Pub Date : 2015-06-08DOI: 10.1142/S2010139215500093
R. Jarrow, Hao Li
This paper provides a framework to analyze the effect of a central bank's bond market intervention on foreign exchange rates. Using this framework, we quantify the impact of the Federal Reserve's 2008–2011 quantitative easing (QE) program on the USD/JPY exchange rate. We find that the Fed's QE accounts for a significant portion of the dollar's depreciation during this period. A central monetary authority can affect exchange rates in two ways, either directly by intervening in foreign exchange markets or indirectly by affecting interest rates. Our analysis emphasizes the importance of the indirect channel when a central bank undertakes large scale asset purchases.
{"title":"The Impact of a Central Bank's Bond Market Intervention on Foreign Exchange Rates","authors":"R. Jarrow, Hao Li","doi":"10.1142/S2010139215500093","DOIUrl":"https://doi.org/10.1142/S2010139215500093","url":null,"abstract":"This paper provides a framework to analyze the effect of a central bank's bond market intervention on foreign exchange rates. Using this framework, we quantify the impact of the Federal Reserve's 2008–2011 quantitative easing (QE) program on the USD/JPY exchange rate. We find that the Fed's QE accounts for a significant portion of the dollar's depreciation during this period. A central monetary authority can affect exchange rates in two ways, either directly by intervening in foreign exchange markets or indirectly by affecting interest rates. Our analysis emphasizes the importance of the indirect channel when a central bank undertakes large scale asset purchases.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"81 1","pages":"1550009"},"PeriodicalIF":0.7,"publicationDate":"2015-06-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85784856","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 : 2015-06-08DOI: 10.1142/S2010139215500184
Pavitra K. Kumar
This paper investigates the association between selected hedge fund characteristics and persistence in both positive and negative abnormal returns using data from the TASS database between 1996 and 2006. I find that higher fund age, size and illiquidity, after controlling for risk, generate stronger persistence in both short- and long-term positive abnormal returns, or good performance. Therefore, these features appear to signal superior managerial and/or fund skill. Furthermore, funds with higher incentive fees display greater long-run persistence in both good and bad performance, net of fees. These results suggest that incentive fees are increased by both skilled and unskilled, but lucky, funds following good past performance.
{"title":"Hedge Fund Characteristics and Performance Persistence: Evidence from 1996–2006","authors":"Pavitra K. Kumar","doi":"10.1142/S2010139215500184","DOIUrl":"https://doi.org/10.1142/S2010139215500184","url":null,"abstract":"This paper investigates the association between selected hedge fund characteristics and persistence in both positive and negative abnormal returns using data from the TASS database between 1996 and 2006. I find that higher fund age, size and illiquidity, after controlling for risk, generate stronger persistence in both short- and long-term positive abnormal returns, or good performance. Therefore, these features appear to signal superior managerial and/or fund skill. Furthermore, funds with higher incentive fees display greater long-run persistence in both good and bad performance, net of fees. These results suggest that incentive fees are increased by both skilled and unskilled, but lucky, funds following good past performance.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"57 1","pages":"1550018"},"PeriodicalIF":0.7,"publicationDate":"2015-06-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88009303","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 : 2015-03-15DOI: 10.1142/S2010139215500020
James Angel, L. Harris, Chester Spatt
This paper updates our previous study, "Equity Trading in the 21st Century", which presented results about US equity market quality. Despite many complaints in the national media, various measures of market quality indicate that US markets continue to be very healthy. Trade transaction cost estimates have stayed low and market depth and execution speeds remained high. New findings that measure the total transaction cost of executing very large block orders indicate that improvements in market quality also have benefited large institutional traders. While still high, both the number of quotes per trade and per minute have declined substantially from their peaks in 2008. Intraday volatility is below the levels of the pre-electronic 1990s. Although market quality is quite good, it could be enhanced. We discuss some current concerns about maker/taker pricing, dark pools, high frequency trading, tick sizes, designated dealers, transaction taxes, IPOs, and market stability.
