Articles Flashcards
Two Pillars of Asset Pricing (Fama)
What is “bubble”?
“Bubble” - an irrational strong price increase that implies a predictable strong decline.
From Efficient Markets Theory to Behavioral Finance (Shiller)
What does in mean that markets are “micro efficient but macro inefficient”?
Across firms there is predictable future path of their dividends and other movements (correspond to EMH) but in aggregate these movements are hardly predictable due to excess noise.
Hedge Funds: Past, Present, and Future (Stulz)
Name 4 popular hedge fund strategies.
- Long-short equity (identifying over-/undervalued stocks)
- Event-driven (significant transactional events such as mergers, bankruptcies etc.)
- Macro (mispriced valuations in stock markets, interest rates etc.)
- Fixed –income (arbitrage in fixed income markets)
HOW DEBT MARKETS HAVE MALFUNCTIONED IN THE CRISIS
Why do haircuts rise in crisis?
Due to lower liquidity
CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS
Functions of CDS
allow to sell debt short
Supposed to make markets more efficient
Provide information
Agency problems at Dual- Class companies
Major economic advantages of dual- class shares?
- Allows a company to grow (selling CF rights, while keeping voting rights), founders or owners of the company can retain control, thus, influence the development of the company;
- Prices of CF shares are lower è You can receive some benefits,
- In case you are not interested in the control, but just the cashflows from company’s operations;
Survey of corporate governance
The most common manifestations of agency costs:
- Managers resist takeovers (from the target’s perspective) to protect PBoC rather than defend the interest of shareholders;
- Managers overinvest rather than return money to investors (potentially in NPV
- When an executive (bad one) dies, then share price goes up (largest for greedy corporations);
- Privatizing at a huge premium (Russia);
The market reaction to cross-listings: Does the destination market matter?
Advantages of Cross-listing
liquidity (leads to lower cost of capital) market segmentation (overcomes international barriers; matters most for emerging markets) information disclosure (requirements, more attention from media and analysts) investor protection (legislation)
The Political Economy of Finance
Interventions in financial markets happen when…
How?
WHEN?
- There is a crisis
- Pressure or political interests of the intervening party
HOW?
- Case by case basis
- Policy level
U.S. Equity return premium (De Longe, Magin)
What is “equity premium puzzle”?
The gains from equity are significantly higher, yet investment in stocks remains disproportionally low.
Two Pillars of Asset Pricing (Fama)
What is Joint hypothesis problem?
We need to know WHAT the market is supposed to do to know whether it does it. If the test fail you can’t tell which of the part failed – asset pricing model or assumptions.
Two Pillars of Asset Pricing (Fama)
Why “bubbles” are based only on beliefs and have no evidence?
- Large swings in stock prices predict real economic activity
- ”Price corrections” of bubbles usually wiped out soon after
The Law of One Price in Financial Markets (Lamont, Thaler)
Name 2 main arguments why LOOP is violated.
- Behavioural biases
- Arbitrage isn’t perfect
Forensic Finance (Ritter)
How academia can help regulators and law officials?
- Attracting attention
- Looking at long-run trends
Forensic Finance (Ritter)
What has Sarbanes–Oxley Act changed?
Sarbanes–Oxley Act requires executives to report insider trades (including receipt of stock grants) within two days of the transaction (instead of 10th day of the following month).
Hedge Funds: Past, Present, and Future (Stulz)
What is the future of hedge funds?
- Worse performance (more of them)
- More instutionalized (institutional investors need more info)
- More regulated
CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS
Problems with CDS
no need for monitoring
perverse incentives (drive into bankruptcy)
Survey of corporate governance
Drawbacks of being a large investor?
- Bear extensive risk due to lack of diversification
- Advocate own interests sometimes at expense of other investors
- Detrimental to efficiency
- Too soft
- Own agency problems
- Want to exit (failed to terminate their position)
The politics of Financial Development: Evidence from Trade liberalization
What is political economy?
- Looks at power balances that impact the allocation of social and economic resources (instead of looking GDP, other macro variables, we look at the power, who possess it, where, when, etc. )
HOW DEBT MARKETS HAVE MALFUNCTIONED IN THE CRISIS
Three areas crucial in all debt market decisions:
risk capital and risk aversion
repo financing and haircuts
counterparty risk
CREDIT DEFAULT SWAPS AND THE CREDIT CRISIS
CDS (def)
insurance against default of a company
Survey of corporate governance
Various forms of expropriation:
stealing
transfer pricing (trade with manager’s affiliates)
private benefits of control (PBoC)
entrenchment
The Political Economy of Finance
2 goals of privatization?
- Raise revenue
- promote competition and economic reform
Private benefits of control: An International Comparison
How can we measure PBoC?
Two ways:
- Control Premium approach (looking at the private negotiations where controlling blocks are sold, typically, for a premium, the question is, what premium do they sell at?);
- Voting rights approach (dual class shares and voting shares trade at a premium that includes probability of a control contest premium for control);
