2019 Robert Day School Publications and Grants

*Indicates student co-author

Richard C. K. Burdekin and Xinyi Hu. "Deflationary Pressures Today: The Chinese, Japanese and Spanish Cases Compared." The Chinese Economy, vol. 51, issue 6, 2018, pp. 471-482.

Published in 2018 but not available until 2019

Abstract: This paper considers the role of supply-side factors in the deflationary pressures seen in the aftermath of the global financial crisis. Although declines in consumer prices have been mild, much larger drops in producer prices occurred not only in China but also in Japan and Spain. Empirical examination of these three cases reveals a consistent impact of oil prices in contributing both to the deflationary pressures and the gap between consumer and producer prices. Not only did these downward pressures emerge in spite of record levels of monetary easing but also there is the risk of a fuller transmission from producer prices to consumer prices in the future.


Burdekin, Richard C.K., and Thomas D. Willett. Editors’ Introduction to “China’s Global Interdependence: International Reserves, Capital Inflows, Financial Market Transmission, and Exchange Rate Determination.” The Chinese Economy, vol. 52, issue 4, 2019, pp. 295-299.


Burdekin, Richard C. K., and Junjie Zhang. "Macroeconomic Drivers of Chinese ADRs: Home Country vs. US Effects." The Chinese Economy, vol. 52, issue 4, 2019, pp. 342-357.

Abstract: The potential connections between macroeconomic variables and the stock market becomes less straightforward for shares issued in one country but traded in another. Whereas past work has suggested that cross-listed stocks respond to country-specific sentiment factors in the location of trade, in this paper we show how Chinese ADRs also generally respond more to US macroeconomic developments than to home-country influences. Following the application of Markov-switching analysis, we find that Chinese macroeconomic effects become relatively more important during times of crisis, however. Particularly large responses to Chinese macroeconomic variables are seen in the case of a Chinese closed-end fund that trades in the United States, but invests directly in Shanghai A-shares.

External Grant: Metrans Research Initiation Grant, Proposal 19-08, Optimal Density Restrictions in the Los Angeles-Long Beach CSA, 2019.

Abstract: In this project we develop a quantitative general equilibrium model of the Los Angeles metropolitan area. Topography, transport infrastructure, and zoning policies shape people's choices of where to live, and businesses' choices of where to hire. These two spatial distributions of residence and employment then determine commuting patterns and with them, congestion and transit-related pollution. We estimate the parameters of the model using data on the distributions of residence and employment across the 3,925 census tracts of the Los Angeles-Long Beach Combined Statistical Area, together with tract-level data on residential and commercial property values and bilateral commuting flows. We then use the model to (a) quantify the effect of current zoning restrictions on aggregate welfare in the Los Angeles-Long Beach CSA; (b) identify zoning policy adjustments which would move the regulatory regime closer to the welfare-maximizing optimum; and (c) make tract-level predictions of the impact of specific policy changes on residential and commercial density, property values, and commuting flows, and the environment.


External Grant: USC Lusk Center for Real Estate Research Award, Optimal Density Restrictions in the Los Angeles-Long Beach CSA, 2019.

Abstract: We develop a quantitative general equilibrium model of the Los Angeles-Long Beach Combined Statistical Area. Topography, transport infrastructure, and zoning policies shape people's choices of where to live, and businesses' choices of where to hire. These two spatial distributions of residence and employment then determine commuting patterns and with them, congestion and transit-related pollution. We estimate the parameters of the model using data on the distributions of residence and employment across the 3,925 census tracts of the Los Angeles-Long Beach CSA, together with tract-level data on residential and commercial property values and bilateral commuting flows. We then use the model to (a) quantify the effect of current zoning restrictions on aggregate welfare in the Los Angeles-Long Beach CSA; (b) identify zoning policy adjustments which would move the regulatory regime closer to the welfare-maximizing optimum; and (c) make tract-level predictions of the impact of specific policy changes on residential and commercial density, as well as property values and commuting flows

Aldy, Joseph, Matthew Kotchen, Mary Evans, Meredith Fowlie, Arik Levinson, and Karen Palmer. Report on the Proposed Changes to the Federal Mercury and Air Toxics Standards. External Environmental Economics Advisory Committee, 2019.


