What a Hectic Couple of Weeks!

On top of finishing the two courses I was teaching this term, the past two weeks have been the busiest ones I've had research-wise this year, with deadlines to submit papers to two of the three major conferences.

The first one was for the European Finance Association meeting in Copenhagen in August 2012. The second meeting, whose deadline is today, is the American Finance Association meeting in San Diego in January 2013.

In the end I managed to submit three papers.

Here they are: 

The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market

  (with Reena Aggarwal and Jason Sturgess, both from Georgetown University)

The Big Short versus The Right Short: Short Selling Activity and Housing Prices Predictability (with Carles Vergara-Alert from IESE)

Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets

Thanks to all of my co-authors for the hard work. Let's get those babies in!

Now is back to revising them all and submit them to journals.

This is Funny

IESE's firewall issues a warning message whenever you try to access websites with keywords on their black list.

Today I was trying to put side-by-side figures on a paper that I'm writing. The problem is that the name of the language I (and most people in Finance) use is Latex.

Well, I googled "Latex side-by-side figures" and boom!

"The page you are trying to see does not adjust to our security requirements and therefore it can´t be accessed directly.

In case you are sure that there is no harmful potential you may go to the page by clicking on the " Permitir" button."

Blocked!

100 Years of the American Economic Review: The Top 20 Articles

Via Brad DeLong's blog, here are the top 20 articles in the AER's first 100 years.

I've read about 6-7 of them, but the one I often use on my research is the Grossman and Stiglitz's one:

Grossman, Sanford J., and Joseph E. Stiglitz. 1980. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70(3): 393–408.

The Economist - Christmas Issue - Lucky to be in Business School

One of my favorite past-times during the Holidays season is to read the Christmas issue of The Economist. There are lots of "not-so-serious" articles on a wide range of topics that makes for an excellent reading.

In the next three posts I'll talk a bit about three of them that drew my attention.

The first ones is about life in academia and the unmatched expectations of doing a PhD (specially in humanities).

It must be really difficult to finish your PhD in Literature and have no place that would have paid you no more than 40k USD / year anyway. Not mention the fact that currently it takes about 7-8 years to get a PhD in those fields. A newly minted Finance PhD in the US gets around 170-220k / year. European salaries are much lower than that (apart from LBS and INSEAD) but still much better than what a humanities PhD would get.

I've been very lucky to be in a field where PhDs are highly paid (thank you Wall Street and the City for raising our outside option value) and that it is something that I love. At least in my case, the expectations I formed over the five years seemed close to what I ended up getting.

What a month!

I apologize to my few readers for the lack of action in this blog. I've spent only 5 days in the past month at home and it has been difficult to find time to post. I hope to publish a few interesting things I've saved over the next week or so.

Anyway, I have spent the past 10 days in the US working with my co-authors in Georgetown. It is amazing how working face-to-face really speed things up. As usual, progress was slower than expected, but nevertheless we did good work on all the papers and should be able to submit at least one before the end of the year. DC is really a great city. Very international, full of good restaurants and with a very nice vibe. I highly recommend a visit to anyone.

It's alive!

Those things don't happen often (at least not as often as I hoped!), but here is the link to my latest paper. It is joint work with Reena Aggarwal and Jason Sturgess (from Georgetown University)

To those of you interested in knowing a bit more about my research, this is it. Any comments are highly welcome!

Does Proxy Voting Affect the Supply and/or Demand for Securities Lending? 

We use a comprehensive proprietary data set consisting of shares available to lend (supply), shares borrowed (demand), and loan fee to study the securities lending market in the United States. We provide a better understanding of the securities lending market; examine the role of institutional investors in the voting process by analyzing the supply of lendable shares around the time of a proxy vote; and to address some of the issues related to empty voting we examine the changes in borrowing demand around the time of a proxy vote. On average, 19.57 percent of a firm’s market capitalization is available for lending, 3.3 percent is actually borrowed, and the annualized loan fee is 42 basis points. During our sample period, 2005-2009, there are 105,143 proxy agenda items. At the time of a proxy vote, there is a significant reduction in the supply of shares available to lend because institutions restrict or recall their loaned shares prior to a vote. The reduction in the supply of lendable shares is most pronounced in cases associated with significant events such as mergers, and with agenda items for which ISS recommends voting AGAINST the proposal. Our findings are consistent with institutional investors responsibly recalling shares, hence reducing supply ahead of material proposals. Most of the increase in loan fee around the time of a vote is associated with the reduction in supply which is related to the desire of institutions to vote their shares. We find statistically significant evidence of increase in demand however this increase in demand is economically small relative to the reduction in supply. In contrast, we find that the large increase in loan fee around the time of the ex-dividend date is driven by an increase in borrowing demand for cash flow reasons, with no change in the supply of lendable shares.

Another year begins!

European schools usually start their academic year about a month after US schools do. Tomorrow it 's my turn and I begin teaching the Capital Markets course to 1st MBA students. It is always exciting to meet a new class and get to know students.

For those of you visiting the blog for the first time, welcome! I hope you like what you read and keep coming back!

 

Tips on Lectures

One of my colleagues sent me this very interesting video with tips/comments on how to improve the quality of lectures. This link below contains the full list of videos at Harvard's Derek Bok Center for Teaching and Learning

http://isites.harvard.edu/icb/icb.do?keyword=k1985&topicid=icb.topic650252&panel=icb.topic650252%3Arwatch%248%3Fentry%3D18850%26watchfull%3Dt&state=popup&view=view.do#a_icb_topic650252

Hat tip to JCVD.

