Journal of Economics and Finance

In this paper we examine the extent to which personal consumptions are sheltered from state-specific economic shocks because of banks’ mortgage loan securitizations. We posit that securitization contributes to personal consumption smoothening due to securitizations’ positive effect on banks’ credit supply, which reduces consumers’ consumption constraints during economic shocks. Using data for U. S. banks’ mortgage loan securitizations from 1989 to 2008, we show that personal consumption smoothening is positively related to securitization. The finding of a significant relationship between loan securitizations and consumption smoothening contributes to the continuing debate on the role of financial innovation in real economy.

We examine the relevance of the pecking order theory of capital structure among emerging market firms in the light of their debt capacity concerns. We consider the financing choices of all public listed Indian firms during 1992 to 2011 for the empirical analysis. The estimated annual pecking order coefficients range from 0.23 to 0.56, rejecting the argument that sample firms follow the pecking order while making their financing choices. We find that the pecking order theory fares poorly among firms that face higher asymmetric information costs. It is found to be performing relatively better among firms without debt capacity concerns. We also report an improvement in the pecking order coefficient once the concave nature of the relationship between debt issuances and financial deficit is considered. However, the pecking order approach when nested in the conventional leverage regression model, adds abysmally small amount of explanatory power. Overall, we argue that the pecking order theory fails to explain sample firms’ financing choices.

We examine the downstream effect of cash holdings along the supply chain. Using a supplier-customer sample from 1989 to 2009, we find evidence that a supplier’s large cash holdings increase its customers’ demand for cash reserves, suggesting that the negative risk spillover effect dominates the positive trade credit effect from a supplier to its customers. This finding is robust to alternative specifications of Two-Stage Least Squares, and the positive downstream impact on cash holdings is amplified during the financial crisis. We also find that the effect is stronger under the condition of a more substantial risk spillover effect or a weaker trade-credit effect.

This paper compares three new methods of estimating the asset returns covariance and evaluates their performances with the conventional covariance estimation methods. We find that taking a simple average of the historical sample covariance matrix and the covariance matrix estimated from the single-index model provides the best overall performance among all competing methods. In addition, we find that commonly used assessment criteria provide systematically different rankings, which explains the preferences to different types of estimation methods in the existing literature. We believe the difference between our results and those of previous studies may be partly due to the differences in the ratio of the time series observations to the number of stocks in the samples that have been used in different studies.

We study the effect of monetary policy and social capital on the efficiency of corporate investments among the public US firms. We use social capital of CEOs at the peer- and non-peer levels to build proxies for the CEO networking and the effective federal funds rate and the spread between the rate and the 10-years US Treasury note as our proxies for monetary policy. We capture investment inefficiency from the residuals of Richardson (2006)‘s investment efficiency model. Our results show that both innovations in monetary policy and social capital of CEOs influence corporate investment inefficiency significantly. Stronger social ties amongst CEOs and their peers lead to greater inefficiency in investments while stronger social ties between CEOs and their non-peer directors lead to lower inefficiency in investments. The results strengthen our belief on social capital’s spillover influence on investment decision at the firm level. Our evidence indicates that CEO social ties function as another channel that affects their investment decision and that the influence of social ties also depends on the role of the other parties CEOs are affiliated with—whether they have titles of CEOs or titles of directors.

A slight modification of the standard GARCH equation results in a good modeling of historical volatility. Using this generated GARCH volatility together with the inputs: spot price divided by strike, time to maturity, and interest rate, a generated Neural Network results in significantly better pricing performance than the Black Scholes model. A single Neural Network for each individual high-tech stock is able to adapt to the market inherent volatility distortion. A single Network for all tested high-tech stocks also results in significantly better pricing performance than the Black-Scholes model.

This study examines two outflows that affect the labor supply of Registered Nurses (RNs), nurses leaving the profession to pursue a non-nursing occupation and employed nurses withdrawing from the labor force. Using pooled CPS data for 1980–90, a probit model is specified to estimate economic influences on the labor-force-withdrawal decisions of RNs. Evaluating the estimated probit function for different sets of RN characteristics yields different probability estimates of labor-force withdrawal. The results suggest that, although relatively few RNs leave the nursing profession to seek non-nursing occupations, a significant number withdraw, at least temporarily, from the labor force. The wage rate, other family income, presence of children, and full-time/part-time work status have a significant influence on the withdrawal decision.

The standard neoclassical life-cycle model predicts that individual consumption should either increase, remain constant or fall monotonically depending on whether the market rate of return on savings is greater than, equal to or less than the discount rate. However, empirical evidence suggests that even after controlling for economic growth and family size, household consumption exhibits a robust hump at around age 45–55, with the ratio of peak consumption to consumption when entering the workforce greater than 1.1. This paper extends the “overconfidence” explanation (Caliendo and Huang, J. Macroecon 30(4):1347–1369, 2008) of this macroeconomic puzzle to a calibrated general equilibrium environment. The main finding is that although it is possible to identify parameter values under which overconfidence alone generates life-cycle consumption profiles and macro-indicators consistent with U.S. experience, quite extreme assumptions about both the magnitude and distribution of overconfidence in the population are generally required to obtain them.

This study investigates whether specific types of institutional futures traders have varying impacts on the quality of the underlying stock market. An assessment of the traders’ effect on market-level price efficiency and excess volatility reveals that futures trading by foreign institutions diminishes the quality of the stock market. On the other hand, futures trading by dealers and investment trusts marginally increases quality, with dealers improving intraday price efficiency and investment trusts reducing excess volatility. This study provides evidence of negative information spillovers driven by foreign investors, thus supporting Stein’s (1987) and Biais and Hillion’s (1994) argument.