Central bank research hub - Papers by George Pennacchi
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Research hub papers by author George PennacchienWhy do banks target ROE?
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr855.pdf
New York Fed Staff reports by George Pennacchi and Joao A. C. SantosWhy do banks target ROE?2018-06-01T00:00:00ZHistorically, nonfinancial corporations relied on performance targets linked to their EPS. Up until the 1970s, banks also appeared to follow a similar practice, but since then they have favored ROE. Equity investors seem to be aware of these differences because EPS growth is better at explaining nonfinancials' stock market value while ROE is better at explaining banks' market values. In this paper we present a model of a bank with fixed-rate deposit insurance that faces increasing competition that erodes its charter value. When under these conditions the bank chooses its capital to maximize shareholder value, its performance based on ROE is much better than its performance based on EPS. We argue that such a situation characterized the banking industry during the 1970s and explains why it adopted an ROE target.Why do banks target ROE?Full texthttps://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr855.pdfJoao A. C. SantosGeorge PennacchiGeorge Pennacchi and Joao A. C. Santos2018-06-01Federal Reserve Bank of New York Staff ReportsG21G28Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps
http://www.clevelandfed.org/research/workpaper/2011/wp1107.pdf
Cleveland Fed Working papers by Joseph G Haubrich, George Pennacchi and Peter RitchkenInflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps2011-03-12T12:39:00ZThis paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short-term real interest rate, expected inflation, inflation's central tendency, and four volatility factors that follow GARCH processes. We derive analytical solutions for nominal bond yields, yields on inflation-indexed bonds that have an indexation lag, and the term structure of expected inflation. Unlike prior studies, the model's parameters are estimated using data on inflation swap rates, as well as nominal yields and survey forecasts of inflation. The volatility state variables fully determine bonds' time-varying risk premia and allow for stochastic volatility and correlation between bond yields, yet they have small effects on the cross section of nominal yields. Allowing for time-varying volatility is particularly important for real interest rate and expected inflation processes, but long-horizon real and inflation risk premia are relatively stable. Comparing our model prices of inflation-indexed bonds to those of Treasury Inflation Protected Securities (TIPS) suggests that TIPS were significantly underpriced prior to 2004 and again during the 2008-2009 financial crisis.Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation SwapsFull texthttp://www.clevelandfed.org/research/workpaper/2011/wp1107.pdfPeter RitchkenGeorge PennacchiJoseph G. HaubrichJoseph G Haubrich, George Pennacchi and Peter Ritchken2011-03Federal Reserve Bank of Cleveland Working PapersA Structural Model of Contingent Bank Capital
http://www.clevelandfed.org/research/workpaper/2010/wp1004.pdf
Cleveland Fed Working papers by George PennacchiA Structural Model of Contingent Bank Capital2010-04-24T06:27:59ZThis paper develops a structural credit risk model of a bank that issues deposits, shareholders¿ equity, and fixed or floating coupon bonds in the form of contingent capital or subordinated debt. The return on the bank¿s assets follows a jump-diffusion process, and default-free interest rates are stochastic. The equilibrium pricing of the bank¿s deposits, contingent capital, and shareholders¿ equity is studied for various parameter values haracterizing the bank¿s risk and the contractual terms of its contingent capital. Allowing for the possibility of jumps in the bank¿s asset value, as might occur during a financial crisis, has distinctive implications for valuing contingent capital. Credit spreads on contingent capital are higher the lower is the value of shareholders¿ equity at which conversion occurs and the larger is the conversion discount from the bond¿s par value. The effect of requiring a decline in a financial stock price index for conversion(dual price trigger) is to make contingent capital more similar to non-convertible subordinated debt. The paper also examines the bank¿s incentive to increase risk when it issues different forms of contingent capital as well as subordinated debt. In general, a bank that issues contingent capital has a moral hazard incentive to raise its assets¿ risk of jumps, particularly when the value of equity at the conversion threshold is low. However, moral hazard when issuing contingent capital tends to be less than when issuing subordinated debt. Because it reduces effective leverage and the pressure for government bailouts, contingent capital deserves serious consideration as part of a package of reforms that stabilize the financial system and eliminate ¿Too-Big-to-Fail.¿A Structural Model of Contingent Bank CapitalFull texthttp://www.clevelandfed.org/research/workpaper/2010/wp1004.pdfGeorge PennacchiGeorge Pennacchi2010-04Federal Reserve Bank of Cleveland Working PapersEstimating Real and Nominal Term Structures using Treasury Yields, Inflation, Inflation Forecasts, and Inflation Swap Rates
http://www.clevelandfed.org/research/workpaper/2008/wp0810.pdf
Cleveland Fed Working papers by Joseph G Haubrich, George Pennacchi and Peter RitchkenEstimating Real and Nominal Term Structures using Treasury Yields, Inflation, Inflation Forecasts, and Inflation Swap Rates2008-11-25T09:29:00ZThis paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. The term structures are driven by state variables that include the short term real interest rate, expected inflation, a factor that models the changing level to which inflation is expected to revert, as well as four volatility factors that follow GARCH processes. We derive analytical solutions for the prices of nominal bonds, inflation-indexed bonds that have an indexation lag, the term structure of expected inflation, and inflation swap rates. The model parameters are estimated using data on nominal Treasury yields, survey forecasts of inflation, and inflation swap rates. We find that allowing for GARCH effects is particularly important for real interest rate and expected inflation processes, but that long¿horizon real and inflation risk premia are relatively stable. Comparing our model prices of inflation-indexed bonds to those of Treasury Inflation Proected Securities (TIPS) suggests that TIPS were underpriced prior to 2004 but subsequently were valued fairly. We find that unexpected increases in both short run and longer run inflation implied by our model have a negative impact on stock market returns.Estimating Real and Nominal Term Structures using Treasury Yields, Inflation, Inflation Forecasts, and Inflation Swap RatesFull texthttp://www.clevelandfed.org/research/workpaper/2008/wp0810.pdfGeorge PennacchiPeter RitchkenJoseph G. HaubrichJoseph G Haubrich, George Pennacchi and Peter Ritchken2008-11Federal Reserve Bank of Cleveland Working PapersE43E52G12Harming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation
http://www.clevelandfed.org/Research/Workpaper/2007/wp0704.pdf
Cleveland Fed Working papers by Kwangwoo Park and George PennacchiHarming Depositors and Helping Borrowers: The Disparate Impact of Bank Consolidation2007-04-04T12:39:59ZHarming Depositors and Helping Borrowers: The Disparate Impact of Bank ConsolidationFull texthttp://www.clevelandfed.org/Research/Workpaper/2007/wp0704.pdfKwangwoo ParkGeorge PennacchiKwangwoo Park and George Pennacchi2007-04Federal Reserve Bank of Cleveland Working PapersG21G34