D. Avramov, Tarun Chordia, Gergana Jostova, Alexander Philipov
This paper shows that distressed stocks and bonds are overpriced during high sentiment periods. The correction of overpricing leads to a range of anomalous cross-sectional patterns in stock and bond returns. Including bonds as additional test assets allows us to develop testable restrictions about overpricing rationales related to lottery-type preferences, shareholders' ability to extract value during bankruptcy, and market sentiment. It also reinforces the notion that anomaly payoffs are unexplained by co-movement with risk factors. The evidence suggests that anomalies are attributable to sentiment-driven investors' (both retail and institutional) excessive optimism about the likelihood and consequences of financial distress.
{"title":"Bonds, Stocks, and Sources of Mispricing","authors":"D. Avramov, Tarun Chordia, Gergana Jostova, Alexander Philipov","doi":"10.2139/ssrn.3063424","DOIUrl":"https://doi.org/10.2139/ssrn.3063424","url":null,"abstract":"This paper shows that distressed stocks and bonds are overpriced during high sentiment periods. The correction of overpricing leads to a range of anomalous cross-sectional patterns in stock and bond returns. Including bonds as additional test assets allows us to develop testable restrictions about overpricing rationales related to lottery-type preferences, shareholders' ability to extract value during bankruptcy, and market sentiment. It also reinforces the notion that anomaly payoffs are unexplained by co-movement with risk factors. The evidence suggests that anomalies are attributable to sentiment-driven investors' (both retail and institutional) excessive optimism about the likelihood and consequences of financial distress.","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"98 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-03-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132462580","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 research was motivated by the excesses of public policy since 2008 in an attempt to re-inflate the housing markets. Is it even possible or desirable to utilize such a vast amount of public resources to inflate a single sector such as housing that suffered from such a spectacular bubble and collapse? The consequences suggest that, as a way to bolster real household incomes and aggregate output, these policies have disappointed. In contrast, there is a fear that the monetary stimuli will lead to unsustainable housing price inflation, if not a bubble. I address these questions in the analysis from the standpoint of determining the stable equilibrium and sustainable house price appreciation rates consistent with the growth of median household income. The problem of identifying stable house price appreciation is to first identify the major proximate determinants of household demand for housing. A second is to show empirically the movement, deviation, and variation of these factors over time compared to housing prices. I use median household income as the major demand factor for houses and median single family house prices as an indicator of the price. A third is determining the stable equilibrium of the growth of these factors and the appreciation of housing prices consistent with them. And a fourth is the adjustment process when there are small deviations from steady-state equilibrium compared to when deviations are large. It is this last distinction where the chaos theory of self-organizing systems and irreversibility of the housing market system enters to explain how the adjustment process is chaotic in this case. I conclude that, as of the beginning of June 2016, the evidence is overwhelming that housing price appreciation is in a bubble that will likely lead to significant declines in house price appreciation if not in house prices. An important policy recommendation to mitigate these declines and hasten a house price recovery follows. The continuation of expansionary monetary policies will only delay house price adjustments and lead to more severe price declines.
{"title":"Identifying House Price Booms, Bubbles and Busts: A Disequilibrium Analysis from Chaos Theory","authors":"G. Hanweck","doi":"10.2139/ssrn.3010330","DOIUrl":"https://doi.org/10.2139/ssrn.3010330","url":null,"abstract":"This research was motivated by the excesses of public policy since 2008 in an attempt to re-inflate the housing markets. Is it even possible or desirable to utilize such a vast amount of public resources to inflate a single sector such as housing that suffered from such a spectacular bubble and collapse? The consequences suggest that, as a way to bolster real household incomes and aggregate output, these policies have disappointed. In contrast, there is a fear that the monetary stimuli will lead to unsustainable housing price inflation, if not a bubble. I address these questions in the analysis from the standpoint of determining the stable equilibrium and sustainable house price appreciation rates consistent with the growth of median household income. The problem of identifying stable house price appreciation is to first identify the major proximate determinants of household demand for housing. A second is to show empirically the movement, deviation, and variation of these factors over time compared to housing prices. I use median household income as the major demand factor for houses and median single family house prices as an indicator of the price. A third is determining the stable equilibrium of the growth