According to the conspicuous–consumption theory, people consume highly observable goods to signal their wealth to others. A growing body of evidence favors this signaling model. However, the empirical evidence available is still far from conclusive; thus, we provide evidence from a new angle. We show that the signaling model of conspicuous consumption predicts that a consumer’s well-being should increase based on his or her household’s ranking of observable consumption within its reference group, but should not be affected by its ranking in the distribution of unobservable consumption. We test this prediction using panel data on household expenditure and subjective well-being. Our evidence is consistent with the predictions of the signaling model.
{"title":"A Test of the Conspicuous-Consumption Model Using Subjective Well-Being Data","authors":"Ricardo Perez-Truglia","doi":"10.2139/ssrn.1934007","DOIUrl":"https://doi.org/10.2139/ssrn.1934007","url":null,"abstract":"According to the conspicuous–consumption theory, people consume highly observable goods to signal their wealth to others. A growing body of evidence favors this signaling model. However, the empirical evidence available is still far from conclusive; thus, we provide evidence from a new angle. We show that the signaling model of conspicuous consumption predicts that a consumer’s well-being should increase based on his or her household’s ranking of observable consumption within its reference group, but should not be affected by its ranking in the distribution of unobservable consumption. We test this prediction using panel data on household expenditure and subjective well-being. Our evidence is consistent with the predictions of the signaling model.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"41 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2013-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75595437","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we analyze the determinants and effects of credit default swap (CDS) trading initiation in the sovereign bond market. CDS trading initiation is associated with a 30–150 basis point reduction in sovereign bond yields, with greater yield reductions accruing to higher default risk economies. For countries with high default risk, rated B or lower by Standard and Poor’s, CDS initiation is also associated with significant price efficiency benefits in the underlying market. CDS trading initiation is more likely following increases in local equity index volatility, index spreads for regional and global CDS markets, or depreciation of the local currency relative to the US dollar, and decreases in a country’s ability to service foreign debt. Our results are robust to selection bias controls based on these factors.
{"title":"Credit Default Swaps and the Market for Sovereign Debt","authors":"Iuliana Ismailescu, B. Phillips","doi":"10.2139/ssrn.1785376","DOIUrl":"https://doi.org/10.2139/ssrn.1785376","url":null,"abstract":"In this paper, we analyze the determinants and effects of credit default swap (CDS) trading initiation in the sovereign bond market. CDS trading initiation is associated with a 30–150 basis point reduction in sovereign bond yields, with greater yield reductions accruing to higher default risk economies. For countries with high default risk, rated B or lower by Standard and Poor’s, CDS initiation is also associated with significant price efficiency benefits in the underlying market. CDS trading initiation is more likely following increases in local equity index volatility, index spreads for regional and global CDS markets, or depreciation of the local currency relative to the US dollar, and decreases in a country’s ability to service foreign debt. Our results are robust to selection bias controls based on these factors.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"289 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2013-04-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73080327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the effect of broker involvement on the LTV and DSR-ratios of mortgages. We show that after controlling for heterogeneity in underwriting standards among lenders, no marginal impact of brokers on debt-ratios is found, despite volume-based commission incentives. This is consistent with the idea that lenders only fund mortgages that conform to their credit standards, irrespective of broker involvement. Second, we test whether the availability of mortgage insurance alters these findings, as mortgage insurance can reduce loan screening and broker monitoring incentives in a similar fashion as securitization (Keys et al. 2010) through the transfer of credit risks. Again, the involvement of brokers is insignificant on debt-ratios. Our findings indicate that lender regulation is probably more effective in mitigating conflicts of interest between households and brokers, than changing compensation schemes or increasing broker regulation.
