Sean Collins

The Effect of Increased Transmission and Storage in an Interconnected Europe: An Application to France and Ireland

A longstanding goal of the European Union (EU) is to promote efficient trading between price zones via electricity interconnection to achieve a single electricity market between the EU countries. This paper uses a power system model (PLEXOS-EU) to simulate one vision of the 2030 EU electricity market based on European Commission studies to determine the effects of a new interconnector between France and the Single Electricity Market of Ireland and Northern Ireland (SEM). We use the same tool to understand the effects of investment in storage, and the effects of the interaction between storage and additional interconnection. Our results show that both investments in interconnection and storage reduce wholesale electricity prices in France and Ireland as well as reduce net revenues of thermal generators in most scenarios in both countries. However, France is only marginally affected by the new interconnector. Renewable generators see a modest increase in net revenues. The project has the potential for a positive impact on welfare in Ireland if costs are shared between countries and remain below 45 million €/year for the scenarios examined. The owners of the new interconnector between France and SEM see increased net revenues in the scenarios without storage. When storage is included in the system, the new interconnector becomes less profitable.

Assessing the credit risk of money market funds during the eurozone crisis

This paper measures credit risk in prime money market funds (MMFs) and studies how such credit risk evolved during the eurozone crisis of 2011–2012. To accomplish this, we estimate the annualized expected loss on each funds portfolio. We also calculate by Monte Carlo the cost of insuring a fund against losses amounting to over 50 basis points. We find that credit risk of prime MMFs, though small, doubled from 12 basis points in June 2011 to 23 basis points in December 2011 before receding in 2012. Contrary to common perceptions, this did not primarily reflect funds’ credit exposure to eurozone banks because funds took measures to reduce this exposure. Instead, credit risk in prime MMFs rose because of the deteriorating credit outlook of banks in the Asia/Pacific region. We conclude that the increase in the credit risk of prime MMFs in the second half of 2011 reflected contagion in the worldwide banking system coupled with slowing global economic growth, not actions taken by MMFs.This paper measures credit risk in prime money market funds (MMFs), studies how such credit risk evolved in 2011-2012, and tests the efficacy of the Securities and Exchange Commission’s (SEC) January 2010 reforms. To accomplish this, we estimate the credit default swap premium (CDS) needed to insure each fund’s portfolio against credit losses. We also calculate by Monte Carlo the cost of insuring a fund against losses amounting to over 50 basis points. We find that credit risk of prime MMFs rose from June to December 2011 before receding in 2012. Contrary to common perceptions, this did not primarily reflect funds’ credit exposure to eurozone banks. Instead, credit risk in prime MMFs rose because of the deteriorating credit outlook of banks in the Asia-Pacific region. Finally, we find evidence that the SEC’s 2010 liquidity and weighted average life (WAL) requirements reduced the credit risk of prime MMFs.

Are Bond Mutual Fund Flows Destabilizing? Examining the Evidence from the 'Taper Tantrum'

The notion that outflows from long-term mutual funds might destabilize financial markets is an old one, dating back to the late 1920s. The hypothesis, which has resurfaced periodically, has three components. First, because of an initial shock to financial markets, fund investors redeem heavily. Second, to meet redemptions, fund portfolio managers sell fund securities. Third, sales of fund securities put additional downward pressure on stock or bond prices. As this paper discusses, there has historically been little evidence supporting this hypothesis. Outflows from equity and bond funds have remained muted in the face of large economic shocks. Also, academic work has had difficulty finding evidence that outflows from funds add downward pressure to market prices. Since the financial crisis of 2007-2009, interest in the destabilizing-fund flows hypothesis has been renewed because of large inflows into bond funds, concerns that long-term interest rates could rise sharply as the Federal Reserve ends quantitative easing, and the development of theoretical models predicting that long-term fund flows could be destabilizing because of a “first-mover” advantage. This paper examines the evidence that outflows from bond fund flows could be destabilizing, focusing on the so-called “taper tantrum” period, the summer of 2013. Using descriptive analysis and vector autoregressions, we find there is at best very weak, if any, statistical evidence that bond fund flows have been destabilizing. Our findings are consistent with much of the literature, which has found that aggregate fund flows respond to market returns (often with a lag), but that there is not much evidence of a feedback effect from aggregate fund flows to market returns.