Finance seminars

Below is a list of upcoming finance seminars hosted by the Finance Discipline Group. All seminars unless stated otherwise are held from 12-1pm in:

Room D301
Level 3, Block D
1-59 Quay St
Haymarket, Sydney Australia

Access to seminars is by invitation. Please contact Lakmali Dias for further details.

If you want to present a paper at our seminar series please contact Dirk Baur.

2011
February
March
April
May
June
July
August
September
October
November
December

February

Speaker: Mikhail Anufriev, Center for Nonlinear Dynamics in Economics and Finance, Department of Economics and Business, University of Amsterdam
Title: "Evolutionary Selection of Individual Expectations and Aggregate Outcomes"
Date: 21 February 2011
Abstract: In recent 'learning to forecast' experiments with human subjects (Hommes, et al. 2005), three di
fferent patterns in aggregate price behavior have been observed: slow monotonic convergence, permanent oscillations and dampened fluctuations. We construct a simple model of individual learning, based on performance based evolutionary selection or reinforcement learning among heterogeneous expectations rules, explaining these di
fferent aggregate outcomes. Out-of-sample predictive power of our switching model is higher compared to the rational or other homogeneous expectations benchmarks. Our results show that heterogeneity in expectations is crucial to describe individual forecasting behavior as well as a ggregatepricebehavior.

Speaker: John Wooders, Department of Economics, University of Arizona
Title: "Auctions with Heterogeneous Entry Costs"
Date: 22 February 2011
Downloads: Slides, Paper
Abstract: It is well known that if bidder shave independent private values and homogeneous entry costs a first-or second-price auction with a reserve price equal to the seller ís value maximizes social surplus and seller revenue, and leaves bidders with no surplus. We show that if entry costs are heterogeneous and private information, then the revenue maximizing reserve price is above the seller's value, a positive admission fee (and a reserve price equal to the seller's value) generates more revenue, and an entry cap combined with an admission fee generates even more revenue. In each case bidders capture informational rents. Nevertheless, social surplus and seller revenue coincide asymptotically, and are the same whether entry costs are homogeneous or heterogeneous, even though the effect of an increase in the number of bidders may differ. Our results are framed in terms of screening values rather than reserve prices, and apply to any standard auction.

Speaker: Hui Zheng, University of Sydney
Title: "The Geographic Origin of Order Flow and Price Discovery"
Date: 28 February 2011
Abstract: This study exploits a unique dataset to determine the relative contribution to price discovery of order flow originating from geographically dispersed ASX servers. It is found that transactions of traders on the Sydney, Chicago and London servers have a significant impact on price volatility. Trades initiated on the Sydney and Chicago servers incur lower pre-trade transaction costs, pay a lower premium to liquidity providers and have a higher price impact. Traders using the Sydney and Chicago servers contribute significantly to price discovery of the local Australian market. Our results imply that foreign investors can differ in their private information endowments, and collectively contribute to the market efficiency of local markets even when their individual impact is small. Our findings extend the previous literature on home equity bias and may explain the conflicting evidence on the relative informativeness between foreign and local investors.

March

Speaker: Mei Dong, Bank of Canada
Title: "Money and Price Posting Under Private Information"
Date: 1 March 2011
Abstract: We study price posting with undirected search in a search theoretic model with divisible money and divisible goods. Ex ante homogeneous buyers experience match specific preference shocks in bilateral trades. The shocks follow a continuous distribution and the realization of the shocks is private information. We show that generically there exists a unique price posting monetary equilibrium. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers spend only when they have high preferences and they spend more when their preferences are higher. As inflation decreases the value of waiting for future trades, higher inflation induces more buyers to spend money and those who spend before buy more goods and spend money faster. The model naturally captures the hot potato effect of inflation along both the intensive margin and the extensive margin.

Speaker: Peter Spencer, Department of Economics and Related Studies, University of York
Title: "Optimal Monetary Policy with Inflation-Conditional Macroeconomic Volatility"
Date: 7 March 2011
Abstract: This paper develops an econometric model of the US macroeconomy that is potentially heteroskedastic and uses it to analyze optimal monetary policy. This model allows the variance structure to depend in a linear or quadratic way on a lagged endogenous variable such as the inflation or interest rate, consistent with the Okun (1971) and Friedman (1977) conjecture that macroeconomic volatility depends upon the underlying rate of inflation. The linear specification is the analogue of the Cox, Ingersoll, and Ross (1985) 'square root' volatility specification found in the term structure literature, but the quadratic specification is novel. Both models fit nicely into the linear-quadratic framework used in the optimal control literature. Theoretically, the quadratic component makes policy more responsive to inflation shocks in the same way that an increase in the welfare weight attached to inflation does, while the linear component reduces the steady state rate of inflation. Empirical results for the period 1961-2009 underline the statistical significance of inflation-dependent US macroeconomic volatility revealed by research on the term structure. Analysis of the welfare losses associated with inflation and macroeconomic volatility shows that the conventional homoskedastic model seriously underestimates the potential welfare gains fromp olicy optimization.

