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Author:Bohn, James 

Working Paper
Reach for Yield by U.S. Public Pension Funds
This paper studies whether U.S. public pension funds reach for yield by taking more investment risk in a low interest rate environment. To study funds? risk-taking behavior, we first present a simple theoretical model relating risk-taking to the level of risk-free rates, to their underfunding, and to the fiscal condition of their state sponsors. The theory identifies two distinct channels through which interest rates and other factors may affect risk-taking: by altering plans? funding ratios, and by changing risk premia. The theory also shows the effect of state finances on funds? risk-taking depends on incentives to shift risk to state debt holders. To study the determinants of risk-taking empirically, we create a new methodology for inferring funds? risk from limited public information on their annual returns and portfolio weights for the interval 2002-2016. In order to better measure the extent of underfunding, we revalue funds? liabilities using discount rates that better reflect their risk. We find that funds on average took more risk when risk-free rates and funding ratios were lower, which is consistent with both the funding ratio and the risk premia channels. Consistent with risk-shifting, we also find more risk-taking for funds affiliated with state or municipal sponsors with weaker public finances. We estimate that up to one-third of the funds? total risk was related to underfunding and low interest rates at the end of our sample period.
AUTHORS: Zlate, Andrei; Pritsker, Matthew; Anadu, Kenechukwu E.; Bohn, James; Lu, Lina
DATE: 2019-06-06

Report
A post-mortem of the life insurance industry's bid for capital during the financial crisis
The 2008?2009 financial crisis was the most serious shock to the U.S. financial system since the Great Depression of the 1930s. A number of large financial institutions failed during the crisis. Many institutions that survived did so only because of extraordinary actions undertaken by company management to maintain solvency, or through the extension of extraordinary support by the federal government and the Federal Reserve System. The impact of the financial crisis on the banking sector has been the subject of extensive research, discussion, and debate. Academic and policy researchers, as well as several government investigations, have examined the measures undertaken by bank managers, banking industry regulators, and governments in response to the crisis (Financial Crisis Inquiry Commission 2011, Stanton 2012). By comparison, relatively few studies have examined the experience of the life insurance sector during the crisis or the response of company managers and insurance regulators during the crisis period. This paper begins to fill that gap.
AUTHORS: Bohn, James; Barnes, Michelle L.; Martin, Cynthia
DATE: 2015-12-01

Journal Article
Estimates of scale and cost efficiency for Federal Reserve currency operations
Meeting the currency demands of depository institutions, businesses, and consumers costs the Federal Reserve more than half a billion dollars each year, yet, very little research has been devoted to understanding what factors affect such costs. The authors estimate a cost function in order to obtain estimates of scale and cost efficiency for this service. They find that as in other paper-based technologies, such as checks, scale economies are achieved at a relatively low level of output, implying that currency services are not a natural monopoly. They also provide estimates of facility-specific marginal costs and returns to scale measures that could be used to improve resource allocations. Lastly, they find that the average processing facility operates at more 80 percent of the efficiency of the ?best practice? facility, comparable to cost efficiency estimates that have been reported elsewhere for private-sector financial institutions.
AUTHORS: Hancock, Diana; Bohn, James; Bauer, Paul W.
DATE: 2001-10

Working Paper
Reach for Yield by U.S. Public Pension Funds
This paper studies whether U.S. public pension funds reach for yield by taking more investment risk in a low interest rate environment. To study funds?? risk-taking behavior, we first present a simple theoretical model relating risk-taking to the level of risk-free rates, to their underfunding, and to the fiscal condition of their state sponsors. The theory identifies two distinct channels through which interest rates and other factors may affect risk-taking: by altering plans?? funding ratios, and by changing risk premia. The theory also shows the effect of state finances on funds?? risk-taking depends on incentives to shift risk to state debt holders. To study the determinants of risk-taking empirically, we create a new methodology for inferring funds?? risk from limited public information on their annual returns and portfolio weights for the interval 2002-2016. In order to better measure the extent of underfunding, we revalue funds?? liabilities using discount rate s that better reflect their risk. We find that funds on average took more risk when risk-free rates and funding ratios were lower, which is consistent with both the funding ratio and the risk-premia channels. Consistent with risk-shifting, we also find more risk-taking for funds affiliated with state or municipal sponsors with weaker public finances. We estimate that up to one-third of the funds?? total risk was related to underfunding and low interest rates at the end of our sample period.
AUTHORS: Lu, Lina; Pritsker, Matthew; Zlate, Andrei; Anadu, Kenechukwu E.; Bohn, James
DATE: 2019-06-27

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