Leading financial scholars present essays examining the performance of the basic financial functi... more Leading financial scholars present essays examining the performance of the basic financial functions underlying global financial systems: payments, lending and investing, pooling funds, allocating risk, providing information, and dealing with incentive issues - with particular emphasis on how their performance is changing and implications for the future.
... Cases in financial engineering: Applied studies of financial innovation. Post a Comment. CONT... more ... Cases in financial engineering: Applied studies of financial innovation. Post a Comment. CONTRIBUTORS: Author: Mason, Scott P. PUBLISHER: Prentice Hall (Englewood Cliffs, NJ). SERIES TITLE: YEAR: 1995. PUB TYPE: Book (ISBN 0130794198 ). VOLUME/EDITION: ...
To predict firms’ fundamentals, the authors construct three proxies for real-time corporate sales... more To predict firms’ fundamentals, the authors construct three proxies for real-time corporate sales from fully distinct information sources: in-store foot traffic (IN-STORE), web traffic to companies’ websites (WEB), and consumers’ interest level in corporate brands and products (BRAND). The authors demonstrate that trading using these proxies, estimated for a sample of 330 firms over 2009–2020, results in significant net-of-transaction-costs profitability. During the pandemic, WEB activity increased significantly whereas IN-STORE experienced a remarkable decrease, reflecting the migration of consumers from physical stores toward online retailers. The results suggest that the information contained in IN-STORE and BRAND is not immediately available to investors, whereas the WEB information diffuses more quickly, and overall information diffusion worsened during the pandemic.
Preliminary draft – not to be quoted without permission. We are indebted to Andrei Shleifer for h... more Preliminary draft – not to be quoted without permission. We are indebted to Andrei Shleifer for helpful comments, to Matt Klaeffling and Riti Samanta for excellent research assistance, and to State Street Corporation for help in obtaining data. All errors are our own. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research
Survey data provide a measure of exchange rate expectations that is superior to the commonly-used... more Survey data provide a measure of exchange rate expectations that is superior to the commonly-used forward exchange rate in the respect that it does not include a risk premium. We use sur-'icy data and the technique of bootstrapping to test a number of propositions of interest. We are able to reject static or "random walk " expectations for both nominal and real exchange rates. Expected depreciation ii large in magnitude. There is even statistically significant unconditional bias: during the 198 1-85 "strong dollar period't the market persistently overestimated depreciation of the dollar. Expected depreciation is also variable1 contrary to some recent claims. The expected future spot rate can be viewed as inelastic with respect to the contem-poraneous spot rate, in that it also puts weight on other variables: the lagged expected spot rate (as in adaptive expectations), the lagged actual spot rate (distributed lag expectations), or a long-
__________________________________________________________________________ During the financial c... more __________________________________________________________________________ During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial val-ue. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statu-tory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of fu-ture insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
We provide a theory of the determination of exchange rates based on cap-ital flows in imperfect f... more We provide a theory of the determination of exchange rates based on cap-ital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from in-ternational imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus affecting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, it also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Our framework is flexible; it accommodates a number of important modeling features within a...
Utilizing multiple big-data sources, firm-level indices intended to track foot traffic to US reta... more Utilizing multiple big-data sources, firm-level indices intended to track foot traffic to US retailer stores are constructed. The foot-traffic index significantly predicts quarterly sales growth, revenue surprises, earnings surprises, as well as excess returns around quarterly earnings announcements. The average excess return difference between stocks with high and low index values during the five-day period around earnings announcement dates is 3.44%. Using the index as a proxy for managerial private information, we find evidence that managers smooth earnings by increasing discretionary accruals amid high prospects for future revenues. However, announcement returns are negatively related with the level of discretionary accruals, implying investors downplay firm announcements when the level of discretionary accruals is high. In addition, the foot-traffic index for the period beginning after the fiscal-quarter end and ending prior to the earnings announcement date strongly predicts t...
We model the equilibrium price and quantity of risk transfer between firms and financial intermed... more We model the equilibrium price and quantity of risk transfer between firms and financial intermediaries. Value-maximizing firms have downward sloping demands to cede risk, while intermediaries, who assume risk, provide less-than-fully-elastic supply. We show that equilibrium required returns will be “high” in the presence of financing imperfections that make intermediary capital costly. Moreover, financing imperfections can give rise to intermediary market power, so that small changes in financial imperfections can give rise to large changes in price. We develop tests of this alternative against the null that the supply of intermediary capital is perfectly elastic. We take the US catastrophe reinsurance market as an example, using detailed data from Guy Carpenter & Co., covering a large fraction of the catastrophe risks exchanged during 1970-94. Our results suggest that the price of reinsurance generally exceeds “fair” values, particularly in the aftermath of large events, that mark...
Leading financial scholars present essays examining the performance of the basic financial functi... more Leading financial scholars present essays examining the performance of the basic financial functions underlying global financial systems: payments, lending and investing, pooling funds, allocating risk, providing information, and dealing with incentive issues - with particular emphasis on how their performance is changing and implications for the future.
