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Keywords:diversification 

Discussion Paper
Is Wall Street the Only Street in New York City?

Has Wall Street?the term for the securities industry that symbolizes New York City?s role as a global financial center?become less of a specialty for the city? In this post, we show that while the securities industry continues to play an outsized role in the New York City economy, the city?s job base has become somewhat more diversified since 1990. Diversification can be beneficial, as it makes a local economy less vulnerable to adverse shocks to its key industry. A recent example appears in a post by Bram and Orr showing that with Wall Street in a bit of a slump, nonfinancial industries have ...
Liberty Street Economics , Paper 20120606

Report
Transformation of corporate scope in U.S. banks: patterns and performance implications

Using a novel database containing the time-series details of the organizational structure of individual bank holding companies, this paper presents the first population-wide study of the transformation in business scope of U.S. banks. Expanding scope has a negative impact on performance on average. However, we find that firms whose expansion keeps them closer to the prevailing ?modal bank? are better off compared with those pursuing generic diversification. Moreover, we find that early expanders into particular activities benefit more, whereas late adopters, rather than benefitting by ...
Staff Reports , Paper 813

Report
Assessing the impact of short-sale constraints on the gains from international diversification

This paper examines the impact of short-sale constraints on the magnitude of international diversification benefit for U.S. investors during the period of 1976?1998. The diversification benefit is measured as the increase in expected return when switching from the U.S. equity index portfolio to the efficient international portfolio with equal variance. Although short-sale constraints reduce the diversification benefit, we find that the reduction caused by the constraints on emerging markets is small. This result holds in both pre- and post-liberalization periods. They are also unaffected by ...
Staff Reports , Paper 89

Report
Bank Complexity, Governance, and Risk

Bank holding companies (BHCs) can be complex organizations, conducting multiple lines of business through many distinct legal entities and across a range of geographies. While such complexity raises the costs of bank resolution when organizations fail, the effect of complexity on BHCs’ broader risk profiles is less well understood. Business, organizational, and geographic complexity can engender explicit trade-offs between the agency problems that increase risk and the diversification, liquidity management, and synergy improvements that reduce risk. The outcomes of such trade-offs may ...
Staff Reports , Paper 930

Working Paper
International Stock Comovements with Endogenous Clusters

We examine international stock return comovements of country-industry portfolios. Our model allows comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster compositions substantially changed over time, with the emergence of clusters among European countries from the early 2000s. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except ...
Working Papers , Paper 2018-038

Working Paper
International Stock Comovements with Endogenous Clusters

We use an endogenous cluster factor model to examine international stock return comovements of country-industry portfolios. Our model allows country-industry portfolio comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except from mid-2000 to mid-2010s when the global component had a more ...
Working Papers , Paper 2018-38

Journal Article
Diversification and Specialization Across Urban Areas

Los Angeles is famous for the entertainment industry, San Jose for technology companies, and New York for the financial firms surrounding Wall Street. While each of these urban areas has a unique identity related to a particular sector of the economy, each is also, in fact, very diverse in its industrial composition. Urban areas differ in the extent to which they have a diverse set of industries or, conversely, the degree to which they are very specialized in a particular industry. Richmond Fed analysis supports previous research findings on the extent to which diversification or ...
Econ Focus , Issue 4Q , Pages 36-39

Working Paper
Undiversifying during Crises: Is It a Good Idea?

High levels of correlation among financial assets, as well as extreme losses, are typical during crisis periods. In such situations, quantitative asset allocation models are often not robust enough to deal with estimation errors and lead to identifying underperforming investment strategies. It is an open question if in such periods, it would be better to hold diversified portfolios, such as the equally weighted, rather than investing in few selected assets. In this paper, we show that alternative strategies developed by constraining the level of diversification of the portfolio, by means of a ...
Working Papers (Old Series) , Paper 1628

Working Paper
The Effect of Possible EU Diversification Requirements on the Risk of Banks’ Sovereign Bond Portfolios

Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries? sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyze the risk and diversification in the sovereign bond portfolios of the largest European banks ...
Working Papers , Paper 201912

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