Social Capital and Financial Development after Economic Shocks: Evidence from Italy after the Financial Crisis of 2007-2009
By Sujay Rao & Ethan Lampert
Like traditional forms of capital, social capital – an intangible measure of an individual’s social networks, trust in institutions, and participation in civic life – has implications for personal and financial behavior. Individuals from educated, well established backgrounds with fruitful family ties may be more amenable to opening new lines of credit or investing in stock markets due to their trust in and connectedness with society. But what happens after a major economic shock, such as the financial crisis of 2008? Using Italy as a case study and panel data from the Survey of Household Income and Wealth, we find that social capital has significant effects on an individual’s credit card usage, informal borrowing, and choice to invest in securities.
Advisors: Professor Grace Kim, Professor Michelle Connolly, Professor Giovanni Zanalda | JEL Codes: G01, G2, O1, D1, D14
Multi-Horizon Forecast Optimality Based on Related Forecast Errors
By Christopher G. MacGibbon
This thesis develops a new Multi-Horizon Moment Conditions test for evaluating multi-horizon forecast optimality. The test is based on the variances, covariances and autocovariances of optimal forecast errors that should have a non-zero relationship for multi-horizon forecasts. A simulation study is conducted to determine the test’s size and power properties. Also, the effects of combining the Multi-Horizon Moment Conditions test and the well-known Mincer-Zarnowitz and zero autocorrelation tests into one forecast optimality test are examined. Lastly, an empirical study evaluating forecast optimality for four multi-horizon forecasts made by the Survey of Professional Forecasters is included.
Advisors: Andrew Patton, Grace Kim and Kent Kimbrough | JEL Codes: G1, G17, G00
The Investment Cost of Currency Crises in Emerging Markets: An Empirical Treatment from 1994-2015
By Eric Ramoutar
Currency crises – large and sudden depreciations in the value of a country’s currency – have been an unfortunate by-product of increased financial openness over the last half century. This study extends the already vast literature on the impact of currency crises by estimating how currency crises affect domestic investment in emerging markets. Specifically, the study uses panel data with fixed effects and various robust standard errors as well as a generalized method of moments estimator to investigate the impact of currency crises on domestic investment in a sample of 14 countries that experienced currency crises between 1994 and 2015 and 10 that did not. The results of the analysis initially indicate that, after controlling for a host of macroeconomic fundamentals, currency crises contribute significantly to dampened domestic investment. Ultimately, after controlling for banking crises, the study concludes that relatively severe, but not all, currency crises have a significant depressing effect on investment. The results further indicate that all currency crises should not be treated equally; those involving exceptionally large depreciations lead to an even greater decline in domestic investment.
Advisor: Cosmin Ilut, Kent Kimbrough, Lori Leachman | JEL Codes: E4, F3, F4, E42, F31, F32, F41, G01
Word-of-Mouth Effects in the Holdings and Trading Activities among Canadian Mutual Fund Managers
By Chang Liu
The study tests the word-of-mouth effects among mutual fund managers in Canada with methodology based on a previous study (Hong et al., 2005), with multiple modifications to it such as the method to locate the mutual fund managers. The results confirm the original findings yet with unexpected outcomes. This study demonstrates smaller word-of-mouth effects compared to the original study and reverse word-of-mouth effects in the largest financial city of Canada. The possible interpretations are further discussed in detail, among which a dynamic model of word-of-mouths effects and product differentiation is introduced. The study also discusses the market structure’s possible implications on such dynamic models.
Advisor: Jia Li | JEL Codes: G02, G15, G20, G21 | Tagged: Word-of-Mouth, Product Differentiation, Herding Behavior
Understanding SME Finance: Determinants of Relationship Lending
By Sean Suk Hyun Choi
Much of the existing literature in small and medium-sized enterprise (SME) finance surveys the impact of borrower and lender characteristics on firms’ credit availability, and it has already been established that there is a link between strong firm-bank relationship and higher level of credit availability. In this paper, I focus on what determines the strength of relationship, measured by length and exclusivity. In particular, I was able to build an original metric to gauge the strength of relationship using the inverse value of the number of financial institution that a firm deals with. Using a set of regressions, I confirm the existing theories that size of the firm and type of ownership matters. Small firms and sole proprietorships tend to have longer and more exclusive relationships, which implies their reliance on relationship lending. Firm owner characteristics are shown to be somewhat important, in that it serves as proxies for a given firm’s creditworthiness.
Advisor: Grace Kim, Michelle Connolly | JEL Codes: G02, G21, G30, L14 | Tagged: Asymmetrical information, Credit Rationing, Relationship Lending, SME Finance
The Hidden Costs of Central Bank Borrowing
By Shane Hunt
This paper explores a previously overlooked unintended consequence of a private bank accepting Central Bank loans as a lender of last resort. Applying the basic Markowitz Security Model, I explore the potential effect of a private bank accepting a Central Bank loan as a signal of increased risk of investment in that private bank to the private markets. Finding a possibility that private investors will charge a penalty risk premium for having sought Central Bank financing, I consider the effects of this premium in three different game theoretic scenarios, each with a different set of assumptions that could apply in different Economic settings. Depending on the specific environment, possible effects include dependence on Central Bank financing, bankruptcy, or an eventual return to the private financial markets for future funding.
Advisor: Marjorie McElroy, Nir Jaimovich | JEL Codes: E58, G02, G21, G28, G32 | Tagged: Banking, Central Banking, Finance
Crisis Period Forecast Evaluation of the DCC-GARCH Model
By Yang Ding
The goal of this paper is to investigate the forecasting ability of the Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity (DCC-GARCH). We estimate the DCC’s forecasting ability relative to unconditional volatility in three equity-based crashes: the S&L Crisis, the Dot-Com Boom/Crash, and the recent Credit Crisis. The assets we use are the S&P 500 index, 10-Year US Treasury bonds, Moody’s A Industrial bonds, and the Dollar/Yen exchange rate. Our results suggest that the choice of asset pair may be a determining factor in the forecasting ability of the DCC-GARCH model.
Advisor: Aino Levonmaa, Emma Rasiel | JEL Codes: G01
Extreme Value Theory with High-Frequency Financial Data
By Abhinay Sawant
Extreme Value Theory (EVT) is one of the most commonly applied models in financial risk management for estimating the Value at Risk of a portfolio. However, the EVT model is practical for estimation only when data is independent and identically distributed, which usually does not characterize financial returns data. This paper aims to modify this model by using high-frequency data to standardize financial returns by their realized volatility and then tests the modified model with recent equity data. The results from the paper show an improvement in the EVT model when forward volatility can be properly forecast.
Advisor: George Tauchen | JEL Codes: G00
Could the Kaminsky-Reinhart Model Have Predicted the 2002 Uruguayan Currency and Banking Crises?
by Steven R. Vickers
Abstract
Because currency and banking crises cause substantial and prolonged disruptions
to an economy, economists have long sought ways to predict these events in advance.
One recent theory advanced is the “leading indicators” approach of Kaminsky (1998) and
Kaminsky and Reinhart (1999). Kaminsky (1998) presents four separate composite
indicators, and Kaminsky and Reinhart (1999) refines the model. This paper provides one
test of this theory by analyzing the currency and banking crises that arose in July 2002 in
Uruguay. This study tests the efficacy of these indicators by analyzing the behavior of
the indicators in the months directly preceding the Uruguayan crises. In general, three
indicators performed reasonably well, while one had exceptional predictive power.
Professor Stephanie Schmitt-Grohé, Faculty Advisor
JEL Codes: E47, G01, G15,
