Similarities and convergence in G-7 cycles

This paper examines the properties of G-7 cycles using a multicountry Bayesian panel VAR model with time variations, unit specific dynamics and cross-country interdependences. We demonstrate the presence of a significant world cycle and show that country specific indicators play a much smaller role. We detect differences across business cycle phases but, apart from an increase in synchronicity in the late 1990s, find little evidence of major structural changes. We also find no evidence of the existence of a Euro specific cycle or of its emergence in the late 1990s.     

Learning and shifts in long-run productivity growth

An extensive literature has analyzed the macroeconomic effects of shocks to the level of aggregate productivity; however, there has been little corresponding research on sustained shifts in the growth rate of productivity. In this paper, we examine the effects of shocks to productivity growth in a dynamic general equilibrium model where agents do not directly observe whether shocks are transitory or persistent. We show that an estimated Kalman filter model using real-time data describes economists’ long-run productivity growth forecasts in the United States extremely well and that filtering has profound implications for the macroeconomic effects of shifts in productivity growth.     

Why are IPO investors net buyers through lead underwriters?

In Nasdaq initial public offerings (IPOs) issued between 1997 and 2002, purchases of lead underwriter clients exceed sales by an amount equal to 8.79% of the total issue. We find that lead underwriter clients do not buy to build larger long-term positions, capitalize on superior execution quality, or because of clientele effects. However, characteristics of net buying that are at odds with these explanations and other behaviors (like institutional purchases of cold IPOs) are all consistent with lead underwriters engaging in quid pro quo arrangements with clients. Price contribution analysis shows that such client buying activity contributes significantly to first-day price increases.     

Is universal banking justified? Evidence from bank underwriting of corporate bonds in Japan

We examine the extent to which universal banking in Japan creates conflicts of interest. We find that as banks enter the securities business, they discount the price of the corporate bonds they underwrite significantly in an effort to attract investors, thereby generating conflicts of interest that are harmful to issuers. Further, we find that close prior lending relationships between banks and their client issuers is the driving force behind such conflicts and that competition from investment houses limits but does not eliminate these conflicts. Our results contrast sharply with the evidence for the US, which largely shows a certification role for banks.     

Portfolio manager ownership and fund performance

This paper documents the range of portfolio manager ownership in the funds they manage and examines whether higher ownership is associated with improved future performance. Almost half of all managers have ownership stakes in their funds, though the absolute investment is modest. Future risk-adjusted performance is positively related to managerial ownership, with performance improving by about 3 basis points for each basis point of managerial ownership. These findings persist after controlling for various measures of fund board effectiveness. Fund manager ownership is higher in funds with better past performance, lower front-end loads, smaller size, longer managerial tenure, and funds affiliated with smaller families. It is also higher in funds with higher board member compensation and in equity funds relative to bond funds. Future performance is positively related to the component of ownership that can be predicted by other variables, as well as the unpredictable component. Our findings support the notion that managerial ownership has desirable incentive alignment attributes for mutual fund investors and indicate that the disclosure of this information is useful in making portfolio allocation decisions.     

Foreign currency-denominated borrowing in the absence of operating incentives

It is well known that corporations issue foreign currency-denominated debt to hedge foreign currency cash flows with offsetting interest payments. We test an alternative “opportunistic” motive for foreign currency-denominated borrowing. We do so by constructing a comprehensive sample of foreign currency-denominated bonds issued by sovereign government and agency issuers with no foreign currency cash flows or foreign operations. We find strong and consistent evidence that the borrowers in our sample consider cross-currency differences in covered and uncovered interest yields in choosing the currency in which to denominate their international debt. We estimate the average gains to opportunistic covered yield borrowing to be 4 to 18 basis points. Interestingly, we also find that the average bond offering in our sample precedes a large and beneficial depreciation of the issue currency over the course of the following year. These results support what has been a frequent conjecture in the foreign debt market.     

Convergence and risk-return linkages across financial service firms

We examine the risk and return linkages across US commercial banks, securities firms, and life insurance companies during the 1991–2001 period. After controlling for changes in the broader stock market, interest rates, and foreign currency values, we find that return and risk interdependencies across these financial firms are significant and size-varying; larger institutions display stronger volatility transmission linkages, while smaller ones exhibit more prominent return-related linkages. The tighter link in risk among large financial institutions (FIs) suggests stronger convergence, employment of common models of risk measurement and risk management, and more intense inter-industry competition, particularly between large banks and large securities firms, compared to smaller institutions. Lack of risk spillover among smaller FIs confirms the intuition that they typically assume more localized and idiosyncratic risk. The co-movement of stock returns among smaller FIs has been helped by the effects of locally based factors, such as economic conditions and state regulations, on all such institutions, and a less diversified product set. Differences in spillover patterns between large and smaller institutions have implications on investment choices and mergers and acquisitions in the industry. Introduction of the Gramm-Leach-Bliley Act (1999) has had dissimilar effects on the riskiness of large versus smaller life insurance and securities firms, and an insignificant effect on commercial banks.     

Regime switching based portfolio selection for pension funds

This paper shows how a mean variance criterion can be applied to a multi period setting in order to obtain efficient portfolios in an asset and liability context. The optimization model allows for rebalancing activities, transaction costs, stochastic volatilities for both assets and liabilities. Furthermore, a general framework for the projection of pension fund liabilities as well as for the generation of asset returns is given. In a further step the dynamics of the liability maturity structure is modeled as customized index, whose volatility and correlation with asset returns become integral components of the applied regime switching approach. The numerical results illustrate the diversification of the assets and its risk return pattern in dependency of the liability dynamics.     

Operating and stock market performance of state-owned enterprise privatizations: The Spanish experience

We investigate the operating and stock market performance of Spanish state-owned enterprises (SOEs) privatized through public share issue offerings (SIPs) from 1990 to 2001, when the last SIP was conducted. We compare the performance of SOEs and privately-owned firms. We find significant operating improvements in Spanish SOEs after the privatization. Specifically, they show significant increases in income efficiency, real sales and employment. Spanish governments tried to minimize the foregone proceeds when selling SOE shares and underpriced them lower than private firms. We relate these results with the pressure of the Maastricht Treaty fiscal criteria, as well as lower information asymmetries between firms and investors. Finally, we do not find long-term abnormal stock market performance after SIPs.     

Dating Business Cycles: A Methodological Contribution with an Application to the Euro Area

This paper proposes a dating algorithm based on an appropriately defined Markov chain that enforces alternation of peaks and troughs, and duration constraints concerning the phases and the full cycle. The algorithm, which implements Harding and Pagan's non‐parametric dating methodology, allows an assessment of the uncertainty of the estimated turning points caused by filtering and can be used to construct indices of business cycle diffusion, aiming at assessing how widespread are cyclical movements throughout the economy. Its adaptation to the notion of a deviation cycle and the imposition of depth constraints are also discussed. We illustrate the algorithm with reference to the issue of dating the euro‐area business cycle and analysing its characteristics, both from the classical and the growth cycle perspectives.