Erwin Hansen

Responsible Personal Finance: The Role of Conscientiousness in Bank and Pension Savings in Chile

We investigate the role of trait conscientiousness, from the Big Five personality traits, in explaining individual saving behavior. Conscientiousness is a disposition to be responsible and pursue non‐immediate goals; thus, we expect this trait to positively predict saving behavior. Using a nationally representative survey from Chile, we find the expected effect of conscientiousness on pension and bank savings.

Stockpiling Cash When It takes Time to Build: Exploring Price Differentials in a Commodity Boom

Some projects take time to build or are slow to yield cash flows. This may impact the dynamics of investment and liquidity management, although few studies test their financial implications. We exploit the peculiar advantages of copper mines as a laboratory to identify cash-flow sensitivities. In this context, investment decisions depend on the expectations of the long run price of the commodity, while the spread between the spot price and this long run expectations shifts current cash-flows. For this study we compiled a sample of copper firms between 2002 and 2012. We do not find significant effects of cash flow on current capital expenditures, but we do observe a systematic cash flow sensitivity of cash holdings, meaning that some of these transitory earnings are retained as liquidity. This cash stockpiling is stronger among financially constrained firms. In a context of time-to-build, our findings support financial theories emphasizing the salience of cash as buffer stock for liquidity in preparation for future investment opportunities.

Political risk and sovereign spreads in Latin America

Purpose The purpose of this paper is to explore the relationship between six different dimensions of political risk in a country and its spread for a sample of 12 Latin American countries. Design/methodology/approach The methodology applied consists of panel estimators with fixed effects. In addition, a panel data model with instrumental variables is considered to tackle with potential problems of endogeneity in the model. Findings The results show there is a strong positive relationship between political risk and sovereign spread in Latin America, i.e., greater political risk is associated with greater sovereign spread. This effect is particularly significant when the political risk is associated with a weak rule of law or low-quality regulation in the country. Research limitations/implications The main limitation of this study concerns the potential risks of endogeneity which might exist between sovereign risk and political risk measures, which may not have been completely eliminated with the econometri...

Portfolio performance of linear SDF models: an out-of-sample assessment

We evaluate linear stochastic discount factor models using an ex-post portfolio metric: the realized out-of-sample Sharpe ratio of mean–variance portfolios backed by alternative linear factor models. Using a sample of monthly US portfolio returns spanning the period 1968–2016, we find evidence that multifactor linear models have better empirical properties than the CAPM, not only when the cross-section of expected returns is evaluated in-sample, but also when they are used to inform one-month ahead portfolio selection. When we compare portfolios associated to multifactor models with mean–variance decisions implied by the single-factor CAPM, we document statistically significant differences in Sharpe ratios of up to 10 percent. Linear multifactor models that provide the best in-sample fit also yield the highest realized Sharpe ratios.

Does the FED's QE Program Alleviate Firms’ Financial Constraints in Emerging Economies?

This paper investigates whether the Quantitative Easing (QE) program implemented by the Federal Reserve Board after the 2007-2008 global financial crisis affects firms in emerging economies by improving their access to external financing. Our hypothesis relies on the idea that the excess of liquidity induced by the QE program in the aftermath of the crisis motivates global investors to reallocate their funds to emerging markets in search of higher expected returns. Consequently, more funds are available for local firms, thus alleviating their financial constraints. We empirically test this hypothesis using a sample of 1,000 nonfinancial firms in 12 emerging economies for the period from 2000 to 2014 from the Compustat Global database. By measuring the extent of firms’ financial constraint with Fazzari et al.’s (1988) investment-cash flow sensitivity coefficient, we find support for our hypothesis only in the second QE episode where ex-ante financially restricted firms become less sensitive to cash flows. For the first and third analyzed QE episodes, we find the opposite; that is, firms become more financially constrained. The results for the first and third periods are thus consistent with flight-to-quality and tapering mechanisms, respectively. Our evidence resembles prior evidence using capital flows data and highlights the significant role of the QE program on emerging economies.