Joe Peek

Comovement after Joining an Index: Spillovers of Nonfundamental Effects

This study considers the case of two overlapping categories in the context of recent category models. Specifically, we examine whether investor sentiment and market frictions specific to one category can affect the returns on assets belonging to the other category. With recent additions of several real estate investment trusts (REITs) into general stock market indices as a natural experiment, we find support for spillovers of such nonfundamental effects, as evidenced by the increased return correlation between REITs that remain outside the index and the index stocks. Further analysis reveals that market frictions play a greater role than investor sentiment.

Does the federal reserve possess an exploitable informational advantage

This paper provides evidence that the Federal Reserve has an informational advantage over the public that can be exploited to improve activist monetary policy. The informational advantage derives from the Fed?s role as a bank supervisor, and it is shown to be of sufficient duration to be effective in guiding activist monetary policy, even in simple rational expectations models. The informational superiority does not result from the Fed having earlier access to publicly released data about the financial condition of banks. Instead, this informational advantage is generated by confidential supervisory knowledge about troubled, non-publicly traded banks. As a result, this information can remain confidential for an extended period of time because these banks do not have an incentive to fully disclose publicly the extent of their financial troubles, and, since they are not publicly traded, are not required to do so. The improvement in forecasts using this confidential information is both statistically significant and economically important, providing a potential justification for activist monetary policy.

Reciprocity and Network Coordination: Evidence from Japanese Banks

In this study, we provide the first detailed empirical evidence on the cooperative behavior of individual members of a functioning, real world network. In contrast to experimental evidence from limited settings, our study employs detailed data on the volume of loans given to individual firms from each individual bank that lends to them at an annual frequency for nearly 20 years. Using this detailed data, we are able to exploit substantial cross-sectional variation in the degree of reliance of the banks on the network as a whole and on other individual banks within the network. In addition, we are able to investigate the impact of economic stress on the cooperative behavior of individual network members by comparing the 1980s with the more turbulent 1990s. We find strong evidence that the strength of system-wide reliance on, and thus commitment to, the network, as well as pairwise reliance on other network members, plays an important role in explaining the observed cooperative behavior by Japanese banks. In the usual course of economic activity, economic agents become linked in many ways. Many of the linkages create networks where the actions of individual network members have significant effects on the well-being of the other members of the network. Among the most important issues in the analysis of networks are the coordination of the actions of the network members and the sustainability of the network. In particular, an important question concerns the motivation underlying any observed cooperation among network members. How (and to what extent) does cooperation by network members respond to economic incentives? Empirical research on the source of the motivation for network coordination, however, faces a severe identification problem. For example, observed cross-sectional differences in the nature of network coordination across countries may be as easily attributed to differences in the cultures or social norms across these countries as by differences in their economic environments. Furthermore, empirical tests are hampered by the paucity of micro-level data on the behavior of individual members of functioning networks. We overcome both problems by using micro-level data on the behavior of individual members of a functioning, real world network in a single country. The key to both the coordination of the actions of the network members and the sustainability of the network itself is a commitment mechanism. As long as parties have potential gains from coordinating through repeated interactions, reciprocity provides an economic commitment mechanism. Reciprocity has two general forms: bilateral reciprocity and system reciprocity. Bilateral reciprocity dictates that a pair of individuals with direct network links will take actions consistent with the cooperative outcome as long as the other party does not defect from the cooperative outcome. System reciprocity is more general, insofar as the reciprocal

Systemic Financial Crises: Crisis Resolution and Credit Allocation: The Case of Japan

A traditional “capital crunch,” like that experienced in the United States in the early 1990s, did not occur in Japan following the bursting of the stock price and real estate price bubbles. Poorly capitalized banks did not disproportionately cut back on loans, and overall lending did not decline dramatically. Nonetheless, we find evidence that the banking problems have contributed to the extended malaise of the Japanese economy during the subsequent decade. Just as the banks were slow to restructure, bank support for troubled and noncompetitive firms prevented the needed restructuring of nonfinancial firms from occurring. Thus, the strong borrower-lender relationships in Japan insulated Japanese firms from market forces and prevented a credit crunch. Nonetheless, bank lending behavior stifled economic growth by allocating an increasing share of bank credit to those firms least likely to use it productively.