with Frank Fabozzi, Pia Mølgaard, Mads Stenbo Nielsen
Abstract: Analyzing a novel dataset of leveraged loan trades executed by managers of collateralized loan obligations (CLOs), we document substantial market inefficiencies. There are four principal results from empirical analysis. First, CLOs with a higher active turnover trade leveraged loans at better prices, the effect being more pronounced for sales than for purchases. Second, more active CLOs sell leveraged loans earlier. Third, leveraged loan sales by active managers predict rating downgrades in the sold loans. Finally, higher active turnover predicts lower CLO default rates and higher equity returns. Tests with a placebo variable, capturing passive turnover, lead to insignificant results.
Abstract: I develop a simple model in which hedge fund managers with access to less profitable investment strategies choose a higher exposure to funding risk in an attempt to generate competitive returns. Empirically, I find that hedge funds with a higher loading on a simple funding risk measure generate lower returns than hedge funds with a lower loading on that measure. In line with the model predictions, I find that (i) this underperformance is driven by a high loading on adverse funding shocks, (ii) a higher loading on funding risk predicts lower fund flows, and (iii) the results are significantly weaker for funds with less favorable redemption terms or funds with multiple prime brokers.
with Suresh Sundaresan
Revise and Resubmit: Journal of Finance
Abstract: The 30-year US swap spreads have been negative since September 2008. We offer an explanation for this persistent anomaly. Through a model, we show that the demand for swaps arising from duration hedging needs of underfunded pension plans, coupled with balance sheet constraints of swap dealers, can drive swap spreads to become negative. We construct an empirical measure of the aggregate funding status of Defined Benefits (DB) pension plans from the Federal Reserve's financial accounts of the United States and show that this measure is a significant explanatory variable of 30-year swap spreads, but not for swaps with shorter maturities.
with David Lando
Revise and Resubmit: Review of Financial Studies
Abstract: We develop a model in which a derivatives-dealing bank faces capital charges from uncollateralized swap positions with sovereigns, and buys Credit Default Swap (CDS) contracts to obtain capital relief. CDS premiums depend on margin requirements for buyers and sellers of CDS contracts, the value of capital relief for the dealer banks, and the return on a risky asset. We explain the regulatory requirements that lead derivatives dealers to buy CDS and translate volumes of derivatives contracts outstanding between sovereigns and banks into CDS hedging demand. We argue that CDS premiums for safe sovereigns are primarily driven by regulatory requirements.
Article based on my master thesis:
with Young Shin Kim, Svetlozar Rachev, and Frank Fabozzi
Published in Applied Financial Economics, 2013, 23(15) p. 1231-1238
Abstract: In this article, we introduce two new six-parameter processes based on time-changing tempered stable distributions and develop an option pricing model based on these processes. This model provides a good fit to observed option prices. To demonstrate the advantages of the new processes, we conduct two empirical studies to compare their performance to other processes that have been used in the literature.
Department of Finance
BI Norwegian Business School
NO - 0442 Oslo