Recourse risk in asset sales
AUTHORS: Wall, Larry D.
Holding company interest-rate sensitivity: before and after October 1979
Since October 1979, market interest-rate movements have been frequent and large. Over the same time period, for a variety of reasons, competition has intensified in both bank loan and deposit markets. These developments have changed the benefits and costs of various types of asset/liability management strategies or alternatively a financial institution's level of interest-rate risk exposure. In this study, the rate-sensitivity postures of a sample of holding companies are examined over the 1977 to 1983 interval to determine whether and how asset/liability management strategies changed after October 1979. In general, the evidence suggests that holding companies reduced their exposure to rate risk in the immediate post-October 1979 period. However, this change does not appear to have been permanent. the data show a reversal of this pattern at a number of companies in 1982 and 1983.
AUTHORS: Whalen, Gary
Performance and asset management effects of bank acquisitions
An analysis of how bank acquisitions affect the performance and asset management of the acquired bank, its acquirer, and the newly formed banking organization, showing that after the acquisition, the acquired bank is transformed along a wide variety of dimensions such that it becomes a replica of the acquirer.
AUTHORS: Craig, Ben R.; Santos, Joao A. C.
Economic theory and asset bubbles
The author summarizes what economic theory tells us about when asset price bubbles can occur and what the welfare implications are from bursting them. In some cases, bursting a bubble may make society worse off by exacerbating the market distortions that give rise to the bubble in the first place.
AUTHORS: Barlevy, Gadi
Duality and arbitrage with transactions costs: theory and applications
Recent advances in duality theory have made it easier to discover relationships between asset prices and the portfolio choices based on them. But this approach to arbitrage-free securities markets has yet to be extended and applied to economies with transactions costs. This paper does so, within the context of a general state-preference model of securities markets. Several applications are developed to illustrate the nature of the theory and its potential to resolve a host of issues surrounding the effects of transactions costs on securities markets.
AUTHORS: Stutzer, Michael J.
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 are constructed as the orthogonalized residuals from a vector autoregression (VAR). These news variables are found to have some explanatory power for asset returns. We also estimate a model of asset returns in which time variation in variances and covariances derives only from conditional heteroskedasticity in the underlying macroeconomic shocks. Although the data give some support for several of the specifications that we tried, neither these models nor GARCH models that used only asset returns appear to have much ability to forecast the second moments of returns. Finally, we allow asset return variances and covariances to depend directly on unemployment rates -- proxying for the general state of the economy -- and find fairly strong evidence for this sort of specification relative to a null hypothesis of homoskedasticity.
AUTHORS: Ammer, John
Inducing agents to report hidden trades: a theory of an intermediary
When contracts are unobserved, agents may have the incentive to promise the same asset to multiple counterparties and subsequently default. The author constructs an optimal mechanism that induces agents to reveal all their trades voluntarily. The mechanism allows agents to report every contract they enter, and it makes public the names of agents who have reached some prespecified position limit. In some cases, an agent's position limit must be higher than the number of contracts he enters in equilibrium. The mechanism has some features of a clearinghouse. ; Supersedes Working Paper 09-10
AUTHORS: Leitner, Yaron
Asset mispricing, arbitrage, and volatility
Market efficiency remains a contentious topic among financial economists. The theoretical case for efficient markets rests on the notion of risk-free, cost-free arbitrage. In real markets, however, arbitrage is not risk-free or cost-free. In addition, the number of informed arbitrageurs and the supply of financial resources they have to invest in arbitrage strategies is limited. This article builds on an important recent model of arbitrage by professional traders who need?but lack?wealth of their own to trade. Professional abitrageurs must convince wealthy but uninformed investors to entrust them with investment capital in order to exploit mispricing and push market prices back toward intrinsic value. The authors introduce an objective function for the arbitrageur that resembles real-world contracts. Also, the authors calibrate the objective function to show that arbitrage generally has a price-stabilizing influence and reduces volatility in asset returns.
AUTHORS: Emmons, William R.; Schmid, Frank A.
On asset-liability matching and federal deposit and pension insurance
Asset-liability mismatch was a principal cause of the Savings and Loan Crisis of the 1980s. The federal government's failure to recognize the mismatch risk early on and manage it properly led to huge losses by the Federal Savings and Loan Insurance Corporation, which had to be covered by taxpayers. In dealing with the problems now facing the defined-benefit pension system and the Pension Benefit Guaranty Corporation (PBGC), the government seems to be making some of the same mistakes it made then. Among the causes is the fallacious belief that because pension funds have a long time horizon the risk of investing in equities is negligible. In fact, the opposite is true. Moreover, for the PBGC, the mismatch risk is magnified by moral hazard and adverse selection. Distressed companies facing the prospect of bankruptcy have an incentive to underfund their pension plans and adopt risky investment strategies; healthy companies have an incentive to terminate their plans and exit the system. The paper explores some ways to limit the costs of a potential PBGC bailout.
AUTHORS: Bodie, Zvi
AUTHORS: Hutchison, Michael M.