Risk and performance estimation in hedge funds revisited: Evidence from errors in variables

This paper revisits the performance of hedge funds in the presence of errors in variables. To reduce the bias induced by measurement error, we introduce an estimator based on cross sample moments of orders three and four. This Higher Moment Estimation (HME) technique has significant consequences on the measure of factor loadings and the estimation of abnormal performance. Large changes in alphas can be attributed to measurement errors at the level of explanatory variables, while we emphasize some shifts in the economic contents of the equity risk premiums by switching from OLS to HME.     

Reflections on Private Water Supply: Agency and Equity Issues

In the second of the two articles, the authors reflect on and extend their earlier work by describing recent trends in water privatization, drawing important lessons from cases where privatization efforts have failed, offering suggestions about the way privatized firms can be successfully monitored, and addressing the popular argument that “fairness” demands that water be distributed by public firms at a zero (or heavily subsidized) price.     

Unveiling the temporally contingent role of codification in alliance success

While prior research highlights the importance of codifying alliance experience to achieve alliance success, it is unclear whether codification is equally useful in the different phases of an alliance. Based on a sample of 192 technology firms that report on over 3,400 strategic alliances, we find that in the partner selection and termination phases, reliance on codified knowledge is useful. However, in the partner management phase, reliance on codified knowledge is less beneficial and can be even negatively related to performance. Our findings have implications for the tension between flexibility and efficiency and the relationship between structure and performance. Copyright © 2013 John Wiley & Sons, Ltd.     

How do quotes and prices evolve around isolated informed trades?

This article investigates the order imbalance and price behavior of trades and quotes around isolated informed trades intraday. Different patterns of order flows around informed trades are documented because of the originating stock exchange, the type of informed trader, the size of the order, and the type of the firm whose shares are traded. The informed trader acts contrarian to prior trades. Informed purchases follow price declines, and sales are after price increases. The informed trade is recognized by the market maker. The purchase is executed at a significantly higher price, while the sale is executed at a significantly lower price. Trades contain more information if the insiders are at small firms. Larger orders and orders by top executives also contain more information. The order imbalance changes around an informed trade. Orders are seller-initiated prior to the purchase and become buyer-initiated after the trade. On the other hand, the order imbalance changes from buyer- to seller-initiated right around insider sales. Reversals in order imbalance are more pronounced for informed trades in small firms, for larger trades, and by top executives. There are important policy implications of the results. The recognition of informed trades by market makers justifies more scrutiny by the Securities and Exchange Commission in order to ensure fair trading.     

Deposit insurance and bank regulation in a monetary economy: a general equilibrium exposition

Summary. It is commonly argued that poorly designed banking system safety nets are largely to blame for the frequency and severity of modern banking crises. For example, underpriced deposit insurance and/or low reserve requirements are often viewed as factors that encourage risk-taking by banks. In this paper, we study the effects of three policy variables: deposit insurance premia, reserve requirements and the way in which the costs of bank bailouts are financed. We show that when deposit insurance premia are low, the monetization of bank bailout costs may not be more inflationary than financing these costs out of general revenue. This is because, while monetizing the costs increases the inflation tax rate, higher levels of general taxation reduce savings, deposits, bank reserves, and the inflation tax base. Increasing the inflation tax rate obviously raises inflation, but so does an erosion of the inflation tax base. We also find that low deposit insurance premia or low reserve requirements may not be associated with a high rate of bank failure.Received: 2 January 2002, Revised: 1 March 2003JEL Classification Numbers: D5, E5, G1.B. D. Smith: Sadly, our co-author, colleague and dear friend, Bruce D. Smith, died on July 9, 2002.