Qualities of a Sucessful PhD student

Sometimes I have MBA students interested in pursuing a PhD or just curious about what it takes to get one.

This article is spot on in describing what are essential qualities of sucessfull PhD student in any field.  I particularly agree with this:

"There's a ruinous misconception that a Ph.D. must be smart.
This can't be true.

A smart person would know better than to get a Ph.D."

I hope that my blogging helps to make me a better and more productive writer...

Equity Premium Puzzle

Today I received a very interesting email from one of my MBA students. Here is what he wrote:

"Professor Saffi,

I noted an article of interest on one of the financial blogs I read, titled "Revisiting the Equity Premium" (http://blogs.reuters.com/felix-salmon/2010/05/20/revisiting-the-equity-premium/). The blogger advances three main points in the article;
1) most managers are not sure why they use an equity premium of 5%-8%

2) That two noted researchers indicate the premium is really 0%-2%
http://alephblog.com/2009/07/15/the-equity-premium-is-no-longer-a-puzzle/
http://falkenblog.blogspot.com/2009/07/is-equity-risk-premium-actually-zero.html

3) That we assume that equities MUST yield more than treasuries based on efficient market hypotheses, however, rather than must, we should be using the word HOPE and recognize the incentives in the system and that the past will not reflect the future.

Please let me know what you think."

Here is my reply:

At the end of the day, the magnitude of the risk premium depends on the risk aversion of investors and the future cash-flows of firms that capture productivity gains (i.e. their average returns). The idea behind using past data is exactly to try to have an estimate of its current value, which can also fluctuate over time. Is it possible that investors have been greatly exaggerating this future estimated performance? Yes, it could. In my humble opinion, this is also related to the Malthusian theory that mankind won’t be able to keep raising food productivity. People have been saying that for 210 years and we’re still going strong

To be honest, one reason why managers don't why they use 5-8% is because most have never seriously studied its determinants. This guy here probably doesn't as well:

Schrager then continues her argument with this:

“Equities are inherently riskier than Treasuries. Equity prices must ultimately reflect and compensate investors for that risk or no one would hold them in their portfolio.”

I’m not sure where that “must” comes from: maybe it’s some kind of corollary of the efficient markets hypothesis. Investors certainly hope that returns on equities will be commensurate with the risk that they’re taking. But there’s no rule saying that any given asset class will “ultimately reflect and compensate” those hopes. After all, if there were such a rule, then really there wouldn’t be any risk at all!

This has nothing to do with the efficient market hypothesis. We could still have rules for things that are inherently uncertain (just think about quantum physics or the Heisenberg uncertainty principle). There is nothing that says that the equity premium MUST be around 5% in the future, it is just our current understanding of it that allows us to forecast this. Sure, some factors are likely to reduce the premia, like taxes, transaction costs, and etc, but saying that the market premium is zero seems a bit of a stretch to me.

Exciting Day

Today I finally got the teach the first case study I've written:
  
Volkswagen AG: Valuation in 2009

This is a case on multiples valuation based on Volkswagen around on May 2009, right at the peak of the crisis.

I think the session went well and students enjoyed themselves. Hope I'm right!

So Long Holiday Feeling!

Wow, it doesn't even feel like I just came back from a very pleasant holiday break in Brazil! This is a gone be a busy couple of weeks!

This Friday there is a deadline (the 2010 FMA meeting in NYC in October), I'm finishing a revision to re-submit a paper to the RFS (fingers crossed for me!) and "own" things to three different sets of co-authors. in very orthogonal projects. Luckily - or not - one of them works right next door to me. so I can always negotiate a small extension...

I guess the alternatives to have to work a lot are much worse. Finding interesting and useful ideas were the most difficult aspect of the PhD (and always a challenge). Hope my (poor) time management skills kick in and everything gets done fast.

Anyway, dinnertime and then back to work!

Paul Krugman on Crises

For my (few) non-academic readers, every January Econ and Finance academics get together for the AEA/AFA meetings, the most important conference we have. (Off-topic: for anecdotes on how cheap economists are during these meetings, check this WSJ article)

This year they took place in Atlanta, where I heard was freezing relative to the nice weather in San Francisco last year. On top of presenting papers, interviewing job market candidates and going out for dinners with old friends, people also get to attend panels and luncheons with speeches by top people.

I just read Paul Krugman's summary of his Nobel luncheon speech on financial crises. It's a very good piece looking the effects of the current financial crisis relative to previous currency crisis.

Every time I think about currency crises, I think about Mark Twain's quote:  "History does not repeat itself, but it often rhymes."

Things I Love about Work

There are many things I love about being an academic. One of the best is the chance to meet interesting people and take part in interesting discussions.

Today IESE hosted a workshop on Football Economics. The event was organized by Barcelona FC and IESE. and opened by Joan Laporta (Barca's president), who even stayed for the whole presentation of the first paper. Johan Cruyff was also in the audience (he's the current manager of Cataluña's national team) and many senior directors of Barcelona.

Papers talked about the market for broadcasting rights, differences between European and US sporting leagues and the labor market for football players.

Overall, a good day.