Department Brown Bag Seminars
Wednesday 12:00-1:05 PM
499 Engineering II
Tamon Asonuma (IMF)
"Sovereign Bond Prices, Haircuts and Maturity"
Rejecting a common assumption in the sovereign debt literature, we document that creditor losses (“haircuts”) during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999–2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.
Kristian Lopez Vargas
Nate Higer (Brown U)
Elira Kuka (SMU)
Chris Limnios (Providence College)
Wednesday 12:00-1:05 PM
499 Engineering II
"The pricing of sovereign risk under costly information"
When investors' information acquisition and the sovereign's default decision are jointly endogenous, sovereign bond spread exhibits significant time-variation in its volatility. Without considering such state-contingent investor attention allocation, model-based estimates of default risk from spread data could be negatively biased during crisis periods.
Dario Pozzoli, Copenhagen Business School
"Coordination of Hours within the Firm"
Teamwork has become increasingly important in many firms, yet little is known about how coordination of hours among heterogeneous coworkers affects pay, productivity and labor supply. In this paper we propose a framework where differently productive firms choose whether or not to coordinate hours in exchange for productivity gains. In this framework, we show that more productive firms select into coordinating hours and pay compensating wage differentials, leading to attenuated labor supply responses and spillovers from tax changes. Next, we bring the model predictions to the data using linked employer-employee registers in Denmark. We first document evidence of positive correlations between wages, productivity and the degree of hours coordination - measured as the dispersion of hours - within firms. We estimate that hours coordination can explain around 4\% of the variance of firm-level wages. We then estimate labor supply elasticities using changes to the personal income tax schedule in 2010 which affected high-wage earners differently. We find evidence of higher labor supply elasticity in firms with lower hours coordination. Furthermore, we find evidence of spillover effects on hours worked by coworkers not directly affected by the reform that are consistent with our model of firm level coordination of hours.
"Climate and Power: The Political Consequences of Climate Change"
Climate change is predicted to shift economic power away from vulnerable populations. We study whether there is likewise a shift in political representation. We estimate the impact of a permanent change in the weather---a shift in the probability distribution of rainfall and temperature---on the representation of disadvantaged castes in India. We show that trends in climate are endogenous, ruling out a simple reduced-form comparison across places with different trends. We propose instead to exploit exogenous variation in weather shocks. The reduced-form impact of these shocks cannot simulate the effect of a permanent change in climate. Instead we use them to estimate a structural model, which can then simulate the counterfactual world in which the weather distribution has permanently changed.
Wednesday 12:00-1:05 PM
499 Engineering II
"School Entry and Criminal Behavior"
Parents whose children’s birthdays fall just before the school entry cutoff face the concern that their children will be the youngest in their cohort for their entire education. There is a literature documenting that, among other things, the youngest students in a classroom have lower test scores, are more likely to be held back and to be diagnosed with ADHD. These outcomes are highly correlated with criminal behavior. This paper investigates being the youngest in a cohort has any impact on an individual's propensity to commit crime. I use a large set of arrest records over a 20-year period in California to assess if being the youngest in a school cohort increases the likelihood of being arrested at any point between the early teen and young adult years. Overall, I find no persistent effect on arrest rates or any effect on the probability of arrest for serious crimes. However, the youngest students in a cohort are at a slightly higher risk of arrest for certain minor offenses at age 14. This transient effect may reflect the influence school setting has on both behavior and the probability of arrest stemming from the peer group composition and monitoring standards experienced by those that begin school younger, who are likely to be in their first year of high school at that age.
"Capital Controls and Foreign Exchange Market Intervention"
Greg Laughlin, Yale University
"Leveraging the Speed of Light — The Dynamics and Economics of Ultra-Low Latency Trading"
The past decade has been characterized by a rapid evolution of the network infrastructure that supports electronic trading. Tick data is now routinely time-stamped to nanosecond precision, and inter-exchange messaging occurs at nearly the speed of light in vacuum. In this talk, I will review how high-frequency traders have adopted these technological innovations. I will argue that cross-correlation of trading activity at microsecond resolution, across physically separated venues, is a powerful tool for understanding liquidity provision, market dynamics, and price formation. I will provide quantitative estimates of the overall profitability of low-latency trading, and I will illustrate how the dissemination of major economic news releases are rapidly incorporated into consensus prices.
Jessica Leight, Williams College
"Complementarity between non-agricultural and agricultural shocks in rural industrialization: Evidence from China"
This paper analyzes patterns of structural transformation in China between 2000 and 2010, seeking to estimate the impact of shocks to labor demand in the secondary (industrial and mining) sector on local economic outcomes, and analyze whether there is any evidence of complementarity between these shocks and agricultural productivity shocks, proxied by county-level rainfall. I employ a newly assembled panel including a nationwide sample of 2000 counties, and construct secondary labor demand shocks following Bartik (1991), using the baseline composition of county employment and national employment fluctuations by subsector. The empirical results indicate that first, there is a robust response to secondary labor demand shocks in terms of increased employment, GDP and value added in the secondary sector, and increases in total GDP. Second, there is evidence of significant complementarity between these shocks and agricultural shocks, but this pattern is restricted to counties that are less industrialized in baseline. In these counties, non-agricultural growth is observed only following positive shocks to both the non-agricultural and agricultural sectors. Further exploration suggests this pattern may be driven by capital constraints in heavily agricultural regions.
