Business Commons^™

Ceo Compensation And Risk-Taking At Financial Firms: Evidence From U.S. Federal Loan Assistance, Amar Gande, Swami Kalpathy

Amar Gande

We examine whether risk-taking among the largest financial firms in the U.S. is related to CEO equity incentives before the 2008 financial crisis. Using data on U.S. Federal Reserve emergency loans provided to these firms, we find that the amount of emergency loans and total days the loans are outstanding are increasing in pre-crisis CEO risk-taking incentives – “vega”. Our results are robust to accounting for endogeneity in CEO equity incentives and selection of financial firms into emergency loan programs. We also rule out the possibility that our results are driven by a bank’s funding base, bank complexity, CEO overconfidence, …

Игры В Призрачном Мире Теневой Банковской Деятельности, Bryane Michael

Брайн Майкл

В своем анализе мы, ско- рее, делаем акцент на способах, позволяю- щих теневому банковскому сектору прино- сить пользу отдельным предпринимателям и компаниям на быстроразвивающихся рынках. Кредиты от таких «небанковских финансовых учреждений», как их часто на- зывают, способны помочь в ослаблении се- рьезных кредитных ограничений во многих анализируемых нами экономических систе- мах. Вследствие этого мы предпочли сосре- доточиться на том, каким образом отдель- ные предприниматели и компании могут предоставлять недорогие кредиты, предла- гать инвесторам доход, генерируемый та- кими кредитами, и при этом по-прежнему получать прибыль.

How You Estimate The Yield Curve Matters!, Luiz Paulo Fichtner, Pedro Santa-Clara

Luiz Paulo Fichtner

We evaluate a two-factor Cox et al. (1985a,b) model using Euribor zero-coupon yields. We estimate this model using a state-space framework, where we sum a log-likelihood function of the state vector dynamics to a log-likelihood function of cross-section pricing errors. We introduce a likelihood-scaling weight in the joint log-likelihood function and show that there is a tradeoff in how one estimates a yield curve. Giving more weight to the cross-section of pricing errors improves the fitting and forecasting of Euribor yields, while giving more weight to the log-likelihood function of the state vector dynamics improves interest rate derivative pricing at …

Out-Of-Sample Predictability Of Bond Returns, Luiz Paulo Fichtner, Pedro Santa-Clara

Luiz Paulo Fichtner

We test the out-of-sample predictive power for one-year bond excess returns for a vari- ety of models that have been proposed in the literature. We find that these models perform well in sample, but have worse out-of-sample performance than the historical sample mean. We write the one-year excess return on a n-maturity bond at time t + 1 as the difference between n times the n-maturity bond yield at time t, and the sum of n − 1 times the (n − 1)-maturity bond yield at time t + 1 and the one-year bond yield at time t. Instead of …

Reserve Currency And A Lender Of Next-To-Last Resort: A Literature Review, Alida S. Skold

Alida S. Skold

The role of the US dollar as the global dominant reserve currency is eroding. Debate is ongoing regarding next steps. Moving the international monetary system to a single global currency is part of the debate. Literature reviews the eroding role of the US dollar and implications the erosion carries for the US. The Special Drawing Rights developed by the IMF could fill the role of Keynes’ recommended global currency known as the “bancor.” Regardless of the nature of the global reserve currency, access to liquidity is required to have an effective international monetary system. Literature defines a missing layer of …

A Comparison Of Anti-Manipulation Rules In U.S. And Eu Electricity And Natural Gas Markets: A Proposal For A Common Standard, Shaun D. Ledgerwood, Dan Harris

Shaun D. Ledgerwood

In this paper, we describe the development and current status of anti-manipulation rules as they apply to wholesale electricity and natural gas markets in the United States and the European Union, including the institutions that are responsible for overseeing these rules. We then compare and contrast these jurisdictions to discuss similarities, differences, and potential gaps in coverage within and across their internal markets. We note that while the behavior prohibited by the U.S. and EU statutes is remarkably similar, there is in fact no common standard for defining market manipulation. The absence of a common EU/U.S. framework for examining manipulative …

Why Do U.S. Securities Laws Matter To Non-U.S. Firms? Evidence From Private Class-Action Lawsuits, Amar Gande, Darius P. Miller

Amar Gande

A continuing controversy is whether U.S. securities laws are enforced against foreign firms, since public enforcement actions by the SEC are infrequent and often result in insignificant penalties. We examine private enforcement actions of U.S. securities laws and find that 269 securities class-action lawsuits were filed against foreign firms from 1996 to 2008. We document the severity of the penalties imposed on foreign firms and show that while firms paid a total of $9 billion to settle lawsuits brought against them, the monetary penalties levied by the market are even larger. During the three-day period surrounding the lawsuit filing date, …

Smart Stimulus Amid Deepening Debt: Future-Flow Tax Credit Programs, William Werkmeister

William Werkmeister

No abstract provided.

