We show that fund-specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures underestimate (overestimate) managerial performance when returns exhibit positive (negative) fund-specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk-adjusted outperformance is 5.5%.

The Taxpayer Relief Act of 1997 (TRA97) replaced a one‐time, post‐age‐55 capital gain exclusion with a larger gain exclusion amount that could be protected every two years without requiring that the taxpayer trades up in housing. This action had the potential to impact housing transactions for every existing homeowner, regardless of age, as well as future purchasers of housing. We analyze household‐level data to determine if the repeated ability to exclude periodic recognized capital gains on housing from taxation shortened housing tenure significantly after TRA97 became effective. We next consider whether the decline was heterogeneous across age groups, across trading up and trading down and across geography. Given that the impact of TRA97 appears at first glance to be most profound for taxpayers close to 55 years of age, a somewhat surprising result of our research is that significant decreases in tenure are pervasive, appearing in all age ranges and in samples of homeowners who trade up and who trade down. Finally, we provide additional evidence at the aggregate level that TRA97 led to measurable changes in the price elasticity of housing turnover in the four geographic regions defined by the U.S. Census Bureau (Northeast, Midwest, South and West) and in states that are home to large metropolitan housing markets.

We show that fund-specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures underestimate (overestimate) managerial performance when returns exhibit positive (negative) fund-specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk-adjusted outperformance is 5.5%.

A borrower whose loan is committed to the securitization process has the ability and incentive to switch lenders if market rates drop during the loan origination period, which creates significant exposure for primary lenders. A simple secondary market contract innovation we call a mortgage rate drop guarantee (MRDG) could shift this risk to the securitizers who represent portfolio investors. Our simulation results indicate this shifting would have improved the risk/return distribution faced by originators without damaging the risk/return position of securitizers during our 1977-2010 sample period. Assuming conservative loan lives and origination periods, and competitive lending markets, the risk reduction features of MRDGs could also have generated significant interest savings for borrowers.

This paper investigates the determinants of underwriting fees charged to active GSE and financial industry borrowers on debt issuances, how such fees change over time, and how they vary with the characteristics of the debt, underwriting mechanism, and issuer. We pay particular attention to how risk factors generated by the actions of individual mortgage borrowers, and the financing strategies put in place by the GSEs, impact underwriting spreads. We find spreads paid by both GSEs and privately held financial firms were significantly influenced by risk-related developments in the market for housing finance well before the advent of the housing crisis.

92 percent of hedge funds in the TASS database have returns which exhibit systematic skewness so the alpha of the managers of these hedge funds is difficult to estimate with OLS. To control for skewness the Residual Augmented Least Squares (RALS) estimator is specified to measure the performance of these hedge funds. We demonstrate that the OLS performance assessment error depends systematically on skewness, is economically significant, and that RALS is not sensitive to this bias. Furthermore, portfolios formed on RALS alphas are more persistent than those formed on OLS alphas, particularly during crisis periods.

Numerous studies have documented that most of the stock price reaction to earnings announcements have occurred by the time the earnings information is made public. This study considers stock price reaction during the time period between the end of the accounting calendar when the forthcoming earnings information is ostensibly available to top management and the earnings release date to measure anticipatory price responses to imminent quarterly earnings announcements. Using bank stocks, the results indicate that portfolios composed of banks that eventually announce improved earnings show significant positive abnormal returns soon after the close of the accounting quarter while portfolios composed of banks that eventually publicize poor profit performance exhibit significant negative abnormal returns.

: 92 percent of hedge funds in the TASS database exhibit significantly skewed returns. The alphas the managers of these funds earn are difficult to estimate accurately with OLS, especially in times of crisis. An alternative, the Residual Augmented Least Squares (RALS) estimator, is robust with respect to skewness. We demonstrate that the OLS performance assessment error relative to RALS depends systematically upon the sign of skewness in a fund’s returns and is economically significant. Furthermore, portfolios formed on RALS alphas persist more than those formed on OLS alphas and the performance persistence is concentrated in crisis periods.

Investors and regulators often treat agency and Treasury debt as substitutes. To evaluate the extent to which this is appropriate, we study the portion of offering yield spreads over Treasury yields not explained by standard issue and issuer characteristics for Government Sponsored Enterprise (GSE) and financial corporation debt floated during 1994-2004. GSE and corporate residual yield spreads strongly correlate, appear to reflect macroeconomic risk, and respond similarly during the Long Term Capital Management Crisis. Agency debt is surprisingly comparable to corporate debt in its response to macroeconomic risk and, on this dimension, is not a good substitute for Treasury debt.

We provide empirical evidence that quoted secondary market mortgage yields conform to the predictions of option theory. We compare Fannie Mae and Freddie Mac origination yields offered in the secondary market from 1985 to 2003 with the predictions of a two-state binomial mortgage option valuation model. Our two-state approach considers a mean-reverting interest rate process as well as a stochastic housing price. Using predictions from option simulations, we find strong links between market practice and mortgage option prepayment and default factors over time. We also find cross-sectional differences that are consistent with the institutional structure of the markets.

