Shades of Green: An Examination Into Second Party ESG Ratings In The Municipal Green Bond Market
by Harrison Zane Cole
Abstract
Since the end of the pandemic the market capitalization of green bonds and investor interest in sustainable investments has grown massively. The tidal wave of ESG funds has accompanied many claims of greenwashing and extreme variation in investment quality. While many investors focus on doing their own due diligence, second party ratings are an important source of information for capturing overall risk and characteristics of a security. This paper aims to take a deeper look at how HIP Investor’s (a popular ESG rating firm) ratings correlate to real-world yield and bond characteristics. Yield refers to the annualized return that investors receive from a bond, and lower yields at issuance reduce borrowing costs for the issuer. It is generally established in popular and academic literature that green bond designation does not directly lead to a benefit for issuers in terms of their cost of capital expressed through interest rates. This paper examines the yield at issuance effects for degrees of “actual greenness” and other inputs that may lead to a security to fit well in an ESG focused or impact fund. Within a sample of green bonds, the estimated yield to worst spread premium for a best-in-class (environmentally) ESG issuer is -23.9 basis points compared to a worst-in-class issuer holding all else equal. When considering non-environmental factors such as human health, the effect is larger at -71.4 basis points. For social wealth considerations, the directionality is reversed at 17.9 basis points. More research is needed to better understand and apply these results. This decrease in interest rates can result in millions of dollars of savings for larger issuances.
Professor Lawrence Kreicher, Faculty Advisor
Professor Michelle Connolly, Faculty Advisor
JEL Codes: G1, G12, G14
Informing the Investor: A Comparative Analysis of the Importance of Pre-Initial Public Offering (IPO) Information on Stock Performance
by Paul Snyder
Abstract
This paper answers which available information about the company, macroeconomic and market environment, regulatory constraints, and offering before an IPO is most impactful on year-long buy-and-hold abnormal returns and how that changes across time while analyzing the IPO markets of 1999 and 2019. Data was gathered from predominantly company prospectuses and proprietary datasets to select a total of 419 IPOs across two samples and regress abnormal geometric returns against the aforementioned information using multivariate OLS regressions. There are a number of interesting findings. First, certain information or factors that act as signals of stock performance before an IPO that correlate with stock performance change across time. Second, there is evidence that companies abiding by more regulation pre-IPO tend to perform better on the stock market after the fact, particularly with the Sarbanes-Oxley and JOBS Acts. While the direction of causality is unknown, there is now a clear and quantified relationship between IPO regulation requirements and stock performance. Third, there is evidence that the IPO market has become more strong-form efficient when comparing 1999 to 2019.
Professor Edward Tower, Faculty Advisor
Professor Grace Kim, Faculty Advisor
JEL Codes: G1, G12, G14
The Elusive “Stock-Picker’s Market”: Dispersion and Mutual Fund Performance
By Jacob Epstein
This paper explores the relationship between active mutual fund performance and market dispersion from January 1990 to December 2018. I find a significant positive relationship between dispersion and 4-factor alpha overall, providing some evidence of managerial skill. There are large differences in this relationship by decade and fund selectivity. The results suggest active mutual funds were able to take advantage of stock-picking opportunities during the 1990s and 2000s, particularly the most active subset of funds. However, I find a significant negative relationship between dispersion and alpha for funds in the 2010s, indicating this relationship has changed over time. I discuss several possible explanations for this reversal, which could present interesting avenues for further research.
Advisors: Professor Emma Rasiel | JEL Codes: G1, G12, G23
Is Smart Money Smart? The Costs of Hedge Funds Trading Market Anomalies
By Matthew J. Farrell
Do hedge funds earn statistically significant premia on common factor trading strategies after trading costs are accounted for? Furthermore, what is the gap between what a hedge fund would earn and the paper portfolios that they hold? I answer this question by using the latest cutting-edge methodology to estimate trading costs for major financial market anomalies. This methodology uses the familiar asset-pricing Fama-MacBeth procedure to compare the on-paper compensation to factor exposures with those earned by hedge funds. I find that the typical hedge fund does not earn profits to value or momentum, and and low returns to size.
Advisor: Professor Brian Weller | JEL Codes: G12; G14; G23;
Evaluating Asset Bubbles within Cryptocurrencies using the LPPL Model
By Rafal Rokosz
The advent of blockchain technology has created a new asset class named cryptocurrencies that have experienced tremendous price appreciation leading to speculation that the asset class is experiencing an asset bubble. This paper examines the novelty and functionality of cryptocurrencies and potential factors that may lead to conclude the existence of an asset bubble. To empirically evaluate whether the asset class is experiencing an asset bubble the LPPL model is used. The LPPL model was able to successfully identify two of the four crashes within the data set signifying that cryptocurrencies are within an asset bubble.
