Debt Spreads Between GSEs and Other Corporations

Policy analysis of the housing GSEs—Freddie Mac, Fannie Mae, and the Federal Home Loan Bank System—has largely centered on a comparison of their cost advantages relative to the benefits they provide to consumers and the market. Researchers generally treat their lower funding costs as the largest component of their cost advantage and measure it by a comparison of spreads between yields on non-GSE securities and GSE securities. This paper provides the first econometric analysis of such spreads. Special components of this research are separate analysis of debentures and medium-term notes, a comparison with all financial firms and a banking subsample, and the introduction of liquidity proxies. Comparing Freddie Mac and Fannie Mae debt with non-GSE debt rated AA– gives an estimated range of 27 to 30 basis points without the inclusion of the liquidity proxies, and a range of 22 to 27 basis points with their inclusion, over 1995–2000.     

Dynamic Linkages Between the Greater China Economic Area Stock Markets—Mainland China,Hong Kong,and Taiwan

This research examines the linkages among three Greater China Economic Area (GCEA) stock markets, including Mainland China, Hong Kong, and Taiwan, and two developed markets, Japan and the United States. We find that: (1) a random walk model is outpredicted by an autoregressive GARCH model and an ARIMA model in all three GCEA markets; (2) the three GCEA markets are not cointegrated with either U.S. or Japan but there exists weak nonlinear relationships between these markets; and (3) result from the innovation accounting analysis reveals that the U.S. market has larger influence on the GCEA markets than the Japanese market. Additionally, Hong Kong is the most influential among the three GCEA markets.JEL Classification: G10, G14, G15Opinions and results presented in this paper are those of the authors and are not intended to represent the views, policies, or interests of Fannie Mae. This paper is not the result of Fannie Mae related research and does not use or cite Fannie Mae data sources.     

Requiem for a Market Maker: The Case of Drexel Burnham Lambert and Junk Bonds

This article adds to both the financial intermediation and market microstructure literature by examining the market reactions surrounding the withdrawal of a major financial intermediary and market maker from a specific securities market. We examine the exit of Drexel Burnham Lambert (Drexel) from the junk bond market in 1990. At the time Drexel exited the market by declaring bankruptcy, it was the dominant market maker and underwriter of junk bonds. We examine the impact of Drexel's failure on direct and indirect holders of junk bonds by investigating the effect of Drexel's collapse on junk bond returns, and on the stock returns of a group of firms that, on average, held significant amounts of junk bonds. We find that the collapse of Drexel had a significant impact on junk bond prices in general, and a greater impact on the prices of lower-quality junk bonds in particular. We interpret this result to imply that the value of the liquidity services supplied by Drexel was higher for lower-quality junk bonds. Additionally, we find that junk bonds underwritten by Drexel, as opposed to other investment banks, experienced a significant decline in price over the months leading up to Drexel's failure announcement. This suggests that the monitoring services provided by Drexel for the bonds it underwrote would not be replaced easily by other financial intermediaries operating in the junk bond market. Our results also indicate that the stock returns of life insurance companies with relatively high junk bond exposure tended to be affected more negatively by Drexel's financial distress than the stock returns of life insurance companies with relatively low junk bond exposure.     

New evidence on the announcement effect of convertible and exchangeable bonds

This study investigates the announcement and issuance effects of offering convertible bonds and exchangeable bonds using data for the Swiss and German markets during January 1996 and May 2003. The analysis suggests that announcement effects of convertible bonds and exchangeable bonds are associated with significantly negative abnormal returns. German firms exhibit a stronger reaction than Swiss firms, possibly for institutional reasons. We also investigate the effect of the market return of the announcement effect and find that the negative abnormal returns are significantly more pronounced when previous market returns have been negative. Furthermore, we analyze the relation between the announcement effects and equity components by controlling for the equity signal sent to the market. We find the size of the equity component of an issue to have a strong influence on the announcement effect for convertible but not for exchangeable securities and offer an explanation for this difference.     

Is There a Size Effect in the Pricing of Stocks in the Chinese Stock Markets?: The Case of Bull Versus Bear Markets

Size effect studies generally suggest that a return premium exists for small firms. While the size effect has mostly disappeared in recent years in mature markets (e.g., US and UK), it remains mostly strong in developing markets. The purpose of this paper is to examine the relationship between firm size and excess stock returns in the Chinese stock markets, and to examine this effect in both a bull and bear market. No studies have previously examined these relationships in the Chinese markets. The results of the study indicate that a size effect exists in the Chinese stock markets over the 6-year period from 1998 to 2003. We find small firms have significantly greater excess returns than large firms. Moreover, small firms are found to have a stronger reaction to the direction of the market than large firms. Small firms have significantly greater positive excess returns than large firms during the bull market. However, small firms have significantly greater negative returns (using total market value), or no significant difference in returns (using float market value) during the bear market period.     

