Contents: ~Morning session distinguished speeches ~Keynote speech by World Bank CFO Gary Perlin ~Afternoon paper presentations ~Election session ===================================================== The Chinese Finance Association held its seventh annual meeting at the Robert H. Smith School of Business, University of Maryland, Collge Park, MD, on August 19, 2000. About 70 members and guests attended this event.
A SUMMARY OF THE SEVENTH ANNUAL CONFERENCE of The Chinese Finance Association University of Maryland, College Park, Maryland, AUGUST 19, 2000 Morning Session
The meeting started with a welcome speech by the President of TCFA, Mr. Chi Su of University of Chicago. The morning session featured chair of the finance department of Smith School of Business of U of Maryland, distinguished finance Professor Lemma Senbet, and Principal advisor for banking of the Inter- nation Finance Corporation,Richard Roulier, and Fannie Mae's Chief Economist, David Berson. In the invitation of TCFA, Benhua Wei, the China executive director of the IMF also participated the meeting and shared his personal views on IMF relationship with China and some of issues raised by speakers. Professor Senbet presented his most recent researches to the audience. His first topic was on the paradigms in corporate finance and optimal banking regulation. He argued that the effectiveness of capital regulation depends on the characteristics of bank investment schedule. There is a role for bank management in capital regulation because managers are corporate insiders, and there is interaction between management compensation and leverage and management compensation has direct effect on incentives. Therefore a fairly priced insurance premium is a function of leverage, investment schedule, observable structure of compensation. He further stressed the agency perspective in bringing corporate finance paradigms to bear upon the root cause of financial crisis in emerging economies. He focused on the role of incentives in preventing financial crisis rather than on the resolution of crisis when it actuall occurs. He showed that where the principal problem is over-investment, it will be mitigated, or even eliminated, through an optimal usage of risky debt, since debt has the beneficial role of inducing some underinvestment. His incentive solutions call for "fixing the roof while the sun shines". Mr. Richard Roulier shared with the audience his perspectives on the WTO's potential impact on China's financial sector. He anylyzed the potential challenges faced by the China's economy by first reviewing the timelines provided in the US and China agreement. He then described the existing fragile state of the Chinese banking system, suggested possible affects of WTO accession on the stability of the financial system, and anticipate likely responses of the Chinese and of foreign banks. Richard finally suggested what he believed are urgent policy actions requiring the cooperation of the authorities, bilateral trading partners and the international community at large. David Berson, Chief Economist of Fannie Mae, provided audience an outlook of the US economy and mortgage market. He began his speech by reviewing the history of US economic cycles and asking how long can the current economy keep expanding. He argued that economic growth that would moderate to a sustainable pace. There will be little additional increase in interest rates this year, and modestly lower rates next year. There will be slower housing and mortgage market activity in the second half of the year.Keynote Speech
During the conference lunch at UMUC conference center, TCFA was honored to have World Bank Chief Financial Officer (CFO), Senior Vice President, Gary Perlin as the keynote speaker. Gary's speech was titled "Private and public sector challeges to financial sector development in emerging markets". He offered his perspectives on the transition from a totally public sector dominated economy to a totally private sector dominated economy. His view was that privitization was not an overnight event. He used Fannie Mae and Freddie Mac's example to argue that transition is an evolving process. It is the gradual progress in the transformation of assets and liabilities that privitized the economy and created the desired market. To move towards a private economy, we should take a good look at it and move step by step. For firms that liabilities are not totally private, public policy objective has to be incentive compatible. Gary argued that there are important things to learn from the development of Fannie Mae, Freddie Mac, and the subsequent evolution of ABS market. The legistration basically created a MBS market and then a structure that works (with only two big players). The privatization of assets and equity went first leaving liabilities somewhat public. Without these gradual steps, it is hard to imagine the totally privatized big MBS/ABS market. Gary also pointed out that financial sector may appear to be not real to some economists, but they are indeed real in his view. The focus of financial institutions should be on information capital and human capital. Financial institutions should try to make use of information