Question A:

Stock markets around the world have seen an increasing concentration of trades in or near the closing auction. In the US, for example, about a third of all S&P 500 stock trades are now executed in the final ten minutes of the session, up from 27% in 2021.

The increased concentration of trading in the final minutes of the trading day has a measurably detrimental effect on market quality.

Question B: Strict indexing implemented with trading at the close to avoid tracking error creates a measurable performance drag that could be avoided with more flexible passive strategies.

Question A: Public companies that pursue social and environmental initiatives bear no measurable costs (in terms of lower profits) relative to similar companies that do not pursue such initiatives.

Question B: Public companies that pursue social and environmental initiatives benefit from a measurably lower cost of capital than similar companies that do not pursue such initiatives.

Question C: There are substantial social benefits when managers of public companies make choices that account for the impact of their decisions on customers, employees, and community members beyond the effects on shareholders.

Question A: The lower willingness of private firms to go public, combined with the increased number of publicly traded firms being taken private over the last 25 years, is measurably net negative for economic growth.

Question B: All else equal, reducing regulatory barriers (including reporting requirements such as Sarbanes Oxley 404) to public listing would substantially increase the share of publicly traded firms in the economy.

Question C: The lack of transparency about unlisted private firms' financial performance substantially hinders the efficiency of the allocation of capital.

Question A: Letting publicly traded firms report earnings annually rather than quarterly would lead their executives to place more weight on long-term issues in their investments and other decisions.

Question B: A switch from quarterly to annual earnings reports would, on net, benefit shareholders.

Question A: It seems likely that Japanese authorities intervened in the foreign exchange market recently to prop up the yen – see, for example: https://www.ft.com/content/455784ec-0465-46ee-8c73-fc5ce3e31c37. In such circumstances, intervention refers to purchases or sales of domestic or foreign currency without changing the monetary policy stance.

Large-scale intervention by public authorities in currency markets can move exchange rates substantially.

Question B: The effectiveness of foreign exchange interventions can last beyond one month.

Retail investors account for a large share of global wealth, but a small share in private equity holdings. (see link: https://bain.com/insights/why-private-equity-is-targeting-individual-investors-global-private-equity-report-2023/)

A reduction in the barriers to all retail investors investing in private equity funds - notably regulatory restrictions on investor wealth/income and on liquidity - would substantially improve household welfare.

Regulator Probes BlackRock and Vanguard Over Huge Stakes in U.S. Banks – The WSJ reports that ‘The FDIC is scrutinizing whether the index-fund giants are sticking to passive roles when it comes to their investments in U.S. banks.’

The exemption of passive asset managers from banking rules - such as needing permission when they acquire shares above the 10% threshold - generates measurable risks to the accomplishment of the FDIC's mission.

Question A: Allowing short selling of financial securities, such as stocks and government bonds, leads to prices that, on average, are closer to their fundamental values.

Question B: When short sellers start to establish substantial short positions in a stock, the stock is likely to have been overvalued.

Question C: Requiring investors to disclose short positions in a stock at the equivalent threshold as they are required to do for long positions would improve the informativeness of stock prices.

With some measures of concentration by market capitalization within broad US stock market indices at an all-time high, investors seeking a well-diversified passive equity portfolio should consider alternatives to market-cap-weighted indices.

Tesla shareholders are likely to benefit substantially from the decision by the Delaware Court of Chancery to void Elon Musk's $56 billion remuneration package.

On 10 January 2024, the SEC approved spot Bitcoin exchange-traded products:
https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023\

The SEC's approval of spot Bitcoin exchange-traded products makes investors overall measurably better off.

The Biden Administration's recommendation to lower the real discount rate used in the cost and benefit analysis of federal regulations to 2 percent (from the current levels of 3 or 7 percent) will substantially improve regulatory analysis.

Question A: Harry Markowitz, the Nobel Prize-winning pioneer of modern portfolio theory, passed away earlier this year:
https://afajof.org/news/in-memoriam-harry-markowitz-past-president-of-the-american-finance-association-1927-2023/

Application of the principles of modern portfolio theory allows investors in practice to achieve substantial improvements in the risk-expected return trade-off relative to naive strategies such as equal-weighting that do not take account of return covariances.

Question B: Widespread adoption of modern portfolio theory by investors has substantially improved the efficiency of capital allocation in financial markets.

Question A: The Federal Reserve has begun quantitative tightening (QT) to reduce the size of its balance sheet. Fed holdings of Treasury securities have declined by $800 billion relative to the March 2020 peak. The Fed currently holds $4.9 trillion of Treasury securities, significantly larger than the $2.5 trillion holdings prior to the Covid pandemic.

A reduction in Fed holdings of Treasury securities measurably increases the interest rate on long-term U.S. Treasury bonds.

Question B: A reduction in Fed holdings of Treasury securities measurably increases volatility in the Treasury market.

Question A: September 2023 was the 25th anniversary of the collapse of Long-Term Capital Management (LTCM). In response to LTCM's troubles, the Federal Reserve orchestrated a multi-billion dollar rescue package by a consortium of banks and it cut the Federal funds rate target by 75 basis points within six weeks.

The hedge fund sector's contribution to systemic risk is substantially lower today than at the time of LTCM.

Question B: Financial market participants' expectation that the Fed will aggressively ease monetary policy in response to financial market dislocations is a substantial source of financial instability.

Question A: SEC Announcement: https://www.sec.gov/news/press-release/2023-155

The benefits of the new SEC rules on private funds - which require private funds to provide transparency to their investors regarding the fees and expenses and other terms of their relationship with private fund advisers and the performance of such private funds - substantially exceed their costs.