Speaker: Rüdiger Fahlenbrach, Ecole Polytechnique Fédérale de Lausanne
Title: "This Time is the Same: Using the Events of 1998 to Explain Bank Returns During the Financial Crisis"
Date: 9 March 2011
Abstract: The collapse in the capitalization of banks is at the heart of the recent financial crisis. In this paper, we investigate whether a bank's experience during the 1998 crisis, which was viewed as the most dramatic crisis since the Great Depression, predicts its experience during the recent financial crisis. One hypothesis is that a bank that has an especially poor experience in a crisis learns and adapts, so that it performs better in the next crisis. Another hypothesis is that a bank's poor experience in a crisis is tied to aspects of its business model that are persistent, so that its past performance during one crisis forecasts poor performance during another crisis. We show that banks that performed worse during the 1998 crisis did so as well during the recent financial crisis. This effect is economically important. In particular, it is economically as important as the leverage of banks before the start of the crisis. The result does not differ for banks having identical chief executives in both crises.

Speaker: Myrna Wooders, Department of Economics, Vanderbilt University
Title: "Share Equilibrium in Local Public Good Economies"
Date: 10 March 2011
Abstract: We define a concept of share equilibrium for local public good (or club) economies where individual members of the population may have preferences over the membership of their jurisdiction. A share equilibrium specifies one share index for each individual. These indices determine each individual's cost shares in any jurisdiction that he might join. We demonstrate that the same axioms as those that characterize the Lindahl equilibrium, as discussed in Lindahl's 1919 paper, also characterize the share equilibrium. Share equilibrium extends the notions of ratio equilibrium and cost share equilibrium (due to Kaneko, 1977; Mas-Colell and Silvestre, 1989) to economies with a local public good and possibly multiple jurisdictions.

Speaker: Louis Mercorelli, Finance Discipline Group, University of Technology, Sydney
Title: "High Frequency Trading and VWAP Algos"
Date: 14 March 2011
Abstract: High Frequency Trading (HFT) is a relatively new field receiving a lot of attention from regulators, academics and industry practitioners. In this presentation I will cover sections from three of my HFT articles. First I will start with the basics of High Frequency Trading including intraday market dynamics and current microstructure theories. I will then discuss how to implement a standard VWAP algorithm and finally I will present simulation results that show how a standard VWAP algorithm performs against traders and how we can improve its performance. Although the examples will be based on Australian equity markets, they should easily translate to other equity markets and other asset classes.

Speaker: Chuan-Yang Hwang, Nanyang Technological University
Title: "Is Information Risk Priced? Evidence from the Price Discovery of Large Trades" and "Information Risk and Momentum Anomalies"
Date: 16 March 2011

Speaker: Zach Sautner, Duisenberg School of Finance, University of Amsterdam
Title: "Opening the Black Box: Internal Capital Markets and Managerial Power"
Date: 21 March 2011
Abstract: We analyze the internal capital markets of a multinational conglomerate to determine whether more powerful unit managers enjoy larger allocations. We use a new dataset of planned and actual allocations to business units to show that, although all unit managers systematically over-budget capital expenditures, more powerful and better connected managers obtain larger shares of cash windfalls and increase investment about 40% more than their less powerful peers. Results survive robustness tests and are not explained by differences in managerial abilities or an endogenous allocation of managers across units. Our findings support bargaining-power theories and provide direct evidence of a source of capital allocation frictions.

Speaker: Jing Yu, Accounting and Finance Discipline Group, Business School, University of Western Australia
Title: "The Role of Foreign Blockholders in Stock Liquidity: A Cross-Country Analysis"
Date: 23 March 2011
Abstract: Foreign block ownership has grown rapidly as the progress of stock market liberalization in the last decade. In view of the substantial presence of foreign blockholders, we investigate direct impact of foreign block ownership on the company's stock liquidity for a sample of international companies from 40 countries. We document strikingly negative liquidity effects of foreign block ownership in the majority of our sample countries. We conduct further analyses to uncover the two possible explanations for foreign blockholders' negative impact on stock liquidity. The results show that the presence of foreign block ownership decreases the number of free-float shares available to the public, which suggests that the inactive trading of foreign blockholders dampens the trading activities and renders real friction in the stock market. Moreover, the negative liquidity effects of foreign blockholders are most pronounced for companies with opaque information environments and for companies in countries with low quality information disclosure. These findings are consistent with the notion that foreign blockholders are perceived as informed traders and thereby discourage the participation of liquidity traders.

