Week 4 - . Cheng, I. H., Raina, S., and Xiong, W. (2014). Wall Street and the housing bubble.

Question 1

What is the main idea of this paper?

Answer 1

• The authors look to find out midlevel managers in securitized finance were aware of a large-scale housing bubble and a looming crisis in 2004–2006 using their personal home transaction data
• Control groups: S&P500 analysts and lawyers not involved in the real estate markets
• H1 (market timing form): Securitization agents were more likely to divest homes and downsize homes in 2004–2006
• H2 (cautious form): Securitization agents were less likely to acquire second homes or move into more expensive homes in 2004–2006
• H3 (performance): Overall, securitization agents had better performance after controlling for their initial holdings of homes at the beginning of 2000
• H4 (conservative consumption): Relative to their current income, any purchases made by securitization agents during the boom were more conservative

Question 2

What are the main findings?

Answer 2

• Securitization agents increased their housing exposure
• They found no location effects, also no differences in financing
• Securitization group experienced 4.5% lower returns than the equity analyst group

Question 3

What is the summary of this paper?

Answer 3

• Private home transactions provide little evidence that securitization agents were aware of problems in housing markets and anticipated a crash earlier than others
• Raises concerns about how Wall Street agents process information and form beliefs (e.g., job environments that foster over optimism).
• Changing the compensation contracts of Wall Street agents alone may be insufficient
• The financial system may benefit from having securities that incentivize information acquisition about tail-risk situations.