Search Results
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 ...
Discussion Paper
"Low-For-Long" Interest Rates and Portfolio Shifts in Advanced Foreign Economies
For the past several years, interest rates in many advanced economies have been at historic lows. Although low interest rates have helped support recovery in these economies, persistently low rates have also raised concerns about increased incentives for risk-taking by investors to achieve higher yields.
Working Paper
Cash flows and discount rates, industry and country effects, and co-movement in stock returns
This paper examines the relative importance of global, country-specific, and industry-specific factors in both the cash flow and discount rate components of equity returns between 1995 and 2003. Our framework draws upon previously separate literatures on country versus industry effects and (forward-looking) cash flow versus discount rate components of equity return innovations. We apply the Campbell (1991) decomposition for industry-by-country, all-country, global industry, and world market index returns so we can produce a richer characterization of same-industry and same-country effects in ...
Working Paper
Are banks market timers or market makers? Explaining foreign exchange trading profits
We analyze the foreign exchange trading earnings of large U.S commercial banks over the past several years. In particular, we use several approaches to try to determine to what extent these profits can be attributed either to position-taking by banks or to the provision of intermediation services to bank customers. The results can be summarized as follows. First, banks appear to generate a substantial portion of their foreign exchange earnings from making markets in conventional spot and forward foreign exchange contracts. In addition, some indirect evidence supports anecdotal reports that ...
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 ...
Working Paper
Why do U.S. cross-listings matter?
This paper investigates the underlying determinants of home bias using a comprehensive sample of U.S. investor holdings of foreign stocks. We document that U.S. cross-listings are economically important, as U.S. ownership in a foreign firm roughly doubles upon cross-listing in the United States. We explore the cross-sectional variation in this "cross-listing effect" and show that increases in U.S. investment are largest in firms from weak accounting backgrounds and in firms that are otherwise informationally opaque, indicating that U.S. investors value the improvements in disclosure ...
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
Accounting standards and information: inferences from cross-listed financial firms
Publicly traded financial firms within the European Union will be required to adhere to International Accounting Standards (IAS) in their financial reporting beginning in 2005, which can entail a higher degree of financial disclosure than was previously mandated under national accounting standards. A number of European financial firms had previously subjected themselves to additional disclosure by listing their stock on U.S. exchanges, which obligates them to reconcile their financial accounts to U.S. GAAP (Generally Accepted Accounting Principles). Among national accounting systems, U.S. ...
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.