Search Results
Working Paper
Incentive Contracting Under Ambiguity Aversion
This paper studies a principal-agent model in which the information on future firm performance is ambiguous and the agent is averse to ambiguity. We show that if firm risk is ambiguous, while stocks always induce the agent to perceive a high risk, options can induce him to perceive a low risk. As a result, options can be less costly in incentivizing the agent than stocks in the presence of ambiguity. In addition, we show that providing the agent with more incentives would induce the agent to perceive a higher risk, and there is a discontinuous jump in the compensation cost as incentives ...
Discussion Paper
Measuring Monetary Policy Uncertainty: The Federal Reserve, January 1985-January 2016
In this note we focus on the U.S. over the period January 1985 to January 2016, but have also constructed measures over a longer time period and for other central banks/economies.
Working Paper
Taxonomy of Global Risk, Uncertainty, and Volatility Measures
A large number of measures for monitoring risk and uncertainty surrounding macroeconomic and financial outcomes have been proposed in the literature, and these measures are frequently used by market participants, policy makers, and researchers in their analyses. However, risk and uncertainty measures differ across multiple dimensions, including the method of calculation, the underlying outcome (that is, the asset price or macroeconomic variable), and the horizon at which they are calculated. Therefore, in this paper, we review the literature on global risk, uncertainty, and volatility ...
Working Paper
Asset returns with earnings management
The paper investigates stock return dynamics in an environment where executives have an incentive to maximize their compensation by artificially inflating earnings. A principal-agent model with financial reporting and managerial effort is embedded in a Lucas asset-pricing model with periodic revelations of the firm's underlying profitability. The return process generated from the model is consistent with a range of financial anomalies observed in the return data: volatility clustering, asymmetric volatility, and increased idiosyncratic volatility. The calibration results further indicate that ...
Discussion Paper
Do Financial Market Frictions Affect Executive Compensation?
Compensation policy, characterized by CEO pay-for-performance, is one of the most important factors in a company's success, shaping how well executives run the company.
Working Paper
Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms
We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak ...
Working Paper
Uncertainty, Curreny Exess Returns, and Risk Reversals
In this paper we provide strong evidence that heightened uncertainty in the U.S. real economy or financial markets significantly raises excess returns to the currency carry trade. We posit that this works through the influence of uncertainty on global investors' risk preferences. Macro and financial uncertainty also lower foreign exchange risk reversals, an effect that is particularly strong for high interest rate portfolios. Our results are consistent with the idea that an increase in uncertainty regarding the U.S. economy or financial markets increases investors' risk aversion, which in ...
Discussion Paper
Measuring Cross Country Monetary Policy Uncertainty
In previous work, we constructed a news-based index of U.S. monetary policy uncertainty (MPU) that captures the degree of uncertainty the public perceives about Federal Reserve policy actions and their consequences. In this note, we extend that work to Canada, the Euro Area, Japan, and United Kingdom.
Working Paper
The Stock Market Response to a "Regulatory Sine Curve"
We construct new indicators of financial regulatory intensity and find evidence that a "regulatory sine curve" generally exists: regulatory oversight increases following a recession and wanes as the economy returns to normalcy. We then build an asset pricing model, based on the idea that regulatory oversight both deters incentives to commit fraud ex ante and reveals hidden negative information ex post. Our calibration suggests that these mechanisms can be quantitatively important for stock price dynamics.