a stylized model of home buyers and bankers behaviours during the 2007 2009 us subprime mortgage crisis a predatory perspective abstractwe examine the behaviour of market agents during the years leading to the 2008 us subprime mortgage crisis using a stylized capital asset pricing model model in our study an average investor eager to make money by flipping houses meets a banker who offers him subprime mortgage deals we refer to recent research that shows the mechanics of the psychological and behavioural components of these two market agents in particular much in line with the famous stanford experiment it is assumed that investors adopt a predator or a prey position our analysis shows that given a historical tendency towards financial predatory acts on the part of market agents including buyers government regulations should be adapted and strengthened to face this dooming reality

delta hedging strategies comparison abstract in this paper we implement dynamic delta hedging strategies based on several option pricing models we analyze different subordinated option pricing models and we examine delta hedging costs using ex post daily prices of s p 500 furthermore we compare the performance of each subordinated model with the black scholes model

cautious risk takers investor preferences and demand for active management actively managed mutual funds have distinct return distributions from their passive benchmarks and our theoretical analysis using tail sensitive risk preferences suggests that active value and growth funds may serve to reduce downside risk and capture upside potential respectively furthermore tail sensitivity measures estimated from the empirical pricing kernel have significant explanatory power for active fund flows even after controlling for business cycles and market wide sentiment finally active funds unlike their passive counterparts have exposures to option strategies hedging downside risk or capturing upside potential

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

tax arbitrage restrictions and financial leverage clienteles abstract this paper argues that while total short sale constraints are often introduced to rule out tax arbitrage such constraints are both unrealistic and conceptually problematic instead milder constraints are advocated which prevent tax arbitrage while still allow short positions it is demonstrated that a model with these constraints employed can support bond pricing as in the miller equilibrium although it leads to a richer set of tax clienteles

the capital gain lock in effect and perfect substitutes abstract this paper analyses the effect of investors accrued capital gains on optimal portfolio composition and equilibrium returns under the assumption that investors are able to re balance with perfect substitute securities no dominance arguments are used to show that pricing differences because of accrued capital gains do not arise among securities which are perfect substitutes these arguments are insufficient however to prevent pricing differences because of accrued capital gains among securities which are not perfect substitutes trading rules are developed which outline the conditions necessary for the realisation of accrued capital gains and the deferral of capital losses these trading rules also provide guidance on which securities investors should sell given their tax basis when re balancing their portfolios

risk returns and values in the presence of differential taxation abstract we show that there exist separate security market lines smls for debt and equity securities in an equilibrium with differential taxation of debt and equity we characterize the conditions under which these smls have the same price of risk with different intercepts and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method we explore the implications of our results for cost of capital calculations how to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

spanning with short selling restrictions in principle the set of attainable payoff vectors is reduced if assets cannot be sold short however we show that the original space of payoff vectors is spanned despite short sale restrictions if there is one additional asset whose payoff is a positively weighted sum of the payoffs of the original assets for example this condition is automatically fulfilled if the original assets are stocks and the additional asset is an index future consisting of these stocks in real world financial markets short sales are restricted in models of asset markets 1 however it is assumed that unlimited short sales of assets are possible this assumption is crucial since short selling restrictions affect the completeness of a market system or the degree of its incompleteness expressed by the difference between the number of states of nature and the number of linearly independent assets litzenberger and ramaswamy 1980 and dybvig and ross 1986 are examples of models with short selling restrictions however the implication of short selling restrictions for market completeness is not discussed in these papers nor in any other to our knowledge in this note we start from an original set of assets and impose a shortselling restriction on all these assets we then introduce one additional asset which is a positively weighted sum of the original assets we show that this is sufficient to span the same space of payoffs as was spanned by the original assets with the possibility of unlimited short sales this implies that the assumption of no short selling restriction in asset market models can be relaxed in most applications with only one additional asset

optimal portfolio selection under institutional procedures for short selling abstract this study presents and formally justifies a simple ranking approach for optimal portfolio selection under institutional procedures for short selling it also provides economic insights of the explicit solution of the portfolio problem the analysis is applicable to different treatments of the short sale proceeds and any margin deposits in contrast to previous approaches it does not require assumptions that overstate short sale benefits for maintaining analytical tractability and it can easily identify and filter out securities that are undesirable for investing or for short selling thus this study can enhance the usefulness of portfolio modeling for assisting practical investment decisions

