Credit default swap (CDS) and equity options markets often experience abnormal swings prior to the announcement of negative credit news. Option prices reveal information about such forthcoming adverse events at least as early as credit spreads, except for negative earnings announcements. Prior to negative credit news being announced, the equity market does not respond to abnormal movements in option prices unless that information has also manifested itself in credit spreads, perhaps because options are perceived as more likely to trade on unsubstantiated rumors than default swaps.
{"title":"Do Equity Markets Favor Credit Markets News Over Options Market News?","authors":"Antje Berndt, Anastasiya Ostrovnaya","doi":"10.2139/ssrn.972806","DOIUrl":"https://doi.org/10.2139/ssrn.972806","url":null,"abstract":"Credit default swap (CDS) and equity options markets often experience abnormal swings prior to the announcement of negative credit news. Option prices reveal information about such forthcoming adverse events at least as early as credit spreads, except for negative earnings announcements. Prior to negative credit news being announced, the equity market does not respond to abnormal movements in option prices unless that information has also manifested itself in credit spreads, perhaps because options are perceived as more likely to trade on unsubstantiated rumors than default swaps.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"315 5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124254341","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 whether time-variation in the profitability of momentum strategies is related to variation in macroeconomic conditions. We find reliable evidence that the momentum strategy exposes investors to greater downside risk. Momentum strategies deliver economically large and statistically reliable negative profits in bad economic states when the expected market risk premium is high, whereas positive profits in good economic states when the expected market risk premium is low. Our results are robust to alternative constructions of momentum portfolios, out-of-sample estimation of the expected market risk premium, and after controlling for the January effect, lagged market return, and investor sentiment.
{"title":"Momentum and Downside Risk","authors":"Byoungkyu Min, T. Kim","doi":"10.2139/ssrn.1570948","DOIUrl":"https://doi.org/10.2139/ssrn.1570948","url":null,"abstract":"We examine whether time-variation in the profitability of momentum strategies is related to variation in macroeconomic conditions. We find reliable evidence that the momentum strategy exposes investors to greater downside risk. Momentum strategies deliver economically large and statistically reliable negative profits in bad economic states when the expected market risk premium is high, whereas positive profits in good economic states when the expected market risk premium is low. Our results are robust to alternative constructions of momentum portfolios, out-of-sample estimation of the expected market risk premium, and after controlling for the January effect, lagged market return, and investor sentiment.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"190 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121327655","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}
Mikhail Chernov, Jeremy J. Graveline, Irina Zviadadze
We develop an empirical model of bilateral exchange rates. It includes normal shocks with stochastic variance and jumps in an exchange rate and in its variance. The probability of a jump in an exchange rate corresponding to depreciation (appreciation) of the U.S. dollar is increasing in the domestic (foreign) interest rate. The probability of a jump in variance is increasing in the variance only. Jumps in exchange rates are associated with announcements; jumps in variance are not. On average, jumps account for 25% of currency risk. The dollar carry index retains these features. Options suggest that jump risk is priced.
{"title":"Crash Risk in Currency Returns","authors":"Mikhail Chernov, Jeremy J. Graveline, Irina Zviadadze","doi":"10.2139/ssrn.2023440","DOIUrl":"https://doi.org/10.2139/ssrn.2023440","url":null,"abstract":"We develop an empirical model of bilateral exchange rates. It includes normal shocks with stochastic variance and jumps in an exchange rate and in its variance. The probability of a jump in an exchange rate corresponding to depreciation (appreciation) of the U.S. dollar is increasing in the domestic (foreign) interest rate. The probability of a jump in variance is increasing in the variance only. Jumps in exchange rates are associated with announcements; jumps in variance are not. On average, jumps account for 25% of currency risk. The dollar carry index retains these features. Options suggest that jump risk is priced.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"231 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-06-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133860019","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 show that Keeping-Up-with-the-Joneses preferences can explain several puzzling retail investor behaviors, including the excessive trading of small local stocks. Status concerns lead households, especially those living in affluent areas, to demand these stocks to track their neighbors' wealth. This demand varies procyclically with the stock market's value and generates household trading. Using Chinese data on local stock turnover, stock message boards, and brokerage account trading, we test and confirm this hypothesis by exploiting the uneven rise of affluence across Chinese cities between 1998 and 2012.
{"title":"Trading for Status","authors":"Harrison G. Hong, Wenxi Jiang, Na Wang, Bin Zhao","doi":"10.2139/ssrn.1961833","DOIUrl":"https://doi.org/10.2139/ssrn.1961833","url":null,"abstract":"We show that Keeping-Up-with-the-Joneses preferences can explain several puzzling retail investor behaviors, including the excessive trading of small local stocks. Status concerns lead households, especially those living in affluent areas, to demand these stocks to track their neighbors' wealth. This demand varies procyclically with the stock market's value and generates household trading. Using Chinese data on local stock turnover, stock message boards, and brokerage account trading, we test and confirm this hypothesis by exploiting the uneven rise of affluence across Chinese cities between 1998 and 2012.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-06-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133311357","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 how differences in bank regulation influence cross‐border bank acquisition flows and share price reactions to cross‐border deal announcements. Using a sample of 7,297 domestic and 916 majority cross‐border deals announced between 1995 and 2012, we find evidence of a form of “regulatory arbitrage” whereby acquisition flows involve acquirers from countries with stronger regulations than their targets. Target and aggregate abnormal returns around deal announcements are positive and larger when acquirers come from more restrictive bank regulatory environments. We interpret this evidence as more consistent with a benign form of regulatory arbitrage than a potentially destructive one.