capital and utilize human capital within capacity. The real side of financial sector comes not from assets, not from liabilities but from its net worth. Net worth is real. Information capital and human capital are real as well. Financial sectors are managed in such a way that they can make real sector more productive. In terms of capital allocation, he asked what system we should follow. He believed that capital markets are more efficient for risk capital allocation, but for information capital and human capital, the system requirement is more demanding. In a evolution sense, we need to create more liquid market for these capital. At the end of his keynote speech,Gary answered questions from audience, In particular, he took some time to talk about how to be successful in finance profession. He stressed that one has to pay attention to the institution and people in the institution. A finance professional has be clear about the big picture he/she is in and understand the skills that are used and can be used elsewhere. One has to be aware of his objective function, which should not be driven by the maximization of return. One needs to be forward looking and inward looking, and put less emphasis on the technical details.Afternoon session
The afternoon session consisted of six professional presentations. Michael Gordy from the Federal Reserve Board of Governors was the first to speak. He showed that it is possible to make a risk- bucketing approach consistent with restricted versions of any of today's leading models of portfolio value-at-risk. For the near term, the asymtotic single-factor approach offers an internally consitent framework within which to calibrate risk-bucket capital charges. Professor Guojun Wu then presented his joint paper on Value at Risk Estimation by Regression Quantiles. In this paper they propose a robust method of estimating Value at Risk(VaR) using the quantile regression model pioneered by Koenker and Bassett (1978). Unlike the traditional VaR estimation methods, the quantile regression approach allows for a general treatment on the error distribution and is robust to distributions with heavy tails. Following Guojun's presentation, Xiaoyun Yufrom University of Minnesota, presented her paper on ownership structure, liquidity and option value of investments. She developed a market microstructure model where the firm's investment decision is the part of the equilibrium, and where the presence of a large shareholder who trades less frequently affects the incentive of informed trading. She found that the optimal ownership structure rests on the key trade-off between the liquidity and the value of the information. Dajiang Guo's presentation, who comes from Centre Solutions in New York, is devoted to pricing "hybrid" (insurance and financial) risk products by combining the financial option pricing method with the actuarial pricing method. It suggests that the price of contingent claims containing both hedgeable risk and unhedgeable risk should reflect the average cost of hedging, plus a risk premium that compensates for the marginal residual risk the contract brings to the existing portfolio. Tong Yao from Boston College presented his paper on hetergeneity in asset pricing models. Assuming lognormality of the cross- sectional distribution of consumption and constant-relative-risk- aversion (CRRA) preferences, he derived a pricing kernel which allows for departures from the complete-markets, representative- agent set-up. The new kernel depends on the growth rate of average per-capita consumption and the change in the cross- sectional variance of log-consumption. The final presentation of the conference was made by Xuemin Yan, who is a PhD candidate from U of Iowa. His study examines the validity of an argument that a substantial trading cost reduction should be realized when a company switches from the multi-dealer Nasdaq system to the AMEX specialist system, using data from 1996-1998 on firms that switch from the Nasdaq to AMEX or NYSE. In agreement with earlier studies, they found that there are some improvements in liquidity when firms switch from Nasdaq to AMEX or NYSE. However, the improvement is declining over our three-year sample period and is virtually erased by 1998. Overall, their findings indicate that the liquidity improvement from exchange listing is very limited in the wake of the Nasdaq reform of 1997. (Due to time constraints, Professor Ju's presentation was cancelled.)Election session
The Seventh Annual Conference concluded with the election. The following members were elected and will serve as TCFA officers for the 2000-2001 term: President: Jian Hu, Fannie Mae President-elect: Xin Zhang, The World Bank Board of Directors: Xiaoling Zhang, Federal Reserve Board of Governors Xin Zhang, The World Bank Dajiang Guo, Centre Solutions Ludan Liu, Boston College Tao Zhao, Salomon Smith Barney Chi Su, University of Chicago Fei Zou, University of Texas at Austin Carrie Cao, Consolidated Stores Corp. Xuemin Yan, University of Iowa Finally, we would like to thank all conference participants, in particular, conference organizers and previous board of directors, for their help in making this conference a big success.