Pub Date : 2021-03-10DOI: 10.1142/S2010139221500130
Ryan Garvey, Tao Huang, Fei Wu
Under U.S. equity transaction-based pricing systems, prior research suggests retail brokers (i.e., conflicted traders) maximize their order flow payments at the expense of their client limit order execution quality. In our study, we examine order type decisions for those who execute their own orders (i.e., non-conflicted traders) and the relation between trading rebates-fees and execution quality. Similar to the conflicted, non-conflicted traders make routing decisions that generate rebates for both limit and marketable orders; but these strategies do not result in consistently lower execution quality dimensions. Our results suggest that higher order flow payments can coincide with higher execution quality.
{"title":"Non-Conflicted Trader “Maker-Taker” Decisions and Execution Quality","authors":"Ryan Garvey, Tao Huang, Fei Wu","doi":"10.1142/S2010139221500130","DOIUrl":"https://doi.org/10.1142/S2010139221500130","url":null,"abstract":"Under U.S. equity transaction-based pricing systems, prior research suggests retail brokers (i.e., conflicted traders) maximize their order flow payments at the expense of their client limit order execution quality. In our study, we examine order type decisions for those who execute their own orders (i.e., non-conflicted traders) and the relation between trading rebates-fees and execution quality. Similar to the conflicted, non-conflicted traders make routing decisions that generate rebates for both limit and marketable orders; but these strategies do not result in consistently lower execution quality dimensions. Our results suggest that higher order flow payments can coincide with higher execution quality.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"62 1","pages":"2150013"},"PeriodicalIF":0.7,"publicationDate":"2021-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77805518","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}
Pub Date : 2021-03-02DOI: 10.1142/S2010139221500142
Bjørn Eraker
Implied option volatility averages about 19% per year, while the unconditional return volatility is only about 16%. The difference, coined the volatility premium, is substantial and translates into large returns for sellers of index options. This paper studies a general equilibrium model based on long-run risk in an effort to explain the premium. In estimating the model on past data of stock returns and volatility (VIX), the model is successful in capturing the premium, as well as the large negative correlation between shocks to volatility and stock prices. Numerical simulations verify that writers of index options earn high rates of return in equilibrium. JEL classification: G12, G13, C15. ∗Wisconsin School of Business, University of Wisconsin. I thank Ivan Shaliastovich for valuable research assistance, Ravi Bansal, Tim Bollerslev, Mike Gallmeyer, Mark Ready, George Tauchen and seminar participants at Duke University, Texas A&M University, University of Wisconsin and the Triangle Econometrics Conference, Caesarea Annual Finance Conference, and Multinational Finance Society Conference for valuable comments
{"title":"The Volatility Premium","authors":"Bjørn Eraker","doi":"10.1142/S2010139221500142","DOIUrl":"https://doi.org/10.1142/S2010139221500142","url":null,"abstract":"Implied option volatility averages about 19% per year, while the unconditional return volatility is only about 16%. The difference, coined the volatility premium, is substantial and translates into large returns for sellers of index options. This paper studies a general equilibrium model based on long-run risk in an effort to explain the premium. In estimating the model on past data of stock returns and volatility (VIX), the model is successful in capturing the premium, as well as the large negative correlation between shocks to volatility and stock prices. Numerical simulations verify that writers of index options earn high rates of return in equilibrium. JEL classification: G12, G13, C15. ∗Wisconsin School of Business, University of Wisconsin. I thank Ivan Shaliastovich for valuable research assistance, Ravi Bansal, Tim Bollerslev, Mike Gallmeyer, Mark Ready, George Tauchen and seminar participants at Duke University, Texas A&M University, University of Wisconsin and the Triangle Econometrics Conference, Caesarea Annual Finance Conference, and Multinational Finance Society Conference for valuable comments","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"219 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2021-03-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76591455","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}
Pub Date : 2021-01-21DOI: 10.1142/s2010139221500117
A. Huang, Madhu Kalimipalli, Subhankar Nayak, Latha Ramchand
How did the crisis impact financial intermediation? We address this question by studying a unique market segment, viz. foreign private debt issued in the U.S., which grew in size despite the financial crisis. Specifically, foreign private (or Rule 144A) debt issued in the U.S. increased more than five-fold as between pre-crisis (1999-06) and crisis (2007-09) periods compared to public (or Yankee) debt. At the same time, domestic private (144A) debt issuances by U.S. firms remained relatively flat. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine the effects of the financial crisis on three key corporate decisions viz., debt choice, pricing, and market timing comparing public (Yankee) and private (Rule 144A) debt issues for all foreign firms. We find that Qualified Institutional Buyers (QIBs), the only investors in unregistered 144A bonds, were preferentially funding foreign firms in the 144A market and at better spreads, despite the firms’ high idiosyncratic risks and leverage, and excessive underlying local market volatility. However, we see no such preference in 144A lending to domestic U.S. borrowers. Overall, our findings are consistent with the flight of intermediation in that while many good quality foreign firms began issuing in U.S. due to local capital constraints, QIBs were able to better allocate their scarce capital in favor of quality private debt borrowers.
