed a transparent, science-based framework to assess and price climate financial risks under uncertainty, the CLIMAFIN tool. It embeds climate scenarios adjusted financial pricing models (for equity holdings, sovereign and corporate bonds), climate scenarios conditioned risk metrics (such as the Climate Spread and the Climate Value-at-Risk). These allow us to introduce forward-looking climate risk scenarios in the valuation of counterparty risk, in the probability of default and largest losses on investors’ portfolios. This handbook is intended to support investors in the assessment of forward-looking climate risks in their portfolios and in the identification of portfolios’ risk management strategies, and financial supervisors in the analysis of risk exposures that could have implications for systemic risk and in the design of prudential measures to mitigate such risk.
Can Firms Run Away from Climate-Change Risk? Evidence from the Pricing of Bank Loans
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We examine whether climate-change risk affects firms’ cost of capital when firms can adapt to the risk. We show that firms’ cost of long-term loans increases with the sea level rise (SLR) risk. This effect is stronger when it is harder for firms to relocate or otherwise diversify SLR risk. Moreover, the spread-risk sensitivity is higher if the lead bank has more experience with the risk and in times of heightened media attention. This suggests banks have limited attention to this unconventional risk. Finally, affected firms respond to the pricing of the risk by using less long-term debt.
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We examine whether climate-change risk affects firms’ cost of capital when firms can adapt to the risk. We show that firms’ cost of long-term loans increases with the sea level rise (SLR) risk. This effect is stronger when it is harder for firms to relocate or otherwise diversify SLR risk. Moreover, the spread-risk sensitivity is higher if the lead bank has more experience with the risk and in times of heightened media attention. This suggests banks have limited attention to this unconventional risk. Finally, affected firms respond to the pricing of the risk by using less long-term debt.
Can an Agenda for Economic Development Be Premised on an Aggressive Program Built around Microfinance?
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This study provides formal theoretical evidence that an agenda for economic development of a `Village' that is built around an aggressive foray into provision of Microfinance is more likely to fail, than to succeed. The Microfinance strategy fails, because any businesses formed by `Villagers' have character of gambles on future consumption. In presence of this outcome, there is little to no chance that Villagers transform into professional entrepreneurs. In equilibrium, there is not any supply-side or income multiplier effect from Microfinance, and there is not arrival at any beneficial transformation to structure of economic activities. In absence of the two stated effects, with exclusion of infrastructural development, which does not reside in purview of Microfinance, there is not arrival at any meaningful economic development. The study proffers some theoretically motivated metrics, estimates for which can be focus of empirical studies. In presence of such metrics, `impacts' of Microfinance programs around the world are more directly comparable.
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This study provides formal theoretical evidence that an agenda for economic development of a `Village' that is built around an aggressive foray into provision of Microfinance is more likely to fail, than to succeed. The Microfinance strategy fails, because any businesses formed by `Villagers' have character of gambles on future consumption. In presence of this outcome, there is little to no chance that Villagers transform into professional entrepreneurs. In equilibrium, there is not any supply-side or income multiplier effect from Microfinance, and there is not arrival at any beneficial transformation to structure of economic activities. In absence of the two stated effects, with exclusion of infrastructural development, which does not reside in purview of Microfinance, there is not arrival at any meaningful economic development. The study proffers some theoretically motivated metrics, estimates for which can be focus of empirical studies. In presence of such metrics, `impacts' of Microfinance programs around the world are more directly comparable.
Do Financial Markets Value Quality of Fiscal Governance?
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We examine the link between the quality of fiscal governance and access to market-based external finance. Stronger fiscal governance is associated with improvements in several indicators of market access, including a higher likelihood of issuing sovereign bonds and having a sovereign credit rating, receiving stronger ratings, and obtaining lower spreads. Using the more granular information on quality of fiscal governance from Public Expenditure and Financial Accountability (PEFA) assessments for 89 emerging and developing economies, we find that similar indicators of market access are correlated with sound public financial management practices, especially those that improve budget transparency and reporting, debt management, and fiscal strategy.
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We examine the link between the quality of fiscal governance and access to market-based external finance. Stronger fiscal governance is associated with improvements in several indicators of market access, including a higher likelihood of issuing sovereign bonds and having a sovereign credit rating, receiving stronger ratings, and obtaining lower spreads. Using the more granular information on quality of fiscal governance from Public Expenditure and Financial Accountability (PEFA) assessments for 89 emerging and developing economies, we find that similar indicators of market access are correlated with sound public financial management practices, especially those that improve budget transparency and reporting, debt management, and fiscal strategy.
Effect of U.S. Monetary Policy on Emerging Sovereign CDS-Bond Market
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In a frictionless market, the CDS-bond basis, defined as CDS spread minus bond spread should be zero. I show that the emerging market CDS-bond basis systematically declines when US interest rates fall. The basis deviations are temporary and occur in both pre and post the financial crisis of 2008-09, although the effect is arguably stronger post crisis. The relationship is driven by a rise in investor demand to sell CDS when US rates are low and the investor motive is most consistent with reaching for yield. Aggregate outstanding sovereign CDS positions held by investors show net CDS sold increases when the rates fall. I also find the largest mutual funds in the emerging debt market are net sellers of CDS during 2006-2016 and show similar sensitivity to interest rates.
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In a frictionless market, the CDS-bond basis, defined as CDS spread minus bond spread should be zero. I show that the emerging market CDS-bond basis systematically declines when US interest rates fall. The basis deviations are temporary and occur in both pre and post the financial crisis of 2008-09, although the effect is arguably stronger post crisis. The relationship is driven by a rise in investor demand to sell CDS when US rates are low and the investor motive is most consistent with reaching for yield. Aggregate outstanding sovereign CDS positions held by investors show net CDS sold increases when the rates fall. I also find the largest mutual funds in the emerging debt market are net sellers of CDS during 2006-2016 and show similar sensitivity to interest rates.
Facebook’s Libra: Why Does US Government Fear Price Stable Cryptocurrency?
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US President Donald J. Trump says he is not “a fan of Bitcoin and other cryptocurrenciesâ€, and he does not have to be, but using this premature reason (like a bully) to rage a war against Bitcoin and Libra is ludicrous. Will Trump (or the United States government) try to destroy everything that he dislikes or is not a fan of? Satoshi Nakamoto (pseudonym) designed Bitcoin as public good in mind, but the US dollar serves totally the opposite as it has been increasingly used as a weapon of mass economic destruction. The real issue is, President Trump feels agitated and concerned because Bitcoin and Libra create an undesired situation of diminishing US power. The anonymity aspect of Bitcoin limits Trump’s (the US government’s) role as the global policeman (i.e. succeeded the UK in 1945). Just to curb Bitcoin’s popularity, politicians produce lies, make short-sighted assertions, and publicly share ill-advised thoughts; regardless, Bitcoin mania is nothing like the tulip mania or the dot.com mania, it is with us now and it will continue to forge ahead unabated in spite of doubters, pessimists, doomsayers, skeptics, and disbelievers. At the backdrop of US-China trade war and the regulatory backlash to force Facebook to halt its Libra project, one is compelled to wonder till when the United States will exploit the world’s scarce resources and how many more lives will be perished for petrodollar so that the U.S. can continue enjoying the “exorbitant privilege†of dollar hegemony.
