As Gerakos and Linnainmaa (2014) point out, the Daniel and Titman (2006) decomposition of returns into tangible and intangible components can potentially be ambiguous. In particular DT's book return, the adjusted growth rate in book value per share which DT use as a tangible measure of long term performance, can be affected by a firm's issuance and repurchase choices as well as by its profitability.
We investigate whether homeowners respond strategically to news of mortgage modification programs by defaulting on their mortgages. We exploit plausibly exogenous variation in modification policy induced by U.S. state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers with subprime mortgages throughout the country. Using a difference-in-difference framework, we find that Countrywide's relative delinquency rate increased more than ten percent per month immediately after the program's announcement.
We develop a simple dynamic investment strategy that allows long‐term passive investors to hedge climate risk without sacrificing financial returns. Our proposed hedging strategy goes beyond a simple divestment of high carbon footprint or stranded assets stocks. This is just the first step. The second step is to optimize the composition of the low carbon portfolio so as to minimize the tracking error with the reference benchmark index. We show that tracking error can be almost eliminated even for a low carbon index that has 50% less carbon footprint.
We propose a new definition of skill as a general cognitive ability to either pick stocks or time the market at different times. We find evidence for stock picking in booms and for market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that gives more weight to a fund's market timing in recessions and to a fund's stock picking in booms.
Recent years have seen extensive investigation of the information aggregation properties of markets. However, relatively little is known about conditions under which a market will aggregate the private information of rational risk averse traders who optimize their portfolios over time; in particular, what features of a market encourage traders to ultimately reveal their private information through trades? We consider a market model involving finitely many informed risk-averse traders interacting with a market maker.
Having invested multiple billion dollars of pension assets, and now teaching "Institutional Investing; Alternatives in Pension Plans," I approach this question with theoretical and empirical knowledge, and more than a modicum of trepidation.
This essay in celebration of Grossman and Hart (1986) (GH) discusses how the introduction of incomplete contracts has fundamentally changed economists' perspectives on corporate finance and control. Before GH, the dominant theory in corporate finance was the tradeoff theory pitting the tax advantages of debt (relative to equity) against bankruptcy costs. After GH, this theory has been enriched by the introduction of control considerations and investor protection issues.
This paper finds statistically and economically significant out-of-sample portfolio benefits for an investor who uses models of return predictability when forming optimal portfolios. The key is that investors must incorporate an ensemble of important features into their optimal portfolio problem, including time-varying volatility, and time-varying expected returns driven by improved predictors such as measures of yield that include share repurchase and issuance in addition to cash payouts. Moreover, investors need to account for estimation risk when forming optimal portfolios.
This paper presents a comprehensive analysis of mortgage delinquency between 2004 and 2008 using a unique loan-level dataset from a major national mortgage bank. Our analysis highlights two major problems underlying the mortgage crisis: a heavy reliance on mortgage brokers who tend to originate lower quality loans, and a high prevalence of low-documentation loans—known in the industry as "liars' loans"—which results in information falsification by borrowers.