How Large Are Housing and Financial Wealth Effects? A New Approach

This paper presents a simple new method for measuring “wealth effects” on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption “habits”) to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration‐based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.     

Interest on bank reserves and optimal sweeping

A key rationale offered by the Federal Reserve for the payment of interest on reserves was to remove the incentive for banks to operate sweep accounts. Sweeping shifts funds from transactions deposits subject to reserve requirements to non-reservable deposits. This paper extends a conventional banking model to analyze sweeping behavior. Sweeping responds positively to increases in bank loan rates and reserve ratios and negatively to increases in the interest rate on reserves or exogenous increases in bank equity. Sweeping generates greater responsiveness in lending to changes in loan rates or the interest rate on reserves and lower responsiveness to changes in reserve ratios or equity than in its absence. Empirical analysis of an explicit condition that we derive suggests that, with an unchanged reserve requirement, the Fed could eliminate sweeping by setting the interest rate on reserves to no less than approximately 4% points below the market loan rate.     

The dark side of financial innovation: A case study of the pricing of a retail financial product

The offering prices of 64 issues of a popular retail structured equity product were, on average, almost 8% greater than estimates of the products' fair market values obtained using option pricing methods. Under reasonable assumptions about the underlying stocks' expected returns, the mean expected return estimate on the structured products is slightly below zero. The products do not provide tax, liquidity, or other benefits, and it is difficult to rationalize their purchase by informed rational investors. Our findings are, however, consistent with the recent hypothesis that issuing firms might shroud some aspects of innovative securities or introduce complexity to exploit uninformed investors.     

Notes from a life influenced by Wendell Bell

Wendell Bell's idealistic vision of the role of the sociologist in creating a brighter future for society and his theoretical framework of the role of intellectual elites in the decisions of nationhood are examined through the personal lens of a former Caribbean student of the West Indies Study Program at UCLA.     

Public perceptions of food-related risks: a cross-national investigation of individual and contextual influences

Public concerns about food risks have grown in recent decades in response to many food-related scandals. Despite some evidence that risk concerns vary across societies and risk domains, these variations remain understudied. To address this gap, this paper conducts a multi-level analysis of public concerns about biological and chemical/technical food risks in 26 European countries. Findings confirm previous work on individual predictors of risk concern and suggest that several contextual factors contribute to cross-national variations: aggregate perceptions of risks as unnatural, retail concentration in the food sector, and media coverage. The effect of institutional trust on risk concerns varies substantially across nations. Findings also reveal important differences in public concerns about biological versus chemical/technical food risks, supporting the view that food risk perception is multi-dimensional and complex.     

Equity valuation: A survey of professional practice

This paper reports the results of a scientific survey of the equity valuation practices of CFA Institute members with equity analysis job responsibilities. Using an instrument designed to minimize biases in prior valuation surveys and sampling a larger group than in previous studies (13,500 investment professionals, resulting in 1,980 valid completed questionnaires), this paper documents professional practices in the selection of equity valuation approaches, including specific model variations and key input preferences. Important differences in practice were observed across geographies and employer firm types.     

Commercial Real Estate Market Property Level Capital Expenditures: An Options Analysis

The Journal of Real Estate Finance and Economics - Option pricing theory predicts that capital improvement expenditures are positively linked with high or increasing market lease rates. Ceteris...     

Sparse Signals in the Cross‐Section of Returns

This paper applies the Least Absolute Shrinkage and Selection Operator (LASSO) to make rolling one‐minute‐ahead return forecasts using the entire cross‐section of lagged returns as candidate predictors. The LASSO increases both out‐of‐sample fit and forecast‐implied Sharpe ratios. This out‐of‐sample success comes from identifying predictors that are unexpected, short‐lived, and sparse. Although the LASSO uses a statistical rule rather than economic intuition to identify predictors, the predictors it identifies are nevertheless associated with economically meaningful events: the LASSO tends to identify as predictors stocks with news about fundamentals.     

Far from the madding crowd: collective wisdom in prediction markets

We investigate market selection and bet pricing in a repeated prediction market model. We derive the conditions for long-run survival of more than one agent (the crowd) and quantify the information content of prevailing prices in the case of fractional Kelly traders with heterogeneous beliefs. It turns out that, apart some non-generic situations, prices do not converge, neither almost surely nor on average, to true probabilities, nor are they always nearer to the truth than the beliefs of all surviving agents. This implies that, in general, prediction market prices are not maximum likelihood estimators of the true probabilities. However, when more than one agent survives, the average price emerging from a prediction market approximates the true probability with lower information loss than any individual belief.     

The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms

The main purpose of this paper is using a unique data set from IPO filings to study the IPO market as a screening device and the going public decision. We find that private firms that are less likely to have the option to access public equity markets receive 54 cents for each dollar they expected to raise in an IPO, whereas firms that are more likely to have the option to go public but sell privately sell at $1.11 for each dollar they expected to receive at the IPO. This result suggests that the lower valuation for firms sold in private markets compared to firms sold in public markets can be at least partially explained by the lower relative bargaining power of private firms. However, owners that took their firms public before selling received, on average, 40% larger payoffs than owners that had the option to go public but decided to sell privately. The results in this study indicate that these differences in valuation are not fully explained by existing theoretical models on the decision to sell privately or in two stages.