Brady, Jacob, Mary F. Evans, and Eric W. Wehrly. “Reputational Penalties for Environmental Violations: A Pure and Scientific Replication Study.” International Review of Law and Economics, vol. 57, 2019, pp. 60-72.

Abstract: Our pure replication of Karpoff et al. (2005) confirms their findings of negative abnormal returns and insignificant reputational penalties following the announcement of environmental violations in the last two decades of the twentieth century. A scientific replication using more recent data finds a decrease in the magnitude of negative abnormal returns but similarly insignificant reputational penalties on average. While mean legal penalties for violations are higher in the more recent period, these penalties have decreased relative to firms’ market valuations.


Evans, Mary F. and Sarah L. Stafford. “The Clean Air Act Watch List and Federal Oversight of State Enforcement Efforts.” Journal of Environmental Economics and Management, vol. 93, 2019, pp. 170-184.

Abstract: For major federal environmental statutes in the United States, primary monitoring and enforcement responsibilities rest with most states. The Environmental Protection Agency (EPA) is charged with overseeing state efforts and has at its disposal formal tools to discipline lax states, tools which are rarely used. In this paper, we explore the extent to which the EPA's now-defunct Clean Air Act Watch List served as an informal tool for influencing the enforcement activities of state regulators. We estimate event studies designed around the primary listing criteria for the Watch List. Our empirical results are consistent with the average state regulator acting to reduce the chances of their facilities appearing on the Watch List. We also examine heterogeneity in the response to the Watch List between two states with high numbers of regulated facilities, Texas and California. We find a larger change in enforcement activity under the Watch List among state and local regulators in Texas compared to California.

Finley, Andrew R. “The Impact of Large Tax Settlement Favorability on Firms’ Subsequent Tax Avoidance.” Review of Accounting Studies, vol. 24, issue 1, 2019, pp. 156-187.

Abstract: I consider how large tax settlements compare to management expectations and then test how the favorability of a resolution (from the firm’s perspective) affects subsequent tax avoidance. Using unrecognized tax benefit information disclosed in firms’ tax footnotes, pursuant to FIN 48, I develop and validate a measure of large tax settlement favorability. I find that firms with relatively favorable settlements subsequently increase their tax avoidance but that firms with relatively unfavorable settlements do not change their behavior. The implication is that favorable settlements inform management of weak tax monitoring or opportunities to avoid additional taxes. In additional analysis, I find that increasingly unfavorable settlements are positively associated with the likelihood of a tax-related restatement announcement. Overall, these findings illustrate how tax settlement favorability has reporting consequences for both subsequent tax returns and the financial statements.


Finley, Andrew R., Mindy H.J. Kim, Phillip T. Lamoreaux, and Clive S. Lennox. “Employee Movements from Audit Firms to Audit Clients.” Contemporary Accounting Research, vol. 36, issue 4, 2019, pp. 1999-2034.

Abstract: Regulators have expressed concerns about the "revolving door" between auditors and clients, whereby audit employees move directly from audit firms to audit clients (i.e., "direct alumni hires"). Regulators are concerned that these direct hires could compromise audit quality, partly because these employees could have previously audited their hiring company's financial statements. In contrast, we examine accounting and finance executives who move indirectly from audit firms to audit clients and who could not have previously audited the hiring company's financial statements (i.e., "indirect alumni hires"). We show that indirect hires occur more often than the direct hires that have concerned regulators. We predict and find that both direct and indirect alumni hires are associated with lower rates of executive turnover and audit firm turnover. However, there is no evidence that the reduced rates of executive turnover are explained by managerial entrenchment, or that these hires are associated with lower audit quality. Overall, our findings suggest that direct and indirect employee movements from audit firms to audit clients are beneficial to executives, audit clients, and audit firms because they reduce the incidence of costly turnover.


