WP Series Archive

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Working Paper Series



40. Bui, Linda & Kapon, Samuel, "The Impact of Voluntary Programs on Polluting Behavior: Evidence from Pollution Prevention Programs and Toxic Releases" (2011).

Abstract: We investigate how a class of voluntary environmental initiatives known as pollution prevention (“P2”) programs affect toxic pollution.  We construct a data base on federal and state-level P2 programs and exploit variation in adoption dates and program characteristics to study their effects on facility-level releases.  We find convincing evidence that these mechanisms can alter polluter behavior.  In particular, we find that (1) state P2 programs had a significant impact on average facility level toxic releases, reducing annual releases by 11%-15%;  (2) for every $100,000 of federal matching funds awarded for state P2 activities, average facility level releases in the recipient state declined on the order of 1%-1.5%; (3) P2-induced reductions are significantly enhanced by information spillovers, diffused primarily via industry networks rather than geographic proximity; (4) facilities respond to  technical assistance programs by reducing toxic releases, but only for substances that are not simultaneously regulated by formal command and control strategies; and (5) facilities respond to filing fees and non-reporting penalties by altering their toxic releases, but only for chemicals that are easily monitored by regulators.

39. Carlson, John (Purdue), Dahl, Christian (U of Aarhus) & Osler, Carol, "Short-run Exchange-rate Dynamics: Theory And Evidence" (2008).

Abstract: Recent research has revealed a wealth of information about the microeconomics of currency markets and thus the determination of exchange rates at short horizons. This information should help in designing exchange-rate models. This paper analyzes an existing model that was previously demonstrated to be consistent with most of the major puzzles that have emerged under floating rates. It shows that this model is also consistent with most of the major new insights from microstructure. The model is consistent with the institutional structure of currency markets, it accurately reflects the constraints and objectives of major participants, and it fits key stylized facts concerning returns and order flow.

38. Bandarchuk, Pavel (SSGA), & Hilscher, Jens, "Sources of Momentum Profits: Evidence on the Irrelevance of Characteristics" (2011).

Abstract: Several recent studies document that sorting stocks first on certain stock-level characteristics and then on past returns results in elevated momentum profits. We show that such strategies enhance momentum profits simply by trading in stocks with more extreme past returns. Adjusted for this effect, elevated momentum profits resulting from characteristics (size, R², turnover, age, analyst coverage, analyst forecast dispersion, market-to-book, price, illiquidity, credit rating) disappear almost entirely. Interaction patterns have been used to support behavioral and limits-to-arbitrage explanations of momentum; our findings imply that explanations of momentum should instead focus on the link between momentum profits and extreme past returns.

37. Pettenuzzo, Davide, Timmermann, Allan (UC San Diego), & Valkanov, Rossen (UC San Diego), "Return Predictability under Equilibrium Constraints on the Equity Premium" (2008).

Abstract: This paper proposes a new approach for incorporating theoretical constraints on return forecasting models such as non-negativity of the conditional equity premium and sign restrictions on the coefficients linking state variables to the equity premium. Our approach makes use of Bayesian methods that update the estimated parameters at each point in time in a way that optimally exploits information in these constraints. Using a variety of predictor variables from the literature on predictability of stock returns, we find that theoretical constraints have an important effect on the coefficient estimates and can significantly reduce biases and estimation errors in these. In out-of-sample forecasting experiments we find that models that exploit the theoretical restrictions produce better forecasts than unconstrained models.

36. Pettenuzzo, Davide, & White, Halbert (UC San Diego), "Granger Causality, Exogeneity, Cointegration, and Economic Policy Analysis" (2010).

Abstract: Policy analysis has long been a main interest of Clive Granger's. Here, we present a framework for economic policy analysis that provides a novel integration of several fundamental concepts at the heart of Granger's contributions to time-series analysis. We work with a dynamic structural system analyzed by White and Lu (2010) with well-defined causal meaning; under suitable conditional exogeneity restrictions, Granger causality coincides with this structural notion. The system contains target and control subsystems, with possibly integrated or cointegrated behavior. We ensure the invariance of the target subsystem to policy interventions using an explicitly causal partial equilibrium recursivity condition. Policy effectiveness is ensured by another explicit causality condition. These properties only involve the data generating process; models play a subsidiary role. Our framework thus complements that of Ericsson, Hendry, and Mizon (1998) (EHM) by providing conditions for policy analysis alternative to weak, strong, and super-exogeneity. This makes possible policy analysis for systems that may fail EHM's conditions. It also facilitates analysis of the cointegrating properties of systems subject to policymaker control. We discuss a variety of practical procedures useful for analyzing such systems and illustrate with an application to a simple model of the U.S. macroeconomy.

