Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?

We explore whether the pattern of international equity returns, equity portfolio flows, and exchange rate returns are consistent with the hypothesis that (unhedged) global investors rebalance their portfolio in order to limit their exchange rate exposure when there are (1) relative equity return and (2) exchange rate shocks. We also explore whether (3) equity flow shocks influence the exchange rates and relative equity prices. In the estimation of the VAR system we do not impose any causal ordering upon the primitive shocks, but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables. International data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics.

Subprime Crisis and Board (In-)Competence: Private vs. Public Banks in Germany

We examine evidence for a systematic underperformance of Germany’s state-owned banks in the current financial crisis and study if the bank losses can be traced to the quality of bank governance. For this purpose, we examine the biographical background of 593 supervisory board members in the 29 largest banks and find a pronounced difference in the finance and management experience of board representatives across private and state-owned banks. Measures of “boardroom competence” are then related directly to the magnitude of bank losses in the recent financial crisis. Our data confirms that supervisory board (in-)competence in finance is related to losses in the financial crisis. Improved bank governance is therefore a suitable policy objective to reduce bank fragility.governance, supervisory boards, banking, financial crisis

Wie (in-)kompetent sind die Aufsichtsräte deutscher Banken?

Eine Auswertung der Lebensläufe von 426 Aufsichtsratsmitgliedern in den 29 größten deutschen Banken, die von Marcel Thum, ifo Dresden, und Harald Hau, INSEAD, Fontainebleau, vorgenommen wurde, zeigt, dass Finanzmarkt- und Bankerfahrung von Aufsichtsratsmitgliedern besonders in den öffentlich-rechtlichen Banken die Ausnahme und nicht die Regel sind. Oft fehlt ihnen dadurch die Kompetenz, ihre Kontrollfunktion effektiv auszufüllen. Die besonders hohen Verluste dieser Banken im internationalen Finanzgeschäft sind, nach Thum und Hau, auch aus dem Fehlen effektiver Managementkontrolle erklärbar. Forderungen nach zusätzlicher Bankenreglementierung erscheinen den Autoren weitgehend irrelevant, solange die bestehenden Aufsichtsratsstrukturen einer hinreichenden Kontrollkompetenz entbehren.Aufsichtsrat, Führungskräfte, Bankmanager, Kompetenz, Deutschland

Home Bias at the Fund Level

This paper presents new stylized facts on the distribution of the home bias at the fund level. We find (i) a large heterogeneity in the degree of home bias across mutual funds; (ii) a positive correlation between the size of funds and home bias; and (iii) a positive correlation between the size of funds, the number of foreign countries and the number of sectors in which they invest. These facts constitute a challenge for existing theories.

Global Portfolio Rebalancing Under the Microscope

Cross border capital flows and returns on assets are two key variables in international macroeconomics. Difficult endogeneity issues plague any analysis of their correlations in aggregate data. This paper examines the dynamics of international portfolios with a unique data set on the stock allocations of approximately 6,500 international equity funds domiciled in four different currency areas during a 5 year period. The disaggregated data structure allows us to examine the effect of realized returns on portfolio adjustments. Do managers rebalance their portfolios towards their desired weights or do they increase their exposure to appreciating assets? We find strong support for portfolio rebalancing behavior aimed at stabilizing exchange rate risk and equity risk exposure around desired levels. These findings are important for the new open economy macroeconomics models featuring endogenous portfolio choice. They should also help inform the burgeoning theoretical literature in macroeconomics and in finance that aims at modeling financial intermediaries.

Bank ratings: what determines their quality?

This paper examines the quality of credit ratings assigned to banks by the three largest rating agencies. We interpret credit ratings as relative assessments of creditworthiness, and define a new ordinal metric of rating error based on banks' expected default frequencies. Our results suggest that on average large banks receive more positive bank ratings, particularly from the agency to which the bank provides substantial securitization business. These competitive distortions are economically significant and contribute to perpetuate the existence of ‘too-big-to-fail' banks. We also show that, overall, differential risk weights recommended by the Basel accords for investment grade banks bear no significant relationship to empirical default probabilities. — Harald Hau, Sam Langfield and David Marques-Ibane

Banken unter Druck: Gibt es Auswege aus der neuen Bankenkrise?

Durch die globale Finanz- und Wirtschaftskrise geraten Europas Banken immer mehr unter Druck. So hat die desolate Verfassung der Staatsfinanzen der südeuropäischen Länder nach Ansicht von Stephan Paul und Christian Farruggio, Ruhr-Universität Bochum, die Krise in den Bankensektor »zurückgebracht«, denn diese halten immer noch in großem Umfang öffentliche Schuldtitel. Die von der Politik favorisierten Vorschläge zur Beseitigung der Bankenkrise lösen aber leider nicht die derzeitigen Probleme, da sie sich vor allem auf die Höhe des regulatorischen Eigenkapitals von Banken beziehen. Stattdessen müsse im Rahmen einer proaktiven Kontrolle der Aufsicht intensiver geprüft werden, welche Risiken Banken eingehen. Gerhard Schick und Jan Weder, Bündnis 90/Die Grünen, sehen es als wichtig an, die Banken- und Schuldenkrisen separat zu lösen, wobei die Stabilisierung der Banken hierfür ein elementarer Baustein sei. Leider habe es die Politik versäumt, sich neue Optionen zwischen den beiden Extremen »Retten« und »Nicht-Retten« zu verschaffen. Jochen Zimmermann, Universität Bremen, möchte an den Anreizstrukturen und dem Geschäftsmodell der großen Privatbanken ansetzen, und zwar in mehrfacher Hinsicht: durch die Trennung von Staat und Kreditwirtschaft, durch weiträumige Verbote derivativer Geschäfte und die Stärkung des Zusammenhangs von Handlung und Haftung. Harald Hau, Universität Genf und Swiss Finance Institute, und Bernd Lucke, Indiana University, Bloomington, und Universität Hamburg, sehen Europa vor der Wahl zwischen hoher Infla­tion oder dem möglichen Staatsbankrott einzelner Staaten der Eurozone.Bankenkrise, Finanzmarkt, Eigenkapital, Bankrisiko, Konjunkturpolitik, Inflation, Staatsbankrott, Europa

The SAURON project - III. Integral-field absorption-line kinematics of 48 elliptical and lenticular galaxies

We present the stellar kinematics of 48 representative elliptical and lenticular galaxies obtained with our custom-built integral-field spectrograph SAURON operating on the William Herschel Telescope. The data were homogeneously processed through a dedicated reduction and analysis pipeline. All resulting SAURON datacubes were spatially binned to a constant minimum signal-to-noise. We have measured the stellar kinematics with an optimized (penalized pixel-fitting) routine which fits the spectra in pixel space, via the use of optimal templates, and prevents the presence of emission lines to affect the measurements. We have thus generated maps of the mean stellar velocity, the velocity dispersion, and the Gauss-Hermite moments h3 and h4 of the line-of-sight velocity distributions. The maps extend to approximately one effective radius. Many objects display kinematic twists, kinematically decoupled components, central stellar disks, and other peculiarities, the nature of which will be discussed in future papers of this series.Comment: 23 pages, 18 figures. Accepted for publication in MNRAS. Version with full resolution images available at http://www.strw.leidenuniv.nl/sauron/papers/emsellem2004_sauron3.pd