of these factors and the appreciation of housing prices consistent with them. And a fourth is the adjustment process when there are small deviations from steady-state equilibrium compared to when deviations are large. It is this last distinction where the chaos theory of self-organizing systems and irreversibility of the housing market system enters to explain how the adjustment process is chaotic in this case. I conclude that, as of the beginning of June 2016, the evidence is overwhelming that housing price appreciation is in a bubble that will likely lead to significant declines in house price appreciation if not in house prices. An important policy recommendation to mitigate these declines and hasten a house price recovery follows. The continuation of expansionary monetary policies will only delay house price adjustments and lead to more severe price declines.","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131153912","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 document the default rates of CMBS loans during the recent financial crisis. The 30 , 60 , and 90 day delinquency rates of conduit CMBS loans have risen sharply since late 2008 and have reached levels that are about 7 times of the 10-year average. Comparing to the previous crisis in the early 1990s, default rates of CMBS loans at the start of the recent crisis were low but they have accelerated more rapidly. Conduit CMBS loans perform similarly to commercial mortgages held by banks & thrifts, but have been worse than those held by life insurance companies in the past 10 years. Comparing to loans in the residential market, conduit CMBS loans have comparable default rate with prime conventional FRMs but remarkably lower default rate than those of subprime FRMs and subprime ARMs. We find limited evidence that substantial deterioration in CMBS loan underwriting occurred prior to the crisis. Instead, we discover that property value change has a significant impact on CMBS loan default with a 4 quarter lag, and that NOI growth affects default with a 1-quarter lag. Finally, we find a structural break in the relation between property value change and CMBS loan default starting from 2007Q4 but the relation between CMBS loan default and NOI growth remains stable over the entire 2000-2010 period.
{"title":"Default of Commercial Mortgage Loans during the Financial Crisis","authors":"Xudong An, A. Sanders","doi":"10.2139/ssrn.1717062","DOIUrl":"https://doi.org/10.2139/ssrn.1717062","url":null,"abstract":"We document the default rates of CMBS loans during the recent financial crisis. The 30 , 60 , and 90 day delinquency rates of conduit CMBS loans have risen sharply since late 2008 and have reached levels that are about 7 times of the 10-year average. Comparing to the previous crisis in the early 1990s, default rates of CMBS loans at the start of the recent crisis were low but they have accelerated more rapidly. Conduit CMBS loans perform similarly to commercial mortgages held by banks & thrifts, but have been worse than those held by life insurance companies in the past 10 years. Comparing to loans in the residential market, conduit CMBS loans have comparable default rate with prime conventional FRMs but remarkably lower default rate than those of subprime FRMs and subprime ARMs. We find limited evidence that substantial deterioration in CMBS loan underwriting occurred prior to the crisis. Instead, we discover that property value change has a significant impact on CMBS loan default with a 4 quarter lag, and that NOI growth affects default with a 1-quarter lag. Finally, we find a structural break in the relation between property value change and CMBS loan default starting from 2007Q4 but the relation between CMBS loan default and NOI growth remains stable over the entire 2000-2010 period.","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-12-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120972519","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 study looks at the causes of the residential real estate and mortgage market collapse in terms of the delinquency and default experience of subprime, Alt-A and Prime mortgages at the individual borrower level in metropolitan (MSA) housing markets. It is recognized that not all high risk loans will become delinquent and/or default and so the study attempts to develop proxies of loan and borrower factors that indicate the profile of those loans and borrowers most likely to default taking into consideration the characteristics of the MSA housing markets. Consideration of the MSA characteristics is an attempt to address the question of why there occurred so many defaults during a period of no recession and a high rate of employment. To do this it is recognized that borrowers’ willingness to pay depends largely on their desire to be a home owner rather than an investor in a residential property. To capture this desire, variables from the Loan Performance data base on loan and borrower characteristics at the time of loan origination are used. This will develop a cross-section analysis of delinquency and default rates of residential, subprime, Alt-A and Prime mortgages. The hypotheses tested represent the effects of loan and borrower level characteristics and MSA economic factors, such as MSA employment growth, unemployment rate, household income and housing price changes and their volatility on the level of delinquency and default rates on mortgages of different types and differing origination dates (vintages). From a previous study (Hanweck 