What Is Systemic Risk?

The traditional view of risk in a financial system is that it is the summation of individual risks within the system. However, the financial crisis that started in 2007 has driven home that this view of risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.     

What Is Real Estate Finance?

The Journal of Real Estate Finance and Economics - How does real estate finance relate to the core of contemporary finance? What research in real estate might most interest financial economists?...     

What Is the Expected Return on a Stock?

We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.     

Mind the Gap: Is Water Disclosure a Missing Component of Corporate Social Responsibility?

Corporate water stewardship is conventionally internally focused, but now it is becoming a critical issue in a wider socio-political context. Drawing on the theory of self-regulation, we investigate the rationale behind, and the factors contributing to, corporate decisions to voluntarily disclose water information via the CDP. The study uses innovative proxies for corporate self-regulation, including water governance, water policy, water actions, and water performance. Our results show that these proxies are significantly related to the propensity of the companies participating in the CDP to disclose water information. Furthermore, belonging to a water-intensive industry may moderate the impact of self-regulation on water transparency. Finally, sharing water information privately with key institutional investors is a strategic tool for implementing self-regulation. The study suggests that corporate self-regulation can play a powerful role in reducing corporate water opaqueness when mandatory water legislation is absent or not yet applicable.     

Public Policy and Accounting Research: What Is to Be Done?

Abstract

Singleton-Green [2010. The communication gap: Why doesn't accounting research make a greater contribution to debates on accounting policy? Accounting in Europe, 7(2), 129–145] argues that a communication gap between researchers and those involved in public debates on accounting problems significantly reduces the impact of accounting research. A new ICAEW report, The Effects of Mandatory IFRS Adoption in the EU: a Review of Empirical Research, tries to bridge the communication gap on the subject that it covers. The report found not only a significant amount of relevant research, but also that its usefulness was limited in various ways. The paper makes a number of recommendations to researchers: they should point out any biases in the data they use, address some issues through field work, not assume that surrounding institutions are unchanged, be careful to understand the specific features of the countries they cover, investigate differences in previous research, and state the economic significance of their findings. The paper also makes recommendations for non-academic participants in public policy debates, including: they should actively promote relevant research, help researchers get access to information, and help ensure that researchers have the incentives to do what is needed to benefit public policy.     

Under What Conditions Is an Insurance Guaranty Fund Beneficial for Policyholders?

In this article, we derive conditions in an imperfect market setting, under which the introduction of a self‐supporting insurance guaranty fund improves the position of the policyholders. When a guaranty fund is advantageous given homogeneous firms in the market, all policyholders benefit from it to the same extent, if they have the same underlying risk preferences and are charged identical premiums. In a more realistic heterogeneous setting, the introduction of an insurance guaranty fund is in general no longer beneficial for all policyholders in the same manner. Hence, systematic wealth transfers take place between the policyholders of different insurance companies. As a possible solution, and in order to counteract this effect, we introduce a framework for utility‐based fund charges.     

Doha Merchandise Trade Reform: What Is at Stake for Developing Countries?

The LINKAGE model of the global economy and the latest GlobalTrade Analysis Project (GTAP) database (version 6.05) are usedto examine the impact of current merchandise trade barriersand agricultural subsidies and possible reform outcomes of theWorld Trade Organization’s (WTO’s) Doha DevelopmentAgenda. The results suggest that moving to free global merchandisetrade would boost real incomes in Sub-Saharan Africa proportionatelymore than in other developing countries or in high-income countries,despite the terms of trade loss in parts of that region. Particularattention is given to agriculture, as farmers constitute thepoorest households in developing countries but the most assistedin rich countries. Net farm incomes would rise substantiallyin Sub-Saharan Africa and other developing country regions,alleviating rural poverty. Partial liberalization could movethe world some way toward those desirable outcomes, the moreso the more developing countries themselves cut applied tariffs,particularly on agricultural imports.     

International Stock Return Predictability: What Is the Role of the United States?

We investigate lead‐lag relationships among monthly country stock returns and identify a leading role for the United States: lagged U.S. returns significantly predict returns in numerous non‐U.S. industrialized countries, while lagged non‐U.S. returns display limited predictive ability with respect to U.S. returns. We estimate a news‐diffusion model, and the results indicate that return shocks arising in the United States are only fully reflected in equity prices outside of the United States with a lag, consistent with a gradual information diffusion explanation of the predictive power of lagged U.S. returns.     

What was privacy?

Why is that question in the past tense? Because individuals can no longer feel confident that the details of their lives--from identifying numbers to cultural preferences--will be treated with discretion rather than exploited. Even as Facebook users happily share the names of their favorite books, movies, songs, and brands, they often regard marketers' use of that information as an invasion of privacy. In this wide-ranging essay, McCreary, a senior editor at HBR, examines numerous facets of the privacy issue, from Google searches, public shaming on the internet, and cell phone etiquette to passenger screening devices, public surveillance cameras, and corporate chief privacy officers. He notes that IBM has been a leader on privacy; its policy forswearing the use of employees' genetic information in hiring and benefits decisions predated the federal Genetic Information Nondiscrimination Act by three years. Now IBM is involved in an open-source project known as Higgins to provide users with transportable, potentially anonymous online presences. Craigslist, whose CEO calls it "as close to 100% user driven as you can get," has taken an extremely conservative position on privacy--perhaps easier for a company with a declared lack of interest in maximizing revenue. But TJX and other corporate victims of security breaches have discovered that retaining consumers' transaction information can be both costly and risky. Companies that underestimate the importance of privacy to their customers or fail to protect it may eventually face harsh regulation, reputational damage, or both. The best thing they can do, says the author, is negotiate directly with those customers over where to draw the line.     

