In this paper, we examine the links among banking supervision, the volatility of financial flows, and economic growth. In particular, we explore whether banking regulation mitigates the adverse effects of capital flows volatility on economic growth. Using cross-country data over four decades, we find that banking supervision promotes economic growth by dampening the negative impact of volatile capital flows. The findings hold for both aggregate capital flows and its various components, and for both its net and gross counterparts, while they are also robust for various indicators of regulatory policies. The results support the argument that bank regulatory policy rules designed to ensure financial stability are beneficial to long-run economic growth.

Abstract We consider mean-variance portfolio choice of a robust investor. The investor receives advice from J experts, each with a different prior for expected returns and risk, and follows a min-max portfolio strategy. The robust investor endogenously combines the experts' estimates. When experts agree on the main return generating factors, the investor relies on the advice of the expert with the strongest prior. Dispersed advice leads to averaging of the alternative estimates. The robust investor is likely to outperform alternative strategies. The theoretical analysis is supported by numerical simulations for the 25 Fama-French portfolios and for 81 European country and value portfolios.

The article contributes to the literature on financial fragility, studying how macroeconomic shocks affect supply and demand in the corporate debt market. We take into account the effect of the competitive environment, as well as the risk level, measured by companies’ default rate. The model is estimated using data from the Harmonised BACH database of corporate accounts for large euro area countries on the 1993–2005 period, in order to carry out an illustrative stress testing exercise. We measure the impact of large macroeconomic shocks (a severe recession and a sharp increase in oil prices) on the equilibrium in the debt market.

Financial institutions are financed by both investors and customers. Investors expect an appropriate risk-adjusted return for providing financing and risk bearing. Customers, in contrast, provide financing in exchange for specific services, and want the service fulfillment to be free of the intermediary's credit risk. We develop a framework that defines the roles of customers and investors in intermediaries, and use it to build an economic theory that has the following main findings. First, with positive net social surplus in the intermediary-customer relationship, the efficient (first best) contract completely insulates the customer from the intermediary's credit risk, thereby exposing the customer only to the risk inherent in the contract terms. Second, when intermediaries face financing frictions, the second-best contract may expose the customer to some intermediary credit risk, generating “customer contract fulfillment” costs. Third, the efficiency loss associated with these costs in the second best rationalizes government guarantees like deposit insurance even when there is no threat of bank runs. We further discuss the implications of this customer-investor nexus for numerous issues related to the design of contracts between financial intermediaries and their customers, the sharing of risks between them, ex ante efficient institutional design, regulatory practices, and the evolving boundaries between banks and financial markets.

This paper investigates whether the institutional affiliation of a collateralized loan obligation (CLO) manager influences the manager's access to information and risk appetite. We find that CLO managers affiliated with banks start to sell off their positions in loans arranged by their bank well before the onset of default. In contrast, CLO managers affiliated with nonbanks do not lower their exposures to distressed loans. These findings are consistent with bank-affiliated CLO managers being more risk averse, but they could also derive from them having access to valuable information. On close inspection, we find that although bank-affiliated CLO managers are averse to holding any distressed loans, they are also more aggressive at divesting distressed loans arranged by their parent bank, suggesting that they benefit from an information wedge. Besides helping us understand CLO managers’ trading activities, our findings highlight a potential limit to banks’ ability to originate loans and distribute them via their affiliated CLOs.

One hesitates to write history as it happens, or to draw policy lessons from current events. The conference took place in May 2008 - after the government-assisted takeover of Bear Stearns but before a capital market downturn fueled a system-wide liquidity crisis, with successive insolvencies at IndyMac, Fannie Mae, Freddie Mac, Lehman, AIG, WaMu, and, as I write, Citigroup. But it would be odd to comment on capital market regulation without mentioning the events of the last three months. I am first to acknowledge that anything I might have written in May would not have foreseen the crisis or linked capital market regulation to financial institutions, which in the US have been conventionally treated as discrete in discourse and institutions (e.g., U.S. Treasury 2008; Leuz and Wysocki 2008).

This paper tests models of mutual fund market timing that allow the manager's payoff function to depend on returns in excess of a benchmark, and distinguish timing based on publicly available information from timing based on finer information. We simultaneously estimate parameters which describe the public information environment, the manager's risk aversion, and the precision of the fund's market-timing signal. Using a sample of more than 400 U.S. mutual funds for 1976–94, our findings suggest that mutual funds behave as highly risk averse, benchmark investors. Conditioning on public information improves the model specification. After controlling for the public information, we find no evidence that funds have significant market-timing ability.

Abstract We examine Twitter discussion of sell-side analysts’ stock recommendation revisions. While many investors lack direct access to analyst research, we observe revision-related Twitter discussion associated with approximately 90 percent of the revisions in our sample, usually within three hours of their announcement. Revision-related Twitter discussion is greater for upgrades and for analysts from larger brokerages. Examining within-revision intraday price discovery, we observe increased price discovery during intraday windows with more revision-related tweets, especially for tweets that have more user engagement, are posted by more influential authors, or involve stocks with more intense retail trading volume. We find that revision-related retail trading is more intense and better predicts future returns for revisions with more revision-related Twitter discussion. We observe no such evidence for institutional investors who have direct access to sell-side research. Our results suggest that Twitter is an important channel in facilitating price discovery following analyst revisions, particularly among retail investors.

The characteristics of the mean-variance, efficient portfolio frontier have been discussed at length in the literature. However, for more than three assets, the general approach has been to display qualitative results in terms of graphs. In this paper, the efficient portfolio frontiers are derived explicitly, and the characteristics claimed for these frontiers are verified. The most important implication derived from these characteristics, the separation theorem, is stated and proved in the context of a mutual fund theorem. It is shown that under certain conditions, the classic graphical technique for deriving the efficient portfolio frontier is incorrect.

Determining the market values of streams of future returns is a task common to many sorts of economic analysis. The literature on this subject is extensive at all levels of abstraction. However, most work has not taken uncertainty into account in a meaningful way.