Abstract: We analyze credit default swap settlement auctions theoretically and evaluate them empirically. In our theoretical analysis we show that the current auction design may not give rise to the fair bond price, and we suggest modifications to minimize this mispricing. In our empirical study, we find that auctions undervalue bonds by an average of 10% on the auction day, and link the undervaluation to the number of bonds exchanged. We also find that underlying bond prices follow a V pattern around the day of the auction: in the preceding 10 days prices decrease by 30% on average, and in the subsequent 10 days they revert to their pre-auction levels.
Abstract: This paper develops a model of active portfolio management in which fund managers may secretly gamble in order to manipulate their reputation and attract more funds. We show that such trading strategies may expose investors to severe losses and are more likely to occur when fund managers are impatient, their trading skills are scalable and generate a high profit per unit of risk. We study long-term contracts that deter this behavior. We show that contracts that simultaneously increase and defer the manager's expected fee after abnormally high returns eliminate risk-shifting incentives and implement the first-best.
Sources of Systematic Risk, (with D. Papanikolaou). [Latest version January 2009]. Winner of Crowell Memorial Prize (second place), PanAgora Asset Management, 2007.
Abstract: Using the restrictions implied by the heteroskedasticity of stock returns, we identify four factors in the U.S. industry returns. The first correlates highly with the market portfolio; the second is a portfolio of stocks that produce investment goods minus stocks that produce consumption goods; the third differentiates between cyclical and noncyclical stocks. The fourth, a portfolio of industries that produce input goods minus the rest of the market, is a robust predictor of excess returns on the market portfolio and bond returns. The extracted factors are shown to contain significant information about future macroeconomic and financial variables.
