- 18 Jun 2018
- Working Paper Summaries
A Measure of Risk Appetite for the Macroeconomy
This paper sheds new light on connections between financial markets and the macroeconomy. It shows that investors’ appetite for risk—revealed by common movements in the pricing of volatile securities—helps determine economic outcomes and real interest rates.
- 02 May 2017
- Working Paper Summaries
The Cross Section of Bank Value
How do commercial banks create value? This paper represents the first attempt to empirically identify the primary determinants of cross-sectional variation in bank value. Among the findings: A bank's ability to produce deposits is by far the most important determinant in explaining cross-sectional variation in bank value.
- 29 Nov 2016
- Working Paper Summaries
Fiscal Risk and the Portfolio of Government Programs
In modern economies, a large fraction of economy-wide risk is borne indirectly by taxpayers via the government. Governments have liabilities associated with retirement benefits, social insurance programs, and financial system backstops. Given the magnitude of these exposures, the set of risks the government chooses to bear and the way it manages those risks is of great importance. This study develops a new model for government cost-benefit analysis, and shows that distortionary taxation impacts the optimal scale and pricing of government programs. It also highlights the interaction between social and fiscal risk management motives, which frequently come into conflict.
- 15 Aug 2016
- Working Paper Summaries
Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds
A key function of many financial intermediaries is liquidity transformation: creating liquid claims backed by illiquid assets. To date it has been difficult to measure liquidity transformation for asset managers. The study proposes a novel measure of liquidity transformation: funds’ cash management strategies. The study validates the measure and shows that liquidity transformation by asset managers is highly dependent on the traditional and shadow banking sectors.
- 02 Oct 2015
- Working Paper Summaries
Gradualism in Monetary-Policy: A Time Consistency Problem?
Jeremy C. Stein and Adi Sunderam develop a model of monetary policy in which the observed degree of policy inertia is not optimal from an ex ante perspective, but rather reflects a fundamental time consistency problem.
- 26 Jan 2015
- Working Paper Summaries
The Rise and Fall of Demand for Securitizations
At the heart of the recent financial crisis were nontraditional securitizations, especially collateralized debt obligations and private-label mortgage-backed securities backed by nonprime loans. Demand for these securities helped feed the housing boom during the early and mid-2000s, while rapid declines in their prices during 2007 and 2008 generated large losses for financial intermediaries, ultimately imperiling their soundness and triggering a full-blown crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers' and mutual funds' holdings of both traditional and nontraditional securitizations, this paper begins to shed light on the economic forces that drove the demand for securitizations before and during the crisis. Among the findings, variation across securitization types and investors is key to understanding the crisis. Beliefs appear to have been an important driver of mutual fund holdings of nontraditional securitizations. Results also underscore the importance of optimal liquidity management in the context of fire sales. Key concepts include: Inexperienced mutual fund managers invested significantly more in these products than experienced managers. Beliefs-shaped by past firsthand experiences-played an important role. Managers who had suffered through the market dislocations of 1998 invested substantially less in nontraditional securitizations than those who had not. For insurance companies, incentives appear to have played an important role, though the nature of the relevant incentive conflict seems to have varied across small and larger insurance firms. Closed for comment; 0 Comment(s) posted.
- 08 Dec 2011
- Working Paper Summaries
Are There Too Many Safe Securities? Securitization and the Incentives for Information Production
Markets for near-riskless securities have suffered numerous shutdowns in the last 40 years, with the recent financial crisis the most prominent example. This suggests that instability could be a general characteristic of such markets, not just a one-time problem associated with the subprime mortgage crisis. Professors Samuel G. Hanson and Adi Sunderam argue that the infrastructure and organization of professional investors are in part determined by the menu of securities offered by originators. Since robust infrastructure is a public good to originators, it may be underprovided in the private market equilibrium. The individually rational decisions of originators may lead to an infrastructure that is overly prone to disruptions in bad times. Policies regulating originator capital structure decisions may help create a more robust infrastructure. Key concepts include: Financial innovations that create near-riskless securities encourage investors to rationally choose to be uninformed. Learning from prior mistakes will not necessarily eliminate the instabilities associated with near-riskless securities. Capital structure regulation in good times can improve welfare. Specifically, it may be desirable to regulate the capital structures of securitization trusts by limiting the amount of AAA-rated debt that can be issued in good times. Informed investors are a robust source of capital capable of analyzing investment opportunities and financing positive NPV (net present value) projects even in bad times. Closed for comment; 0 Comment(s) posted.
Do Fire Sales Create Externalities?
This paper contributes to our understanding of the role of large institutional investors in securities markets, providing evidence that the structure of the mutual fund industry increases the risks of costly "fire sales."