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Report
Merger options and risk arbitrage
Van Tassel, Peter
(2016-01-01)
Option prices embed predictive content for the outcomes of pending mergers and acquisitions. This is particularly important in merger arbitrage, where deal failure is a key risk. In this paper, I propose a dynamic asset pricing model that exploits the joint information in target stock and option prices to forecast deal outcomes. By analyzing how deal announcements affect the level and higher moments of target stock prices, the model yields better forecasts than existing methods. In addition, the model accurately predicts that merger arbitrage exhibits low volatility and a large Sharpe ratio ...
Staff Reports
, Paper 761
Journal Article
The equity risk premium: a review of models
Rosa, Carlo; Duarte, Fernando M.
(2015)
The authors estimate the equity risk premium (ERP)?the expected return on stocks in excess of the risk-free rate?by combining information from twenty models for the period 1960-2013. They begin their analysis by categorizing the models into five classes: trailing historical mean, dividend discount, cross-sectional estimation, regression analysis using valuation ratios or macroeconomic variables, and surveys. They find that an optimal weighted average of all models places the one-year-ahead ERP in June 2012 at 12.2 percent, close to levels reached in the mid- and late 1970s, when the ERP was ...
Economic Policy Review
, Issue 2
, Pages 39-57
Working Paper
Pre-LBO Credit Market Conditions and Post-LBO Target Behavior
Kwak, Seung; Press, Charles
(2023-12-01)
In the context of leveraged buyouts (LBOs), this paper empirically studies the relation between pre-buyout credit market conditions and the post-buyout behavior of target companies, employing a supervisory dataset to overcome limited data availability for post-buyout target financial information. We propose an LBO-specific measure of (changes of) credit market conditions---the short-term (6-month) change of credit spreads leading up to buyout close. Using this proposed measure, we show that loosening pre-LBO credit market conditions, which are related to higher buyout leverage consistent with ...
Finance and Economics Discussion Series
, Paper 2023-077
Report
Shadow bank monitoring
Cetorelli, Nicola; Ashcraft, Adam B.; Adrian, Tobias
(2013-09-01)
We provide a framework for monitoring the shadow banking system. The shadow banking system consists of a web of specialized financial institutions that conduct credit, maturity, and liquidity transformation without direct, explicit access to public backstops. The lack of such access to sources of government liquidity and credit backstops makes shadow banks inherently fragile. Shadow banking activities are often intertwined with core regulated institutions such as bank holding companies, security brokers and dealers, and insurance companies. These interconnections of shadow banks with other ...
Staff Reports
, Paper 638
Working Paper
Not so disconnected: exchange rates and the capital stock
Hassan, Tarek A.; Mertens, Thomas M.; Zhang, Tony
(2015-12-01)
We investigate the link between stochastic properties of exchange rates and differences in capital-output ratios across industrialized countries. To this end, we endogenize capital accumulation within a standard model of exchange rate determination with nontraded goods. The model predicts that currencies of countries that are more systemic for the world economy (countries that face particularly volatile shocks or account for a large share of world GDP) appreciate when the price of traded goods in world markets is high. These currencies are better hedges against consumption risk faced by ...
Working Paper Series
, Paper 2015-21
Report
Bank Liquidity Provision across the Firm Size Distribution
Luck, Stephan; Chodorow-Reich, Gabriel; Darmouni, Olivier M.; Plosser, Matthew
(2020-10-01)
Using loan-level data covering two-thirds of all corporate loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. We test ...
Staff Reports
, Paper 942
Working Paper
Bond Insurance and Public Sector Employment
Amornsiripanitch, Natee
(2022-02-07)
This paper uses a unique data set of local governments’ bond issuance, expenditure, and employment to study the impact of the monoline insurance industry’s demise on local governments’ operations. To show causality, I use an instrumental variable approach that exploits persistent insurance relationships and the cross-sectional variation in insurers’ exposure to high-quality residential mortgage-backed securities. Governments associated with ailing insurers issued less debt, cut expenditures, and hired fewer workers. These effects are persistent. Partial equilibrium calculations show ...
Working Papers
, Paper 22-03
Report
Intermediary balance sheets
Adrian, Tobias; Boyarchenko, Nina
(2013-11-01)
We document the cyclical properties of the balance sheets of different types of intermediaries. While the leverage of the bank sector is highly procyclical, the leverage of the nonbank financial sector is acyclical. We propose a theory of a two-agent financial intermediary sector within a dynamic model of the macroeconomy. Banks are financed by issuing risky debt to households and face risk-based capital constraints, which leads to procyclical leverage. Households can also participate in financial markets by investing in a nonbank ?fund? sector where fund managers face skin-in-the-game ...
Staff Reports
, Paper 651
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