Department of FinanceSeminar Series

Seminar Schedule 2019

Jules Van Binsbergen
April 18th, 2019.
Institution: University of Pennsylvania
Zhi Da
March 22nd, 2019
Institution: University of Notre Dame
Michael Gallmeyer
February 22nd, 2019
Institution: University of Virginia
Kristine Hankins
February 15th, 2019
Institution: University of Kentucky

Seminar Schedule 2018

Seminar Schedule 2017

Wayne Ferson
October 27, 2017

Holdings-based Fund Performance Measures: Estimation and Inference
Wayne E. Ferson
University of Southern California and NBER
Junbo L. Wang
Louisiana State Universit

This paper introduces a predictive panel regression framework for holdings-based fund performance measures. Existing measures are special cases. The panel approach facilitates the correction of lagged stochastic regressor bias and allows the application of other statistical tools for panel regressions to the holdings-based measures. We find an “Average Alpha Effect” in most of the classical measures. This Effect is a cross-sectional relation between a fund’s average weights and the average stock alphas in the benchmark model. The Average Alpha Effect is large in simulated strategies, in data on active US equity funds and in index funds. It dominates the cross-sectional variation in the classical measures and is stronger in more recent data. The Effect is not related to active management and does not help predict stock returns, but it is related to the tendency of a fund to follow a buy-and-hold strategy. Removing the passive Average Alpha Effect from the classical measures reverses the inference of previous evidence that the before-cost performance from active fund management is positive.

Gurdip Bakshi
October 20, 2017

Crossing a Rubicon into Active Money Management Realities: Performance Measurement When Funds Follow Opaque Strategies
Gurdip Bakshi1, John Crosby2, and Xiaohui Gao3
1Smith School of Business, University of Maryland
2University of Technology Sydney Business School, Sydney, NSW 2007, Australia
3Smith School of Business, University of Maryland

We develop a performance measure, termed MAP, which is based on the concept of ambiguity
aversion, and is relevant for actively managed funds that follow opaque investment strategies.
When investors are ambiguity averse, our empirical evidence refutes the notion that many
(popular) actively managed equity strategies outperform the (passive) market. We further
contextualize the approach using strategies based on selling tail events in the equity, Treasury,
volatility, and currency markets. Our investigation addresses other questions including the
efficacy of hedge fund investments and carry trades.

Gustavo Schwenkler
October 5, 2017

Efficient Parameter Estimation for Multivariate Jump-Difusions
Francois Guay and Gustavo Schwenkler

This paper develops unbiased estimators of the transition density and posterior
lters of a multivariate jump-diusion process. The drift, volatility, jump intensity,
and jump magnitude are allowed to be state-dependent and non-ane. It is not necessary
to diagonalize the volatility matrix. Our approach facilitates the parametric
estimation of multivariate jump-diusion models based on discretely observed data.
Our parameter estimators have the same asymptotic behavior as maximum likelihood
estimators under mild conditions. Our methodology is found to be highly
accurate and computationally ecient for the estimation of consumption growth

Jay Shanken
September 29, 2017 | RB 210

Comparing Asset Pricing Models
Francisco Barillas and Jay Shanken

A Bayesian asset-pricing test is derived that is easily computed in closed-form from the standard F-statistic. Given a set of candidate traded factors, we develop a related test procedure that permits an analysis of model comparison, i.e., the computation of model probabilities for the collection of all possible pricing models that are based on subsets of the given factors. We find that the recent models of Hou, Xue and Zhang (2015a,b) and Fama and French (2015, 2016) are both dominated by a variety of models that include a momentum factor, along with value and profitability factors that are updated monthly.

Dr. Lixin Huang
March 10, 2017 | RB 210

Effects of “Large” Customers on Firm Value: The Case of Earnings Surprises

This paper investigates the effect of large customers on firm behavior and firm value. We find that, compared with firms without large customers, firms with large customers suffer more negative market reactions not only when they miss but even when they barely meet earnings forecasts. We show that the more negative market reactions are weakly supported by the difference in future profitability between firms with and without large customers. Further, since large customers make supplier firms’ earnings more persistent, we hypothesize that firms with large customers have greater incentives to manage earnings. In support, we find that firms with large customers (i) are less likely to miss earnings forecasts; and (ii) have significantly higher levels of discretionary accruals.

