Finance seminars

Below is a list of upcoming finance seminars hosted by the Finance Discipline Group. All seminars unless stated otherwise are held from 12-1pm in:

Room D301
Level 3, Block D
1-59 Quay St
Haymarket, Sydney Australia

Access to seminars is by invitation. Please contact Lakmali Dias for further details.

If you want to present a paper at our seminar series please contact Jianxin Wang.

2013

Speaker: Narasimhan Jegadeesh, Goizueta Business School, Emory University
Title: "Empirical Tests of Asset Pricing Models with Individual Stocks"
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Date: 5 June 2013
Abstract: We develop an instrumental variables methodology to test asset pricing models using individual stocks. Simulation evidence indicates that this methodology yields unbiased estimates and that the tests are well specified in finite samples. We use this method to test a number of recently proposed asset pricing models. We find that the market risk under the CAPM, cash flow risk and discount rate risk, and systematic illiquidity risk are not priced. In Fama-French three-factor model, we find significantly positive market risk premium but significantly negative HML risk premium.

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Speaker: Emilio Osambela, Tepper School of Business, Carnegie Mellon University
Title: "The Impact of Speculation on Aggregate Consumption Risk"
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Date: 22 May 2013
Abstract: We study the effects of speculation caused by differences of opinion in a dynamic general equilibrium production economy. Speculation leads to speculative aggregate consumption risk: output shocks affect individual consumption shares and aggregate consumption dynamics. Speculative aggregate consumption risk increases aggregate consumption growth volatility, the equity premium and Sharpe ratios, and reduces interest rate volatility and price-dividend ratio volatility relative to an endowment economy with disagreement. Optimistic investors' portfolios are less tilted towards stocks and pessimistic investors' portfolios are more tilted towards stocks because speculative aggregate consumption risk amplifies speculation risk for optimists and causes stock prices to hedge speculation risk for pessimists. In addition, our model is consistent with the size, book-to-market and investment-to-assets anomalies.

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Speaker: Hardy Hulley, Finance Discipline Group, University of Technology, Sydney
Title: "The Impact of Idiosyncratic Risk on Mutual Fund Fees"
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Date: 15 May 2013
Abstract: In the context of a theoretical model for the interaction between an active fund manager and a risk-averse investor, we show that mutual fund fees should exhibit a positive concave dependence on their idiosyncratic volatilities. The crucial ingredients are the infeasibility of short-selling the fund, and the fact that its idiosyncratic volatility generates uncertainty about its performance. Our empirical investigations provide strong support for this result. In fact, idiosyncratic volatility appears to be the most important determinant of mutual fund fees. Moreover, we demonstrate that when it is included as an explanatory variable in cross-sectional regressions, the widely-reported negative dependence of fees on performance dissipates. Significantly, our resolution for this puzzle does not require assumptions of investor unsophistication or fund manager opportunism. In fact, we provide positive evidence for a certain amount of investor sophistication, by demonstrating their apparent unwillingness to pay active fees for passive performance, as predicted by our model.

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Speaker: Vyacheslav Fos, College of Business, University of Illinois at Urbana-Champaign
Title: "Do Prices Reveal the Presence of Informed Trading?"
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Date: 8 May 2013
Abstract: Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several measures of adverse selection reveal the presence of informed trading. The evidence suggests that when Schedule 13D filers accumulate shares, both high-frequency and low-frequency measures of stock liquidity and adverse selection indicate higher stock liquidity and lower adverse selection, even though prices are positively affected. We document three channels that help explain this phenomenon: (a) informed traders select times of higher liquidity when they trade, (b) liquidity increases in response to informed traders' trades, (c) informed traders use limit orders.