Speaker: Russell Jame, School of Banking and Finance, University of NSW
Title: "Pension Fund Herding and Stock Returns"
Date: 28 March 2011
Abstract: This paper examines the daily trading activity of 590 pension fund managers from 1999-2008. We find that pension funds engage in significant herding, and that this herding forecasts stock returns. The stocks most heavily bought by pension funds outperform the stocks most heavily sold by pension funds over the subsequent week. However, this effect fully reverses over longer horizons. The stocks most heavily bought by pension funds underperform the stocks most heavily sold by pension funds by over 4% over the subsequent year. Our results suggest that pension fund herding has a destabilizing effect on stock prices.

Speaker: Peter Bossaerts, Division of Social Sciences, California Institute of Technology
Title: "Market Bubbles and Crashes as an Expression of Tension between Social and Individual Rationality: Experiments"
Date: 30 March 2011
Abstract: We investigate the claim that social rationality explains the emergence of one type of bubble in competitive asset markets that we shall refer to as “credit market bubble,” and that individual rationality explains the subsequent crash. The bubble is defined as a situation where (i) the debt is priced above its intrinsic value and (ii) the debt is rolled over even though each creditor should cash in as it is commonly known that the debtor would never be able to repay the debt at face value. Building on evidence from behavioural game theory, we propose that credit market bubbles emerge whenever the debtor’s payment ability, although never sufficient, grows over time. We argue that this captures the essence of many financial bubbles alleged to have been observed in the real world. Experimental data confirm the emergence of bubbles in this setting. The bubbles are robust – they re-emerge upon replication – but show evidence of decay when replication is with exactly the same parameters and the same subject cohort. Prices always remain above levels predicted by conventional asset pricing theory. Nevertheless, they are not unreasonable; e.g. the following strategy delivers high Sharpe ratios except in replications with the same parameters and subjects: buy in the first round and sell from the moment the face value increases beyond the original purchase price. We believe no existing theory is truly applicable to explain pricing in credit bubbles. In parallel to behavioural game theory, we expect our experiments to lead to new theory, best referred to as behavioural asset pricing theory.

April

Speaker: Nicole Choi, Department of Economics and Finance, University of Wyoming
Title: "Why Does Financial Strength Forecast Stock Returns? Evidence from Subsequent Demand by Institutional Investors"
Date: 11 April 2011
Abstract: Measures of a firm's financial strength forecast stock returns. The relation between financial condition and future returns, however, is consistent with two explanations: (1) changes in investors' expectations are impounded gradually over time and, (2) riskier firms—with higher discount rates—require greater profitability to generate the same valuation ratios and changes in investors' expectations are quickly impounded into prices. Using net demand by institutional investors as a proxy for the incorporation of information driven by revisions in sophisticated investors' expectations, we test whether changes in investors' expectations are immediately or gradually impounded over time. Consistent with the gradual incorporation of information explanation, financial strength predicts both future returns and future institutional investor demand.

Speaker: Jay Shanken, Goizueta Business School, Emory University
Title: "Pricing Model Performance and the Two-Pass Cross-Sectional Regression Methodology"
Date: 13 April 2011
Abstract: Since Fama and MacBeth( 1973), the two-pass cross-sectional regression (CSR) methodology has been the most popular approach for estimating and testing asset pricing models. Over the years, many studies have employed the CSR R2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the inevitable impact of model misspecification on the variability of the CSR estimates. This provides a formal alternative to the common heuristic of simply comparing the point estimates of R2. Indeed, we encounter several examples of large R2 differences that are not statistically significant. Aversion of the intertemporal CAPM exhibits the best overall performance in our tests, followed by the more empirically motivated "three-factor model" of Fama and French (1993). Interestingly, the performance of several prominent consumption CAPMs proves to be sensitive to variations in design, such as the portfolios used as test assets or economic restrictions imposed on model parameters.

Speaker: David Byrne, Department of Economics, Faculty of Business and Economics, University of Melbourne
Title: "Peer E
ffects in Policymaking: Evidence From Canadian Provincial Formulary Listings"
Date: 18 April 2011
Abstract: This paper measures the extent to which policy decisions by a government in one political jurisdiction are aff
ected by prior policy choices i nother jurisdictions. Our application studie show provincial governments in Canada determine what drugs to list on their formularies, or the list of drugs that are covered under their provincial health insurance plans. We
find strong evidence of peer e
ffects in provincial formulary listings that are large in magnitude. An investigation of heterogeneity in peer e
ffects reveals that peer e
ffects in formulary listings are stronger amongst novel drugs, therapeutic drug classes with higher prescription rates and for smaller
financially constrained provinces. We do not
find a systematic relationship between the magnitude of peer e
ffects and the size of a pharmaceutical company. We also evaluate the impact of the Common Drug Review (CDR), a 2003 federal policy that aims to reduce uncertainty in formulary listings by providing upfront cost-bene
fit analyses and listing recommendations for the provinces. Overall, the policy has a heterogeneous impact on the provinces' listing behaviour; some provinces tend to agree with "Do Not List" recommendations while others focus on "List" recommendations. For "Me-too" drugs, the novelty class the CDR mainly evaluates, we
find that CDR evaluations reduce the peer e
ffects in provinces' formulary listings.

