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A Strategy to Prevent Losses in Local Government Investment Pools
Author(s) -
Lynch Thomas D.,
Shamsub Hannarong,
Onwujuba Christie
Publication year - 2002
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/1540-5850.00066
Subject(s) - investment (military) , return on investment , rate of return , business , government (linguistics) , state (computer science) , investment strategy , investment performance , economics , finance , return of capital , monetary economics , microeconomics , production (economics) , linguistics , philosophy , algorithm , politics , political science , computer science , market liquidity , law
In the first half of the 1990s, some local government investment pools (LGIPs) suffered losses from derivatives investments. Although the losses came from derivatives, the actual cause of the losses was the violation of public‐fund prudent investment practices. This article provides a strategy to prevent future losses for LGIPs’ participants by looking at the pattern of return on investment of the pools. Our proposal is that rates of return on state pools that co‐move with market rates are generally an indication of adherence to prudent investment practices. We demonstrate the viability of this proposal by using co‐integration methodology. The implication is that if rates of return on a state pool do not co‐move with market rates, they may indicate the violation of prudent investment practices.

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