time diversification and estimation risk the recommendation that investors with long investment horizons tilt their portfolios toward stocks is commonplace we used a nonparametric bootstrap approach to investigate whether in a mean variance efficient portfolio the weights for u s stocks and u s t bills vary in a systematic manner with investment horizon this approach allowed us to analyze the impact of estimation risk on the optimal weights of stocks and fixed income securities the results show that an investor can gain from time diversification the weights for stocks in an efficient portfolio were significantly larger for long investment horizons than a one year horizon

equilibrium with investors using a diversity of deviation measures abstract it has been argued that investors who optimize their portfolios with attention paid only to mean and standard deviation will all end up choosing some multiple of a certain master fund portfolio justification for the capital asset pricing model of classical portfolio theory which relates individual assets to such a master fund has come from this direction in particular attempts have been made to provide solid mathematical support by showing that the imputed behavior of investors is a consequence of price equilibrium in a market in which assets are traded subject to budget constraints and optimization is carried out with respect to utility functions that depend only on mean and standard deviation in recent years reliance on standard deviation has come under increasing criticism because of inconsistencies in its effect on portfolio preferences one response has been to introduce generalized measures of deviation which lead to alternative master funds the market implications of such extensions of theory have hitherto been unclear but in this paper the existence of equilibrium is established in circumstances where nonstandard deviations are admitted equilibrium is guaranteed even when different investors use different measures of deviation and thereby end up with portfolios scaled from different master funds whether they employ the same measure or not they may impose caps on deviation which likewise may be different

short sale restrictions and market reaction to short interest announcements according to the diamond verrecchia hypothesis if increases in short interest are correlated with information that is not yet public they should precipitate a price adjustment stocks with unexpected increases in short interest are found to generate statistically significant but small negative abnormal returns for a short period around the announcement date when the sample is divided into stocks with and without tradable options nonoptioned stocks closely mimic these results but the optioned stocks do not in a cross sectional analysis of individual firms the short term negative abnormal returns are found to be 1 more negative the higher the degree of unexpected short interest and 2 less negative if the firm has tradable options

arbitrage and martingales with taxation this paper extends the martingale analysis of no arbitrage pricing to worlds with taxation the absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments for example no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed andfor item s such as depreciation expenses that influence only after tax cash flows the analysis is applied to several topics in finance including the debt equity decision tax options and the taxation of dividends and pensions copyright 1987 by university of chicago press

capital asset prices with and without negative holdings prize lecture to the memory of alfred nobel december 7 1990 this abstract was borrowed from another version of this item

a portfolio of nobel laureates markowitz miller and sharpe three pioneers of quantitative finance have now been justly honored harry markowitz merton miller and william sharpe received the nobel prize in economic science in 1990 from today s perspective it is hard to understand what finance was like before portfolio theory here i attempt to provide a very brief history of the quantitative revolution in finance drawing upon p bernstein s capital ideas 1992 and accounts of the three nobel laureates

the capital asset pricing model in economic perspective the capital asset pricing model capm is theoretically incomplete in its demand side focus risk averse investors and internally inconsistent homogeneous beliefs is not conclusively supported empirically and yet it legitimizes a notion that investors can earn higher returns by bearing undiversifiable risk our article does not merely extend the capm with more realistic assumptions it completes its original framework by including 1 risk taking investors in the investor population 2 investors who can have heterogeneous expectations or beliefs an overlooked but required condition for the capm to be an internally consistent and meaningful model of competitive financial asset pricing under uncertainty and 3 a positive sloped short run supply curve based on a reasonable interpretation of the nature of financial asset trade upon a complete economic interpretation it is shown that the equilibrium systematic risk rate of return relationship depends on whose aggregate trading activity dominates ri

empirical tests for stochastic dominance efficiency we derive empirical tests for the stochastic dominance efficiency of a given portfolio with respect to all possible portfolios constructed from a set of assets the tests can be computed using straightforward linear programming bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference our results could provide a stimulus to the further proliferation of stochastic dominance for the problem of portfolio selection and evaluation using our tests the fama and french market portfolio is significantly inefficient relative to benchmark portfolios formed on market capitalization and book to market equity ratio