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US President Donald J. Trump says he is not “a fan of Bitcoin and other cryptocurrenciesâ€, and he does not have to be, but using this premature reason (like a bully) to rage a war against Bitcoin and Libra is ludicrous. Will Trump (or the United States government) try to destroy everything that he dislikes or is not a fan of? Satoshi Nakamoto (pseudonym) designed Bitcoin as public good in mind, but the US dollar serves totally the opposite as it has been increasingly used as a weapon of mass economic destruction. The real issue is, President Trump feels agitated and concerned because Bitcoin and Libra create an undesired situation of diminishing US power. The anonymity aspect of Bitcoin limits Trump’s (the US government’s) role as the global policeman (i.e. succeeded the UK in 1945). Just to curb Bitcoin’s popularity, politicians produce lies, make short-sighted assertions, and publicly share ill-advised thoughts; regardless, Bitcoin mania is nothing like the tulip mania or the dot.com mania, it is with us now and it will continue to forge ahead unabated in spite of doubters, pessimists, doomsayers, skeptics, and disbelievers. At the backdrop of US-China trade war and the regulatory backlash to force Facebook to halt its Libra project, one is compelled to wonder till when the United States will exploit the world’s scarce resources and how many more lives will be perished for petrodollar so that the U.S. can continue enjoying the “exorbitant privilege†of dollar hegemony.
Financial Repression is Knocking at the Door, Again
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Financial repression (legal restrictions on interest rates, credit allocation, capital movements, and other financial operations) was widely used in the past but was largely abandoned in the liberalization wave of the 1990s, as widespread support for interventionist policies gave way to a renewed conception of government as an impartial referee. Financial repression has come back on the agenda with the surge in public debt in the wake of the Global Financial Crisis, and some countries have reintroduced administrative ceilings on interest rates. By distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified. This study attempts to assess some of these losses by estimating the impact of financial repression on growth using an updated index of interest rate controls covering 90 countries over 45 years. The results suggest that financial repression poses a significant drag on growth, which could amount to 0.4-0.7 percentage points.
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Financial repression (legal restrictions on interest rates, credit allocation, capital movements, and other financial operations) was widely used in the past but was largely abandoned in the liberalization wave of the 1990s, as widespread support for interventionist policies gave way to a renewed conception of government as an impartial referee. Financial repression has come back on the agenda with the surge in public debt in the wake of the Global Financial Crisis, and some countries have reintroduced administrative ceilings on interest rates. By distorting market incentives and signals, financial repression induces losses from inefficiency and rent-seeking that are not easily quantified. This study attempts to assess some of these losses by estimating the impact of financial repression on growth using an updated index of interest rate controls covering 90 countries over 45 years. The results suggest that financial repression poses a significant drag on growth, which could amount to 0.4-0.7 percentage points.
Friends or Bullies? Common Analysts and Conforming Corporate Investment Strategies
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This paper shows that firms have conforming investment patterns within the same analyst coverage network. Analyses using exogenous variation generated by idiosyncratic equity shocks suggest such common analysts propagate investment conformity across firms they cover. This result is mainly driven by acquisition investments. We further show that this positive link is offset for firms with poor growth opportunities while strengthened for those with good prospects yet short shareholder horizons. We find that acquisition wealth effect for the acquirer firm is positively influenced by average value creation of its analyst peers' acquisitions in the prior year. Deals are also more likely to be completed when analyst peers' acquisitions are more value-enhancing. Overall evidence indicates that common analysts foster not only conformity but also efficiency in corporate investment.
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This paper shows that firms have conforming investment patterns within the same analyst coverage network. Analyses using exogenous variation generated by idiosyncratic equity shocks suggest such common analysts propagate investment conformity across firms they cover. This result is mainly driven by acquisition investments. We further show that this positive link is offset for firms with poor growth opportunities while strengthened for those with good prospects yet short shareholder horizons. We find that acquisition wealth effect for the acquirer firm is positively influenced by average value creation of its analyst peers' acquisitions in the prior year. Deals are also more likely to be completed when analyst peers' acquisitions are more value-enhancing. Overall evidence indicates that common analysts foster not only conformity but also efficiency in corporate investment.
Funding Economic Development and the Role of National Development Banks - The Case of Cyprus
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The paper draws on previous research on the role of Multilateral Development Banks (MDBs), Regional Development Banks (RDBs) and National Development Banks (NDBs). It examines the role of the Cyprus Development Bank (CDB), prior its privatisation in 2008, in the economic development of the country and, specifically, its intermediation of international finance from multilateral and regional development banks. Currently, this function is undertaken by the commercial banks, which are however limited by a balance sheet fatigue, resulting from the excessive levels of private debt, as shown in this paper. Moreover, the commercial banks lack necessary elements in successfully executing this key role. They do not have the professional competence as well as the discipline and culture for executing such a highly demanding role in the economy. Last but not least, and judging from the experience of the CDB it is imperative to have a totally independent and competent financing institution, which will lead by example. Further to the analysis of the current macroeconomic and institutional context in Cyprus, there is a void of institutional capacity to fund projects and offer valuable advice to state and private decision-making bodies on decisive development projects. This paper recommends the establishment of an NDB or a National Development Finance Agency (NDFA), and proposes an appropriate model.
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The paper draws on previous research on the role of Multilateral Development Banks (MDBs), Regional Development Banks (RDBs) and National Development Banks (NDBs). It examines the role of the Cyprus Development Bank (CDB), prior its privatisation in 2008, in the economic development of the country and, specifically, its intermediation of international finance from multilateral and regional development banks. Currently, this function is undertaken by the commercial banks, which are however limited by a balance sheet fatigue, resulting from the excessive levels of private debt, as shown in this paper. Moreover, the commercial banks lack necessary elements in successfully executing this key role. They do not have the professional competence as well as the discipline and culture for executing such a highly demanding role in the economy. Last but not least, and judging from the experience of the CDB it is imperative to have a totally independent and competent financing institution, which will lead by example. Further to the analysis of the current macroeconomic and institutional context in Cyprus, there is a void of institutional capacity to fund projects and offer valuable advice to state and private decision-making bodies on decisive development projects. This paper recommends the establishment of an NDB or a National Development Finance Agency (NDFA), and proposes an appropriate model.
How Informative are Real Time Output Gap Estimates in Europe?
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We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy's potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities' real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
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We study the properties of the IMF-WEO estimates of real-time output gaps for countries in the euro area as well as the determinants of their revisions over 1994-2017. The analysis shows that staff typically saw economies as operating below their potential. In real time, output gaps tend to have large and negative averages that are largely revised away in later vintages. Most of the mis-measurement in real time can be explained by the difficulty in predicting recessions and by overestimation of the economy's potential capacity. We also find, in line with earlier literature, that real-time output gaps are not useful for predicting inflation. In addition, countries where slack (and potential growth) is overestimated to a larger extent primary fiscal balances tend to be lower and public debt ratios are higher and increase faster than projected. Previous research suggests that national authorities' real-time output gaps suffer from a similar bias. To the extent these estimates play a role in calibrating fiscal policy, over-optimism about long-term growth could contribute to excessive deficits and debt buildup.
