This paper proposes a two-good, two-country general equilibrium model with external habits and home-biased preferences that addresses a number of international …nance puzzles. Speci…cally, the model reconciles the high degree of international risk sharing implied by relatively smooth exchange rates with the modest cross-country consumption growth correlations seen in the data, resolving the Brandt, Cochrane and Santa-Clara (2006) puzzle. Furthermore, the model matches the empirically observed low correlation between exchange
{"title":"Asset Prices and Risk Sharing in Open Economies","authors":"A. Stathopoulos","doi":"10.2139/ssrn.1364082","DOIUrl":"https://doi.org/10.2139/ssrn.1364082","url":null,"abstract":"This paper proposes a two-good, two-country general equilibrium model with external habits and home-biased preferences that addresses a number of international …nance puzzles. Speci…cally, the model reconciles the high degree of international risk sharing implied by relatively smooth exchange rates with the modest cross-country consumption growth correlations seen in the data, resolving the Brandt, Cochrane and Santa-Clara (2006) puzzle. Furthermore, the model matches the empirically observed low correlation between exchange","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"69 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126437118","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}
Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.
{"title":"The End of Market Discipline? Investor Expectations of Implicit Government Guarantees","authors":"V. Acharya, D. Anginer, A. Warburton","doi":"10.2139/ssrn.1961656","DOIUrl":"https://doi.org/10.2139/ssrn.1961656","url":null,"abstract":"Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"59 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127538188","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 find that small buy trades of U.S. agency mortgage-backed securities (MBS) are priced 3%-8% lower than large sell trades. No such “crossing” exists in corporate bonds and agency debentures. We attribute the MBS price patterns to impediments to position aggregation in combination with investor suitability rules that disproportionately affect retail-sized trading and show in a model that classic market frictions cannot produce crossing. Our findings imply that valuations placed on securities affected by aggregation and suitability frictions should adjust for position size. Such securities include not only agency MBS, but also ABS, CMBS, CMOs, CLOs, and private-label RMBS.
{"title":"Why Do Dealers Buy High and Sell Low? An Analysis of Persistent Crossing in Extremely Segmented Markets","authors":"V. Atanasov, John J. Merrick, Philipp Schuster","doi":"10.2139/ssrn.2023779","DOIUrl":"https://doi.org/10.2139/ssrn.2023779","url":null,"abstract":"We find that small buy trades of U.S. agency mortgage-backed securities (MBS) are priced 3%-8% lower than large sell trades. No such “crossing” exists in corporate bonds and agency debentures. We attribute the MBS price patterns to impediments to position aggregation in combination with investor suitability rules that disproportionately affect retail-sized trading and show in a model that classic market frictions cannot produce crossing. Our findings imply that valuations placed on securities affected by aggregation and suitability frictions should adjust for position size. Such securities include not only agency MBS, but also ABS, CMBS, CMOs, CLOs, and private-label RMBS.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-02-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114894086","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 find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but are rather the result of widespread and highly persistent option mispricing driven by the incorrect treatment of non-smoothness in stock return variance. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects and non-smoothness in variance more generally. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.
{"title":"Option Mispricing Around Nontrading Periods","authors":"C. S. Jones, Joshua Shemesh","doi":"10.2139/ssrn.1364721","DOIUrl":"https://doi.org/10.2139/ssrn.1364721","url":null,"abstract":"We find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but are rather the result of widespread and highly persistent option mispricing driven by the incorrect treatment of non-smoothness in stock return variance. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects and non-smoothness in variance more generally. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"34 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116672303","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 present evidence that some mutual funds systematically act as contrarian traders, and earn returns in the stock market by providing liquidity to investors, while others systematically demand liquidity and suffer costs of immediacy. On average, the mutual funds’ costs of immediacy exceed their returns from providing liquidity. The funds with outflows, flows that correlate with industry flows, high market beta funds, and funds highly exposed to the momentum strategy suffer the most in costs of immediacy. The mutual funds’ average underperformance can be explained with their costs of immediacy. Finally, the funds’ historical costs of immediacy predict their alphas.
{"title":"Short-Term Reversals, Returns to Liquidity Provision and the Costs of Immediacy","authors":"K. Rinne, Matti Suominen","doi":"10.2139/ssrn.1537923","DOIUrl":"https://doi.org/10.2139/ssrn.1537923","url":null,"abstract":"We present evidence that some mutual funds systematically act as contrarian traders, and earn returns in the stock market by providing liquidity to investors, while others systematically demand liquidity and suffer costs of immediacy. On average, the mutual funds’ costs of immediacy exceed their returns from providing liquidity. The funds with outflows, flows that correlate with industry flows, high market beta funds, and funds highly exposed to the momentum strategy suffer the most in costs of immediacy. The mutual funds’ average underperformance can be explained with their costs of immediacy. Finally, the funds’ historical costs of immediacy predict their alphas.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"119 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-01-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125156921","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 examine the benefit of incorporating test assets with nonzero alphas into an optimal portfolio when the mean and covariance matrix of asset returns are estimated with errors. Under the normality assumption, we derive the distribution of out-of-sample return of a portfolio that is optimized based on sample mean and covariance matrix. We show that as long as the benchmarks are not ex ante efficient, this sample optimal portfolio will generate positive alpha relative to the benchmarks. However, due to estimation errors, we need a very long estimation window for the sample optimal portfolio to outperform the benchmarks. We further consider a strategy that optimally combines the risk-free asset, the sample optimal portfolio, and the sample optimal portfolio based on just the benchmarks. This combining strategy consistently outperforms the benchmarks, providing a reliable way to realize the economic value of nonzero alphas.