Speaker: Ravi Jagannathan, Department of Finance, Kellogg Graduate School of Management, Northwestern University
Title: "The Cross-Section of Hurdle Rates for Capital Budgeting: An Empricial Analysis of Survey Data"
Date: 20 April 2011
Abstract: Whereas Poterba and Summers (1995) find that firms use hurdle rates that are unrelated to their CAPM betas, Graham and Harvey (2001) find that 74% of their survey firms use the CAPM for capital budgeting. We provide an explanation for these two apparently contradictory conclusions. We find that firms behave as though they add a hurdle premium to their CAPM based cost of capital. Following McDonald and Siegel (1986), we argue that the hurdle premium depends on the value of the option to defer investments. While CAPM explains only 10% of the cross-sectional variation in hurdle rates across firms, variables that proxy for the benefits from the option to wait for potentially better investment opportunities explain 35%. Estimates of our hurdle premium model parameters imply an equity premium of 3.8% per year, a figure that is essentially the same as that reported in the survey by Graham and Harvey (2005). Consistent with our model, growth firms use a higher hurdle rate when compared to value firms, even though they have a lower cost of capital.

May

Speaker: Philip Gharghori, Department of Accounting and Finance, Monash University
Title: "Trading on Stock Split Announcements and the Ability to Earn Long-Run Abnormal Returns: Caveat Emptor"
Date: 2 May 2011
Abstract: According to the extant academic literature, the market under-reacts to stock split announcements. The current study offers compelling evidence challenging this assertion, and thereby attempts to resolve conflicts associated with the empirical findings on stock splits. All stock splits over the period 1975-2006 are examined, with particular attention paid to each of three sub-periods: 1975-1987, 1988-1997 and 1998-2006. In order to identify the source of prior results, the dataset is segmented based on a number of factors. Consistent with prior research, event firms exhibit positive one-year abnormal returns over the entire dataset. However, this finding is not robust across sub-periods or the market capitalisation of event firms. In particular, for the sub-period 1998-2006, there is only weak evidence that the market under-reacts to stock split announcements. Further, evidence of excess long-run abnormal returns is confined to small and micro capitalisation firms. We also show that the abnormal returns can be enhanced by focusing on stocks that have not split in the recent past. Our key finding is that the positive abnormal returns associated with stock splits are conditional on the event firm splitting again in the future. This result is robust across all periods, market capitalisations and to a firm’s splitting history. The positive signal associated with stock splits does not appear to be economically exploitable.

Speaker: David Veredas, European Center for Advanced Research in Economics and Statistics
Title: "Modeling Vast Panels of Volatilities with Long-Memory Dynamic Factor Models"
Date: 4 May 2011
Abstract: Modeling vast panels of volatilities has always been an issue of paramount importance, yet elusive. These volatilities, when observed through time, share certain stylized facts: co-movement, clustering and long-memory. Based on Dynamic Factor Models, we propose a methodology that i) disentangles between commonness and idiosyncrasies, ii) is suitable for large dimensions, and iii) explains the above-mentioned stylized facts. A throughout Monte Carlo study shows the usefulness of the approach both in terms of factor identification and parameter estimation. An application to 90 daily realized volatilities, pertaining to S&P100, from January 2001 to December 2008, evinces five findings. i) All the volatilities have long memory, more than half of them in the nonstationary range, which increases during financial turmoil ii) Tests and criteria point towards one dynamic common factor driving the co-movements, which naturally qualifies as the unobservable market volatility. iii) This factor has larger long memory that the assets volatilities, suggesting that long-memory is a market characteristic. Indeed, the idiosyncratic components show a much smaller deal of fractional integration. iv) The time-varying long-memory is mainly due to the common factor, while the degree of long-memory in the idiosyncrasies is relatively stable. v) a forecasting horse race with univariate models shows the factor models overwhelming win for short-, medium- and long-run predictions.

Speaker: Harjoat Bhamra, Finance Division, Sauder School of Business, University of British Columbia
Title: "Asset Prices with Heterogeneity in Preferences and Beliefs"
Date: 9 May 2011
Abstract: In this paper, we study asset prices in a dynamic, continuous-time, general-equilibrium endowment economy where agents have power utility and di
ffer with respect to both beliefs and their preference parameters for time discount and risk aversion. We solve inclosed form for the following quantities: optimal consumption and portfolio policies of individual agents; the riskless interest rate and market price of risk; the stock price, equity risk premium, and volatility of stock returns; and, the term structure of interest rates. Our solution allows us to identify the strengths and limitations of the model with heterogeneity in both preferences and beliefs. We fi
nd that beliefs about the mean growth rate of the aggregate endowment that are pessimistic on average (across investors) lead to a signi
cant increase in the market price of risk, while heterogeneity in risk aversion increases stock-return volatility. Consequently, the equity risk premium, which is the product of the market price of risk and stock return volatility, is considerably higher in the model where average beliefs are pessimistic and risk aversions are heterogeneous, and this is not accompanied by an increase in either the level or the volatility of the short-term riskless rate. The main limitation of the model is that it is stationary only for a restricted set of parameter values, and for these parameter values one can get a high market price of risk and equity risk premium but not excess stock return volatility.

