http://www.federalreserve.gov/pubs/feds/feeds.xml Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgment) should be cleared with the author(s) to protect the tentative character of these papers. 2009-07-08T14:13:45-05:00 en Board of Governors of the Federal Reserve System http://www.federalreserve.gov/pubs/feds/2009/200947/200947abs.html Geng Li. Using the Panel Study of Income Dynamics, we document that, controlling for observable characteristics, household investors' likelihood of entering the stock market within the next five years is about 30 percent higher if their parents or children had entered the stock market during the previous five years. Because even family members who live far away from each other tend to communicate frequently, despite the fact that interactions among people living close geographically have declined with the rise of alternative social channels, we argue that these findings highlight the significance of information sharing regarding household financial decisions. In addition, focusing on the sequential patterns of stock market entry, we explicitly take into account the time needed for information to be shared and disseminated among family members. Our finding that one member's entry positively influences future entries of other family members at distinct stages of the life cycle allows us to largely rule out the hypothesis that the observed correlations in stock market entries are primarily caused by common preferences shared by family members. Furthermore, because we do not find similar sequential patterns in stock market exits, our results do not support the hypothesis of herding behavior. 2009-11-16T15:49:32-05:00 en Information Sharing and Stock Market Participation: Evidence from Extended Families 2009-11-16T15:49:32-05:00 Information sharing stock market participation extended families 2009-47: Information Sharing and Stock Market Participation: Evidence from Extended Families http://www.federalreserve.gov/pubs/feds/2009/200947/200947.pdf PDF version Geng Li Geng Li Board of Governors of the Federal Reserve System Geng Li 2009-11-16T15:49:32-05:00 2009-47 D14 D83 G11 http://www.federalreserve.gov/pubs/feds/2009/200946/200946abs.html Ricardo Correa and Gustavo A. Suarez. This paper exploits the staggered timing of state-level banking deregulation in the United States during the 1980s to study the causal effect of banking integration on the volatility of non-financial corporations. We find that firm-level employment, production, sales, and cash flows are less volatile after interstate banking deregulation, particularly for firms that have limited access to external finance. This finding suggests that bank-dependent firms exploit wider access to finance after deregulation to smooth out idiosyncratic shocks. In fact, short-term credit becomes less pro-cyclical after out-of-state bank entry is permitted. Finally, lower volatility in real-side variables after deregulation translates into lower idiosyncratic risk in stock returns. 2009-11-16T15:24:39-05:00 en Firm Volatility and Banks: Evidence from U.S. Banking Deregulation 2009-11-16T15:24:39-05:00 Bank deregulation firm volatility external finance idiosyncratic volatility 2009-46: Firm Volatility and Banks: Evidence from U.S. Banking Deregulation http://www.federalreserve.gov/pubs/feds/2009/200946/200946.pdf PDF version Ricardo Correa Ricardo Correa Board of Governors of the Federal Reserve System Gustavo Suarez Gustavo Suarez Board of Governors of the Federal Reserve System Ricardo Correa and Gustavo A. Suarez 2009-11-16T15:24:39-05:00 2009-46 G21 G32 http://www.federalreserve.gov/pubs/feds/2009/200945/200945abs.html Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod. Only about one-fifth of respondents in the Reuters/University of Michigan survey report that the 2008 tax rebates led them to mostly increase spending, while over half said it would lead them to mostly pay off debt. Of those in the mostly-spend category, the response was swift, with over 80 percent reporting increasing their spending within three months of receiving their rebate. Older households, households with higher wealth and higher income, and those expecting future income growth were generally more likely to spend the rebates. A review of other surveys confirms the general pattern of results and suggests that small changes in survey design do not have a major effect on the distribution of responses. The distribution of survey answers corresponds to an aggregate MPC after one year of about one-third. The paper combines this survey-based estimate of the MPC and the survey-based estimate of the timing of spending to show that the rebates help explain the aggregate movements in saving, spending, and debt in 2008. Because the rebate was large and distributed over a short period, we estimate that it had a non-trivial effect on total spending in the second and third quarters of 2008. Nonetheless, the results imply that the rebates provided only a modest stimulus to spending per dollar of rebate. 