"Effectiveness of Precautionary Capital Controls - Generalized Propensity Score Approach"
This paper investigates the effect of ex-ante capital controls in mitigating the output cost of the Global Financial Crisis (GFC) 2008-2009. Restrictions on capital accounts are accepted as a tool for financial stability purpose among the policy community after the GFC, but empirical evidence of capital controls' usefulness is not clearly verified yet. We employ Imbens (2000)'s generalized propensity score (GPS) analysis using 88 cross-country data to handle this issue. GPS analysis is designed to find average treatment effect where the treatment is in continuous form. GPS approach combined with balancing property can remove all the biases from country characteristics related with capital controls. We found indeterminate evidence that pre-crisis inflow capital controls were successful to lessen the GDP cost of the GFC. Also, we found a partial result that pre-crisis outflow capital controls even worsened crisis severity of the GFC.
Dan Freidman, Eric Aldrich, and Kristian Lopez Vargas
"High-Frequency Trading Experiments"
High-frequency trading (HFT) firms, with latency-driven algorithms, now account for a large and increasing fraction of trades at major financial exchanges worldwide. Some experts say that HFT helps increase market liquidity and reduce transaction costs. But others argue that HFT hurts ordinary investors and provides illusory liquidity. Existing data is insufficient to resolve these controversies since it is gathered using only a single market format, the continuous double auction.
Using laboratory experiments, we study the performance of existing and alternative market formats in the presence HFT. The baseline market format is the Continuous Double Auction (CDA), also known as the Continuous Limit Order Book, which organizes trade in most modern exchanges around the world. Second, we study the newly-launched IEX format, which is intended to reduce the incentives for HFT. The IEX market delays all incoming orders and allows hidden, “pegged” orders to move automatically with the National Best Bid and Offer prices. Third we study a format used by Electronic Broking Services (EBS), one of the largest currency exchanges. Within a narrow time-window, the new EBS format randomizes the sequence in which orders are processed. Finally, we study the frequent batch auction (FBA) -- also known as the multiple call market -- as proposed in Budish et al. (2015). This format gives equal priority to all orders received in the same batching period (of, say, a tenth of a second), and, in theory, reduces the incentive for investment on speed and restores primacy to competition on price.
These formats are implemented in a simplified laboratory environment based on the Budish et al. (2015, BCS) model. In the experiments, human participants tune algorithms that automatically submit orders to a financial exchange on their behalf. We compare performance across formats in metrics associated with liquidity, stability and transactions costs, among others. We have already developed the basic experimental interfaces and started running pilots.
In Wednesday’s Brown Bag we present a first set of results comparing CDA to HFT performance in a BCS laboratory environment. Later we plan to conduct a high-profile, public tournament using a specially developed exchange that will compare all four market formats in a realistic, yet controlled setting.
Luke Lindsay, University of Exeter
"Avoidable Costs and Market Design"
In many laboratory settings, the continuous double auction gives highly efficient outcomes. However, in markets where sellers have avoidable costs, van Boening and Wilcox (1996) observed wild price and efficiency dynamics. Subsequent studies have tested a range of other market designs in this setting; however, mechanisms that reliably deliver high efficiency in markets with avoidable costs have remained elusive. We experimentally test four market mechanisms. First, a continuous double auction where the order book is hidden. Second, a continuous double auction where the order book is visible to traders. Third, a call market where sellers submit supply schedules and buyers submit demand schedules. Fourth, a mechanism where traders submit schedules in continuous time. Provisional transactions are shown and traders may update their schedules subject to an improvement rule. The market closes when no improved schedules have been submitted for a period of time and at this point the standing provisional transactions are executed. The main result is that the mechanisms where traders submit schedules give higher efficiency than the double auctions, with the mechanism that allows for updating schedules delivering the highest efficiency overall.
Michael Hutchison, Evan Miao, and Mahir Binici
"Down But Not Out: Do Credit Rating Agencies Provide Valuable Information in Market Evaluation of Sovereign Default Risk?"
This paper assesses the information value of the three largest credit rating agencies’ (CRA) announcements of sovereign credit rating changes, “outlook” changes and “watch” changes on market pricing of country default risk as embedded in credit default swap (CDS) spreads. An event study framework is employed for 56 advanced and emerging-market countries and daily data over January 2005 through June 2014. We find marked asymmetries in market impact from watch and outlook designations; negative and positive watch/outlook designations; credit upgrades and downgrades; and across different CRA announcements. Credit rating downgrades and negative watch announcements have a large impact on CDS spreads. Credit upgrades and positive watch/outlook announcements, by contrast, have little impact on market prices. We also investigate whether rating changes and other announcements from CRAs have the same "news" impact on markets before and after the global financial crisis (GFC). We find that CRA announcements have similar qualitative effects before and after the GFC, but that the magnitude of the effects were larger prior to the global financial crisis.
"Customer DIscrimination and the Effects of Segregation on Business in the Jim Crow Era"