The Determinants of Default on Insured Conventional Residential Mortgage Loans

This paper presents empirical evidence on the determinants of default for insured residential mortgages. A multinomial logit model is specified and estimated for regional aggregates constructed from cross sectional and time series data. The results document the independent statistical significance of contemporaneous payment/income and loan/ value ratios and unemployment rates as well as more commonly studied determinants of default such as age and the original loan/value ratio.     

Seasonality and Consumption-Based Asset Pricing

Most of the evidence on consumption-based asset pricing is based on seasonally adjusted consumption data. The consumption-based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time-separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures.     

False (and Missed) Discoveries in Financial Economics

Multiple testing plagues many important questions in finance such as fund and factor selection. We propose a new way to calibrate both Type I and Type II errors. Next, using a double-bootstrap method, we establish a t-statistic hurdle that is associated with a specific false discovery rate (e.g., 5%). We also establish a hurdle that is associated with a certain acceptable ratio of misses to false discoveries (Type II error scaled by Type I error), which effectively allows for differential costs of the two types of mistakes. Evaluating current methods, we find that they lack power to detect outperforming managers.     

REFORM OF THE DEPOSIT INSURANCE SYSTEM: AN APPRAISAL OF THE FHLBB AND FDIC STUDIES

This paper presents an appraisal of the studies of the deposit insurance system submitted to Congress by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board in compliance with the Garn-St. German legislation of 1982. The purpose of these studies was to assess the current structure of the deposit insurance system in light of the changes in the regulation of depository institutions mandated in recent legislation
Many observers of the financial system believe that, as a result of recent regulatory changes, the deposit insurance agencies do not have sufficient power to control risk-taking of insured institutions. These two reports present an assessment of mechanism which could be used to limit the risk of the deposit insurance agencies
The emphasis in both reports is on ways in which the amount of market discipline applied to insured institutions could be increased. Both reports identify essentially three ways in which this might be accomplished. First, risk-adjusted deposit insurance prices might be employed. Second, the volume of uninsured creditors might be increased, either through changes in limits of insurance coverage or through imposition of requirements for use of subordinated debt. Third, the current public deposit insurance system might be partially supplanted by one that is private. This paper evaluates the merits of each of these proposals and compares the positions taken by the FHLBB and the FDIC on the issues     

Optimal Choice of a Proximate Monetary Target in an Open Economy*

This paper investigates the implications of hitting a monetary target (rate of interest or money supply) in an open economy. The technique of linear optimal control is applied to a small open economy of the Australian economy. A feature of the model is the interrelationship between the monetary and open sectors which complicates the use of monetary policy. Four optimal control experiments are reported in detail. The results indicate that we should aim for a money-supply target rather than an interest-rate target and that some assistance from fiscal policy should be provided to monetary policy in order to achieve this target.