Finley, Andrew R., and Anthony Ribal. “The Information Content from Releases of the Deferred Tax Valuation Allowance.” The Journal of the American Taxation Association, vol. 41, no. 2, 2019, pp. 83-101.

Abstract: We examine the extent to which deferred tax valuation allowance (VA) releases- a discretionary accounting judgment that increases net income based on estimated future tax benefit realizations- are predictive of future earnings. We first find that profitable firms releasing at least a portion of a full VA have higher subsequent earnings relative to a control group that maintains a full VA. These results vary depending on firms' cumulative profitability in recent years and suggest some firms appear to rely on historical fact patterns rather than estimations of future profitability to justify the VA release. In additional analysis, we observe that among firms lacking cumulative profits in recent years, VA releasers generate higher subsequent abnormal returns than VA maintainers, suggesting investors are not timely responding to the information content from the VA release decision.

Flory, Jeffrey A. “Do Competitive Environments Push Good Female Leaders Away? Competition and the Leadership Gender Gap.” Women’s Leadership Journeys: Stories Research, and Novel Perspectives, edited by Sherylle J. Tan and Lisa DeFrank-Cole. Routledge, 2019, pp. 226-246.
 

Abstract: Unequal representation by women in key areas of leadership persists throughout society and the economy, despite recent advances and large amounts of resources dedicated to correcting imbalances. While discrimination, stereotypes, and human capital differences are all likely to play a role, a prominent new line of research in economics has uncovered another critical factor that is likely to be a major driver of these gender imbalances: men and women can react differently to competition. A rich and growing literature in experimental economics has shown that, among men and women of the same skill level, men have a tendency to be attracted to situations in which they compete, while women often avoid these situations. This difference may help explain the relative dearth of women in top positions, since such positions are typically achieved through competition. While the origins of this gender difference in reaction to competition remain a matter of debate, its existence across a multitude of settings and impacts on career and job choices by men and women is well established. This chapter discusses major findings emanating from the latest work in this area and explores some of the practical policies and approaches to correcting gender imbalances suggested by this research.

Garín, Julio, and Robert Lester. “The Opportunity Cost(s) of Employment and Search Intensity.” Macroeconomics Dynamics, vol. 23, issue 1, 2019, pp. 216-239.

Abstract: The flow utility of unemployment plays a crucial role in labor search and matching models. Recent evidence by Chodorow-Reich and Karabarbounis suggests that the flow utility is high on average, volatile, and strongly procyclical. Taken together, these facts imply that labor search and matching models perform worse than prevailing conventional wisdom. In contrast, we build a model where unemployed workers choose between home production and job search. Procyclical job search implies that the effective unemployment benefit is countercyclical. Our results suggest that omitting endogenous search will upwardly bias the measured correlation between effective unemployment benefits and productivity.


Garín, Julio, Robert Lester, and Eric Sims. “Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data.” Review of Economics and Statistics, vol. 101, issue 1, 2019, pp. 160-175.

Abstract: The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. We find that there is no significant difference in the response of expected inflation to a productivity shock at the ZLB compared to normal times.


Garín, Julio, Robert Lester, Eric Sims, and Jonathan Wolff. “Without Looking Closer, It May Seem Cheap: Low Interest Rates and Government Borrowing.” Economic Letters, vol. 180, 2019, pp. 28-32.

Abstract: Are periods of low interest rates advantageous times for governments to increase expenditure by issuing debt? Because borrowing costs are lower, some economists have argued that the answer is yes. We argue that the logic used in reaching this conclusion may in fact be too simplistic. Whether or not it is a good time to issue debt depends not on whether interest rates are low, but rather on why interest rates are low. We show that if interest rates are low because of an increased preference for saving, then fiscal sustainability allows increasing debt in a period of low interest rates. In contrast, if interest rates are low because of a decline in trend output growth, then it is not sustainable to increase deficit financed spending.