2009-11-12T14:35:18-05:00 en Household Response to the 2008 Tax Rebates: Survey Evidence and Aggregate Implications 2009-11-12T14:35:18-05:00 Tax rebates marginal propensity to consume survey responses 2009-45: Household Response to the 2008 Tax Rebates: Survey Evidence and Aggregate Implications http://www.federalreserve.gov/pubs/feds/2009/200945/200945.pdf PDF version Claudia Sahm Claudia Sahm Board of Governors of the Federal Reserve System Matthew Shapiro Matthew Shapiro University of Michigan and NBER Joel Slemrod Joel Slemrod University of Michigan and NBER Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod 2009-11-12T14:35:18-05:00 2009-45 C83 E21 H31 http://www.federalreserve.gov/pubs/feds/2009/200944/200944abs.html Xin Huang, Hao Zhou, and Haibin Zhu. This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. The analysis on the marginal contribution of individual banks to the systemic risk suggests that ``too-big-to-fail" is a valid concern from a macroprudential perspective of bank regulation. 2009-11-02T10:05:47-05:00 en Assessing the Systemic Risk of a Heterogeneous Portfolio of Banks During the Recent Financial Crisis 2009-11-02T10:05:47-05:00 Systemic risk macroprudential regulation portfolio distress loss credit default swap dynamic conditional correlation 2009-44: Assessing the Systemic Risk of a Heterogeneous Portfolio of Banks During the Recent Financial Crisis http://www.federalreserve.gov/pubs/feds/2009/200944/200944.pdf PDF version Xin Huang Xin Huang Department of Economics, University of Oklahoma Hao Zhou Hao Zhou Risk Analysis Section, Federal Reserve Board Haibin Zhu Haibin Zhu Bank for International Settlements, Asia-Pacific Office Xin Huang, Hao Zhou, and Haibin Zhu 2009-11-02T10:05:47-05:00 2009-44 G21 G28 G13 http://www.federalreserve.gov/pubs/feds/2009/200943/200943abs.html Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf. Delinquencies on residential mortgages and home foreclosures have risen dramatically in the past couple of years. The mortgage losses triggered a broad-based financial crisis and severe recession, which, in turn, exacerbated the initial financial distress faced by homeowners. Although servicers increased their loss mitigation efforts as defaults began to mount, foreclosures continued to occur in cases where both the borrower and investor would be better off if such an outcome were avoided. The U.S. government has engaged in a number of initiatives to reduce such foreclosures. This paper examines the economic underpinnings of the Administration's loan modification program, the Home Affordable Modification Program (HAMP). We argue that HAMP should help many borrowers avoid foreclosure, as its key features--a standardized protocol, incentive fees for servicers, and a requirement that the first lien mortgage payment be reduced to 31 percent of gross income--alleviate some of the previous obstacles to successful modifications. That said, HAMP is not well-suited to address payment problems associated with job loss because the required modification in such cases would often be too costly to qualify for the program. In addition, the focus of the program on reducing the payments associated with the mortgage rather than the principal of the mortgage may limit its effectiveness when the homeowner's equity is sufficiently negative. In this case, recent government efforts to establish a protocol for short sales should be a useful tool in avoiding costly foreclosure. 2009-10-27T18:15:57-05:00 en Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program 2009-10-27T18:15:57-05:00 Mortgage mortgage-servicers mortgage-modification foreclosures HAMP GSEs 2009-43: Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program http://www.federalreserve.gov/pubs/feds/2009/200943/200943.pdf PDF version Larry Cordell Larry Cordell Federal Reserve Bank of Philadelphia Karen Dynan Karen Dynan Brookings Institute Andreas Lehnert Andreas Lehnert Board of Governors of the Federal Reserve System Nellie Liang Nellie Liang Board of Governors of the Federal Reserve System Eileen Mauskopf Eileen Mauskopf Board of Governors of the Federal Reserve System Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf 2009-10-27T18:15:57-05:00 2009-43 G01 G21 G28 H40 H20 H00 H81 http://www.federalreserve.gov/pubs/feds/2009/200942/200942abs.html Hui Shan. Reverse mortgages allow elderly homeowners to tap into their housing wealth without having to sell or move out of their homes. However, very few eligible homeowners have used reverse mortgages to achieve consumption smoothing until recently when the reverse mortgage market in the United States witnessed substantial growth. This paper examines 1989-2007 loan-level reverse mortgage data and presents a number of findings. First, I show that recent reverse mortgage borrowers are significantly different from earlier borrowers in many respects. Second, I find that borrowers who take the line-of-credit payment plan, single male borrowers, and borrowers with higher house values exit their homes sooner than other reverse mortgage borrowers. Third, I combine the reverse mortgage data with county-level house price data to show that elderly homeowners are more likely to purchase reverse mortgages when the local housing market is at its peak. This finding suggests that the 2000-05 housing market boom may be partially responsible for the rapid growth of reverse mortgage markets. Lastly, I show that the Federal Housing Administration (FHA) mortgage limits, which cap the amount of housing wealth that an eligible homeowner can borrow against, have no effect on the demand for reverse mortgages. The findings have important implications to both policy-making and the economics of housing and aging. 