29 November 2012
A repurchase agreement -- "repo" -- is the sale of securities together with an agreement for the seller to buy back those securities at a later date. Between the second quarter of 2007 and the first quarter of 2009, net repo financing provided to U.S. banks and broker-dealers fell by about $1.3 trillion. Gary Gorton
and Andrew Metrick
analyze official data sources on repo, along with the results of a unique market survey conducted by the Bond Market Association among its members on their use of repo as of June 30, 2004. The researchers conclude that the 2007-9 “run on repo” was predominantly driven by the flight of foreign financial institutions, domestic and offshore hedge funds, and other unregulated cash pools.
28 November 2012
According to the "unbiasedness hypothesis", the interest rate differential between two countries should be an unbiased predictor of the change in the exchange rate between them. In a sample of countries extending up to the year 2000, this was true at longer horizons of five and ten years, but not for shorter horizons of up to one year. Menzie Chinn
and Saad Quayyum
ask whether this relationship still holds in data extending up to 2011. They find that it does, but their results are sensitive to the bond yields used and are more pronounced at long horizons when they use the pound instead of the dollar as the base currency. For currencies characterized by particularly low bond yields – the Japanese yen and the Swiss franc -- interest rates from the mid-1990s onward do not point in the right direction for subsequent exchange rate changes.
27 November 2012
Is corporate social responsibility profitable, and do financial constraints change the relationship between profits and corporate “goodness”? Harrison Hong
, Jeffrey Kubik
, and Jose Scheinkman
study a sample of S&P 500 firms over the period 1991-2008 and find that during the Internet bubble, when firms that had previously faced financial constraints were less constrained, their “goodness” temporarily increased relative to their peers who had not previously had financial constraints. The researchers also find that a financially constrained firm's (environmental) sustainability score increases more with its equity valuation and a lower cost of capital than does the score of a less constrained firm.
26 November 2012
, Jeff Lingwall
, and Mel Stephens
analyze the effect of compulsory attendance laws on the schooling of U.S. children for three overlapping time periods: 1880-1927, 1890-1927, and 1898-1927. They find that laws passed after 1880 had significant effects on both school enrollment and attendance. Laws passed after 1890 affected not only enrollment and attendance but also educational outcomes, and the timing of the increases in enrollment and attendance suggests that they were caused by the change in the laws. For men of school age in 1898-1927 who reported positive wage income in the 1940 census, the compulsory attendance laws increased both schooling and wage income.
21 November 2012
, Robert Darko Osei
, Isaac Osei-Akoto
, and Christopher Udry
analyze the results of an experiment in northern Ghana in which farmers were randomly assigned to one group that received a cash grant, another that received free rainfall-index insurance or the opportunity to purchase it, and a third group that received a combination of the two. They find that the demand for rainfall insurance is strong, and that having such insurance leads farmers to invest more in their land and to choose production methods that on average yield more crops, but are more rain-sensitive. For farmers, the constraint to investing in agriculture appears to be uninsured rainfall risk.