THE EFFECTS OF MUTUAL FUNDS ON M&A COMPENSATION

Motivated by shareholders’ interest in combating executive wealth expropriation through the merger and acqusition (M&A) process, we study how mutual funds influence firm behavior around an acquisition through votes against management proposals. We find that mutual funds reduce the chief executive officer's ability to extract rents during the M&A process by voting against management‐sponsored compensation proposals after the acquisition, thus lowering both excess compensation and increasing pay‐for‐performance sensitivity. Furthermore, mutual fund voting magnifies the impact on negatively performing firms and firms with a larger amount of the mutual fund's holdings in the firm.     

Comments on the valuation of derivative assets

This paper presents an alternative approach to derive the Breeden-Litzenberger valuation formula, which expresses the price of an arbitrary derivative security in terms of call options' prices. This valuation formula follows from the observation that a continuous derivative security can be replicated by a portfolio including a bond and call options with all possible exercise prices. Discrete terms are added to the original Breeden-Litzenberger formula to reflect possible discontinuities of the call option price's derivative with respect to the exercise price. These discontinuities are subsequently shown to correspond to mass points of the probability distribution of the stock price. Several applications of the Breeden-Litzenberger valuation formula are demonstrated.     

Inflation and growth: new evidence from a dynamic panel threshold analysis

We introduce a dynamic panel threshold model to estimate inflation thresholds for long-term economic growth. Advancing on Hansen (J Econom 93:345–368, 1999) and Caner and Hansen (Econom Theory 20:813–843, 2004), our model allows the estimation of threshold effects with panel data even in case of endogenous regressors. The empirical analysis is based on a large panel-dataset including 124 countries. For industrialized countries, our results confirm the inflation targets of about 2% set by many central banks. For non-industrialized countries, we estimate that inflation rates exceeding 17% are associated with lower economic growth. Below this threshold, however, the correlation remains insignificant.     

The relationship between reciprocal currency futures prices

Consider a futures contract on Country 2’s currency denominated in Country 1’s currency, and its reciprocal, a futures contract on Country 1’s currency denominated in Country 2’s currency. Because both are marked to market in different currencies, the relationship between the associated futures prices is not simple. We investigate the functional relationship between these two futures prices.     

Revisiting the effect of household size on consumption over the life-cycle

Although the link between household size and consumption has strong empirical support, there is no consistent way in which demographics are dealt with in standard life-cycle models. We study the relationship between the predictions of the Single Agent model (the standard in the literature) versus a simple model extension (the Demographics model) where deterministic changes in household size and composition affect optimal consumption decisions. We show theoretically that the Demographics model is conceptually preferable to the Single Agent model as it captures economic mechanisms ignored by the latter. However, our quantitative analysis demonstrates that differences in predictions for consumption are negligible across models, when using standard calibration strategies. This suggests that it is largely irrelevant which model specification is used.     

Two Closed-Form Formulas for the Futures Price in the Presence of a Quality Option

The paper derives closed-form formulas for the futures pricein the presence of a multi-asset quality option. This is donefor two cases: In the first one the underlying assets are zerocoupon bonds with different maturities in the single-factorVasicek model. In the second one these are commodities in amulti-factor setting, again with Vasicek interest rate uncertainty.     

Hedging structured credit products during the credit crisis: A horse race of 10 models

Pricing and hedging structured credit products poses major challenges to financial institutions. This paper puts several valuation approaches through a crucial test: How did these models perform in one of the worst periods of economic history, September 2008, when Lehman Brothers went under? Did they produce reasonable hedging strategies? We study several bottom-up and top-down credit portfolio models and compute the resulting delta hedging strategies using either index contracts or a portfolio of single-name CDS contracts as hedging instruments. We compute the profit-and-loss profiles and assess the performances of these hedging strategies. Among all 10 pricing models that we consider the Student-t copula model performs best. The dynamical generalized-Poisson loss model is the best top-down model, but this model class has in general problems to hedge equity tranches. Our major finding is however that single-name and index CDS contracts are not appropriate instruments to hedge CDO tranches.     

Hours Worked in Europe and the United States: New Data,New Answers*

We use national labor force surveys from 1983 to 2015 to construct hours worked per person on the aggregate level and for different demographic groups for 18 European countries and the United States. We apply a harmonization procedure to measure hours worked consistently across countries and over time. In the recent cross‐section, Europeans work 14 percent fewer hours than US Americans. Differences in weeks worked and in the educational composition each account for one quarter to one half of this gap. In addition, lower hours worked per person than in the United States are driven by lower weekly hours worked in Scandinavia and Western Europe, but by lower employment rates in Eastern and Southern Europe.