This paper examines the market for catastrophe event risk – i.e., financial claims that are linked to losses associated with natural hazards, such as hurricanes and earthquakes. Risk management theory suggests protection by insurers and other corporations against the largest cat events is most valuable. However, most insurers purchase relatively little cat reinsurance against large events, and premiums are high relative to expected losses. To understand why the theory fails, we examine transactions that look to capital markets, rather than traditional reinsurance markets, for risk-bearing capacity. We develop eight theoretical explanations and find the most compelling to be supply restrictions associated with capital market imperfections and market power exerted by traditional reinsurers.

This paper develops and tests procedures for ranking the performance of security analysts based on the timeliness of their earnings forecasts, the abnormal trading volume associated with these forecasts, and forecast accuracy. Our framework provides an objective assessment of analyst quality that differs from the standard approach, which uses survey evidence to rate analysts. We find that lead analysts identified by our measure of forecast timeliness have a greater impact on stock prices than follower analysts. Further, we find that performance rankings based on forecast timeliness are more informative than rankings based on abnormal trading volume and forecast accuracy. We also present evidence that analyst's forecast revisions are correlated with recent stock price performance, suggesting that security analysts use publicly available information to revise their earnings forecasts.

In 1993 and 1994, FreeportMcMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capacity in Indonesia. The pricing of these securities reflected their enhanced credit quality, which arose from the positive correlation between the value of the firm and the value of the securities. This feature of the securities effectively bundles a gold hedge with financing. A bundled hedge avoids wealth transfers to senior bondholders, since junior bondholders can effectively net their bond-related claims on the firm against their hedge-related liability to the firm. Such securities cannot be replicated by conventional hedging strategies, and they also mitigate the asset substitution problem.

This paper explores daily international portfolio flows into and out of 44 countries from 1994 through 1998. We find several facts concerning the behavior of flows and their relationship with equity returns. First, we detect regional flow factors that have increased in importance through time. Second, the flows appear to be stationary, but far more persistent than returns. Third, flows are strongly influenced by past returns, a finding consistent with positive feedback trading by international investors. Fourth, inflows have positive forecasting power for future equity returns, and this power is statistically significant in emerging markets. Fifth, the sensitivity of local stock prices to foreign inflows is positive and large. Sixth, prices seem consistent with flow persistence, in that transitory inflows impact future returns negatively.

This paper studies the costs of applying single-factor exercise strategies to American swap options when the term structure is actually driven by multiple factors. Using a multifactor string market model of the term structure, we find that even when single-factor models are recalibrated to match the market at every exercise date, the exercise strategies they imply can be suboptimal. Based on estimates of notional amounts outstanding, the total present value costs of following single-factor strategies could be several billion dollars. These results illustrate the importance of using well-specified term structure models.