Forthcoming Articles

Short Selling and Price Discovery in Corporate Bonds

Terrence Hendershott, Roman Kozhan, and Vikas Raman

We show short selling in corporate bonds forecasts future bond returns. Short selling predicts bond returns where private information is more likely, in high-yield bonds, particularly after Lehman Brothers collapse of 2008. Short selling predicts returns following both high and low past bond returns. This, together with short selling increasing following past buying order imbalances, suggests short sellers trade against price pressures as well as trade on information. Short selling predicts bond returns both in the individual bonds that are shorted and in other bonds by the same issuer. Past stock returns and short selling in stocks predict bond returns, but do not eliminate bond short selling predicting bond returns. Bond short selling does not predict the issuer’s stock returns. These results show bond short sellers contribute to efficient bond prices and that short sellers’ information flows from stocks to bonds, but not from bonds to stocks.

Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd–Frank Act

Evangelos Benos, Richard Payne, and Michalis Vasios

We use proprietary transaction data on interest rate swaps to assess the effects of centralized trading, as mandated by Dodd–Frank, on market quality. Contracts with the most extensive centralized trading see liquidity metrics improve by between 12% and 19% relative to those of a control group. This is driven by a clear increase in competition between dealers, particularly in U.S. markets. Additionally, centralized trading has caused interdealer trading in EUR swap markets to migrate from the United States to Europe. This is consistent with swap dealers attempting to avoid being captured by the trade mandate in order to maintain market power.

Estimation of Multivariate Asset Models with Jumps

Angela Loregian, Laura Ballotta, Gianluca Fusai, and M. Fabricio Perez

We propose a consistent and computationally efficient 2-step methodology for the estimation of multidimensional non-Gaussian asset models built using Lévy processes. The proposed framework allows for dependence between assets and different tail-behaviors and jump structures for each asset. Our procedure can be applied to portfolios with a large number of assets as it is immune to estimation dimensionality problems. Simulations show good finite sample properties and significant efficiency gains. This method is especially relevant for risk management purposes such as, for example, the computation of portfolio Value at Risk and intra-horizon Value at Risk, as we show in detail in an empirical illustration.

Shaping Expectations and Coordinating Attention: The Unintended Consequences of FOMC Press Conferences

Oliver Boguth, Vincent Grégoire, and Charles Martineau

In an effort to increase transparency, the Chair of the Federal Reserve now holds a press conference (PC) following some, but not all, FOMC announcements. Evidence from financial markets shows that investors lower their expectations of important decisions on days without PCs and that these announcements convey less price-relevant information. Correspondingly, we show that investors pay more attention to upcoming announcements with PCs. This coordination of attention can reduce welfare in models of the social value of public information. Consistent with theories of investor attention, the market risk premium is larger on days with PCs.

Predicting U.S. Bank Failures with MIDAS Logit Models

Francesco Audrino, Alexander Kostrov, and Juan-Pablo Ortega

We propose a new approach based on a generalization of the logit model to improve prediction accuracy in U.S. bank failures. Mixed-data sampling (MIDAS) is introduced in the context of a logistic regression. We also mitigate the class-imbalance problem in data and adjust the classification accuracy evaluation. In applying the suggested model to the period from 2004 to 2016, we show that it correctly classifies significantly more bank failure cases than the classic logit model, in particular for long-term forecasting horizons. Some of the largest recent bank failures in the United States that were previously misclassified are now correctly predicted.

Capital Asset Pricing with a Stochastic Horizon

Michael J. Brennan and Yuzhao Zhang

In this paper we present empirical tests of an extended version of the capital asset pricing model (CAPM) that replaces the single period horizon with a probability distribution over different horizons. Adopting a simple parameterization of the probability distribution of the length of the horizon, we estimate the parameters of the distribution as well as the parameters of the CAPM. We find that the extended model is not rejected for several different samples of common stocks and for these samples outperforms not only the standard CAPM but also the Fama–French (1993) 3-factor model. The probability distribution over horizon dates varies over time with the New York Stock Exchange (NYSE) turnover rate. We also find that returns satisfy the Euler equation of a representative financial institution that holds the market portfolio and has horizon probabilities that we estimate from 13F filings.

Attention to Market Information and Underreaction to Earnings on Market Moving Days

Badrinath Kottimukkalur

Post-earnings announcement drift is stronger in firms that release earnings on days when market returns are higher in magnitude. This drift remains robust after controlling for previously documented factors such as Friday releases, the number of simultaneous releases, and price delay measure. Negative earnings surprises drive this drift, and the drift is more pronounced among small stocks, value stocks, and stocks that have low analyst following. Slower analyst response to earnings contributes to the drift. These findings are consistent with investors paying more attention to market information and less attention to firm-specific information due to attention constraints.

Can Strong Corporate Governance Selectively Mitigate the Negative Influence of ‘Special Interest’ Shareholder Activists? Evidence from the Labor Market for Directors

Diane Del Guercio and Tracie Woidtke

Union and public pension funds, the most prolific institutional activists employing low-cost targeting methods, are often accused of pursuing private benefits. Extant literature finds that unions representing workers, as stakeholders, are not aligned with shareholders. Limiting shareholder power may mitigate “special interest” activism but can also exacerbate managerial agency problems. In two different settings, majority approved and withdrawn shareholder proposals, we examine and find supportive evidence that the director labor market as a corporate governance mechanism can selectively mitigate the negative influence that conflicted stakeholder-shareholder union funds have over firms without stifling all influence of low-cost activists.