The effect of large investors on asset quality: Evidence from subprime mortgage securities

Fannie Mae and Freddie Mac (the GSEs), the dominant investors in subprime mortgage-backed securities before the 2008 crisis, substantively affected collateral composition in this market. Mortgages included in securities designed for the GSEs performed better than those backing other securities in the same deals, holding observable risk constant. Consistent with the transmission of private information, these effects are concentrated in low-documentation loans and for issuers that were highly dependent on the GSEs and were corporate affiliates of the mortgage originators. Additional analysis of yield spreads shows that these performance differences were not reflected in prices.     

SECONDARY MORTGAGE MARKET PURCHASE COMMITMENT YIELDS

We provide empirical evidence that quoted secondary market mortgage yields conform to the predictions of option theory. We compare Fannie Mae and Freddie Mac origination yields offered in the secondary market from 1985 to 2003 with the predictions of a two‐state binomial mortgage option valuation model. Our two‐state approach considers a mean‐reverting interest rate process as well as a stochastic housing price. Using predictions from option simulations, we find strong links between market practice and mortgage option prepayment and default factors over time. We also find cross‐sectional differences that are consistent with the institutional structure of the markets.     

遏制金融危机：美国史上规模最大的行动

尽管"两房"(房利美和房地美)已经实现了国有化,美林被美国银行成功收入囊中,雷曼已经寿终正寝,AIG获得了美国政府850亿美元的贷款援助,但华尔街金融危机却并不会因此划上句号。     

The mitigation of high-growth-related accounting distortions after sarbanes-oxley

This study examines the effect of the Sarbanes-Oxley Act of 2002 (SOX) on accounting distortions in the context of the earnings quality of high-growth firms relative to lower-growth firms. High-growth creates unique management and reporting challenges that can contribute to accounting-related distortions. SOX, with its emphasis on financial reporting, control systems and management responsibility, could have been particularly relevant for high-growth firms with such challenges. Test results indicate a stronger reduction (weaker increase) in accounting distortions related to total accruals and book-tax differences (performance-matched modified Jones discretionary accruals) for high-growth firms from the pre- to the post-SOX period relative to lower-growth firms. Other tests indicate that the relation between accounting returns and market returns strengthened for high-growth firms in the period after SOX, but not for lower-growth firms. These results suggest greater reductions in accounting distortions and related improvements in reporting quality for high-growth firms relative to other firms coinciding with the post-SOX period.     

An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and An Evaluation of the Policy Options for Reducing Those Risks

Fannie Mae and Freddie Mac are government-sponsored enterprises that are central players in U.S. secondary mortgage markets. Over the past decade, these institutions have amassed enormous mortgage- and non-mortgage-oriented investment portfolios that pose significant interest-rate risks to the companies and a systemic risk to the financial system. This paper describes the nature of these risks and systemic concerns and then evaluates several policy options for reducing the institutions’ investment portfolios. We conclude that limits on portfolio size (assets or liabilities) would be the most desirable approach to mitigating the systemic risk posed by Fannie Mae and Freddie Mac.     

Resolving large financial intermediaries: Banks versus housing enterprises

This paper examines the policy issues associated with resolving the possible failure of Fannie Mae or Freddie Mac (housing enterprises). It compares and contrasts these issues with those raised in the context of large bank failures and also identifies important differences in the extant supervisory authorities. Based on these discussions, a number of policy suggestions are offered to minimize the cost of resolution and protect taxpayers from loss should a large bank or housing enterprise fail.     

The Shareholder Wealth Effects of Insurance Securitization: Preliminary Evidence from the Catastrophe Bond Market

Insurance securitization has long been hailed as an important tool to increase the underwriting capacity for companies exposed to catastrophe-related risks. However, global volumes of insurance securitization have remained surprisingly low to date which raises questions over its benefits. In this paper, we examine changes in the market value of insurance and reinsurance firms which announce their engagement in insurance securitization by issuing catastrophe (Cat) bonds. Consistent with the hitherto underwhelming contribution of Cat bonds to global catastrophe coverage, we do not find evidence that Cat bonds lead to strong wealth gains for shareholders in the issuing firm. More importantly, we report large variations in the distribution of wealth effects in response to the issue announcement. We show that the wealth effects for shareholders in firms which issue Cat bonds appear to be driven by explanations according to which Cat bonds offer cost savings relative to other forms of catastrophe risk management (and less by the potential of Cat bonds to hedge catastrophe risk). Thus, abnormal returns are particularly large for issues by firms which face low levels of loss uncertainty (which reduces the information acquisition costs in financial markets) as well as for issues during periods when prices for catastrophe coverage (including Cat bonds) are low.     

Time-varying expected small firm returns and closed-end fund discounts

This article describes the relation between closed-end funddiscounts and time-varying expected excess returns on smallfirms. The results indicate that closed-end fund discounts forecastfuture excess returns on small firms. The information in discountsis independent of that in other commonly used forecasting variablessuch as the dividend yield on the market, the default spread,and the term spread. Furthermore, the closed-end fund discountforecasts only the small firm factor return and is the onlyvariable that forecasts the small firm factor return. Additionaltests indicate that the information in discounts is relatedto expectations of future earnings growth and expectations offuture inflation. These results provide significant supportfor a rational explanation of the time-series relationship betweendiscounts and expected returns on small firms.     

