2015 / 2016

Title: Commodities as Collateral

Abstract:

This paper proposes and tests a theory of using commodities as collateral for financing. Under capital control and collateral constraint, financial investors import commodities and pledge them as collateral to earn a risk premium. The collateral demand for com- modities increases commodity prices globally; it also increases commodity futures risk premium in the importing country but reduces that in the exporting country. Evidence from eight commodities in China and developed markets supports the theoretical pre-dictions, and the effects are economically large. Our theory and evidence complement
the theory of storage and provide new insights on the financialization of commodity markets.

Date: Tuesday 8th September, 12:00 - 13:00 

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

Title: Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market

Abstract:

We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and private information in the mortgage market in the run-up to the foreclosure crisis of 2007 to 2010. We develop a simple theoretical model to motivate our empirical analysis. Our results show that the majority of additional risk associated with ``low-doc'' mortgages is due to adverse selection on the part of borrowers who could verify income, but chose not to.  We provide evidence that these borrowers, who tend to live in relatively low-income neighborhoods, are more likely to inflate or exaggerate their income. Our paper contributes to the debate concerning income overstatement and mortgage credit expansion by extending the analysis of borrower income misrepresentation and adverse selection observed across mortgage types and borrower employment status.  By focusing on differences in employment status, we show that the majority of adverse selection and income falsification is confined to a specific borrower group that was never intended to utilize the low-documentation product.  Thus, our results show that broad policies designed to eliminate activities associated with excesses in mortgage originations during the housing boom may have unintended consequences.

Date: Thursday 15th October, 13:00 - 14:00

Event Location: 

Room W4.03, Cambridge Judge Business School

Title: Portfolio Choice with Model Misspecification: A Foundation for Alpha and Beta Portfolios

Abstract:

Hedge funds such as Bridgewater Associates o↵er two kinds of portfolios: “alpha”portfolios (a strategy with both long and short positions with overall zero market risk)and “beta” portfolios (a long-only strategy with exposure to market risk); similarly,sovereign wealth funds such as Norges Bank separate the management of their alpha and beta funds. Moreover, hedge funds and sovereign funds hold a large number of assets in their portfolios, ranging from several hundred to thousands (the portfolio of Norges Bank has over 9,000 assets). In this paper, we provide a rigorous foundation for “alpha” and “beta” portfolio strategies and characterize their properties when the number of assets is asymptotically large and returns are given by the Arbitrage Pricing Theory (APT). The APT is ideal for this analysis because it allows for alphas, while still imposing no arbitrage. Our first contribution is to extend the interpretation of the APT to show that it can capture not just small pricing errors that are independent of factors but also large pricing errors that arise from mismeasured or missing factors. Our second contribution is to show that under the APT, the optimal mean-variance portfolio in the presence of a risk-free asset can be decomposed into two components: an “alpha” portfolio that depends only on pricing errors and a “beta” portfolio that depends only on factor risk premia and their loadings. We then demonstrate that the alpha portfolio is the minimum-variance portfolio that is orthogonal to the beta portfolio, and vice versa, `a l a Roll (1980). This optimality property implies that the alpha and beta portfolios satisfy properties similar to those of the optimal mean-variance portfolio in terms of the relation between portfolio mean and variance. Moreover, their optimality implies that the squares of their Sharpe ratios sum to the square of the Sharpe ratio of the optimal mean-variance portfolio. Our third contribution is to characterize alpha and beta portfolios when the number of assets is asymptotically large: in this setting, we show that the portfolio weights of the alpha portfolio typically dominate the weights of the beta portfolio. We obtain similar decompositions and asymptotic results for the tangency portfolio, the global-minimum-variance portfolio, and the portfolios that comprise the Markowitz efficient frontier. Our fourth contribution is to show how these results about the decomposition of various portfolio weights, together with the restriction arising from the extended APT, can and should be used to improve the estimation of portfolio weights in the presence of model misspecification.

