Breaking the Cycle: How the News and Markets Created a Negative Feedback Loop in COVID-19
New research from CBS Professor Harry Mamaysky reveals how negativity in the news and markets can escalate a financial crisis.
New research from CBS Professor Harry Mamaysky reveals how negativity in the news and markets can escalate a financial crisis.
Adapted from “Global Value Chains in Developing Countries: A Relational Perspective from Coffee and Garments,” by Laura Boudreau of Columbia Business School, Julia Cajal Grossi of the Geneva Graduate Institute, and Rocco Macchiavello of the London School of Economics.
Adapted from “Online Advertising as Passive Search,” by Raluca M. Ursu of New York University Stern School of Business, Andrey Simonov of Columbia Business School, and Eunkyung An of New York University Stern School of Business.
This paper from Columbia Business School, “Meaning of Manual Labor Impedes Consumer Adoption of Autonomous Products,” explores marketing solutions to some consumers’ resistance towards autonomous products. The study was co-authored by Emanuel de Bellis of the University of St. Gallen, Gita Johar of Columbia Business School, and Nicola Poletti of Cada.
Co-authored by John B. Donaldson of Columbia Business School, “The Macroeconomics of Stakeholder Equilibria,” proposes a model for a purely private, mutually beneficial financial agreement between worker and firm that keeps decision-making in the hands of stockholders while improving the employment contract for employees.
At Columbia Business School, our faculty members are at the forefront of research in their respective fields, offering innovative ideas that directly impact the practice of business today. A quick glance at our publication on faculty research, CBS Insights, will give you a sense of the breadth and immediacy of the insight our professors provide.
As a student at the School, this will greatly enrich your education. In Columbia classrooms, you are at the cutting-edge of industry, studying the practices that others will later adopt and teach. As any business leader will tell you, in a competitive environment, being first puts you at a distinct advantage over your peers. Learn economic development from Ray Fisman, the Lambert Family Professor of Social Enterprise and a rising star in the field, or real estate from Chris Mayer, the Paul Milstein Professor of Real Estate, a renowned expert and frequent commentator on complex housing issues. This way, when you complete your degree, you'll be set up to succeed.
Columbia Business School in conjunction with the Office of the Dean provides its faculty, PhD students, and other research staff with resources and cutting edge tools and technology to help push the boundaries of business research.
Specifically, our goal is to seamlessly help faculty set up and execute their research programs. This includes, but is not limited to:
All these activities help to facilitate and streamline faculty research, and that of the doctoral students working with them.
The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks whose volatilities are commensurate with their risk aversion. The data, 1995-2000 holdings of over 20,000 clients at a large German broker, are consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk averse customers indeed hold and trade into less volatile stocks.
As we contemplate the raft of regulatory reforms currently being proposed, it is important not only to consider the content of regulation, but also its structure. In particular, it is important to ask how the role of the Fed as a regulator should change, and how the targets and the tools of monetary and regulatory policy should adapt to new regulatory mandates. For example, some reform proposals envision a dramatic expansion of Fed regulatory authority, while others do not, and some proposals envision the Fed's using monetary policy to prick asset bubbles, while others do not.
We study the economic sources of stock-bond return comovements and their time variation using a dynamic factor model. We identify the economic factors employing a semistructural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors.
Prices are typically used as proxies for countries' export quality. I relax this strong assumption by exploiting both price and quantity information to estimate the quality of products exported to the U.S. Higher quality is assigned to products with higher market shares conditional on price. The estimated qualities reveal substantial heterogeneity in product markets' scope for quality differentiation, or their "quality ladders." I use this variation to explain the heterogeneous impact of low-wage competition on U.S. manufacturing employment and output.
The banking legislation of the 1930s took very little time to pass, was unusually comprehensive, and unusually responsive to public opinion. Ironically, the primary motivations for the main bank regulatory reforms in the 1930s (Regulation Q, the separation of investment banking from commercial banking, and the creation of federal deposit insurance) were to preserve and enhance two of the most disastrous policies that contributed to the severity and depth of the Great Depression — unit banking and the real bills doctrine.
Under accrual accounting, earnings add to shareholders' equity. Cash flow generated by a business has no effect on the book value of shareholders' equity but reduces the book value of net assets employed in business operations. In short, accrual accounting rules prescribe that earnings add to shareholder value, but cash flow is irrelevant to the valuation of equity. This paper documents that the stock market prices equity shares according to this prescription.
Accounting is often criticized for omitting intangible assets from the balance sheet. This paper points out that the omission is not necessarily a deficiency. There is also an income statement, and the value of intangible (and other) assets can be ascertained from the income statement. Thus, calls for the recognition of "intangible assets" on the balance sheet may be misconceived. The paper lays out the property whereby the income statement corrects for deficiencies in the balance sheet.
