Lunes de papers

The “Other” Imbalance and Financial Crisis

Abstract:
One of the main economic villains before the crisis was the presence of large “global imbalances.” The concern was that the U.S. would experience a sudden stop of capital flows, which would unavoidably drag the world economy into a deep recession. However, when the crisis finally did come, the mechanism did not at all resemble the feared sudden stop. Quite the opposite, during the crisis net capital inflows to the U.S. were a stabilizing rather than a destabilizing source. I argue instead that the root imbalance was of a different kind: The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the U.S. financial system and its incentives (and this was facilitated by regulatory mistakes). The crisis itself was the result of the negative feedback loop between the initial tremors in the financial industry created to bridge the safe-assets gap and the panic associated with the chaotic unraveling of this complex industry. Essentially, the financial sector was able to create “safe” assets from the securitization of lower quality ones, but at the cost of exposing the economy to a systemic panic. This structural problem can be alleviated if governments around the world explicitly absorb a larger share of the systemic risk. The options for doing this range from surplus countries rebalancing their portfolios toward riskier assets, to private-public solutions where asset-producer countries preserve the good parts of the securitization industry while removing the systemic risk from the banks’ balance sheets. Such public-private solutions could be designed with fee structures that could incorporate all kind of too-big- or too-interconnected-to-fail considerations.

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The Puzzling Inventory Growth Risk Premium

Abstract:
In the cross-section of U.S. publicly traded firms, we document that the spread in expected returns between firms with high versus low inventory growth rates is as high as 7% per annum, after controlling for differences across the firm’s capital investment rate. We investigate the ability of existing macroeconomic models of inventory behavior to simultaneously match the cross-sectional properties of asset prices and real quantities in the data. Calibrated to match quantities as close to the data as possible, we find that none of the models considered here can quantitatively explain the observed large dispersion in risk associated with inventory growth. Adding convex adjustment costs in inventory investment slightly improves the ability of these models to match the asset pricing facts, but it deteriorates the fit along the quantity dimension. We conclude that the strong link between inventory growth and firms’ risk documented here is a quantitative puzzle for existing macroeconomic models of inventory behavior.

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On the Size of the Active Management Industry

Abstract:
We analyze the equilibrium size of the active management industry and the role of historical data – how investors use it to decide how much to invest in the industry, and how researchers use it to judge whether the industry’s size is reasonable. As the industry’s size increases, every manager’s ability to outperform passive benchmarks declines, to an unknown degree. We find that researchers need not be puzzled by the industry’s substantial size despite the industry’s negative track record. We also find investors face endogeneity that limits their learning about returns to scale and allows prolonged departures of the industry’s size from its optimal level.

Link al Paper (Bajarlo desde SSRN)