Dr. Srini Krishnamurthy
March 3, 2017 | RB 210

Do directors use information from committee memberships to manage their directorships?

Recent literature suggests that directors leave firms when they expect them to perform poorly. In this paper, we examine whether directors utilize information obtained from their directorships to time their departures prior to poor performance. Consistent with directors using information from their directorships, we find that audit committee directors who are in demand in the director labor market depart prior to the disclosure of deterioration in earnings quality. Other directors do not appear to time their departure decisions prior to earnings quality declines. We examine whether such departures help maintain the audit directors’ reputation in the market for directorships, but do not find that they receive more directorships than other directors who depart without a decline in earnings quality.

Dr. Robert Webb
February 17, 2017 | RB 210

The Impact of Latency Sensitive Trading on High Frequency Arbitrage Opportunities

This study examines the duration, frequency and profitability of potential high frequency arbitrage strategies between the Australian Securities Exchange (ASX) Share Price Index futures contract and an exchange-traded fund (ETF) written on the S&P/ASX200 constituent securities. Not surprisingly, we find the frequency and profitability of potential arbitrage opportunities are greater during volatile and high turnover periods− other things equal. We examine the impact of increased competition in high frequency trading (HFT) by identifying the number of ‘cabinets’ co-located in the ASX’s minimum latency liquidity center. With increased HFT connections, we observe an increase in the frequency, duration and value (albeit small) of index arbitrage profit opportunities. Our results are robust to the inclusion of transaction costs. We conclude that the activity of disruptive HFT outweighs the activity of index arbitrage HFTs and that the ASX market is not saturated by HFT.

Dr. Daniel Bradley
February 3, 2017 | RB 210

The Value of Hot News: Intellectual Property and the Sell-Side Research Industry

We examine the value of sell-side analysts by exploiting an exogenous court case (Barclays Capital v. (FLY))that diminished the intellectual property of brokers providing research. Between 2009 and 2013, approximately 60% of all recommendation revisions are leaked by FLY and one-third of these have time stamps that precede the I/B/E/S time stamp.Leaked recommendations facilitate price discovery resulting in an immediate market reaction, while non-leaked recommendations are associated with price drift. Stock prices of brokers with research divisions react positively (1.5%) to an initial court ruling protecting the intellectual property of brokers’recommendations and then negatively to the Court of Appeal’s reversal in favor of FLY (-1.2%). In the six month period following the Court of Appeal’s reversal decision, trading commissions significantly decline. Brokerage houses respond by trimming their analyst workforce and the number of stocks covered. Firms impacted by this loss of analyst coverage experience negative liquidity shocks. Our paper has important implications regarding the scope and future of sell-side research.

Dr. Steve Figlewski
January 20, 2017 | RB 210

Exercise Boundary Violations in American-Style Options: The Rule, not the Exception

An exercise boundary violation (EBV) occurs when the best bid price for an American option is
below the option’s intrinsic value. Using intraday data, we show that EBVs are actually very
common. In March 2010, 48.6% of all bid quotes for in-the-money calls were below intrinsic
value, rising to nearly 100% for deep in-the-money contracts near to expiration. Under these
conditions, the rational response of an investor liquidating an option is to exercise the option
rather than sell it, and we find that EBVs are strong predictors of the likelihood of early exercise.
Our results reverse standard theory on American option valuation and optimal exercise strategy.
Early exercise is very often rational in the real world and an American option on a non-dividend
paying stock should therefore command a premium over the equivalent European contract
because of its greater liquidity. Our results also suggest it is important to consider EBVs when
estimating implied volatilities, marking option positions to market, and measuring market
liquidity, perhaps by using an option's intrinsic value in place of an EBV bid quote.

