Alternatives for issuer-paid credit rating agencies

This paper investigates the economic viability and welfare contribution of alternatives to issuer-paid credit rating agencies (CRAs). To this end, it introduces a heterogeneous competition model for credit and ratings markets. Frictions among issuers or investors induce rating inflation from issuer-paid CRAs. Investor-paid CRAs suffer from three sources of free-riding and are generally not economically viable when competing with issuer-paid CRAs. Only for very limited parameter ranges can investor-paid CRAs thrive and counter rating inflation. Other proposed alternatives such as investor-produced ratings and CRA co-investments employ skin-in-the-game to induce proper screening accuracy. However, as traditional issuer-paid CRAs can cater better to issuers, such alternatives generate little demand or are implemented ineffectively. Hence, this paper provides an explanation for the evolution, dominance and resiliency of issuer-paid CRAs

Liquidity and clientele effects in green debt markets

We jointly model green and regular bond markets. Green bonds can improve allocative efficiency and lower financing costs for green projects, but economies of scale, like liquidity fragmentation, may cause friction. Consequently, profitable and welfare-enhancing projects, green and brown, can be rationed in equilibrium. Rationing green projects happens with a shortage of climate investors, large non-monetary offsets, and/or costly fragmentation. Rationing regular projects can happen with a shortage of regular investors, but also with an abundance, when more profitable green projects crowd out regular ones. We propose an alternative security design that preserves green earmarking but prevents fragmentation

Liquidity and clientele effects in green debt markets

We jointly model green and regular bond markets. Green bonds can improve allocative efficiency and lower financing costs for green projects, but economies of scale, like liquidity fragmentation, may cause friction. Consequently, profitable and welfare-enhancing projects, green and brown, can be rationed in equilibrium. Rationing green projects happens with a shortage of climate investors, large non-monetary offsets, and/or costly fragmentation. Rationing regular projects can happen with a shortage of regular investors, but also with an abundance, when more profitable green projects crowd out regular ones. We propose an alternative security design that preserves green earmarking but prevents fragmentation

Competition among liquidity providers with access to high-frequency trading technology

status: publishe

Conditional Volatility Targeting

In analyzing the performance of volatility-targeting strategies, we found that conventional volatility targeting fails to consistently improve performance in global equity markets and can lead to markedly greater drawdowns. Motivated by return patterns in various volatility states, we propose a strategy of conditional volatility targeting that adjusts risk exposures only in the extremes during high- and low-volatility states. This strategy consistently enhances Sharpe ratios and reduces drawdowns and tail risks, with low turnover and leverage, when used in the major equity markets and for momentum factors across regions. Conditional volatility management can also be applied to tactical allocations among multiple assets or risk factors

Tiebreaker: Certification and Multiple Credit Ratings

This paper explores the economic role credit rating agencies play in the corporate bond market. We consider three existing theories about multiple ratings: information production, rating shopping and regulatory certification. Using differences in rating composition, default prediction and credit spread changes, our evidence only supports regulatory certification. Marginal, additional credit ratings are more likely to occur because of, and seem to matter primarily for regulatory purposes, but do not seem to provide significant additional information related to credit quality.

The Propagation of Shocks Across International Equity Markets: A Microstructure Perspective

We study the high-frequency propagation of shocks across international equity markets. We identify intraday shocks to stock prices, liquidity, and trading activity for 12 equity markets around the world based on non-parametric jump statistics at the 5-minute frequency from 1996 to 2011. Shocks to prices are prevalent and large, with regular spillovers across markets – even within the same 5-minute interval. We find that price shocks are predominantly driven by information rather than liquidity. Consistent with the information channel, price shocks do not revert and often occur around macroeconomic news announcements. Liquidity shocks tend to be isolated events that are neither associated with price shocks nor with liquidity shocks on other markets. Our results challenge the widespread view that liquidity plays an important role in the origination and propagation of financial market shocks

Uveal Melanoma Patients Have a Distinct Metabolic Phenotype in Peripheral Blood

Uveal melanomas (UM) are detected earlier. Consequently, tumors are smaller, allowing for novel eye-preserving treatments. This reduces tumor tissue available for genomic profiling. Additionally, these small tumors can be hard to differentiate from nevi, creating the need for minimally invasive detection and prognostication. Metabolites show promise as minimally invasive detection by resembling the biological phenotype. In this pilot study, we determined metabolite patterns in the peripheral blood of UM patients (n = 113) and controls (n = 46) using untargeted metabolomics. Using a random forest classifier (RFC) and leave-one-out cross-validation, we confirmed discriminatory metabolite patterns in UM patients compared to controls with an area under the curve of the receiver operating characteristic of 0.99 in both positive and negative ion modes. The RFC and leave-one-out cross-validation did not reveal discriminatory metabolite patterns in high-risk versus low-risk of metastasizing in UM patients. Ten-time repeated analyses of the RFC and LOOCV using 50% randomly distributed samples showed similar results for UM patients versus controls and prognostic groups. Pathway analysis using annotated metabolites indicated dysregulation of several processes associated with malignancies. Consequently, minimally invasive metabolomics could potentially allow for screening as it distinguishes metabolite patterns that are putatively associated with oncogenic processes in the peripheral blood plasma of UM patients from controls at the time of diagnosis.</p

Hiding behind Writing: Communication in the Offering Process of Mortgage-Backed Securities

Abstract Securities Offering Reform (SOR) in 2005 formalized free writing prospectus (FWP) as permittable written communication in the offering process by securities issuers. Using non-agency mortgage deals securitized following SOR, we find the surprising result that MBS deals with more FWP usage suffered up to 2% higher cumulative net loss, accounting for almost 18% of the deal average loss. Examining the contents of FWPs, we uncover that textual FWPs rather than loan data tape played a more significant role for the larger deal losses. More FWPs are associated with increased uncertain text usage in the final prospectus supplements, a tactic often used to hedge litigation risk on undisclosed information. Our findings provide evidence that MBS issuers may have hidden information behind writing for their financial benefits. Keywords: Written Communication, Free Writing Prospectus, Information Withholding, Uncertain Text * We thank Dion Bongaerts, Zhonglan Dai, Kathleen Weiss Hanley, Jun Li, Tim Loughran, Han Xia, and the seminar participants at Erasmus University for helpful comments. All three authors are from Naveen Jindal School of Management, University of Texas at Dallas, 800 West Campbell Road, Richardson, Texas, 75080, email: [email protected], [email protected], [email protected] &quot;In many ways, mortgage products such as RMBS were ground zero in the financial crisis. Misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed.&quot

Pension fund performance and costs: small is beautiful.

Abstract Using the CEM pension fund data set, we document the cost structure and performance of a large sample of US pension funds. To date, self-reporting biases and a deficiency of comprehensive return and cost data have severely hindered pension fund performance studies. The bias-free CEM dataset resolves these issues and provides detailed information on fund-specific returns, benchmarks and costs for all types of pension plans and equity mandates. We find that pension fund cost levels are substantially lower than mutual fund fees. The domestic equity investments of US pension funds tend to generate abnormal returns (after expenses and trading costs) close to zero or slightly positive, contrasting the average underperformance of mutual funds. However, small cap mandates of defined benefit funds have outperformed their benchmarks by about 3% a year. While larger scale brings costs advantages, liquidity limitations seem to allow only smaller funds, and especially small cap mandates, to outperform their benchmarks. JEL Classifications : G23, G11, G14 Acknowledgements Our thanks to Keith Ambachtsheer, CEM Benchmarking Inc. for providing the pension fun