{"title":"Mortgage Risk Exposure and the Effect of Broker Involvement","authors":"Ruben Cox","doi":"10.2139/ssrn.1868276","DOIUrl":"https://doi.org/10.2139/ssrn.1868276","url":null,"abstract":"This paper examines the effect of broker involvement on the LTV and DSR-ratios of mortgages. We show that after controlling for heterogeneity in underwriting standards among lenders, no marginal impact of brokers on debt-ratios is found, despite volume-based commission incentives. This is consistent with the idea that lenders only fund mortgages that conform to their credit standards, irrespective of broker involvement. Second, we test whether the availability of mortgage insurance alters these findings, as mortgage insurance can reduce loan screening and broker monitoring incentives in a similar fashion as securitization (Keys et al. 2010) through the transfer of credit risks. Again, the involvement of brokers is insignificant on debt-ratios. Our findings indicate that lender regulation is probably more effective in mitigating conflicts of interest between households and brokers, than changing compensation schemes or increasing broker regulation.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"14 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2013-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89662622","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
T. Bielecki, Areski Cousin, S. Crépey, Alexander Herbertsson
We consider a bottom-up Markovian copula model of {portfolio} credit risk where instantaneous contagion is possible in the form of simultaneous defaults. Due to the Markovian copula nature of the model, calibration of marginals and dependence parameters can be performed separately using a two-steps procedure, much like in a standard static copula set-up. In this sense this model solves the bottom-up top-down puzzle which the CDO industry had been trying to do for a long time. It can be applied to any dynamic credit issue like consistent valuation and hedging of CDSs, CDOs and counterparty risk on credit portfolios.
{"title":"A Bottom-Up Dynamic Model of Portfolio Credit Risk; Part I: Markov Copula Perspective","authors":"T. Bielecki, Areski Cousin, S. Crépey, Alexander Herbertsson","doi":"10.2139/ssrn.1844574","DOIUrl":"https://doi.org/10.2139/ssrn.1844574","url":null,"abstract":"We consider a bottom-up Markovian copula model of {portfolio} credit risk where instantaneous contagion is possible in the form of simultaneous defaults. Due to the Markovian copula nature of the model, calibration of marginals and dependence parameters can be performed separately using a two-steps procedure, much like in a standard static copula set-up. In this sense this model solves the bottom-up top-down puzzle which the CDO industry had been trying to do for a long time. It can be applied to any dynamic credit issue like consistent valuation and hedging of CDSs, CDOs and counterparty risk on credit portfolios.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"59 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2013-03-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90451960","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the stock performance around initiation announcements of open market share repurchase programs, the price impact of repurchase trading and the long-run abnormal stock performance following the initiation announcements in a European regulatory framework. The study uses a unique dataset on initiation announcements and actual repurchases conducted by firms listed on the Stockholm Stock Exchange during the period 2000-2009. The results show that initiation announcements of open market repurchase programs exhibit a two-day abnormal return of approximately 2%. The price impact on the actual repurchase days is positively correlated with the daily repurchase volume, and is both statistically and economically significant during the first 3 repurchase days in a repurchase program. The long-run abnormal stock performance is positively associated with the fraction of shares bought in the program and is approximately 7% the first year following the initiation announcement. The results indicate that repurchase trading provides price support and that the market participants detect and perceive the initiation announcement and the first repurchase days in a repurchase program as a signal of undervaluation.
