2010 / 2011

Title: Long and Short Term Jumps in Commodity Futures Prices

Abstract: 

This paper is the latest of a sequence developing new commodity pricing techniques. It analyzes long and short term jumps in commodity futures prices from the statistical and economic perspectives. First we show that both commodity futures returns and convenience yields are strongly leptokurtotic. We then propose a non-Gaussian model for futures prices by adding jumps to the Schwartz-Smith(2000) model. Thirdly we propose a new state space form to calibrate the extended model. Estimates of jump arrival times indicate that both important surprising information and market activity generate jumps of different intensities. As an application of our model we show that jumps are an important ingredient in pricing options on commodity futures.

Date: Tuesday 5th October, 17:00 - 18:00

Event Location: Winstanley Lecture THeatre, Trinity College

Title: From Keynesian consensus to 'sado-monetarism': UK monetary policy from devaluation to Mrs Thatcher

Abstract:

This presentation will chart the course of UK monetary policy from the Keynesian consensus of the 1960s to the 'sado-monetarism' of the first Thatcher administration. This is a period which included the collapse of Bretton Woods, stagflation, the oil shocks, the 1976 IMF loan and the winter of discontent. It will show that Bank of England and Treasury opposition to the monetarism of the first Thatcher administration stemmed partly from a belief in the intellectual incoherence of the theory, but also from the failure of an earlier experiment in 'practical monetarism', Competition and Credit Control, in the early 1970s.

Date: Tuesday 12th October, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: On the Forecasting Performance of Macroeconomic Fundamentals on Exchange Rate Movements

Abstract:

This paper investigates the forecasting performance of macroeconomic fundamentals on exchange rate returns using a macro-finance approach. Exchange rate movements are endogenously determined by the ratio between domestic and foreign stochastic discount factors, through which the macroeconomic fundamentals nonlinearly model the exchange rate dynamics. Using three floating nominal exchange rates, i.e. DEM(EUR)/USD, GBP/USD, and JPY/USD observed at the monthly as well as quarterly time frequencies, this paper has the following findings. First, five out of the six model-implied time-varying foreign exchange risk premiums satisfy the Fama conditions (Fama, 1984). Second, comparing to the random walk model, this no-arbitrage macro-finance model reduces the forecasting root mean square errors, especially for data observed at the quarterly time frequency.

Date: Tuesday 19th October, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Optimal hedging of variance derivatives

Abstract:

We examine the optimal hedging of variance derivatives, focussing principally on variance swaps (but, en route, also considering skewness swaps), when the underlying stock price has discontinuous sample paths i.e. jumps. In general, with jumps in the underlying, the market is incomplete and perfect hedging is not possible. We derive easily implementable formulae which give optimal (or nearly optimal) hedges for variance swaps under very general dynamics for the underlying stock which allow for multiple jump processes and stochastic volatility (or, more generally, (possibly, multiple) stochastic time-changes). We also consider special cases when perfect hedging of variance swaps is possible even when the underlying stock price has jumps. We illustrate how, for parameters which are realistic for equity markets, our methodology gives significantly better hedges than the standard log-contract replication approach which assumes continuous sample paths.

Date: Tuesday 26th October, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: What Determines Government Spending Multipliers?

Abstract:

Theory predicts that the effect of fiscal expansion varies with the economic environment, notably the monetary and exchange rate regime, the state of public finances, and the health of the financial system. Using a panel of OECD countries, we evaluate the issue empirically, focusing on the macroeconomic effects of government consumption. Fiscal shocks are identified as residuals from an estimated government spending rule. These shocks are then interacted with conditioning variables in order to explain macroeconomic outcomes across a range of economic environments. Without such interactions, the unconditional responses to a spending shock are in line with earlier results, featuring a positive, if relatively small output multiplier, no significant movement in consumption, and a fall in investment and the trade balance. Yet these average results mask important differences across environments. In particular, the responses of the real exchange rate and net exports vary systematically across exchange rate regimes, with real appreciation and external deficits emerging mainly under a currency peg. Output and consumption multipliers, in turn, become quite sizeable during times of financial crisis.

Date: Tuesday 2nd November, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Roundheads versus Cavaliers: An Early Assessment of Quantitative Easing

Abstract:

Quantitative easing in the UK has involved the creation of fund to purchase medium term dated government bonds with borrowed central bank reserves and so has increased the liquidity of non-bank financial sector and temporarily eased the budget constraint of HMT. I outline the theoretical rationales for QE: (i) portfolio balance of the non-bank financial sector; (ii) an offset for the zero bound; (iii) signalling mechanism about medium term inflation expectations. I gauge its effectiveness in terms of the impact on bond and asset prices. And assess the impact on a macro-finance yield curve and judge that the purchase programme has subtracted somewhat less than 100Bp from medium term yields reported by the Bank of England.  Finally, I assess the case for QE from three separate DGSE models and find that bond purchases are typically of limited importance.