Gillen, Benjamin J., Sergio Montero, Hyungsik Roger Moon, and Matthew Shum. “BLP-2LASSO for Aggregate Discrete Choice Models with Rich Covariates.” Econometrics Journal, vol. 22, issue 3, 2019, pp. 262-281.

Abstract: We introduce the BLP-2LASSO model, which augments the classic BLP (Berry, Levinsohn, and Pakes, 1995) random-coefficients logit model to allow for data-driven selection among a high-dimensional set of control variables using the ’double-LASSO’ procedure proposed by Belloni, Chernozhukov, and Hansen (2013). Economists often study consumers’ aggregate behaviour across markets choosing from a menu of differentiated products. In this analysis, local demographic characteristics can serve as controls for market-specific preference heterogeneity. Given rich demographic data, implementing these models requires specifying which variables to include in the analysis, an ad hoc process typically guided primarily by a researcher’s intuition. We propose a data-driven approach to estimate these models, applying penalized estimation algorithms from the recent literature in high-dimensional econometrics. Our application explores the effect of campaign spending on vote shares in data from Mexican elections.


Gillen, Benjamin, Erik Snowberg, and Leeat Yariv. “Experimenting with Measurement Error: Techniques with Applications to the Caltech Cohort Study.” Journal of Political Economy, vol. 127, issue 4, 2019, pp. 1826-1863.

Abstract: Measurement error is ubiquitous in experimental work. It leads to imperfect statistical controls, attenuated estimated effects of elicited behaviors, and biased correlations between characteristics. We develop statistical techniques for handling experimental measurement error. These techniques are applied to data from the Caltech Cohort Study, which conducts repeated incentivized surveys of the Caltech student body. We replicate three classic experiments, demonstrating that results change substantially when measurement error is accounted for. Collectively, these results show that failing to properly account for measurement error may cause a field-wide bias leading scholars to identify “new” phenomena.

Grant, Laura, and Christian Langpap. "Private Provision of Public Goods by Environmental Groups." Proceedings of the National Academy of Sciences, vol. 116, no. 2, 2019, 5334-5340.

Abstract: Many environmental nonprofit groups are assumed to provide public goods. While an extensive literature examines why donors join and give to nonprofits, none directly test whether donations actually provide public goods. We seek such a test by using a common form of environmental organization: watershed groups. We find their increased presence resulted in lower dissolved oxygen deficiency and higher proportions of swimmable and fishable water bodies. Increased donations to and expenditures by the groups also improved water quality. Thus, private groups likely played a role in mitigating environmental problems. Overall, our results indicate private provision of a public good by nonprofit organizations.

Heaton, Paul and Eric Helland. “Does it Matter Who Pays for Auto Injuries?” The Journal of Risk and Insurance, vol. 86, issue 4, 2019, pp. 947-972.

Abstract: In many states, auto insurers rather than health insurers pay for a substantial fraction of the medical care following auto crashes. We examine whether payer identity affects the care received by auto injury patients. A 2003 Colorado reform shifted a large fraction of auto injury patients from coverage through auto insurers to the traditional health insurance system. Despite negligible changes in auto injury characteristics during this period, treatment supply increased following the reform. Procedure use rose by 5–10 percent and billed charges rose by 5 percent. These changes reflect an increase in resources devoted to treatment, yet do not improve mortality.


External Grant: William and Flora Hewlett Foundation, Grant for Support of the Public Policy Lab, 2019-2022, $250,000.

Bernstein, Asaf, Eric Hughson, and Marc Weidenmier. "Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse.” Journal of Political Economy, vol. 127, no. 2, 2019, pp. 689-729.

Abstract: We examine the effect of the establishment of the New York Stock Exchange (NYSE) clearinghouse in 1892 on counterparty risk using a novel historical experiment. During this period, the NYSE stocks were dual-listed on the Consolidated Stock Exchange (CSE), which already had a clearinghouse. Using identical securities on the CSE as a control, we find that the introduction of multilateral net settlement through a clearinghouse substantially reduced volatility of NYSE returns caused by settlement risk and increased asset values. Our results indicate that a clearinghouse can improve market stability and value through a reduction in network contagion and counterparty risk.

