Predicting Spatial Patterns of House Prices Using LPR and Bayesian Smoothing

This article is motivated by the limited ability of standard hedonic price equations to deal with spatial variation in house prices. Spatial patterns of house prices can be viewed as the sum of many causal factors: Access to the central business district is associated with a house price gradient; access to decentralized employment subcenters causes more localized changes in house prices; in addition, neighborhood amenities (and disamenities) can cause house prices to change rapidly over relatively short distances. Spatial prediction (e.g., for an automated valuation system) requires models that can deal with all of these sources of spatial variation. We propose to accommodate these factors using a standard hedonic framework but incoporating a semiparametric model with structure in the residuals modeled with a partially Bayesian approach. The Bayesian framework enables us to provide complete inference in the form of a posterior distribution for each model parameter. Our model allows prediction at sampled or unsampled locations as well as prediction interval estimates. The nonparametric part of our model allows sufficient flexibility to find substantial spatial variation in house values. The parameters of the kriging model provide further insights into spatial patterns. Out–of–sample mean squared error and related statistics validate the proposed methods and justify their use for spatial prediction of house values.     

Believing one's own press: the causes and consequences of CEO celebrity

This theoretical article introduces the construct of CEO celebrity in order to explain how the tendency of journalists to attribute a firm's actions and outcomes to the volition of its CEO affects such firm. In the model developed here, journalists celebrate a CEO whose firm takes strategic actions that are distinctive and consistent by attributing such actions and performance to the firm's CEO. In so doing, journalists over‐attribute a firm's actions and outcomes to the disposition of its CEO rather than to broader situational factors. A CEO who internalizes such celebrity will also tend to believe this over‐attribution and become overconfident about the efficacy of her past actions and future abilities. Hubris arises when CEO overconfidence results in problematic firm decisions, including undue persistence with actions that produce celebrity. Copyright © 2004 John Wiley & Sons, Ltd.     

Race,redlining, and residential mortgage loan performance

Theories of discrimination in credit markets suggest that under certain circumstances systematic lender bias may result in creditors holding minority applicants or applicants from minority neighborhoods to higher standards of creditworthiness than other borrowers. This implies lower default rates or smaller dollar losses on loans to marginally qualified minority borrowers or borrowers from minority neighborhoods, compared to loans extended to other similarly qualified borrowers. This study seeks to test this prediction by examining the default-risk characteristics of FHA-insured single-family residential mortgages. All things equal, empirical findings fail to support the theoretical predictions that observed default rates are relatively lower among minority borrowers or neighborhoods.     

Wimp or tough guy: Sequential default risk and signaling with mortgages

When analyzing what to do with a currently defaulted loan, the lender must consider the impact of his foreclosure versus workout decision on the expected payoff of subsequent loans as well as on the payoff of the current loan. This is because borrowers with future loan payoff dates can observe the lender's actions and update prior information regarding the lender's toughness or wimpiness when dealing with defaulted loans. In this paper we consider the strategic interaction between a lender and multiple borrowers, where borrowers have distinct, sequentially maturing mortgage loans and where the lender has private information regarding the magnitude of his foreclosure costs. We find that a variety of strategic outcomes can occur that explain the co-existence of workout and foreclosure in the mortgage marketplace. In general, the lender's workout/foreclosure response depends on the cost of bluffing (e.g., foreclosing when workout is cheaper) versus the value of reducing expected defaults and workout concession losses on future loans (e.g., imperfect foreclosure cost information leads future borrowers to payoff the mortgage when default would have been optimal under perfect information). Given recently revised expectations regarding the depth of the real estate recession, our results may explain the move by many lenders away from granting workout concessions and toward taking a harder line when dealing with defaulting borrowers.     

HOW DO MARKET FAILURES JUSTIFY INTERVENTIONS IN RURAL CREDIT MARKETS?

Understanding of the economic causes and consequences of marketfailure in credit markets has progressed a great deal in recentyears. This article draws on these developments to appraisethe case for government intervention in rural financial marketsin developing countries and to discover whether the theoreticalfindings can be used to identify directives for policy. Before debating the when and how of intervention, the articledefines market failure, emphasizing the need to consider thefull array of constraints that combine to make a market workimperfectly. The various reasons for market failure are discussedand set in the context in which credit markets function in developingcountries. The article then looks at recurrent problems thatmay be cited as failures of the market justifying intervention.Among these problems are enforcement; imperfect information,especially adverse selection and moral hazard; the risk of bankruns; and the need for safeguards against the monopoly powerof some lenders. The review concludes with a discussion of interventions,focusing on the learning process that must take place for financialmarkets to operate effectively.      

An Empirical Test of Ross's Cash Flow Beta Theory of Capital Structure

This paper empirically investigates Ross's cash flow beta theory of capital structure. Ross hypothesizes that, for firms of similar cash flow variance, there will be an inverse relationship between financial leverage and cash flow beta. This paper provides empirical support for Ross's theory, though the extent of the support depends upon the sample period and the leverage specification.     

Corporate use of derivatives and excess value of diversification

We provide a link between diversification discount and corporate use of financial derivatives. We show that diversified firms benefit from financial risk management. Our findings are consistent with the notion that derivative usage lowers information asymmetry and thereby reduces the negative valuation effects of diversification. Our evidence complements the earlier findings of both the risk management literature and diversification discount literature and is robust to controls for endogeneity and information asymmetry levels.     

Some Hicksian and Marshallian consumer's surplus estimates in discrete choice

This note describes the theory and practice of applying the Hicksian approach to cost-benefit analysis to discrete choice models. It illustrates the technique with numerical estimates of Hicksian and Marshallian consumer's surplus measures based on computer simulations using real-world data.     

Profitability in traditional and emerging lines of black business enterprise

The literature on Black entrepreneurship identifies two major obstacles to progressive operation of Black-owned businesses: (1) lack of capital and contact with financial institutions and (2) lack of managerial skills and attitudes among Blacks. These explanations are essentially hypotheses and the present study attempts to measure empirically the relative significance of financial capital inputs and human capital inputs as determinants of business profitability. Results of the estimation exercise provide an empirical basis for examining a number of hypotheses concerning historical patterns of Black business development and future developmental prospects of Black entrepreneurship.