{"title":"On the Economic Value of Alphas","authors":"Raymond Kan, Xiaolu Wang","doi":"10.2139/ssrn.1785161","DOIUrl":"https://doi.org/10.2139/ssrn.1785161","url":null,"abstract":"In this paper, we examine the benefit of incorporating test assets with nonzero alphas into an optimal portfolio when the mean and covariance matrix of asset returns are estimated with errors. Under the normality assumption, we derive the distribution of out-of-sample return of a portfolio that is optimized based on sample mean and covariance matrix. We show that as long as the benchmarks are not ex ante efficient, this sample optimal portfolio will generate positive alpha relative to the benchmarks. However, due to estimation errors, we need a very long estimation window for the sample optimal portfolio to outperform the benchmarks. We further consider a strategy that optimally combines the risk-free asset, the sample optimal portfolio, and the sample optimal portfolio based on just the benchmarks. This combining strategy consistently outperforms the benchmarks, providing a reliable way to realize the economic value of nonzero alphas.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"126 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131835185","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 study the effect of bank governance on risk-taking in commercial lending. Banks with more effective boards are less likely to lend to riskier borrowers. This effect is restricted to periods of distress in the banking industry and is stronger at banks with board-level credit committees. Banks with more effective boards are less likely to lend to riskier borrowers right after the Russian default, which exogenously imposed distress conditions on U.S. banks. Thus, value-maximizing banks appear to ration credit to riskier borrowers precisely when such firms might be credit-constrained, suggesting that bank governance regulations may have potential unintended consequences.
{"title":"Risky Lending: Does Bank Corporate Governance Matter?","authors":"O. Faleye, K. Krishnan","doi":"10.2139/ssrn.1661837","DOIUrl":"https://doi.org/10.2139/ssrn.1661837","url":null,"abstract":"We study the effect of bank governance on risk-taking in commercial lending. Banks with more effective boards are less likely to lend to riskier borrowers. This effect is restricted to periods of distress in the banking industry and is stronger at banks with board-level credit committees. Banks with more effective boards are less likely to lend to riskier borrowers right after the Russian default, which exogenously imposed distress conditions on U.S. banks. Thus, value-maximizing banks appear to ration credit to riskier borrowers precisely when such firms might be credit-constrained, suggesting that bank governance regulations may have potential unintended consequences.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115618816","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 how access to bank credit affects trade credit in the supplier–customer relationships of U.S. public firms. For identification, we use exogenous liquidity shocks to supplier firms in the form of staggered changes to interstate bank branching laws. Using a variety of tests, we show that supplier firms with greater access to banking liquidity offer more trade credit to their customers. We also show that when bank branching restrictions are relaxed in the supplier’s state, the supplier–customer relationship is more likely to survive.
{"title":"Trade Credit and the Joint Effects of Supplier and Customer Financial Characteristics","authors":"Jaideep Shenoy, Ryan Williams","doi":"10.2139/ssrn.1786282","DOIUrl":"https://doi.org/10.2139/ssrn.1786282","url":null,"abstract":"We examine how access to bank credit affects trade credit in the supplier–customer relationships of U.S. public firms. For identification, we use exogenous liquidity shocks to supplier firms in the form of staggered changes to interstate bank branching laws. Using a variety of tests, we show that supplier firms with greater access to banking liquidity offer more trade credit to their customers. We also show that when bank branching restrictions are relaxed in the supplier’s state, the supplier–customer relationship is more likely to survive.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"21 3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132593576","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 studies models in which active portfolio managers utilize conditioning information unavailable to their clients to optimize performance relative to a benchmark. We derive explicit solutions for the optimal strategies with multiple risky assets, with or without a risk-free asset, and consider various constraints on portfolio risks or weights. The optimal strategies feature a mean–variance efficient component (to minimize portfolio variance), and a hedging demand for the benchmark portfolio (to maximize correlation with the benchmark). A currency portfolio example shows that the optimal strategies improve the measured performance by 53% out of sample, compared with portfolios ignoring conditioning information.
{"title":"Modern Portfolio Management with Conditioning Information","authors":"I-Hsuan Ethan Chiang","doi":"10.2139/ssrn.890845","DOIUrl":"https://doi.org/10.2139/ssrn.890845","url":null,"abstract":"This paper studies models in which active portfolio managers utilize conditioning information unavailable to their clients to optimize performance relative to a benchmark. We derive explicit solutions for the optimal strategies with multiple risky assets, with or without a risk-free asset, and consider various constraints on portfolio risks or weights. The optimal strategies feature a mean–variance efficient component (to minimize portfolio variance), and a hedging demand for the benchmark portfolio (to maximize correlation with the benchmark). A currency portfolio example shows that the optimal strategies improve the measured performance by 53% out of sample, compared with portfolios ignoring conditioning information.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"57 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127975737","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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