2014  / 2015

About Jose A. Scheinkman

Title: Misspecified Recovery

Abstract: 

Asset prices contain information about the probability distribution of future states and the stochastic discounting of those states as used by investors. To better understand the challenge in distinguishing investors' beliefs from risk-adjusted discounting, we use Perron-Frobenius Theory to isolate a positive martingale component of the stochastic discount factor process. This component recovers a probability measure that absorbs long-term risk adjustments. When the martingale is not degenerate, surmising that this recovered probability captures investors' beliefs distorts inference about risk-return tradeoffs. Stochastic discount factors in many structural models of asset prices have empirically relevant martingale components.

Date: Thursday 9th October, 17:00 - 18:00

Event Location: Room W4.03, Cambridge Judge Business School

About Daniel Paravisini

Title:  Comparative Advantage and Specialization in Bank Lending

Abstract:

We develop an empirical approach for identifying comparative advantages in bank lending. Using matched credit-export data from Peru, we first uncover patterns of bank specialization by export market: every country has a subset of banks with an abnormally large loan portfolio exposure to its exports. Using outliers to measure specialization, we use a revealed preference approach to show that bank specialization reflects a comparative advantage in lending. We show, in specifications that saturate all firm-time and bank-time variation, that firms that expand exports to a destination market tend to expand borrowing disproportionately more from banks specialized in that destination market. Bank comparative advantages increase with bank size in the cross section, and in the time series after mergers. Our results challenge the perceived view that, outside relationship lending, banks are perfectly substitutable sources of funding.

Date: Thursday 16th October, 17:00 - 18:00

Event Location: Barbara White Room, Newnham College

About Fabio Braggion

Title: The Economic Impact of a Bank Oligopoly: Britain at the Turn of the 20th Century

Abstract:

We investigate the impact of the formation of the "Big 5" highly concentrated banking market in England and Wales. By 1920 five banks controlled 80% of the deposit base, following several decades of mergers and acquisitions and aggressive branch expansion. Borrowers in the counties that experienced higher bank concentration received smaller loan, had to post more collateral, and were granted loans of shorter duration.In those high concentration counties, the quality of loan applicants had improved, which suggests that it is likely the oligopoly restricted credit, rather than changing the quality of loan applicants. We find signs that bank concentration negatively impacted local economies. Counties with a more concentrated banking system generated lower tax revenues and experienced slower firm incorporation.

Date: Thursday 14th November, 17:00 - 18:00

Event Location: Room W4.03, Cambridge Judge Business School

About Jan Obloj

Title: Robust vs realistic: interpolating between model-specific and model-free settings for pricing and hedging

Abstract: 

Classical models in mathematical finance, even if highly complex, typically share important methodological weaknesses: failure to account for model uncertainty and failure to incorporate market information in a consistent manner. In the wake of financial crisis these have been much debated. In response, an increasingly active field of research focuses on model-free super/sub-hedging using the underlying and Vanilla options. Explicit results often rely on pathwise inequalities and embedding techniques while pricing-hedging duality is obtained using martingale optimal transport methods. However, the resulting prices and hedges are often too expensive to be practically relevant. In this talk I show how to interpolate between the two worlds. I argue that quoted option prices should be incorporated through distributional constraints while beliefs, or past data, are most naturally included through pathwise restrictions. The resulting framework is robust and flexible. It allows for realistic outputs while quantifying the impact of making assumptions. I will present abstract results about pricing-hedging duality and then discuss examples of restrictions on future realised volatility and future option prices.

Date: Thursday 27th November, 17:00 - 18:00

Event Location:  Room W4.03, Cambridge Jude Business School

About David Hobson 

Title: Randomized Strategies and Prospect Theory in a Dynamic Context

Abstract:

Cumulative prospect theory (CPT) helps explain many features of individuals' attitudes to risk. But, as observed by Barberis (2012), in a dynamic setting the probability weighting of CPT leads to time inconsistency. It also leads to another feature which has not been considered to date - agents may prefer randomized strategies to pure strategies. In this paper we consider the impact of allowing CPT agents to follow randomized strategies. In the discrete-time, discrete-space model of gambling in a casino of Barberis (2012) we show that allowing randomized strategies leads to significant value gains. In a continuous-time, continuous-space model of Ebert and Strack (2014) we show that allowing randomization can significantly change the predictions of the model. Ebert and Strack show that a naive investor with CPT preferences never chooses to stop and gambles until the bitter end. We show that this extreme conclusion is no longer valid if the agent has a coin in his pocket.

Date: Thursday 22nd January, 12:30 - 13:30

Event Location: Lecture Theatre 3, Cambridge Judge Business School

Title: The Excessive Creation of Sequel Firms

Abstract: 

When an inventing firm does not exploit itself, but sells an innovation, it internalizes the value of exploiting this innovation in a newly created firm. Such a sequel firm has however the ability to contract separately. As the research production of a firm suffers from a moral hazard in team problem, it is then worthwhile for the sequel firm to build its' own research team, in order to compete for further innovations. So selling an innovation, the innovating firm also looses some likelihood of  making future innovations. This imposes a negative externality on the innovating firm. We construct a model which captures this trade-off and the resulting dynamics of sequel firm creation. We compare the equilibrium frequency of firm creation with the first-best. There is predominantly "excessive" creation of firms, particularly in young industries. Inefficiencies fade away as the industry develops. This helps explaining the empirical observation that the frequency of sequel firm creation, as well as the focus of firms, decrease with the age of the industry.

