Friday, 22 May 2015

2015-035: Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News

Otmane El Rhazi, Lena Dräger, Michael J. Lamla, and Damjan Pfajfar. In this paper we analyze whether central bank communication can facilitate the understanding of key economic concepts. Using survey data for consumers and professionals, we calculate how many of them have expectations consistent with the Fisher Equation, the Taylor rule and the Phillips curve and test, by accounting for three different communication channels, whether central banks can influence those. A substantial share of participants has expectations consistent with the Fisher equation, followed by the Taylor rule and the Phillips curve. We show that having theory-consistent expectations is beneficial, as it improves the forecast accuracy. Furthermore, consistency is time varying. Exploring this time variation, we provide evidence that central bank communication as well as news on monetary policy can facilitate the understanding of those concepts and thereby improve the efficacy of monetary policy . Full Text

Regards,
Otmane El Rhazi
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2015-034: On Default and Uniqueness of Monetary Equilibria

Otmane El Rhazi, Li Lin, Dimitrios P. Tsomocos, and Alexandros P. Vardoulakis. We examine the role that credit risk in the central bank's monetary operations plays in the determination of the equilibrium price level and allocations. Our model features trade in fiat money, real assets and a monetary authority which injects money into the economy through short-term and long-term loans to agents. Short-term loans are riskless, but long-term loans are collateralized by a portfolio of real assets and are subject to credit risk. The private monetary wealth of individuals is zero, i.e., there is no outside money. When there is no default in equilibrium, there is indeterminacy. Positive default in every state of the world on some long-term loan endogenously creates positive liquid wealth that supports positive interest rates and resolves the aforementioned indeterminacy. Hence, a non-Ricardian policy across loan markets can determine the equilibrium allocations while it allow s the central bank to earn profits from seigniorage in order to compensate for any losses. Full Text

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Otmane El Rhazi
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ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.

2015-033: Ambiguity in Securitization Markets

Otmane El Rhazi, Alyssa G. Anderson. During the financial crisis of 2008, origination and trading in asset-backed securities markets dropped dramatically. I present a model with ambiguity averse investors to explain how such a market freeze could occur and to investigate how ambiguity affects origination and securitization decisions. The model captures many features of the crisis, including market freezes and fire sales, as well as the timing and duration of the freeze. The presence of ambiguity also reduces real economic activity. Lastly, I consider the differing implications of ambiguity and risk, as well as the role of policies that reduce ambiguity during market freezes. Full Text

Regards,
Otmane El Rhazi
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Equity Trading
Text/Mobile, +44 7414 782 320


RISK DISCLOSURE STATEMENT
ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.

Thursday, 21 May 2015

SEC Announces Charges Against Investment Firm and Two Executives Accused of Defrauding Police and Firefighter Pension Funds

Otmane El Rhazi,

The Securities and Exchange Commission today announced fraud charges against an Atlanta-based investment advisory firm and two executives accused of selling unsuitable investments to pension funds for the city’s police and firefighters, transit workers, and other employees.

The SEC’s Enforcement Division alleges that Gray Financial Group, its founder and president Laurence O. Gray, and its co-CEO Robert C. Hubbard IV breached their fiduciary duty by steering these public pension fund clients to invest in an alternative investment fund offered by the firm despite knowing the investments did not comply with state law.  Georgia law allows most public pension funds in the state to purchase alternative investment funds, but the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet.

In an order instituting an administrative proceeding, the SEC’s Enforcement Division alleges that Gray Financial Group has collected more than $1.7 million in fees from the pension fund clients as a result of the improper investments.

“As alleged in our order, Gray Financial Group breached a fiduciary duty to public pension fund clients by recommending investments it knew did not comply with legal requirements,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “To make matters worse, the firm profited handsomely from this alleged failure.” 

According to the order, Gray Financial Group recommended investments in its fund called GrayCo Alternative Partners II LP to the city of Atlanta’s Firefighters’ Pension Fund, General Employees’ Pension Fund, and Police Officers’ Pension Fund as well as the MARTA/ATU Local 732 Employees Retirement Plan.  The SEC’s Enforcement Division alleges the investments violated Georgia law in the following ways:

  • A Georgia public pension fund’s investment is limited to no more than 20 percent of the capital in an alternative fund.  Two of the pension funds’ investments surpassed that limit.
  • The law requires at least four other investors in an alternative fund at the time of a Georgia public pension fund’s investment.  There were fewer than four other investors in GrayCo Alternative Partners II L.P. at the time of these investments.
  • There must be at least $100 million in assets in an alternative fund at the time a Georgia public pension fund invests.  GrayCo Alternative Partners II LP has never reached that amount.

The SEC’s Enforcement Division further alleges that Gray Financial Group and Gray made material misrepresentations to at least one client when asked specifically about the investments’ compliance with the law.  They also misrepresented the number and identity of prior investors in the fund.

“We allege that Gray Financial Group and its senior officials put their own interests ahead of their clients, and Gray deliberately misrepresented that the recommended investments were permissible under Georgia law,” said Walter Jospin, Director of the SEC’s Atlanta Regional Office.  “Public pension funds and their beneficiaries deserve better from their advisers.”

The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s Enforcement Division alleges that Gray Financial Group and Gray violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 as well as Rule 10b-5, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 as well as Rule 206(4)-8.  Hubbard is charged with violating Section 17(a)(1) and (3) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5(a) and (c) as well as aiding, abetting and causing violations by Gray Financial Group and Gray. 

The SEC’s investigation, which is continuing, has been conducted by Michael Adler and supervised by Peter Diskin of the Atlanta office.  They work in the Enforcement Division’s nationwide Municipal Securities and Public Pensions Unit, and they were assisted by the following examiners in the Atlanta office: Gina Bailey, Lisa Cimino, Donna Esau, Eugene Mooring, Deloris Rankins, and Debra Smith.  The Enforcement Division’s litigation will be led by Kristin Wilhelm of the Atlanta office.

Full Text

Regards,
Otmane El Rhazi
Press Releases
Equity Trading
Text/Mobile, +44 7414 782 320


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ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.