We examine the extent to which uncertainty delays investment, and the effect of competition on this relationship, using a sample of 1214 condominium developments in Vancouver, Canada built from 1979–1998. We find that increases in both idiosyncratic and systematic risk lead developers to delay new real estate investments. Empirically, a one-standard deviation increase in the return volatility reduces the probability of investment by 13 percent, equivalent to a 9 percent decline in real prices.
The global economic crisis in September 2008 was preceded by the crises of 2007: the subprime mortgage crisis, the corporate credit crunch, and the "quant liquidity crunch." The evolution of these crises appears to have resulted from a set of "deleveraging" that started in the subprime mortgage market but then spilled over into a number of other asset markets and resulted in large premiums in multiple markets. To respond to these events, new proprietary factors have been deployed that are not vulnerable to the actions of others.
This paper studies the joint impact of corruption on the entry mode and volume of inward foreign direct investment (FDI) using a unique firm-level data set. We find that corruption not only reduces inward FDI, but also shifts the ownership structure towards joint ventures. The latter finding supports the view that corruption increases the value of using a local partner to cut through the bureaucratic maze. However, R&D intensive firms are found to favor sole ownership.
We propose a new three-pronged plan to address the recent harmful flood of foreclosures. Our plan would address the major barriers that inhibit the ability of third-party servicers to modify mortgages the way portfolio lenders are now doing with greater success. The plan provides greater compensation for servicers to perform their duties, removes legal constraints that inhibit modification, and addresses critical second liens that often get in the way of effective mortgage modifications.
We propose a new three-pronged plan to address the recent harmful flood of foreclosures. Our plan would address the major barriers that inhibit the ability of third-party servicers to modify mortgages the way portfolio lenders are now doing with greater success. The plan provides greater compensation for servicers to perform their duties, removes legal constraints that inhibit modification, and addresses critical second liens that often get in the way of effective mortgage modifications.
The literature on the benefits and costs of financial globalization for developing countries has exploded in recent years, but along many disparate channels with a variety of apparently conflicting results. There is still little robust evidence of the growth benefits of broad capital account liberalization, but a number of recent papers in the finance literature report that equity market liberalizations do significantly boost growth.
Financial innovations often respond to regulation by sidestepping regulatory restrictions that would otherwise limit activities in which people wish to engage. Securitization of loans (e.g., credit card receivables, or subprime residential mortgages) is often portrayed, correctly, as having arisen in part as a means of "arbitraging" regulatory capital requirements by booking assets off the balance sheets of regulated banks.
Stocks with recent past high idiosyncratic volatility have low future average returns around the world. Across 23 developed markets, the difference in average returns between the extreme quintile portfolios sorted on idiosyncratic volatility is -1:31% per month, after controlling for world market, size, and value factors. The effect is individually significant in each G7 country. In the United States, we rule out explanations based on trading frictions, information dissemination, and higher moments.
How public pension plan assets should be invested is an important but unsettled question. Some observers endorse the standard practice of investing heavily in higher yielding but riskier equities, reasoning that the higher average returns will reduce future required tax receipts and also help to reduce underfunding over time. Others advocate a more conservative approach that reduces the volatility of funding levels and the likelihood of severe shortfalls during economic downturns when government resources are already constrained.
This paper examines liquidity and how it affects the behavior of mutual fund portfolio managers, who account for a significant portion of trading in many assets. We define an asset to be perfectly liquid if a portfolio manager can trade the quantity she desires when she desires at a price not worse than the uninformed expected value. A portfolio manager is limited by both what she needs to attain and the ease with which she can attain it, making her sensitive to three dimensions of liquidity: price, timing, and quantity.
As the record of Fed interventions from December 2007 to December 2008 make abundantly clear, a foremost concern of monetary authorities in responding to the financial crisis has been to avoid a repeat of the great depression, and especially a repeat of the monetary contraction identified as the major cause of the 1930s depression.
As the record of Fed interventions from December 2007 to December 2008 make abundantly clear, a foremost concern of monetary authorities in responding to the financial crisis has been to avoid a repeat of the great depression, and especially a repeat of the monetary contraction identified as the major cause of the 1930s depression.
This paper provides an optimal filtering methodology in discretely observed continuous-time jump-diffusion models. Although the filtering problem has received little attention, it is useful for estimating latent states, forecasting volatility and returns, computing model diagnostics such as likelihood ratios, and parameter estimation. Our approach combines time-discretization schemes with Monte Carlo methods. It is quite general, applying in nonlinear and multivariate jump-diffusion models and models with nonanalytic observation equations.
We investigate determinants of slave family discounts in the New Orleans slave market. We find large price discounts for families unrelated to scale effects, childcare costs, legal restrictions, or transport costs. We posit that because family members voluntarily cared for each other, sellers sometimes found it advantageous to keep families together (when families included needy or dependent members). Evidence from ship manifests carrying slaves for sale in New Orleans provides direct evidence for selectivity bias in explaining slave family discounts.