2008) that aggregated individual loan data to the MSA level, we found that loan and borrower level characteristics such as loan-to-value ratio weighted by original loan balances, the weighted proportion of loans that have no documentation or the borrowers’ weighted FICO score and MSA level economic factors such as employment growth and house price index rates of change are highly statistically significant and economically important in explaining MSA loan delinquency and default rates over the 359 MSAs for 2005 and 2006 vintages mortgages. Using the 2006 vintage parameters delinquency and default rates for the 2007 vintage loans were projected by MSA.The uniqueness of the proposed study, that the Q Group Research funding will permit, is that it will develop estimates of individual loan level conditional probabilities of borrowers moving from one payments’ status to another – current to 30-days delinquent to 90-days delinquent to 180-days delinquent to default, ROE or foreclosure. The data is from Loan Performance Corp. and is collected from securitizations on a monthly basis for the years 2004 to 2009. The results of this study can be used by investors to more efficiently value the conditional likelihood of default, expected losses due to default and portfolio retention, and potential recoveries from mortgage modifications or sale. The probability of severe delinquency or default within any specified period fro
{"title":"Individual Borrower and Regional Factors Contributing to Subprime and Prime Mortgage Delinquency and Default Rates: An Analysis by Origination Vintages and Projections for 2009","authors":"G. Hanweck","doi":"10.2139/ssrn.1443298","DOIUrl":"https://doi.org/10.2139/ssrn.1443298","url":null,"abstract":"This study looks at the causes of the residential real estate and mortgage market collapse in terms of the delinquency and default experience of subprime, Alt-A and Prime mortgages at the individual borrower level in metropolitan (MSA) housing markets. It is recognized that not all high risk loans will become delinquent and/or default and so the study attempts to develop proxies of loan and borrower factors that indicate the profile of those loans and borrowers most likely to default taking into consideration the characteristics of the MSA housing markets. Consideration of the MSA characteristics is an attempt to address the question of why there occurred so many defaults during a period of no recession and a high rate of employment. To do this it is recognized that borrowers’ willingness to pay depends largely on their desire to be a home owner rather than an investor in a residential property. To capture this desire, variables from the Loan Performance data base on loan and borrower characteristics at the time of loan origination are used. This will develop a cross-section analysis of delinquency and default rates of residential, subprime, Alt-A and Prime mortgages. The hypotheses tested represent the effects of loan and borrower level characteristics and MSA economic factors, such as MSA employment growth, unemployment rate, household income and housing price changes and their volatility on the level of delinquency and default rates on mortgages of different types and differing origination dates (vintages). From a previous study (Hanweck 2008) that aggregated individual loan data to the MSA level, we found that loan and borrower level characteristics such as loan-to-value ratio weighted by original loan balances, the weighted proportion of loans that have no documentation or the borrowers’ weighted FICO score and MSA level economic factors such as employment growth and house price index rates of change are highly statistically significant and economically important in explaining MSA loan delinquency and default rates over the 359 MSAs for 2005 and 2006 vintages mortgages. Using the 2006 vintage parameters delinquency and default rates for the 2007 vintage loans were projected by MSA.The uniqueness of the proposed study, that the Q Group Research funding will permit, is that it will develop estimates of individual loan level conditional probabilities of borrowers moving from one payments’ status to another – current to 30-days delinquent to 90-days delinquent to 180-days delinquent to default, ROE or foreclosure. The data is from Loan Performance Corp. and is collected from securitizations on a monthly basis for the years 2004 to 2009. The results of this study can be used by investors to more efficiently value the conditional likelihood of default, expected losses due to default and portfolio retention, and potential recoveries from mortgage modifications or sale. The probability of severe delinquency or default within any specified period fro","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132581256","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}
The recent rise in shared appreciation mortgage (SAM) availability motivates careful consideration of underlying borrower incentives. The lender's share of appreciation in SAMs (share) is essentially a dynamic prepayment penalty imposed on the borrower. However, the borrower faces a moral hazard due to his ability to affect the penalty by reducing maintenance. We adapt a competing risks mortgage-pricing model to calculate SAM theoretical equilibrium rates. Our borrower possesses rational expectations of both the house price market and interest rates. Our simulation results may help explain the lack of secondary market interest for the UK SAMs containing extreme contract terms.