{"title":"The Price Impact of Open Market Share Repurchases","authors":"Jonas Råsbrant","doi":"10.2139/ssrn.1780967","DOIUrl":"https://doi.org/10.2139/ssrn.1780967","url":null,"abstract":"This paper examines the stock performance around initiation announcements of open market share repurchase programs, the price impact of repurchase trading and the long-run abnormal stock performance following the initiation announcements in a European regulatory framework. The study uses a unique dataset on initiation announcements and actual repurchases conducted by firms listed on the Stockholm Stock Exchange during the period 2000-2009. The results show that initiation announcements of open market repurchase programs exhibit a two-day abnormal return of approximately 2%. The price impact on the actual repurchase days is positively correlated with the daily repurchase volume, and is both statistically and economically significant during the first 3 repurchase days in a repurchase program. The long-run abnormal stock performance is positively associated with the fraction of shares bought in the program and is approximately 7% the first year following the initiation announcement. The results indicate that repurchase trading provides price support and that the market participants detect and perceive the initiation announcement and the first repurchase days in a repurchase program as a signal of undervaluation.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"40 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2013-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85092216","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine a stylized version of Miller's (1977) hypothesis as the explanation of the puzzling ndings of both Chordia, Subrahmanyam and Anshuman (2001) and Ang, Hodrick, Xing and Zhang (2006). Identifying stocks that are prone to disagreement by using low analyst coverage produces results that are strongly consistent with the model's predictions.The low returns to high return volatility stocks are corrections of optimistic mispricing that arises because information arrivals generate disagreement among traders. Disagreement also implies a negative relation between returns and shocks to trading volume. The abnormal returns to a trading strategy based on idiosyncratic return volatility are explained by the returns to a strategy based on turnover volatility, suggesting that the same economic forces underlie both relations as the model predicts.
{"title":"Analyst Coverage and Two Puzzles in the Cross Section of Returns","authors":"Thomas J. George, C. Hwang","doi":"10.2139/ssrn.1787152","DOIUrl":"https://doi.org/10.2139/ssrn.1787152","url":null,"abstract":"We examine a stylized version of Miller's (1977) hypothesis as the explanation of the puzzling ndings of both Chordia, Subrahmanyam and Anshuman (2001) and Ang, Hodrick, Xing and Zhang (2006). Identifying stocks that are prone to disagreement by using low analyst coverage produces results that are strongly consistent with the model's predictions.The low returns to high return volatility stocks are corrections of optimistic mispricing that arises because information arrivals generate disagreement among traders. Disagreement also implies a negative relation between returns and shocks to trading volume. The abnormal returns to a trading strategy based on idiosyncratic return volatility are explained by the returns to a strategy based on turnover volatility, suggesting that the same economic forces underlie both relations as the model predicts.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"146 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2013-01-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86089893","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
When a firm cross-lists its shares in segmented markets, the price of the first issued share, as a reference, plays both an informational and anchoring role in pricing the second issued share. We develop a model illustrating the dual-role. Empirically, we examine a group of Chinese firms that first issue foreign shares and then domestic A-shares, for which the anchoring effect adds to the A-share underpricing. Consistent with the model predictions, we find that the A-share underpricing is positively related to the difference in costs of capital in the two segmented markets, and that this positive association is weaker when participants are less likely to resort to the anchoring heuristic and when the A-share valuation involves less uncertainty.
{"title":"Cross-Listing and Pricing Efficiency: The Informational and Anchoring Role Played by the Reference Price","authors":"E. C. Chang, Yan Luo, Jinjuan Ren","doi":"10.2139/ssrn.1916769","DOIUrl":"https://doi.org/10.2139/ssrn.1916769","url":null,"abstract":"When a firm cross-lists its shares in segmented markets, the price of the first issued share, as a reference, plays both an informational and anchoring role in pricing the second issued share. We develop a model illustrating the dual-role. Empirically, we examine a group of Chinese firms that first issue foreign shares and then domestic A-shares, for which the anchoring effect adds to the A-share underpricing. Consistent with the model predictions, we find that the A-share underpricing is positively related to the difference in costs of capital in the two segmented markets, and that this positive association is weaker when participants are less likely to resort to the anchoring heuristic and when the A-share valuation involves less uncertainty.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"50 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2012-12-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79648810","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Busy directors have been widely criticized as being ineffective. However, we hypothesize that busy directors offer advantages for many firms. While busy directors may be less effective monitors, their experience and contacts arguably make them excellent advisors. Among IPO firms, which have minimal experience with public markets and likely rely heavily on their directors for advising, we find busy boards to be common and to contribute positively to firm value. Moreover, these positive effects of busy boards extend to all but the most established firms. Benefits are lowest among Forbes 500 firms, which likely require more monitoring than advising.
