Futures prices as risk-adjusted forecasts of monetary policy

Many researchers have used federal funds futures rates as measures of financial markets’ expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy shocks used in the literature.     

Boardroom centrality and firm performance

Firms with central boards of directors earn superior risk-adjusted stock returns. A long (short) position in the most (least) central firms earns average annual returns of 4.68%. Firms with central boards also experience higher future return-on-assets growth and more positive analyst forecast errors. Return prediction, return-on-assets growth, and analyst errors are concentrated among high growth opportunity firms or firms confronting adverse circumstances, consistent with boardroom connections mattering most for firms standing to benefit most from information and resources exchanged through boardroom networks. Overall, our results suggest that director networks provide economic benefits that are not immediately reflected in stock prices.     

The Effect of Policyholder Transfer Behavior on the Value of Guaranteed Minimum Death Benefits

Abstract

Variable annuity contracts frequently include both guaranteed minimum death benefit (GMDB) options and options to transfer funds between fixed and variable accounts. We model the difference between fixed and variable rates as the primary determinant of policyholder transfer behavior. We find that people tend to transfer their money into variable accounts at about 39% of the rate that would be required to maintain constant percentage rebalancing, but with the opposite sign. If these transfers are not taken into account, the GMDB options on the variable accounts will be overvalued and overhedged. Ignoring this effect can have a substantial impact on the size of the futures portfolio needed to hedge this risk and a nonnegligible impact on the earnings of the variable annuity portfolio.     

Estimating the price elasticity of demand in the London stock market

The hypothesis that demand curves for individual stocks slope downwards is typically investigated by empirical analysis of stock price movements following events that cause shifts in demand or supply. However, it is difficult to attribute observed price movements between downward sloping demand curves and information conveyed by the event. In this paper an econometric approach, based on market-maker response to unexpected changes in inventory, is used to separate out the slope of the demand curve from information effects and estimate the slopes of the demand curves for twenty stocks included in the Financial Times-Stock Exchange 100 Share Index (FTSE100). The analysis suggests that downward sloping demand curves would decrease the price by about 7.5% for a 1% increase in the number of outstanding shares.     

The German Capital Markets Model Case Act (KapMuG): a European role model for increasing the efficiency of capital markets? Analysis and suggestions for reform

Abstract

The purpose of this study is to examine the determinants of the sovereign credit ratings provided by the three major rating agencies: Fitch Ratings, Moody’s and Standard and Poor. A principal component analysis is employed in order to identify the common factors affecting these ratings. The impact of the variables correlated with these factors on ratings is then assessed through an ordered logistic model. Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. The study also highlights the importance of corruption, as measured by Transparency International’s Corruption Perceptions Index, which appears as a proxy for both economic development and the quality of the governance of a country.     

Heterogeneity effects from market interventions

The aim of this paper is to test whether the European Commission activities generate a heterogeneity effect on the merging parties. A sample of 74 firms involved in 45 contested merger and acquisition operations during the years 1990 to 1999 is used. The methodology is based on the GARCH framework. The main result is that, globally, the DGC interventions seem not to reduce significantly the heterogeneity among investors, except for the operations where it takes strong decisions like prohibition. In these last cases, the signal coming from the DGC encompasses valuable information and is well understood by market participants.     

Do Investment Newsletters Move Markets?

We analyze the market impact of stock recommendations made by a single investment newsletter that focuses on instances of heavy insider trading. The market reacts positively to the actual insider trades and the associated Form 4 Securities and Exchange Commission (SEC) filings that attracted the newsletter's interest. The subsequent recommendations, which occur within a delay of several days, are associated with an even larger announcement period return and higher trade volume. Thus, despite the fact that recommendations are largely based on publicly available information on insider trades and the reach of the newsletter is limited, the newsletter has a significant impact on the market.     

Efficiency Gains Under Exchange-Rate Emission Trading

In the case of emission of non-uniformly dispersed pollutants such as SO2 the negative effects depend on the location of the sources. A unit increase at one source must be compensated by either a larger or smaller reduction at another source to keep the negative effects at the same level. Emission trading between countries is possible under the Second Sulphur Protocol. Exchange rate trading and third party problems are studied within a simultaneous model facilitating impositions of various environmental constraints. Simulations based on the negotiated emission quotas are offered. Results indicate potential cost savings of 19%.