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.     

Subsidizing Liquidity: The Impact of Make/Take Fees on Market Quality

Facing increased competition over the last decade, many stock exchanges changed their trading fees to maker‐taker pricing, an incentive scheme that rewards liquidity suppliers and charges liquidity demanders. Using a change in trading fees on the Toronto Stock Exchange, we study whether and why the breakdown of trading fees between liquidity demanders and suppliers matters. Posted quotes adjust after the change in fee composition, but the transaction costs for liquidity demanders remain unaffected once fees are taken into account. However, as posted bid‐ask spreads decline, traders (particularly retail) use aggressive orders more frequently, and adverse selection costs decrease.     

Optimal Monetary Policy in a Model with Agency Costs

This paper integrates a fully explicit model of agency costs into an otherwise standard Dynamic New Keynesian model in a particularly transparent way. A principal result is the characterization of agency costs as endogenous markup shocks in an output‐gap version of the Phillips curve. The model's utility‐based welfare criterion is derived explicitly and includes a measure of credit market tightness that we interpret as a risk premium. The paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy. Finally, optimal policy can be expressed as an inflation targeting criterion that (depending upon parameter values) can be either forward or backward looking.     

Acquisition Targets and Motives in the Banking Industry

This paper uses a large sample of individual banking organizations, observed from 1996 to 2005, to investigate the characteristics that made them more likely to be acquired. We use a definition of acquisition that we consider preferable to that used in much of the previous literature, and we employ a competing-risk hazard model that reveals important differences that depend on the type of acquirer. Since interstate acquisitions became more numerous during this period, we also investigate differences in the determinants of acquisition between in-state and out-of-state acquirers. We also employ a subsample of publicly traded banking organizations to investigate the role of managerial ownership in explaining the likelihood of acquisition. The hypothesis that acquisitions serve to transfer resources from less efficient to more efficient uses receives substantial support from our results, as do a number of other relevant hypotheses.     

On the Riskiness of Universal Banking: Evidence from Banks in the Investment Banking Business Pre- and Post-GLBA

We explore whether an economically significant differential exists in market-based risk measures between universal banks and traditional banks. Using a three-asset portfolio regression model, we find that between 1990 and 2007—a period of gradual deregulation culminating in passage of the Gramm–Leach–Bliley Act (GLBA) of 1999—an increased participation in investment banking was associated with higher total and unsystematic risks and no significant change in systematic risk. Small risk-reduction benefits emerged in the post-GLBA era, but such benefits were likely the result of the particular sample period rather than a fundamental change in bank structure following the GLBA. Our results cannot justify the GLBA on risk-reduction grounds, though the Act may be defensible for other reasons.     

PUBLICATION RECORDS AND TENURE DECISIONS IN THE FIELD OF STRATEGIC MANAGEMENT

To better define levels of accomplishment for publishing journal articles in strategic management, a bibliometric study was performed on the publication records of 96 doctorates in the field whose first post-degree job was in academics. By examining 20 journals that are outlets for research in strategic management, publication records were developed for each individual for the first 5–10 years following receipt of the doctoral degree. Two factors influenced the publication records of these new faculty. Having publications prior to receiving the doctorate and getting a first job at an institution with a graduate program in management were associated with more frequent publishing after an academic career began. As expected, the number of papers published was related to the likelihood of receiving tenure. However, despite the fact that they had produced more papers during the first 5 years than male faculty members and had higher citation rates, female faculty members were less likely to receive tenure. The findings are discussed in terms of institutional policy for hiring and evaluating new faculty.     

Mortgage Design in an Equilibrium Model of the Housing Market

How can mortgages be redesigned to reduce macrovolatility and default? We address this question using a quantitative equilibrium life‐cycle model. Designs with countercyclical payments outperform fixed payments. Among those, designs that front‐load payment reductions in recessions outperform those that spread relief over the full term. Front‐loading alleviates liquidity constraints when they bind most, reducing default and stimulating housing demand. To illustrate, a fixed‐rate mortgage (FRM) with an option to convert to adjustable‐rate mortgage, which front‐loads payment reductions relative to an FRM with an option to refinance underwater, reduces price and consumption declines six times as much and default three times as much.     

MEDIA ADVERTISING AND BALLOT INITIATIVES: THE CASE OF ANIMAL WELFARE REGULATION

Spending on political advertising increases with every election cycle, not only for congressional or presidential candidates, but also for state‐level ballot initiatives. There is little research in marketing, however, on the effectiveness of political advertising at this level. In this study, we conduct an experimental analysis of advertisements used during the 2008 campaign to mandate new animal welfare standards in California (Proposition 2). Using subjects' willingness‐to‐pay for cage‐free eggs as a proxy for their likely voting behavior, we investigate whether advertising provides real information to likely voters, and thus sharpens their existing attitudes toward the issue, or whether advertising can indeed change preferences. We find that advertising in support of Proposition 2 was more effective in raising subjects' willingness‐to‐pay for cage‐free eggs than ads in opposition were in reducing it, but we also find that ads in support of the measure reduce the dispersion of preferences and thus polarize attitudes toward the initiative. More generally, political ads are found to contain considerably more “hype” than “real information” in the sense of Johnson and Myatt [Johnson, J. P., and D. P. Myatt. “On the Simple Economics of Advertising, Marketing and Product Design.” American Economic Review, 96, 2006, 756–84]. (JEL D12, D72, K32, L66, M37)     

ACCUMULATION, CAPACITY UTILISATION AND DISTRIBUTION

This paper examines three approaches to the process of accumulationwhich are based on the ‘Keynesian premise’: the‘neo-Keynesian’, the ‘Kaleckian’ andthe ‘Sraffian’. Making some criticisms of the firsttwo from the viewpoint of the third and from a certain formal/conceptualperspective, we propose a synthetic model which is free fromthese criticisms and in which the adjustment of savings to investmentin the long period is achieved through all the three routesemphasised separately by these approaches: changes in the long-perioddegree of utilisation; changes in the ‘normal’ distributionof income; and variations in the size of productive capacity.The key to the synthesis is the hypothesis that, in the longperiod, the ‘normal’ degree of utilisation is endogenouslydetermined to coincide with the average level through mutualinfluence effected by investment in the short period. Our syntheticmodel, like the first two approaches, is in the line of steady-stateanalysis, but in a way compatible with the ‘Keynesianpremise’.