... Cases in financial engineering: Applied studies of financial innovation. Post a Comment. CONT... more ... Cases in financial engineering: Applied studies of financial innovation. Post a Comment. CONTRIBUTORS: Author: Mason, Scott P. PUBLISHER: Prentice Hall (Englewood Cliffs, NJ). SERIES TITLE: YEAR: 1995. PUB TYPE: Book (ISBN 0130794198 ). VOLUME/EDITION: ...
To predict firms’ fundamentals, the authors construct three proxies for real-time corporate sales... more To predict firms’ fundamentals, the authors construct three proxies for real-time corporate sales from fully distinct information sources: in-store foot traffic (IN-STORE), web traffic to companies’ websites (WEB), and consumers’ interest level in corporate brands and products (BRAND). The authors demonstrate that trading using these proxies, estimated for a sample of 330 firms over 2009–2020, results in significant net-of-transaction-costs profitability. During the pandemic, WEB activity increased significantly whereas IN-STORE experienced a remarkable decrease, reflecting the migration of consumers from physical stores toward online retailers. The results suggest that the information contained in IN-STORE and BRAND is not immediately available to investors, whereas the WEB information diffuses more quickly, and overall information diffusion worsened during the pandemic.
Preliminary draft – not to be quoted without permission. We are indebted to Andrei Shleifer for h... more Preliminary draft – not to be quoted without permission. We are indebted to Andrei Shleifer for helpful comments, to Matt Klaeffling and Riti Samanta for excellent research assistance, and to State Street Corporation for help in obtaining data. All errors are our own. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research
Survey data provide a measure of exchange rate expectations that is superior to the commonly-used... more Survey data provide a measure of exchange rate expectations that is superior to the commonly-used forward exchange rate in the respect that it does not include a risk premium. We use sur-'icy data and the technique of bootstrapping to test a number of propositions of interest. We are able to reject static or "random walk " expectations for both nominal and real exchange rates. Expected depreciation ii large in magnitude. There is even statistically significant unconditional bias: during the 198 1-85 "strong dollar period't the market persistently overestimated depreciation of the dollar. Expected depreciation is also variable1 contrary to some recent claims. The expected future spot rate can be viewed as inelastic with respect to the contem-poraneous spot rate, in that it also puts weight on other variables: the lagged expected spot rate (as in adaptive expectations), the lagged actual spot rate (distributed lag expectations), or a long-
__________________________________________________________________________ During the financial c... more __________________________________________________________________________ During the financial crisis, life insurers sold long-term policies at deep discounts relative to actuarial val-ue. The average markup was as low as −19 percent for annuities and −57 percent for life insurance. This extraordinary pricing behavior was due to financial and product market frictions, interacting with statu-tory reserve regulation that allowed life insurers to record far less than a dollar of reserve per dollar of fu-ture insurance liability. We identify the shadow cost of capital through exogenous variation in required reserves across different types of policies. The shadow cost was $0.96 per dollar of statutory capital for the average company in November 2008.
We provide a theory of the determination of exchange rates based on cap-ital flows in imperfect f... more We provide a theory of the determination of exchange rates based on cap-ital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from in-ternational imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus affecting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, it also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Our framework is flexible; it accommodates a number of important modeling features within a...
Utilizing multiple big-data sources, firm-level indices intended to track foot traffic to US reta... more Utilizing multiple big-data sources, firm-level indices intended to track foot traffic to US retailer stores are constructed. The foot-traffic index significantly predicts quarterly sales growth, revenue surprises, earnings surprises, as well as excess returns around quarterly earnings announcements. The average excess return difference between stocks with high and low index values during the five-day period around earnings announcement dates is 3.44%. Using the index as a proxy for managerial private information, we find evidence that managers smooth earnings by increasing discretionary accruals amid high prospects for future revenues. However, announcement returns are negatively related with the level of discretionary accruals, implying investors downplay firm announcements when the level of discretionary accruals is high. In addition, the foot-traffic index for the period beginning after the fiscal-quarter end and ending prior to the earnings announcement date strongly predicts t...
We model the equilibrium price and quantity of risk transfer between firms and financial intermed... more We model the equilibrium price and quantity of risk transfer between firms and financial intermediaries. Value-maximizing firms have downward sloping demands to cede risk, while intermediaries, who assume risk, provide less-than-fully-elastic supply. We show that equilibrium required returns will be “high” in the presence of financing imperfections that make intermediary capital costly. Moreover, financing imperfections can give rise to intermediary market power, so that small changes in financial imperfections can give rise to large changes in price. We develop tests of this alternative against the null that the supply of intermediary capital is perfectly elastic. We take the US catastrophe reinsurance market as an example, using detailed data from Guy Carpenter & Co., covering a large fraction of the catastrophe risks exchanged during 1970-94. Our results suggest that the price of reinsurance generally exceeds “fair” values, particularly in the aftermath of large events, that mark...
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Papers by Kenneth Froot