Speaker: Tarek Hassan, Booth School of Business, University of Chicago
Title: "Carry Trade: Beyond the Forward Premium Puzzle"
Date: 11 May 2011
Abstract: We show that the Carry Trade exploits a static interest rate differential which is largely unrelated to the fact that currencies with high interest rates tend to appreciate (the forward premium puzzle). We argue that this static interest rate differential is the result of a static risk premium: investors are permanently more averse to being exposed to the exchange rate risk associated with particular countries. Moreover, this static risk premium appears to be unrelated to liquidity risk, default risk, or the risk of a sudden large depreciation (tail risk). Based on these results we argue that few of the models which are designed to address the forward premium anomaly are able to explain the carry trade. We then relate the static risk premium in the data to several macroeconomic variables and find that investors seem to be considerably less averse to exposure to currency risk associated with larger countries.

Speaker: Paul Pezanis-Christou, UNSW
Title: "Information Quality (and Behaviour) in Multi-Unit High-Bid Auctions"
Date: 16 May 2011
Abstract: We study the effects of buyers’ private information quality on the formation of prices in simultaneous and sequential high-bid auctions with multi-unit demands. Our model, which is a hybrid of Hausch (1986) (which assumes symmetric bidders) and of Engelbrecht-Wiggans and Weber (1983) (which assumes asymmetric bidders), shows that sequential auctions generate lower expected revenues for a wider range of parameters than previously established and puts in perspective different types of winner’s curse. It also offers simple comparative statics on bidders’ behaviour, the seller’s expected revenues and on price trends in sequential auctions that can (and will) be experimentally tested.

Speaker: Gunter Meyer
Title: "Comments on Pricing Options and Bonds with Partial Differential Equations"
Date: 18 May 2011
Abstract: It is well known that the price of options and bonds can be found from the numerical solution of an underlying diffusion equation. This talk will concentrate on the constraints and freedoms present when specific financial instruments are to be priced with numerical methods for PDEs. As illustration we shall examine the bond equation for a one-factor interest rate model near zero interest rates, and the question of bounds on option prices for uncertain parameters in the Black Scholes equation.

Speaker: Stefano Sacchetto, Tepper School of Business, Carnegie Mellon University
Title: "Preemptive Bidding, Target Resistance and Takeover Premia: An Empirical Investigation"
Date: 25 May 2011
Abstract: This paper proposes an empirical framework to evaluate two sources of large takeover premia that have been advanced in the literature: preemptive bidding and target resistance. We develop an auction model that features costly sequential entry of bidders in takeover contests and encompasses both explanations. The parameters of the model are estimated using a structural approach for a sample of US target firms in the period 1988-2006. We find that takeover premia are mainly determined by target resistance rather than preemptive bidding. The paper also quantifies the benefits of preemption for an initial bidder and the effects of target resistance and costs of entry on bidders?participation decisions.

June

Speaker: Youchang Wu, University of Wisconsin-Madison
Title: "Mutual Fund Families and Performance Evaluation"
Date: 1 June 2011
Abstract: We develop a continuous-time Bayesian learning model to evaluate the composite skill of a mutual fund manager and a fund family. Our model estimates the composite skill of each fund as a function of its own performance and family performance. We show two competing effects of the family performance on the evaluation of a member fund: a positive common-skill effect and a negative common-noise effect. The overall effect increases with the correlation of unobservable skills, and decreases with the correlation of unobservable noise. This pattern is stronger in larger families. Consistent with our assumptions, we find empirically that funds within the same family show higher correlations of estimated alphas and of residual returns. We also find that the effect of family performance on flows to a member fund exhibits strong cross-sectional patterns that are consistent with our model predictions.

Speaker: Hengjie Ai, Finance Area, Fuqua School of Business, Duke University
Title: "Growth to Value: Option Exercise and the Cross Section of Equity Returns"
Date: 8 June 2011
Abstract: We put forward a general equilibrium model to study the link between the cross section of expected returns and book-to-market characteristics. We model two primitive assets: value assets and growth assets that are options on assets in place. The cost of option exercise, which is endogenously determined in equilibrium, is highly procyclical and acts as a hedge against risks in assets in place. Consequently, growth options are less risky than value assets, and the model features a value premium. Our model incorporates long-run risks in aggregate consumption (as in Bansal and Yaron (2004)) and replicates the empirical failure of the conditional CAPM prediction. We show that the model is able to quantitatively account for the observed pattern in mean returns on book-to-market sorted portfolios, the magnitude of the CAPM-alphas, and other stylized features of the cross-sectional data.

