Friday, 27 February 2015

2015-011: Why Do We Need Both Liquidity Regulations and a Lender of Last Resort? A Perspective from Federal Reserve Lending during the 2007-09 U.S. Financial Crisis

Otmane El Rhazi, Mark Carlson, Burcu Duygan-Bump, and William Nelson. During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks. Full Text



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Otmane El Rhazi

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Wednesday, 25 February 2015

IFDP2015-1130: Risk Choices and Compensation Design

Otmane El Rhazi, Mark Carey and Bo Sun We analyze the impact of bad-tail risks on managerial pay functions, especially the decision to pay managers in stock or in options. In contrast to conventional wisdom, we find that options are often a superior vehicle for limiting managerial incentives to take bad-tail risks while providing incentives to exert effort. Arrangements similar to collar options are able to incent the desired project choice in wider range of circumstances than call options or stock. However, information requirements appear high. We briefly explore alternatives with features similar to maluses and clawbacks, which are a bit like weakening the limited liability of managers. 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.

IFDP2015-1129: Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms

Otmane El Rhazi, Robert Cull, Wei Li, Bo Sun, and Lixin Colin Xu We examine the role of firms’ government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the ‘grabbing-the-big-and-letting-go-the-small’ privatization program in China. Our empirical results suggest that government connections play an important role in explaining Chinese firms’ financing conditions, and provide further evidence on the nature of the misallocation of credit by China’s dominant state-owned banks. 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.

IFDP2015-1128: A Model of Anomaly Discovery

Otmane El Rhazi, Qi Liu, Lei Lu, Bo Sun, and Hongjun Yan. We analyze a model of anomaly discovery. Consistent with existing evidence, we show that the discovery of an anomaly reduces its magnitude and increases its correlation with existing anomalies. One new prediction is that the discovery of an anomaly reduces the correlation between deciles 1 and 10 for that anomaly. Using data for 12 well-known anomalies, we find strong evidence consistent with this prediction. Moreover, the correlation between deciles 1 and 10 of an anomaly becomes correlated with the aggregate hedge-fund wealth volatility after the anomaly is discovered. Our model also sheds light on how to distinguish between risk-and mispricing-based anomalies. Full Text



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Otmane El Rhazi

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Thursday, 19 February 2015

2015-010: Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations

Otmane El Rhazi, Josh Frost, Lorie Logan, Antoine Martin, Patrick McCabe, Fabio Natalucci, and Julie Remache. We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including impacts on the structure of short-term funding markets and financial stability. We also investigate design features of an ON RRP facility that could mitigate secondary effects deemed undesirable. Finally, we discuss tradeoffs that policymakers may face in designing an ON RRP f acility, as they seek to balance the objectives of setting an effective floor on money market rates during the normalization process and limiting any adverse secondary effects. Full Text



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Otmane El Rhazi

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2015-009: The Evolution of Retirement Wealth

Otmane El Rhazi, Sebastian Devlin-Foltz, Alice M. Henriques, and John Sabelhaus. Is the current mix of tax preferences for employer-sponsored pensions and individual retirement saving in the U.S. delivering the best possible retirement-preparedness across and within generations? Using data from the triennial Survey of Consumer Finances for 1989 through 2013, cohort-based analysis of life-cycle trajectories shows that (1) overall retirement plan participation was relatively stable or even rising through 2007, though participation fell noticeably in the wake of the Great Recession and has remained lower, (2) participation is strongly correlated with income, and the shift in the type of pension coverage occurred within—not just across—income groups, (3) relative to previous cohorts and a counterfactual lifecycle benchmark, the recent decline in retirement plan participation and DC retirement account balance-to-income ratios is concentrated among younger families and lower-income families. Full Text



Regards,

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.

2015-008: Mode effects in mixed-mode economic surveys: Insights from a randomized experiment

Otmane El Rhazi, Joanne W. Hsu and Brooke H. McFall. Web-based surveys have become increasingly common in economic, marketing, and other social science research. However, questions exist about the comparability of data gathered using a web interview and data gathered using more traditional survey modes, particularly for surveys on household economic behavior. Differences between data from different survey modes may arise through two different mechanisms: sample selectivity due to (lack of) web access and mode effects. This study leverages the randomized experimental design of the mixed-mode Cognitive Economics Study to examine mode effects separately from sample selectivity issues. In particular, we examine differences in survey response rates, item nonresponse, and data quality due to mode effects. Our results indicate that, in contrast to mail mode, web mode surveys (1) attain higher response rates among web users, (2) display lower item nonresponse, and (3) elicit more precise values for financial measures. We conclude that, for web-using populations, web mode surveys appear to result in more usable data than mail mode surveys, and these data appear to be of high quality. However, we also find no systematic mode differences in the categorical distributions of responses to items, providing no evidence that pooling data from the two modes is inadvisable. Full Text



Regards,

Otmane El Rhazi

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Equity Trading

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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.