We investigate pricing effects of the joint production of loans and security underwritings. We control for firm and borrower characteristics, including differences in sequencing, which are important for pricing. Contrary to previous studies, when banks combine lending and underwriting within the same customer relationship they charge premiums for both loans and underwriting services. Abstracting from effects of joint production within relationships, depository banks engaged in underwriting price lending and underwriting more cheaply than stand alone investment banks.
Affine jump-diffusion (AJD) processes constitute a large and widely used class of continuous-time asset pricing models that balance tractability and flexibility in matching market data. The prices of e.g., bonds, options, and other assets in AJD models are given by extended pricing transforms that have an exponential-affine form; these transforms have been characterized in great generality by Duffie et al. [2000. Transform analysis and asset pricing for affine jump-diffusions. Econometrica 68, 1343–1376].
The first hints of trouble in the mortgage market surfaced in mid-2005, and conditions subsequently began to deteriorate rapidly. Mortgage defaults and delinquencies are particularly concentrated among borrowers whose mortgages are classified as "subprime" or "near-prime." The main factors underlying the rise in mortgage defaults appear to be declines in house prices and deteriorated underwriting standards, in particular an increase in loan-to-value ratios and in the share of mortgages with little or no documentation of income.
Previous research concludes that options are mispriced based on the high average returns, CAPM alphas, and Sharpe ratios of various put selling strategies. One criticism of these conclusions is that these benchmarks are ill suited to handle the extreme statistical nature of option returns generated by nonlinear payoffs. We propose an alternative way to evaluate the statistical significance of option returns by comparing historical statistics to those generated by option pricing models.
Previous research concludes that options are mispriced based on the high average returns, CAPM alphas, and Sharpe ratios of various put selling strategies. One criticism of these conclusions is that these benchmarks are ill suited to handle the extreme statistical nature of option returns generated by nonlinear payoffs. We propose an alternative way to evaluate the statistical significance of option returns by comparing historical statistics to those generated by option pricing models.
While residents receive similar benefits from many local government programs, only about one-third of all households have children in public schools. We argue that capitalization of school spending into house prices can encourage even childless residents to support spending on schools. We identify a proxy for the extent of capitalization — the supply of land available for new development — and show that towns in Massachusetts with little undeveloped land have larger changes in house prices in response to a plausibly exogenous spending shock.
This paper introduces new variance reduction techniques and computational improvements to Monte Carlo methods for pricing American-style options. For simulation algorithms that compute lower bounds of American option values, we apply martingale control variates and introduce the local policy enhancement, which adopts a local simulation to improve the exercise policy. For duality-based upper bound methods, specifically the primal-dual simulation algorithm, we have developed two improvements.
We investigate the effect of discrete sampling and asset price jumps on fair variance and volatility swap strikes. Fair discrete volatility strikes and fair discrete variance strikes are derived in different models of the underlying evolution of the asset price: the Black-Scholes model, the Heston stochastic volatility model, the Merton jump-diffusion model and the Bates and Scott stochastic volatility and jump model.
Four studies investigated whether activating a social identity can lead group members to choose options that are labeled in words associated with that identity. When political identities were made salient, Republicans (but not Democrats) became more likely to choose the gamble or investment option labeled "conservative." This shift did not occur in a condition in which the same options were unlabeled.
Portfolio credit derivatives are contracts that are tied to an underlying portfolio of defaultable reference assets and have payoffs that depend on the default times of these assets. The hedging of credit derivatives involves the calculation of the sensitivity of the contract value with respect to changes in the credit spreads of the underlying assets, or, more generally, with respect to parameters of the default-time distributions. We derive and analyze Monte Carlo estimators of these sensitivities.
Much of the puzzle of underissuance of national bank notes can be resolved for the period 1880–1900 (the period when detailed, bank-level data are available) by disaggregating, taking account of regulatory limits, and considering differences in banks' opportunity costs cross-sectionally and over time. Banks with poor lending opportunities issued more, within regulatory limits. Banks tended to issue more when bond yields (the backing for notes) were high relative to lending opportunities.
Traditional explanations for indirect trade through an entrepot focus on savings in transport costs and the role of specialized agents in processing and distribution. We provide an alternative perspective based on the potential for entrepots to facilitate tariff evasion. Using data on direct exports to mainland China and indirect exports via Hong Kong SAR, we find that the indirect export rate rises with the Chinese tariff rate, despite the absence of any legal tax advantage to sending goods via Hong Kong SAR.
Venture capitalists add value to portfolio firms by obtaining and transferring information about senior managers across firms over time. Information transfer occurs on a significant scale and takes place both among a single venture capitalist's portfolio firms and between different venture capitalists' firms via a network of venture capitalists, which venture capitalists use to locate and relocate managers. Cross-sectional differences are associated with differences in the intensity with which venture capitalists network.