Question B: The new SEC rules will have a substantially negative impact on the industry by stifling capital formation and reducing competition.

Question C: It is appropriate policy for the SEC to impose such rules on private funds even though the investors (limited partners) are sophisticated entities.

Question A: New Money Market Fund (MMF) Rules: The SEC adopted amendments to the MMF rules, including a new mandatory liquidity fee for institutional prime and tax-exempt funds. The liquidity fee would trigger when daily net redemptions exceed five percent and when the costs associated with such redemptions are more than de minimus. https://www.sec.gov/news/press-release/2023-129

The new liquidity fee will substantially reduce the likelihood of runs on MMFs.

Question B: The new liquidity fee will cause a substantial shift of assets under management from institutional prime and tax-exempt funds to government MMFs (which are exempt from the fees).

Question A: The impact of the Covid-19 pandemic on working and shopping habits has not been fully priced into current private valuations of downtown commercial properties in major cities.

Question B: A continued fall in commercial real estate valuations would trigger another round of banking panic.

Question A: Regulation that allows state pension funds to consider environmental, social, and governance factors in investment decisions only if these factors are material for risk and expected return would make retirees measurably worse off.

Question B: Regulation that prevents state pension funds from considering environmental, social, and governance factors in investment decisions even if these factors are material for risk and expected return would make retirees measurably worse off.

Question A: Since maturity transformation is an inherent feature of commercial banks' business model, some duration mismatch between assets and liabilities is unavoidable.

Question B: For the purposes of capital regulation, banks should be required to mark their holdings of Treasury and Agency securities to market at all times (even though their loans are not marked to market).

Question A: Despite the empirical failures of the Capital Asset Pricing Model (CAPM) in explaining expected stock returns, a shareholder-value maximizing publicly-traded firm should still use the CAPM to calculate the cost of equity in capital budgeting.

Question B: The equity risk premium that U.S. publicly traded firms should use in cost of equity calculations in April 2023 is above 6%.

Question A: Financial regulators in the US and Europe lack the tools and authority to deter runs on banks by uninsured depositors.

Question B: Not guaranteeing uninsured deposits at Silicon Valley Bank in full would have created substantial damage to the US economy.

Question C: Fully guaranteeing uninsured deposits at Silicon Valley Bank substantially increases banks’ incentives to engage in excessive risk-taking.

Question A: By issuing inflation-indexed bonds, and thereby providing a long-term real safe asset for pension funds and retirement savers, governments can make a substantial contribution to social welfare.

Question B: Issuance of inflation-indexed bonds substantially helps government commit to a responsible fiscal and monetary policy.

Question A: Large-scale stock buybacks by public corporations provide short-term rewards for shareholders and senior executives at the expense of potentially higher-return corporate investments.

Question B: The proposed higher tax on corporate stock buybacks (an increase from 1% to 4%) would generate substantial public revenues.

Question C: The proposed higher tax on corporate stock buybacks would generate a substantial increase in corporate investment.

Question A: Missing payments on the US Treasury security obligations for several weeks would pose a substantial risk of a global financial crisis.

Question B: The requirement to periodically increase the debt ceiling measurably reduces the long-run size of the debt.

Question A: The SEC’s proposed new rule for stock orders from individual investors is likely to be effective in giving those investors better prices on their trades on average.

Question B: The new rule would improve the overall operation of the stock market.

Question A: Although the reported volatility of asset values in private markets (private equity, buyouts, and venture capital) is lower than that of comparable assets in public markets, their true volatility is broadly similar or greater.

Question B: Since the global financial crisis, the realized returns on private equities have measurably exceeded the returns on public equities.

Question A: The collapse of a major crypto intermediary will have little impact on the wider economy and the stability of the traditional financial system.

Question B: The collapse of a major crypto intermediary suggests the need for the crypto asset class to be more tightly regulated.

The amount of passively invested funds has reached levels at which it has a measurable detrimental effect on market efficiency.

Question A: Research on the nature and impact of bank runs has made it possible to limit substantially the wider economic damage from financial crises.

Question B: Reforms of financial regulation since 2008 (and macroprudential policies in some countries) will not substantially reduce the probability of financial crises.

Question A: The costs and risks associated with a sharp fall in the value of sterling outweigh any macroeconomic benefits for the UK of export stimulus due to a weaker currency.

Question B: Concerns about government finances and debt sustainability can undermine the reserve currency status of a major currency.

Question A: The typical chief executive officer of a publicly traded corporation in the U.S. is paid more than his or her marginal contribution to the firm's value.

Question B: Mandating that U.S. publicly listed corporations must allow shareholders to cast a non-binding vote on executive compensation was a good idea.

Question A: Having companies run to maximize shareholder value creates significant negative externalities for workers and communities.

Question B: Appropriately managed corporations could create significantly greater value than they currently do for a range of stakeholders – including workers, suppliers, customers and community members – with negligible impacts on shareholder value.

Question C: Effective mechanisms for boards of directors to ensure that CEOs act in ways that balance the interests of all stakeholders would be straightforward to introduce.

Question A: A mandate for public companies to provide climate-related disclosures (such as their greenhouse gas emissions and carbon footprint) would provide financially material information that enables investors to make better decisions.

Question B: A mandate for public companies to provide climate-related disclosures would provide material information that enables investors to make better decisions with regards to non-financial objectives (such as aiding portfolio choice based on ESG principles).

Question C: A mandate for public companies to provide climate-related disclosures would induce them to reduce their climate impact substantially.