10 January 2013

The "Law of One Price" and Currency Unions

Alberto Cavallo, Brent Neiman, and Roberto Rigobon study the daily online prices for all products sold by Apple, IKEA, H&M, and Zara in 83 countries between December 2008 and July 2012. They find that the "law of one price" holds within the euro zone, but that there are large deviations from it outside of currency unions, even with pegged currencies. For example, although the Danish krone is pegged to the euro, Danish prices differ markedly from those in the euro zone countries for the same product.

9 January 2013

Firms and Credit Constraints along the Value-Added Chain: Processing Trade in China

Kalina Manova and Zhihong Yu analyze customs and balance sheet data on Chinese firms that are involved in "import and assembly" processing trade -- in which the processing firm pays for imported inputs -- and "pure assembly trade" in which the processing firm receives imported inputs for free. They find that profits, profitability, and value-added all decline when exporters orient their sales away from import-and-assembly and towards pure assembly. They also find that limited access to capital restricts firms to low value-added stages of the supply chain and keeps them from pursuing more profitable opportunities.

8 January 2013

The Asset Price Meltdown and the Wealth of the Middle Class

Edward Wolff finds that between 2007 and 2010, median household wealth in the United States plummeted to its lowest level since 1969 and that household net worth became more unequal. He suggests that those declines can be traced to the high leverage of middle class families in 2007 and to the high share of homes in their portfolio. He also finds that Hispanics were particularly hurt by the Great Recession, in terms of net worth and net equity in their homes. Households under age 45 also experienced sharp declines in their relative and absolute wealth from 2007 to 2010.

7 January 2013

Embedded Leverage

Embedded leverage is the amount of market exposure per unit of committed capital associated with a security. Many financial instruments, including options and leveraged exchange traded funds, are designed with embedded leverage. Andrea Frazzini and Lasse Pedersen find that asset classes with embedded leverage offer low risk-adjusted returns. They conclude that a portfolio long in low-embedded-leverage securities and short in high-embedded-leverage securities earns large abnormal returns.

4 January 2013

The Federal Reserve, Emerging Markets, and Capital Controls

Sebastian Edwards analyzes weekly data from seven emerging nations -- Brazil, Chile, Colombia, Mexico, Indonesia, Korea, and the Philippines -- all of which had flexible exchange rates and followed some kind of inflation targeting during the period he examines. He confirms that there is interest-rate “pass through” from the U.S. Federal Reserve System to these emerging markets during the 2000s. However, the transmission of interest rate shocks differs -- in terms of impact, steady state effect, and dynamics -- in Latin America and Asia. He also finds little evidence that capital controls can isolate emerging countries from global interest rate disturbances.

3 January 2013

Volatility and Growth

Geert Bekaert and Alexander Popov find a positive short-term relationship between the volatility and skewness of growth in a sample of 110 countries. This relationship is driven by differences in the rate of industrialization, macroeconomic stabilization, and in the discovery and exploitation of natural resources in mostly developing countries. However, in panel data looking at the longer term, they find a negative relationship between volatility and skewness, driven by business cycle variation in rich countries. They suggest that this correlation is due to sudden and short-lived growth spurts in mostly developing countries and sharp crises in mostly developed countries.

2 January 2013

Evidence from Industry IPO Waves

Zhi Da, Ravi Jagannathan, and Jianfeng Shen find that there are time periods when market conditions are more favorable to growth firms and that during those times, firms with strong growth but weak margins may be overvalued. Focusing on a set of firms in the same industry that went public at about the same time in a cluster -- which is called an IPO wave -- they find that firms with relatively high valuations (price-to-book ratios) and historical sales growth rates but low gross margins during their first three years after the IPO wave under-performed their industry peers by more than 1 percent per month during the subsequent four-year period.

31 December 2012

Information and College Access

Phil Oreopoulos and Ryan Dunn analyze the results of a small field experiment in which students from disadvantaged high schools in Toronto were invited to participate in two short internet surveys. They could receive $20 for their participation. At the end of the first survey, half of the students, selected at random, were shown a 3-minute video describing the costs and benefits of post-secondary education and how to make it affordable. Three weeks later, all the students were asked to complete a second survey, with questions about their impressions of the costs and benefits of post-secondary education, as well as their own educational attainment expectations. The students who had seen the video were more convinced of the benefits of continuing their education, less concerned about the costs, and they reported themselves more likely to go on to post-secondary school.

28 December 2012

Quiet Bubbles

The credit bubble of 2003-7 is often equated with earlier episodes, like the Internet boom. But while credits were over priced in this period, like Internet stocks a decade earlier, Harrison Hong and David Sraer show that the two periods were quite different. Equity bubbles are "loud" -- meaning that price and volume move together -- because investors speculate on the capital gains they will achieve from reselling to more optimistic investors. As for debt, the resale option is limited, so debt bubbles require that investors be optimistic -- that optimism leads to less speculative trading, because investors view debt as safe and having only a limited upside. Therefore, debt bubbles are "quiet": high price comes with low volume.

27 December 2012

Mismeasurement of Pensions Before and After Retirement

Alan Gustman, Thomas Steinmeier, and Nahid Tabatabai demonstrate that Current Population Survey (CPS) data on pension incomes received in retirement understate the full contribution of pensions to the support of retirees. One reason is that the CPS ignores irregular payments from pensions. Another is that some pension wealth that was accumulated prior to retirement, and would be measured in pre-retirement surveys, “disappears” at retirement. Sixteen percent of pension wealth is transformed into some other form at the time of disposition and thus not counted in the CPS, and for those with defined benefit pensions, 12 percent of the benefit is transformed in such a way that it is not counted as pension income after retirement.
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