How Rational Are the Option Prices of Hong Kong Dollar Exchange Rate?
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In this paper, we study the prices of the options on Hong Kong's linked exchange rate. The study was motivated by the apparent contradiction that options with strike prices outside the narrow trading band have positive prices. We developed a simple regime-switching model of the exchange rate and provided a formula for the prices of its options. The option pricing formula allows us to back out the implied probability of the failure of the linked exchange rate regime. With the option price data for the period from June 1, 2005 to July 31, 2018, we find that the market's belief about the likelihoods of the failure, as implied by the option prices, is too high to be justified by the possibility of the failure alone. This is first shown qualitatively, without using any model, with ratio of empirical over implied volatilities and the implied range of strike prices. Then, using the model, we find that, close to 40% of the sample period, the market thinks the failure probability is greater than 10%. When contrasted with the fact that the regime has not failed since 1983, the p-value of that event is less than 0.1%. Our finding suggests that, while the failure of the linked exchange rate regime is a significant risk factor, it cannot explain the risk premium seen in the option prices.
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In this paper, we study the prices of the options on Hong Kong's linked exchange rate. The study was motivated by the apparent contradiction that options with strike prices outside the narrow trading band have positive prices. We developed a simple regime-switching model of the exchange rate and provided a formula for the prices of its options. The option pricing formula allows us to back out the implied probability of the failure of the linked exchange rate regime. With the option price data for the period from June 1, 2005 to July 31, 2018, we find that the market's belief about the likelihoods of the failure, as implied by the option prices, is too high to be justified by the possibility of the failure alone. This is first shown qualitatively, without using any model, with ratio of empirical over implied volatilities and the implied range of strike prices. Then, using the model, we find that, close to 40% of the sample period, the market thinks the failure probability is greater than 10%. When contrasted with the fact that the regime has not failed since 1983, the p-value of that event is less than 0.1%. Our finding suggests that, while the failure of the linked exchange rate regime is a significant risk factor, it cannot explain the risk premium seen in the option prices.
How Would 401(k) ‘Rothification’ Alter Saving, Retirement Security, and Inequality?
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The U.S. has long incentivized retirement saving in 401(k) and similar retirement accounts by permitting workers to defer taxes on contributions, levying them instead when retirees withdraw funds in retirement. This paper develops a dynamic life-cycle model to show how and whether “Rothification†â€" that is, taxing 401(k) contributions rather than payouts â€" would alter household saving, investment, and Social Security claiming patterns. We show that these changes differ importantly for low- versus higher-paid workers. We conclude that moving to a system that taxes pension contributions instead of withdrawals will lead to later retirement ages, particularly for the better-educated. It also would reduce work hours and lifetime tax payments and increase wealth and consumption inequality. In addition, we show how these behaviors would differ in a persistently low interest rate environment versus a more “normal†historical return world.
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The U.S. has long incentivized retirement saving in 401(k) and similar retirement accounts by permitting workers to defer taxes on contributions, levying them instead when retirees withdraw funds in retirement. This paper develops a dynamic life-cycle model to show how and whether “Rothification†â€" that is, taxing 401(k) contributions rather than payouts â€" would alter household saving, investment, and Social Security claiming patterns. We show that these changes differ importantly for low- versus higher-paid workers. We conclude that moving to a system that taxes pension contributions instead of withdrawals will lead to later retirement ages, particularly for the better-educated. It also would reduce work hours and lifetime tax payments and increase wealth and consumption inequality. In addition, we show how these behaviors would differ in a persistently low interest rate environment versus a more “normal†historical return world.
Informational Content and Assurance of Textual Disclosures: Evidence on Integrated Reporting
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This paper examines the economic benefits associated with textual attributes and the external assurance of integrated reporting (IR), an innovative form of corporate disclosure that connects financial and environmental, social and governance (ESG) information in a single report. We investigate the empirical setting of South Africa, where IR has been mandatory since 2010 for listed companies. We find that IR readability is associated with a higher market valuation, conciseness is linked with higher stock liquidity and tone bias is associated with less dispersed analysts’ estimates. Results suggest that market participants seem to appreciate IRs that are readable, short and focused, as well as hint at possible tone management strategies targeting analysts. We also show that assurance on IR moderates the negative effects of poor textual attributes: if firms publish IRs that are difficult to read but assure them, this compensates for the negative influence of reading difficulty on a market value; if long IRs are assured, this dampens the negative effect of verbosity on liquidity; if firms assure IRs, analysts’ forecast dispersion is lower, therefore suggesting that assurance acts as a credibility-enhancing mechanism for external users. Finally, we show that textual attributes and assurance matter for broader audiences of stakeholders interested in the ESG dimensions of a firm’s performance.
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This paper examines the economic benefits associated with textual attributes and the external assurance of integrated reporting (IR), an innovative form of corporate disclosure that connects financial and environmental, social and governance (ESG) information in a single report. We investigate the empirical setting of South Africa, where IR has been mandatory since 2010 for listed companies. We find that IR readability is associated with a higher market valuation, conciseness is linked with higher stock liquidity and tone bias is associated with less dispersed analysts’ estimates. Results suggest that market participants seem to appreciate IRs that are readable, short and focused, as well as hint at possible tone management strategies targeting analysts. We also show that assurance on IR moderates the negative effects of poor textual attributes: if firms publish IRs that are difficult to read but assure them, this compensates for the negative influence of reading difficulty on a market value; if long IRs are assured, this dampens the negative effect of verbosity on liquidity; if firms assure IRs, analysts’ forecast dispersion is lower, therefore suggesting that assurance acts as a credibility-enhancing mechanism for external users. Finally, we show that textual attributes and assurance matter for broader audiences of stakeholders interested in the ESG dimensions of a firm’s performance.
LIBRA â€" A Differentiated View on Facebook’s Virtual Currency Project
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Libra â€" a global virtual currency project initiated by Facebook â€" has been the subject of many controversial discussions since its announcement in June 2019. This paper provides a differentiated view on Libra, recognising that different development scenarios of Libra are conceivable.Libra could serve purely as an alternative payment system in combination with a dedicated payment token, the Libra coin. Alternatively, the Libra project could develop into a broader financial infrastructure for advanced financial services such as savings and loan products operating on the Libra blockchain. Based on a comparison of the Libra architecture with other cryptocurrencies, the opportunities and challenges for the development of the respective Libra ecosystems are investigated form a commercial, regulatory and monetary policy perspective.
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Libra â€" a global virtual currency project initiated by Facebook â€" has been the subject of many controversial discussions since its announcement in June 2019. This paper provides a differentiated view on Libra, recognising that different development scenarios of Libra are conceivable.Libra could serve purely as an alternative payment system in combination with a dedicated payment token, the Libra coin. Alternatively, the Libra project could develop into a broader financial infrastructure for advanced financial services such as savings and loan products operating on the Libra blockchain. Based on a comparison of the Libra architecture with other cryptocurrencies, the opportunities and challenges for the development of the respective Libra ecosystems are investigated form a commercial, regulatory and monetary policy perspective.
