2002

PROJECTS FUNDED IN 2002

Indices of Demand and Supply in Asset Markets with an Application to Formation of a Constant Liquidity Index for Real Estate

Jeffrey Fisher, Indiana University
Dean H. Gatzlaff, Florida State University
David Geltner, Massachusetts Institute of Technology
Donald Haurin, Ohio State University

In some asset markets, the transaction price represents both value and liquidity. Introducing liquidity requires modeling the underlying search process of asset buyers and sellers. Not all assets sell at each point in time, which introduces concepts such as time-on-market and ease-of-selling the asset. We characterize how the buyer-seller match process changes over a market’s cycle, highlighting the role of transaction volume. We then show how standard price indices used to measure changes in the value of assets such as commercial and residential property are flawed and we separate the impact of changing value of the asset from changing liquidity. We will apply our theory to calculate the periodic returns of properties in the NCREIF index of commercial real estate.

What Are Assets under Management Worth to Managers?

Susan Christoffersen, McGill University
Rene Garcia, CIRANO


David K. Musto,
University of Pennsylvania

What is a dollar under management worth to the manager? It depends how long the manager expects it to stay; the longer it stays, the longer the manager collects fees and therefore the more it is worth. We will develop a model relating a fund’s outflows to its earlier inflows, with particular attention to the circumstances of the original inflows, such as the recent performance of the fund, its category or its asset class, and also to the fund’s attrition. Our results will bear on the incentives provided by fund flows, and also on the valuation of investment advisory contracts.

Taxes, Estate Planning and Financial Theory: New Insights and Perspectives

Link to PDF File:Taxes, Estate Planning and Financial Theory: New Insights and Perspectives
Robert Dammon, Carnegie-Mellon University
Chester Spatt, Carnegie Mellon University
Harold Zhang, University of North Carolina

We provide insight into conventional approaches to estate planning and suggest how to enhance these strategies. For example, we show that the advantage of resetting the investor’s capital gains tax bases to the market value at the time of death is greater for individual rather than joint ownership of assets, provided that at the first death of one of the owners the basis is reset to an average of the date of death value and the survivor’s original cost. Furthermore, we analyze asset location and distribution policies for the beneficiary’s direct funds as well as trusts that are outside his taxable estate, highlighting the effect of estate taxation and reset of the capital gains tax basis at death. Finally, we examine the value and importance of borrowing in estate planning.

A Rational Model of Active Portfolio Management

Richard Green, Carnegie-Mellon University
Jonathan Berk, University of California, Berkeley

The objective of this research proposal is to develop a rational model of active portfolio management. Such a model provides a natural benchmark against which to evaluate several features of the fund management industry. Using this model we will show that many of the effects that are widely regarded as anomalous are consistent with the rational paradigm. A puzzle that remains to be tackled is the existence of two different compensation contracts in the money management process. A second stage of this research proposal will extend the model. We hope to use the model to understand why the two types of compensation contracts co-exist.

Evaluating Fixed Income Fund Performance with Stochastic Discount Factors

Wayne Ferson, Boston College
Darren Kisgen, University of Washington
Tyler Henry, University of Washington

We evaluate the performance of fixed income mutual funds using stochastic discount factors from continuous-time term structure models. We also provide the first conditional performance evaluation for US fixed income mutual funds, conditioning on a variety of discrete ex ante characterizations of the state of the term structure and the economy. Preliminary results suggest that the additional empirical factors that arise when the term structure models are time-aggregated for discrete data contribute to an improved performance of the models. Fixed income funds return less than passive benchmarks that don’t pay expenses, but not in all economic states.

Understanding Comovement

Nicholas Barberis, University of Chicag

Andrei Shleifer, Harvard University
Jeffrey Wurgler, New York University

A number of studies have identified patterns of positive correlation of returns, or comovement, among different traded securities. The traditional view of comovement explains these patterns with a positive correlation in fundamental values. We model tow alternative views, which attribute comovement to investor trading patterns in markets with imperfect arbitrage, and then assess them empirically using data on revisions in the S&P 500 Index. Index revisions are noteworthy because they change the way a stock is traded but not its fundamentals. Using a variety of regression specifications, we finds that, when a stock is added to the index, its beta and R-squared with respect to the index increase, while it beta with respect to stocks outside the index falls. The converse happens when a stock is deleted. These results support the predictions of the trading-based models of comovement but not the fundamentals view. We argue that trading-based models may help explain other instances of comovement in the data


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