Benjamin Remy Chabot

Momentum Trading, Return Chasing and Predictable Crashes

We combine self-collected historical data from 1867 to 1907 with CRSP data from 1926 to 2012, to examine the risk and return over the past 140 years of one of the most popular mechanical trading strategies — momentum. We find that momentum has earned abnormally high risk-adjusted returns — a three factor alpha of 1 percent per month between 1927 and 2012 and 0.5 percent per month between 1867 and 1907 — both statistically significantly different from zero. However, the momentum strategy also exposed investors to large losses (crashes) during both periods. Momentum crashes were predictable — more likely when momentum recently performed well (both eras), interest rates were relatively low (1867–1907), or momentum had recently outperformed the stock market (CRSP era) — times when borrowing or attracting return chasing “blind capital” would have been easier. Based on a stylized model and simulated outcomes from a richer model, we argue that a money manager has an incentive to remain invested in momentum even when the crash risk is known to be high when (1) he competes for funds from return-chasing investors and (2) he is compensated via fees that are convex in the amount of money managed and the return on that money.

Bank Panics, Government Guarantees, and the Long-Run Size of the Financial Sector: Evidence from Free-Banking America

Governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility. Confidence in these guarantees presumably alters the size of the financial sector, but observing the long‐run consequences of failed guarantees is difficult. We look to Americas free‐banking era and compare the consequences of a broken guarantee during the Indiana‐centered Panic of 1854 to the Panic of 1857 in which guarantees were honored. Our estimates of a model of endogenous market structure indicate substantial negative long‐run consequences to financial depth when panics cast doubt upon a governments ability to honor its guarantees.

Did Adhering to the Gold Standard Reduce the Cost of Capital

A commonly cited benefit of the pre‐World War One gold standard is that it reduced the cost of international borrowing by signaling a country’s commitment to financial probity. Using a newly constructed data set that consists of more than 55,000 monthly sovereign bond returns, we test if gold‐standard adherence was negatively correlated with the cost of capital. Conditional on UK risk factors, we find no evidence that the bonds issued by countries off gold earned systematically higher excess returns than the bonds issued by countries on gold. Our results are robust to allowing betas to differ across bonds issued by countries off‐ and on‐gold; to including proxies that capture the effect of fiscal, monetary, and trade shocks on the commitment to gold; and to controlling for the effect of membership in the British Empire.

The cost of banking panics in an age before “Too Big to Fail”

How costly were the banking panics of the National Banking Era (1861-1913)? I combine two hand-collected data sets - the weekly statements of the New York Clearing House banks and the monthly holding period return of every stock listed on the NYSE - to estimate the cost of banking panics in an era before “too big to fail.” The bank statements allow me to construct a hypothetical insurance contract which would have allowed investors to insure against sudden deposit withdrawals and the cross-section of stock returns allow us to draw inferences about the marginal utility during panic states. Panics were costly. The cross-section of gilded-age stock returns imply investors would have willing paid a 14% annual premium above actuarial fair value to insure

Back to the Future: Backtesting Systemic Risk Measures during Historical Bank Runs and the Great Depression

100 against unexpected deposit withdrawals The implied consumption of stock investors suggests that the consumption loss associated with National Banking Era bank runs was far more costly than the consumption loss from stock market crashes.

Institutions, the cost of capital, and long-run economic growth: Evidence from the 19th century capital market

We evaluate the performance of two popular systemic risk measures, CoVaR and SRISK, during eight financial panics in the era before FDIC insurance. Bank stock price and balance sheet data were not readily available for this time period. We rectify this shortcoming by constructing a novel dataset for the New York banking system before 1933. Our evaluation exercise focuses on two challenges: the ranking of systemically important financial institutions (SIFIs) and financial crisis prediction. We find that CoVaR and SRISK meet the SIFI ranking challenge, i.e. help identifying systemic institutions in periods of distress beyond what is explained by standard risk measures up to six months prior to panics. In contrast, aggregate CoVaR and SRISK are only somewhat effective at predicting financial crises.

Momentum Cycles and Limits to Arbitrage Evidence from Victorian England and Post-Depression Us Stock Markets

Late 19th century investors demanded compensation to invest in countries with poor institutional protection of property rights. Using the monthly stock returns of 1,808 firms located in 43 countries but traded in London between 1866 and 1907, we estimate the country-specific cost of capital. We find a negative relationship between institutions that protect property rights and capital costs. Firms located in countries with weak institutions were charged a premium compared to similarly risky firms located in countries with strong institutions, and this penalty appeared to be costly in terms of future growth. Countries that paid a premium for borrowing in London during this period grew more slowly after 1913 and are poorer today. We thus identify the capital market as a channel through which strong institutions promote growth.