Luck versus Skill in Mutual Funds: Size and Power Pitfalls in Bootstrap Methods
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We question the applicability of existing bootstrap methods for mutual fund performance evaluation, where the number of funds is large relative to the sample size of each fund. Theoretically, we derive the asymptotic distribution of the bootstrap test statistics by using Edgeworth expansion to characterize the approximation error in estimating alpha. We demonstrate that the test size is severely distorted as a large fraction of funds has small sample sizes and that the test power depends on the existence of both negative and positive alphas. Empirically, we design a simulation study to support our theoretical findings.
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We question the applicability of existing bootstrap methods for mutual fund performance evaluation, where the number of funds is large relative to the sample size of each fund. Theoretically, we derive the asymptotic distribution of the bootstrap test statistics by using Edgeworth expansion to characterize the approximation error in estimating alpha. We demonstrate that the test size is severely distorted as a large fraction of funds has small sample sizes and that the test power depends on the existence of both negative and positive alphas. Empirically, we design a simulation study to support our theoretical findings.
Macroeconomic Outcomes in Disaster-Prone Countries
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Using a dynamic stochastic general equilibrium model, we study the channels through which natural disaster shocks affect macroeconomic outcomes and welfare in disaster-prone countries. We solve the model using Taylor projection, a solution method that is shown to deal effectively with high-impact weather shocks calibrated in accordance to empirical evidence. We find large and persistent effects of weather shocks that significantly impact the income convergence path of disaster-prone countries. Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent. Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible, and international aid has to be sizable to achieve significant welfare gains. In addition, it is more cost-effective for donors to contribute to the financing of resilience before the realization of disasters, rather than disbursing aid after their realization.
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Using a dynamic stochastic general equilibrium model, we study the channels through which natural disaster shocks affect macroeconomic outcomes and welfare in disaster-prone countries. We solve the model using Taylor projection, a solution method that is shown to deal effectively with high-impact weather shocks calibrated in accordance to empirical evidence. We find large and persistent effects of weather shocks that significantly impact the income convergence path of disaster-prone countries. Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent. Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible, and international aid has to be sizable to achieve significant welfare gains. In addition, it is more cost-effective for donors to contribute to the financing of resilience before the realization of disasters, rather than disbursing aid after their realization.
Major Government Customer and Management Earnings Forecasts
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This paper examines whether customer base composition, i.e., whether a firm’s major customers comprise of government entities or publicly traded companies in the U.S., affects the properties of supplier’s management earnings forecasts. Using a sample of 1,168 management earnings forecasts from 1998 through 2014, we find that firms whose major customers are government entities (i.e., government suppliers) issue more precise and more accurate management earnings forecasts than firms whose major customers are public companies (i.e., corporate suppliers). Moreover, when managers disclose negative information to the market, earnings forecasts issued by government suppliers have greater price impact than those issued by corporate suppliers. Collectively, our empirical results suggest that having government as a major customer has a positive impact on the quality of management earnings forecasts.
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This paper examines whether customer base composition, i.e., whether a firm’s major customers comprise of government entities or publicly traded companies in the U.S., affects the properties of supplier’s management earnings forecasts. Using a sample of 1,168 management earnings forecasts from 1998 through 2014, we find that firms whose major customers are government entities (i.e., government suppliers) issue more precise and more accurate management earnings forecasts than firms whose major customers are public companies (i.e., corporate suppliers). Moreover, when managers disclose negative information to the market, earnings forecasts issued by government suppliers have greater price impact than those issued by corporate suppliers. Collectively, our empirical results suggest that having government as a major customer has a positive impact on the quality of management earnings forecasts.
Medicare Part D: Are Insurers Gaming the Low Income Subsidy Design?
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This paper shows how in Medicare Part D insurers’ gaming of the subsidy paid to low-income enrollees distorts premiums and raises the program cost. Using plan-level data from the first five years of the program, I find multiple instances of pricing strategy distortions for the largest insurers. Instrumental variable estimates indicate that the changes in a concentration index measuring the manipulability of the subsidy can explain a large share of the premium growth observed between 2006 and 2011. Removing this distortion could reduce the cost of the program without worsening consumer welfare.
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This paper shows how in Medicare Part D insurers’ gaming of the subsidy paid to low-income enrollees distorts premiums and raises the program cost. Using plan-level data from the first five years of the program, I find multiple instances of pricing strategy distortions for the largest insurers. Instrumental variable estimates indicate that the changes in a concentration index measuring the manipulability of the subsidy can explain a large share of the premium growth observed between 2006 and 2011. Removing this distortion could reduce the cost of the program without worsening consumer welfare.
More Gray, More Volatile? Aging and (Optimal) Monetary Policy
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The evidence on the inflation impact of aging is mixed, and there is no evidence regardingthe volatility of inflation. Based on advanced economies' data and a DSGE-OLG model, wefind that aging leads to downward pressure on inflation and higher inflation volatility. Ourpaper is also the first, using this framework, to discuss how aging affects the transmissionchannels of monetary policy. We are also the first to examine aging and optimal central bankpolicies. As aging redistributes wealth among generations and the labor force becomes morescarce, our model suggests that aging makes monetary policy less effective and in more graysocieties central banks should react more strongly to nominal variables.
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The evidence on the inflation impact of aging is mixed, and there is no evidence regardingthe volatility of inflation. Based on advanced economies' data and a DSGE-OLG model, wefind that aging leads to downward pressure on inflation and higher inflation volatility. Ourpaper is also the first, using this framework, to discuss how aging affects the transmissionchannels of monetary policy. We are also the first to examine aging and optimal central bankpolicies. As aging redistributes wealth among generations and the labor force becomes morescarce, our model suggests that aging makes monetary policy less effective and in more graysocieties central banks should react more strongly to nominal variables.
On Extensions of the Barone-Adesi & Whaley Method to Price American-Type Options
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The present article provides an efficient and accurate hybrid method to price American standard options in certain jump-diffusion models as well as American barrier-type options under the Black & Scholes framework. Our method generalizes the quadratic approximation scheme of Barone-Adesi & Whaley (1987) and several of its extensions. Using perturbative arguments, we decompose the early exercise pricing problem into sub-problems of different orders and solve these sub-problems successively. The obtained solutions are combined to recover approximations to the original pricing problem of multiple orders, with the 0-th order version matching the general Barone-Adesi & Whaley ansatz. We test the accuracy and efficiency of the approximations via numerical simulations. The results show a clear dominance of higher order approximations over their respective 0-th order version and reveal that significantly more pricing accuracy can be obtained by relying on approximations of the first few orders. Additionally, they suggest that increasing the order of any approximation by one generally refines the pricing precision, however that this happens at the expense of greater computational costs.
