Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions such as banks. Our model incorporates two key features: I) value-maximizing banks have a well-founded concern with risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including: the evaluation of proprietary trading operations; and the pricing of unhedgeable derivatives portfolios. This paper was presented at the Financial Institutions Center's May 1996 conference on "

Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions such as banks. Our model incorporates two key features: i) value-maximizing banks have a well-founded concern with risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including the evaluation of proprietary trading operations, and the pricing of unhedgeable derivatives positions.

Aggregate Short Interest and Market Valuations

We examine some basic data on the evolution of aggregate short interest, both during the dot-com era, and at other times in history. Total short interest moves in a countercyclical fashion. For example, short interest in NASDAQ stocks actually declines as the NASDAQ index approaches its peak. Moreover, this decline does not seem to reflect a substitution away from outright short-selling and towards put options, as the ratio of put-to-call volume displays the same countercyclical tendency. The evidence suggests that: i) arbitrageurs are reluctant to bet against aggregate mispricings; and ii) short-selling does not play a particularly helpful role in stabilizing the overall stock market.

Investor Sentiment and Corporate Finance: Micro and Macro

We document that net equity issuance is considerably more sensitive to aggregate stock returns and Q's than to firm-level stock returns and Q's. Very similar patterns also emerge when we look at merger activity. In light of earlier work (Campbell 1991, Vuolteenaho 2002) which finds that aggregate stock returns are less informative about future cashflows than are firm-level stock returns--and thus, potentially more strongly influenced by investor sentiment--these results suggest that both equity issuance and mergers are to a significant extent driven by market-timing considerations, as opposed to by purely fundamental factors.

Comment on "Nonlinear current-voltage curves of gold quantum point contacts" [Appl. Phys. Lett. 87, 103104 (2005)]

In a recent Letter [Appl. Phys. Lett. 87, 103104 (2005)], Yoshida et al. report that nonlinearities in current-voltage curves of gold quantum point contacts occur as a result of a shortening of the distance between electrodes at finite bias, presumably due to thermal expansion. For short wires, the electrode displacement induces a thickening of the wire, as well as nonlinearities of the IV curve, while the radius of long wires is left unchanged, thus resulting in a linear IV curve. We argue here that electron shell effects, which favor wires with certain "magic radii," prevent the thickening of long wires under compression, but have little effect on wires below a critical length.Comment: Version accepted for publication in Applied Physics Letter

Aggregate Short Interest and Market Valuations

We examine some basic data on the evolution of aggregate short interest, both during the dot-com era, and at other times in history. Total short interest moves in a countercyclical fashion. For example, short interest in NASDAQ stocks actually declines as the NASDAQ index approaches its peak. Moreover, this decline does not seem to reflect a substitution away from outright short-selling and towards put options, as the ratio of put-to-call volume displays the same countercyclical tendency. The evidence suggests that: i) arbitrageurs are reluctant to bet against aggregate mispricings; and ii) short-selling does not play a particularly helpful role in stabilizing the overall stock market.

Fluctuational Instabilities of Alkali and Noble Metal Nanowires

We introduce a continuum approach to studying the lifetimes of monovalent metal nanowires. By modelling the thermal fluctuations of cylindrical nanowires through the use of stochastic Ginzburg-Landau classical field theories, we construct a self-consistent approach to the fluctuation-induced `necking' of nanowires. Our theory provides quantitative estimates of the lifetimes for alkali metal nanowires in the conductance range 10 < G/G_0 < 100 (where G_0=2e^2/h is the conductance quantum), and allows us to account for qualitative differences in the conductance histograms of alkali vs. noble metal nanowires

Theory of metastability in simple metal nanowires

Thermally induced conductance jumps of metal nanowires are modeled using stochastic Ginzburg-Landau field theories. Changes in radius are predicted to occur via the nucleation of surface kinks at the wire ends, consistent with recent electron microscopy studies. The activation rate displays nontrivial dependence on nanowire length, and undergoes first- or second-order-like transitions as a function of length. The activation barriers of the most stable structures are predicted to be universal, i.e., independent of the radius of the wire, and proportional to the square root of the surface tension. The reduction of the activation barrier under strain is also determined.Comment: 5 pages, 3 figure