2009-10-19T18:15:08-05:00 en Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market 2009-10-19T18:15:08-05:00 Reverse mortgages housing aging 2009-42: Reversing the Trend: The Recent Expansion of the Reverse Mortgage Market http://www.federalreserve.gov/pubs/feds/2009/200942/200942.pdf PDF version Hui Shan Hui Shan Board of Governors of the Federal Reserve System Hui Shan 2009-10-19T18:15:08-05:00 2009-42 E21 J14 R21 http://www.federalreserve.gov/pubs/feds/2009/200941/200941abs.html Soohyung Lee and Benjamin A. Malin. We explore education's role in improving the allocation of labor between China's agricultural and nonagricultural sectors and measure the portion of China's recent growth attributable to this channel. Building from micro-level estimates, we find that education's impact on labor reallocation between sectors accounts for about 9 percent of Chinese growth, whereas its impact on within-sector human capital growth explains only 2 percent. Our findings suggest that, when frictions cause large productivity gaps across sectors and returns to education are greater in higher-productivity sectors, education policy may be a useful tool for increasing efficiency. 2009-10-27T09:54:15-05:00 en Education's Role in China's Structural Transformation 2009-10-27T09:54:15-05:00 Returns to education structural transformation China labor reallocation economic growth 2009-41: Education's Role in China's Structural Transformation http://www.federalreserve.gov/pubs/feds/2009/200941/200941.pdf PDF version Soohyung Lee Soohyung Lee University of Maryland and MPRC Benjamin Malin Benjamin Malin Board of Governors of the Federal Reserve System Soohyung Lee and Benjamin A. Malin 2009-10-27T09:54:15-05:00 2009-41 O1 O5 I2 J6 N3 http://www.federalreserve.gov/pubs/feds/2009/200940/200940abs.html Pawel J. Szerszen. In this paper I analyze a broad class of continuous-time jump diffusion models of asset returns. In the models, stochastic volatility can arise either from a diffusion part, or a jump part, or both. The jump component includes either compound Poisson or Levy alpha-stable jumps. To be able to estimate the models with latent Levy alpha-stable jumps, I construct a new Markov chain Monte Carlo algorithm. I estimate all model specifications with S&P500 daily returns. I find that models with Levy alpha-stable jumps perform well in capturing return characteristics if diffusion is a source of stochastic volatility. Models with stochastic volatility from jumps and models with Poisson jumps cannot represent excess kurtosis and tails of return distribution. In density forecast and VaR analysis, the model with Levy alpha-stable jumps and joint stochastic volatility performs the best among all other specifications, since both diffusion and infinite activity jump part provide information about latent volatility. 2009-10-14T16:28:47-05:00 en Bayesian Analysis of Stochastic Volatility Models with Levy Jumps: Application to Risk Analysis 2009-10-14T16:28:47-05:00 Bayesian estimation stochastic volatility Levy Jumps density forecast 2009-40: Bayesian Analysis of Stochastic Volatility Models with Levy Jumps: Application to Risk Analysis http://www.federalreserve.gov/pubs/feds/2009/200940/200940.pdf PDF version Pawel Szerszen Pawel Szerszen Board of Governors of the Federal Reserve System Pawel J. Szerszen 2009-10-14T16:28:47-05:00 2009-40 C1 C11 G1 G12 http://www.federalreserve.gov/pubs/feds/2009/200939/200939abs.html Kenneth P. Brevoort. Using a proprietary dataset of credit bureau records, Cohen-Cole (2008) finds that banks set credit limits on revolving accounts based in part on the racial composition of the neighborhood in which each borrower resides. This paper evaluates the evidence presented in that working paper using the same proprietary database of credit bureau records. The replication effort presented in this paper suggests that decisions about how to calculate the variables used in that study may have resulted in the unnecessary exclusion of one-fifth of available observations from the estimation samples and may have increased the size of the reported effect by over 25 percent. Furthermore, this analysis suggests that when a control for neighborhood income is added to the estimations, the results presented as evidence of redlining activities disappear. 