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Hilton Atlanta, Salon West
American Finance Association
Risk and Return in Financial Intermediation
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Stephen Dimmock, Nanyang Technological University
The Private Production of Safe Assets
AbstractDo claims on the private sector serve the role of safe assets? We answer this question using high-frequency panel data on prices and quantities of certificates of deposit (CD) and commercial paper (CP) issued in Europe. We show that only very short-term private securities benefit from a premium for safety. Using a structural model and several identification strategies, we show that the issuance of short-term CDs, but not of CPs, strongly responds to measures of safety demand. The private production of safe assets is stronger for issuers with high creditworthiness, and breaks down during episodes of market stress. We conclude that even very short-term private assets are sensitive to changes in the information environment and should not be treated as equally safe at all times.
Do Banks Have an Edge?
AbstractWe decompose bank activities into passive and active components and evaluate the performance of the active components of the bank business model by controlling for passive maturity transformation strategies that can be executed in the capital market. We find that (1) unlevered bank assets underperform passive portfolios of maturity-matched US Treasury bonds after paying corporate taxes, (2) the cost advantage of bank deposits appears to have disappeared since 1986, (3) bank equities have CAPM betas near one, while passive maturity transformation strategies have CAPM betas near zero, and (4) portfolios of bank equities underperform portfolios designed to passively mimic their economic exposures. The very strong investment performance of passive maturity transformation strategies over this period may mask the underperformance of the specialized bank activities.
London Business School
University of Rochester
University of Illinois
- G2 - Financial Institutions and Services