short selling and efficient sets the effect of short selling on the composition and location of the efficient set has been analyzed in a variety of ways however the situation typically facing investors where the initial margin requirement is less than 100 percent and the riskfree interest rate that is paid on the short proceeds is less than the rate paid on initial margin has not previously been considered the elton gruber padberg algorithm 1976 1978 subject to certain modifications is shown here to be capable of identifying the efflcient set under such conditions when harry markowitz 1952 developed the notion of efficient sets as a method of identifying an investor s optimal portfolio he did so in a setting where short selling was prohibited since then the effect of short selling on the composition and location of the efficient set has been considered in a variety of ways for example lintner 1965 suggested that short sales be treated from the perspective of a broker dealer where an amount of money equal to the short proceeds must be put up as initial margin with the short seller receiving riskfree interest on both the short proceeds and the margin alternatively black 1972 and merton 1972 assumed that the short seller did not have to put up any initial margin and that the short seller actually got the use of the short proceeds more recently dyl 1975 has assumed that the short seller must put up initial margin that is less than the short proceeds but receives no interest on either the margin or short proceeds this paper is concerned with the generation of efficient sets where short selling is allowed but with certain restrictions attached to it referred to hereafter as restricted short selling in particular initial margin is required but can be met by depositing interest bearing securities with the brokerage firm where the short seller s account is kept furthermore the model allows the short seller to earn interest on the short proceeds accordingly the model

earnings functions testing for the demand side abstract to analyze labor market phenomena one may simultaneously grade workers by education and jobs by level of difficulty and complexity human capital theory predicts earnings based on only worker quality thurow s version of a segmented labor market theory predicts that only the job level is relevant and the assignment theory predicts that both variables are relevant using three different data sets for the netherlands testing demonstrates convincingly the superiority of the assignment theory

debt and taxes and uncertainty with a graduated personal tax schedule miller showed that there could be an equilibrium debt supply for the corporate sector as a whole in the presence of uncertainty there is also a unique debt equity ratio for each individual firm and this ratio is related to the firm s operational risk characteristics however if firms merge and spin off in response to tax incentives the identity of firms is ambiguous and only the corporate sector is a meaningful construct these arguments are developed in both discrete and continuous models that employ extensions of the arbitrage free pricing theory in his famous paper debt and taxes 1977 merton miller 11 showed that the original miller modigliani propositions on the irrelevance of capital structure were not necessarily overturned by considerations of taxation miller argued that with a broad enough span of progressivity in personal income taxation the corporate tax advantage to the issuance of debt would be offset by the disadvantage to investors of receiving ordinary income on personal account in equilibrium the differential rates of return on equity and debt would be such that the marginal investor would be indifferent between purchasing debt instruments or equity the margin would be determined by the total amount of debt issued by the corporate sector but in a competitive world it would be unaffected by the debt issued by any one firm as a consequence the total supply of corporate debt would be determined in equilibrium increasing to the point where aggregate corporate value was not enhanced by further debt financing but any individual firm would be looking at prices set at the margin and would find itself indifferent between issuing debt or equity the purpose of this article is to extend miller s argument by recognizing the differences between debt and equity when the environment is not certain we will not be concerned with what might be called corner questions i e with whether or not there is a marginal investor or an internal equilibrium to do so would obscure the basic points we have to make instead we will examine models that have internal equilibria and ordinary neoclassical marginal interpretations in related work de angelo and masulis 5 6 have also extended miller s analysis but their primary concern was with the effects of a more detailed treatment of the tax code and with the impact of bankruptcy we will deal with such matters only in passing our central concern is with the impact of uncertainty our main result is the finding that there is a relationship between the capital structure of the firm as induced by tax effects and ordinary beta measures

tax management and investment strategies of property liability insurers abstract the tax reform act tra of 1986 reduced the incentives for institutional investors to participate in the tax exempt bond market this paper develops a model of profit maximization incorporating the tra provisions applicable to property liability pl insurers the theory predicts that pl insurers will use underwriting losses to shelter taxable investment income and invest the balance of their portfolios in tax favored securities our empirical evidence reveals that insurers continued to invest in tax exempts following the tra suggesting that implicit tax rates are low enough to attract insurers into the long term tax exempt market however insurers reduced the proportions of income derived from tax exempt interest and dividends following the tra

multinational capital structure and financial flexibility abstract we address multinational capital structure decisions when firms have varying degrees of financial flexibility for shifting income and or tax shields between subsidiaries we find 1 firms can use leverage to dramatically reduce negative valuation effects from operating in a high tax country 2 financial flexibility is a key determinant of optimal capital structure acting as both a substitute and a complement for leverage 3 multinational firms derive a synergistic effect from financial flexibility which can enhance their value beyond that for a single country firm from a low tax jurisdiction and 4 optimal capital structure typically differs substantially across subsidiaries with each having positions in multiple currencies