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The present article provides an efficient and accurate hybrid method to price American standard options in certain jump-diffusion models as well as American barrier-type options under the Black & Scholes framework. Our method generalizes the quadratic approximation scheme of Barone-Adesi & Whaley (1987) and several of its extensions. Using perturbative arguments, we decompose the early exercise pricing problem into sub-problems of different orders and solve these sub-problems successively. The obtained solutions are combined to recover approximations to the original pricing problem of multiple orders, with the 0-th order version matching the general Barone-Adesi & Whaley ansatz. We test the accuracy and efficiency of the approximations via numerical simulations. The results show a clear dominance of higher order approximations over their respective 0-th order version and reveal that significantly more pricing accuracy can be obtained by relying on approximations of the first few orders. Additionally, they suggest that increasing the order of any approximation by one generally refines the pricing precision, however that this happens at the expense of greater computational costs.
Prospect Theory and Stock Market Anomalies
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We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of its beta, volatility, skewness, and capital gain overhang. We find that the model is helpful for thinking about a majority of the anomalies we consider. It performs particularly well for the momentum, volatility, distress, and profitability anomalies, but poorly for the value anomaly. For several anomalies, the model explains not only the average returns of extreme anomaly deciles, but also more granular patterns in the average returns of intermediate deciles.
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We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 22 prominent stock market anomalies. The model incorporates all the elements of prospect theory, takes account of investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of its beta, volatility, skewness, and capital gain overhang. We find that the model is helpful for thinking about a majority of the anomalies we consider. It performs particularly well for the momentum, volatility, distress, and profitability anomalies, but poorly for the value anomaly. For several anomalies, the model explains not only the average returns of extreme anomaly deciles, but also more granular patterns in the average returns of intermediate deciles.
Public Insurance and Climate Change (Part One): Past Trends in Weather-Related Insurance in New Zealand
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Climate change appears to be increasing the frequency and magnitude of extreme weather events, negatively affecting communities as well as posing long-term sustainability challenges to insurance (risk transfer) mechanisms. New Zealand’s public natural hazard insurer, the Earthquake Commission (EQC), covers homeowners for damage to land (and in some cases to dwellings and contents) caused by landslip, storm or flood. We comprehensively explore the EQC claims data to investigate these weather-related claims from 2000-2017. We find no clear upward trend yet emerging in the number of claims or their value. We find that the northern regions of both islands are the source of most claims, that only a handful of weather events caused a large proportion of EQC’s weather-related pay-outs, that the average property lodging a weather-related claim is located twice as close to the coast as the national average, and that properties with claims usually are cited on much steeper land than the typical property in New Zealand. We also explore their relation between claims and socio-economic characteristics, finding that higher income neighbourhoods appear to be those most benefiting from the EQC coverage for weather events.
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Climate change appears to be increasing the frequency and magnitude of extreme weather events, negatively affecting communities as well as posing long-term sustainability challenges to insurance (risk transfer) mechanisms. New Zealand’s public natural hazard insurer, the Earthquake Commission (EQC), covers homeowners for damage to land (and in some cases to dwellings and contents) caused by landslip, storm or flood. We comprehensively explore the EQC claims data to investigate these weather-related claims from 2000-2017. We find no clear upward trend yet emerging in the number of claims or their value. We find that the northern regions of both islands are the source of most claims, that only a handful of weather events caused a large proportion of EQC’s weather-related pay-outs, that the average property lodging a weather-related claim is located twice as close to the coast as the national average, and that properties with claims usually are cited on much steeper land than the typical property in New Zealand. We also explore their relation between claims and socio-economic characteristics, finding that higher income neighbourhoods appear to be those most benefiting from the EQC coverage for weather events.
Refined Book-to-Market Ratio and the Cross-Section of Stock Returns in China
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Motivated by the necessity of including BM rather than replacing it by EP in the valuation of a firm, we survey 7 refinements of BM measures, and test their performance in China. BM augmented with R&D and SG&A expense contains more information about the cross-section of stock returns than the regular one. BM remains significant, after controlling for EP and other common risk factors, hence is indispensable for valuing firms, while EP becomes insignificant once BM, ROE and other variables are considered. These findings favor incorporating both BM and ROE as two separate pricing factors to using EP only.
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Motivated by the necessity of including BM rather than replacing it by EP in the valuation of a firm, we survey 7 refinements of BM measures, and test their performance in China. BM augmented with R&D and SG&A expense contains more information about the cross-section of stock returns than the regular one. BM remains significant, after controlling for EP and other common risk factors, hence is indispensable for valuing firms, while EP becomes insignificant once BM, ROE and other variables are considered. These findings favor incorporating both BM and ROE as two separate pricing factors to using EP only.
SME Financial Inclusion for Sustained Growth in the Middle East and Central Asia
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This paper offers empirical evidence that greater financial inclusion of small and medium enterprises (SMEs) can promote higher economic growth and employment, especially in the Middle East and Central Asia regions. First, we show that countries with higher SME financial inclusion exhibit more effective monetary policy transmission and tax collection. Second, we find substantial employment and labor productivity growth gains at the firm level from access to credit, gains that are higher for SMEs. We also obtain evidence of a substantial positive impact on SME employment and labor productivity growth from improved credit bureau coverage and insolvency regimes. Finally, cross-country aggregate evidence confirms the employment and growth gains from SME financial inclusion, which appear larger in the Middle East and Central Asia than in other regions.
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This paper offers empirical evidence that greater financial inclusion of small and medium enterprises (SMEs) can promote higher economic growth and employment, especially in the Middle East and Central Asia regions. First, we show that countries with higher SME financial inclusion exhibit more effective monetary policy transmission and tax collection. Second, we find substantial employment and labor productivity growth gains at the firm level from access to credit, gains that are higher for SMEs. We also obtain evidence of a substantial positive impact on SME employment and labor productivity growth from improved credit bureau coverage and insolvency regimes. Finally, cross-country aggregate evidence confirms the employment and growth gains from SME financial inclusion, which appear larger in the Middle East and Central Asia than in other regions.
The Efficiency of US Community Banks
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Using a novel method to separate community US banks over the 1984-2013 period from their non-community counterparts we compare the two banking paradigms on the basis of cost efficiency. We decompose cost efficiency into a persistent and a residual component; the former capturing the market structure and regulatory changes, the latter reflecting the managerial performance. Our results show community banks to exhibit 4.9% higher efficiency compared to their non-community counterparts. The decomposition further reveals that community banks benefit from superior managerial capabilities and from developments at the regulatory front. Size is non-linearly related to efficiency and large community banks are the most efficient. A strong positive link between profitability and efficiency is evidenced for community banks, with the effect being muted in non-community banks. Participation in bank holding companies is harmful for community banks’ efficiency. Liquidity creation is positively (negatively) related to efficiency of (non-)community banks, and highlights the distinctiveness of the business models and need for differentiated regulatory supervision. Community banks efficiency is positively (negatively) related to liquidity (credit) risk. Our results are robust to a series of robustness checks.
