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Discussion Paper
Impact of Leverage Ratio Relief Announcement and Expiry on Bank Stock Prices
The onset of the Covid-19 pandemic in early 2020 drastically increased uncertainty throughout the economy. This led to turmoil in various financial markets, evidenced by the Dow Jones Industrial Average in March 2020 posting its largest single-day drop since the 2008 global financial crisis.
Working Paper
Finance and Productivity Growth: Firm-level Evidence
Using data on a broad set of European firms, we find a strong positive relationship between the use of external financing and future productivity (TFP) growth within firms. This relationship is robust to various measures of financing and productivity, and strengthens as financing costs increase. We provide evidence against a reverse-causality explanation by showing that this relationship arises from the component of TFP that is outside the information set of the firm. These findings indicate that financial development supports productivity growth within firms, and helps explain why economic ...
Working Paper
COVID-19 as a Stress Test: Assessing the Bank Regulatory Framework
The widespread economic damage caused by the ongoing COVID-19 pandemic poses the first major test of the bank regulatory reforms put in place following the global financial crisis. This study assesses this framework, with an emphasis on capital and liquidity requirements. Leading up to the COVID-19 crisis, banks were well-capitalized and held ample liquid assets, reflecting in part heightened requirements. Capital requirements were comparable across major jurisdictions, despite differences in the implementation of the international Basel standards. The overall robust capital and liquidity ...
Working Paper
Capital ratios and bank lending: a matched bank approach
This paper examines the impact of bank capital ratios on bank lending by comparing differences in loan growth to differences in capital ratios at sets of banks that are matched based on geographic area as well as size and various business characteristics. We argue that such comparisons are most effective at controlling for local loan demand and other environmental factors. For comparison we also control for local factors using MSA fixed effects. We find, based on data from 2001 to 2009, that the relationship between capital ratios and bank lending is insignificant until the recent financial ...
Discussion Paper
Matching Banks by Business Model, Geography and Size : A Dataset
In this note, we describe an algorithm, developed in Carlson, Shan, and Warusawitharana (2013), to match banks that are geographically close and are similar in size and business model. Concurrently, we also release a data set of matched banks obtained from applying this algorithm from 1998 to 2014, as well as some of the associated computer programs.
Working Paper
Mapping Heat in the U.S. Financial System
We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging ...
Working Paper
Research and development, profits and firm value: a structural estimation
Is the return to private R&D as high as believed? This study identifies a flaw in the production function approach to estimating the return to R&D. I provide new estimates based on a structural estimation approach that incorporates uncertainty about the outcome from R&D. The results shed light on the rate of innovation, the impact of an innovation on profits, and the market value of the R&D stock. The parameter estimates imply a mean return to R&D of 3.7-5.5%, much lower than previous values. The analysis also demonstrates the unsuitability of using the return to R&D as a basis for policy ...
Working Paper
Financial market shocks during the Great Depression
This study examines the effect of shocks observed in financial markets on output and employment during the Great Depression. We present three main findings. First, an adverse financial shock leads to a decline in the manufacturing sector's output and employment that peaks about 11 months afterward. Next, this shock has a much greater impact on the durables sector than the nondurables sector. Last, continuing financial market weakness in 1933 and 1934 may have restrained the recovery from the Great Depression. The findings suggest that financial market weakness contributed to the length and ...
Discussion Paper
The Social Discount Rate in Developing Countries
The "social discount rate" is the interest rate used in cost-benefit analyses of infrastructure and other public projects.
Working Paper
Time-varying Volatility and the Power Law Distribution of Stock Returns
While many studies find that the tail distribution of high frequency stock returns follow a power law, there are only a few explanations for this finding. This study presents evidence that time-varying volatility can account for the power law property of high frequency stock returns. The power law coefficients obtained by estimating a conditional normal model with nonparametric volatility show a striking correspondence to the power law coefficients estimated from returns data for stocks in the Dow Jones index. A cross-sectional regression of the data coefficients on the model-implied ...