Günter Strobl

Bank capital regulation with random audits

We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the banks asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholders/managers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the bank, and of the auditing frequency are examined.

Adaptive Erwartungsbildung und Finanzmarktdynamik

SummaryBased on a classical financial market model we discuss three model variants, each focusing on a different approach in the formation of (heterogeneous) beliefs about future asset prices: the concept of Consistent Expectations, the concept of Adaptive Belief Systems, and artificial financial markets, where beliefs (or expectations) are formed by Classifier Systems. We analyze the consequences of these different mechanisms of expectations formation on the equilibrium dynamics of asset prices and compare statistical properties of returns generated by these models with the characteristics of real world time series.

Credit Ratings: Strategic Issuer Disclosure and Optimal Screening

We study a model in which an issuer can manipulate information obtained by a credit rating agency (CRA) seeking to screen and rate its financial claim. Better CRA screening leads to a lower probability of obtaining a high rating but makes a high rating more valuable. Over an intermediate range of manipulation cost, improving screening quality can lead to more manipulation, dampening the CRAs incentive to screen. We further show that a CRAs own incentives to inflate ratings constrain its optimal screening intensity. Our model suggests that strategic disclosure by issuers may have played a role in recent ratings failures.

The Industrial Organization of Money Management

We construct and analyze a model of delegated portfolio management in which money managers signal their investment skills via their choice of transparency for their fund. We show that a natural equilibrium is one in which high- and low-skill managers pool in opaque funds, while medium-skill managers separate in transparent funds. In this equilibrium, high-skill managers rely on their eventual performance to separate from low-skill managers over time, saving the monitoring costs associated with transparency. In contrast, medium-skill managers rely on transparency to separate from low-skill managers, especially when it is difficult for investors to tell them apart through performance alone. Low-skill managers prefer mimicking high-skill managers in opaque funds in the hope of replicating their performance and compensation. The model yields several novel empirical predictions that contrast transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds).

Rational Disposition Effects

The paper examines the tendency to sell winners and hold on to losers in a dynamic noisy rational expectations equilibrium with informed and uninformed investors. The key feature of the model is that the information asymmetry between investors varies over time. Besides demonstrating that the disposition effect is not intrinsically at odds with rational behavior, the model makes two novel predictions. First, disposition effects among uninformed investors should weaken after events that reduce information asymmetry. Second, disposition effects among uninformed investors should be weaker in persistent winners and persistent losers. The data, transactions of 30,000 clients at a German broker between 1995 and 2000, are consistent with these predictions.

Publicizing Performance

In most employment relationships, the employees performance at the firm is privately, not publicly, observed. Firms can reward successful employees by publicizing their abilities, for example, via a job title, a glowing letter of recommendation, or a resume-worthy award. Firms that establish reputations for hiring young workers and promoting those who succeed lose good workers to competitors but can pay less to young, inexperienced workers in exchange. We find in a general equilibrium setting that firms with reputations for publicizing performance are able to pay less to employees at every level of tenure and thus earn economic profit, but that these firms will never be the most productive in the economy. For such equilibria to exist, the worker--firm match must be important, suggesting that this practice takes place only in human-capital-intensive industries. This paper was accepted by Wei Xiong, finance.

Volatility Forecasts and the Profitability of Automated Trading Strategies

Traditional approaches to forecast option prices and implement trading strategies make use of implied volatilities. Noh, Engle, and Kane (1994) propose a different approach. Based on conditional variance models of the GARCH type they forecast volatility and use these forecasts to predict future option prices. In combination with simple trading rules Noh et al. evaluate the profitability of these forecasts for the S&P 500 index. In this paper we take up their approach and apply it to Bund future options. We show that volatility forecasts together with simple option trading strategies create value. The profits can be significant even when transaction costs are taken into account.