Research Lab

Suresh Sundaresan offers several insights on the development of financial markets in Asia and the Pacific. First, financial market development in the region should take account of the large number of households who are effectively unbanked, given the potential for positive feedback effects between financial markets, economic growth and stability. Second, there is a need for fundamental banking reforms of capital structures and liquidity sources to mitigate bankruptcy risks, as well as the cost to taxpayers of insolvency and bailouts.

A certain number of corporations, probably an increasing number, go considerably beyond what is required of them legally in minimizing their environmental impact. They meet legal limits on environmental impacts and then go beyond these. This has been called "overcompliance," a descriptive, if not elegant, phrase designating going well beyond what is required by laws and regulations in force. Why do corporations overcomply, going beyond what is legally required of them?

Valuation involves forecasting payoffs and discounting expected payoffs for risk. Forecasting is often seen as the province of the statistician, risk determination the province of asset pricing. This paper elaborates on the idea that financial forecasting, risk determination and valuation are a matter of accounting. Accounting not only provides information to forecast payoffs but also specifies the payoffs to be forecasted.

We study the structure of optimal wedges and capital taxes in a dynamic Mirrlees economy with endogenous distribution of skills. Human capital is a private, stochastic state variable that drives the skill process of each individual. Building on the findings of the labor literature, we construct a tractable life-cycle model of human capital evolution with risky investment and stochastic depreciation.

This article starts by discussing the concept of "inflation hedging" and provides some estimates of "inflation betas" for standard bond and well-diversified equity indices for over 45 countries. We show that such standard securities are poor inflation hedges. Expanding the menu of assets to foreign bonds, real estate and gold only improves matters marginally. This indicates a potentially important role for inflation index linked bonds.

We study a dynamic overlapping generations model where the population growth rate is stochastic, or can experience gradual but persistent changes. This leads to changes in the demographic makeup of the economy across the young, middle aged (who do the principal saving) and the old (who sell their assets to finance consumption).

This paper examines the so far unexplored relationship between short selling and news. It starts with a theoretical analysis of short selling's potentially beneficial and harmful effects, a brief history of its regulation and a review of the existing empirical literature. The study that follows uses daily NYSE short sale trading data representing a total of 2.3 million firm days and a measure negativity of firm news based on a content analysis of the Dow Jones Newswires.

This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes.