Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

We present evidence that fund managers inflate quarter-end portfolio prices with last-minute purchases of stocks already held. The magnitude of price inflation ranges from 0.5 percent per year for large-cap funds to well over 2 percent for small-cap funds. We find that the cross section of inflation matches the cross section of incentives from the flow/performance relation, that a surge of trading in the quarter\u27s last minutes coincides with a surge in equity prices, and that the inflation is greatest for the stocks held by funds with the most incentive to inflate, controlling for the stocks\u27 size and performance

Mutual Fund Survivorship

This article provides a comprehensive study of survivorship issues using the mutual fund data of Carhart (1997). We demonstrate theoretically that when survival depends on multiperiod performance, the survivorship bias in average performance typically increases with the sample length. This is empirically relevant because evidence suggests a multiyear survival rule for U.S. mutual funds. In the data we find the annual bias increases from 0.07% for 1-year samples to 1% for samples longer than 15 years. We find that survivor conditioning weakens evidence of performance persistence. Finally, we explain how survivor conditioning affects the relation between performance and fund characteristics

A Sampling-Window Approach to Transactions-Based Libor Fixing

We examine the properties of a method for fixing Libor rates that is based on transactions data and multi-day sampling windows. The use of a sampling window may mitigate problems caused by thin transaction volumes in unsecured wholesale term funding markets. Using two partial data sets of loan transactions, we estimate how the use of different sampling windows could affect the statistical properties of Libor fixings at various maturities. Our methodology, which is based on a multiplicative estimate of sampling noise that avoids the need for interest rate data, uses only the timing and sizes of transactions. Limitations of this sampling-window approach are also discussed

Hedge Funds, Financial Intermediation, and Systemic Risk

Hedge funds are significant players in the U.S. capital markets, but differ from other market participants in important ways such as their use of a wide range of complex trading strategies and instruments, leverage, opacity to outsiders, and their compensation structure. The traditional bulwark against financial market disruptions with potential systemic consequences has been the set of counterparty credit risk management (CCRM) practices by the core of regulated institutions. The characteristics of hedge funds make CCRM more difficult as they exacerbate market failures linked to agency problems, externalities, and moral hazard. While various market failures may make CCRM imperfect, it remains the best line of defense against systemic risk

Broadband Cortical Desynchronization Underlies the Human Psychedelic State

Psychedelic drugs produce profound changes in consciousness, but the underlying neurobiological mechanisms for this remain unclear. Spontaneous and induced oscillatory activity was recorded in healthy human participants with magnetoencephalography after intravenous infusion of psilocybin—prodrug of the nonselective serotonin 2A receptor agonist and classic psychedelic psilocin. Psilocybin reduced spontaneous cortical oscillatory power from 1 to 50 Hz in posterior association cortices, and from 8 to 100 Hz in frontal association cortices. Large decreases in oscillatory power were seen in areas of the default-mode network. Independent component analysis was used to identify a number of resting-state networks, and activity in these was similarly decreased after psilocybin. Psilocybin had no effect on low-level visually induced and motor-induced gamma-band oscillations, suggesting that some basic elements of oscillatory brain activity are relatively preserved during the psychedelic experience. Dynamic causal modeling revealed that posterior cingulate cortex desynchronization can be explained by increased excitability of deep-layer pyramidal neurons, which are known to be rich in 5-HT2A receptors. These findings suggest that the subjective effects of psychedelics result from a desynchronization of ongoing oscillatory rhythms in the cortex, likely triggered by 5-HT2A receptor-mediated excitation of deep pyramidal cells