Found 518 article(s) in category 'Financial Services'

A Quantity-Driven Theory of Term Premiums and Exchange Rates

A Quantity-Driven Theory of Term Premiums and Exchange Rates. Robin Greenwood, Samuel Hanson, Jeremy Stein, Adi Sunderam. 2019, Paper, “We develop a model in which risk-averse, specialized bond investors must be paid to absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, our model naturally links the predictability of long-term bond returns to the predictability of foreign exchange returns. Specifically, a shift in the net supply of long-term bonds in one currency influences bond term premiums in both currencies as well as the foreign exchange rate between the two currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and bond term premiums as well as the finding that central banks’ quantitative easing policies impact not only local-currency long-term yields, but also foreign exchange rates. We also show that this quantity-driven approach provides a unified account explaining both why foreign exchange tends to outperform when the foreign interest rates exceed domestic rates and why long-term bonds tend to outperform when the yield curve is steep.Link

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Corporate Identity in Play: The Role of ESG Investing

Corporate Identity in Play: The Role of ESG Investing. John Ruggie, 2019, Book Chapter, “On August 19, 2019, the U.S. Business Roundtable (BR), comprising the CEOs of more than 200 of America’s largest corporations, issued a new mission statement on “the purpose of a corporation” (BR, 2019a). The press release noted that each periodic update on principles of corporate governance since 1997 had endorsed the principle of maximizing shareholder value.
In contrast, the new statement commits signatory CEOs “to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders” (BR, 2019b). “[Milton] Friedman must be turning in his grave,” a Fortune magazine article declared (Murray, 2019). “” Link

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Redeemable Platform Currencies

Redeemable Platform Currencies. Kenneth Rogoff, October 30, 2019, Paper, “Can massive online retailers such as Amazon and Alibaba issue digital tokens that potentially compete with bank debit accounts? We explore whether a large platform’s ability to guarantee value and liquidity by issuing prototype digital tokens for in-platform purchases constitutes a significant advantage that could potentially be leveraged into wider use. Our central finding is that unless introducing tradability creates a significant convenience yield, platforms can potentially earn higher revenues by making tokens non-tradable. The analysis suggests that if platforms have any comparative advantage in issuing tradable tokens, it comes from other factors.Link

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The Economic Effects of Private Equity Buyouts

The Economic Effects of Private Equity Buyouts. Josh Lerner, October 14, 2019, Paper, “We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms, both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions.Link

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Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds

Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds. Lauren Cohen, October 9, 2019, Paper, “We provide evidence that mutual fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. In particular, we provide the first systematic study of bond funds’ reported asset profiles to Morningstar against their actual portfolios. Many funds report more investment grade assets than are actually held in their portfolios, making these funds appear significantly less risky. This results in pervasive misclassifications across the universe of US fixed income mutual funds by Morningstar, who relies on these reported holdings. The problem is widespread- resulting in about 30% of funds being misclassified with safer profiles, when compared against their actual, publicly reported holdings. “Misclassified funds” – i.e., those that hold risky bonds, but claim to hold safer bonds– outperform the actual low-risk funds in their peer groups. “Misclassified funds” therefore receive higher Morningstar Ratings (significantly more Morningstar Stars) and higher investor flows due to this perceived outperformance. However, when we correctly classify them based on their actual risk, these funds are mediocre performers. Misreporting is stronger following several quarters of large negative returns, and it is strong at the fund family level. We report those families that have the highest percentage of misreported funds in the sample.Link

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Undisclosed Debt Sustainability

Undisclosed Debt Sustainability. Laura Alfaro, 2019, Paper, “Over the past decade, non–Paris Club creditors, notably China, have become an important source of financing for low- and middle-income countries. In contrast with typical sovereign debt, these lending arrangements are not public, and other creditors have no information about their magnitude. We transform the traditional sovereign debt and default model to quantitatively study incomplete information arrangements and find they greatly reduce traditional/Paris Club creditors’ debt sustainability. Disclosure of nontraditional debt would imply significant welfare gains for the recipient countries but would reduce its sustainability. We discuss the implications of nontraditional lending on standard assumptions of sovereign debt models.Link

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The effect of automatic enrolment on debt

The effect of automatic enrolment on debt. John Beshears, David Laibson, September 17, 2019, Paper, “Automatic enrolment in defined contribution pension plans might be the most common policy application of behavioural economics. But does automatic enrolment increase pension savings at the expense of increased household debt? This column examines a natural experiment in which the US Army began automatically enrolling its civilian employees in its retirement savings plan. It finds strong evidence against the hypothesis that automatic enrolment increases financial distress and debt excluding auto loans and first mortgages.Link

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Collusion in Brokered Markets

Collusion in Brokered Markets. Scott Duke Kominers, September 7, 2019, Paper, “The U.S. residential real estate agency market presents a puzzle for economic theory: commissions on real estate transactions have remained constant and high for decades even though agent entry is frequent and agents’ costs of providing service are low. We model the real estate agency market, and other brokered markets, via repeated extensive form games; in our game, brokers first post prices for customers and then choose which agents on the other side of the market to work with. We show that prices appreciably higher than the competitive prices can be sustained (for a fixed discount factor) regardless of the number of brokers; this is done through strategies that condition willingness to transact with each broker on that broker’s initial posted prices. Our results can thus rationalize why brokered markets exhibit pricing high above marginal cost despite fierce competition for customers; moreover, our model can help explain why agents and platforms who have tried to reduce commissions have had trouble entering the market.Link

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Financial Market Risk Perceptions and the Macroeconomy

Financial Market Risk Perceptions and the Macroeconomy. Emil Siriwardane, Adi Sunderam, , Paper, “In this appendix, we provide details about the data construction for all variables used in the main text. We then present a battery of tests and additional analysis demonstrating the robustness of the relationship between the real rate and PVSt. In addition, we show that roughly 90% of the covariation between the real rate and PVSt stems from the fact that the real rate forecasts future returns on the vol-sorted portfolio. We also relate PVS to objective and subjective measures of expected risk for aggregate macroeconomic variables and the aggregate stock market, showing that PVS is related to expected risk, and that this connection is most evident for subjective measures of risk that reflect both public and private firms.  Moreover, we offer complementary VAR and local projection evidence that shocks to risk perceptions, as measured by PVSt, lead to a boom in the real economy. We also document that periods of high risk perceptions coincide with investor outflows from high-volatility mutual funds. Finally, we provide proofs for the propositions contained in the model section of the main text.Link

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Robust Decision Theory and Econometrics

Robust Decision Theory and Econometrics. Gary Chamberlain, 2019, Paper, “Subjective expected utility can provide normative guidance to an investor making a portfolio choice. The investor, however, may have doubts on the specification of the distribution. The investor may, at some cost, be able to reduce these doubts by working on a more careful specification of the model. Or he may seek a decision theory that is less sensitive to the specification. I consider three such theories: maxmin expected utility, multiplier preferences, and smooth ambiguity preferences. A simple two-period model is used to illustrate their application. The model is rich enough to exhibit connections between atemporal preferences over contingent plans and recursive (conditional) preferences, and to draw attention to limitations of recursive preferences in some cases. In addition to portfolio choice, the paper discusses connections between robust decision theory and point estimation in misspecified models.Link

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