PUBLIC PROVISION: THE CONSUMER DILEMMA

In this paper the author considers the origins of consumer activity in the public ‘social’ sector in the nineteenth century and makes suggestions about consumer activity in such areas as health and welfare, education, housing and the law in the twentieth century.     

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.     

Optimal Hedging under Intertemporally Dependent Preferences

This paper examines optimal hedging behavior in a market where preferences for current consumption are partly determined by the consumer's past consumption history. The model considers an individual exposed to price risk, who allocates wealth between consumption and futures contracts over a (continuous-time) finite planning horizon. The speculative component of the hedge ratio is shown to be smaller and the consumption path smoother than in models where preferences are separable over time. Some comparative-static properties of the hedge ratio are also examined.     

Partial Identification in Monotone Binary Models: Discrete Regressors and Interval Data

We investigate identification in semi-parametric binary regression models, y = 1( x β +υ+ε > 0) when υ is either discrete or measured within intervals. The error term ε is assumed to be uncorrelated with a set of instruments z , ε is independent of υ conditionally on x and z , and the support of − ( x β +ε) is finite. We provide a sharp characterization of the set of observationally equivalent parameters β . When there are as many instruments z as variables x , the bounds of the identified intervals of the different scalar components β _k of parameter β can be expressed as simple moments of the data. Also, in the case of interval data, we show that additional information on the distribution of υ within intervals shrinks the identified set. Specifically, the closer the conditional distribution of υ given z is to uniformity, the smaller is the identified set. Point identified is achieved if and only if υ is uniform within intervals.     

Underreaction to Industry‐Wide Earnings and the Post‐Forecast Revision Drift

We test whether the post‐forecast revision drift is mainly attributable to investors’ underreaction to industry‐wide earnings news conveyed by analysts’ forecast revisions. We find a large drift associated with industry‐wide earnings news but no drift associated with firm‐specific earnings news. Consistent with the functional fixation hypothesis, we provide evidence that the post‐forecast revision drift is driven by investors’ underreaction to the higher persistence of industry‐wide earnings. Although prior research has focused on differential persistence of earnings components stemming from managerial reporting discretion, we provide evidence suggesting that investors do not fully understand the differential earnings persistence attributable to industry fundamentals.     

How Wise Are Crowds? Insights from Retail Orders and Stock Returns

We analyze the role of retail investors in stock pricing using a database uniquely suited for this purpose. The data allow us to address selection bias concerns and to separately examine aggressive (market) and passive (limit) orders. Both aggressive and passive net buying positively predict firms’ monthly stock returns with no evidence of return reversal. Only aggressive orders correctly predict firm news, including earnings surprises, suggesting they convey novel cash flow information. Only passive net buying follows negative returns, consistent with traders providing liquidity and benefiting from the reversal of transitory price movements. These actions contribute to market efficiency.