Capital Account Liberalization, Financial Development And Industry Growth: A Synthetic View, Rachita Gullapalli, Barry Eichengreen, Ugo Panizza

Rachita Gullapalli

This paper synthesizes studies analyzing the effects of capital account liberalization on industry growth while controlling for financial crises, domestic financial development and the strength of institutions. We find evidence that financial openness has positive effects on the growth of financially dependent industries, although these growth-enhancing effects evaporate during financial crises. Further analysis indicates that the positive effects of capital account liberalization are limited to countries with relatively well-developed financial systems, good accounting standards, strong creditor rights and rule of law. It suggests that countries must reach a certain threshold in terms of institutional and economic development before they can …

Cv, Lorán Chollete

Lorán Chollete

No abstract provided.

International Diversification: An Extreme Value Approach, Lorán Chollete, Victor De La Peña, Ching-Chih Lu

Lorán Chollete

No abstract provided.

Using Spectrum Auctions To Enhance Competition In Wireless Services, Peter Cramton, Evan Kwerel, Gregory Rosston, Andrzej Skrzypacz1

Peter Cramton

Spectrum auctions are used by governments to assign and price licenses for wireless communications. Effective auction design recognizes the importance of competition, not only in the auction, but in the downstream market for wireless communications. This paper examines several instruments regulators can use to enhance competition and thereby improve market outcomes.

Letter To Deputy Administrator Blum (Cms) On Medicare Auction, Peter Cramton

Peter Cramton

No abstract provided.

Reducing Healthcare Costs Requires Good Market Design, Peter Cramton, Brett Katzman

Peter Cramton

No abstract provided.

Letter From 167 Concerned Auction Experts On Medicare Competitive Bidding Program, Peter Cramton

Peter Cramton

No abstract provided.

Economic Consequences Of Speculative Side Bets: The Case Of Naked Credit Default Swaps, Yeon-Koo Che, Rajiv Sethi

Yeon-Koo Che

We examine the effects of “naked” credit default swaps on equilibrium debt contracts, pro ject choice, and the likelihood of default when investors have heterogeneous beliefs about the future revenues of the borrower. Although such contracts are zero sum side bets, their existence can have important economic consequences. They induce investors who are most optimistic about the future revenues of borrowers, and would therefore be natural purchasers of debt, to sell credit protection instead. This diverts their capital away from potential borrowers and channels it into collateral to support speculative positions. The resulting shift in the terms of lending against …

Wind Energy In Colombia: A Framework For Market Entry, Peter Cramton, Walter Vergara, Alejandro Deeb, Natsuko Toba, Irene Leino

Peter Cramton

The purpose of this report is to provide decision makers in Colombia (and by extension other countries or regions), who are considering the deployment or consolidation of wind power, with a set of options to promote its use. The options presented are the result of an analysis of the Colombian market; this analysis included simulations and modeling of the country’s power sector, and extensive consultations with operators, managers, and agents. More information on the analysis and simulations is presented in the appendixes. Wind was chosen to exemplify the range of renewable energy alternatives available to complement traditional power sector technologies …

Media Attention & Executive Pay In The Netherlands, Jordan Otten

Jordan Otten

This report is centered around three research questions on newspaper coverage and executive compensation in The Netherlands. 1) How has the coverage developed over the years? 2) How selective are newspapers in their coverage? And 3) What are the influences of newspaper coverage on executive compensation?

Based on the articles that have appeared in the period 1998- mid 2009, it can be concluded that the attention by newspapers is not only of the most recent years. Newspapers do not systematically focus on the better or worse performing companies and do also not focus on the higher or highest paid executives. …

International Diversification: A Copula Approach, Lorán Chollete, Victor De La Pena, Ching-Chih Lu

Lorán Chollete

No abstract provided.