{"title":"Role of Institutional Investors: Evidence from the Foreign Rule-144A Debt Market","authors":"A. Huang, Madhu Kalimipalli, Subhankar Nayak, Latha Ramchand","doi":"10.1142/s2010139221500117","DOIUrl":"https://doi.org/10.1142/s2010139221500117","url":null,"abstract":"How did the crisis impact financial intermediation? We address this question by studying a unique market segment, viz. foreign private debt issued in the U.S., which grew in size despite the financial crisis. Specifically, foreign private (or Rule 144A) debt issued in the U.S. increased more than five-fold as between pre-crisis (1999-06) and crisis (2007-09) periods compared to public (or Yankee) debt. At the same time, domestic private (144A) debt issuances by U.S. firms remained relatively flat. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine the effects of the financial crisis on three key corporate decisions viz., debt choice, pricing, and market timing comparing public (Yankee) and private (Rule 144A) debt issues for all foreign firms. We find that Qualified Institutional Buyers (QIBs), the only investors in unregistered 144A bonds, were preferentially funding foreign firms in the 144A market and at better spreads, despite the firms’ high idiosyncratic risks and leverage, and excessive underlying local market volatility. However, we see no such preference in 144A lending to domestic U.S. borrowers. Overall, our findings are consistent with the flight of intermediation in that while many good quality foreign firms began issuing in U.S. due to local capital constraints, QIBs were able to better allocate their scarce capital in favor of quality private debt borrowers.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"17 1","pages":"2150011"},"PeriodicalIF":0.7,"publicationDate":"2021-01-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80132507","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}
Pub Date : 2020-12-18DOI: 10.1142/s2010139221500099
Vladimir Atanasov, Christo Pirinsky, Qinghai Wang
We examine the effect of the Efficient Market Hypothesis (EMH) on the investment behavior of mutual fund managers. We show that managers who are more likely to be exposed to the ideas of EMH throughout their higher education are more “passive” than their unexposed peers: they are more likely to manage index funds, and when managing active funds, they hold portfolios with larger numbers of stocks and deviate less from their investment benchmarks. Exposed managers, however, take more systematic risks. Although academic exposure to the EMH does not result in better performance, it helps professional investors generate capital inflows.
{"title":"Efficient Market Managers","authors":"Vladimir Atanasov, Christo Pirinsky, Qinghai Wang","doi":"10.1142/s2010139221500099","DOIUrl":"https://doi.org/10.1142/s2010139221500099","url":null,"abstract":"We examine the effect of the Efficient Market Hypothesis (EMH) on the investment behavior of mutual fund managers. We show that managers who are more likely to be exposed to the ideas of EMH throughout their higher education are more “passive” than their unexposed peers: they are more likely to manage index funds, and when managing active funds, they hold portfolios with larger numbers of stocks and deviate less from their investment benchmarks. Exposed managers, however, take more systematic risks. Although academic exposure to the EMH does not result in better performance, it helps professional investors generate capital inflows.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"142 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2020-12-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138539257","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}
Pub Date : 2020-11-19DOI: 10.1142/s201013922150004x
Bige Kahraman
Mutual funds sold via brokers offer fund portfolios that investors can purchase in one of three classes: A, B or C. These classes are distinguished only by their fee schedules and thus have different net performance results. An analysis of relative class performances for a set of U.S. mutual funds between 1992 and 2008 reveals a striking fact about class B: while classes A and C provide the best performance results at long and short holding periods, respectively, class B is dominated by either class A or C at any holding period. The inferiority yet popularity of class B at first suggests that naïve investors who do not understand the fee schedule of this class are being exploited. However, I propose two hypothetical clienteles which might rationally demand class B shares: one (a) with uncertain holding periods, or one (b) that desires to have long holding periods but is unable to commit to them. I identify whether investors rationally or naïvely purchase class B by examining the flow-fee sensitivity and estimating investor holding periods. My results support the naïve investor explanation.
