I examine pricing of credit securities after a credit event for a sample of firms on which CDS are traded. Secondary market prices of bonds along with those discovered at Credit Event Auctions are estimates of terminal or ultimate recovery on these securities. I use hand-collected data on ultimate recovery to jointly test for bias in prices at the auction and in secondary markets. Credit Event Auctions are biased in a manner consistent with theory and generate prices that, on average, underestimate ultimate recovery resulting in higher payouts to buyers of credit protection. Moreover, bond prices in secondary markets are more informed about ultimate recovery before the auction than after it suggesting that existence of open CDS positions enriches the information environment for these bonds.
Corporate Insiders and Investment Horizon. - with Alok Nemani and Shyam Sunder.
We investigate insider reaction to momentum and find that insiders as managers repurchase more if their firm is
in momentum but trade against it in their personal capacity. Our results show that insiders act efficiently as
private investors but not as managers of the firm, as low momentum stocks with higher insider buying generate
superior returns versus high momentum stocks with higher repurchases. On the other hand, for value stocks net
insider demand is higher while repurchases are unaffected. We hypothesize that this difference could be due to
insiders having a longer investing horizon in their personal capacity than as managers of the firm. Alternatively,
insiders view momentum as mispricing and use repurchases to facilitate personal trades against it.
Unraveling Momentum's Moments.
I examine the momentum anomaly through the prism of higher order risk neutral moments of high and low momentum stocks. I use option prices from Feb 2002 to Nov 2013 to extract ex ante estimates of Variance, Skew and Kurtosis of stocks in high and low momentum portfolios. High momentum stocks have lower variance, less negative skews and lower kurtosis. This is in contrast to studies that use ex post estimates of skewness to explain momentum returns. These results highlight that momentum returns are not explained by ex ante estimates of higher order moments and remain difficult to resolve empirically in a rational expectations framework.
Work in Progress
Option Market Informativeness and Mergers and Acquisitions. - with Alok Nemani and Danjue Shang.
Do Option Markets Inform Executive Contracting. - with Alok Nemani.
CDS Bond Basis - The Mirage of Arbitrage.