Investment in a New Technology as a Signal of Firm Value Under Regulatory Opportunism

We examine the question of whether a regulated firm that makes a long-term investment in infrastructure can credibly signal its private information regarding the future demand for its output to the capital market. We show that necessary conditions for a separating equilibrium in which the magnitude of investment signals high future demand may include a low degree of managerial myopia, large variability of future demand, a lenient regulatory climate, and low sunk cost. Our model suggests that in estimating valuation models of regulated firms it is important to separate firms into two groups: firms for which a separating equilibrium is likely to obtain and firms for which the equilibrium is likely to be pooling. The market value of a firm in the first group is positively correlated with its level of investment, but uncorrelated with the level of actual demand, whereas for the second group the opposite holds.     

Housing Return and Construction Cycles

This paper presents a general equilibrium model of the residential housing market. Within the model housing returns, housing construction, mortgage loan terms, and household maintenance behavior are all endogenous. These interacting elements tie expected housing returns to expected changes in family wealth. As a result: (1) families are credit constrained; (2) mortgage loan-to-value ratios can be used to forecast future housing returns; (3) developers acquire land when expected housing returns lie above the rate of interest and then develop when housing returns lie below. Thus, their holdings and construction decisions also forecast housing returns.     

Informed speculation and hedging in a noncompetitive securities market

We examine an adverse selection model of trading in which bothinformed and uninformed traders are rational, maximizing agents.Replacing the price inelastic 'noise' or 'liquidity' traderswith strategic, utility-maximizing hedgers permits an explicitanalysis of the uninformed traders' welfare, and demonstratesthat several comparative statics obtained from the standardparadigm of Kyle (1984, 1985) are altered significantly uponendogenizing the trading motives of these agents. In contrastto extant models, market liquidity and price efficiency areboth nonmonotonic in the number of uninformed hedgers in themarket. Also, the welfare of hedgers monotonically decreaseswith the number of informed traders, despite greater competitionbetween the informed.     

Asset Price Persistence and Real Estate Market Illiquidity: Evidence from Japanese Land Values

We develop an overlapping generations model of the real estate market in which search frictions and a debt overhang combine to generate price persistence and illiquidity. Illiquidity stems from heterogeneity in agent real estate valuations. The variance of agent valuations determines how quickly prices adjust following a shock to fundamentals. We examine the predictions of the model by studying price depreciation in Japanese land values subsequent to the 1990 stock market crash. Commercial land values fell much more quickly than residential land values. As we would posit that the variance of buyer valuations would be greater for residential real estate than for commercial real estate, this model matches the Japanese experience.     

CROSS‐COUNTRY CAUSES AND CONSEQUENCES OF THE 2008 CRISIS: INTERNATIONAL LINKAGES AND AMERICAN EXPOSURE

We model the causes of the 2008 financial crisis together with its manifestations, using a cross‐country multiple indicator multiple cause model. We consider both national and, critically, international linkages between countries and potential crisis ‘epicentres’, including the United States. A country holding an epicentre's securities is exposed through a financial channel, while a country that exports to that epicentre is exposed through a real channel. We are unable to find strong evidence that international linkages can be associated with crisis incidence. In particular, exposure to the United States in either form has little impact. If anything, it appears to help.     

Improved Forecasting of Mutual Fund Alphas and Betas

This paper proposes a simple back testing procedure that isshown to dramatically improve a panel data model's ability toproduce out of sample forecasts. Here the procedure is usedto forecast mutual fund alphas. Using monthly data with an OLSmodel it has been difficult to consistently predict which portfoliomanagers will produce above market returns for their investors.This paper provides empirical evidence that sorting on the estimatedalphas populates the top and bottom deciles not with the bestand worst funds, but with those having the greatest estimationerror. This problem can be attenuated by back testing the statisticalmodel fund by fund. The back test used here requires a statisticalmodel to exhibit some past predictive success for a particularfund before it is allowed to make predictions about that fundin the current period. Another estimation problem concerns theuse of a single statistical model for all available mutual funds.Since no one statistical model is likely to fit every fund,the result is a great deal of misspecification error. This papershows that the combined use of an OLS and Kalman filter modelincreases the number of funds with predictable out of samplealphas by about 60%. Overall, a strategy that uses very modestex-ante filters to eliminate funds whose parameters likely deriveprimarily from estimation error produces an out of sample risk-adjustedreturn of over 4% per annum.     

Regional Competition for Domestic and Foreign Investment: Evidence from State Development Expenditures

We develop a model in which state governments spend funds on attracting capital with the intent of maximising the local net wage. Our results suggest that states are likely to spend less on economic development as the state wage level increases, and to spend more on industrial development as the state wage level increases, and to spend more on industrial development as the share of manufacturing in the state labor force increases. Empirical tests using state expenditure data confirm the predictions of the model.     

Patterns in cross market liquidity

Academic research on liquidity has generally focused on explaining what can be called within market liquidity. That is it seeks to explain things like why one stock is more liquid than another. But there has been considerably less attention to cross market liquidity: the issue of why some securities are more liquid than others. For example, stocks are apparently far more liquid than high yield bonds. Why? Why do some markets exist (orange juice for example) while others do not (potatoes for example)? This article lays out the current academic evidence regarding liquidity across assets and explains why current theories have trouble with one item or another. The challenge then is to produce an overarching theory that offers predictions that are closer to what the data seems to imply about cross market liquidity.     

A Spatial Model of Housing Returns and Neighborhood Substitutability

This article provides a method for estimating housing indices at the local level. It develops a distance-weighted repeat-sales procedure to exploit the factor structure of the error-covariance matrix in the repeat-sales model. A distance function defined in characteristic and geographical space provides weights for the generalized least-squares model, and allows the use of all of the repeated sales in a metropolitan area to measure returns for the specific neighborhood of interest. We use distance-weighted repeat sales to estimate return indices for all zip codes in the San Francisco Bay area over the period 1980--1994.When distance is defined in terms of socioeconomic characteristics, we find that median household income is the salient variable explaining covariance of neighborhood housing returns. Racial composition and educational attainment, while significant, are much less influential. Zip-code level indices often deviate dramatically from the citywide index, depending upon income levels. This has implications for investors and lenders. Our results indicate that rates of return may vary considerably within a metropolitan area. Thus, simply using broad metropolitan area indices as a proxy for capital appreciation within a specific neighborhood may not be justified.