HEDGING INTEREST RATE RISK UNDER TERM STRUCTURE EFFECTS: AN APPLICATION TO FINANCIAL INSTITUTIONS

In this paper we investigate the use of the structured full rank model for hedging the balance sheet of a financial institution. Simulation results suggest that the optimal hedge is insensitive to changes in parameter estimates. In addition, we hedge a portfolio of Treasury bills using both the full information covariance matrix and the structured covariance matrix. We then contrast these results with those obtained from a duration-based model. Empirical results suggest that the structured full rank model is generally more effective in hedging applications than either the full information model or duration-based model.     

GATT,Preferential/Regional Trading Blocs and Agricultural Trade*

Agricultural trade impasses have again frustrated the GATT process. Interest in preferential/regional trading blocs is increasing. the paper probes the theoretical and empirical consequences of preferential arrangements instead of multilateral liberalization. It concludes that in a second-best world preferential arrangements could either improve or decrease global welfare. For agricultural trade, previous experience suggests that in regional groupings such as the EC trade diversion exceeded trade creation. This results from trade distorting domestic policies. Prospects for liberalization of agricultural trade under either GATT or preferential arrangements are limited. the consequences for small agricultural exporters are not positive.     

Uncovering the Risk–Return Relation in the Stock Market

There is ongoing debate about the apparent weak or negative relation between risk (conditional variance) and expected returns in the aggregate stock market. We develop and estimate an empirical model based on the intertemporal capital asset pricing model (ICAPM) that separately identifies the two components of expected returns, namely, the risk component and the component due to the desire to hedge changes in investment opportunities. The estimated coefficient of relative risk aversion is positive, statistically significant, and reasonable in magnitude. However, expected returns are driven primarily by the hedge component. The omission of this component is partly responsible for the existing contradictory results.     

Rural Population Growth, 1950–1990: The Roles of Human Capital, Industry Structure, and Government Policy

Human capital raises rural incomes, but this effect is swamped by higher returns to human capital in urban markets. This leads to "brain drain" from rural areas. Populations grow more rapidly in rural counties that have a diversified employment base. Farm population grows faster (or declines more slowly) in counties with relatively high farm income, and nonfarm populations grow faster in counties with relatively high nonfarm income. However, higher farm incomes lead to slower nonfarm population growth and vice versa. Rural county government services financed by local taxes or debt have neutral or negative effects on population growth.     

Does an Industry Effect Exist for Initial Public Offerings?

We examine the impact of initial public offerings (IPOs) on rival firms and find that the valuation effects are insignificant. This insignificant reaction can be explained by offsetting information and competitive effects. Significant positive information effects are associated with IPOs in regulated industries and the first IPO in an industry following a period of dormancy. Significant negative competitive effects are associated with larger IPOs in competitive industries, those in relatively risky industries, those in high‐performing industries, and those in the technology sector. IPO firms that use the proceeds for debt repayment appear to represent a more significant competitive threat to rival firms relative to IPO firms that use their proceeds for other purposes.     

Managerial Equity Ownership and the Demand for Outside Directors

This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive‐alignment demand for monitoring when managers own little stock and an entrenchment‐amelioration demand when managerial stock ownership is high. As a consequence, we predict the association between managerial ownership and board composition will be nonlinear (U‐shaped if the entrenchment effect is sufficiently pronounced). Using UK data, we find that both quadratic and logarithmic models outperform the simple linear relationship assumed in prior research and that the substitution between managerial ownership and board composition is stronger than hitherto supposed.     

A comparison of several approximations to the power function of the likelihood ratio test in covariance structure analysis*

In this paper we compare alternative asymptotic approximations to the power of the likelihood ratio test used in covariance structure analysis for testing the fit of a model. Alternative expressions for the noncentrality parameter (ncp) lead to different approximations to the power function. It appears that for alternative covariance matrices close to the null hypothesis, the alternative ncp's lead to similar values, while for alternative covariance matrices far from H_o the different expressions for the ncp can conflict substantively. Monte Carlo evidence shows that the ncp proposed in Satorra and Saris (1985) gives the most accurate power approximations.     

AN EMPIRICAL INVESTIGATION INTO THE IMPACT OF PROFIT SHARING SCHEMES OF EXECUTIVIES ON THE CONTENT OF CORPORATE SUBMISSIONS ON PROPOSED ACCOUNTING STANDARDS

This paper examines the comments submitted by UK companies on 20 proposed accounting standards to test the hypotheses that executives favor standards that increase, or dampen the variance of, accounting profit numbers on which their incentive remuneration is based. Test results were generally as hypothesised but only the profit variance outcomes were statistically significant. Allowing for political environment changes affected only the profit variance results. There was no evidence that the relative monetary size of bonus payments was a significant lobbying factor. No significant differences were found between the lobbying preferences of companies with or without executive incentive schemes.     

Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks

Consolidation in the banking industry has sparked concern about the survival of small banks, particularly as it relates to the availability of credit to small businesses. However, if small banks have an advantage in processing credit information, compared to large banks, they should continue to survive in a competitive environment. We evaluate risk-adjusted commercial loan yields (gross yields less net charge-offs and the risk-free rate of return) at small and large banks for the period of 1996 through 2001. Our primary finding is that, after controlling for market concentration, cost of funds, and a variety of other factors that might influence yields, smaller banks earn greater risk-adjusted yields than larger banks. This result suggests that small banks make better choices from the available small business loans and is consistent with the notion that these banks have an information advantage in evaluating credit.