Research

Campbell and Shiller (1988) decompose unexpected stock returns into two components: news about discount rates (DR news) and news about cash flows (CF news). We develop a new measure of directional option-to-stock trading volume imbalance based on widely available aggregate volume totals and document its connection to CF and DR news. We show that our trading imbalance measures are significantly related to the news and consistently predict future abnormal performance. These novel trading imbalance measures contain incremental information relative to the aggregate option-to-stock measures. The mechanism driving the predictive power of our measures is consistent with investors' underreaction to CF news.

Bank attention plays an important role in the pricing of corporate debt. Prior studies show that bank loans serve as certification and monitoring mechanisms that signal firm quality to bond markets. To separate continuous monitoring effects from certification effects, we use a measure of bank distraction that results from exogenous shocks to unrelated parts of the bank loan portfolio. Firms with distracted bank lenders have higher credits spreads, especially when distraction is caused by negative attention-grabbing events. The effect is stronger in lower-rated bond issues and when default risk and information asymmetry are high. Bank distraction remains important even for bond issues with a high degree of covenant protections. Greater monitoring losses arise from the distraction of industry specialist banks. Overall, our findings suggest that a temporary decrease in bank monitoring due to unrelated attention-shifting shocks creates negative externalities in the public debt market.

We examine the effects of institutional shareholder distraction in the REIT industry and its implications for the capital markets. First, we establish that lack of attention for institutional shareholders is associated with higher levels of informational asymmetry. Second, we link the stock price stability of REITs with distracted shareholders. According to our results, REITs with distracted shareholders have a higher probability of stock price crashes. Finally, we examine the outcomes of shareholders' distraction for the credit markets and document that lack of monitoring leads to higher credit spreads and lower credit ratings in the REIT market.

We examine the role of institutional ownership horizon, as measured by the average portfolio turnover of the firm's institutional investors, in determining audit fees and audit quality. Our contribution is three-fold. First, we find that longer horizons are associated with lower audit fees, lower abnormal accruals, and less pronounced real earnings management. In addition, we find similar results for firms with high public pension fund ownership. These results are consistent with the idea of additional monitoring provided by long-horizon institutions and public pensions funds. Second, we show that the quality of the auditor and long-term institutional ownership act as substitutes in terms of their effect on financial reporting quality. Finally, we show that our results persist even after allowing for the possibility that long-horizon institutions intentionally select firms with lower audit fees and better audit quality, thereby providing evidence for the causal effect of long-horizon ownership.

Using option-implied volatilities and betas of mutual fund holdings, implied volatility of a market index, and portfolio weights of the holdings, I construct a measure that reflects the idiosyncratic component of mutual fund implied volatility. Consistent with the intuition that mutual fund managers must take on idiosyncratic risk to outperform their benchmarks, my measure also captures the skill of the managers. Sorting mutual funds each month into five portfolios based on their 30-day implied idiosyncratic volatility, I show that the high-low portfolio generates an annualized four-factor alpha of 5.65% based on gross returns over the subsequent month. As a forward-looking measure, implied idiosyncratic volatility reflects the dimension of fund manager skill not previously captured by other popular measures and predicts fund performance as far as 15 months into the future.

We investigate information contained in the term structure of interest rate futures contracts in the US, Eurozone, UK, and Switzerland. We find that current forward-spot differentials often predict return premiums and, especially, future spot rates. This predictability follows time-series patterns common to all four markets, except around crises. Macroeconomic indicators are important determinants of predictability within and between markets. One common factor captures a significant portion of variation in predictability. No single market has a dominant share of macroeconomic indicators linked with the common predictability factor. Inflation and exchange rates arise as the most important determinants of the common factor.

We show that there is an inverse relationship between ownership by institutional investors with increased incentives to monitor and the cost of both public and private debt in the REIT industry. Our study focuses on four types of ``incentivized'' investors: long-horizon institutional investors, public pension funds, institutions with significant portfolio allocations to particular REITs (motivated institutional owners), and institutional investors that specialize in REITs. In addition, we confirm our findings using a composite index (ISCORE) that incorporates only that part of incentivized ownership that is free from the effects of total institutional ownership. Finally, we provide evidence that some of the empirical relationships that we observe can be attributed to monitoring effects and cannot be entirely explained by intentional selection of REITs with low agency risk into institutional portfolios.

We study the joint trading behavior of corporate insiders and option traders. We establish that contemporaneous insider and option market sentiment are positively related, particularly in smaller, value firms that have recently experienced negative price pressure. When insiders buy (sell) and call (put) options are more expensive, we find persistent abnormal returns for up to six months following portfolio formation. These results are especially pronounced in firms with high levels of information asymmetry. Overall, these results suggest that the validation of insider trades by options markets contains significant information about the future direction of prices.

Samuelson hypothesis is a much-tested proposition that futures volatility increases as expiration date approaches. We study the variation in the strength of the Samuelson hypothesis over time in ten most actively traded U.S. commodity futures. Capturing the dynamics of the futures volatility terms structure with three factors, we show that in most markets the slope factor is strongly negative in certain periods and only weakly or not at all negative in other periods, reflecting varying strength of the Samuelson hypothesis. We find that high inventory levels correspond to a flatter volatility term structure in corn, wheat, crude oil, heating oil, gold, silver, and copper futures. This finding is consistent with the linkage between carry arbitrage and the Samuelson hypothesis because arbitrage is feasible only when inventories are sufficiently high. We also find that a flatter volatility term structure indicative of higher arbitrage activity moves futures term premiums toward zero in all but wheat futures.

Recent developments in biofuel technologies have resulted in heightened linkages between the petroleum and agricultural sectors. As such, a large price and/or volatility shift experienced in one sector is now more likely to spill-over into the other. In trying to capture the interrelations present in the two markets, we take seriously the importance of properly modeling smooth structural shifts. We incorporate trigonometric functions into a multivariate GARCH model of crude and corn futures prices in order to obtain the empirical volatility response functions and the time-varying correlation coefficient. Although both short-term and long-term futures exhibit shifts in the mean and volatility, volatility shifts do not manifest themselves in the same manner for different maturities. This indicates that the term structure of futures volatility changes over time.