Speaker: Denis Sosyura, Stephen M. Ross School of Business, University of Michigan
Title: "Divisional Managers and Internal Capital Markets"
Date: 15 June 2011
Abstract: Using hand-collected data on divisional managers at the S&P 500 firms, we provide one of the first studies of their role in internal capital budgeting. Divisional managers with connections to the CEO receive more capital. Managers’ informal connections, such as social ties to the CEO, outweigh measures of managers’ formal influence, such as board membership and seniority, and affect both the appointment of managers and subsequent capital allocations to their divisions. The impact of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. When governance is weak, connections reduce investment efficiency and erode firm value by fostering favoritism. When information asymmetry is high, managerial ties increase investment efficiency and firm value by facilitating information transfer. Overall, we provide novel evidence on the role of formal and informal managerial influence inside conglomerates.

July

Speaker: Lorenzo Garlappi, University of Texas at Austin
Title: "TBA"
Date: 20 July 2011

Speaker: Andrea Seidl
Title: "TBA"
Date: 25 July 2011

Speaker: Hanno Lustig, UCLA Anderson
Title: "TBA"
Date: 27 July 2011

August

Speaker: Ralph Koijen, Chicago Booth
Title: Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice
Date: 3 August 2011

Speaker: Ivan Shaliastovich, The Wharton School, University of Pennsylvania
Title: "Volatility, the Macroeconomy and Asset Prices"
Date: 10 August 2011
Abstract:  In this paper we show that volatility news is essential for a coherent economic interpretation and measurement of the underlying risks in the economy,and that ignoring volatility can lead to substantial biases in the stochastic discount factor (SDF). We quantify and show that ignoring volatility can have first-order implications for the implied consumption innovations, the SDF, and asset returns. Furthermore, using a VAR based approach we document that accounting for volatility leads to a positive correlation between the return to human capital and the market, while this correlation is negative when volatility is ignored. Our volatility based asset pricing model captures well the levels and differences in the risk premia across value and size portfolios. We further show that accounting for volatility risks is important for correct economic interpretation of the assets’ exposure to the underlying sources of risks.

Speaker: Rik Sen, Hong Kong University of Science and Technology
Title: "TBA"
Date: 17 August 2011

Speaker: Georgios Skoulakis, RHSmith School of Business, University of Maryland
Title: "TBA"
Date: 24 August 2011

Speaker: Jarrad Harford, University of Washington
Title: "Financial Flexibility, Risk Management, and Payout Choice"
Date: 31 August 2011
Abstract:  Risk management and payout decisions affect a firm’s financial flexibility—the ability to avoid costly financial distress as well as underinvestment. We provide evidence of substitution between hedging and payout decisions using samples of both financial and non-financial firms. We show that the extent to which a firm hedges with derivatives affects both its level and form of payout. Consistent with financial flexibility in payout decisions substituting for hedging, as a firm increases hedging with derivatives, its payout favors dividends over more flexible repurchases. Our findings are robust to controlling for the endogeneity of hedging and for other determinants of payout policy and risk management, including institutional ownership and executive compensation. These results suggest that risk management decisions affect distributions and that payout flexibility offers operational hedging benefits.

September

Speaker: Youwei Li, Queens University, Belfast
Title: "Price Discovery in the Dual-Platform US Treasury Market"
Date: 7 September 2011
Abstract: Inter-dealer trading in US Treasury Securities is almost equally divided between two similar electronic trading platforms. BrokerTec is more active in the trading of 2-, 5-, and 10-year T-notes than eSpeed which has more active trading for 30-year bond; eSpeed is slightly more pre-trade transparent BrokerTec platform. We examine the contribution to ‘price discovery’ of activity in the two platforms using high frequency data. We find that price discovery does not derive equally from the two platforms and that the shares vary across term to maturity. This can be traced to differential trading activities and transparency of the two platforms.

Speaker: Brandon Julio, London Business School
Title: "Policy Uncertainty and Cross-Border Flows of Capital"
Date: 14 September 2011
Abstract: We find that policy uncertainty is an important determinant of fluctuations in crossborder flows of capital. Spefically, we find that fluctuations in policy uncertainty around national elections generate cycles in cross-border flows around the world. FDI flows from US companies to foreign affiliates drop significantly when there is a national election in either the US or the destination country. The election patterns in foreign direct investment are more pronounced in countries with lower measures of government stability and a lower degree of checks and balances in the political system. We also find that elections with more uncertain outcomes lead to larger swings in FDI flows. The electoral cycles in cross-border capital flows are limited to investments that are relatively irreversible. That is, we find cycles in foreign direct investment but not in foreign portfolio flows. Finally, we find that capital flows are sensitive to policy uncertainty in both high and low income countries, suggesting that political uncertainty is not only an emerging market phenomenon. These results suggest that policy uncertainty acts as a tax on cross-border investment.

