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Newsletter
Retirement Account Basics: Why You’re Never Too Young to Start Thinking About Retirement
In this February 2024 Issue of Page One Economics: Focus on Finance, we’ll explore the most common retirement savings plans and other things to consider as you begin thinking about retirement. We will compare employer-based defined-benefit and defined-contribution plans, as well as options available to individuals. Understanding the basics of retirement savings accounts can help you feel empowered to start making decisions today for your retirement!
Working Paper
Money Matters: Broad Divisia Money and the Recovery of Nominal GDP from the COVID-19 Recession
The rise of inflation in 2021 and 2022 surprised many macroeconomists who ignored the earlier surge in money growth because past instability in the demand for simple-sum monetary aggregates had made these aggregates unreliable indicators. We find that the demand for more theoretically-based Divisia aggregates can be modeled and that their growth rates provide useful information for future nominal GDP growth.Unlike M2 and Divisia-M2, whose velocities do not internalize shifts in liabilities across commercial and shadow banks, the velocities of broader Divisia monetary aggregates are more ...
Working Paper
It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) plans
This paper investigates whether mutual fund families acting as service providers in 401(k) plans display favoritism toward their own funds. Using a hand-collected dataset on retirement investment options, we show that poorly-performing funds are less likely to be removed from and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, the subsequent performance of poorly-performing affiliated funds indicates that these trustee decisions are not ...
Working Paper
An Industrial Organization Approach to International Portfolio Diversification: Evidence from the U.S. Mutual Fund Families
Although the lack of international portfolio diversification has long interested the financial economics literature, the role of financial intermediaries in the market for diversified portfolios has rarely been studied. In this paper, I introduce a microeconomic aspect of under-diversification by examining a new data on U.S.-based mutual fund families' global diversification. I document the fund families' investments in global equity markets and explore features of supply and demand in the mutual fund market to explain their limited global diversification. Demand estimation confirms that ...
Working Paper
The Shift from Active to Passive Investing: Potential Risks to Financial Stability?
The past couple of decades have seen a significant shift in assets from active to passive investment strategies. We examine the potential effects of this shift on financial stability through four different channels: (1) effects on investment funds? liquidity transformation and redemption risks; (2) passive strategies that amplify market volatility; (3) increases in asset-management industry concentration; and (4) the effects on valuations, volatility, and comovement of assets that are included in indexes. Overall, the shift from active to passive investment strategies appears to be increasing ...
Report
Monetary Policy, Investor Flows, and Loan Fund Fragility
We find robust evidence indicating a pro-cyclical relationship between monetary policy shocks and loan fund flows. This relationship, however, is asymmetric: weaker for policy rate increases and stronger for policy rate decreases. Further, the effect of monetary policy shocks is stronger when short-term rates are higher. Finally, we document that large outflows from loan funds are associated with a decline in prices in the leveraged loan market. Our results identify a novel channel of monetary policy transmission that not only affects a critical segment of the credit sector, but also has the ...
Working Paper
Bayesian Nonparametric Learning of How Skill Is Distributed across the Mutual Fund Industry
In this paper, we use Bayesian nonparametric learning to estimate the skill of actively managed mutual funds and also to estimate the population distribution for this skill. A nonparametric hierarchical prior, where the hyperprior distribution is unknown and modeled with a Dirichlet process prior, is used for the skill parameter, with its posterior predictive distribution being an estimate of the population distribution. Our nonparametric approach is equivalent to an infinitely ordered mixture of normals where we resolve the uncertainty in the mixture order by partitioning the funds into ...
Discussion Paper
Redemption Risk of Bond Mutual Funds and Dealer Positioning
Market participants have recently voiced concerns that bond markets seem to become illiquid precisely when they want to sell bonds. Some possible reasons for a decline in corporate bond market liquidity in times of stress include the increasing share of corporate bond ownership by mutual funds and the reduced share of corporate bond ownership by dealers. In this post, we examine the potential effects of outflows from bond mutual funds and the role of dealers? positioning in corporate bonds.
Working Paper
Why Has U.S. Stock Ownership Doubled Since the Early 1980s? Equity Participation Over the Past Half Century
The U.S. stock ownership rate doubled between 1983 and 2001 but remains below predictions of some equity participation models. Consistent with calibration studies by Heaton and Lucas (2000) and Gomes and Michaelides (2005), mutual fund costs and indicators of background labor risk are significantly related to stock ownership over 1964-2019. Coefficient estimates and continuous data on driving variables can be used to create a continuous proxy for stock ownership, which could help researchers gauge the effects of shocks that are transmitted via equity participation. Typically omitted asset ...