{"title":"Fee Complexity and Investor Mistakes in Retail Financial Markets","authors":"Bige Kahraman","doi":"10.1142/s201013922150004x","DOIUrl":"https://doi.org/10.1142/s201013922150004x","url":null,"abstract":"Mutual funds sold via brokers offer fund portfolios that investors can purchase in one of three classes: A, B or C. These classes are distinguished only by their fee schedules and thus have different net performance results. An analysis of relative class performances for a set of U.S. mutual funds between 1992 and 2008 reveals a striking fact about class B: while classes A and C provide the best performance results at long and short holding periods, respectively, class B is dominated by either class A or C at any holding period. The inferiority yet popularity of class B at first suggests that naïve investors who do not understand the fee schedule of this class are being exploited. However, I propose two hypothetical clienteles which might rationally demand class B shares: one (a) with uncertain holding periods, or one (b) that desires to have long holding periods but is unable to commit to them. I identify whether investors rationally or naïvely purchase class B by examining the flow-fee sensitivity and estimating investor holding periods. My results support the naïve investor explanation.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"220 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2020-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79856864","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}
Pub Date : 2020-11-19DOI: 10.1142/s2010139221500075
M. Park
Due to the tightening of conditions required to obtain a mortgage loan following the recent financial crisis, the rent-to-own contract and contract for deed sales for residential real estate have become increasingly popular among potential home buyers and sellers. In this study, after analyzing the embedded options in the contracts, I use option-theoretic methods to develop models for valuing both contracts for deed sale and rent-to-own contracts, which can be used to determine equilibrium monthly payments and the equilibrium down payment.
{"title":"Alternatives to Traditional Mortgage Financing in Residential Real Estate: Rent to Own and Contract for Deed Sales","authors":"M. Park","doi":"10.1142/s2010139221500075","DOIUrl":"https://doi.org/10.1142/s2010139221500075","url":null,"abstract":"Due to the tightening of conditions required to obtain a mortgage loan following the recent financial crisis, the rent-to-own contract and contract for deed sales for residential real estate have become increasingly popular among potential home buyers and sellers. In this study, after analyzing the embedded options in the contracts, I use option-theoretic methods to develop models for valuing both contracts for deed sale and rent-to-own contracts, which can be used to determine equilibrium monthly payments and the equilibrium down payment.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"24 1","pages":"2150007"},"PeriodicalIF":0.7,"publicationDate":"2020-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83819162","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}
Pub Date : 2020-11-17DOI: 10.1142/s2010139221500063
Rwan El-Khatib, Nishi Joy
We examine board diversity in India following a 2013 law requiring all public companies to have at least one female board member. Our results indicate that having women on the board of directors improves firm performance and reduces firm bankruptcy risk. Using data on directors’ backgrounds and social connections, we find that important factors include female directors’ independence, social network size, committee memberships, and graduate education. Our results hold after addressing endogeneity using instrumental variable (IV) and difference-in-differences (DID) approaches.
{"title":"Do Women Directors Improve Firm Performance and Risk in India?","authors":"Rwan El-Khatib, Nishi Joy","doi":"10.1142/s2010139221500063","DOIUrl":"https://doi.org/10.1142/s2010139221500063","url":null,"abstract":"We examine board diversity in India following a 2013 law requiring all public companies to have at least one female board member. Our results indicate that having women on the board of directors improves firm performance and reduces firm bankruptcy risk. Using data on directors’ backgrounds and social connections, we find that important factors include female directors’ independence, social network size, committee memberships, and graduate education. Our results hold after addressing endogeneity using instrumental variable (IV) and difference-in-differences (DID) approaches.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"58 1","pages":"2150006"},"PeriodicalIF":0.7,"publicationDate":"2020-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73130900","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}
Pub Date : 2020-11-17DOI: 10.1142/s2010139221500051
Joseph M. Marks, Chenguang Shang
We show an inverse relation between the use of short-term debt and stock market liquidity. This finding is robust to a battery of control variables, alternative measures of the key variables, and various identification strategies. A difference-in-difference (DiD) approach suggests that the relation between debt maturity structure and stock liquidity may be causal. The impact of stock liquidity on debt maturity is stronger in the presence of large institutional holdings and when borrowers are subject to greater refinancing risk. We also provide evidence that firms with liquid stock tend to issue longer-term bonds and enjoy lower bond yield spreads. Overall, our results support the view that the governance function of stock market liquidity reduces the necessity of debt market monitoring, which allows firms to shift toward longer-term debt to avoid the costs and risk of frequent refinancing.