{"title":"Equity Trading in the 21st Century: An Update","authors":"James Angel, L. Harris, Chester Spatt","doi":"10.1142/S2010139215500020","DOIUrl":"https://doi.org/10.1142/S2010139215500020","url":null,"abstract":"This paper updates our previous study, \"Equity Trading in the 21st Century\", which presented results about US equity market quality. Despite many complaints in the national media, various measures of market quality indicate that US markets continue to be very healthy. Trade transaction cost estimates have stayed low and market depth and execution speeds remained high. New findings that measure the total transaction cost of executing very large block orders indicate that improvements in market quality also have benefited large institutional traders. While still high, both the number of quotes per trade and per minute have declined substantially from their peaks in 2008. Intraday volatility is below the levels of the pre-electronic 1990s. Although market quality is quite good, it could be enhanced. We discuss some current concerns about maker/taker pricing, dark pools, high frequency trading, tick sizes, designated dealers, transaction taxes, IPOs, and market stability.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"43 1","pages":"1-39"},"PeriodicalIF":0.7,"publicationDate":"2015-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76733761","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 : 2015-03-15DOI: 10.1142/S2010139215500160
Rahul Ravi
Underpricing in the initial public offering (IPO) market has been traditionally explained as a means of attracting liquidity traders. We find strong evidence suggesting that the intensity of trading coming from these uninformed traders and the rate of idiosyncratic information arrival play important roles in determining the level of adverse selection cost of trading in the post-IPO market. Timeseries analysis reveals that this cost is lowest immediately post-IPO and it increases monotonically in the first 8–12 weeks of secondary market trading. Order flow variability and the fraction of small trades (both proxies for the extent of uninformed trading) are at their highest in the immediate aftermarket and their levels decay for the next 8–12 weeks. Our results allude to the existence of a negative relationship between underpricing and the adverse selection problem in the post-IPO market, mediated by the intensity of uninformed trading.
{"title":"Uninformed Trading and Information Uncertainty in the Post-IPO Market","authors":"Rahul Ravi","doi":"10.1142/S2010139215500160","DOIUrl":"https://doi.org/10.1142/S2010139215500160","url":null,"abstract":"Underpricing in the initial public offering (IPO) market has been traditionally explained as a means of attracting liquidity traders. We find strong evidence suggesting that the intensity of trading coming from these uninformed traders and the rate of idiosyncratic information arrival play important roles in determining the level of adverse selection cost of trading in the post-IPO market. Timeseries analysis reveals that this cost is lowest immediately post-IPO and it increases monotonically in the first 8–12 weeks of secondary market trading. Order flow variability and the fraction of small trades (both proxies for the extent of uninformed trading) are at their highest in the immediate aftermarket and their levels decay for the next 8–12 weeks. Our results allude to the existence of a negative relationship between underpricing and the adverse selection problem in the post-IPO market, mediated by the intensity of uninformed trading.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"91 1","pages":"1550016"},"PeriodicalIF":0.7,"publicationDate":"2015-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80577442","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 : 2015-03-15DOI: 10.1142/S2010139215500159
Adam Yonce
The investment behavior of US firms exhibits systematic variation over the political cycle. After controlling for investment opportunities, US firms reduce investment expenditures approximately 2.0% during Presidential election years, 5.3% during periods of single-party government, and 8.7% during Republican presidential administrations. Neoclassical investment theory has little to say about direct links between investment and the political environment. I show that the empirical results arise naturally in a model of investment under regulatory and political uncertainty, provided that (i) regulatory policy affects the cash flows of the firm, (ii) firms have flexibility over the scale of their investments and (iii) regulatory uncertainty resolves quickly.
{"title":"US Corporate Investment Over the Political Cycle","authors":"Adam Yonce","doi":"10.1142/S2010139215500159","DOIUrl":"https://doi.org/10.1142/S2010139215500159","url":null,"abstract":"The investment behavior of US firms exhibits systematic variation over the political cycle. After controlling for investment opportunities, US firms reduce investment expenditures approximately 2.0% during Presidential election years, 5.3% during periods of single-party government, and 8.7% during Republican presidential administrations. Neoclassical investment theory has little to say about direct links between investment and the political environment. I show that the empirical results arise naturally in a model of investment under regulatory and political uncertainty, provided that (i) regulatory policy affects the cash flows of the firm, (ii) firms have flexibility over the scale of their investments and (iii) regulatory uncertainty resolves quickly.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"162 1","pages":"1550015"},"PeriodicalIF":0.7,"publicationDate":"2015-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80238895","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 : 2014-12-01DOI: 10.1142/S201013921450013X
Salvatore Miglietta
If risk-averse agents prefer to be wealthier both in absolute terms and relative to their peers (relative wealth concerns), then (1) they prefer positive correlation, and (2) they are averse to negative correlation between their payoffs. A laboratory experiment shows that subjects prefer positively correlated payoffs. Subjects interested in relative payoffs display stronger aversion to negatively correlated payoffs. This novel evidence has implications that motivate firms' extensive use of broad-based incentive plans and firms' scarce use of Relative Performance Evaluation (RPE) contracts.
