Sparse Signals in the Cross‐Section of Returns

This paper applies the Least Absolute Shrinkage and Selection Operator (LASSO) to make rolling one‐minute‐ahead return forecasts using the entire cross‐section of lagged returns as candidate predictors. The LASSO increases both out‐of‐sample fit and forecast‐implied Sharpe ratios. This out‐of‐sample success comes from identifying predictors that are unexpected, short‐lived, and sparse. Although the LASSO uses a statistical rule rather than economic intuition to identify predictors, the predictors it identifies are nevertheless associated with economically meaningful events: the LASSO tends to identify as predictors stocks with news about fundamentals.     

Elections and Capital Flows

This paper investigates the extent to which elections affect capital flows. I find little evidence of political capital flow cycles in advanced economies. In emerging and developing countries, however, presidential elections significantly lower preelection foreign direct investment (FDI) inflows but have no effect on other types of capital flows. Furthermore, I find evidence that these cycles are not caused by economic crises related to elections or preelection manipulation of policy variables. These results suggest that uncertainty about future government policies, which should have greater impact on more irreversible forms of capital flows like FDI, may be an important factor in generating this cycle.     

Disciplining the ‘black sheep of the Balkans’: financial supervision and sovereignty in Bulgaria, 1902–38

Using the example of Bulgaria, we argue that familiar models of international political economy fail to capture the tension between national sovereignty and access to capital markets experienced by peripheral debtors in the late nineteenth and early twentieth centuries. Existing accounts exaggerate the significance of the gold standard as a good housekeeping seal of approval and underestimate the role of direct financial controls. Furthermore, they underestimate the linkage in zones of inter‐imperial rivalry, such as the Balkans, between foreign borrowing and strategic alignment. We show how Bulgaria found its politics destabilized prior to 1914 by the demands of its creditors. After defeat in the First World War, Bulgaria was forced to submit to an even tighter system of creditor control. Though it obtained substantial debt relief during the 1930s, these concessions were gained not through an assertion of national sovereignty and default, but at the price of even closer supervision. This in turn casts new light on the conventional view of Bulgaria as a victim of Nazi ‘informal imperialism’. In light of Bulgaria's previous experience, the more striking feature of its trade relations with Hitler's Germany is that they were conducted on a basis of sovereign equality.     

The New Game in Town: Competitive Effects of IPOs

We analyze the effect of initial public offerings (IPOs) on industry competitors and provide evidence that companies experience negative stock price reactions to completed IPOs in their industry and positive stock price reactions to their withdrawal. Following a successful IPO in their industry, they show significant deterioration in their operating performance. These results are consistent with the existence of IPO‐related competitive advantages through the loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. These aspects of competitiveness are significant in explaining the cross‐section of underperformance as well as survival probabilities for competing firms.     

The Federal Home Loan Bank System: The Lender of Next‐to‐Last Resort?

The Federal Home Loan Bank (FHLB) System is a large cooperatively owned government‐sponsored liquidity facility that lends predominately to U.S. depository institutions. This paper documents the significant role played by the FHLB System at the outset of the recent financial crisis and provides evidence on the uses of FHLB funding by member banks and thrifts during that time. We then compare lending activity by the FHLB System and the Federal Reserve during 2007 and 2008, discuss the types of institutions seeking government‐sponsored liquidity at various times, and identify the trade‐offs faced by borrowers eligible to tap liquidity from both facilities.     

Interest Rates and the Market for New Light Vehicles

We study the impact of interest rate changes on the demand and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. Interest rate changes impact the auto market through both households and manufacturers. For the impact of rate changes on price and output growth, the household channel is quantitatively more important. A 100 basis‐point increase in both interest rates causes annual growth rates of production to fall from 1.0% to ?11.0% and sales to fall from 1.0% to ?2.9% in the short run.     

Short‐Selling Risk

Short sellers face unique risks, such as the risk that stock loans become expensive and the risk that stock loans are recalled. We show that short‐selling risk affects prices among the cross‐section of stocks. Stocks with more short‐selling risk have lower returns, less price efficiency, and less short selling.     

Stock Market Volatility and Learning

We show that consumption‐based asset pricing models with time‐separable preferences generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. Rational investors with subjective beliefs about price behavior optimally learn from past price observations. This imparts momentum and mean reversion into stock prices. The model quantitatively accounts for the volatility of returns, the volatility and persistence of the price‐dividend ratio, and the predictability of long‐horizon returns. It passes a formal statistical test for the overall fit of a set of moments provided one excludes the equity premium.     

Nonlinear Pricing and the Market for Settling Payments

Fedwire Funds is a real‐time gross settlement system that uses a decreasing block pricing scheme to attract nonurgent payments. A bank's optimal response to Fedwire's pricing depends on its perceived benefits to settling nonurgent payments quickly. If the urgency for immediate settlement is great enough, a bank responds to marginal price; otherwise, it responds to average price. We find banks respond to average price, suggesting that Fedwire's advantage over competing services of being able to provide immediate settlement is small. Moreover, attempts to increase demand for Fedwire services by lowering the cost of banks' final block of payments may be ineffective if there is not a corresponding decrease in average cost.