Adjustment Costs, Errors In Risk Weights, And Banks' Balance Sheets: The 1988 Basel Accord Revisited, Kevin T. Jacques, Elva Coadari, John Thornton

Kevin T Jacques

In the context of a profit-maximization model that recognizes both non-homogeneous adjustment costs and errors in risk weights, this paper examines the question of why different banks exhibited different responses to implementation of the 1988 Accord.

Procyclicality, Bank Lending, And The Macroeconomic Implications Of A Revised Basel Accord, Kevin T. Jacques

Kevin T Jacques

No abstract provided.

Using Forward Markets To Improve Electricity Market Design, Peter Cramton, Lawrence Ausubel

Peter Cramton

Forward markets, both medium term and long term, complement the spot market for wholesale electricity. The forward markets reduce risk, mitigate market power, and coordinate new investment. In the medium term, a forward energy market lets suppliers and demanders lock in energy prices and quantities for one to three years. In the long term, a forward reliability market assures adequate resources are available when they are needed most. The forward markets reduce risk for both sides of the market, since they reduce the quantity of energy that trades at the more volatile spot price. Spot market power is mitigated by …

Virtual Power Plant Auctions, Peter Cramton, Lawrence Ausubel

Peter Cramton

Since their advent in 2001, virtual power plant (VPP) auctions have been implemented widely. In this paper, we describe the simultaneous ascending-clock auction format that has been used for virtually all VPP auctions to date, elaborating on other design choices that most VPP auctions have had in common as well as discussing a few aspects that have varied significantly among VPP auctions. We then evaluate the various objectives of regulators in requiring VPP auctions, concluding that the auctions have been effective devices for facilitating new entry into electricity markets and for developing wholesale power markets.

The Defense-Growth Relationship: An Economic Investigation Into Post-Soviet States, Bruce D. Mcdonald Iii, Robert J. Eger Iii

Bruce D. McDonald, III

An important question stemming from the collapse of the Soviet Union is how defense spending has influenced the economic performance of the 15 member states since their establishment as market economies. This study furthers the understanding of the relationship between defense spending and economic growth using data from the states of the former Soviet Union from 1992 to 2007. A nonlinear production function was used for direct effects, and models of investment and employment were employed for indirect effects. Contrary to expectations, the findings show that continued reliance on the defense sector in post-Soviet states has helped overall economic growth. …

There Should Be Little Or No Liquidity Discounts For Controlling Interests In Closely Held Businesses, Michael Sack Elmaleh

Michael Sack Elmaleh

The application of liquidity discounts to the appraised values of controlling interests in closely held businesses reflects a failure of the valuation community to fully appreciate the fact that these equity interests belong to a fundamentally different investment class than publicly traded securities. Investors in publicly traded securities have dramatically different expectations about the benefits and sacrifices of such investments, compared to the expectations of benefits and sacrifices of investors in closely held companies. Investors in publicly traded securities expect their minority interest investments to be highly liquid, yield free cash flow, and require no participation in the management of …

Policies To Mitigate Procyclicality, John Kiff, Jochen Andritzky, Laura Kodres, Jodi Scarlata, Andrea Maechler, Pamela Madrid, Aditya Narain, Noel Sacasa

John Kiff

The present crisis has focused attention on how procyclicality in the financial system can have outsized effects. This paper examines the reasons for this, specifically focusing on regulations or market practices that can accentuate economic cycles. In this light, the paper thus discusses the role of private sector risk management practices (including liquidity risk management), compensation practices, capital adequacy requirements and provisioning rules, deposit insurance regimes, and monetary policy actions. While recognizing various practical limitations, new policy responses are identified that could help to mitigate procyclicality.

A Two-Sided Auction For Legacy Loans, Peter Cramton

Peter Cramton

On Monday, 23 March 2009, Treasury Secretary Geithner presented the Public-Private Investment Program as a key instrument to resolve the financial crisis (www.financialstability.gov). The Treasury’s description still leaves many issues unanswered. We flesh out the auction design for legacy loans. A two-sided auction is required. Both banks and private investors must compete in a transparent and competitive process.

Financial Distress And Idiosyncratic Volatility: An Empirical Investigation, Lorán Chollete, Jing Chen, Rina Ray

Lorán Chollete

No abstract provided.

Financial Implications Of Extreme And Rare Events, Lorán Chollete, Dwight Jaffee

Lorán Chollete

No abstract provided.

Dependence Of Macro Variables In The Us Economy, Lorán Chollete, Cathy Ning

Lorán Chollete

No abstract provided.