Speaker: Geoff Evatt, University of Manchester
Title: "Real Options and Mining: When Economics meets Engineering"
Date: 21 September 2011
Abstract: When a mining company begins extraction from a finite resource, it does so in the presence of numerous uncertainties. One key uncertainty is the future price of the commodity being extracted, since a large enough drop in price can make a resource no longer cost-effective to extract, resulting in the mine being closed down. By specifying a stochastic price process, and implementing a financial-type model which leads to the use of partial differential equations, this paper creates the framework for efficiently capturing the probability of a mine remaining open throughout its planned extraction period, and derives the associated expected lifetime of extraction. An approximation to the abandonment price is described, which enables a closed-form solution to be derived for the probability of operational success and expected lifetime. This approximation compares well with the full solution obtained using a semi-Lagrangian numerical technique.

October

Speaker: Sudipto Bhattacharya, London School of Economics
Title: "Securitized Lending, Asymmetric Information, and Financial Crisis: New Perspectives for Regulation"
Date:  5 October 2011
Abstract: We develop a model of securitized (Originate, then Distribute) lending in which both publicly observed aggregate shocks to values of securitized loan portfolios, and later asymmetrically observed discernment of the qualities of subsets thereof, play crucial roles, as in the recent paper of Bolton, Santos and Scheinkman (2010). Unlike in their framework, we find that originators and potential buyers of such assets may differ in their preferences over timing of trades, leading to a reduction in the aggregate surplus accruing from securitization. In addition, heterogeneity in agents’ selected timing of trades – arising from differences in their ex ante beliefs - coupled with high leverage, may lead to financial crises, implying uncoordinated asset liquidations inconsistent with overall (inter-temporal) market equilibrium. We consider and contrast mitigating regulatory policies, such as leverage restrictions and corresponding ex ante resale price guarantees on securitized asset portfolios. We show that the latter performs strictly better than the former, by ensuring not only bank survival, but also enhancing the social surplus arising from securitized lending, in a better coordinated equilibrium.

Speaker: Stefan Trück, Macquarie University
Title: "Modeling Spot Price Dependence in Australian Electricity Markets with Applications to Risk Management"
Date:  19 October 2011
Abstract: We examine the dependence structure of electricity spot prices across regional markets in the Australian National Electricity Market (NEM). Our analysis is based on a GARCH approach to model the marginal price series in the considered regions in combination with copulae to capture the dependence structure between the different markets. We apply different copula models including Archimedean, elliptical and copula mixture models. We find a positive dependence structure between the prices for all considered markets, while the strongest dependence is usually exhibited between markets that are connected via interconnector transmission lines. Regarding the nature of dependence, among the considered Archimedean and elliptical copulae, the Student-t copula provides the best fit. On the other hand, the overall best results are obtained using mixture models due to their ability of also capturing asymmetric dependence in the tails of the distribution. We find significant tail dependence between Australian wholesale electricity prices, indicating that especially extreme observations like price spikes may happen jointly across regional markets. Examining the Value-at-Risk of stylized portfolios constructed from electricity spot contracts in different regional markets, we find that the Student-t and mixture copula models outperform the Gaussian copula in a backtesting study. Our results are important for risk management and hedging decisions of market participants, in particular for those operating in several regional markets simultaneously.

Speaker: Pedro Matos, University of Virginia – Darden School of Business
Title: "The Mutual Fund Industry Worldwide: Explicit and Closet Indexing, Fees, and Performance*"
Date:  26 October 2011
Abstract: Mutual fund investors face a basic choice between actively-managed funds and index funds with lower expenses. However, the prevalence of indexing is rare in most countries. Rather, actively managed funds in many countries engage in “closet indexing,” choosing portfolios that closely match their declared benchmark. The degree of explicit indexing in a country is negatively related to fees, while “closet indexing” is positively associated with fees and negatively with performance. The most actively managed funds charge higher fees but outperform their benchmarks after expenses. The degree of indexing and the ability of active managers to outperform are both associated with competition and fees.

November

Speaker:  Gary Tian, University of Wollongong
Title: "Political Promotion, CEO Incentives, and the Relationship between Pay and Performance"
Date:  2 November 2011
Abstract: We examine how incentives for political promotion affect compensation policy and firm performance in Chinese state-owned enterprises (SOEs). In contrast to the conventional wisdom that political incentives tend to be misaligned with value maximization, we find that the likelihood that the CEO receives a political promotion is positively related to firm performance. In addition, as predicted by models of career concerns (Baker, Gibbons, and Murphy (1987)) we find that CEOs with a higher likelihood of political promotion have lower pay levels and lower sensitivity of pay to performance. Overall, the evidence suggests that competition in the political job market helps mitigate weak monetary incentives for CEOs in China. Moreover, the Chinese example suggests that state control and political connections are not necessarily inconsistent with good economic incentives.

