Search Results
Working Paper
The behavior of China's stock prices in response to the proposal and approval of bonus issues
Event study analysis is applied to investigate stock price reaction to the announcement of bonus issues for the emerging stock markets of China. Results show that the issues with a high bonus ratio (number of bonus shares in the issue/number of existing shares) usually attract positive returns for both Chinese (A-share traders) and foreign (B-share traders) residents. Issues with a low bonus ratio are rewarded with negative returns for A-share traders and do not stimulate significant activity by B-share traders. The hypothesis of semi-strong form market efficiency is rejected only for ...
Working Paper
Estimation of forward-looking relationships in closed form: an application to the New Keynesian Phillips curve
We illustrate the importance of placing model-consistent restrictions on expectations in the estimation of forward-looking Euler equations. In two-stage limited-information settings where first-stage estimates are used to proxy for expectations, parameter estimates can differ substantially, depending on whether these restrictions are imposed or not. This is shown in an application to the New Keynesian Phillips Curve (NKPC), first in a Monte Carlo exercise, and then on actual data. The closed-form (CF) estimates require by construction that expectations of inflation be model-consistent at all ...
Discussion Paper
Alternative measures of the Federal Reserve banks' cost of equity capital
The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices that fully reflect the costs a private-sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are ?woefully? and ?unavoidably? imprecise, the Reserve Banks require such an estimate every year. We examine several COE estimates based on the Capital Asset Pricing Model (CAPM) and compare them using econometric and materiality criteria. Our results ...
Working Paper
The forecasting power of consumer attitudes for consumer spending
The widely studied Reuters/Michigan Index of Consumer Sentiment is constructed from the answers to five questions from the more comprehensive Reuters/Michigan Surveys of Consumers. Yet little work has been done on what predictive power the information taken from this more thorough compilation of consumer attitudes and expectations may have for forecasting consumption expenditures. The authors construct a limited set of real-time summary measures for 42 questions selected from these broader Surveys corresponding to three broad economic determinants of consumption?income and wealth, prices, and ...
Working Paper
Do real-time Okun's law errors predict GDP data revisions?
Using U.S. real-time data, we show that changes in the unemployment rate unexplained by Okun's Law have significant predictive power for GDP data revisions. A positive (negative) error in Okun's Law in real time implies that GDP will be later revised to show less (more) growth than initially estimated by the statistical agency. The information in Okun's Law errors about the true state of real economic activity also helps to improve GDP forecasts in the near term. Our findings add a new dimension to the interpretation of real-time Okun's Law errors, as they show that these errors can convey ...
Working Paper
Internal sources of finance and the Great Recession
The rising stockpile of cash as a share of total assets at U.S. firms has intrigued economists since at least the paper of Bates, Kahle, and Stulz (2006), yet there has been relatively little work on where this cash has come from and how it is related to investment performance. We exploit Statement of Cash Flows data from Compustat to decompose firms' cash stocks and show that the rise in cash holdings has coincided with an increased willingness to save internally generated cash. We show that although investment is normally sensitive to externally generated cash, the increased sensitivity of ...
Working Paper
Financial variables and macroeconomic forecast errors
A large set of financial variables has only limited power to predict a latent factor common to the year-ahead forecast errors for real Gross Domestic Product (GDP) growth, the unemployment rate, and Consumer Price Index (CPI) inflation for three sets of professional forecasters: the Federal Reserve?s Greenbook, the Survey of Professional Forecasters (SPF), and the Blue Chip Consensus Forecasts. Even when a financial variable appears to be fairly robust across sample periods in explaining the latent factor, from an economic standpoint its contribution appears modest. Still, several financial ...
Journal Article
What is the Federal Reserve banks' imputed cost of equity capital?
The Federal Reserve System is an important participant in the nation's payments system, which is the infrastructure used for transmitting and settling payments between individuals, firms, and government entities. For example, as reported in the Federal Reserve System's 2004 annual report, the twelve Federal Reserve Banks processed about 16 billion checks, or about 45%, of the 37 billion checks written in 2003. In addition, the Federal Reserve provides fully electronic payments services, such as automated clearing house services. Since the Federal Reserve is required to charge fees for these ...
Working Paper
The sensitivity of long-term interest rates to economic news: comment
Refet Grkaynak, Brian Sack, and Eric Swanson (2005) provide empirical evidence that long forward nominal rates are overly sensitive to monetary policy shocks, and that this is consistent with a model where long-term inflation expectations are not anchored because agents must infer the central bank's inflation target from noisy interest rate movements. Using the same data, methodology, and model, we show that their empirical results are neither persistent nor robust to small changes in sample period or methodology. In addition, their theoretical results rely mainly on an ad hoc law of motion ...
Working Paper
Closed-form estimates of the New Keynesian Phillips curve with time-varying trend inflation
We compare estimates of the New Keynesian Phillips Curve (NKPC) when the curve is specified in two different ways. In the standard difference equation (DE) form, current inflation is a function of past inflation, expected future inflation, and real marginal costs. The alternative closed form (CF) specification explicitly solves the DE form to express inflation as a function of past inflation and a present-discounted value of current and expected future marginal costs. The CF specification places model-consistent constraints on expected future inflation that are not imposed in the DE form. In ...