How Are Derivatives Used? Evidence from the Mutual Fund Industry

Approximately 20 percent of the 675 equity mutual funds analyzed in this paper invest in derivatives. We compare the return distributions of equity mutual funds that invest in derivatives to those that do not. We also analyze the use of derivatives to affect intertemporal changes in fund risk. Equity mutual funds that invest in derivatives have similar risk and similar net return performance in those that do not. Change in fund risk is negatively related to past performance, but derivatives allow funds to dampen these changes. We interpret these results as consistent with the hypothesis that managers are slow to respond to unexpected cash flows, and inconsistent with gaming of incentive compensation systems. This paper was presented at the Financial Institutions Center's May 1996 conference on "

Reliability and Validity of Three Clinical Methods to Measure Lower Extremity Muscle Power

Background: Lower extremity muscle power is critical for daily activities and athletic performance in clinical populations. Objective: The purpose of this study was to determine the reliability and validity of 3 clinically feasible methods to measure lower extremity muscle power during a leg press. Methods: Ten of 26 subjects performed 2 sessions of 5 submaximal leg presses separated by 3-7 days in this repeated-measures cross-sectional design; the remaining performed 1 test session. Power was calculated independently for each method [simple video, linear position transducer, and accelerometer] and compared to the reference force plate. Test-retest reliability was evaluated using intraclass correlation coefficients (ICC). Pearson’s correlation coefficient (r), Bland-Altman plots with 95% limits of agreement (LOA), and mean bias percentages (%) were used to determine relative and absolute validity. Results: Power measures were reliable for all methods (ICC=.97-.99). All were highly correlated with the force plate (r=.96-.98). Mean bias was -0.8% (LOA: -16.57% to 14.98%) (video), -13.21% (LOA: -23.81% to -2.61%) (position transducer) compared to the force plate. Proportional bias was observed for accelerometry. Conclusion: All methods were reliable and highly correlated with the force plate. Only the video and position transducer demonstrated absolute validity. The position transducer was the most feasible method because of its simplicity and accuracy in measuring power

News-Specific Price Discovery in Credit Default Swap Markets

We examine the lead and lag relation between equity and credit default swap (CDS) markets. We find that price discovery in equity markets only leads CDS markets following aggregate positive news and not so following other news. While difficult to reconcile with standard asset pricing theories, asymmetric price adjustment is common in goods markets, arising from intermediary power. We provide an explanation for this asymmetry based on dealers exploiting informational advantages vis-à-vis investors with hedging motives. Consistent with this explanation, we find that the patterns we document are related to firm-level proxies for hedging demand, as well as economy-wide measures of information asymmetries

Market Segmentation, Liquidity Spillover, and Closed-End Country Fund Discounts

10.1016/j.finmar.2008.01.005Journal of Financial Markets114377-39

Information demand and stock return predictability

Recent theoretical work suggests that signs of asset returns are predictable given that their volatilities are. This paper investigates this conjecture using information demand, approximated by the daily internet search volume index (SVI) from Google. Our results reveal that incorporating the SVI variable in various GARCH family models significantly improves volatility forecasts. Moreover, we demonstrate that the sign of stock returns is predictable contrary to the levels, where predictability has proven elusive in the US context. Finally, we provide novel evidence on the economic value of sign predictability and show that investors can form profitable investment strategies using the SVI

Price discovery in the CDS market: the informational role of equity short interest

This paper documents a negative relation between equity short interest and future returns on credit default swaps (CDS). This relation is most consistent with the theory that equity short interest telegraphs relevant information to secondary market CDS investors about credit spread not transmitted into prices in other ways. The CDS return predictive pattern also strengthens negatively for equity short-interest positions subject to an outward shift in the demand for shortable stocks, which we view as a proxy for the expected benefits of private information (Cohen et al. in J Finance 62(5):2061–2096, 2007). This suggests that features of the shorting market may help explain the lagged response of CDS spreads to equity short interest. Our tests of economic significance, however, do not support the view that the CDS return predictive pattern is strong enough to cover the round-trip cost of trading in the secondary CDS market