Drew B. Winters

The value of auditor assurance: Evidence from loan pricing

This paper provides empirical evidence on the economic value of services provided by independent auditors by analyzing whether auditor association leads to reduced interest rates on revolving credit agreements. Using multivariate regressions, we analyze the relation between interest rates on revolving bank loans to small, private firms and the degree of auditor association with the financial statements provided to the lender,

Day-of-the-week effects in federal funds rates: Further empirical findings

Abstract We extend the Spindt and Hoffmeister (1988) model of the daily operation of an institutions federal reserve account to show strong inter-and intra-period incentives to borrow and lend in the federal funds market at predictable points in the 10 trading day settlement period. Using intraday high and low prices, we demonstrate changes in the federal funds rate consistent with our models predictions. We provide evidence of predictable changes in the variance of Fed funds returns on a daily and intraday basis. Our analysis confirms that Federal Reserve requirements result in daily and intraday variances which are not constant.

The Turn of the Year in Money Markets: Tests of the Risk-Shifting Window Dressing and Preferred Habitat Hypotheses

Musto (1997) identifies a turn-of-the-year effect in the commercial paper market and offers risk-shifting window dressing as an explanation. We revisit this market with different methods and find strong evidence rejecting the risk-shifting hypothesis. We extend our analysis to other private-issue money market instruments and find similar results. We find further corroborating evidence in the 1-month T-bill market and aggregate demand deposit data. Our results are consistent with a year-end preferred habitat for liquidity associated with year-end cash flow obligations.

The Market Value of Debt, Market Versus Book Value of Debt, and Returns to Assets

Empirical studies usually measure the value of debt based on book rather than market value, even though the underlying theory is almost always based on market values. This paper documents how using book value to measure debt can distoret debt-equity rations and cost of capital calculations.

An Intraday Examination of the Federal Funds Market: Implications for the Theories of the Reverse-J Pattern

The intraday literature suggests that returns, variances, and volume form an intraday reverse-J pattern. Two competing theories explain the observed patterns: private information about future security prices and trading stoppages. The Federal funds market allows a unique opportunity to study the causes of intraday patterns because private information common to most markets does not play a role in setting prices. We find reverse-J variance patterns while accounting for generalized autoregressive conditional heteroskedasticity (GARCH) model effects. Our results support trading stops as an explanation for the reverse-J pattern and suggest that private information is not a necessary condition for the observed pattern. Copyright 2001 by University of Chicago Press.

The Effect of Federal Reserve Accounting Rules on the Equilibrium Level of Overnight Repo Rates

This paper addresses whether Federal Reserve Board accounting requirements are sufficiently pervasive to create regularities in government overnight repurchase agreement (repo) rates. US bank settlement regulations allow overnight government repos as substitutes for Federal (Fed) funds. We find that overnight government repos exhibit rate changes and variance regularities consistent with regularities identified in the Fed funds market, which have been shown to result directly from the Federal Reserve regulations and accounting policies governing the US bank settlement process. Thus, we conclude that the overnight government repo rates are influenced in a similar manner by regulatory rules. However, since the rate changes are not large economically, the influence of regulatory accounting practices does not violate the premise of an efficient market. Copyright Blackwell Publishers Ltd 1997.

Does an Industry Effect Exist for Leveraged Buyouts

We examine the industry effect hypothesis for leveraged buyouts that suggests leveraged buyouts will be concentrated in low-growth industries that produce free cash flow. Past studies of the leveraged buyout phenomenon have not examined the validity of the industry effect hypothesis. By testing for an industry effect, we hope to further the research concerning the motivations for why leveraged buyouts occur. The findings in this paper in general do not support the industry effect hypothesis. We find only spurious correlation between leveraged buyouts and industries. Based on these results, we conclude that firm specific factors motivate leveraged buyouts.

The Federal Reserve and the 2007–2009 Financial Crisis: Treating a Virus with Antibiotics? Evidence from the Commercial Paper Market

The two main explanations for the crisis in the commercial paper (CP) market are credit concerns and liquidity issues. The CP market is not homogeneous in terms of credit quality, maturities and types of issues. We find that lower credit-quality CP suffered more during the crisis. Additionally, we find little evidence that Federal Reserve (Fed) liquidity facilities reduced the impact of the crisis, but that when the Fed became a lender in the CP market, the crisis pressures were dramatically reduced. We conclude that the crisis in the money markets is related more to increases in credit risk. Liquidity is a secondary issue.

An empirical examination of the intraday volatility in euro-dollar rates

Abstract We examine hourly observations of one-month euro–dollar rates using the GARCH model from Baillie and Bollerslev (1990) and find an intraday volatility pattern with two important components. First, intraday volatility is largest during regular business hours in the Asian markets and smallest during regular business hours in the U.S. This result is in contrast to the previously identified intraday volatility patterns in the currency exchange rates. Second, we find volatility spikes at the beginning of the business day in Tokyo, London, and New York. Currency exchanges rates also show volatility spikes at the beginning of the business day in Tokyo, London, and New York. We interpret these results as support for the model by Hong and Wang (2000) which suggests that volatility clusters at the beginning and end of the regular business day, even in the absence of market closures, if most traders are not active during regular non-business hours.

Year-End Seasonality in One-Month LIBOR Derivatives

The January effect in the stock market is well-known. Many markets have also been found to exhibit distinct day of the week effects or seasonal patterns. A less well-known but surprisingly strong end of year phenomenon occurs in LIBOR during the month of December. As Neely and Winters show, the daily average LIBOR is more than 30 basis points higher during December than the rest of the year, and volatility is about twice as high. The article examines whether the interest rate futures and options markets fully reflect this effect, and the strong conclusion is that they do, mostly, and so does the embedded forward rate in the LIBOR term structure. Neely and Winters find that the futures market in general is not a fully efficient predictor of future spot LIBOR, and December is a little worse than the other months, but only by a little. As is typical in such tests, implied volatility in futures options is also found to be a biased estimate of future volatility, but again, December is not different from other months. The overall conclusion is that even though the futures and options markets provide biased forecasts of the future level and volatility of LIBOR, they do seem to capture the end of the year pattern quite well.