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June 2012

Published / Preprint: Evaporating Liquidity

June 19, 2012 by MoneyScience   Comments (0)

The returns of short-term reversal strategies in equity markets can be interpreted as a proxy for the returns from liquidity provision. Using this approach, this article shows that the return from liquidity provision is highly predictable with the VIX index. Expected returns and conditional Sharpe ratios from liquidity provision spike during periods of financial market turmoil. The results point to withdrawal of liquidity supply and an associated increase in the expected returns from liquidity...

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Published / Preprint: The Real Consequences of Market Segmentation

June 19, 2012 by MoneyScience   Comments (0)

We study the real effects of market segmentation due to credit ratings by using a matched sample of firms just above and just below the investment-grade cutoff. These firms have similar observables, including average investment rates. However, flows into high-yield mutual funds have an economically significant effect on the issuance and investment of the speculative-grade firms relative to their matches, especially for firms likely to be financially constrained. The effect is associated with...

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Published / Preprint: Lender Screening and the Role of Securitization: Evidence from Prime and Subprime Mortgage Markets

June 19, 2012 by MoneyScience   Comments (0)

This article examines the link between mortgage securitization and lender screening during the boom and bust of the U.S. housing market. Using comprehensive data on both prime and subprime securitized and bank-held loans, we provide evidence that securitization affected lenders' screening decisions in the subprime market for low-documentation loans through two channels: the securitization rate and the time it takes to securitize a loan. The change in decision-making by subprime lenders occurs...

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Published / Preprint: Asymmetric Information, Portfolio Managers, and Home Bias

June 19, 2012 by MoneyScience   Comments (0)

We propose a model of delegated asset management that can explain the following empirical regularities in international markets: the presence of home bias, the lower proportion of mutual funds investing domestically, and the higher market value of mutual funds investing domestically. In the model, fund managers choose whether to specialize in domestic or foreign assets. Individual investors are uncertain about managers' abilities, and they are more informed about domestic markets. This makes...

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Published / Preprint: Examining the Dark Side of Financial Markets: Do Institutions Trade on Information from Investment Bank Connections?

June 19, 2012 by MoneyScience   Comments (0)

Institutions often have access to corporate inside information through their connections, but relatively little is known about the extent to which they exploit their informational advantage through short-term trading. We employ broker-level trading data to systematically examine possible cases of connected trading. Despite examining the issue from multiple angles, we are unable to find much evidence to support that investment bank clients take advantage of connections through takeover advising,...

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Published / Preprint: Rare Disasters and Risk Sharing with Heterogeneous Beliefs

June 19, 2012 by MoneyScience   Comments (0)

Risks of rare economic disasters can have a large impact on asset prices. At the same time, difficulties in inference regarding both the likelihood and severity of disasters, as well as agency problems, can lead to significant disagreements among investors about disaster risk. We show that such disagreements generate strong risk-sharing motives, such that just a small number of optimists in the economy will significantly reduce the disaster risk premium. Our model highlights the "latent" nature...

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