{"title":"Regulatory Arbitrage and Cross-Border Bank Acquisitions","authors":"G. Karolyi, Alvaro G. Taboada","doi":"10.2139/ssrn.1573168","DOIUrl":"https://doi.org/10.2139/ssrn.1573168","url":null,"abstract":"We study how differences in bank regulation influence cross‐border bank acquisition flows and share price reactions to cross‐border deal announcements. Using a sample of 7,297 domestic and 916 majority cross‐border deals announced between 1995 and 2012, we find evidence of a form of “regulatory arbitrage” whereby acquisition flows involve acquirers from countries with stronger regulations than their targets. Target and aggregate abnormal returns around deal announcements are positive and larger when acquirers come from more restrictive bank regulatory environments. We interpret this evidence as more consistent with a benign form of regulatory arbitrage than a potentially destructive one.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-05-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121255952","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 the trading behavior of individual Chinese investors before and during the recent financial crisis.We have three major findings: (i) individual investors did not withdraw their capital from the equity market during the crisis; instead, they reduced investments following portfolio gains; (ii) the asymmetric net flow decisions are strongly influenced by the disposition effect, in the absence of tax effects; this fi nding holds over our entire sample period and it is even stronger during the crisis; (iii) individual investors revised their portfolios to hold relatively safer and more liquid stocks.
{"title":"Individual Investors and the Financial Crisis","authors":"J. Kallberg, Crocker H. Liu, Na Wang","doi":"10.2139/ssrn.1784565","DOIUrl":"https://doi.org/10.2139/ssrn.1784565","url":null,"abstract":"This paper studies the trading behavior of individual Chinese investors before and during the recent financial crisis.We have three major findings: (i) individual investors did not withdraw their capital from the equity market during the crisis; instead, they reduced investments following portfolio gains; (ii) the asymmetric net flow decisions are strongly influenced by the disposition effect, in the absence of tax effects; this fi nding holds over our entire sample period and it is even stronger during the crisis; (iii) individual investors revised their portfolios to hold relatively safer and more liquid stocks.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"94 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-03-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129765126","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 out-of-sample performance of a long-term investor who follows an optimized dynamic trading strategy. Although the dynamic strategy is able to benefit from predictability out-of-sample, a short-term investor using a single-period market timing strategy would have realized an almost identical performance. The value of intertemporal hedge demands in strategic asset allocation appears negligible. The result is caused by the estimation error in predicting the predictors. A myopic investor only needs to predict one-period-ahead expected returns, but hedge demands also require accurate predictions of the predictor variables. To reduce the problem of errors in optimized portfolio weights, we consider Bayesian procedures. Myopic and dynamic portfolios are similarly affected by such modifications, and differences in performance become even smaller. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1924 . This paper was accepted by Brad Barber, finance.
{"title":"Long-Term Strategic Asset Allocation: An Out-of-Sample Evaluation","authors":"B. Diris, F. Palm, P. Schotman","doi":"10.2139/ssrn.1107840","DOIUrl":"https://doi.org/10.2139/ssrn.1107840","url":null,"abstract":"We evaluate the out-of-sample performance of a long-term investor who follows an optimized dynamic trading strategy. Although the dynamic strategy is able to benefit from predictability out-of-sample, a short-term investor using a single-period market timing strategy would have realized an almost identical performance. The value of intertemporal hedge demands in strategic asset allocation appears negligible. The result is caused by the estimation error in predicting the predictors. A myopic investor only needs to predict one-period-ahead expected returns, but hedge demands also require accurate predictions of the predictor variables. To reduce the problem of errors in optimized portfolio weights, we consider Bayesian procedures. Myopic and dynamic portfolios are similarly affected by such modifications, and differences in performance become even smaller. \u0000 \u0000Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1924 . \u0000 \u0000This paper was accepted by Brad Barber, finance.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"33 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131204237","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}
Given recent regulatory inquiries into the derivative-trading practices of mutual funds, we examine their detailed option holdings to assess how mutual funds employ options, what funds use options, and how that affects performance and risk. Mutual funds’ use of options appears consistent with income generation and hedging motives, is systematically related to experience, education, and gender characteristics of portfolio managers, and does not lead to performance benefits, on average. Instead, certain uses of options lead to underperformance. We document no permanent or temporary aggressive risk taking by options users, finding instead that some funds use options to effectively lower risk.