Seminar Schedule 2016

Dr. George Pennacchi
November 4, 2016 | RB 210

Syndicated Loan Risk: The Effects of Covenants and Collateral

This paper develops a new approach for quantifying the impact thatcollateral and covenants have in reducing the risk of syndicated loans, both from a credit rating agency’s and investors’ perspectives. First, it analyzes how a loan’s covenants and collateral affect the difference between the loan’s credit rating and the senior, unsecured credit rating of the borrowing firm. Second, it examines how a loan’s covenants and collateral affect the difference between the borrowing firm’s senior, unsecured credit default swap (CDS) spread and its loan’s credit spread. The credit rating agency and investors agree that collateral and particular types of covenants (interest or fixed charge coverage and dividend restrictions) are particularly important for reducing loan risk, and the impacts of these loan provisions are greater the riskier is the borrowing firm. They also agree that other covenants (excess cashflow and equity issuance sweeps) are actually detrimental to a loan’s credit quality. Disagreement is found on the relative importance of collateral and covenants for term loans versus revolving lines of credit.

Dr. Vikram Nanda
October 28, 2016 | RB 210

Using Managerial Attributes to Identify Market Feedback Effects: The Case of Mutual Fund Fire Sales

We develop a simple model of feedback and learning in the aftermath of a “fire sale,” and test its implications. Our model is based on the notion of market-feedback in which investors such as mutual funds gather information about a firm’s potential investment opportunities. This in-formation finds its way into stock prices and helps firms to decide on whether to engage in new investments. The incentive for mutual funds to produce information comes from two potential sources of profits: “trading” profits and capital gains on portfolio “holding”. We show that fire sales can disrupt the incentive to produce information, especially by reducing profits on portfolio holdings. Further, we show that unbiased (or rational) firm managers tend to rely to a greater extent on market-produced information, and are more likely to be affected by the information disruption caused by fire-sales. Rational managers are more likely to cutback on their investments and suffer a drop in firm value. On the other hand, an overconfident (OC) CEO with positively biased beliefs is inherently less dependent on market feedback and is less affected by a fire sale. Our empirical findings strongly support the testable implications of our model. We find a mono-tonic relationship between level of overconfidence and investment-Q sensitivity. A striking finding is that firms headed by OC CEOs suffer little drop in firm value following a fire sale vis-´a-vis firms headed by non-OC CEOs.

Dr. Robert Weaver
October 14, | RB 210

Commodity Price Dynamics: Identifying, Predicting, and Explaining Jumps

The variation of energy prices has been a traditional source of shocks to the real economy. In many cases, this variation has manifested in jumps in energy prices that were characterized by some persistence. From another perspective, energy price volatility has historically been noted and its effects on real economy debated. Historically, the importance of the shocks to the real economy has led them to be labeled as energy crises, as they were argued to have resulted in substantial changes in real prices that induced changes in behavior on the demand and supply sides of the many markets. This paper re-examines evidence of such a linkage by considering the transmission of energy prices into soft commodity prices. This nexus lies within the core of any real effects as softs include food-related commodities. The paper contributes to the literature by re-examining this linkage with a close eye on the role played by structural breaks within a time series and by considering the question of causality within a nonlinear framework. The paper finds that functional form is a critical specification that conditions inference. Using linear forms, we find no cointegration between energy and food in the full sample under the maintained hypothesis that there are no structural breaks. Using linear nonparametric methods, we examine the series for structural breaks and find evidence of their importance. Based on subdivisions of the sample period as suggested by the structural break examination, within the structural break intervals identified we find evidence of co-integration. We next reconsider the issue within the context of nonlinear functional forms posing the question of whether evidence of structural breaks based on linear methods follow from underlying nonlinearity. Our results confirm the importance of functional form specification and we find evidence of nonlinear causality between energy and soft commodity prices.

Dr. Vikas Agrawal
February 12, 2016 | RB 210

Seminar Schedule 2015

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