Date: Tuesday 9th November, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Trading to Stops

Abstract: Not Disclosed

Date: Tuesday 16th November, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Households' Subjective Stock Market Expectations and Portfolio Choice

Abstract:

Households portfolios remain poorly understood. The theory emphasizes the central role of beliefs to understand choices at both the extensive and the intensive margins (participation and conditional demands). Only recently have beliefs started to be elicited systematically in large scale surveys. Here we employ a novel methodology to elicit French households' subjective beliefs about Stock Market returns, to find that they are crucial in explaining both margins. Importantly, we are able to control for households' heterogeneous information sets. In addition, we show that subjective beliefs about Stock Market performance can explain the observed hump-shaped age-portfolio profiles.

Date: Tuesday 23rd November, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity Hall

Title: Coherent global market simulations for counterparty credit portfolios

Abstract:

Valuing, hedging and securitizing counterparty credit risk involves analyzing large portfolios of netting sets over time horizons spanning decades. Theory dictates that the simulation measure should be coherent, i.e. arbitrage free. It should also be used consistently both to simulate and to value all instruments.  This talk describes the Mathematics and the software architecture of a risk system that accomplishes this task while delivering a very rich set of valuation information and 3-dimensional risk metrics in real time to the end user, including portfolio loss distributions, equilibrium tranche spreads and sensitivities.  The network bottleneck is bypassed by using capable boards with acceleration. The memory bottleneck is avoided at the algorithmic level by adapting the mathematical framework to revolve around a handful of compute-bound algorithms.

Date: Tuesday 30th November, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Subprime consumer credit demand: an empirical analysis of a randomised interest rate experiment

Abstract:

We test the interest rate sensitivity of subprime credit card borrowers using a unique panel data  set from a UK credit card company.  What is novel about our contribution is that we were given details of a randomized interest rate experiment conducted by the lender between October 2006 and January 2007.  We find that individuals who tend to utilize their credit limits fully do not reduce their demand for credit when subject to increases in interest rates as high as 3 percentage points.  This finding is naturally interpreted as evidence of binding liquidity constraints.  

We also demonstrate the importance of truly exogenous variation in interest rates when estimating credit demand elasticities.  We show that estimating a standard credit demand equation with nonexperimental variation leads to seriously biased estimates even when conditioning on a rich set of controls and individual fixed effects.  In particular, this procedure  results in a large and statistically significant 3-month elasticity of credit card debt with respect to interest rates even though the experimental estimate of the same elasticity is neither economically nor statistically different from zero.

Date: Tuesday 1st February, 16:45 - 17:45

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Likelihood Inference in Non-Linear Term Structure Models: The Importance of the Zero Lower Bound

Abstract:

This paper shows how to use adaptive particle filtering and Markov chain Monte Carlo methods to estimate quadratic term structure models (QTSMs) by likelihood inference. The procedure is applied to quadratic models for the US and UK during the recent financial crisis. We find that these models provide a better statistical description of the data than Gaussian affine term structure models. In addition, QTSMs account perfectly for the zero lower bound whereas Gaussian affine models frequently imply forecast distributions with negative interest rates. Such predictions appear during the recent financial crisis in the US and UK but also prior to the crisis.

Date: Tuesday 8th February, 16:30 - 17:30

Event Location: Winstanley Lecture Theatre, Trinity College

Title: What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?

Abstract:

An efficient managerial labor market should compensate executives according to their contribution to shareholder value. We provide novel empirical evidence about the relationship between executive pay and managerial contribution to value by exploiting the exogenous variation resulting from stock price reactions to sudden deaths. We find, first, that the managerial labor market is characterized by positive sorting: managers with high contributions to value obtain higher pay. We find, second, that executives appear, on average, to retain about 80% of the value they create. Overall, our results are informative about the workings of the managerial labor market.

Date: Tuesday 22nd February, 16:45 - 17:45

Event Location: Winstanley Lecture Theatre

Title: Understanding the Global Imbalance from the Perspective of Outsourcing Activities to China

Abstract:

“Global Imbalance” is one of the most frequently highlighted keywords that people discuss the current financial crisis and China is certainly mentioned as the “Source” of it. Considering that a majority of the trade surplus are from the products made by branches of multinational companies, China seems have enough argument against this blame. This paper is going to interpret the phenomenon through the input-output analysis of these outsourcing activities. The basic nature of international division of labor will help us to understanding the imbalance more deeply.

Date: Tuesday 1st March, 16:45 - 17:45

 Event Location: Winstanley Lecture Theatre, Trinity College

Title: Coordination Failure and Financial Accelerator

Abstract:

This paper studies the effect of short-term uncoordinated creditors in a DSGE model with leveraged borrowers. Creditors (financial intermediaries) receive imperfect signals regarding the profitability of borrowers (entrepreneurs) and, based on these signals and their beliefs about other intermediaries' actions, choose between rolling over and foreclosing on the debt. The global games methodology is employed to determine uniquely the behavior of intermediaries in equilibrium. Due to the uncoordinated actions of intermediaries, the incidence of rollover is suboptimal, generating an illiquidity risk premium on external finance. As entrepreneurs become more leveraged, the size of the inefficiencies increase as do the premiums paid on external finance. In addition, we find that the elasticity of the illiquidity risk premium with respect to leverage is higher when (i) intermediaries are close substitutes for the entrepreneurs, and (ii) when the intra-period illiquidity of capital stock is higher. The interaction between entrepreneurial net worth, leverage and the illiquidity risk premium propagates technology shocks, similar in nature to the financial accelerator. Moreover, the model predicts that persistent illiquidity shocks generate disproportionately severe and long recessions.  Further, we analyze two unconventional policy responses to an illiquidity crisis in credit markets: direct lending and equity injections.