Lincoln, William F., Andrew H. McCallum, and Michael Siemer. “The Great Recession and a Missing Generation of Exporters.” IMF Economic Review, vol. 67, issue 4, 2019, pp. 703-745.

Abstract: We study the impact of foreign market entry and exit by firms on the trajectory of U.S. exports during and after the Great Recession. Using confidential microdata from the U.S. Census Bureau, we find that incumbent exporters were primarily responsible for the changes in aggregate foreign sales during these years. While there was a substantial decline in the number of firms that sold abroad in the midst of the crisis, new exporters during the recovery compensated for this by having larger foreign sales. Thus, while changes in foreign market participation drove substantial shifts in the variety of U.S. goods that were exported, overall they were less important for the trajectory of total foreign sales over time.

Madison, Florian. “Frictional Asset Reallocation Under Adverse Selection.” Journal of Economic Dynamics and Control, vol. 100, 2019, pp. 115-130.

Abstract: This paper studies asset reallocation in over-the-counter markets subject to search, bargaining, and information frictions, and discusses their implications for optimal monetary policy. The results show that inefficiencies arise from trade under private information, resulting in reduced trading volume and consumption. Conditional on search frictions in the over-the-counter market, information frictions can be both welfare-decreasing and welfare-increasing, addressing the pecuniary externality arising from the portfolio choice of liquid and illiquid assets. Optimality is guaranteed under the Friedman rule. Away from the Friedman rule, efficiency can be restored through open market operations, exchanging information-sensitive assets for risk-free bonds, as conducted by the Federal Reserve in response to the global financial crisis.

Page, Marianne, Jessamyn Schaller, and David Simon. “The Effects of Aggregate and Gender-Specific Labor Demand Shocks on Child Health.The Journal of Human Resources, vol. 54, no. 1, 2019, pp. 37-78.

Abstract: We estimate the relationship between local labor market opportunities and child health using state unemployment rates and demand-induced changes in mothers’ and fathers’ employment opportunities. In contrast with studies of adult health, we find little evidence that aggregate economic conditions are correlated contemporaneously with children’s health. However, we find important patterns by gender. In particular, improvements in women’s employment opportunities are consistently associated with worse child health, while better labor market conditions for men have positive effects. These patterns suggest that both family income and maternal time are important inputs to child health.


Schaller, Jessamyn, Lisa Schulkind, and Teny Shapiro. “Disease Outbreaks, Healthcare Utilization, and On-Time Immunization in the First Year of Life.” Journal of Health Economics, vol. 67, 2019, 102212.

Abstract: This paper examines the determinants of parental decisions about infant immunization. Using the exact timing of vaccination relative to birth, we estimate the effects of local pertussis outbreaks occurring in utero and during the first two months of life on the likelihood of on-time initial immunization for pertussis and other diseases. We find that parents respond to changes in perceived disease risk: pertussis outbreaks within a state increase the rate of on-time receipt of the pertussis vaccine at two months of age, particularly among low-socioeconomic status (SES) subgroups. In addition, we find that pertussis outbreaks increase the likelihood of immunization against other vaccine-preventable diseases. Spillover effects in low-SES subgroups are as large as direct effects and are present only for vaccines given during the same visit as the pertussis vaccine, which suggests that provider contact may be a key factor in infant vaccination decisions in poor families.


Schaller, Jessamyn and Mariana Zerpa. “Short-Run Effects of Parental Job Loss on Child Health.” American Journal of Health Economics, vol. 5, issue 1, 2019, pp. 8-41.

Abstract: Recent research suggests that parental job loss has negative effects on children's outcomes, including their academic achievement and long-run educational and labor market outcomes. In this paper we turn our attention to the effects of parental job loss on children's health. We combine health data from 16 waves of the Medical Expenditure Panel Survey, which allows us to use a fixed-effects specification and still have a large sample of parental job displacements. We find that paternal job loss is harmful to children's physical and mental health, particularly among children in low–socioeconomic status families. By contrast, we find that maternal job loss does not have detrimental effects on child health. Increases in public health insurance coverage compensate for close to half of the loss in private coverage that follows parental displacement, and we find no significant changes in medical-care utilization.

