We investigate conditions sufficient for identification of average treatment effects using instrumental variables. First we show that the existence of valid instruments is not sufficient to identify any meaningful average treatment effect. We then establish that the combination of an instrument and a condition on the relation between the instrument and the participation status is sufficient for identification of a local average treatment effect for those who can be induced to change their participation status by changing the value of the instrument. Finally we derive the probability limit of the standard IV estimator under these conditions. It is seen to be a weighted average of local average treatment effects.

Evolution and Rationality Some Recent Game-Theoretic Results. Identification and Estimation of Local Average Treatment Effects

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks using US data over the period 1963 to 2003. Firms with higher leverage, lower profitability, lower market capitalization, lower past stock returns, more volatile past stock returns, lower cash holdings, higher market-book ratios, and lower prices per share are more likely to file for bankruptcy, be delisted, or receive a D rating. When predicting failure at longer horizons, the most persistent firm characteristics, market capitalization, the market-book ratio, and equity volatility become relatively more significant. Our model captures much of the time variation in the aggregate failure rate. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with a low risk of failure. These patterns hold in all size quintiles but are particularly strong in smaller stocks. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w12362.pdf?abstractid=917567&mirid=1

In Search of Distress Risk

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small-cap risk factors than stocks with low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage-related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress. THE CONCEPT OF FINANCIAL DISTRESS has been invoked in the asset pricing literature to explain otherwise anomalous patterns in the cross-section of stock returns (Chan and Chen (1991) and Fama and French (1996)). The idea is that certain companies have an elevated probability that they will fail to meet their financial obligations; the stocks of these financially distressed companies tend to move together, so their risk cannot be diversified away; and investors charge a premium for bearing such risk. 1 The premium for distress risk may not be captured by the standard Capital Asset Pricing Model (CAPM) if corporate failures

/pdf/in-search-of-distress-risk-1nbpnxwcsk.pdf

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Regularization Of Inverse Problems

Handbook of the Economics of Finance

Hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008Q3-Q4, hedge funds sold 29% of their aggregate portfolio. Consistent with a fire sale explanation, hedge funds sold high-volatility and liquid stocks. We find that investor redemptions and pressure from lenders were the primary drivers of selloffs. To broaden the perspective, we compare to mutual funds, for which redemptions and stock sales were not nearly as severe. In a pooled analysis of flow-performance sensitivity, we show that hedge fund investors withdraw capital three times as intensely as do mutual fund investors in response to poor returns. When studying the sources of this difference in behavior, we identify important roles for share liquidity restrictions and institutional ownership in hedge funds.

Hedge Fund Stock Trading in the Financial Crisis of 2007–2009

An ongoing debate in finance centers on the impact of derivatives on the efficiency of prices of the underlying securities. The paper contributes to this literature by studying whether exchange traded funds (ETFs) — an asset of increasing importance — affect the non-fundamental volatility of the stocks in their baskets. Using identification strategies based on the mechanical variation in ETF ownership, including regression discontinuity, we show that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. Variance-ratio tests, as well as price reversals, suggest that the mean-reverting component of stock prices is inflated by ETF ownership. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 19% in intraday stock volatility. Our evidence suggests that ETFs attract a new layer of demand shocks to the stock market due to their high liquidity.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3081063_code1542588.pdf?abstractid=1967599&mirid=1

Do ETFs Increase Volatility

The paper discloses a new asset pricing anomaly. The conventional models fail to correctly price firms with defined benefit pension plans. Mispricing arises as a function of the funding level of the pension plan. Firms with a pension surplus have a premium in returns and, more significantly, firms with a shortfall have a discount. We provide evidence in favor of an explanation that is based on investors’ underreaction to pension plan information. Working under this hypothesis, and exploiting the features of the regulatory environment, we build trading strategies that earn abnormal returns of about 12% annually, adjusted for the exposures to the market, size, book-to-market, and momentum factors. The findings of the paper have relevance for corporate and public policies, and, possibly, for the debate on momentum in assets prices.

/pdf/pension-plan-funding-and-stock-market-efficiency-464ffbm7t5.pdf

Pension Plan Funding and Stock Market Efficiency

Hedge funds significantly reduced their equity holdings during the recent financial crisis. In 2008Q3-Q4, hedge funds sold about 29% of their aggregate portfolio. Redemptions and margin calls were the primary drivers of selloffs. Consistent with forced deleveraging, the selloffs took place in volatile and liquid stocks. In comparison, redemptions and stock sales for mutual funds were not as severe. We show that hedge fund investors withdraw capital three times as intensely as mutual fund investors do in response to poor returns. We relate this stronger sensitivity to losses to share liquidity restrictions and institutional ownership in hedge funds.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1927318_code1542588.pdf?abstractid=1550240&mirid=1

Hedge Fund Stock Trading in the Financial Crisis of 2007-2009

/pdf/do-etfs-increase-volatility-do-etfs-increase-volatility-qgypsautiy.pdf

Francesco Franzoni

Papers

Hedge Fund Stock Trading in the Financial Crisis of 2007–2009

Do ETFs Increase Volatility

Pension Plan Funding and Stock Market Efficiency

Hedge Fund Stock Trading in the Financial Crisis of 2007-2009

Do ETFs Increase Volatility?: Do ETFs Increase Volatility?