CAFIN publishes five new working papers

May 30, 2017

The Center for Analytical Finance (CAFIN) added five new working papers to the website.

Adding to the center’s cutting-edge research is “Do Oil Endowment and Productivity Matter for Accumulation of International Reserves?” by Rasmus Fatum, Guozhong Zhu, and Wenjie Hui. This is the 38th paper the center has published.

The abstract reads: “We develop a dynamic stochastic optimization model with oil price shocks to show that countries with certain combinations of oil endowment and productivity have strong precautionary incentives to accumulate foreign reserves in response to oil price shocks. Using the Simulated Method of Moments to estimate the model we demonstrate how oil price shocks are absorbed by changes in foreign reserves which, in turn, leads to less variation in aggregate consumption. Along with productivity and oil endowment, we also consider as determinants of reserves holding conventional variables such as trade-to-GDP ratio and capital openness. Overall, our results suggest that productivity and oil endowment are potentially important determinants of foreign reserves that for some countries should be considered as complements to conventional determinants.”
The working paper can be downloaded here.

“Does competition affect truth-telling? An experiment with rating agencies” by Jean Paul Rabanal is the 39th paper the center has published.

The abstract reads: “We use an experimental approach to study the effect of market structure on the incidence of misreporting by credit rating agencies. In the game, agencies receive a signal regarding the type of asset held by the seller and issue a report. The sellers then present the asset, with the report if one is solicited, to the buyer for purchase. We find that competition among rating agencies significantly reduces the likelihood of misreporting.”
The working paper can be downloaded here.  

“Does Competition Aggravate Moral Hazard? A Multi-Principal-Agent Experiment” by Olga A. Rud, Jean Paul Rabanal, and John Horowitz is the 40th paper the center has published.

The abstract reads: “We conduct a Multi-Principal-Agent experiment to determine whether market structure affects intermediary behavior. The intermediaries (Agents) are perfectly informed regarding project types and can recommend that Principals either proceed or discontinue with a project. Agents earn revenues only when they recommend to continue. We find that monopolist Agents protect the interests of Principals better than when Agents compete. Our findings are robust to a significant fee increase. The results of our study apply to a number of economic and financial environments (e.g., money-managers and rating agencies) and provide additional evidence on the impact of market structure on individual incentives and equilibrium outcomes.”
The working paper can be downloaded here.

“Malleable Risk Preferences and Learning from Experience in an Asset Allocation Game” by Sameh Habib is the 41st paper the center has published.

The abstract reads: “Does experience modulate elicited risk preferences? How does experience shape expectations? This paper provides evidence that investors’ own experiences play a key role in shaping revealed risk preferences and the weighting of past observations when forming expectations. The results suggest that experiencing severe negative or positive returns leads subjects’ revealed preferences to become closer to risk neutrality, while subsequent asset allocation is affected primarily by subjects’ own returns relative to the market and not by the market experience itself, indicating that agents’ performance relative to a benchmark is what matters in shaping expectations.”
The working paper can be downloaded here.

“FOMC Sentiment Extraction and its Transmission to Financial Markets” by Raul Cruz Tadle is the 42nd paper the center has published.

The abstract reads: “I use Automated Content Analysis, adopted from computational linguistics and political science, to derive sentiments acquired from Federal Open Market Committee (FOMC) meeting documents. I assign an index to the minutes in order to determine if the sentiments obtained from the information therein can be classified as hawkish (analogous to improving economic conditions and stronger inflationary pressures) or dovish (related to deteriorating economic outlook and subdued price changes). I compare the sentiments of the discussions in the minutes to the sentiments of information in corresponding FOMC statements released immediately after the meetings and calculate the surprise component of the relative sentiments. I then evaluate how this news shock in the minutes impacts broad equity and real estate investment trust indices, as well as the exchange rate valuation of different world currencies against the U.S. Dollar. My findings indicate that financial assets respond to the minutes based on the type of news shock they contain and that financial markets react more significantly during the FOMC's date-based policy guidance period.”
The working paper can be downloaded here.