Date: Thursday 29th October, 13:00 - 14:00 in Room W4.03, Cambridge Judge Business School

Title: Noisy Rational Bubbles

Abstract:

This paper develops a novel theory of price dynamics during bubble-like episodes in a tractable noisy rational expectations model with endogenous investor inflows. The unique linear partially revealing rational expectations equilibrium features a dramatic non-fundamental rise and fall of asset prices driven by speculation. Two layers of uncertainty---uncertainty about the fundamental value and uncertainty regarding the probability with which the fundamental value is fully revealed in each period, can generate the hump shape in prices. Gradual investor inflows can greatly amplify price movements. Simulation results show that the model equilibrium can produce various real-life bubble-like events.

Date: Thursday 12th November, 13:00 - 14:00

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

About Susan Christoffersen

Title: Why Do Institutions Delay Reporting Their Shareholdings? Evidence from Form 13F

Abstract:

Institutional investors are allowed to delay their disclosures of quarter-end holdings via form 13F for up to 45 days. This forbearance may help protect the institutions from potentially damaging behavior by other traders, in particular from free-riding copycatters and from front-runners. It also may help the institutions hide their voting power, and this has prompted public corporations to request a much shorter maximum reporting lag. We look at 14 years of 13F filings to gauge the role of these three motives in the decision to delay disclosure, and the results indicate that front-running and voting, but not copycatting, motivate delays.

Date: Thursday 26th November, 13:00 - 14:00

Event Location: Room W2.02, Cambridge Judge Business School

About Kjell G. Nyborg

Title: Central Bank Collateral Frameworks

Abstract:

This paper seeks to inform about a feature of monetary policy that is largely overlooked, yet occupies a central role in modern monetary and financial systems, namely central bank collateral frameworks. Their importance can be understood by the observation that the money at the core of these systems, central bank money, is injected into the economy on terms, not defined in a market, but by the collateral frameworks and interest rate policies of central banks. Using the collateral framework of the Eurosystem as a basis of illustration and case study, the paper brings to light the functioning, reach, and impact of collateral frameworks. A theme that emerges is that collateral frameworks may have distortive effects on financial markets and the wider economy. They can, for example, bias the private provision of real liquidity and thereby also the allocation of resources in the economy as well as contribute to financial instability. Evidence is presented that the collateral framework in the euro area promotes risky and illiquid collateral and, more generally, impairs market forces and discipline. The paper also emphasizes the important role of ratings and government guarantees in the Eurosystem’s collateral framework.

Date: Thursday 21st January, 13:00 - 14:00 

Event Location: Room W4.05, Cambridge Judge Business School

About Raghavendra Rau

Title: Are Serial Acquirers Born or Made

Abstract: 

Serial acquirers conduct the vast majority of acquisitions in the U.S. We show that serial acquirers are not all alike. There is considerable heterogeneity in acquirer types, with four major types of acquirers common in the data – loners, occasional acquirers, sprinters, and marathoners. Importantly, these acquirers can be distinguished on an ex ante basis. Marathoners comprise the most efficient acquirers who learn from prior acquisitions. Peer effects and overvaluation matter for sprinters who acquire large numbers of targets in short intervals. Path dependency typically does not matter in making an acquirer a serial acquirer.

Date: Thursday 4th February, 13:00 - 14:00

Event Location: Lecture Theatre 2 Cambridge Judge Business School

About Michael Haliassos

Title: Incompatible European Partners? Cultural Predisposition and Household Financial Behaviour

Written in collaboration with Thomas Jansson (Sveriges Riksbank) and Yigitcan Karabulut (Rotterdam School of Management, Erasmus University and CEPR). 

Abstract: 

The recent influx of migrants and refugees into Europe and elsewhere raises questions as to whether migrant behavior reflects cultural predispositions and whether those prevent assimilation through exposure to host institutions. The paper focuses on financial behavior and uses administrative data on migrants and refugees to Sweden to study differences across cultural groups in the relationship of behavior to underlying household characteristics. It shows that such differences do exist but they diminish with exposure to host country institutions, even when cultural distances are large. Viewed from a different angle, our results also have implications for the potential of European institutional harmonization, exogenously imposed in the context of the fiscal crisis, to alleviate cultural differences in financial behavior. Finally, we find that robust cultural classification of European countries, based on genetic distance or on Hofstede’s cultural dimensions, fails to identify a single ‘southern’ culture but points to a ‘northern’ culture. 