{"title":"Shared Appreciation Mortgages: Lessons from the UK","authors":"A. Sanders, V. Carlos Slawson, Jr.","doi":"10.2139/ssrn.772784","DOIUrl":"https://doi.org/10.2139/ssrn.772784","url":null,"abstract":"The recent rise in shared appreciation mortgage (SAM) availability motivates careful consideration of underlying borrower incentives. The lender's share of appreciation in SAMs (share) is essentially a dynamic prepayment penalty imposed on the borrower. However, the borrower faces a moral hazard due to his ability to affect the penalty by reducing maintenance. We adapt a competing risks mortgage-pricing model to calculate SAM theoretical equilibrium rates. Our borrower possesses rational expectations of both the house price market and interest rates. Our simulation results may help explain the lack of secondary market interest for the UK SAMs containing extreme contract terms.","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"49 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2005-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132344706","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}
Banks face the choice of keeping loans on their balance sheet as private debt or transforming them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still choose to retain a portion of their loans in portfolio. An open research question is whether lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in response to regulatory capital incentives (regulatory capital arbitrage). We examine this question empirically using micro-level data and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with the latter explanation for securitization.
{"title":"Does Regulatory Capital Arbitrage or Asymmetric Information Drive Securitization?","authors":"B. Ambrose, Michael LaCour-Little, A. Sanders","doi":"10.2139/ssrn.557223","DOIUrl":"https://doi.org/10.2139/ssrn.557223","url":null,"abstract":"Banks face the choice of keeping loans on their balance sheet as private debt or transforming them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still choose to retain a portion of their loans in portfolio. An open research question is whether lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in response to regulatory capital incentives (regulatory capital arbitrage). We examine this question empirically using micro-level data and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with the latter explanation for securitization.","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2004-05-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130598961","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}
The Chicago Mercantile Exchange introduced E-mini S&P 500 index futures in September 1997, and E-mini Nasdaq 100 index futures in June 1999. This paper empirically examines the effects from the introduction of the E-mini futures contracts on the market quality of the original S&P 500 and Nasdaq 100 index futures markets. The analysis is performed in a structural model framework, using bid-ask spreads, trading volume, and price volatility as measurements of market quality. We also evaluate, by using trader-size distribution data and the Commodity Futures Trading Commission's Commitments of Traders reports, whether the introduction of E-mini contracts has achieved their intended goal of attracting smaller investors. Finally, we evaluate any differences in the types of traders who use the E-mini futures contracts versus the original equity index futures contracts. Our empirical results suggest that two measurements of market quality of the original equity index futures (bid-ask spreads and trading volume) have not been negatively impacted, but one other measurement (price volatility) has increased, following the introduction of the E-mini equity index futures. Our empirical results also suggest that the E-mini index futures contracts have successfully attracted smaller investors to the equity index futures markets. In particular, 70 percent of all E-mini contracts traded are in single-contract units, and 95 percent are in units of less than five contracts (that is, less than the dollar value of a single original equity index futures contract). Furthermore, we found that a portion of the new, smaller traders in the E-mini equity index futures markets consists of day traders.
{"title":"When Size Matters: The Case of Equity Index Futures","authors":"George H. K. Wang, Aysegul Ates","doi":"10.2139/ssrn.497502","DOIUrl":"https://doi.org/10.2139/ssrn.497502","url":null,"abstract":"The Chicago Mercantile Exchange introduced E-mini S&P 500 index futures in September 1997, and E-mini Nasdaq 100 index futures in June 1999. This paper empirically examines the effects from the introduction of the E-mini futures contracts on the market quality of the original S&P 500 and Nasdaq 100 index futures markets. The analysis is performed in a structural model framework, using bid-ask spreads, trading volume, and price volatility as measurements of market quality. We also evaluate, by using trader-size distribution data and the Commodity Futures Trading Commission's Commitments of Traders reports, whether the introduction of E-mini contracts has achieved their intended goal of attracting smaller investors. Finally, we evaluate any differences in the types of traders who use the E-mini futures contracts versus the original equity index futures contracts. Our empirical results suggest that two measurements of market quality of the original equity index futures (bid-ask spreads and trading volume) have not been negatively impacted, but one other measurement (price volatility) has increased, following the introduction of the E-mini equity index futures. Our empirical results also suggest that the E-mini index futures contracts have successfully attracted smaller investors to the equity index futures markets. In particular, 70 percent of all E-mini contracts traded are in single-contract units, and 95 percent are in units of less than five contracts (that is, less than the dollar value of a single original equity index futures contract). Furthermore, we found that a portion of the new, smaller traders in the E-mini equity index futures markets consists of day traders.","PeriodicalId":120147,"journal":{"name":"Mason: Finance (Topic)","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2003-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132650557","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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