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Using a novel method to separate community US banks over the 1984-2013 period from their non-community counterparts we compare the two banking paradigms on the basis of cost efficiency. We decompose cost efficiency into a persistent and a residual component; the former capturing the market structure and regulatory changes, the latter reflecting the managerial performance. Our results show community banks to exhibit 4.9% higher efficiency compared to their non-community counterparts. The decomposition further reveals that community banks benefit from superior managerial capabilities and from developments at the regulatory front. Size is non-linearly related to efficiency and large community banks are the most efficient. A strong positive link between profitability and efficiency is evidenced for community banks, with the effect being muted in non-community banks. Participation in bank holding companies is harmful for community banks’ efficiency. Liquidity creation is positively (negatively) related to efficiency of (non-)community banks, and highlights the distinctiveness of the business models and need for differentiated regulatory supervision. Community banks efficiency is positively (negatively) related to liquidity (credit) risk. Our results are robust to a series of robustness checks.
The Riskiness of Credit Allocation and Financial Stability
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We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes. Using firm-level data for 55 countries over 1991-2016, we show that the riskiness of credit allocation, captured by Greenwood and Hanson (2013)'s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead. Our analysis indicates that the riskiness of credit allocation is both a measure of corporate vulnerability and of investor sentiment. Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.
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We explore empirically how the time-varying allocation of credit across firms with heterogeneous credit quality matters for financial stability outcomes. Using firm-level data for 55 countries over 1991-2016, we show that the riskiness of credit allocation, captured by Greenwood and Hanson (2013)'s ISS indicator, helps predict downside risks to GDP growth and systemic banking crises, two to three years ahead. Our analysis indicates that the riskiness of credit allocation is both a measure of corporate vulnerability and of investor sentiment. Economic forecasters wrongly predict a positive association between the riskiness of credit allocation and future growth, suggesting a flawed expectations process.
Trinity Strikes Back: Monetary Independence and Inflation in the Caribbean
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Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980-2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country's ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship-robust to alternative specifications and estimation methodologies-has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy.
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Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980-2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country's ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship-robust to alternative specifications and estimation methodologies-has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy.
Unfinished Business: A Multicommodity Intertemporal Planner-Doer Framework
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There was unfinished business to address in the version of the planner-doer model developed in Thaler and Shefrin (1981). The unfinished business involved identifying and modeling the crucial roles played by temptation and mental accounting in pensions and savings behavior. The present paper has two objectives. The first objective is to describe the key lessons learned in transitioning from the model in Thaler and Shefrin (1981) to the model in Shefrin and Thaler (1988), a transition which addressed some of the unfinished business. The second objective is to describe as yet unfinished business associated with developing a multicommodity, intertemporal version of the planner-doer framework, incorporating the concepts of temptation and mental accounting, to replace the neoclassical theory of the consumer. Doing so will provide a theoretical foundation for nudges related to household budgeting, spending, saving, borrowing, and investing.
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There was unfinished business to address in the version of the planner-doer model developed in Thaler and Shefrin (1981). The unfinished business involved identifying and modeling the crucial roles played by temptation and mental accounting in pensions and savings behavior. The present paper has two objectives. The first objective is to describe the key lessons learned in transitioning from the model in Thaler and Shefrin (1981) to the model in Shefrin and Thaler (1988), a transition which addressed some of the unfinished business. The second objective is to describe as yet unfinished business associated with developing a multicommodity, intertemporal version of the planner-doer framework, incorporating the concepts of temptation and mental accounting, to replace the neoclassical theory of the consumer. Doing so will provide a theoretical foundation for nudges related to household budgeting, spending, saving, borrowing, and investing.
Us vs. Euro Area: Who Drives Cross-Border Bank Lending to EMS?
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This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs)during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and realsector shocks in both the US and the euro area. The literature has traditionally highlighted theinfluence of US monetary policy on driving cross-border bank flows, and more recently theimportance of both US and Euro Area (EA) financial/banking sectors' related variables. Ourcontribution is the simultaneous analysis of the role of these US and EA drivers, as well astheir interactions with real sector shocks. We corroborate the negative impact of US monetarypolicy tightening on cross-border lending to EMs, but we find that EA monetary policy seemsto have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending tomost other EM regions is dollar denominated. We also find that real sector shocks in both theUS and EA trigger an increase in cross-border lending, but less in EA when modeling thefinancial sector. Finally, for financial sector shocks, such as those associated with a decreasein bank leverage, our results indicate a broad-based overall contraction of cross-border lendingif the shock originates in the US, and heterogenous effects across borrowing regions if theshock originates in the EA.
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This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs)during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and realsector shocks in both the US and the euro area. The literature has traditionally highlighted theinfluence of US monetary policy on driving cross-border bank flows, and more recently theimportance of both US and Euro Area (EA) financial/banking sectors' related variables. Ourcontribution is the simultaneous analysis of the role of these US and EA drivers, as well astheir interactions with real sector shocks. We corroborate the negative impact of US monetarypolicy tightening on cross-border lending to EMs, but we find that EA monetary policy seemsto have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending tomost other EM regions is dollar denominated. We also find that real sector shocks in both theUS and EA trigger an increase in cross-border lending, but less in EA when modeling thefinancial sector. Finally, for financial sector shocks, such as those associated with a decreasein bank leverage, our results indicate a broad-based overall contraction of cross-border lendingif the shock originates in the US, and heterogenous effects across borrowing regions if theshock originates in the EA.
Value Added: West Virginia University’s Approach to Innovative Experiential Learning
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The purpose of this paper is to expand the domain of experiential learning by sharing the experiences of establishing and developing Student Managed Investment Fund at West Virginia University.
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The purpose of this paper is to expand the domain of experiential learning by sharing the experiences of establishing and developing Student Managed Investment Fund at West Virginia University.
Valuing Tradeability in Exponential Lévy Models
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The present article provides a novel theoretical way to evaluate tradeability in markets of ordinary exponential Lévy type. We consider non-tradeability as a particular type of market illiquidity and investigate its impact on the price of the assets. Starting from an adaption of the continuous-time optional asset replacement problem initiated by McDonald and Siegel (1986), we derive tradeability premiums and subsequently characterize them in terms of free-boundary problems. This provides a simple way to compute non-tradeability values, e.g. by means of standard numerical techniques, and, in particular, to express the price of a non-tradeable asset as a percentage of the price of a tradeable equivalent. Our approach is illustrated via numerical examples where we discuss various properties of the tradeability premiums.
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The present article provides a novel theoretical way to evaluate tradeability in markets of ordinary exponential Lévy type. We consider non-tradeability as a particular type of market illiquidity and investigate its impact on the price of the assets. Starting from an adaption of the continuous-time optional asset replacement problem initiated by McDonald and Siegel (1986), we derive tradeability premiums and subsequently characterize them in terms of free-boundary problems. This provides a simple way to compute non-tradeability values, e.g. by means of standard numerical techniques, and, in particular, to express the price of a non-tradeable asset as a percentage of the price of a tradeable equivalent. Our approach is illustrated via numerical examples where we discuss various properties of the tradeability premiums.