{"title":"Does Stock Liquidity Affect Corporate Debt Maturity Structure?","authors":"Joseph M. Marks, Chenguang Shang","doi":"10.1142/s2010139221500051","DOIUrl":"https://doi.org/10.1142/s2010139221500051","url":null,"abstract":"We show an inverse relation between the use of short-term debt and stock market liquidity. This finding is robust to a battery of control variables, alternative measures of the key variables, and various identification strategies. A difference-in-difference (DiD) approach suggests that the relation between debt maturity structure and stock liquidity may be causal. The impact of stock liquidity on debt maturity is stronger in the presence of large institutional holdings and when borrowers are subject to greater refinancing risk. We also provide evidence that firms with liquid stock tend to issue longer-term bonds and enjoy lower bond yield spreads. Overall, our results support the view that the governance function of stock market liquidity reduces the necessity of debt market monitoring, which allows firms to shift toward longer-term debt to avoid the costs and risk of frequent refinancing.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"30 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2020-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77648387","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}
Pub Date : 2020-11-12DOI: 10.1142/s2010139221500014
Jorge Cruz López, Alfredo Ibáñez
In a default corridor [Formula: see text] that the stock price can never enter, a deep out-of-the-money American put option replicates a pure credit contract (Carr and Wu, 2011, A Simple Robust Link between American Puts and Credit Protection, Review of Financial Studies 24, 473–505). Assuming discrete (one-period-ahead predictable) cash flows, we show that an endogenous credit-risk model generates, along with the default event, a default corridor at the cash-outflow dates, where [Formula: see text] is given by these outflows (i.e., debt service and negative earnings minus dividends). In this endogenous setting, however, the put replicating the credit contract is not American, but European. Specifically, the crucial assumption that determines an endogenous default corridor at the cash-outflow dates is that equityholders’ deep pockets absorb these outflows; that is, no equityholders’ fresh money, no endogenous corridor.
{"title":"European Puts, Credit Protection, and Endogenous Default","authors":"Jorge Cruz López, Alfredo Ibáñez","doi":"10.1142/s2010139221500014","DOIUrl":"https://doi.org/10.1142/s2010139221500014","url":null,"abstract":"In a default corridor [Formula: see text] that the stock price can never enter, a deep out-of-the-money American put option replicates a pure credit contract (Carr and Wu, 2011, A Simple Robust Link between American Puts and Credit Protection, Review of Financial Studies 24, 473–505). Assuming discrete (one-period-ahead predictable) cash flows, we show that an endogenous credit-risk model generates, along with the default event, a default corridor at the cash-outflow dates, where [Formula: see text] is given by these outflows (i.e., debt service and negative earnings minus dividends). In this endogenous setting, however, the put replicating the credit contract is not American, but European. Specifically, the crucial assumption that determines an endogenous default corridor at the cash-outflow dates is that equityholders’ deep pockets absorb these outflows; that is, no equityholders’ fresh money, no endogenous corridor.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"23 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2020-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138539268","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}
Pub Date : 2020-11-09DOI: 10.1142/s2010139221500038
Sudheer Chava, Rohan Ganduri, Vijay Yerramilli
We analyze whether bond investors price tail risk exposures of financial institutions using a comprehensive sample of bond issuances by U.S. financial institutions. Although primary bond yield spreads increase with an institution’s own tail risk (expected shortfall), systematic tail risk (marginal expected shortfall) of the institution doesn’t affect its yields. The relationship between yield spreads and tail risk is significantly weaker for depository institutions, large institutions, government-sponsored entities, politically-connected institutions, and in periods following large-scale bailouts of financial institutions. Overall, our results suggest that implicit bailout guarantees of financial institutions can exacerbate moral hazard in bond markets and weaken market discipline.
{"title":"Do Bond Investors Price Tail Risk Exposures of Financial Institutions?","authors":"Sudheer Chava, Rohan Ganduri, Vijay Yerramilli","doi":"10.1142/s2010139221500038","DOIUrl":"https://doi.org/10.1142/s2010139221500038","url":null,"abstract":"We analyze whether bond investors price tail risk exposures of financial institutions using a comprehensive sample of bond issuances by U.S. financial institutions. Although primary bond yield spreads increase with an institution’s own tail risk (expected shortfall), systematic tail risk (marginal expected shortfall) of the institution doesn’t affect its yields. The relationship between yield spreads and tail risk is significantly weaker for depository institutions, large institutions, government-sponsored entities, politically-connected institutions, and in periods following large-scale bailouts of financial institutions. Overall, our results suggest that implicit bailout guarantees of financial institutions can exacerbate moral hazard in bond markets and weaken market discipline.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"8 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2020-11-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138539264","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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