Smith, Janet Kiholm and Richard L. Smith. Entrepreneurial Finance: Venture Capital, Deal Structure, and Valuation, Second Edition. Stanford University Press, 2019.

Abstract: Entrepreneurial Finance: Venture Capital, Deal Structure, & Valuation, Second Edition illustrates how the theory and methods of finance and economics can be used to guide strategic decision-making. This text prepares readers for a variety of situations that confront stakeholders in the rapidly evolving fields of entrepreneurial finance and venture capital, outlining ways to think from the investor’s and entrepreneur’s perspectives. Readers will find a unique and direct focus on value creation as the objective of each strategic and final choice. The authors specifically address the influences of risk and uncertainty on new venture success and investment performance, devoting substantial attention to methods of financial modeling and contract design. Finally, they provide a comprehensive survey of approaches to new venture valuation, with an emphasis on applications.

Anbil, Sriya and Angela Vossmeyer. “The Quality of Banks at Stigmatized Lending Facilities.” AEA Papers and Proceedings, vol. 109, 2019, pp. 506-510.

Abstract: When the names of banks that borrow from an emergency lending facility are inadvertently leaked, the facility may become stigmatized. We examine how the quality of the borrowing pool of banks changed when stigma was unexpectedly introduced at a once confidential lending facility during the Great Depression. This facility experienced a compositional shift in the quality of its borrowing pool, where only weaker banks that maintained smaller liquidity buffers used the facility, while an alternative confidential facility attracted stronger banks. Our results shed light on how the design of lending facilities may attract certain types of banks.


Rahman, Mohammad Arshad, and Angela Vossmeyer. “Estimation and Applications of Quantile Regression for Binary Longitudinal Data.” Advances in Econometrics, vol. 40B, 2019, pp. 157-191.

Abstract: This chapter develops a framework for quantile regression in binary longitudinal data settings. A novel Markov chain Monte Carlo (MCMC) method is designed to fit the model and its computational efficiency is demonstrated in a simulation study. The proposed approach is flexible in that it can account for common and individual-specific parameters, as well as multivariate heterogeneity associated with several covariates. The methodology is applied to study female labor force participation and home ownership in the United States. The results offer new insights at the various quantiles, which are of interest to policymakers and researchers alike


Vossmeyer, Angela. “Analysis of Stigma and Bank Credit Provision.” Journal of Money, Credit and Banking, vol. 51, issue 1, 2019, pp. 163-194.

Abstract: Bank rescue programs are designed to provide assistance to struggling financial intermediaries during financial crises. A complicating factor is that participating banks are often stigmatized by accepting assistance from the government. This paper investigates stigma in two ways: (i) it examines how stigma changes a bank's decision to seek assistance from the rescue program, and (ii) it analyzes how stigma affects a bank's ability to operate as a financial intermediary using a joint model for bank‐level application, approval, and lending decisions. The empirical results indicate that stigma hinders the objectives of the rescue program and slows the production of credit.

Burdekin, Richard C.K., and Thomas D. Willett. Editors’ Introduction to “China’s Global Interdependence: International Reserves, Capital Inflows, Financial Market Transmission, and Exchange Rate Determination.” The Chinese Economy, vol. 52, issue 4, 2019, pp. 295-299.


Efremidze, Levan, Ozan Sula, and Thomas Willett. “Capital Flow Reversals, Sudden Stops, and International Reserve Adequacy: Further Evidence from the Global Financial Crisis.” International Journal of Financial Research, vol. 10, no. 1, 2019, pp. 52-67.

