Sustainability of public finances and automatic stabilisation under a rule of budgetary discipline

This paper addresses the question of how a fiscal rule of a general type can preserve the sustainability of public finances and provide automatic stabilisation, taking as given interest rates and price stability. This issue can be considered complementary to the analysis of monetary policy rules, whose targets are price stability and often also output stabilisation, assuming that fiscal policy guarantees the sustainability of public finances. Considering the institutional framework provided by the Stability and Growth Pact, the paper also draws some policy conclusions. JEL Classification: E61, H62, H63

Portable alphas from pension mispricing

We introduce a new dynamic trading strategy based on the systematic misspricing of U.S. companies sponsoring Defined Benefit pension plans. This portfolio produces an average return of 1.51% monthly between 1989 and 2004, with a Sharpe Ratio of 0.26. The returns of the strategy are not explained by those of primary assets. These returns are not related to those of benchmarks in the alternative investments industry either. Hence, we are in the presence of a "pure alpha" strategy that can be ported into a large variety of portfolios to significantly enhance their performance.Defined Benefit Plans, Portable Alpha, Enhanced Indexing, Pension Contributions, Pricing Anomaly

Flat 3-webs of degree one on the projective plane

The aim of this work is to study global $3$-webs with vanishing curvature. We wish to investigate degree $3$ foliations for which their dual web is flat. The main ingredient is the Legendre transform, which is an avatar of classical projective duality in the realm of differential equations. We find a characterization of degree $3$ foliations whose Legendre transform are webs with zero curvature.Comment: 14 page

Pension plan funding and stock market efficiency

The paper argues that the market signifficantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least five years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies.Pricing anomalies, DB plans, market efficiency

Price support in the stock market

The interplay of delegated portfolio management and asset management ownership generates a double agency problem that may result on trading to support security prices. We test this hypothesis analyzing the trading patterns of mutual funds affiliated with banks with the stocks of their controlling banks. We show that affiliated mutual funds tend to increase the holdings of the parent bank stock following a large drop in the stock price of the bank. Further, we provide evidence that these patterns of trading are not consistent with portfolio rebalancing into the banking sector, contrarian trading or timing skills. We also provide evidence that the patterns of trading are not information-driven. This leads us to conclude that affiliated mutual funds follow this strategy to support the price of the parent bank.price support; conflict of interests; agency problem; mutual funds; asset management; fund families; banks; prosecution

The dog that did not bark: Insider trading and crashes

This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution. Finally we provide new evidence regarding crashes and the degree of information asymmetry.Insider Trading, Rational Expectations Equilibrium, Trading Constraints, Volatility, Crashes

Performance evaluation in competitive REE models

Our basic premise is that fund managers performance is related to superior information about an asset payoff. We investigate the relationship between managerial skills and trading behavior within a two-period rational expectation equilibrium (REE) model where agents trade on private information in the first round, while a public signal arrives at the second date that makes traders revise their beliefs and retrade. The public signal can be related to the asset payoff, or to variables not related to fundamentals (noise), or both. We characterize the unique partially revealing REE and explore the drivers of price dynamics and trading behavior. Our main prediction is that good managers are contrarian traders, while bad managers are momentum traders when public news arrive to the market. Furthermore, the change in holdings of each type of trader is monotonic on the traders' skills. Based on these predictions, we propose new performance evaluation measures that rely on the manager's change in holdings around the arrival of public news rather than his past performance. A byproduct of our analysis is the proposal of a new protocol for performance evaluation and Due Diligence (DD) procedures.REE; performance evaluation; mutual fund; hedge funds; talent; informed traders; due diligence

The dog that did not bark: Insider trading and crashes

This paper documents that at the individual stock level insiders sales peak many months before a large drop in the stock price, while insiders purchases peak only the month before a large jump. We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. A key feature of our theory is that rational uninformed investors may react more strongly to the absence of insider sales than to their presence (the “dog that did not bark” effect). We test our hypothesis against competing stories such as patterns of insider trading driven by earnings announcement dates, or insiders timing their trades to evade prosecution.insider trading; rational expectations equilibrium; trading constraints; volatility; crashes; short- sales constraint

Multi-site H-bridge breathers in a DNA--shaped double strand

We investigate the formation process of nonlinear vibrational modes representing broad H-bridge multi--site breathers in a DNA--shaped double strand. Within a network model of the double helix we take individual motions of the bases within the base pair plane into account. The resulting H-bridge deformations may be asymmetric with respect to the helix axis. Furthermore the covalent bonds may be deformed distinctly in the two backbone strands. Unlike other authors that add different extra terms we limit the interaction to the hydrogen bonds within each base pair and the covalent bonds along each strand. In this way we intend to make apparent the effect of the characteristic helicoidal structure of DNA. We study the energy exchange processes related with the relaxation dynamics from a non-equilibrium conformation. It is demonstrated that the twist-opening relaxation dynamics of a radially distorted double helix attains an equilibrium regime characterized by a multi-site H-bridge breather.Comment: 27 pages and 10 figure

The use of derivatives in the Spanish mutual fund industry

We study the use of derivatives in the Spanish mutual fund industry. The picture that emerges from our analysis is rather negative. In general, the use of derivatives does not improve the performance of the funds. In only one out of eight categories we find some (very weak and not robust) evidence of superior performance. In most of the cases users significantly underperform non users. Furthermore, users do not seem to exhibit superior timing or selectivity skills either, but rather the contrary. This bad performance is only partially explained by the larger fees funds using derivatives charge. Moreover, we do not find evidence of derivatives being used for hedging purposes. We do find evidence of derivatives being used for speculation. But users in only one category exhibit skills as speculators. Finally, we find evidence of derivatives being used to manage the funds’ cash inflows and outflows more efficiently.Mutual Funds, Derivative use, Risk Management