This paper compares centralized and decentralized price setting by a firm that sells a single product in two markets, but is constrained to set one price (e.g., due to arbitrage). Each market is characterized by a different linear demand function, and demand conditions are privately observed by a local manager. This manager only cares about profits in his own market and, as a result, communicates his information strategically. Our main results link organizational design to market demand.
A German broker's clients place similar speculative trades and therefore tend to be on the same side of the market in a given stock during a given day, week, month, and quarter. Aggregate liquidity effects, short sale constraints, the systematic execution of limit orders (coordinated through price movements) or the correlated trading of other investors who pick off retail limit orders, do not fully explain why retail investors trade similarly. Correlated market orders lead returns, presumably due to persistent speculative price pressure.
Consider an economy in which the underlying security returns follow a linear factor model with constant coeffcients. While portfolios that invest in these securities will, in general, have a linear factor structure, it will be one with time-varying coeffcients. However, under certain assumptions regarding the portfolio's investment strategy, it is possible to estimate these time-varying alphas and betas.
This paper develops rare-event simulation methods for the estimation of portfolio credit risk—the risk of losses to a portfolio resulting from defaults of assets in the portfolio. Portfolio credit risk is measured through probabilities of large losses, which are typically due to defaults of many obligors (sources of credit risk) to which a portfolio is exposed.
In this paper, we discuss earnings quality and the related concept of earnings management, focusing on the primary financial accounts. For each key line-item from the financial statements, we summarize accounting and economic considerations applicable to that item, discuss implications for earnings quality, evaluate the susceptibility of the item to manipulation, and identify potential red flags. The red flags and specific issues discussed for the individual line-items provide a framework for fundamental and contextual analysis by academic researchers and practitioners.
Volatility is the key variable in option pricing models and for risk management in general. Not surprisingly, this has led to the recognition that volatility uncertainty is an important risk factor. This realization, in turn, has given rise to derivative instruments tied to volatility, such as variance swaps, volatility swaps, and options on both variance and volatility, which are specifically designed to help manage this risk. To price these contracts, a model is needed for the volatility process.
Competing organizations are often defined by their niche overlap or structural equivalence in resource dependence, but the very structure that defines competitors can also identify cooperators. There is a fine line between competition and cooperation, but current theories give insufficient guidance as to which will take place and also contribute to the belief that cooperation between competitors is illegitimate. We show that the legitimacy of these practices, as well the evaluation of their welfare implications, are context bound.
Competing organizations are often defined by their niche overlap or structural equivalence in resource dependence, but the very structure that defines competitors can also identify cooperators. There is a fine line between competition and cooperation, but current theories give insufficient guidance as to which will take place and also contribute to the belief that cooperation between competitors is illegitimate. We show that the legitimacy of these practices, as well the evaluation of their welfare implications, are context bound.
We analyze data on fees paid to investment bankers and acquisition premia paid for targets in cash tender offers. Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant.
We analyze data on fees paid to investment bankers and acquisition premia paid for targets in cash tender offers. Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant.
Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant. Variation in acquisition premia also can be explained by fundamental deal attributes.
Our results are broadly consistent with the predictions of a benign view of the role of investment banks in advising acquisition targets. Fees to investment banks are correlated with attributes of transactions and target firms in ways that make sense if banks are being paid for processing information. The more contingent (and, therefore, risky) the fees, the higher they tend to be, all else held constant. Variation in acquisition premia also can be explained by fundamental deal attributes.
We match Big Mac prices with prices of its ingredients as a unique prism to study real exchange rates (RERs). This approach has several advantages. First, the levels of the Big Mac RER can be measured meaningfully. Second, as the exact composition of a Big Mac is known, the contributions of its tradable and non-tradable components can be estimated relatively precisely. Third, the dynamics of the RER can be studied in a setting free of several biases inherent in CPI-based RERs. Finally, a large cross-country dimension allows us to overturn the Engel result on what drives RERs.
The pricing of corporate debt is still a challenging and active research area in corporate finance. Starting with Merton (1974), many authors proposed a structural approach in which the value of the assets of the firm is modeled by a stochastic process, and all other variables are derived from this basic process. These structural models have become more complex over time in order to capture more realistic aspects of bankruptcy proceedings.
This paper develops numerical approximations for pricing collateralized debt obligations (CDOs) and other portfolio credit derivatives in the multifactor Normal Copula model. A key aspect of pricing portfolio credit derivatives is capturing dependence between the defaults of the elements of the portfolio. But, compared with an independent-obligor model, pricing in a model with correlated defaults is more challenging. Our approach strikes a balance by reducing the problem of pricing in a model with correlated defaults to calculations involving only independent defaults.