{"title":"On the Use of Options by Mutual Funds: Do They Know What They are Doing?","authors":"G. Cici, Luis-Felipe Palacios","doi":"10.2139/ssrn.1786125","DOIUrl":"https://doi.org/10.2139/ssrn.1786125","url":null,"abstract":"Given recent regulatory inquiries into the derivative-trading practices of mutual funds, we examine their detailed option holdings to assess how mutual funds employ options, what funds use options, and how that affects performance and risk. Mutual funds’ use of options appears consistent with income generation and hedging motives, is systematically related to experience, education, and gender characteristics of portfolio managers, and does not lead to performance benefits, on average. Instead, certain uses of options lead to underperformance. We document no permanent or temporary aggressive risk taking by options users, finding instead that some funds use options to effectively lower risk.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-01-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133562691","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}
I propose a friction measure of bond round-trip liquidity costs that is robust to outliers and accounts for the idiosyncratic information behind trading decisions. Particularly effective with investment-grade bonds, the proposed measure displays properties consistent with the credit risk puzzle. Using transactions from January 2004 to December 2011, I find that liquidity costs display a strong correlation with credit conditions and peaked during the subprime crisis. After controlling for equity volatility with high-frequency measures, liquidity costs explain a substantial fraction of the variation in the yield spreads of highly rated bonds, but become less important for speculative-grade bonds.
{"title":"Realized Volatility, Liquidity, and Corporate Yield Spreads","authors":"Marco Rossi","doi":"10.2139/ssrn.1571437","DOIUrl":"https://doi.org/10.2139/ssrn.1571437","url":null,"abstract":"I propose a friction measure of bond round-trip liquidity costs that is robust to outliers and accounts for the idiosyncratic information behind trading decisions. Particularly effective with investment-grade bonds, the proposed measure displays properties consistent with the credit risk puzzle. Using transactions from January 2004 to December 2011, I find that liquidity costs display a strong correlation with credit conditions and peaked during the subprime crisis. After controlling for equity volatility with high-frequency measures, liquidity costs explain a substantial fraction of the variation in the yield spreads of highly rated bonds, but become less important for speculative-grade bonds.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123110812","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 analyze the imperfect competition among multiple informed traders in an economy with a risky asset whose liquidation value is private information and follows a mean-reverting process. The unique linear equilibrium has an analytic form and is explicitly analyzed. When there are more auctions per unit time of trading, informed traders reduce the size of their orders at the same rate as the reduction in liquidity trading. When time is continuous, neither informed trading nor liquidity trading dominates the trading volume. The competitive market maker concludes that not all orders are informed. Therefore, price sensitivity to trades is finite, and the rents from private information are strictly positive, in sharp contrast with the findings obtained by Holden and Subrahmanyam (1992). In addition, informed trades cannot collude in order to "smooth" their trades, as in the monopolist models by Kyle (1985) and Chau and Vayanos (2008). Thus, informed traders can add significantly to trading volume and price variance. Although informed trading can be very volatile, the risk associated with traders' profits can be arbitrarily small. We propose an alternative measure of strong-form efficiency based on the Euclidean distance between the equilibrium price and the true value of the asset. Price errors in our model can be arbitrarily small, but Euclidean distance over a finite time is always positive even when time is continuous. Under this alternative measure, different notions of market efficiency can be consistent. Our model provides a rationale for the competition among high frequency traders, and shows that batching orders less frequently does not necessarily improve market liquidity.
{"title":"Multiple Insiders with Long Lived Flow of Private Information, and High Frequency Competition","authors":"Su Li","doi":"10.2139/ssrn.1970699","DOIUrl":"https://doi.org/10.2139/ssrn.1970699","url":null,"abstract":"We analyze the imperfect competition among multiple informed traders in an economy with a risky asset whose liquidation value is private information and follows a mean-reverting process. The unique linear equilibrium has an analytic form and is explicitly analyzed. When there are more auctions per unit time of trading, informed traders reduce the size of their orders at the same rate as the reduction in liquidity trading. When time is continuous, neither informed trading nor liquidity trading dominates the trading volume. The competitive market maker concludes that not all orders are informed. Therefore, price sensitivity to trades is finite, and the rents from private information are strictly positive, in sharp contrast with the findings obtained by Holden and Subrahmanyam (1992). In addition, informed trades cannot collude in order to \"smooth\" their trades, as in the monopolist models by Kyle (1985) and Chau and Vayanos (2008). Thus, informed traders can add significantly to trading volume and price variance. Although informed trading can be very volatile, the risk associated with traders' profits can be arbitrarily small. We propose an alternative measure of strong-form efficiency based on the Euclidean distance between the equilibrium price and the true value of the asset. Price errors in our model can be arbitrarily small, but Euclidean distance over a finite time is always positive even when time is continuous. Under this alternative measure, different notions of market efficiency can be consistent. Our model provides a rationale for the competition among high frequency traders, and shows that batching orders less frequently does not necessarily improve market liquidity.","PeriodicalId":369344,"journal":{"name":"American Finance Association Meetings (AFA)","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-12-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115843914","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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