Repo Runs: Evidence from the Tri‐Party Repo Market
Pages: 2343-2380 | Published: 11/2014 | DOI: 10.1111/jofi.12205 | Cited by: 189
ADAM COPELAND, ANTOINE MARTIN, MICHAEL WALKER
The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system‐wide run on repo. Using confidential data on tri‐party repo, a major segment of this market, we show that, the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis. However, we also document a sharp decline in the tri‐party repo funding of Lehman in September 2008.
Pages: 2381-2417 | Published: 11/2014 | DOI: 10.1111/jofi.12168 | Cited by: 248
ARVIND KRISHNAMURTHY, STEFAN NAGEL, DMITRY ORLOV
To understand which short‐term debt markets experienced “runs” during the financial crisis, we analyze a novel data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities. Consistent with a run, repo volume backed by private asset‐backed securities falls to near zero in the crisis. However, the reduction is only $182 billion, which is small relative to the stock of private asset‐backed securities as well as the contraction in asset‐backed commercial paper. While the repo contraction is small in aggregate, it disproportionately affected a few dealer banks.
The Cross‐Section of Credit Risk Premia and Equity Returns
Pages: 2419-2469 | Published: 11/2014 | DOI: 10.1111/jofi.12143 | Cited by: 136
NILS FRIEWALD, CHRISTIAN WAGNER, JOSEF ZECHNER
We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton (): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk‐neutral default probabilities alone. This sheds new light on the “distress puzzle”—the lack of a positive relation between equity returns and default probabilities—reported in previous studies.
Volatility, the Macroeconomy, and Asset Prices
Pages: 2471-2511 | Published: 11/2014 | DOI: 10.1111/jofi.12110 | Cited by: 245
RAVI BANSAL, DANA KIKU, IVAN SHALIASTOVICH, AMIR YARON
How important are volatility fluctuations for asset prices and the macroeconomy? We find that an increase in macroeconomic volatility is associated with an increase in discount rates and a decline in consumption. We develop a framework in which cash flow, discount rate, and volatility risks determine risk premia and show that volatility plays a significant role in explaining the joint dynamics of returns to human capital and equity. Volatility risk carries a sizable positive risk premium and helps account for the cross section of expected returns. Our evidence demonstrates that volatility is important for understanding expected returns and macroeconomic fluctuations.
Strategic and Financial Bidders in Takeover Auctions
Pages: 2513-2555 | Published: 11/2014 | DOI: 10.1111/jofi.12194 | Cited by: 129
ALEXANDER S. GORBENKO, ANDREY MALENKO
Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.
Financial Intermediaries and the Cross‐Section of Asset Returns
Pages: 2557-2596 | Published: 11/2014 | DOI: 10.1111/jofi.12189 | Cited by: 532
TOBIAS ADRIAN, ERKKO ETULA, TYLER MUIR
Financial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor (SDF) than that of a representative consumer. Guided by theory, we use shocks to the leverage of securities broker‐dealers to construct an intermediary SDF. Intuitively, deteriorating funding conditions are associated with deleveraging and high marginal value of wealth. Our single‐factor model prices size, book‐to‐market, momentum, and bond portfolios with an R2 of 77% and an average annual pricing error of 1%—performing as well as standard multifactor benchmarks designed to price these assets.
The Global Crisis and Equity Market Contagion
Pages: 2597-2649 | Published: 11/2014 | DOI: 10.1111/jofi.12203 | Cited by: 515
GEERT BEKAERT, MICHAEL EHRMANN, MARCEL FRATZSCHER, ARNAUD MEHL
We analyze the transmission of the 2007 to 2009 financial crisis to 415 country‐industry equity portfolios. We use a factor model to predict crisis returns, defining unexplained increases in factor loadings and residual correlations as indicative of contagion. While we find evidence of contagion from the United States and the global financial sector, the effects are small. By contrast, there has been substantial contagion from domestic markets to individual domestic portfolios, with its severity inversely related to the quality of countries’ economic fundamentals. This confirms the “wake‐up call” hypothesis, with markets focusing more on country‐specific characteristics during the crisis.