Advisors: Ed Tiryakian and Grace Kim | JEL Codes: G12, Z00, C60
Effect of Sentiment on Bitcoin Price Formation
By Brian Perry-Carrera
With the recent growth in the investment of cryptocurrencies, such as bitcoin, it has become increasingly relevant to understand what drives price formation. Given that investment in bitcoin is greatly determined by speculation, this paper seeks to find the econometric relationship between public sentiment and the price of bitcoin. After scraping over 500,000 tweets related to bitcoin, sentiment analysis was performed for each tweet and then aggregated for each day between December 1st, 2017 and December 31st, 2017. This study found that both gold futures and market volatility are negatively related to the price of bitcoin, while sentiment demonstrates a positive relationship.
Advisor: Grace Kim | JEL Codes: G12, G41, Z00
Vanguard’s Index Funds vs. Vanguard’s Managed Funds: a Nine Style Box and Fama-French Multi-Variable Regression Approach
By Susheel Nalla
Many investors struggle to determine whether they want to invest in managed funds or indexed funds when they build portfolio. Vanguard, founded by John Bogle, a strong advocate for indexed investing has seen his company grow to over $3.9 trillion in funds. In the last three years $1 trillion of new money has come into their passive funds as investors are moving towards saving on cheaper expense ratios. However, many people like Vanguard’s former CIO Gus Sauter believe that managed funds can deliver additional value to their investors by keeping expense ratios low and hiring the world’s best managers. This study looks at Vanguard indexed and managed funds in three different market capitalizations organized nine style boxes to see whether Vanguard’s strategy of low management expense ratios provides additional value to their own benchmarks. This study uses two comparison methods to analyze market returns of these funds from 2006-2016. First, indexed and managed Vanguard funds will be compared using a Morningstar nine-style box to directly see differences in return rates and estimate riskiness of these assets through standard deviations. Second, the Fama-French three-factor model will be used to create a regression explaining where the fund returns may be coming from. This method will determine the SMB and HML of the funds telling us the size of the equities in the fund along with their value premium over book value. Also, a market coefficient will be determined to see how close these funds are relative to a market benchmark. Overall, it is determined that Vanguard indexed funds in small-cap and mid-caps are slightly better investments based on returns and exposure to risk along with their equity composition. Based on the same criteria, large-cap funds perform slightly better than their indexed counterparts.
Advisor: Edward Tower | JEL Codes: C55, G10, G11, G12
The Impact of Fossil Fuel Prices on Alternative Energy Stocks
By Roman Milioti
The purpose of this paper is to determine if fossil fuel price fluctuations can influence the price alternative energy stock valuations. Employing a Lag Augmented VAR analysis, the research analyzes how natural gas and WTI oil prices impact the price of an alternative energy index. The analysis reveals that neither the price of natural gas nor the price of WTI have a statistically significant positive impact of the price of the alternative energy index. The results are attributed to natural gas and alternative energy acting as both substitutes and compliments given renewable
energy intermittency.
Advisor: Gale Boyd, Kent Kimbrough | JEL Codes: G12, Q42
Where Did The Liquidity Go? The Cost of Financial Regulation to Foreign Exchange Markets
By James Stevenson
In financial markets, the terms “bull” and “bear” markets are used to describe the cyclicality of asset prices. Similar to asset price cycles, there are cycles in regulatory scrutiny. Beginning in the 1980’s, regulatory scrutiny diminished, cumulating in the repeal of the Glass-Steagall Act in 1999, allowing commercial banks and securities firms to be housed under the same roof for the first time since the 1930’s. In the aftermath of the global financial crisis in 2008 and 2009, the tides have reversed on financial regulation. With the Dodd-Frank reforms in the United States, and similar regulation being signed into law around the world, it is unknown how new regulation will affect financial markets. Legislators wrote the new rules in hopes that they would create safer financial institutions, but at what cost?
Advisor: Connel Fullenkamp | JEL Codes: G1, G12, G18 | Tagged: Dodd-Frank, Financial Regulation, Foreign Exchange, Market Liquidity, Volcker Rule
Multiples Valuation and Abnormal Returns
By Joon Sang Yoon
I investigate whether three commonly used valuation multiples—the Price-to-Earnings Ratio, the EV-to-EBITDA multiple, and the EV-to-Sales multiple—can be used to identify mispriced securities. I find that multiples are successful in identifying mispricing in both the equal and value weighted portfolios relative to the One-Factor CAPM. I further find, after controlling for size and value effects, that the bulk of the abnormal returns are concentrated in smaller firms. Moreover, the Sales multiple seems to outperform the other two multiples in the equal weighted design. In the value weighted design, however, the P/E ratio outperforms the others.
Advisor: Per Olsson, Michelle Connolly | JEL Codes: G12, G14, M4 | Tagged: Equity Valuation, Long-run Abnormal Returns, Market Efficiency, Multiples Valuation
