EFFICIENCY AND BARGAINING POWER IN THE INTERBANK LOAN MARKET

Using detailed transactions‐level data on interbank loans, we examine the efficiency of an overnight interbank lending market and the bargaining power of its participants. Our analysis relies on the equilibrium concept of the core, which imposes a set of no‐arbitrage conditions on trades in the market. For Canada's Large Value Transfer System, we show that although the market is fairly efficient, systemic inefficiency persists throughout our sample. The level of inefficiency matches distinct phases of both the Bank of Canada's operations as well as phases of the 2007–8 financial crisis. We find that bargaining power tilted sharply toward borrowers as the financial crisis progressed and (surprisingly) toward riskier borrowers.     

Spatial Variation in Reverse Mortgages Usage: House Price Dynamics and Consumer Selection

Reverse mortgages have been obtained by nearly one million senior households. In the future, the number of eligible households will grow substantially, about 80 % are homeowners, and many of them have substantial equity in their home. We study state-level variations in rate of originations of HUD’s Home Equity Conversion Mortgage (HECM) product. Our focus is on the impact of house prices on the origination rate. We test the hypothesis that in states where real house prices are volatile and the current level is above the long term norm, seniors rationally anticipate future reductions in house prices and lock-in their housing equity gains by obtaining a reverse mortgage. We test alternative hypotheses, the first being that seniors living in states with high rates of house price appreciation increase their use of HECMs as a means to convert an illiquid wealth capital gain into a more liquid asset. A second alternative hypothesis is that the intertemporal changes in originations of HECMs were a result of changes in the supply of mortgage originators. Our empirical work supports the hypothesis that seniors used HECMs to insure against house price declines, but we find no evidence in support of the alternative hypotheses.     

Informed Trading in Corporate Bonds Prior to Earnings Announcements

This paper examines the information content of corporate bond trading prior to earnings announcements using data from both NAIC and TRACE. We find that the direction of pre‐announcement bond trading is closely related to earnings surprises. This link is most evident prior to negative news and in high‐yield bonds. Further, abnormal bond trading during the pre‐announcement period can help predict both earnings surprises and post‐announcement bond returns. Such predictive ability of bond trading largely originates from institutional‐sized trades and is concentrated in the issuer's most actively traded bond. Finally, even after accounting for transactions costs, informed bond trading can generate significant net profits, especially prior to the release of bad news.     

On Efficiency of Decentralized Environmental Regulation

Contrary to conventional wisdom about an environmental race to the bottom, the theoretical literature as exemplified by Oates and Schwab [1988, Journal of Public Economics, 35:333–354] maintains that homogeneous jurisdictions’ decentralized choices are likely to be socially optimal because each locale sets capital tax rates to zero and sets optimal environmental standards. This paper shows the well-received Oates–Schwab-style efficiency result is not likely if allowed aggregate-emissions act as a firm-augmenting public input that benefits mobile firms.Thanks to participants at the University of Alberta and the reviewers and editors for their helpful comments     

What you export matters

When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the “income level of a country’s exports,” document its properties, and show that it predicts subsequent economic growth.     

Foreign Exchange Volatility Is Priced in Equities

This paper finds that standard asset pricing models fail to explain the significantly negative delta hedging errors that occur as a result of the purchase of options on foreign exchange futures. Foreign exchange volatility does influence stock returns, however. The volatility of the JPY/USD exchange rate predicts the time series of stock returns and is priced in the cross‐section of stock returns.     

Pharmaceutical new product development: why do clinical trials fail?

A high percentage of new drug candidates fail to reach the market during clinical trials, and these failures imply massive financial losses for the pharmaceutical companies. Clinical trials have distinctive characteristics and additional complexity compared with the late stages of product development in many other industrial sectors. Although the current literature on clinical trial has offered explanations for why a drug is abandoned during clinical trials (e.g., toxicity, lack of efficacy, and economics), studies investigating non‐drug‐related causes of failure are scarce. New product development (NPD) failures also differ from one another; however, no comprehensive conceptual framework in the NPD literature describes how to classify failures. This study suggests a conceptual framework for explaining NPD failures in the pharmaceutical industry by drawing on clinical trial literature combined with an exploratory empirical approach based on 17 interviews with industry experts. The initial interviews were used to identify managerial issues related to clinical trial failure, and the later interviews had a more iterative character to validate the issues identified in the previous round. We identified seven critical management issues causing failures in clinical trials. Our findings indicate that chaotic and slow patient recruitment, lack of experience in choosing and monitoring partners, lack of feasibility of the study protocol, low quality of the registered data, too high incidence of serious adverse events and severe incidents, unmanageable level of portfolio complexity, and incorrect assessment of the market potential or returns cause the failure of clinical trials. The conceptual framework for failures proposed in this paper combines project and product failures while acknowledging relevant specificities in clinical trials. Clinical trial managers are also supported in their decision making in clinical trials with an identified list of critical management issues that require attention to reducing the chance of failure. This study provides a basis for future empirical testing, including measuring interdependencies among the critical management issues and their adequacy for predicting failure.