Weekly Idiosyncratic Risk Metrics and Idiosyncratic Momentum: Evidence from the Chinese Stock Market
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This paper focuses on the weekly idiosyncratic momentum (IMOM) as well as its risk-adjusted versions with respect to various idiosyncratic risk metrics. Using the A-share individual stocks in the Chinese market from January 1997 to December 2017, we first evaluate the performance of the weekly momentum and idiosyncratic momentum based on raw returns and idiosyncratic returns, respectively. After that the univariate portfolio analysis is conducted to investigate the return predictability with respect to various idiosyncratic risk metrics. Further, we perform a comparative study on the performance of the IMOMportfolios with respect to various risk metrics. At last, we explore the possible explanations to the IMOM as well as risk-based IMOM portfolios. We find that 1) there is a prevailing contrarian effect and a IMOM effect for the whole sample; 2) a negative relation exists between most of the idiosyncratic risk metrics and the cross-sectional returns, and better performance is found that is linked to idiosyncratic volatility (IVol) and maximum drawdowns (IMDs); 3) additionally, the IVol-based and IMD-based IMOM portfolios exhibit a better explanatory power to the IMOM portfolios with respect to other risk metrics; 4) finally, higher profitability of the IMOM as well as IVol-based and IMD-based IMOM portfolios is found to be related to upside market states, high levels of liquidity and high levels of investor sentiment.
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This paper focuses on the weekly idiosyncratic momentum (IMOM) as well as its risk-adjusted versions with respect to various idiosyncratic risk metrics. Using the A-share individual stocks in the Chinese market from January 1997 to December 2017, we first evaluate the performance of the weekly momentum and idiosyncratic momentum based on raw returns and idiosyncratic returns, respectively. After that the univariate portfolio analysis is conducted to investigate the return predictability with respect to various idiosyncratic risk metrics. Further, we perform a comparative study on the performance of the IMOMportfolios with respect to various risk metrics. At last, we explore the possible explanations to the IMOM as well as risk-based IMOM portfolios. We find that 1) there is a prevailing contrarian effect and a IMOM effect for the whole sample; 2) a negative relation exists between most of the idiosyncratic risk metrics and the cross-sectional returns, and better performance is found that is linked to idiosyncratic volatility (IVol) and maximum drawdowns (IMDs); 3) additionally, the IVol-based and IMD-based IMOM portfolios exhibit a better explanatory power to the IMOM portfolios with respect to other risk metrics; 4) finally, higher profitability of the IMOM as well as IVol-based and IMD-based IMOM portfolios is found to be related to upside market states, high levels of liquidity and high levels of investor sentiment.
What Happens If Central Banks Misdiagnose a Slowdown in Potential Output
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In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem. We do this in a real model, in which inflation is not an issue. We show that aggressive central bank action may revive gross investment, but it will not revive net investment or growth. Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries.
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In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem. We do this in a real model, in which inflation is not an issue. We show that aggressive central bank action may revive gross investment, but it will not revive net investment or growth. Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries.
When Do Currency Unions Benefit from Default?
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Since the Eurozone Crisis of 2010-12, a key debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country international finance model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative financial mechanism to improve the welfare of a currency union. When domestic credit risks are present, I show that a lenient union-wide bankruptcy code that allows for default in the cross-border capital markets union leads to a Pareto improvement within the currency union. However, if the union-wide bankruptcy code is too lenient, default may cause the collapse of the capital markets union and impede cross-border risk sharing. Moreover, the absence of floating exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the union-wide bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the economic and welfare implications of bankruptcy within a capital markets union in the Eurozone.
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Since the Eurozone Crisis of 2010-12, a key debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country international finance model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative financial mechanism to improve the welfare of a currency union. When domestic credit risks are present, I show that a lenient union-wide bankruptcy code that allows for default in the cross-border capital markets union leads to a Pareto improvement within the currency union. However, if the union-wide bankruptcy code is too lenient, default may cause the collapse of the capital markets union and impede cross-border risk sharing. Moreover, the absence of floating exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the union-wide bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the economic and welfare implications of bankruptcy within a capital markets union in the Eurozone.
КÐ'ОРУМ И ПОРЯÐ"ОК ПРИÐЯТИЯ РЕШЕÐИЯ ПО Ð'ОПРОСÐÐœ Ð"ÐЧИ СОÐ"ЛÐСИЯ ÐРСОÐ'ЕРШЕÐИЕ ИЛИ ПОСЛЕÐ"УЮЩЕЕ ОÐ"ОÐ'РЕÐИЕ КРУПÐЫХ СÐ"ЕЛОК И СÐ"ЕЛОК С Ð' ОÐ'ЩЕСТÐ'Е С ОÐ"Ð ÐÐИЧЕÐÐОЙ ОТÐ'ЕТСТÐ'ЕÐÐОСТЬЮ (Quorum and Procedure for Making a Decision on Matters of the Giving Agreement for or Performing or Following Approval for Major Transactions and Transactions in a Limited Liability Company)
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Russian Abstract: УÑтановлены Ñпециальные правила Ð¾Ð¿Ñ€ÐµÐ´ÐµÐ»ÐµÐ½Ð¸Ñ ÐºÐ²Ð¾Ñ€ÑƒÐ¼Ð° и порÑдка принÑÑ‚Ð¸Ñ Ñ€ÐµÑˆÐµÐ½Ð¸Ð¹ по вопроÑам дачи ÑоглаÑÐ¸Ñ Ð½Ð° Ñовершение или поÑледующее одобрение крупных Ñделок и Ñделок Ñ Ð·Ð°Ð¸Ð½Ñ‚ÐµÑ€ÐµÑованноÑтью в ООО. English Abstract: Special rules have been established for determining the quorum and decision-making procedure on the issues of consenting to the conclusion or subsequent approval of major transactions and transactions with an interest in a limited liability company.
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Russian Abstract: УÑтановлены Ñпециальные правила Ð¾Ð¿Ñ€ÐµÐ´ÐµÐ»ÐµÐ½Ð¸Ñ ÐºÐ²Ð¾Ñ€ÑƒÐ¼Ð° и порÑдка принÑÑ‚Ð¸Ñ Ñ€ÐµÑˆÐµÐ½Ð¸Ð¹ по вопроÑам дачи ÑоглаÑÐ¸Ñ Ð½Ð° Ñовершение или поÑледующее одобрение крупных Ñделок и Ñделок Ñ Ð·Ð°Ð¸Ð½Ñ‚ÐµÑ€ÐµÑованноÑтью в ООО. English Abstract: Special rules have been established for determining the quorum and decision-making procedure on the issues of consenting to the conclusion or subsequent approval of major transactions and transactions with an interest in a limited liability company.
