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Creator: Smith, Bruce D. (Bruce David), 19542002 Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 228 Abstract: "Summary of Recommendations: . . . Repeal present control by the System over interest rates that member banks may pay on time deposits and present prohibition of interest payments by member banks on demand deposits." Milton Friedman (1960, p. 100) "I conclude that the overall monetary effects of ceiling regulations are small and easy to neutralize by traditional monetary controls. The allocative and distributive effects are, however, unfortunate. The root of the policy was an exaggerated and largely unnecessary concern for the technical solvency of savings and loan associations." James Tobin (1970, p. 5) The regulation of deposit interest rates has received little support from economists. The same is true for the original rationale for such regulation: that bank competition for deposits generates inherent "instability" in the banking system. This paper develops an "adverse selection" model of banking in which this rationale is correct. Moreover, in this model instability in the banking system can arise despite the presence of a "lender of last resort," and despite the absence of any need for "deposit insurance." However, in the world described, the regulation of deposit interest rates is shown to be an appropriate response to "instability" in the banking system. Finally, it is argued that "adverse selection" models of deposit interest rate determination can confront a number of observed phenomena that are not readily explained in other contexts.
Stichwort: Risk, Banking panics, Unregulated banks, Banking Act of 1935, Instability, Bank regulation, Banking Act of 1933, and Banking Act Fach: D82  Asymmetric and Private Information; Mechanism Design, G21  Banks; Depository Institutions; Micro Finance Institutions; Mortgages, G11  Portfolio Choice; Investment Decisions, and E42  Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems 
Creator: Wallace, Neil Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 024 Abstract: In "Liquidity Preference as Behavior Towards Risk," Tobin suggests that risk aversion and expected utility maximization can provide a rigorous foundation for an equilibrium demand for money. In Tobin's model, money plays a risk reducing role in individual portfolios. This note considers whether a general equilibrium stochastic model can produce equilibrium yield distributions that allow money to play that role if money does not appear directly as an argument in the utility or production functions of the economy. The model examined, a stochastic production variant of Samuelson's model of overlapping generations, cannot produce such yield distributions.
Stichwort: Risk aversion, Stochastic, and Monetary economy Fach: E41  Demand for Money, C51  Model Construction and Estimation, and G11  Portfolio Choice; Investment Decisions 
Creator: Supel, Thomas M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 006 Abstract: Previous work on discrete time portfolio selection models encompassed (a) transaction's costs, and (b) uncertainty about cash flows during the first (and only) period. This paper extends these models by considering uncertainty about asset yields in the second period and the optimal strategy for portfolio selection over a twoperiod horizon. Among the implications are i) the optimal initial portfolio is, in general, diversified and contains more shortterm assets than the myopic investor's portfolio, and ii) the shape of the meanvariance locus ensures diversification for all (twomoment) types of investors, except certain forms of risk lovers. Other partial derivatives are investigated.
Beschreibung: Working paper 6 is based largely on chapter 3 of Supel's University of Minnesota Ph.D. dissertation, "A twoperiod balance sheet model for banks."
Stichwort: Cash flow, Portfolio diversifying behavior, Optimal strategy, and Diversification Fach: D81  Criteria for DecisionMaking under Risk and Uncertainty and G11  Portfolio Choice; Investment Decisions 
On the Relation Between the Expected Value and the Volatility of the Nominal Excess Return on Stocks
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 505 Abstract: Earlier researchers have found either no relation or a positive relation between the conditional expected return and the conditional variance of the monthly excess return on stocks when they used the standard GARCHM model. This is in contrast to the negative relation found when other approaches were used to model conditional variance. We show that the difference in the estimated relation arises because the standard GARCHM model is misspecified. When the standard model is modified allow for (i) the presence for seasonal patterns in volatility, (ii) positive and negative innovations to returns to having different impacts on conditional volatility, and (iii) nominal interest rates to affect conditional variance, we once again find support for a negative relation. Using the modified GARCHM model, we also show that there is little evidence to support the traditional view that conditional volatility is highly persistent. Also, positive unanticipated returns result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility of a similar magnitude. Hence the time series properties of the monthly excess return on stocks appear to be substantially different from that of the daily excess return on stocks.
Stichwort: Stock market, Rate of return, Risk, Asset valuation, Return rate, and Stocks Fach: G12  Asset Pricing; Trading Volume; Bond Interest Rates and G11  Portfolio Choice; Investment Decisions