Showing papers by "Tarun Ramadorai published in 2015"

Change You Can Believe In? Hedge Fund Data Revisions

Abstract: We analyze the reliability of voluntary disclosures of financial information, focusing on widely-employed publicly available hedge fund databases. Tracking changes to statements of historical performance recorded at different points in time between 2007 and 2011, we find that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Moreover, funds that revise their performance histories significantly and predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for current and potential investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators.

The Effects of Experience on Investor Behavior: Evidence from India's IPO Lotteries

Abstract: We exploit the randomized allocation of stocks in 57 Indian IPO lotteries to 1.7 million investors between 2007 and 2012 to provide new estimates of the causal effect of investment experiences on future investment behavior. We find that investors experiencing exogenous gains in IPO stocks (the treatment) are more likely to apply for future IPOs, increase trading in their portfolios, exhibit a stronger disposition effect, and tilt their portfolios towards the sector of the treatment IPO. Treatment effects are stronger for smaller accounts, and inherit the sign of the IPO first-day return.

Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market

Abstract: This paper studies the refinancing behavior of Danish households during a recent period of declining interest rates. Danish data are particularly suitable for this purpose because the Danish mortgage system imposes few barriers to refinancing, and demographic and economic characteristics of mortgage borrowers can be accurately measured. The paper finds that household characteristics affect both inattention (a low responsiveness of mortgage refinancing to financial incentives) and inertia (a low unconditional probability of refinancing). Many characteristics move inattention and inertia in the same direction, implying a high cross-sectional correlation of 0.76 between these two household attributes. Middle-aged and older households show greater inertia and inattention than young households. Education and income reduce both inertia and inattention, but the effect of education is greater among more educated households, while the effect of income is greater among poorer households. Housing and financial wealth have opposite effects on inertia, consistent with the view that households manage their mortgages more actively when housing is relatively more important to them.

Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds

Abstract: Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-policy-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping." As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply and demand, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege policies results in different levels of home-state-biased ownership of local municipal bonds. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to demand and supply variation, heightened sensitivity of muni yields to local political uncertainty, and greater difficulties in raising capital for public projects.

The Impact of Hedge Funds on Asset Markets

Abstract: This paper provides evidence of the impact of hedge funds on asset markets. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, based on the cross-sectional average first order autocorrelation coefficient of hedge fund returns, and show that it has strong and robust in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We rationalize these findings using a simple equilibrium model in which hedge funds provide liquidity in asset markets.

The Impact of Regulation on Mortgage Risk: Evidence from India

Abstract: We employ loan-level data on over a million loans disbursed in India between 1995 and 2010 to understand how fast-changing regulation impacted mortgage lending and risk. Our paper uses changes in regulatory treatment discontinuities associated with loan size and leverage to detect regulation-induced loan delinquencies. We also find that an acceleration in the classification of assets as non-performing resulted in substantially lower delinquency probabilities and losses given delinquency

The Impact of Hedge Funds on Asset Markets

Abstract: While there has been enormous interest in hedge funds from academics, prospective and current investors, and policymakers, rigorous empirical evidence of their impact on asset markets has been di¢ cult to …nd. We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, and show that it has strong in- and out-of-sample forecasting power for 72 portfolios of international equities, corporate bonds, and currencies over the 1994 to 2011 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables for each of these asset classes. We construct a simple equilibrium model to rationalize our …ndings, and empirically verify auxiliary predictions of the model.

Change You Can Believe In? Hedge Fund Data Revisions: Erratum

Abstract: We analyze the reliability of voluntary disclosures of financial information, focusing on widely-employed publicly-available hedge fund databases. Tracking changes to statements of historical performance recorded between 2007 and 2011, we find that historical returns are routinely revised. These revisions are not merely random or corrections of earlier mistakes; they are partly forecastable by fund characteristics. Funds that revise their performance histories significantly and predictably underperform those that have never revised, suggesting that unreliable disclosures constitute a valuable source of information for investors. These results speak to current debates about mandatory disclosures by financial institutions to market regulators. IN JANUARY 2011, THE SECURITIES and Exchange Commission (SEC) proposed a rule requiring U.S.-based hedge funds to provide regular reports on their performance, trading positions, and counterparties to a new financial stability panel established under the Dodd-Frank Act. A modified version of this proposal was voted for in October 2011, and was phased in starting late 2012. The rule requires detailed quarterly reports (using new Form PF) for 200 or so large hedge funds, those managing over U.S.$1.5 billion, which collectively account for over 80% of total hedge fund assets under management (AUM); for smaller hedge funds, the reports are less detailed, and are required only annually. The rule states clearly that the reports will only be available to the regulator, with no provisions regarding reporting to funds’ investors. Nevertheless, hedge funds argued against the adoption of the rule, citing concerns that the government regulator responsible for collecting the reports could not guarantee that their contents would not eventually be made public.1 ∗Patton is at the Department of Economics, Duke University, and Oxford-Man Institute of Quantitative Finance. Ramadorai is at Saı̈d Business School, Oxford-Man Institute, and CEPR. Streatfield is at Saı̈d Business School and Oxford-Man Institute. We thank Michael Brandt, Oliver Burkart, John Campbell, Evan Dudley, Cam Harvey, Jakub Jurek, Byoung Kang, Robert Kosowski, Bing Liang, Terry Lyons, Colin Mayer, Narayan Naik, Ludovic Phalippou, Istvan Nagy, Chris Schwarz, Neil Shephard, and seminar participants at the Oxford-Man Institute of Quantitative Finance, the Paris Hedge Fund Conference, Saı̈d Business School, Sydney University, UC-San Diego, UNC-Chapel Hill, and Vanderbilt University for comments and suggestions. Sushant Vale provided excellent and dedicated research assistance. 1 See SEC press releases 2011-23 and 2011-226, available at http://www.sec.gov/news/ press.shtml. For response from the hedge fund industry, see “Hedge Funds Gird to Fight Proposals on Disclosure,” Wall Street Journal, February 3, 2011. DOI: 10.1111/jofi.12240

Does the Ownership Structure of Government Debt Matter? Evidence from Munis

Abstract: The U.S. municipal bond market provides a natural laboratory, free of impediments to capital flows across states or currency considerations, to assess how the composition of ownership of government debt affects government bond prices and real economic outcomes. We exploit quasi-exogenous variation in local (in-state) bond ownership arising from variation in state tax privileges for state-resident bondholders. A high in-state holding of local government debt is associated with higher susceptibility of government bond prices to demand and supply shocks, heightened sensitivity of bond prices to local political uncertainty, and difficulty raising capital for public projects during crises.