Date: Thursday 18th February, 13:00 - 14:00

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

Title: Innovation, Social Connections, and the Boundary of the Firm

Abstract: 

In this paper, we propose and provide evidence that the existence of prior social connections between managers or board members of supplier (upstream) and customer (downstream) firms can encourage relation-specific investment and foster innovation by the upstream firms. We show that innovative activities by suppliers increase with the existence and strength of their social connections with customers. To establish causality, we exploit connection breaches due to manager/director retirements or deaths in the (much larger) customer firms and find that innovative activities drop for those suppliers connected to these customer members. Our work sheds light on how social connections can shape the boundary of the firm by mitigating contractual incompleteness and transactions costs, thereby allowing the upstream firms to remain as standalone entities instead of being vertically integrated with the downstream firms.

Date: Thursday 3rd March, 13:00 - 14:00

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

Title: Time and value: traps and fallacies of asset pricing

Abstract:

We are familiar with the concept of 'statistical illusion', that is, the tendency for human beings to make statistically incorrect inferences from empirical data. Examples of these include the clustering illusion ('hot hand fallacy'), and the gambler's fallacy. This presentation discusses statistical illusion and cognitive bias in the financial markets, and how it can impact the decisions of buyers and sellers. Examples include technical analysis, correlation products, long-term discount rates, securitisation products and mortgage break clauses. To what extent are all market agents prone to cognitive bias? If so, what implication does such bias have for regulation and market ethics?

Date: Thursday 28th April, 13:00 - 14:00

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

About Yacine Ait-Sahalia

Title: A Hausman Test for the Presence of Market Microstructure Noise in High Frequency Data

Abstract:

We develop tests that help assess whether a high frequency data sample can be treated as reasonably free of market microstructure noise at a given sampling frequency for the purpose of implementing high frequency volatility and other estimators. The tests are based on the Hausman principle of comparing two estimators, one that is efficient but not robust to the deviation being tested, and one that is robust but not as efficient. We investigate the asymptotic properties of the test statistic in a general nonparametric setting, and compare it with several alternatives that are also developed in the paper. Empirically, we find that improvements in stock market liquidity over the past decade have increased the frequency at which simple, uncorrected, volatility estimators can be safely employed.

Date: Thursday 12th May, 13:00 - 14:00

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

Title: Risk Management - the Revealing Hand

Abstract:

Many believe that the recent emphasis on enterprise risk management function is misguided, especially after the failure of sophisticated quantitative risk models during the global financial crisis. The concern is that top-down risk management will inhibit innovation and entrepreneurial activities. We disagree and argue that risk management should function as a Revealing Hand to identify, assess, and mitigate risks in a cost–efficient manner. Done well, the Revealing Hand of risk management adds value to firms by allowing them to take on innovative, therefore riskier projects and strategies. But risk management must overcome severe individual and organizational biases that prevent managers and employees from thinking deeply and analytically about their risk exposure. In this paper, we draw lessons from seven case studies about the multiple and contingent ways that a corporate risk function can foster highly interactive and intrusive dialogues to surface and prioritize risks, help to allocate resources to mitigate them, and bring clarity to the value trade-offs and moral dilemmas that lurk in those decisions.

Date: Thursday 26th May, 13:00 - 14:00

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

Title: Switching Risk Off: FX Correlations and Risk Premia

Abstract:

The recently popularized phrase "risk-off" refers to a change in risk preferences and the effect on asset prices of the associated portfolio rebalancing. We identify these episodes as a switch to a polarized correlation regime of currency returns. These risk-off transitions are relatively infrequent but noticeably increasing over time. They are persistent and associated with geopolitical events. Finally, risk-off switches are unrelated to changes in macroeconomic fundamentals and to volatility or average correlation shocks. Risk-off switches have very significant spill-over to the returns of broad asset classes and active trading strategies, with risky and safe asset returns being penalized and favored, respectively. We document that risk-off switches are associated with significant changes in the positions of professional investors across different financial markets, suggesting that the return evidence is consistent with price pressure induced by portfolio rebalancing.

Date: Thursday 9th June, 13:00 - 14:00

Event Location:  Castle Teaching Room, Level 4, Cambridge Judge Business School.