Value or volume strategy?

This article reports a study that analyzes financial data for US firms listed during 1996–2005 to examine the asymmetric effects of the informative variables on stock returns between the boom and bust conditions in stock price. The study includes analysis of changing distribution of stock returns across stocks and over time by using a quantile regression (QR hereafter) model and comparison of the results with OLS and LAD estimates. The present empirical results indicate that market investors are more influenced by the fundamental variable, such as P/E ratios, derived from the value strategy when the stock they invest is in experience of a large fall in price. Conversely, when the stock price is hugely rising, market participants increase the loading of the effect of trading volume. Last, although the market returns have a significantly positive impact on the individual stock returns, we further indicate that the systematic effects involved in the market returns are much more notable when this specific stock is experiencing a recession condition in price.     

The Equity Share in New Issues and Aggregate Stock Returns

The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.     

The Valuation Impact of SEC Enforcement Actions on Nontarget Foreign Firms

This study shows that the Securities and Exchange Commission's (SEC) enforcement intensity toward the foreign firms under its jurisdiction has increased dramatically over the past two decades. Because enforcement events signify an increased threat of future enforcement, I examine the stock returns of foreign firms not targeted by the SEC during windows around enforcement actions that target foreign firms. This design captures the net effects of public enforcement and helps to rule out omitted variables as alternative explanations, because other factors would have to align with enforcement events that do not occur in an obvious pattern (and are therefore unlikely to map onto other news). Nontarget firms experience positive stock returns during the event windows, which is consistent with enforcement constraining the risks of expropriation. The cross‐sectional pattern in returns reveals greater returns for firms from weak home legal environments. Finally, consistent with the market adjusting to a new enforcement regime, the magnitude of event returns declines over time. Overall, SEC enforcement is associated with increases in the value of foreign firms, supporting the premise of the legal bonding hypothesis.     

Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance

Fannie Mae and Freddie Mac are unique and controversial participants in the housing finance system of the United States. Because of these enterprises' federal government charters, the financial markets believe that the government would not allow Fannie and Freddie to fail to honor their debt obligations, and they are thereby able to borrow more cheaply in credit markets; in turn, they lower interest rates for residential mortgages. If the financial markets are right, however, Freddie and Fannie also create a contingent liability for the government. Though there are positive externalities from home ownership, the Fannie/Freddie route is far too broad and unfocused to address those externalities effectively. Privatization, accompanied by targeted federal assistance for potential first-time low- and moderate-income home buyers, would be a superior policy direction.     

An analysis of working capital efficiency and shareholder return

Since 1997, CFO Magazine has published a ranking of 1000 companies in its “Working Capital Scorecard.” Our research explores the question as to whether working capital management practices based on the accounting metrics used by CFO Magazine serve as a basis for investor-based strategies for superior return generation. We examine the stock performance of top ranked companies from 1997 to 2012 against benchmark portfolios. Controlling for market, market capitalization, book to market, momentum factors, liquidity factors, and corporate governance; the higher ranked firms produce statistically higher excess returns than bottom ranked firms. In bull market periods, firms with superior working capital management outperformed their counterparts on a raw and risk-adjusted basis. These top ranked firms also provide statistically significant active returns regardless of market cycle. In sum, our results indicate that shareholders reward firms with superior working capital management strategies with higher raw and risk-adjusted performance over longer holding periods across the economic cycle especially in bear markets cycles.     

Government asset sales,economic nationalism,and acquirer wealth effects

We analyze acquirer wealth effects using a comprehensive sample of government asset sale announcements in 123 countries around the world in 1984–2009. Overall, we find positive abnormal returns to acquirers of state-owned assets. Returns are greater when the acquirer is domestic, when the sale occurs in a developing nation, and when the acquirer itself is not a former state-owned enterprise. Buyers of bailed-out firms experience average abnormal returns of 3.16%, compared to 0.70% for all other government sales. Our results suggest that the market favors acquirers that benefit from divesting governments driven by economic nationalism rather than sale revenue maximization.     

Did the Federal Reserve's MBS purchase program lower mortgage rates?

On November 25, 2008, the Federal Reserve announced it would purchase mortgage-backed securities (MBS). This program affected mortgage rates through three channels: (1) improved market functioning in both primary and secondary mortgage markets, (2) clearer government backing for Fannie Mae and Freddie Mac, and (3) anticipation of portfolio rebalancing effects. We use empirical pricing models for MBS yields and for mortgage rates to measure relative importance of channels: The first two were important during the height of the financial crisis, but the effects of the third depended on market conditions. Overall, the program put significant downward pressure on mortgage rates.