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Working Paper
Regulation and the cost of capital in Japan: a case study
Over the last several years, a combination of loan losses and regulatory barriers to equity issuance have left Japanese banks starved for capital. In September 1995, the Mitsubishi Bank was permitted to issue a complicated convertible security in a foreign market. The results of simulations of the price path of the underlying equity imply that Mitsubishi Bank's annualized risk-adjusted cost of capital through this instrument was between 80 and 310 basis points higher than if the bank had instead been able to issue common stock at its current price.
Working Paper
U.S. international equity investment
U.S. investors are the largest group of international equity investors in the world, but to date conclusive evidence on which types of foreign firms are able to attract U.S. investment is not available. Using a comprehensive dataset of all U.S. investment in foreign equities, we find that the single most important determinant of the amount of U.S. investment a foreign firm receives is whether the firm cross-lists on a U.S. exchange. Correcting for selection biases, cross-listing leads to a doubling (or more) in U.S. investment, an impact greater than all other factors combined. We also show ...
Working Paper
Macroeconomic state variables as determinants of asset price covariances
This paper explores the possible advantages of introducing observable state variables into risk management models as a strategy for modeling the evolution of second moments. A simulation exercise demonstrates that if asset returns depend upon a set of underlying state variables that are autoregressively conditionally heteroskedastic (ARCH), then a risk management model that fails to take account of this dependence can badly mismeasure a portfolio's "Value-at-Risk" (VaR), even if the model allows for conditional heteroskedasticity in asset returns. Variables measuring macroeconomic news ...
Working Paper
Look at me now: the role of cross-listing in attracting U.S. investors
We use a comprehensive 1997 survey to examine U.S. investors' preferences for foreign equities. We document a variety of firm characteristics that can influence U.S. investment, but the most important determinant is whether the stock is cross-listed on a U.S. exchange. Our selection bias-corrected estimates imply that firms that cross-list can increase their U.S. holdings by 8 to 11 percent of their market capitalization, roughly doubling the amount held without cross-listing. All else equal, we find that firms experience smaller increases in U.S. shareholdings upon cross-listing if they are ...
Working Paper
How consistent are credit ratings? a geographic and sectoral analysis of default risk
We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.
Working Paper
Sovereign CDS and bond pricing dynamics in emerging markets: does the cheapest-to-deliver option matter?
We examine the relationships between credit default swap (CDS) premiums and bond yield spreads for nine emerging market sovereign borrowers. We find that these two measures of credit risk deviate considerably in the short run, due to factors such as liquidity and contract specifications, but we estimate a stable long-term equilibrium relationship for most countries. In particular, CDS premiums tend to move more than one-for-one with yield spreads, which we show is broadly consistent with the presence of a significant "cheapest-to-deliver" (CTD) option. In addition, we find a variety of ...
Working Paper
Monetary Policy Expectations, Fund Managers, and Fund Returns: Evidence from China
Although many central banks in the 21st century have become more transparent, Chinese monetary policy communications have been relatively opaque, making it more difficult for financial market participants to make decisions that depend on the future path of interest rates. We conduct a novel systematic textual analysis of the discussion in the quarterly reports of China fund managers, from which we infer their near-term expectations for monetary policy. We construct an aggregate index of manager expectations and show that, as a forecast of Chinese monetary policy, it compares favorably with ...
Working Paper
When is monetary policy effective?
In this paper, we investigate a number of issues that have not been completely addressed in previous studies regarding the possible asymmetric effects of monetary policy. Overall, we interpret our results as weak evidence in favor of sticky-wage and sticky-price theories and strong evidence against credit-rationing theories. First, we find that models that allow for asymmetries with respect to contractionary/expansionary monetary policy fit the data better than models that allow for asymmetries associated with the state of the business cycle. Second, we find that contractionary monetary ...
Working Paper
Home Country Interest Rates and International Investment in U.S. Bonds
We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003 - 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In ...
Working Paper
Searching for Yield Abroad : Risk-Taking Through Foreign Investment in U.S. Bonds
The risk-taking effects of low interest rates, now prevailing in many advanced countries, "search-for-yield," can be hard to analyze due to both a paucity of data and challenges in identification. Unique, security-level data on portfolio investment into the United States allow us to overcome both problems. Analyzing holdings of investors from 36 countries in close to 15,000 unique U.S. corporate bonds between 2003 and 2016, we show that declining home-country interest rates lead investors to shift their portfolios toward riskier U.S. corporate bonds, consistent with "search-for-yield". We ...