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Research Notes–January 2007

Featuring research published in December 2006


Dollar Depreciates in November
The average monthly value for the trade-weighted dollar index of 15 major currencies tracked by the Federal Reserve Bank of Atlanta fell 0.7 percent in November from the previous month.


Preface—Hedge Funds: Creators of Risk?
Economic Review Q4 2006

Hedge Funds: An Industry in Its Adolescence
Economic Review Q4 2006
The business model presented in this article explains hedge funds’ need for secrecy and their strategy risk and provides a framework to help investors, intermediaries, and regulators identify hedge funds’ inherent systemic risk factors.

Hedge Funds and Investor Protection Regulation
Economic Review Q4 2006
Increasing regulatory protection for hedge fund investors may ultimately prove too costly, and the author recommends that hedge fund investment strategies be made more, not less, accessible to a broader spectrum of investors.

Do Hedge Funds Increase Systemic Risk?
Economic Review Q4 2006
Hedge funds’ investment strategies entail dynamic risks that could significantly affect systemic risk. The authors propose some new risk measures that gauge hedge funds’ risk-and-return profiles at both the individual-fund and aggregate-industry levels.

Corporate Governance and Hedge Fund Management
Economic Review Q4 2006
The article provides a theoretical framework for thinking about the governance issues for hedge funds, which, the author argues, are much like those for limited partnerships or public firms with similar assets or liabilities.

Preconditions for a Successful Implementation of Supervisors’ Prompt Corrective Action: Is There a Case for a Banking Standard in the European Union?
Working Paper 2006-27
European Union countries are being encouraged to adopt standards for prompt corrective action (PCA) of undercapitalized banks. The authors focus on the conditions needed for the adoption of effective PCA.

When Target CEOs Contract with Acquirers: Evidence from Bank Mergers and Acquisitions
Working Paper 2006-28
Acquirers often offer a position to the chief executive officer of the acquired bank. These offers do not cause a significant transfer of shareholder wealth or increase the transaction’s value, the authors find.

Why Do Borrowers Pledge Collateral? New Empirical Evidence on the Role of Asymmetric Information
Working Paper 2006-29
Economic theory suggests that collateral is widely used to reduce information gaps between borrowers and lenders. Focusing on small business lending, the authors find empirical evidence that reducing information asymmetries lowers the incidence of collateral.