How Much Do Investors Care About Macroeconomic Risk? Evidence from Scheduled Economic Announcements

Wharton author: Pavel Savor [with Mungo Wilson, Oxford Univ.]

Stock market average returns and Sharpe ratios are significantly higher on days when important macroeconomic news about inflation, unemployment, or interest rates is scheduled for announcement. The average announcement day excess return from 1958 to 2009 is 11.4 basis points versus 1.1 basis points for all the other days, suggesting that over 60% of the cumulative annual equity risk premium is earned on announcement days. The Sharpe ratio is ten times higher. In contrast, the risk-free rate is detectably lower on announcement days, consistent with a precautionary saving motive. Our results demonstrate a trade-off between macroeconomic risk and asset returns, and provide an estimate of the premium investors demand to bear this risk.

Land and House Price Measurement in China

Wharton Author: Joseph Gyourko [with Yongheng Deng, Natl. Univ. of Singapore; Jing Wu, Tsinghua Univ. & Natl. Univ. of Singapore]

This paper reports the first results and summary statistics on conditions in Chinese land markets using new data based on auction sales from 2003-2010 in 35 major cities. The typical market has experienced double-digit compound annual growth in real values on average in the last eight years. Three notable characteristics about the land value appreciation series are its strong mean reversion at annual frequencies, the strong common factor in its movement, and its very high volatility. We also investigated the quality of the two most prominent house prices indexes in China, and concluded that a traditional hedonic index would more accurately reflect how house prices have changed over time in eight major markets in China. We believe these data will serve as the foundation for much broader and in-depth future work on Chinese land and housing markets.

Efficiency Gains from Removing Entry and Price Controls: Evidence from a Change in Regulation

Wharton Authors: Katja Seim & Maria Ana Vitorino

This paper investigates empirically the role of Portuguese deregulation in shaping the structure of local markets for driving instruction and competition among driving schools. We develop a framework that integrates quality and price competition among horizontally and vertically differentiated driving schools. We estimate the model using detailed data on the market structure, firm attributes and prices, and consumer preferences for 593 schools in 117 markets. We use the estimated parameters of our model to predict the effect that the 1998 easing of price and entry restrictions governing the sector had on firm profits and consumer welfare. We also explore the effect of new regulations currently being considered.

Women and Power: Unwilling, Ineffective, or Held Back?

Wharton author: Albert Saiz [with Pablo Casas-Arce, Univ. Pompeu Fabra, Barcelona GSE & IESE Business School]

We develop a model that nests previous explanations for women under-representation in positions of power. Focusing on democratic electoral dynamics, our framework delineates the three types of mechanisms that may be at play: consumer demand, candidate supply, and internal party dynamics beyond electoral markets. We use Spain’s Equality Law, requiring a 40% female quota in electoral lists, to test the alternative theories. The law was enacted by the social-democratic party after the surprise parliamentary electoral results following the Madrid terrorist bombings, and was therefore completely unexpected by regional political machines. The law only applied to towns with populations above 5000, so we can use a treatment-control, before-and-after discontinuity design to learn about the impact of female politicians in local elections. Our evidence is most consistent with the existence of entrenched male-dominated political machines capturing influential power positions within the parties.

Pop Internationalism: Has A Half Century of World Music Trade Displaced Local Culture?

Wharton author: Fernando Ferreira [with Joel Waldfogel, Univ. of Minnesota]

 Has World Music Trade Displaced Local Culture?Has World Music Trade Displaced Local Culture? Advances in communication technologies over the past half century have made the cultural goods of one country more readily available to consumers in another, raising concerns that cultural products from large economies – in particular the US – will displace the indigenous cultural products of smaller economies. In this paper we first provide stylized facts about global music consumption and trade since 1960 using a unique data on popular music charts from 22 countries, corresponding to over 98% of the global music market. We document similarity between music trade and the trade of physical goods: trade volumes are higher between countries that are geographically closer and between those that share a language. We then develop a model of music trade based on those stylized facts, and we estimate gravity equations that are directly linked to the model. Contrary to growing fears about large-country dominance, we find a substantial bias toward domestic music which has, surprisingly, increased sharply in the past decade. Moreover, we find no evidence that new communications channels – such as the growth of regional MTV channels and Internet penetration – reduce the consumption of domestic music.

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The Network Structure of Sovereign Debt Defaults

Wharton author: Mauro Guillen [with Doğa Kerestecioğlu, Univ. of Pennsylvania]

This paper analyzes the effects of the global network structure of states on sovereign debt defaults. Following the institutionalism, world-system, and world-society perspectives in sociology, we posit that economic events are embedded in the social sphere and how states perceive others will affect their behavior. After building mapping our sample of countries on two separate networks based on two different types of trade ties, we test whether high volume trade partner states or competing states are more likely to default compared to other trade pairs. We also test whether partnership effect changes at different levels of democracy. We test our hypotheses with data on 64 countries between 1962 and 2000, using fixed effects logistic regression and multilevel logistic regression models. Controlling for macroeconomic and political economy variables, we find strong support that role equivalency increases the likelihood of sovereign default spillovers. The results reveal mixed findings about trade cohesion and the effects of democracy.

Thin Capitalization Rules & Multinational Firm Capital Structure

Wharton Author: Jennifer Blouin [with Harry Huizinga, Tilburg Univ.; Luc Laeven, IMF; Gaëtan Nicodème]

This paper examines how thin capitalization regimes, that limit the deductibility of interest, affect the leverage of the affiliates of US multinationals. For this purpose, we construct a new data set on thin capitalization rules in 51 countries for the period 1980-2007 that provides detailed information on criteria and remedies. The presence of a thin capitalization regime is estimated to reduce affiliate leverage by 2.6 percent. At the same time, thin capitalization regimes reduce the sensitivity of total leverage to the tax rate by about two thirds.