35. Hilscher, Jens, Pollet, Joshua (Michigan State) & Wilson, Mungo (Oxford), "Are Credit Default Swaps a Sideshow? Evidence that Information Flows from Equity to CDS Markets" (2011).

Abstract: In this paper we provide evidence that equity returns lead credit protection returns at daily and weekly frequencies, while credit protection returns do not lead equity returns. Our results indicate that informed traders are primarily active in the equity market rather than the CDS market. These findings are consistent with standard theories of market selection by informed traders in which market selection is determined partially by transaction costs. We also find that credit protection returns respond more quickly during salient news events (earnings announcement days) compared to days with similarly volatile equity returns. This evidence regarding the response of credit protection returns to news provides support for explanations related to investor inattention.

34. Hilscher, Jens & Sisli-Ciamarra, Elif, "Conflicts of Interest on Corporate Boards: The Effect of Creditor-Directors on Acquisitions" (2011).

Abstract: This paper investigates the effects on acquisitions of creditor-director presence on corporate boards. Using a hand-collected dataset for boards of large U.S. corporations, we find that companies with creditor-directors are more likely to engage in acquisitions with attributes that are unfavorable to shareholders and favorable to creditors (more diversifying and fewer cash-financed acquisitions). Consistent with these patterns, acquisition announcements are associated with lower shareholder value, higher creditor value, and lower overall firm value when a creditor is present. These results support the hypothesis that conflicts of interest between shareholders and creditors result in value-destroying acquisitions. In addition, commercial bankers with no lending relationship are not affected by conflicts of interest. Where appropriate, our estimation strategy takes into account that there may be self selection of bankers onto corporate boards.

33. Du, Luosha (UC Berkeley), Harrison, Ann (World Bank), & Jefferson, Gary, "Do Institutions Matter for FDI Spillovers? The Implications of China’s “Special Characteristics”"(2011).

Abstract:  We investigate how institutions affect productivity spillovers from foreign direct investment (FDI) to China’s domestic industrial enterprises during 1998-2007. We examine three institutional features that comprise aspects of China’s “special characteristics”:  (1) the different sources of FDI, where FDI is nearly evenly divided between mostly Organization for Economic Co-operation and Development (OECD) countries and the region known as “Greater China”, consisting of Hong Kong, Taiwan, and Macau; (2) China’s heterogeneous ownership structure, involving state- (SOEs) and non-state owned (non-SOEs) enterprises, firms with foreign equity participation, and non-SOE, domestic firms; and (3) industrial promotion via tariffs or through tax holidays to foreign direct investment. We also explore how productivity spillovers from FDI changed with China’s entry into the WTO in late 2001.  We find robust positive and significant spillovers to domestic firms via backward linkages (the contacts between foreign buyers and local suppliers).  Our results suggest varied success with industrial promotion policies.  Final goods tariffs as well as input tariffs are negatively associated with firm-level productivity.  However, we find that productivity spillovers were higher from foreign firms that paid less than the statutory corporate tax rate.

32. Deng, Paul (Copenhagen Business School) & Jefferson, Gary, "Explaining Spatial Convergence of China’s Industrial Productivity" (2011).

Abstract: This paper investigates the conditions that may auger a reversal of China’s increasingly unequal levels of regional industrial productivity during China’s first two decades of economic reform.  Using international and Chinese firm and industry data over the period 1995-2004, we estimate a productivity growth-technology gap reaction function.  We find that as China’s coastal industry has closed the technology gap with the international frontier relative to interior regions, labor productivity growth in the coastal region has begun to slow in relation to the interior.  This may serve as an early indicator of China’s initial movement toward reversing the widespread income inequality.  This paper investigates the conditions that may auger a reversal of China’s increasingly unequal levels of regional industrial productivity during China’s first two decades of economic reform.  Using international and Chinese firm and industry data over the period 1995-2004, we estimate a productivity growth-technology gap reaction function.  We find that as China’s coastal industry has closed the technology gap with the international frontier relative to interior regions, labor productivity growth in the coastal region has begun to slow in relation to the interior.  This may serve as an early indicator of China’s initial movement toward reversing the widespread income inequality. 

31. Hilscher, Jens & Wilson, Mungo (U of Oxford), "Credit ratings and credit risk" (2011).

Abstract: This paper investigates the information in corporate credit ratings. We examine the extent to which firms' credit ratings measure raw probability of default as opposed to systematic risk of default, a firm's tendency to default in bad times. We find that credit ratings are dominated as predictors of corporate failure by a simple model based on publicly available financial information (`failure score'), indicating that ratings are poor measures of raw default probability. However, ratings are strongly related to a straightforward measure of systematic default risk: the sensitivity of firm default probability to its common component (`failure beta'). Furthermore, this systematic risk measure is strongly related to credit default swap risk premia. Our findings can explain otherwise puzzling qualities of ratings.