Date: Thursday 5th February, 13:00 - 14:00

Event Location: 10 Trumpington Street (Lower Ground Floor), Cambridge, UK

About Joel Shapiro 

Title: Credit Ratings and Structured Finance

Abstract:

The poor performance of credit ratings on structured …finance products has prompted investigation into the role of Credit Rating Agencies (CRAs) in designing and marketing these products. We analyze a two-period reputation model where a CRA both designs and rates securities that are sold to different clienteles: un-constrained investors and investors constrained by minimum quality requirements.When quality requirements for constrained investors are higher, rating infl‡ation increases. Rating infl‡ation decreases if the quality of the asset pool is higher. Securities for both types of investors may have in‡ated ratings. The motivation for pooling assets derives from tailoring to clienteles and from reputational incentives.

Date: Thursday 19th February, 13:00 - 14:00

Event Location: 10 Trumpington Street (Lower Ground Floor), Cambridge, UK

About M. Edouard Challe

Title: Precautionary saving and aggregate demand

Abstract:

How do fluctuations in households’ precautionary wealth contribute to the propagation of aggregate shocks? In this paper, we attempt to answer this question by formulating and estimating a tractable structural model of the business cycle with incomplete insurance against idiosyncratic risk, nominal frictions, and involuntary unemployment. Time-variations in precautionary wealth have two conflicting effects on output volatility: a stabilizing “aggregate supply” effect working through the supply of capital and potential output; and a destabilizing “aggregate demand effect” working through aggregate consumption and the output gap. We quantify these forces via a maximum-likelihood estimation of the structural parameters of the model, using as observables both aggregate and cross-sectional information (such as the extent of consumption insurance and the distributions of wealth and consumption across households). We find the impact of demand shocks on aggregates to be significantly altered by time-varying precautionary savings.

Date: Thursday 5th March, 13:00 - 14:00

Event Location:  Room W4.06, Cambridge Judge Business School

Title: Financially Constrained Arbitrage and Cross-Market Contagion

Abstract: 

We propose a continuous time infinite horizon equilibrium model of financial markets in which arbitrageurs have multiple valuable investment opportunities but face financial constraints. The investment opportunities, heterogeneous along different dimensions, are provided by pairs of
similar assets trading at different prices in segmented markets. By exploiting these opportunities, arbitrageurs alleviate the segmentation of markets, providing liquidity to other investors by intermediating their trades. We characterize the arbitrageurs’ optimal investment policy, and derive implications for market liquidity and asset prices. We show that liquidity is smallest, volatility is largest, correlations between asset pairs with uncorrelated fundamentals are largest, and correlations between asset pairs with highly correlated fundamentals are smallest for intermediate levels of arbitrageur wealth.

Date: Thursday 30th April, 13:00 - 14:00 

Event Location: Room W4.03, Cambridge Judge Business School

About Anthony Saunders

Title: Mind the Gap: The Difference between US and European Loan Rates

Abstract:

Carey and Nini (2007) provide evidence that interest rate spreads on syndicated loans differed systematically between the European and the US market during the 1992 to 2002 period. Loan spreads in Europe are, on average, about 30 basis points smaller than in the US. We show that accounting for unused fees (AISU) fully explains the pricing puzzle for lines of credit. While European borrowers pay a significantly lower AISD, they also pay a significantly higher AISU. For term loans, we document a systematic selection effect: Firms with high borrowing costs in the market for lines of credit  as measured via the AISD and AISU  are more likely to also be active in the term loan market. This selection effect is significantly smaller in Europe and explains 50-90% of the pricing difference between US and European term loans. These results are consistent with commitments being exclusively provided by banks, while term funding is subject to a selection effect depending on the availability of outside options for borrowing via bond markets.

Date: Wednesday 6th May, 13:00 - 14:00

Event Location: 10 Trumpington Street (lower ground), Cambridge, UK

Title: On the Long Run Volatility of Stocks

Abstract: 

In this paper we investigate whether or not the conventional wisdom that stocks are more attractive for long horizon investors hold. Taking the perspective of an investor, we evaluate the predictive variance of k-period returns for different models and prior specifications and conclude, that stocks are indeed less volatile in the long run. Part of the developments include an extension of the modeling framework to incorporate time varying volatilities and covariances in a constrained prior information set up.

Date: Thursday 14th May, 13;00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

Title: Can Metropolitan Housing Risk Be Diversified? A Cautionary Tale from the Recent Boom and Bust

Written in collaboration with Stuart Gabriel and Richard Roll.

Abstract:

This study evaluates the effectiveness of geographic diversification in reducing housing investment risk.  To characterize diversification potential, we estimate spatial correlation and integration among 401 US metropolitan housing markets.  The 2000s boom brought a marked uptrend in housing market integration associated with eased residential lending standards and rapid growth in private mortgage securitization.  As boom turned to bust, macro factors, including employment and income fundamentals, contributed importantly to the trending up in housing return integration.  Portfolio simulations reveal substantially lower diversification potential and higher risk in the wake of increased market integration.      

Date: Thursday 11th June, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School