Preface: hedge funds: creators of risk?

Hedge funds

Social Security private accounts: a risky proposition?

In the ongoing debate over Social Security, private accounts have been recommended as one part of the resolution of the funding difficulties the system faces in coming years. This article discusses what private accounts can and cannot do for individuals who choose to use them and for future Social Security deficits. ; Under current proposals, private accounts would give account holders personal ownership rights and could be willed to heirs at death. Most proposals would limit the range of assets that can be held but would permit account owners to determine their investments based on personal risk preferences. To the extent that financial asset returns can be higher than returns on Social Security, private accounts can be more worthwhile for those with a longer time until retirement because any difference in returns can compound over a longer period. ; Private accounts carry the risks inherent in holding financial assets, but Social Security carries a real risk of lower benefits in the future. Holders of private accounts would be trading one type of risk for another. ; The creation of private accounts can reduce Social Security’s future problems if the reductions in benefits in exchange for deposits in private accounts reflect the initial deposit plus interest earned.>Social security

Economic slowdown: demand or supply induced?

Economic indicators ; Business cycles

Rules and discretion in monetary policy

Monetary policy ; Velocity of money

Inflation and monetary regimes

Correlations of inflation with the growth rate of money increase when data are averaged over longer time periods. Correlations of inflation with the growth of money also are higher when high-inflation as well as low-inflation countries are included in the analysis. We show that serial correlation in the underlying inflation rate ties these two observations together and explains them. We present evidence that averaging increases the correlation of inflation and money growth more when the underlying inflation rate has higher serial correlation.

Expected returns to stock investments by angel investors in groups

Angel investors invest billions of dollars in thousands of entrepreneurial projects annually, far more than the number of firms that obtain venture capital. Previous research has calculated realized internal rates of return on angel investments, but empirical estimates of expected returns have not yet been produced. Although calculations of realized returns are a valuable contribution, expected returns, rather than realized returns, drive investment decisions. We use a new data set and statistical framework to produce the first empirical estimates of expected returns on angel investments. We also allow for the time value of money, which previous research has typically ignored. Our sample of 588 investments spans the 1972–2007 period and contains 419 exited investments. We conduct extensive tests to explore potential bias in the data set and conclude that the evidence in favor of bias is tenuous at best. Our results suggest that angel investors in groups can expect to earn returns that are on the order of returns on venture capital investments. Estimated net returns are about 70 percent in excess of the riskless rate per year for an average holding period of 3.67 years. This estimate is reasonable compared to Cochrane's (2005) estimate of 59 percent per year for venture capital investments, which tend to be in lower-variance, later-stage projects. Returns have a large variance and are heavily skewed, with many losses and occasional extraordinarily high returns.

Is money irrelevant?

Money ; Income ; Inflation (Finance) ; Prices

The financial crisis of 2008 in fixed income markets

We explore how a relatively small amount of heterogeneous securities created turmoil in financial markets in much of the world in 2007 and 2008. The drivers of the financial turmoil and the financial crisis of 2008 were heterogeneous securities that were hard to value. These securities created concerns about counterparty risk and ultimately created substantial uncertainty. The problems spread in ways that were hard to see in advance. The run on prime money market funds in September 2008 and the effects on commercial paper were an important aspect of the crisis itself and are discussed in some detail.

Interest rates and economic announcements

Interest rates

Bank failures in banking panics: Risky banks or road kill?

Are banks that fail in banking panics the riskiest ones prior to the panics? The free banking era in the United States provides useful data to examine this question because the assets held by the banks were traded at the New York Stock Exchange. The authors estimate the ex ante riskiness of a bank’s portfolio by examining the portfolio relative to mean-variance frontiers and by examining the bank's leverage and notes relative to assets. The authors find that the ex ante riskiness of a bank’s portfolio helps predict which banks fail and the extent of noteholders’ losses in the event of failure.Risk ; Debt ; Bank supervision ; Bank failures