Aversion to Student Debt? Evidence from Low-Wage Workers

We combine state minimum wage changes with individual-level income and credit data to estimate the effect of wage gains on the debt of low-wage workers. In the three years following a $0.88 minimum wage increase, low-wage workers experience a $2,712 income increase and a $856 decrease in debt. The entire decline in debt comes from less student loan borrowing among enrolled college students. Credit constraints, buffer-stock behavior, and other rational channels cannot explain the reduction in student debt. Our results are consistent with students perceiving a utility cost of borrowing student debt arising from mental accounting.     

What is the Truth About the Scale of Japanese Banks' Bad Debts? Is the Situation Manageable?

In January 1998, the Japanese Ministry of Finance (MoF, 1998) released figures which suggested that the Japanese banking industry';s bad debts might be as high as ¥77 trillion (since revised upward to ¥87.5 trillion, if cooperative-type institutions are included; Financial Supervisory Agency (FSA), 1998). This compared with the previous official estimate of ¥28 trillion. The revelation was designed to do three things: (1) to convince investors, at home and abroad, who had long suspected that the true level of bad debts was much higher than the authorities (and the banks) were willing to admit to, that the authorities were sincere in their quest to enhance disclosure by local financial intermediaries; (2) to stifle opposition to the government's plans to use up to ¥30 trillion (since increased to ¥60 trillion) of public funds to stabilize the financial system¹ by underlining the gravity of the situation facing the Japanese economy; and (3) to pave the way for the introduction of more transparent reporting by the banks in April 1998 when a regime of prompt corrective action (PCA)² was scheduled to commence. This article explains the evolution of bad debt disclosure by the Japanese banking industry and assesses the significance of the latest figures. In particular, it highlights the extent to which accounting forbearance has been, and continues to be, used to mask the true level of the banks' bad debts and refutes the claim that the industry's bad debt burden peaked in 1995. The banking industry's ability to handle the continuing bad debt problem, in the face of a significant impairment of economic capital and the market's relentless drive for full disclosure and transparency, also is assessed.     

What Drives Anomaly Returns?

We decompose the returns of five well-known anomalies into cash flow and discount rate news. Common patterns emerge across the five factor portfolios and their mean-variance efficient (MVE) combination. Whereas discount rate news predominates in market returns, systematic cash flow news drives the returns of anomaly portfolios and their MVE combination with the market portfolio. Anomaly cash flow and discount rate shocks are largely uncorrelated with market cash flow and discount rate shocks and with business cycle fluctuations. These rich empirical patterns restrict the joint dynamics of firm cash flows and the pricing kernel, thereby informing models of stocks' expected returns.     

What Moves Investment Growth?

We use accounting identities to decompose unexpected changes in investment growth into surprises to current cash‐flow growth and stock returns, and revisions of expectations about future cash‐flow growth and future discount rates. Using a vector autoregressive model we find that current cash‐flow surprises account for the largest element of the variance decomposition. Investment growth and current cash‐flow surprises are negatively correlated with news about future cash‐flow growth, which can be expected from persistent productivity shocks and decreasing returns to scale. We find little evidence of a discount rate channel for investment since return terms are small and have unintuitive signs.     

What Drives ETF Flows?

The value of exchange traded fund (ETF) assets has increased from $66 billion in 2000 to almost a trillion dollars in 2010. We use this massive expansion in ETF assets to study what drives ETF flows. Using a data set of over 500 ETFs from 2001 to 2010, we show that ETF investors chase returns in the same way as mutual fund investors. While there is an active debate about whether return chasing by mutual fund investors represents the pursuit of superior talent, the existence of return chasing in this passively managed environment should not represent a search for skilled managers. We also show that ETF flows increase following high volume, small spreads, and high price/net asset value ratios. Finally, we find little evidence of superior market timing in ETF flows. Our results suggest that return chasing in both mutual funds and ETFs is more likely the result of naïve extrapolation bias on the part of investors that has contributed to the growth of the ETF industry.     

What Drives Consumption Booms?

Consumption booms have been common in both industrial and developingcountries, and several explanations have been offered for theiroccurrence. These include economywide wealth effects associatedwith favorable movements in the terms of trade or euphoric expectationstriggered by macroeconomic reforms, Ricardian effects associatedwith fiscal stabilization, lending booms following financialliberalization, and a variety of distortions in intertemporalrelative prices. Using a large cross-country sample of booms,this article assesses how widely applicable these explanationsare. The key finding is that wealth effects linked to favorablemovements in the terms of trade and anticipated improvementsin macroeconomic performance seem to have been more importantempirically than explanations relying primarily on fiscal phenomenaor distortions in intertemporal relative prices.