This paper exploits the unique experimental setting created by nearly 1,300 new single stock futures listings on the OneChicago exchange between 2003 and 2009, to investigate the impact of derivatives introductions on the tightness of short sale constraints facing their underlying assets. After controlling explicitly for supply and demand conditions in the stock lending market, this experiment reveals a precipitous decline in active utilization rates and loan fees in the lending market, after the futures introductions. The paper provides strong evidence supporting the view that derivatives represent a viable alternative synthetic short selling venue relaxing short sale constraints facing their underlying assets.
Vol. 53 No. 1 - February 2018
A longstanding concern for municipal bond investors is the lack of timely financial statement disclosures. Municipalities are held to lower disclosure standards than corporations. Using continuing disclosure dates for audited financial statements, we find bond issuers with slower disclosure have higher secondary market yields and spreads, less frequent secondary market trading, and are less likely to issue new bonds. We observe that future disclosure is largely predictable based on past disclosure and that disclosure often improves prior to new bond issuances. When municipalities do not capitalize on the benefits of timely disclosure, economic consequences are imposed on bondholders and taxpayers.
We show that highly liquid Exchange-Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele amongst institutional investors: i) relative liquidity is significantly more important for short- than for long-term investors; and ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. The two findings provide evidence that relative liquidity encourages short-term demand.
Exchange traded funds (ETF) provide a means for investors to access assets indirectly that may be accessible at a high cost otherwise. I show that liquidity segmentation can explain the tendency for ETFs to trade at a premium to NAV as well as the life-cycle pattern in premiums. ETFs with larger NAV tracking error standard deviations (TESD) tend to trade at higher premiums and the liquidity benefits offered by foreign ETFs and fixed income ETFs are revealed to be the most valuable to investors. Further tests validate that TESD has the desirable properties of a liquidity segmentation measure.
I examine whether incorporating economically-motivated prior information yields more accurate forecasts of industry costs of equity. I find that incorporating the long-run mean of the CAPM parameters and the industry characteristics in the cross section produces more accurate parameter estimates, which subsequently translate into more accurate out-of-sample forecasts of industry costs of equity. The outperformance of this method over rolling-window estimates becomes larger as the forecast horizon extends into the future. These findings provide evidence that the CAPM parameters have a long-run mean-reversion property and correlate with the industry characteristics in a systematic way.
Wolfers (2006) first documented that heavy favorites in college basketball win but fail to cover the pre-game point spread at a statistically higher rate than expected. We generate a hedged strategy to exploit the “win but does not cover” phenomenon using two wagers: a bet on the underdog sides line and a bet on the favorite money line. While one bet is guaranteed to win regardless of the outcome, both bets win if the favorite wins but does not cover. We show that the minimum-variance portfolio best exploits this anomaly, yielding an average return of 0.34% per game and a positive return in five of the seven seasons of college basketball analyzed.