Subprime Mortgage Defaults and Credit Default Swaps

We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.     

Stock Options as Lotteries

We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery‐like options.     

CANADIAN ENERGY PROSPECTS: NATURAL GAS,TAR SANDS,AND OIL POLICY

This paper provides a brief overview of recent oil and gas developments in Canada. It describes marketing problems that the Canadian natural gas industry is facing and reports on some encouraging new developments in the recovery of bitumen from the Alberta tar sands deposits. Finally, the paper analyzes the current pricing, royalty, and taxation regime existing in Canada and where this overall fiscal system seems to be heading.     

Stock Price Volatility,Ordinary Dividends,and Other Cash Flows to Shareholders

This paper shows that the results of variance-bound tests depend on how cash distributions to shareholders are measured. As in prior studies, we find apparent evidence of excess volatility when a narrow definition of cash flow (dividends only) is applied. However, we are unable to reject the hypothesis of market efficiency when the cash flow measure also includes share repurchases and takeover distributions in addition to ordinary cash dividends.     

Gender Effects in Grievance Arbitration

This study investigates arbitrators' decisions in 557 suspension cases and reveals that, other things equal, male arbitrators were 74 per cent more likely to sustain the grievances of female grievants than male grievants. There was no evidence, however, that female arbitrators treat male and female grievants differently. A review of studies on gender effects in arbitration suggests a weak gender effect where male arbitrators are more lenient with female grievants than with male grievants.     

DO PSYCHOLOGICAL SHOCKS AFFECT FINANCIAL RISK TAKING BEHAVIOR? A STUDY OF U.S. VETERANS

Traditional economic theories assume that individuals are endowed with certain risk preferences that are unaltered by experiences. However, recent evidence indicates that macroeconomic shocks do have an effect on an individual's willingness to take financial risks. In the context of investment decisions, we examine empirically whether an individual's risk preferences are affected by other types of traumatic life experiences. Using a unique proprietary data set, we investigate whether personal traumatic experiences—such as the combat experiences of veterans—have long‐term effects on financial risk‐taking behavior. We find that having experienced combat decreases the probability of investing in risky assets. Key policy implications are noted. (JEL G11, D14)     

Methodological Issues in Cross-Sectional and Panel Estimates of the Human Resource-Firm Performance Link

Because companies differ in factors such as management ability that may lead to both high performance work systems and enhanced firm performance, conventional estimates of the effects of human resource (HR) management practices on firm performance may be biased upward. Alternatively, if HR management practices are measured with error, estimates of their effects on firm performance may be biased downward. We find that although longitudinal estimates that avoid the first source of bias are substantially smaller than cross-sectional estimates, the former are strongly influenced by errors in measuring HR management practices. Based on independent estimates of the measurement error, we calculate a range of estimates that correct for both biases. We estimate that a one standard deviation increase in our measure of high performance work systems raises the market value of the corporation by approximately $15,000 per employee.