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Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines (Published Paper) How do liquidation values affect financial contract renegotiation? While the 'incomplete contracting' theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. More >> |
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Investor Protection and the Coasian View (Published Paper) The corporate charters of a sample of Mexican firms show that private firms often significantly enhance the legal protection offered to investors, but public firms rarely do so. We construct a model that endogenizes the degree of investor protection that firms provide, using as a springboard the assumption that legal regimes differ in their ability to enforce precisely filtering contracts that provide protection only in those cases where expropriation can occur. More >> |
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Volatility Information Trading in the Option Market (Published paper) This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. More >> |
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Financial Puzzles (Published paper) Financial Puzzles written by Stewart Myers of MIT will be published over the next several issues of JAF. These are offered to stimulate discussion and thought around several topics in finance. The proposed solutions to the puzzles will be published in the following issue of JAF, as well as in the FMA on-line journal. We trust that you will find these puzzles both enjoyable and thought provoking. More >> |
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What Happened to the Quants in August 2007 (Published paper) During the week of August 6, 2007, a number of quantitative long/short equity hedge funds experienced unprecedented losses. Based on TASS hedge-fund data and simulations of a specific long/short equity strategy, we hypothesize that the losses were initiated by the rapid "unwind" of one or more sizable quantitative equity market-neutral portfolios. Given the speed and price impact with which this occurred, it was likely the result of a forced liquidation by a multi-strategy fund or proprietary-trading desk, possibly due to a margin call or a risk reduction. These initial losses then put pressure on a broader set of long/short and long-only equity portfolios, causing further losses by triggering stop/loss and de-leveraging policies. More >> |
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Securities Trading of Concepts (Published paper) Market prices are well known to efficiently collect and aggregate diverse information regarding the economic value of goods, services, and firms, particularly when trading financial securities. We propose a novel application of the price discovery mechanism in the context of marketing research: to use pseudo-securities markets to measure consumer preferences for new product concepts. This is the first research to test potential new product concepts using virtual markets and the first to validate such an approach using eight years of stated-choice and longitudinal revealed preference data. We directly address the challenge of validating simulated market results in which actual outcomes cannot be observed. More >> |
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The Information in Option Volume for Future Stock Prices (Published paper) We present strong evidence that option trading volume contains information about future stock prices. Taking advantage of a unique data set, we construct put-call ratios from option volume initiated by buyers to open new positions. Stocks with low put-call ratios outperform stocks with high put-call ratios by more than 40 basis points on the next day and more than 1% over the next week. More >> |
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Pricing American Options: A Duality Approach (Published paper) We develop a new method for pricing American options. The main practical contribution of this paper is a general algorithm for constructing upper and lower bounds on the true price of the option using any approximation to the option price. We show that our bounds are tight, so that if the initial approximation is close to the true price of the option, the bounds are also guaranteed to be close. More >> |
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Asset Prices and Real Investment (Published paper) Firm investment activity and firm characteristics, particularly the market-to-book ratio or q, are functions of the state of the economy and therefore contain information about the dynamic behavior of stock returns. This paper develops a model of a production economy in which real investment is irreversible and subject to convex adjustment costs. More >> |
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The Survival and Price Impact of Irrational Traders (Published paper) Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long-run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. More >> |
Our employment report statistics reflect the strong demand for our students. The Class of 2007 reported that 97 percent of the students had a job offer three months after graduation. More >>
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