{"title":"Incentives and Relative Wealth Concerns","authors":"Salvatore Miglietta","doi":"10.1142/S201013921450013X","DOIUrl":"https://doi.org/10.1142/S201013921450013X","url":null,"abstract":"If risk-averse agents prefer to be wealthier both in absolute terms and relative to their peers (relative wealth concerns), then (1) they prefer positive correlation, and (2) they are averse to negative correlation between their payoffs. A laboratory experiment shows that subjects prefer positively correlated payoffs. Subjects interested in relative payoffs display stronger aversion to negatively correlated payoffs. This novel evidence has implications that motivate firms' extensive use of broad-based incentive plans and firms' scarce use of Relative Performance Evaluation (RPE) contracts.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"48 1","pages":"1450013"},"PeriodicalIF":0.7,"publicationDate":"2014-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79366278","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 : 2014-11-21DOI: 10.1142/S2010139214500116
Jing-Zhi Huang, Li Xu
We propose and estimate a new class of equity return models that incorporate scale mixtures of the skew-normal distribution for the error distribution into the standard stochastic volatility framework. The main advantage of our models is that they can simultaneously accommodate the skewness, heavy-tailedness, and leverage effect of equity index returns observed in the data. The proposed models are flexible and parsimonious, and include many asymmetrically heavy-tailed error distributions — such as skew-t and skew-slash distributions — as special cases. We estimate a variety of specifications of our models using the Bayesian Markov Chain Monte Carlo method, with data on daily returns of the S&P 500 index over 1987–2009. We find that the proposed models outperform existing ones of index returns.
{"title":"Stochastic Volatility Models for Asset Returns with Leverage, Skewness and Heavy-Tails via Scale Mixture","authors":"Jing-Zhi Huang, Li Xu","doi":"10.1142/S2010139214500116","DOIUrl":"https://doi.org/10.1142/S2010139214500116","url":null,"abstract":"We propose and estimate a new class of equity return models that incorporate scale mixtures of the skew-normal distribution for the error distribution into the standard stochastic volatility framework. The main advantage of our models is that they can simultaneously accommodate the skewness, heavy-tailedness, and leverage effect of equity index returns observed in the data. The proposed models are flexible and parsimonious, and include many asymmetrically heavy-tailed error distributions — such as skew-t and skew-slash distributions — as special cases. We estimate a variety of specifications of our models using the Bayesian Markov Chain Monte Carlo method, with data on daily returns of the S&P 500 index over 1987–2009. We find that the proposed models outperform existing ones of index returns.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"23 1","pages":"1450011"},"PeriodicalIF":0.7,"publicationDate":"2014-11-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76638881","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 : 2014-11-04DOI: 10.1142/S2010139214500086
Rachel Graefe-Anderson
Because CEO turnover events provide the board of directors with a unique opportunity to potentially completely restructure CEO compensation packages, changes to CEO compensation following a turnover event could prove to inform the ongoing debate regarding CEO compensation. This paper investigates what happens to CEO compensation when a turnover event occurs. Specifically, I examine CEO compensation levels and pay-performance sensitivity for incoming and outgoing CEOs involved in turnover events at public companies in the United States. My main findings are as follows: (1) incoming CEOs are paid as much as or more than those they replace, (2) outsider replacements are paid more than their predecessors even after controlling for education and skills, and (3) CEOs who are forced out are not paid differently from those who replace them, while CEOs who leave voluntarily are paid significantly less than their replacements. Further analysis reveals that proxies for managerial power including CEO tenure, CEO centrality, founder status, and high CEO ownership cannot explain these results. Overall, these findings are difficult to reconcile with the view that managerial power is the primary determinant of CEO compensation.