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Speaker: Tim Boonen, Department of Econometrics and Operations Research, Tilburg University
Title: "Risk Redistribution with Distortion Risk Measures"
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Date: 1 May 2013
Abstract: This paper studies optimal risk redistribution between firms, such as banks or insurance companies. The introduction of the Basel II regulation and the Swiss Solvency Test (SST) has increased the use of risk measures to evaluate financial or insurance risk. More generally, we let firms use a distortion risk measure (also called dual utility) to evaluate risk. The paper first characterizes all Pareto optimal redistributions. Thereafter, it characterizes competitive equilibria in settings where a well-functioning market exists and firms act as price-takers. It also characterizes optimal redistributions in cases where a well-functioning market does not exist, so that redistributions can only be obtained via Over-the-Counter trade. The paper contributes to the literature in two ways. First, when a well-functioning market exists, it presents three separate sufficient conditions for the existence of a unique equilibrium redistribution. This equilibrium's redistribution and prices are provided in closed form. Second, when a well-functioning market does not exist, it identifies four properties that need to be satisfied for a redistribution to be perceived as ``fair'' by all involved parties. It shows that there is a unique such risk redistribution. This redistribution coincides with the competitive equilibrium.

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Speaker: Adlai Fisher, Finance Division, Sauder School of Business, University of British Columbia
Title: "Leverage and the Limits of Arbitrage Pricing: Implications for Dividend Strips and the Term Structure of Equity Risk Premia"
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Date: 24 April 2013
Abstract: Negligible pricing frictions in underlying asset markets can become greatly magnified when using no-arbitrage arguments to price derivative claims. Amplification occurs when a replicating portfolio contains partially osetting positions that lever up exposures to primary market frictions, and can cause arbitrarily large biases in synthetic return moments. We show theoretically and empirically how synthetic dividend strips, which shed light on the pricing of risks at different horizons, are impacted by this phenomenon. Dividend strips are claims to dividends paid over future time intervals, and can be replicated by highly levered long-short positions in futures contracts written on the same underlying index, but with different maturities. We show that tiny pricing frictions can help to reproduce a downward-sloping term structure of equity risk premia, excess volatility, return predictability, and a market beta substantially below one, consistent with empirical evidence. Using more robust return measures we find smaller point estimates of the returns to short-term dividend claims, and little support for a statistical or economic difference between the returns to short- versus long-term dividend claims.

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Speaker: Simon Gervais, The Fuqua School of Business, Duke University
Title: "The Industrial Organization of Money Management"
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Date: 17 April 2013
Abstract: We construct and analyze a model of delegated portfolio management in which money managers signal their investment skills via their choice of transparency for their fund. We show that a natural equilibrium is one in which high- and low-skill managers pool in opaque funds, while medium-skill managers separate in transparent funds. In this equilibrium, high-skill managers rely on their eventual performance to separate from low-skill managers over time, saving the monitoring costs associated with transparency. In contrast, medium-skill managers rely on transparency to separate from low-skill managers, especially when it is difficult for investors to tell them apart through performance alone. Low-skill managers prefer mimicking high-skill managers in opaque funds in the hope of replicating their performance and compensation. The model yields several novel empirical predictions that contrast transparent funds (e.g., mutual funds) and opaque funds (e.g., hedge funds).

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Speaker: Mark Humphery-Jenner, School of Banking and Finance, University of NSW
Title: "Restraining Overconfident CEOs"
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Date: 10 April 2013
Abstract: Prior literature posits that while some CEO overconfidence may benefit shareholders, high levels of overconfidence do not. We investigate whether improvements in governance can help to mitigate the adverse effects of overconfidence while preserving its positive aspects. We use the passage of the Sarbanes-Oxley (SOX) Act as a natural experiment to examine whether improvements in regulation and governance help to mitigate investment distortions and moderate risk-taking tendencies of the more overconfident CEOs. We conduct tests using options-based proxies for CEO overconfidence. The results indicate that, after SOX, overconfident CEOs reduced investment, improved performance and market value, reduced their risk-exposure, increased dividends and substantially improved long-term performance following acquisitions. We also find that these SOX-related benefits are concentrated in the firms that were SOX non-compliant prior to its passage. While the beneficial aspects of SOX in restraining overconfident CEOs may have been an unintended consequence, the message of our paper is simple: CEO over-confidence can be monitored and regulated – just like any other CEO attribute.