2009-10-14T16:28:34-05:00 en Credit Card Redlining Revisited 2009-10-14T16:28:34-05:00 Credit cards redlining racial disparities discrimination 2009-39: Credit Card Redlining Revisited http://www.federalreserve.gov/pubs/feds/2009/200939/200939.pdf PDF version Kenneth Brevoort Kenneth Brevoort Board of Governors of the Federal Reserve System Kenneth P. Brevoort 2009-10-14T16:28:34-05:00 2009-39 J15 G21 http://www.federalreserve.gov/pubs/feds/2009/200938/200938abs.html Louise Sheiner. The physical process of aging means that the use of health services varies significantly by age. This association between age and health care consumption raises a number of issues related to intergenerational and intragenerational equity, including the allocation of societal resources across age groups and the effects of population aging and health cost growth on public sector health care burdens and, hence, on intergenerational redistribution. This working paper (forthcoming as a chapter in the Oxford Handbook of Health Economics) provides a detailed look at the theoretical and empirical relationships between health spending and age, both in the US and internationally, and reviews the evidence on the intergenerational redistribution associated with public health spending over time. 2009-10-14T16:28:24-05:00 en Intergenerational Aspects of Health Care 2009-10-14T16:28:24-05:00 Health demographics 2009-38: Intergenerational Aspects of Health Care http://www.federalreserve.gov/pubs/feds/2009/200938/200938.pdf PDF version Louise Sheiner Louise Sheiner Board of Governors of the Federal Reserve System Louise Sheiner 2009-10-14T16:28:24-05:00 2009-38 I1 http://www.federalreserve.gov/pubs/feds/2009/200937/200937abs.html Xin Huang, Hao Zhou, and Haibin Zhu. In this paper we propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. Our stress testing methodology, using an integrated micro-macro model, takes into account dynamic linkages between the health of major U.S. banks and macrofinancial conditions. Our results suggest that the theoretical insurance premium that would be charged to protect against losses that equal or exceed 15 percent of total liabilities of 12 major U.S. financial firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in July 2008. 2009-09-17T16:41:02-05:00 en A Framework for Assessing the Systemic Risk of Major Financial Institutions 2009-09-17T16:41:02-05:00 Systemic risk stress testing portfolio credit risk credit default swap high-frequency data 2009-37: A Framework for Assessing the Systemic Risk of Major Financial Institutions http://www.federalreserve.gov/pubs/feds/2009/200937/200937.pdf PDF version Xin Huang Xin Huang Department of Economics, University of Oklahoma Hao Zhou Hao Zhou Risk Analysis Section, Federal Reserve Board Haibin Zhu Haibin Zhu Bank for International Settlements, Asia-Pacific Office Xin Huang, Hao Zhou, and Haibin Zhu 2009-09-17T16:41:02-05:00 2009-37 G21 G28 G14 C13 http://www.federalreserve.gov/pubs/feds/2009/200936/200936abs.html Daniel M. Covitz, Nellie Liang, and Gustavo A. Suarez. The $350 billion contraction in the asset-backed commercial paper (ABCP) market in the last five months of 2007 played a central role in transforming concerns about the credit quality of mortgage-related assets into a global financial crisis. This paper attempts to better understand why the substantial contraction in ABCP occurred by measuring and analyzing runs on ABCP programs over the period from August 2007 through December 2007. While it has been suggested that commercial paper programs, like commercial banks, may be prone to runs, we are the first to conduct a comprehensive empirical analysis of runs in the ABCP market using a rich and novel issue-level data set for all ABCP programs in the U.S. market. A program is defined as being run when it does not issue new paper during a week despite having a substantial share of its outstandings scheduled to mature, and then continuing in a run until it issues. We find evidence of extensive runs: more than 100 programs (one-third of all ABCP programs) were in a run within weeks of the onset of the turmoil and the odds of subsequently leaving the run state were very low. We interpret this finding as an indication that the ABCP market was subject to a bank-like "panic." We also find that while runs were linked to credit and liquidity exposures of individual programs, runs were also related importantly to non-program specific variables in the first several weeks of the turmoil, indicating that runs were relatively indiscriminate during the early part of the panic. Thus the ABCP market may be inherently unstable and a source of systemic risk. 2009-09-14T14:10:44-05:00 en The Evolution of a Financial Crisis: Panic in the Asset-Backed Commercial Paper Market 2009-09-14T14:10:44-05:00 Commercial paper asset-backed commercial paper bank runs financial crisis panics 2009-36: The Evolution of a Financial Crisis: Panic in the Asset-Backed Commercial Paper Market http://www.federalreserve.gov/pubs/feds/2009/200936/200936.pdf PDF version Daniel Covitz Daniel Covitz Board of Governors of the Federal Reserve System Nellie Liang Nellie Liang Board of Governors of the Federal Reserve System Gustavo Suarez Gustavo Suarez Board of Governors of the Federal Reserve System Daniel M. Covitz, Nellie