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

taxes and capital structure evidence from firms response to the tax reform act of 1986 while the theoretical relation between taxes and capital structure has been extensively analyzed the empirical evidence on this issue has thus far been inconclusive one of the main difficulties confronting previous empirical studies of the cross sectional relationship between taxes and leverage was the control of intervening variables the tax reform act of 1986 tra which drastically changed the tax regime provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment the authors test the relationship between leverage and certain tax related variables for a large sample of companies in the years surrounding the enactment of tra the results support the tax based theories of capital structure the findings indicate that there exists a substitution effect between debt and nondebt tax shields and that both corporate and personal tax rates affect leverage decisions coauthors are dan givoly aharon r ofer and oded sarig article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the optimality of long short strategies we consider the optimality of portfolios not subject to short selling constraints and derive conditions that a universe of securities must satisfy for an optimal active portfolio to be dollar neutr

adaptive asset allocation policies this article proposes an asset allocation policy that adapts to market movements by taking into account changes in the outstanding market values of major asset classes such a policy considers important information reduces or avoids contrarian behavior and can be followed by a majority of investors

on the consequences of legal constraints and taxation for corporate choice in this article the author analyzes the effect taxation and legal constraints have on the definition of the firm s cost of capital and optimal financial policy under uncertainty the assumes firms are competitive and considers only input choices spanned by the return vectors of existing securities under very specific tax conditions these assumptions still guarantee a unique definition of the tax adjusted cost of capital but it is shown that under more general tax structures there is a split among potential shareholders accounted for by the ownership of the corporation

systemic risk in financial systems we consider default by firms that are part of a single clearing mechanism the obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity we first show via a fixed point argument that there always exists a clearing payment vector that clears the obligations of the members of the clearing system under mild regularity conditions this clearing vector is unique next we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms finally we produce qualitative comparative statics for financial systems these comparative statics imply that in contrast to single firm results even unsystematic nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms

human capital and job levels explaining the age income funnel in a previous paper on optimal human capital investment theeuwes et al 1985 we derived earnings functions based on a lifetime wealth maximization assumption a cobb douglas specification for the human capital production function resulted in a non linear estimation equation in which earnings were explained as a function of years of experience in the present paper we re estimate this model using individual instead of aggregate data and extend the model with job level information as a contribution to the explanation of the age income funnel the latter refers to the increasing variance of the age income distribution for older age brackets assignment to job levels over the life cycle contributes significantly to the variance of the ageincome profile

efficient trading strategies in the presence of market frictions we provide a price characterization of efficient contingent claims that is chosen by at least a rational agent in multiperiod economies with market frictions frictions include market incompleteness transaction costs short selling and borrowing costs we characterize the inefficiency cost of a trading strategy its required investment minus the largest amount necessary to obtain the same utility level and we propose a measure of portfolio performance we show that arbitrage bounds cannot be tightened based on efficiency without restricting preferences or endowments we observe common investment strategies becoming inefficient with market frictions and others rationalized by them in this article we characterize efficient contingent claims to future consumption consumption bundles in multiperiod economies with uncertainty taking a wide range of market frictions into account 1 such as dynamic market

anonymity adverse selection and the sorting of interdealer trades this article asks why london security dealers use more than one trading venue to trade with one another we argue that differences in the exclusivity liquidity anonymity and post trade transparency of each system permit a more efficient sorting of interdealer trades than if there were just one system our evidence comes from detailed data on where london dealers chose to place interdealer trades contrary to intuition we show that uninformed interdealer trades as measured by subsequent price impact tend to migrate to third party brokered systems where trade is anonymous by contrast informed interdealer trades tend to migrate to the direct nonanonymous public market additionally we show that this distribution of trades is supported by differences in the price improvement dealers receive in the direct and brokered markets our findings have implications for three strands of the market microstructure literature first they contribute to our understanding of the importance of anonymity and transparency in securities trading most theoretical models of the effects of anonymity and transparency predict that anonymous trading systems will attract more informed trades

