Increasing Returns,Financial Capital Mobility and Real Exchange Rate Dynamics*

The late 1990s saw a US IT investment boom, large capital flows into the USA and an appreciation of the US$. At the time, this appeared to be driven by expectations of continued IT‐related knowledge spillover externalities and associated productivity and profit growth. Using a two‐region dynamic general equilibrium model with externalities, we find a once‐off productivity shock leads to capital inflow and a real appreciation only in the short term. In the long term, capital flows stabilise and the real exchange rate depreciates. For a single shock to trigger long‐term growth in capital flows requires unrealistically large externalities.     

Intraday Patterns in the Cross‐section of Stock Returns

Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross‐section of stock returns. We find a striking pattern of return continuation at half‐hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40 trading days. Volume, order imbalance, volatility, and bid‐ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that short‐term return reversal is driven by temporary liquidity imbalances lasting less than an hour and bid‐ask bounce. Timing trades can reduce execution costs by the equivalent of the effective spread.     

Private Equity Performance: Returns, Persistence, and Capital Flows

This paper investigates the performance and capital inflows of private equity partnerships. Average fund returns (net of fees) approximately equal the S&P 500 although substantial heterogeneity across funds exists. Returns persist strongly across subsequent funds of a partnership. Better performing partnerships are more likely to raise follow‐on funds and larger funds. This relationship is concave, so top performing partnerships grow proportionally less than average performers. At the industry level, market entry and fund performance are procyclical; however, established funds are less sensitive to cycles than new entrants. Several of these results differ markedly from those for mutual funds.     

Information Asymmetries and Security Market Design: An Empirical Study of the Secondary Market for U.S. Government Securities

This paper examines the empirical implications of an information asymmetry between primary and secondary dealers in the U.S. Government Securities market. This asymmetry arises because primary dealers are permitted to trade through all brokers operating in the marketplace while secondary dealers are restricted to trade through only a subset of brokers. Brokers distribute valuable information over video screens to their trading clients including dealers' up-to-date bid-ask spreads and recent transaction prices. As such, all brokers' video screen information is available to primary dealers, while only a subset of brokers' information is available to secondary dealers. Empirical analyses detect the resulting information asymmetry.     

Bias in an Empirical Approach to Determining Bond and Mortgage Risk Premiums

Empirical studies of bond and commercial mortgage performance often quantify a required risk premium by examining the difference between the promised yield and the realized yield as adjusted for default occurrence. These studies omit the effects of various other sources of risk, however, including collateral asset market risk, interest rate risk, and possibly call risk. These omissions downwardly bias the empirical risk premium estimate on the debt. In this paper, we disentangle and quantify the sources of this bias by modeling secured coupon debt (the commercial mortgage) as used in the calculation of a realized investment return. We consider deterministic and stochastic interest rate economies with mortgage contracts that are either noncallable or subject to a temporary prepayment lockout period. Given realistic parameter values associated with the term structure, underlying asset dynamics, and debt contracting, we show that the magnitude of the bias can be significant.     

IES 4 — Ethics Education Revisited

In 2003, the International Federation of Accountants (IFAC) issued a set of International Education Standards (IES). IES 4 Professional Values, Ethics and Attitudes aims to equip candidates for membership of an IFAC member body with the appropriate professional values, ethics and attitudes to function as professional accountants. This paper explores the implications of IES 4 and analyses some of the challenges arising from an international professional accounting body prescribing ethics education. It concludes with an overview of considerations to be addressed to ensure that the implementation of IES 4 is successful .