Speaker:  Daniel Roesch, University of Hannover
Title: "Systematic Risk and Credit Ratings: How Bonds and Mortgage Securitizations are Different"
Date:  9 November 2011
Abstract: Investors were surprised during the Global Financial Crisis that mortgage securitizations implied larger default rates than corporate bonds given the same credit rating. This paper provides theoretical and empirical evidence that mortgage securitizations imply a larger degree of systematic risk than bonds. In addition, the paper shows that credit ratings do not reflect the systematic risk appropriately.

Speaker:  Meg Sato, Australian National University
Title: "A Dynamic Multitask Model: Fixed Wage Contracts and Effort Allocation Problems"
Date:  16 November 2011
Abstract: Holmstrom and Milgrom (1991) proposed a multitask principal-agent model in which the principal's utility is determined by several tasks the agent engages in. Their results depend on externalities between tasks and several assumptions related to the agent's effort. In this paper, we override certain assumptions (such as, the agent's effort can be negative and disutility is a non-increasing function of the effort up to some level) and obtain the similar outcomes in deriving fixed wage contracts and effort allocation problems. We further introduce timing, outputs that are unveri…able (such as leadership and collegial work), and …firm-specifi…c knowledge as observed in actual labor markets and practices. This restructure also allows us to develop a multitask model without externalities, allowing us to study an optimal wage profi…le and …find the optimal timing to sign a contract. Our model predicts that in industries where unveri…able outputs are valued, the more frequently the wage contract is renewed.

Speaker:  Wolfgang Buehler, University of NSW
Title: "Time-Varying Credit Risk and Liquidity Premia in Bond and CDS Markets"
Date:  23 November 2011
Abstract: We develop a reduced-form model to explore the relation between the corporate bond and CDS market via three channels: credit risk, liquidity, and the correlation between these two components. Using a new concept for CDS liquidity, we document credit risk and liquidity links within and between the two markets, both at a state space and a premia level. Liquidity in both markets dries up as credit risk increases, and higher bond market liquidity leads to lower CDS market liquidity but not vice versa. Ignoring CDS liquidity results in partly negative liquidity premia in corporate bond yields.

Speaker:  Gordon Philllips, Robert H Smith School of Business , University of Maryland
Title: "R&D and the Incentives from Merger and Acquisition Activity"
Date:  30 November 2011
Abstract: We develop a reduced-form model to explore the relation between the corporate bond and CDS market via three channels: credit risk, liquidity, and the correlation between these two components. Using a new concept for CDS liquidity, we document credit risk and liquidity links within and between the two markets, both at a state space and a premia level. Liquidity in both markets dries up as credit risk increases, and higher bond market liquidity leads to lower CDS market liquidity but not vice versa. Ignoring CDS liquidity results in partly negative liquidity premia in corporate bond yields.

December

Speaker:  Hengjie Ai, Duke University
Title: "Moral Hazard, Investment, and Firm Dynamics"
Date:  7 December 2011
Abstract: We present a dynamic general equilibrium model with heterogeneous fi…rms. Owners of the …firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated model has implications on the cross-sectional distribution and time-series dynamics of …firms' investment, manager compensation and dividend payout policies. Risk sharing requires that managers' equity shares decrease with fi…rm sizes. This in turn implies that it is harder to prevent private bene…fit in larger …firms, where managers have lower equity stake under the optimal contract. Consequently, small fi…rms invest more, pay less dividends, and grow faster than large …firms. Despite the heterogeneity in …firms decision rules and the failure of Gibrat's law, we show that the size distribution of …firms in our model resembles a power law distribution with a slope coefficient about 1.06, as in the data.

Speaker:  Tolga Cenesizoglu, Department of Finance, HEC Montreal
Title: "Time Varying Return Decomposition"
Date:  8 December 2011
Abstract: Campbell and Shiller (1988) suggest that the volatility of stock returns can be decomposed into three components: the volatility of cash flow news and discount rate news and their covariance. To operationalize the Campbell and Shiller decomposition approach, most studies employ a vector autoregression with constant parameters which in turn implies that the relative importance of each component is constant over time. In this paper, we extend the return decomposition of Campbell and Shiller approach to the case where the relative importance of each component depends on an underlying latent state variable. Specifically, we employ a Markov regime switching vector autoregression to decompose the returns. In this framework, we identify four different states and the relative importance of each component depends on the underlying state with discount rate being relative more important in three of the four states. We show that this finding is consistent with a general equilibrium asset pricing model where the fundamentals follow a Markov regime switching model.