balance sheet contagion japan has been in a slump for the past decade after gdp had been growing by on average 4 percent during the 1980 s the growth rate dropped to 1 percent in the 1990 s asset prices also fluctuated significantly capital gains on stocks and real estate in the 1980 s followed by capital losses in the 1990 s were both on the order of a few years worth of gdp even after taking inflation into account together with production and asset prices the fraction of nonperforming loans fluctuated substantially these are by no means all bank loans for the nonfinancial corporate sector in japan the ratio of financial assets to total assets is about 40 percent much higher than in the united states such financial assets include loans to and securities of other private agents that is nonfinancial institutions simultaneously borrow from and lend to each other on a significant scale many nonperforming loans are interlocked paralyzing the financial system it is important to recognize that these swings have been experienced by almost all sectors of the japanese economy yet in other countries comparable movements in asset prices have had less widespread consequences for example the recent fluctuations in the nasdaq index in the united states have been no smaller than those of asset prices in japan but the damage appears to be contained to closely related sectors although u s equity holders particularly pension funds have lost value the level of nonperforming loans is relatively limited up to now the question is why does there appear to be more contagion in some countries than in others has contagion anything to do with the nature of financing or the extent to which there are inter locking loans in this theoretical paper we examine two different mechanisms by which contagion may occur in both cases propagation is through balancesheet effects first through the indirect effects that fluctuations in asset prices have on collateral values second through the direct effects that default on or postponement of debt repayments have when there are chains of credit

estimation of optimal human capital accumulation parameters for the netherlands abstract using the theory of optimal investments in human capital in general and rosen s 1975 1976 version of it in particular we tried to model and explain aggregate life cycle income profiles for the netherlands in 1965 1972 and 1979 the model allowed us to estimate and impute human capital accumulation parameters and paths changes in rates of return depreciation rates the value of the human capital stock and of lifetime human wealth could be identified and compared for the sample years it was found that in terms of some of these parameters public sector employees gained compared with private sector employees and employees with higher vocational training gained ground over university trained employees

financial market structures revealed by pricing rules efficient complete markets are prevalent abstract it is well known that when an arbitrage free financial market is incomplete or has tradable financial assets with frictions there must be multiple risk neutral probability measures the main motivation for the present study is to elucidate what type of market structure usually emerges from pricing rules first we obtain that finitely generated pricing rules characterized by polytopes of probabilities capture the class of all finite arbitrage free financial markets that are potentially incomplete or subject to frictions affecting tradable assets next we provide a novel characterization of efficient securities and introduce related notions of market completeness that underlies pricing rules our main result shows that the class of efficient complete markets with bid ask spreads is the prevalent case revealed by finitely generated pricing rules

tax clienteles and optimal capital structure under uncertainty this article demonstrates that investors heterogeneous tax status implies that they value bonds differently at the margin due to asymmetric personal taxes high risk bonds generate a higher amount of taxable income than low risk bonds and are therefore held by investors in low tax brackets in such a setting firms can increase their value by choosing a capital structure that attracts a particular bondholder clientele the author analyzes how bondholder clienteles change as the uncertainty about a bond s final payoff is resolved over time and shows how tax clientele effects influence firms capital structure decisions copyright 1990 by the university of chicago

domestic and external sectoral portfolios network structure and balance sheet contagion abstract this paper uses a unique comprehensive database on french security assets and liabilities to study the dynamics of domestic and external sectoral portfolios their network structure and their role in the propagation of shocks we first show how the sharp deterioration of the net external portfolio position of france between 2008 and 2014 was driven by sectoral patterns such as the banking sector retrenchment and the increase in foreign liabilities of the public and corporate sectors but was mitigated by the expansion of domestic and foreign asset portfolios of insurance companies we also provide a network representation of the links between domestic sectors and the rest of the world and document their evolution between 2008 and 2014 second we put forward and estimate a model of balance sheet contagion through inter sectoral security linkages the estimation of the model through gmm shows that the financial sectors of the economy banking mutual fund and insurance sector are affected by balance sheet contagion