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Speaker: Nagpurnanand Prabhala, Robert H. Smith School of Business, University of Maryland
Title: "Customized Mutual Fund Peers"
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Date: 3 April 2013
Abstract: We propose new techniques for identifying benchmark peers for mutual funds. We identify the location of funds in the space of stock style characteristics. All funds within a pre-specied normed distance are a fund's peers. Our benchmark peers are customized to each fund, intransitive, and employ techniques that are readily scalable across dimensions and loss functions. We show that peers derived in this fashion are significantly different cross-sectionally from conventional peers and exhibit considerable dynamic churn. The customized peers we construct outperform traditional peers in out of sample prediction tests, have lower tracking error, and our peer-excess alphas predict the future alpha of funds. While industry and additional growth proxies such as P/E and sales growth add little, dividend yield and (perhaps surprisingly) momentum help significantly in improving style classifications. We find that measures of competition derived from our peers predict fund expenses and the performance persistency of funds for up to four quarters.

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Speaker: Jon Karpoff, Washington Mutual Endowed Chair in Innovation and Professor of Finance, Michael G. Foster School of Business, University of Washington
Title: "The Impact of Anti-Bribery Enforcement Actions on Targeted Firms"
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Date: 27 March 2013
Abstract: Firms prosecuted for foreign bribery experience significant costs. Their share values decline by 3.11%, on average, on the first day that news of the bribery enforcement action is reported, and by 8.98% over all announcements related to the enforcement action. Fines, internal investigation costs, and losses associated with financial restatements account for 3.20% of the cumulative loss in share values, suggesting that the remainder, 5.78%, could be attributed to a reputational impact. Closer inspection, however, indicates that most bribery enforcement actions are co-mingled with charges of financial misrepresentation and fraud, and that most of these firms’ costs are due to the financial violations, not the bribery charges per se. Excluding cases in which the bribery charges are accompanied by charges of financial fraud, the mean initial loss in share value drops to -1.60%, and the cumulative loss to -3.55%. Focusing on bribery-related announcements that are not contaminated by contemporaneous charges for financial misrepresentation, the magnitude of the initial loss drops further, to -0.47%, and is statistically insignificant. These results indicate that the financial deterrents to bribery come primarily from the direct costs imposed by regulators, and not from an impact to the firm’s reputation with counterparties.

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Speaker: Kian Guan Lim, Lee Kong Chian School of Business, Singapore Management University
Title: "A Generalized Two-Moment Asset Pricing Model"
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Date: 5-6 pm, 21 March 2013
Abstract: In this paper we propose a generalized two-moment CAPM that subsumes rather naturally the Sharpe-Lintner CAPM as a special case. While there are other developed models that also subsume the latter as a special case, such as the three-moment CAPM or the lower partial moment model, the generalized model in this paper embodies all the advantages and prized classical results of easy computation of optimal portfolio weights and thus establishment of uniqueness and existence of a maximum expected utility, as well as establishment of a representative agent via aggregation across heterogeneous agents with different risk aversions. The generalized model in this paper decomposes portfolio variance into two parts, a desirable part comprising positive variability, and the remaining part that is not desirable. Minimization is taken with respect not to variance as in the Sharpe-Lintner CAPM, but to the subvariance, or the total variance less the desirable positive variability. We provide a range of discussion on motivations for the development of this original idea of positive variability and of the associated positive covariability. Positive covariability reduces risk premium, and has a similar effect compared to positive skewness or upper partial moment. The empirical results indicate a clear case of superior statistical performance over the more restrictive Sharpe-Lintner CAPM, and more robust and stable result versus the Kraus-Litzenberger (1976) three-moment CAPM. While somewhat similar in performance with the lower partial moment models of Hogan and Warren (1974), and of Bawa and Linden-berg (1977), our generalized two moment model nevertheless facilitates easy intuition, and fast computation of a unique optimal portfolio set of weights. In terms of within-sample as well as out-of-sample optimal portfolio performance, the generalized model consistently outperforms the traditional CAPM by 0.12% return each year. The generalized model presented in this paper is a natural improvement of the existing two-moment or two-parameter CAPM.