Abstract: Using a dataset of 39 emerging markets, we examined the role of international reserves during currency and capital flow crises. Our analysis revealed that higher levels of reserves are associated with lower intensity crises where intensity is measured by the magnitude of the change in exchange market pressure (EMP) or size of capital flow reversals. We also find evidence for the cushioning effects of reserves during the crises. When used against capital flow reversals, reserves can help mitigate the negative output effects of the crisis. Finally, our findings show that reserve adequacy should be evaluated based on the nature of the potential crisis. Policy makers may prefer to refrain from using reserves if export competitiveness is more important than potential balance sheet effects of currency depreciation.


Pentecost, Eric J., Wenti Du, Graham Bird, and Thomas D. Willett. “Contagion from the Crises in the Euro-Zone: Where, When and Why?The European Journal of Finance, vol. 25, issue 14, 2019, pp. 1309-1327.

Abstract: The prevalence of contagion between the Euro-zone countries and other European countries since the Greek crisis of 2009 is now well – known, but the factors that influence the pattern of this contagion are not well understood. We investigate this question both within Europe and beyond to the USA and Japan, using an asymmetric M-GARCH model that focuses on extreme values of the risk premia on government bonds. We compare these extreme values with news of major events and find that they are highly correlated. We find a different pattern of contagion emanating from Ireland compared to the other crisis countries of Greece, Italy, Portugal and Spain. We also examine the factors that have made countries vulnerable to contagion and find that financial factors are more important than trade ones. However, intra-Euro-zone trade has also been a significant factor between the major Euro-zone economies. There is little evidence that global factors affect contagion between EU member states, but some evidence that nominal exchange rate movements offer a degree of insulation from contagion for the non-Euro zone states.


Wang, Yanzhen, Thomas D. Willett, and Xiumin Li. “International Capital Flows and the Independence of China’s Monetary Policy.” The Chinese Economy, vol. 52, issue 4, 2019, pp. 300-317.

Abstract: This article estimates the quantitative relationship between international capital flows and China's monetary policy. A major innovation over most previous studies is taking into consideration the effects of changes in the reserve requirement ratio. Employing the method of the Federal Reserve Bank of St. Louis, this article translates the change in the reserve requirement ratio into the change in the monetary base, while the money multiplier remains unchanged. The change in the reserve requirement ratio is combined with the other monetary policies that directly affect the monetary base to construct an integrated measure of monetary policy. We then construct a modified offset and sterilization coefficients model. We find that the failure to take reserve requirement ratio changes into account leads to an underestimation of both the degree of sterilization and of capital mobility as measured by the offset coefficients. The results show that China's capital flows are quite limited, while China's monetary policy is able to almost completely sterilize monetary base fluctuations caused by international capital flows. Thus, we find that China has been able to maintain a great deal of domestic monetary policy independence despite a limited degree of exchange rate flexibility.


Chun, Albert Lee, Ethan Namvar, Xiaoxia Ye, and Fan Yu. “Modeling Municipal Yields With (and Without) Bond Insurance.” Management Science, vol. 65, no. 8, 2019, pp. 3694-3713.

Abstract: We develop an intensity-based model of municipal yields, making simultaneous use of the CDS premiums of the insurers and both insured and uninsured municipal bond transactions. We estimate the model individually for 61 municipal issuers by exploiting the dramatic decline in credit quality of the bond insurers from July 2007 to June 2008, and decompose the municipal yield spread based on the estimated parameters. The decomposition reveals a dominant role of the liquidity component as well as interactions between liquidity and default similar to those modeled by Chen et al. (2018) for corporate bonds. Towards the end of the sample period, our model also reproduces the "yield inversion" phenomenon documented in the literature.


Marra, Miriam, Fan Yu, and Lu Zhu. “The Impact of Trade Reporting and Central Clearing on CDS Price Informativeness.” Journal of Financial Stability, vol. 43, 2019, pp. 130-145.

Abstract: We find that the magnitude of unique credit default swap (CDS) market information (constructed to be orthogonal to contemporaneous and lagged stock returns) declined after recent reforms that increased the level of post-trade regulatory and market transparency for CDS. Around the same reforms, the ability of this CDS-unique information to predict future stock returns decreased. These results suggest the CDS market has become less of a "hidden" trading venue for informed investors after central clearing and trade reporting started.