Liang, and Gustavo A. Suarez 2009-09-14T14:10:44-05:00 2009-36 G01 G10 G21 http://www.federalreserve.gov/pubs/feds/2009/200935/200935abs.html Regis Barnichon. This paper studies the relative importance of the two main determinants of cyclical unemployment fluctuations: vacancy posting and job separation. Using a matching function to model the flow of new jobs, I draw on Shimer's (2007) unemployment flow rates decomposition and find that job separation and vacancy posting respectively account for about 40 and 60 percent of unemployment's variance. When considering higher-order moments, I find that job separation contributes to about 60 percent of unemployment steepness asymmetry, a stylized fact of the jobless rate. Finally, while vacancy posting is, on average, the most important contributor of unemployment fluctuations, the opposite is true around business cycle turning points, when job separation is responsible for most of unemployment movements. 2009-08-25T16:19:27-05:00 en Vacancy Posting, Job Separation and Unemployment Fluctuations 2009-08-25T16:19:27-05:00 Gross worker flows job finding rate employment exit rate matching function 2009-35: Vacancy Posting, Job Separation and Unemployment Fluctuations http://www.federalreserve.gov/pubs/feds/2009/200935/200935.pdf PDF version Regis Barnichon Regis Barnichon Board of Governors of the Federal Reserve System Regis Barnichon 2009-08-25T16:19:27-05:00 2009-35 E24 E32 J63 J64 http://www.federalreserve.gov/pubs/feds/2009/200934/200934abs.html Michael S. Barr, Jane K. Dokko, and Benjamin J. Keys. This paper presents data from a new survey of low- and moderate-income households in Detroit to examine bank account usage and alternative financial service (AFS) products. We find that for the vast majority of households, annual outlays on financial services for transactional and credit products are relatively small, around 1 percent of annual income. This estimate is lower than those extrapolated by previous work using the posted fees of financial services alone, suggesting that LMI households do not always choose the most expensive financial services option. This evidence is also consistent with LMI households substituting among an array of financial services from the mainstream and alternative financial services sector. Households with bank accounts are more economically active and have access to more forms of credit than unbanked households, resulting in greater use of financial services and higher total outlays. Results from the DAHFS study show permeability in the financial services decisions of LMI households. Namely, having a bank account does not preclude the use of AFS, being unbanked does not exclude households from using mainstream financial services, and contrary to popular belief, being unbanked is not a permanent financial outcome. Generally, results from the DAHFS study suggest that policies designed to expand bank account access alone are unlikely to improve financial outcomes among LMI households unless accompanied by changes in the functionality of mainstream banking products. 2009-08-20T17:09:23-05:00 en And Banking for All? 2009-08-20T17:09:23-05:00 Financial services low- and moderate-income households 2009-34: And Banking for All? http://www.federalreserve.gov/pubs/feds/2009/200934/200934.pdf PDF version Michael Barr Michael Barr University of Michigan Jane Dokko Jane Dokko Board of Governors of the Federal Reserve System Benjamin Keys Benjamin Keys University of Michigan Michael S. Barr, Jane K. Dokko, and Benjamin J. Keys 2009-08-20T17:09:23-05:00 2009-34 G2 http://www.federalreserve.gov/pubs/feds/2009/200933/200933abs.html Robin A. Prager. A large and growing number of low-to-moderate income U.S. households rely upon alternative financial service providers (AFSPs) for a variety of credit products and transaction services, including payday loans, pawn loans, automobile title loans, tax refund anticipation loans and check-cashing services. The rapid growth of this segment of the financial services industry over the past decade has been quite controversial. One aspect of the controversy involves the location decisions of AFSPs. This study examines the determinants of the locations of three types of AFSPs--payday lenders, pawnshops, and check-cashing outlets. Using county-level data for the entire country, I find that the number of AFSP outlets per capita is significantly related to demographic characteristics of the county population (e.g., racial/ethnic composition, age, and education level), measures of the population's credit worthiness, and the stringency of state laws and regulations governing AFSPs. 2009-07-27T16:02:31-05:00 en Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets 2009-07-27T16:02:31-05:00 Alternative financial services payday loans pawnshops check cashing location 2009-33: Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets http://www.federalreserve.gov/pubs/feds/2009/200933/200933.pdf PDF version Robin Prager Robin Prager Board of Governors of the Federal Reserve System Robin A. Prager 2009-07-27T16:02:31-05:00 2009-33 G21 L50