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Speaker: Cary Frydman, Department of Finance and Business Economics, University of Southern California
Title: "Using Neural Data to Test A Theory of Investor Behavior: An Application to Realization Utility"
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Date: 20 March 2013
Abstract: We use measures of neural activity provided by functional magnetic resonance imaging (fMRI) to test the “realization utility” theory of investor behavior, which posits that people derive utility directly from the act of realizing gains and losses. Subjects traded stocks in an experimental market while we measured their brain activity. We find that all subjects exhibit a strong disposition effect in their trading, even though it is suboptimal. Consistent with the realization utility explanation for this behavior, we find that activity in the ventromedial prefrontal cortex, an area known to encode the value of options during choices, correlates with the capital gains of potential trades; that the neural measures of realization utility correlate across subjects with their individual tendency to exhibit a disposition effect; and that activity in the ventral striatum, an area known to encode information about changes in the present value of experienced utility, exhibits a positive response when subjects realize capital gains. These results provide support for the realization utility model and, more generally, demonstrate how neural data can be helpful in testing models of investor behavior.

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Speaker: Chien-Ting Lin, School of Accounting, Economics and Finance, Deakin University
Title: "The Pricing of Deposit Insurance in the Presence of Systematic Risk"
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Date: 13 March 2013
Abstract: Based on the Merton (1977) put option framework, we develop a deposit insurance pricing model that incorporates asset correlations, a measurement for the systematic risk of a bank, to account for the risk of joint bank failure. Estimates from our model suggest that actuarially fair risk-based deposit insurance that considers only individual bank failure risk is underpriced, leaving insurance providers exposed to net losses. Our model also captures the size premium where big banks are priced with higher deposit insurance than small banks. This result may particularly be related to the current financial regulatory concerns on big banks that tend to be more systemically important. Finally, our approach in pricing deposit insurance may provide a unified framework to integrate risk-based deposit insurance with risk-based capital requirements.

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Speaker: Paul Irvine, Department of Finance, University of Georgia
Title: "The Convergence and Divergence of Investors’ Opinions around Earnings News: Evidence from a Social Network"
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Date: 6 March 2013
Abstract: We collect a unique dataset of Twitter posts to examine the change in investor disagreement around earnings announcements. We find that investors’ opinions can either converge (reduced disagreement) or diverge (increased disagreement) around earnings announcements. While the convergence of opinion is associated with lower earnings announcement returns, the divergence of opinion is associated with higher earnings announcement returns. Consistent with recent theory, both the convergence of opinion and the divergence of opinion are associated with greater volume reaction to earnings news.

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Speaker: Hui Zheng, Finance Discipline, University of Sydney
Title: "An Empirical Analysis of Market Segmentation on U.S. Equities Markets"
Date: 27 February 2013
Abstract: This paper examines the impact of trading by markets partially exempt from National Market System (“NMS”) requirements on equity market quality. NMS and non-NMS trading venues differ in their regulatory structure in a number of dimensions most notably in whether they must provide fair-access and pre-trade transparency and restrict sub-penny trading increments. These different features make it possible for non-NMS venues to differentiate themselves and thereby attract orders. We show that non-NMS venues are able to segregate order flow based on asymmetric information risk, which results in their transactions being less informed and contributing less to price discovery on the consolidated market. Our results reveal that the effects of non-NMS order segmentation are damaging to overall market quality. Higher levels of non-NMS trading are associated with higher transaction costs for both NMS and non-NMS venues and with lower aggregate price efficiency after controlling for market information asymmetry. The execution of large transactions on non-NMS venues, however, does not harm market quality.

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Speaker: Matheus Grasselli, Department of Mathematics and Statistics, McMaster University
Title: "Persistence Results in a Keen Model with Government Intervention"
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Date: 4-5 pm 21 February 2013

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