Date: Tuesday 26th April, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title:  Financial Frictions, the Great Trade Collapse and International Trade over the Business Cycle

Abstract:

This paper investigates the impact of financial frictions on the dynamics of trade over the business cycle and their role in the great trade collapse of 2008-2009. The study introduces a financial accelerator into an open-economy general equilibrium model with heterogenous firms in which international trade is more dependent on external finance than domestic sales. The analysis demonstrates that endogenously driven countercyclical changes in the external finance premium amplify the effects of real and financial shocks on trade and help to explain the procyclicality of trade to GDP ratio as well as the decline in trade during the recent financial crisis.

Date: Tuesday 3rd May, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Analytical CoVaR

Abstract:

 Conditional Value at Risk (CoVaR) is a newly proposed macro prudential risk measure to capture systemic risk and it is claimed to overcome some problems of traditional VaR. Accordingly, the objective of this paper is to propose an analytical form of CoVaR that shares the advantages of analytical VaR and are readily employable, then to provide a theoretical approach to investigate how analytical CoVaR captures systemic risk when asset and market

returns are independent and when they are autocorrelated. The paper presents empirical backtest using Kupiec’s failure frequency test and Christoffersen’s conditional test to find that the analytical CoVaR exceedances pass both tests while the analytical VaR exceedances does not pass the conditional test. Analytical CoES is presented as an extension to capture loss beyond CoVaR and potential applications of CoVaR are discussed.

Date: Tuesday 10th May, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: The Defeasance of Control Rights 

Abstract: 

We analyze one frequent clause in bonds, covenant defeasance. Covenant defeasance allows the issuer to remove the bond's covenants by placing the remaining payments with a trustee in escrow to be paid out on schedule. We provide theoretical justification for this option and show empirically that it allows inclusion of more covenants in bond issues. We highlight characteristics that make issuers likely to add a defeasance clause. In line with the model's prediction, the empirical analysis documents 13-24 basis points yield reduction for defeasible bonds - annual saving of about $1m, or $11m over the life of the average bond.

Date: Tuesday 24th May. 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Which Firms benefit from Bribes and How Much? Evidence from corruption cases worldwide

Abstract:

We analyze a hand-collected sample of 166 prominent bribery cases, involving 107 publicly listed firms from 20 stock markets that have been reported to have bribed government officials in 52 countries worldwide during 1971-2007. We focus on the initial date of award of the contract for which the bribe was paid (rather than of the revelation of the bribery) and compare the bribing firms with a matched sample of competitors that have not been involved in bribery incidents. Our data enable us to describe in detail the mechanisms through which bribes affect firm value. We find that firms that win contracts by paying bribes under-perform their peers for up to three years before and after winning the contract for which the bribe was paid. Firm performance, the rank of the politicians bribed, as well as bribe-paying and bribe-taking country characteristics affect the magnitude of the bribes and the benefits that firms derive from them.

Date: Tuesday 31st May, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Sovereign Wealth Funds’ Investment Behaviour

Abstract:

With $4.3 bn of assets under management increasing at spectacular paces in the recent decade, feared and at the same time courted by governments all over the world, characterized by low levels of transparency and often accused of hidden motivations, sovereign wealth funds (SWFs) are today among the most controversial players in the financial and political global arena. That is where the interest of this research has moved from. SWFs are government owned financial vehicles deriving their wealth from oil related or other fiscal or balance of payment surpluses. Aim of this paper is to investigate whether they behave differently compared to other institutional investors. Basing on a newly and specifically built database of 2740 equity transactions spanning 1990-2010 and involving 31 (totalling $3.4 bn AuM) out of the 52 existing SWFs, this research answers the question whether SWFs herd in equity markets on single industries applying the methodology by Lakonishok, Shleifer, Vishny (1992). The result, a measure of herding equal to -6%, implies that SWF do not herd among industries, but, on the contrary, this result indicates less dispersion around the expected pattern of trades among industries than if trades were randomly and independently distributed. This could suggest that SWFs do not differentiate their investment strategies among industries providing evidence of a different behaviour compared to what other institutional investors do.

Date: Tuesday 7th June, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Not Disclosed

Abstract: Not Disclosed

Date: Tuesday 14th June, 17:00 - 18:00

Event Location: Winstanley Lecture Theatre, Trinity College

Title: Not Disclosed

Abstract: Not Disclosed

Date: Tuesday 14th June, 17:00 - 18:00

Event Location: Not Disclosed