{"title":"CEO Turnover and Compensation: An Empirical Investigation","authors":"Rachel Graefe-Anderson","doi":"10.1142/S2010139214500086","DOIUrl":"https://doi.org/10.1142/S2010139214500086","url":null,"abstract":"Because CEO turnover events provide the board of directors with a unique opportunity to potentially completely restructure CEO compensation packages, changes to CEO compensation following a turnover event could prove to inform the ongoing debate regarding CEO compensation. This paper investigates what happens to CEO compensation when a turnover event occurs. Specifically, I examine CEO compensation levels and pay-performance sensitivity for incoming and outgoing CEOs involved in turnover events at public companies in the United States. My main findings are as follows: (1) incoming CEOs are paid as much as or more than those they replace, (2) outsider replacements are paid more than their predecessors even after controlling for education and skills, and (3) CEOs who are forced out are not paid differently from those who replace them, while CEOs who leave voluntarily are paid significantly less than their replacements. Further analysis reveals that proxies for managerial power including CEO tenure, CEO centrality, founder status, and high CEO ownership cannot explain these results. Overall, these findings are difficult to reconcile with the view that managerial power is the primary determinant of CEO compensation.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"14 1","pages":"1450008"},"PeriodicalIF":0.7,"publicationDate":"2014-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78925873","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}
Recent research on the subprime crisis and rollover risk suggests that debt market liquidity is a major factor affecting the risk of default. This implies that firms that rely heavily on short-term debt, such as commercial paper (CP), are at greater risk of default. Debt market illiquidity could reduce the value of the firm and thus impact the firm's leverage, which is a major factor in predicting default. We estimate the effect of debt market conditions on the probability of default with a discrete-time dynamic hazard model that takes into account measurement error in firm leverage. Our results indicate that rollover risk is a significant factor in causing default, but the risk was higher for nonfinancial firms around 2000–2001 and considerably less entering the subprime crisis.
{"title":"Debt Market Liquidity and Corporate Default Prediction","authors":"Deming Wu, Suning Zhang","doi":"10.2139/SSRN.2146852","DOIUrl":"https://doi.org/10.2139/SSRN.2146852","url":null,"abstract":"Recent research on the subprime crisis and rollover risk suggests that debt market liquidity is a major factor affecting the risk of default. This implies that firms that rely heavily on short-term debt, such as commercial paper (CP), are at greater risk of default. Debt market illiquidity could reduce the value of the firm and thus impact the firm's leverage, which is a major factor in predicting default. We estimate the effect of debt market conditions on the probability of default with a discrete-time dynamic hazard model that takes into account measurement error in firm leverage. Our results indicate that rollover risk is a significant factor in causing default, but the risk was higher for nonfinancial firms around 2000–2001 and considerably less entering the subprime crisis.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"38 1","pages":"1550003"},"PeriodicalIF":0.7,"publicationDate":"2014-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78360495","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 : 2014-01-13DOI: 10.1142/S2010139214500013
Jesús Sierra
We investigate whether foreign purchases of long-term U.S. Treasury securities significantly affect their expected excess-returns. We run predictive regressions of realized excess returns on measures of net purchases of treasuries by both foreign official and private agents. We find that official flows, with a negative effect, appear similar to relative supply shocks; private flows, with a positive impact, resemble flows that absorb excess-supply and are thus compensated for this service, similar to the role of arbitrageurs. The results are robust to out-of-sample tests and the use of benchmark survey-consistent adjusted flows data.
{"title":"International Capital Flows and Bond Risk Premia","authors":"Jesús Sierra","doi":"10.1142/S2010139214500013","DOIUrl":"https://doi.org/10.1142/S2010139214500013","url":null,"abstract":"We investigate whether foreign purchases of long-term U.S. Treasury securities significantly affect their expected excess-returns. We run predictive regressions of realized excess returns on measures of net purchases of treasuries by both foreign official and private agents. We find that official flows, with a negative effect, appear similar to relative supply shocks; private flows, with a positive impact, resemble flows that absorb excess-supply and are thus compensated for this service, similar to the role of arbitrageurs. The results are robust to out-of-sample tests and the use of benchmark survey-consistent adjusted flows data.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"23 1","pages":"1-36"},"PeriodicalIF":0.7,"publicationDate":"2014-01-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90474826","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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