The Real Product Market Impact of Mergers
Pages: 2651-2688 | Published: 11/2014 | DOI: 10.1111/jofi.12200 | Cited by: 66
ALBERT SHEEN
I document sources of value creation in mergers by analyzing novel data on the quality and price of goods sold by merging firms. When two competitors in a product market merge, their products converge in quality, and prices fall relative to the competition. These effects take two to three years to be fully realized and are stronger in mature industries. Prices do not fall, however, when the acquirer is diversifying into a new product market. This direct evidence of real changes induced by merger activity is consistent with consolidation by related merging firms to achieve operational efficiencies and lower costs.
A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk
Pages: 2689-2739 | Published: 11/2014 | DOI: 10.1111/jofi.12206 | Cited by: 599
VIRAL ACHARYA, ITAMAR DRECHSLER, PHILIPP SCHNABL
We model a loop between sovereign and bank credit risk. A distressed financial sector induces government bailouts, whose cost increases sovereign credit risk. Increased sovereign credit risk in turn weakens the financial sector by eroding the value of its government guarantees and bond holdings. Using credit default swap (CDS) rates on European sovereigns and banks, we show that bailouts triggered the rise of sovereign credit risk in 2008. We document that post‐bailout changes in sovereign CDS explain changes in bank CDS even after controlling for aggregate and bank‐level determinants of credit spreads, confirming the sovereign‐bank loop.
Investment‐Based Corporate Bond Pricing
Pages: 2741-2776 | Published: 11/2014 | DOI: 10.1111/jofi.12204 | Cited by: 88
LARS‐ALEXANDER KUEHN, LUKAS SCHMID
A standard assumption of structural models of default is that firms' assets evolve exogenously. In this paper, we examine the importance of accounting for investment options in models of credit risk. In the presence of financing and investment frictions, firm‐level variables that proxy for asset composition are significant determinants of credit spreads beyond leverage and asset volatility, because they capture the systematic risk of firms' assets. Cross‐sectional studies of credit spreads that fail to control for the interdependence of leverage and investment decisions are unlikely to be very informative. Such frictions also give rise to a realistic term structure of credit spreads in a production economy.
Duration of Executive Compensation
Pages: 2777-2817 | Published: 11/2014 | DOI: 10.1111/jofi.12085 | Cited by: 220
RADHAKRISHNAN GOPALAN, TODD MILBOURN, FENGHUA SONG, ANJAN V. THAKOR
Extensive discussions on the inefficiencies of “short‐termism” in executive compensation notwithstanding, little is known empirically about the extent of such short‐termism. We develop a novel measure of executive pay duration that reflects the vesting periods of different pay components, thereby quantifying the extent to which compensation is short‐term. We calculate pay duration in various industries and document its correlation with firm characteristics. Pay duration is longer in firms with more growth opportunities, more long‐term assets, greater R&D intensity, lower risk, and better recent stock performance. Longer CEO pay duration is negatively related to the extent of earnings‐increasing accruals.
Incentives and Endogenous Risk Taking: A Structural View on Hedge Fund Alphas
Pages: 2819-2870 | Published: 11/2014 | DOI: 10.1111/jofi.12167 | Cited by: 50
ANDREA BURASCHI, ROBERT KOSOWSKI, WORRAWAT SRITRAKUL
Hedge fund managers are subject to several nonlinear incentives: performance fee options (call); equity investors' redemption options (put); and prime broker contracts allowing for forced deleverage (put). The interaction of these option‐like incentives affects optimal leverage ex ante, depending on the distance of fund‐value from the high‐water mark. We study how these endogenous effects influence performance measures used in the literature. We show that reduced‐form measures that do not account for these features are subject to economically significant false discovery biases. The result is stronger for low‐quality funds. We propose an alternative structural methodology for conducting performance attribution in hedge funds.
Preliminary Program AFA 2015 BOSTON MEETINGS
Pages: 2881-2912 | Published: 11/2014 | DOI: 10.1111/jofi.fe552 | Cited by: 0
Participant Schedule Report Participants in the AFA 2015 Boston Meetings
Pages: 2913-2951 | Published: 11/2014 | DOI: 10.1111/jofi.fe553 | Cited by: 0