Exposure to Real Estate in Bank Portfolios

We implement a three-step procedure to assess the extent of exposure to real estate in commercial banks. First, we investigate the determinants of delinquency on real estate loans. We find the changes in interest rates and income to be the major determinants of aggregate delinquency rate. In the second step, we adopt a stress testing approach to calculate the potential impact on banks’ position of any adverse changes in these determinants. These calculations suggest that a 1.3 percentage point increase in mortgage interest rate leads to a 20% decrease in a typical bank’s distance to default. Finally, we look at the cross-sectional differences to identify the most vulnerable banks. Banks with rapid loan growth along with high cost-income ratio appear to be the most likely to experience a deterioration in their soundness.

"White men can't jump," but would you bet on it?

We identify an otherwise efficient market in which racial stereotypes affect market outcomes. In this market, there are well-defined prices, well-defined outcomes, a finite time horizon, and readily available information. The market appears to efficiently process the available information, with the exception of the race of the participants. We examine data on point spreads for NBA games over the 15 seasons from 1993-94 to 2007-08. We find evidence that the racial composition of the team is related to the size of the spread and their performance against the spread. Specifically, we find that a more black team tends to face a larger point spread and that these teams perform worse against the spread. It is possible that this effect is driven by the bookmakers setting a biased point spread or driven by excessive betting on the more black team. Using a different data set containing the movement of the spread, we do not find a relationship between the movement of the spread and the racial composition of the team. As a result, we favor the explanation that the bookmakers set a biased point spread.Stereotypes; Point spread; Market efficiency

Liquidity and Dividend Policy

We document the association between a firm's payout policy and its stock's liquidity. In particular, we show that dividend-paying firms have a more liquid market for their stock and measures of a stock's liquidity is positively linked to its probability of being a dividend payer. Furthermore, this link between dividends and liquidity is stronger when shareholders are more powerful. This is consistent with a mechanism in which payout decisions act as a commitment not to invest: by distributing cash, the firm reduces its potential for internal equity financing, raising its cost of capital and leading to less investment. Such a mechanism may lead to less volatile stock prices and potentially to a decrease in the adverse selection costs faced by liquidity-constrained shareholders, increasing stock price liquidity. When shareholders have more power, liquidity would be more strongly linked with dividends as managers would be more likely to pay dividends to meet shareholders�preference for liquidity.Liquidity; Dividend Payers; Adverse Selection Costs; Corporate Governance; Shareholder Power; Informed Trading

Three's company: Wall Street, Capitol Hill, and K Street

This paper explores the link between the political influence of the financial industry and financial regulation in the run-up to the global financial crisis. We construct a detailed database documenting the lobbying activities, campaign contributions, and political connections of the financial industry from 1999 to 2006 in the United States. We find evidence that spending on lobbying by the financial industry and network connections between lobbyists and the legislators were positively linked to the probability of a legislator changing positions in favor of deregulation. The evidence also suggests that hiring connected lobbyists who had worked for legislators in the past enhanced this link

Three's company: Wall Street, Capitol Hill, and K Street

This paper explores the link between the political influence of the financial industry and financial regulation in the run-up to the global financial crisis. We construct a detailed database documenting the lobbying activities, campaign contributions, and political connections of the financial industry from 1999 to 2006 in the United States. We find evidence that spending on lobbying by the financial industry and network connections between lobbyists and the legislators were positively linked to the probability of a legislator changing positions in favor of deregulation. The evidence also suggests that hiring connected lobbyists who had worked for legislators in the past enhanced this link

The effects of relative performance objectives on financial markets

We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark. In the presence of such relative-performance-based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion leads to increases in price volatility; (iii) home bias emerges as a rational outcome. Finally, when information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market

The effects of relative performance objectives on financial markets

We analyze the implications of linking the compensation of fund managers to the return of their portfolio relative to that of a benchmark. In the presence of such relative-performance-based objectives, investors have reduced expected utility but markets are typically more informative and deeper. Furthermore, in a multiple asset/market framework we show that (i) relative performance concerns lead to an increase in the correlation between markets (financial contagion); (ii) benchmark inclusion leads to increases in price volatility; (iii) home bias emerges as a rational outcome. Finally, when information is costly, information acquisition is hindered and this attenuates the effects on informativeness and depth of the market

Three Cycles: Housing, Credit and Real Activity

We examine the characteristics and comovement of cycles in house prices, credit, real activity and interest rates in advanced economies during the past 25 years, using a dynamic generalised factor model. House price cycles generally lead credit and business cycles over the long term, while in the short to medium run the relationship varies across countries. Interest rates tend to lag other cycles at all time horizons. While global factors are important, the U.S. business cycle, house price cycle and interest rate cycle tend to lead the respective cycles in other countries over all time horizons. However, the U.S. credit cycle leads mostly over the long term.Macro-financial linkages, house prices, credit, business cycle

"White men can't jump," but would you bet on it?

We identify an otherwise efficient market in which racial stereotypes affect market outcomes. In this market, there are well-defined prices, well-defined outcomes, a finite time horizon, and readily available information. The market appears to efficiently process the available information, with the exception of the race of the participants. We examine data on point spreads for NBA games over the 15 seasons from 1993-94 to 2007-08. We find evidence that the racial composition of the team is related to the size of the spread and their performance against the spread. Specifically, we find that a more black team tends to face a larger point spread and that these teams perform worse against the spread. It is possible that this effect is driven by the bookmakers setting a biased point spread or driven by excessive betting on the more black team. Using a different data set containing the movement of the spread, we do not find a relationship between the movement of the spread and the racial composition of the team. As a result, we favor the explanation that the bookmakers set a biased point spread