{"title":"Are Busy Boards Detrimental?","authors":"L. Field, M. Lowry, A. Mkrtchyan","doi":"10.2139/ssrn.1894776","DOIUrl":"https://doi.org/10.2139/ssrn.1894776","url":null,"abstract":"Busy directors have been widely criticized as being ineffective. However, we hypothesize that busy directors offer advantages for many firms. While busy directors may be less effective monitors, their experience and contacts arguably make them excellent advisors. Among IPO firms, which have minimal experience with public markets and likely rely heavily on their directors for advising, we find busy boards to be common and to contribute positively to firm value. Moreover, these positive effects of busy boards extend to all but the most established firms. Benefits are lowest among Forbes 500 firms, which likely require more monitoring than advising.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"49 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2012-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78017678","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2010. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 12 years. Past returns no longer explain the cross-sectional variation in stock returns, not even following up markets. The patterns in the post holding period returns of momentum portfolios and risk adjusted identification period buy and hold returns of stocks in momentum supports improvement in market efficiency as a possible explanation for the declining momentum profits.
{"title":"Momentum Loses Its Momentum: Implications for Market Efficiency","authors":"Debarati Bhattacharya, Raman Kumar, Gokhan Sonaer","doi":"10.2139/ssrn.1762264","DOIUrl":"https://doi.org/10.2139/ssrn.1762264","url":null,"abstract":"We evaluate the robustness of momentum returns in the US stock market over the period 1965 to 2010. We find that momentum profits have become insignificant since the late 1990s partially driven by pronounced increase in the volatility of momentum profits in the last 12 years. Past returns no longer explain the cross-sectional variation in stock returns, not even following up markets. The patterns in the post holding period returns of momentum portfolios and risk adjusted identification period buy and hold returns of stocks in momentum supports improvement in market efficiency as a possible explanation for the declining momentum profits.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2012-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77206675","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we propose the average F -statistic for testing linear asset pricing models. The average pricing error, captured in the statistic, is of more interest than the ex post maximum pricing error of the multivariate F -statistic that is associated with extreme long and short positions and excessively sensitive to small perturbations in the estimates of asset means and covariances. The average F -test can be applied to thousands of individual stocks and thus is free from the information loss or the data-snooping biases from grouping. This test is robust to ellipticity, and more importantly, our simulation and bootstrapping results show that the power of the average F -test continues to increase as the number of stocks increases. Empirical tests using individual stocks from 1967 to 2006 demonstrate that the popular four-factor model (i.e. Fama-French three factors and momentum) is rejected in two sub-periods from 1967 to 1971 and from 1982 to 1986.
{"title":"Testing Linear Factor Models on Individual Stocks Using the Average F Test","authors":"Soosung Hwang, S. Satchell","doi":"10.2139/ssrn.620461","DOIUrl":"https://doi.org/10.2139/ssrn.620461","url":null,"abstract":"In this paper, we propose the average F -statistic for testing linear asset pricing models. The average pricing error, captured in the statistic, is of more interest than the ex post maximum pricing error of the multivariate F -statistic that is associated with extreme long and short positions and excessively sensitive to small perturbations in the estimates of asset means and covariances. The average F -test can be applied to thousands of individual stocks and thus is free from the information loss or the data-snooping biases from grouping. This test is robust to ellipticity, and more importantly, our simulation and bootstrapping results show that the power of the average F -test continues to increase as the number of stocks increases. Empirical tests using individual stocks from 1967 to 2006 demonstrate that the popular four-factor model (i.e. Fama-French three factors and momentum) is rejected in two sub-periods from 1967 to 1971 and from 1982 to 1986.","PeriodicalId":11485,"journal":{"name":"Econometrics: Applied Econometrics & Modeling eJournal","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2012-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86023305","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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