Christopher C. Geczy

Stocks are special too: an analysis of the equity lending market

With a year of equity loans by a major lender, we measure the effect of actual short-selling costs and constraints on trading strategies that involve short-selling. We find the loans of initial public offering (IPOs), DotCom, large-cap, growth and low-momentum stocks to be cheap relative to the strategies’ documented profits and that investors who can short only stocks that are cheap and easy to borrow can enjoy at least some of the profits of unconstrained investors. Most IPOs are loaned on their first settlement days and throughout their first months, and the underperformance around lockup expiration is significant even for the IPOs that are cheap and easy to borrow. The effect of short-selling frictions appears strongest in merger arbitrage. Acquirers’ stock is expensive to borrow, especially when the acquirer is small, though the major influence on trading profits is not through expense but availability.

The Use of Multiple Risk Management Strategies: Evidence from the Natural Gas Industry

Starting in 1978 and continuing throughout the 1980s, natural gas pipelines faced a series of regulatory changes, including price deregulation, which changed their exposures to price and quantity risk. We exploit this unique environment and examine cross-sectional and time-series patterns in the use of multiple risk management strategies by pipeline companies. Natural gas pipelines use a combination of such strategies, including gas storage, cash holdings, line-of-business and geographic diversification, and commodity derivatives to hedge their increasing risks. Gas storage shows a complementary relation to holding cash and using derivatives to mitigate these risks. However, differences in the financial characteristics of derivatives hedgers and storage hedgers suggest that firms use derivatives to manage price risk and store gas to manage volume risk. Derivatives hedgers are similar to firms that diversify. In addition, firms that engage in hedging activities have smaller and less variable sensitivities to price changes than firms that do not, especially post-deregulation.

Two Centuries of Multi-Asset Momentum (Equities, Bonds, Currencies, Commodities, Sectors and Stocks)

Extending price return momentum tests to the longest available histories of global financial asset returns, including country-specific sectors and stocks, fixed income, currencies, and commodities, as well as U.S. stocks, we create a 215-year history of multi-asset momentum, and we confirm the significance of the momentum premium inside and across asset classes. Consistent with stock-level results, we document a large variation of momentum portfolio betas, conditional on the direction and duration of the return of the asset class in which the momentum portfolio is built. A significant recent rise in pair-wise momentum portfolio correlations suggests features of the data important for empiricists, theoreticians and practitioners alike.

The New Diversification: Open Your Eyes to Alternatives

During the 2008 financial crisis, many portfolios considered widely diversified failed to fulfill their expected function of protecting against large drawdowns. Historically, correlations among various types of stocks and bonds have usually increased during financial shocks, but the diversification shortcomings of standard portfolio allocations still surprised investors. Six years later, managers have a more sophisticated understanding of portfolio drawdown risk and how to mitigate it through diversification. In this article, the author advocates a focus on the risk exposures within a portfolio and inclusion of risk diversifiers—often sourced through so-called “alternatives”—to design portfolios more resistant to volatility spikes and major shocks.

The Limits to Dividend Arbitrage: Implications for Cross Border Investment

The economic significance of the tax on cross-border dividends depends on the limits to dividend arbitrage. In the case of Canadian payments to the U.S. we observe these limits exactly because we see the actual pricing of the dividend-arbitrage transactions. These transactions recover only some withholding, so that Canadian and non-tax U.S. accounts perceive different expected returns from Canadian stocks, where the difference increases with dividend yield. The resulting difference in expected utility of wealth is small but the difference in efficient portfolio weights is potentially large and increasing in yield, and the actual difference between Canadian and U.S. holdings of Canadian stocks is large and increasing in yield. Governments may thus take advantage of robust financial markets to boost domestic governance of domestic firms at a low utility cost, though this may be more preferable for zero-dividend firms, whose governance moves abroad.

Financial market assumptions and pension plan models: a comment on PIMS model asset markets assumptions

The financial market assumptions of the Pension Benefit Guaranty Corporation (PBGC)s Pension Insurance Modeling System model are critical inputs to simulations for most apparent uses of the system. They currently appear to be based on a reduced form, ‘classical’ approach to assessing and forecasting the distribution of returns on various classes of input assets, allowing for a fairly sophisticated and useful approach to understanding simulated distributions of potential pension insurance outcomes as well as the net financial status of the PBGC. This technical note discusses some of the capital market side assumptions utilized in the model. It also comments on important related assumptions including the assumed asset allocations of insured plans, making suggestion for possible modification of input assumptions of the model to reflect time variation in financial market return behavior as well as time variation in observed plan allocations.