Essays in financial economics
- This thesis consists of three essays, which examine several problems in active asset management and financial intermediation. The first essay demonstrates that skill and scale are significantly mismatched among actively managed equity mutual funds. The second essay models dealer balance sheet costs that arise from debt-overhang, and shows how these balance sheet costs affect valuation, pricing, and liquidity in dealer-intermediated market. The third essay shows that the funding costs to derivatives dealers' shareholders for carrying and hedging dealing inventory have an economically important impact on derivatives prices. An implication is that some supposed ``no-arbitrage" pricing relationships, such as put-call parity, frequently break down. Specifically, the first essay demonstrates that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors behave as though they rely on the Capital Asset Pricing Model. They confuse the effects of fund exposures to other common factors with managerial skill. Actively managed mutual funds with positive factor-related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark-adjusted performance of all actively managed equity mutual funds is caused mainly by the poor performance of this small subset of oversized funds. I find that less skilled active fund managers are inclined to tilt their portfolios toward common factors in order to gather more flows and collect more fees. The second essay, co-authored with Leif Andersen and Darrell Duffie, demonstrates that the funding value adjustments (FVAs) of major dealers are debt-overhang costs to their shareholders. In order to maximize shareholder value, dealer quotations therefore adjust for FVAs. Our case examples include interest-rate swap FVAs and violations of covered interest parity. Contrary to current valuation practice, FVAs are not themselves components of the market values of the positions being financed. Current dealer practice does, however, align incentives between trading desks and shareholders. We also establish a pecking order for preferred asset financing strategies and provide a new interpretation of the standard debit value adjustment (DVA). The third essay shows how debt-overhang funding costs to derivatives dealers' shareholders for carrying and hedging inventory affect mid-market derivatives prices. An implication is that some supposed ``no-arbitrage" pricing relationships, such as options put-call parity, frequently break down. I also explore the implications for measuring the term structure of S& P 500 dividend risk premia.
|Type of resource
|electronic resource; remote; computer; online resource
|1 online resource.
|Singleton, Kenneth J
|Degree committee member
|Singleton, Kenneth J
|Stanford University, Graduate School of Business.
|Statement of responsibility
|Submitted to the Graduate School of Business.
|Thesis Ph.D. Stanford University 2018.
- © 2018 by Yang Song
- This work is licensed under a Creative Commons Attribution Non Commercial 3.0 Unported license (CC BY-NC).
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