КÐ'ОРУМ И ПОРЯÐ"ОК ПРИÐЯТИЯ РЕШЕÐИЯ ПО Ð'ОПРОСÐÐœ Ð"ÐЧИ СОÐ"ЛÐСИЯ ÐРСОÐ'ЕРШЕÐИЕ ИЛИ ПОСЛЕÐ"УЮЩЕЕ ОÐ"ОÐ'РЕÐИЕ КРУПÐЫХ СÐ"ЕЛОК И СÐ"ЕЛОК С ЗÐИÐТЕРЕСОÐ'ÐÐÐОСТЬЮ Ð' ÐКЦИОÐЕРÐОМ ОÐ'ЩЕСТÐ'Е (Quorum and Procedure for Making a Decision on Matters of the Giving Agreement for or Performance or Following Approval for Major Transactions and Transactions with Interest in Joint Stock Company)
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Russian Abstract: УÑтановлены Ñпециальные правила Ð¾Ð¿Ñ€ÐµÐ´ÐµÐ»ÐµÐ½Ð¸Ñ ÐºÐ²Ð¾Ñ€ÑƒÐ¼Ð° и порÑдка принÑÑ‚Ð¸Ñ Ñ€ÐµÑˆÐµÐ½Ð¸Ð¹ по вопроÑам дачи ÑоглаÑÐ¸Ñ Ð½Ð° Ñовершение или поÑледующее одобрение крупных Ñделок и Ñделок Ñ Ð·Ð°Ð¸Ð½Ñ‚ÐµÑ€ÐµÑованноÑтью. Ðти правила отличаютÑÑ Ð² акционерном общеÑтве и общеÑтве Ñ Ð¾Ð³Ñ€Ð°Ð½Ð¸Ñ‡ÐµÐ½Ð½Ð¾Ð¹ ответÑтвенноÑтью. При Ñтом имеютÑÑ Ñпециальные правила Ð´Ð»Ñ Ñлучаев, когда в Ñовершении Ñделки заинтереÑованы владельцы вÑех голоÑующих акций или вÑе учаÑтники ООО, а также Ð´Ð»Ñ ÑлучаÑ, когда ÐºÑ€ÑƒÐ¿Ð½Ð°Ñ Ñделка одновременно ÑвлÑетÑÑ Ñделкой Ñ Ð·Ð°Ð¸Ð½Ñ‚ÐµÑ€ÐµÑованноÑтью.English Abstract: Special rules have been established for determining the quorum and decision-making procedure on issues of consenting to the conclusion or subsequent approval of major and related-party transactions. These rules differ in joint stock company and limited liability company. At the same time, there are special rules for cases when owners of all voting shares or all participants of an LLC are interested in making a transaction, as well as for cases when a major transaction is simultaneously an interested party transaction.
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Russian Abstract: УÑтановлены Ñпециальные правила Ð¾Ð¿Ñ€ÐµÐ´ÐµÐ»ÐµÐ½Ð¸Ñ ÐºÐ²Ð¾Ñ€ÑƒÐ¼Ð° и порÑдка принÑÑ‚Ð¸Ñ Ñ€ÐµÑˆÐµÐ½Ð¸Ð¹ по вопроÑам дачи ÑоглаÑÐ¸Ñ Ð½Ð° Ñовершение или поÑледующее одобрение крупных Ñделок и Ñделок Ñ Ð·Ð°Ð¸Ð½Ñ‚ÐµÑ€ÐµÑованноÑтью. Ðти правила отличаютÑÑ Ð² акционерном общеÑтве и общеÑтве Ñ Ð¾Ð³Ñ€Ð°Ð½Ð¸Ñ‡ÐµÐ½Ð½Ð¾Ð¹ ответÑтвенноÑтью. При Ñтом имеютÑÑ Ñпециальные правила Ð´Ð»Ñ Ñлучаев, когда в Ñовершении Ñделки заинтереÑованы владельцы вÑех голоÑующих акций или вÑе учаÑтники ООО, а также Ð´Ð»Ñ ÑлучаÑ, когда ÐºÑ€ÑƒÐ¿Ð½Ð°Ñ Ñделка одновременно ÑвлÑетÑÑ Ñделкой Ñ Ð·Ð°Ð¸Ð½Ñ‚ÐµÑ€ÐµÑованноÑтью.English Abstract: Special rules have been established for determining the quorum and decision-making procedure on issues of consenting to the conclusion or subsequent approval of major and related-party transactions. These rules differ in joint stock company and limited liability company. At the same time, there are special rules for cases when owners of all voting shares or all participants of an LLC are interested in making a transaction, as well as for cases when a major transaction is simultaneously an interested party transaction.
ÐÐ¾Ð²Ð°Ñ ÐœÐµÑ€Ð° РиÑка VAR в Квадрате ( ) и Ее Ð'ычиÑление ЧаÑÑ‚ÑŒ I: Случай Равномерного и Треугольного РаÑпределений Ð'ероÑтноÑтей Убытков (New Risk Measure VAR Squared ( ) and its Calculation Part I: The Case of Uniform and Triangular Probability Distributions)
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Russian Abstract: Ð' работе вводитÑÑ Ð¿Ð¾Ð½Ñтие новой меры риÑка VaR в квадрате ( ), ÐºÐ¾Ñ‚Ð¾Ñ€Ð°Ñ ÑвлÑетÑÑ Ñ‚ÐµÐ¾Ñ€ÐµÑ‚Ð¸Ñ‡ÐµÑким оÑмыÑлением применÑемых на практике подходов оценки ÑтреÑÑовой VaR (sVaR) и выводитÑÑ Ñ„Ð¾Ñ€Ð¼ÑƒÐ»Ð° ее вычиÑÐ»ÐµÐ½Ð¸Ñ Ð´Ð»Ñ Ñлучаев равномерного или треугольного раÑпределений денежного потока по активу (проекту). ОказываетÑÑ, что намного конÑервативнее оценивает риÑки, чем мера риÑка VaR, во многих ÑлучаÑÑ… может ÑоÑтавить в применении конкуренцию другим мерам риÑка, например, таким, как ES.English Abstract: The paper introduces the concept of a new risk measure VaR squared ( ), which is a theoretical understanding of the practical approaches to assessing stress VaR (sVaR) and derives a formula for calculating it for cases of uniform or triangular distribution of cash flow over an asset (project). It turns out that it is much more conservative in assessing risks than the VaR risk measure, in many cases it can compete with other risk measures, for example, such as ES.
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Russian Abstract: Ð' работе вводитÑÑ Ð¿Ð¾Ð½Ñтие новой меры риÑка VaR в квадрате ( ), ÐºÐ¾Ñ‚Ð¾Ñ€Ð°Ñ ÑвлÑетÑÑ Ñ‚ÐµÐ¾Ñ€ÐµÑ‚Ð¸Ñ‡ÐµÑким оÑмыÑлением применÑемых на практике подходов оценки ÑтреÑÑовой VaR (sVaR) и выводитÑÑ Ñ„Ð¾Ñ€Ð¼ÑƒÐ»Ð° ее вычиÑÐ»ÐµÐ½Ð¸Ñ Ð´Ð»Ñ Ñлучаев равномерного или треугольного раÑпределений денежного потока по активу (проекту). ОказываетÑÑ, что намного конÑервативнее оценивает риÑки, чем мера риÑка VaR, во многих ÑлучаÑÑ… может ÑоÑтавить в применении конкуренцию другим мерам риÑка, например, таким, как ES.English Abstract: The paper introduces the concept of a new risk measure VaR squared ( ), which is a theoretical understanding of the practical approaches to assessing stress VaR (sVaR) and derives a formula for calculating it for cases of uniform or triangular distribution of cash flow over an asset (project). It turns out that it is much more conservative in assessing risks than the VaR risk measure, in many cases it can compete with other risk measures, for example, such as ES.