This paper makes indirect inference about the time variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, and there is no evidence that predictability has diminished in recent years. Semi-strong-form evidence suggests that time variation in expected returns remains economically important.

If option implied volatility is an unbiased, efficient forecast of future return volatility in the underlying asset, then we should be able to predict its path around macroeconomic announcements from responses in cash markets. Regressions show that volatilities rise the afternoon before announcements that move cash markets, and that post–announcement volatilities return to normal as rapidly as cash prices do. Although implied volatilities are predictable, the Treasury options market is efficient since informed traders do not earn arbitrage profits once we account for trading costs.

This article develops a model of the interactions between borrowers, originators, and a securitizer in primary and secondary mortgage markets. In the secondary market, the securitizer adds liquidity and plays a strategic game with mortgage originators. The securitizer sets the price at which it will purchase mortgages and the credit-score standard that qualifies a mortgage for purchase. We investigate two potential links between securitization and mortgage rates. First, we analyze whether a portion of the liquidity premium gets passed on to borrowers in the form of a lower mortgage rate. Somewhat surprisingly, we find very plausible conditions under which securitization fails to lower the mortgage rate. Second, and consistent with recent empirical results, we derive an inverse correlation between the volume of securitization and mortgage rates. However, the causation is reversed from the standard rendering. In our model, a decline in the mortgage rate causes increased securitization rather than the other way around.

Asset pricing is the topic of the 2001 Eastern Finance Association Symposium and the five papers selected for this collection, which are summarized below, span a broad range of subjects that fall under the umbrella of the determinants of market prices. For example, the Schwartz and Moon article that introduces the symposium uses real options methodology to value firms whose cash flows are subject to multiple sources of uncertainty while the Luders and Peisl and Mixon analytical models that close the selections incorporate dual stochastic processes to derive relationships between information flow, trading volume and price volatility that are consistent with empirical evidence. In between, Mishra and O'Brien present new evidence on the important of index and factor selection when estimating the required return on equity and Spahr and Schwebach revisit the issue of time diversification by reintroducing a statistical construct from earlier times. Each of the works included here makes an important contribution to our understanding of the asset pricing process in a distinct area and opens new doors onto avenues for future research.

This paper develops a model of the interactions between borrowers, originators, and a securitizer in primary and secondary mortgage markets. In the secondary market, the securitizer adds liquidity and plays a strategic game with mortgage originators. The securitizer sets the price at which it will purchase mortgages and the credit score standard that qualifies a mortgage for purchase. We investigate two potential links between securitization and mortgage rates. First, we analyze whether a portion of the liquidity premium gets passed on to borrowers in the form of a lower mortgage rate. Somewhat surpringly, we find plausible conditions under which securization fails to lower the mortgage rate. Secondly, and consistent with recent empirical results, we derive an inverse correlation between the volume of securitization and mortgage rates. However, the causation is reversed from the standard rendering. In our model, a decline in the mortgage rate causes increased securitization rather than the other way around.

This paper links two strands of existing microstructureresearch by integrating recent findings on how macro-economic announcements movemarkets with well-known theoretical relationships between asset prices and the value of theirderivatives. This allows us to develop testable hypotheses about how sector index options onTreasury securities should behave before and after scheduled macro-economic announcements.To our knowledge, this paper is the first attempt to use transactions data on sector ...

This paper makes indirect inference about the time-variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, more reliable predictability in indexes than large common stocks, and no evidence that predictability has diminished over time. A "strong-form" analysis using options suggests that time-variation in market discount rates are economically important.

This paper evaluates the interest-rate risk inherent in an adjustable-rate mortgage (ARM) with sporadic rate adjustments and possibly binding periodic and life-of-loan rate change constraints. Simulation analysis forecasts ARM cash flows, determines the probability that constraints will hold, and partitions the loan into fixed and variable components. Simulation parameters are then altered to measure the impact of changes in contract terms and market conditions on the interest-rate risk of a typical ARM loan. Interest-rate sensitivity is found to be significantly less than that of fixed-rate loans and remarkably insensitive to changes in loan margins or initial loan rates after the first few years of an ARM’s life. Therefore, it is not surprising that lenders have used these features to lure borrowers to ARMs. Periodic rate change limits and volatility in the underlying index are the only factors that influence the interest-rate risk of an existing ARM in a substantive way.

AbstractResidential mortgage originators can transfer loans to ultimate lenders quickly and efficiently using the secondary mortgage market. Some adjustable rate mortgage (ARM) lenders use this outlet consistently while others hold whole loans in their portfolios on a long‐term basis. Selling and holding lenders should respond to different economic factors when setting yields on ARM loans originated because their long‐term positions in the loans are so diverse.This paper develops and tests a model of differential pricing behavior for selling and holding strategies. Empirical results support the notion that lenders use different factors to price loans and that these factors are related to the risks faced by the originating lender given its origination strategy. Additional findings suggest that institutional and firm‐specific pricing tendencies exist in the primary mortgage market for adjustable rate debt.