Determinants of NFL Spread Pricing: Incorporation of Google Search Data Over the Course of the Gambling Week
By Shiv S. Gidumal and Roland D. Muench
We investigate the factors that Las Vegas incorporates into opening spreads for NFL matchups. We include a novel proxy measure for gambler sentiment constructed with Google search data. We then investigate whether changes in this proxy are reflected in the closing spreads for NFL matchups and find that they are incorporated. We also reveal bettors’ preferences for highly visible teams and teams performing well recently. Lastly, we show that the factors that matter in the actual outcome of a game are home field advantage, average points scored for and against, and, most interestingly, our proxy measure for gambler sentiment.
Advisor: Michelle Connolly, Emma Rasiel | JEL Codes: G14, G17
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
Modeling Variation in U.S. Bank Holding Companies’ Net Interest Margins
By Daniel Dorchuck
This study explores variation in US bank holding companies’ (BHCs) net inter-est margins (NIMs) and the effects of interest rate risk exposure on NIMs. Interest rate risk (IRR) is intrinsic in maturity transformation and financial intermediation as banks take on short-term liabilities in the form of deposits and create assets in the form of loans with longer maturities and different repricing profiles. Accordingly, interest rate risk is necessary for bank holding companies (BHCs) to be profitable in financial intermediation, and net interest margins are chosen as a variable of inter-est because they are an isolated measure of bank’ profitability from interest earning assets. Naturally, BHCs employ maturity pairing and derivative hedging to mitigate IRR and ultimately increase and smooth earnings. Synthesizing banks’ balance sheet and income statement data, macroeconomic variables, credit conditions, and interest rate environment variables, this study hopes to expand on existing work by provid-ing insight on the determinants of NIMs as well as interest rate derivatives’ efficacy in increasing and stabilizing net interest margins. The models presented establish links between long term rate exposure, risk-averse capital positions, and increased margins. Additionally, the models suggest that banks earn smaller spreads (NIMs) in higher interest rate environments but benefit from steeper yield curves.
Advisor: Mary Beth Fisher, Kent Kimbrough | JEL Codes: E44, G20, G21 Tagged: Depository Institutions, Interest Rate Derivatives, Interest Rate Risk, Net Interest Margins, US Commercial Banking
Evaluating Stock and Bond Portfolio Allocations using CAPER and Tobin’s Q
By Jayanth Ganesan
I test whether an investor can increase the returns on their portfolio over the long-term by timing the market using measures of market value, such as the Tobin’s q ratio and the Cyclically Adjusted Price Earnings (CAPE or Shiller-CAPE). To test this proposition, I examine contrarian investor strategies proposed by Smithers and Wright (2000) and investor strategies based on different equity-fixed income combination portfolios. I seek to determine whether these strategies produce higher risk-adjusted returns than buy-and-hold equity strategies such as those proposed by Siegel (2014) for long-term portfolios. I also examine whether Siegel’s theory that stocks are better investment vehicles than bonds for investment horizons greater than 20 years. In my study, buy-and-hold portfolios composed of the S&P 500 have additional annualized returns of 1.5% than portfolios which reallocate funds in alternative securities based on CAPE and q thresholds. I conclude that for long-term investment horizons, an investor is unlikely to increase portfolio returns by reallocating funds to an alternative asset class when stocks are overvalued. However, I do not find that stocks are better investment vehicles compared to bonds as portfolio with bonds have a lower portfolio risk in my sample. I believe that the effectiveness q ratios for market timing is likely to be independent of how the q ratio is calculated. As suggested by Asness (2015), I find that portfolios that utilize both value and trend investing principles with CAPE and q may outperform portfolios that utilize only value-based market timing strategies. I conclude that CAPE and q based timing strategies are difficult to implement without detailed knowledge of future stock valuations.
Advisor: Edward Tower | JEL Codes: G11, G14 Tagged: Information on Market Efficiency, Investment Decisions, Portfolio Choice
An Economic Approach to Evaluating the Impact of AML/CFT Regulations
By Caitlin McGough
This paper addresses the unintended consequences of AML/CFT regulations, seeking to provide an economic analysis of the drivers of de–risking and the broader consequences for the goal of financial integrity. Looking at qualitative data, this paper (1) concludes the problem of de–risking warrants a reconsideration of the enforcement approach and (2) recommends reorienting the banks’ payoff matrix by reducing the cost of compliance and regulatory risk associated with providing financial services to high–risk, low–profit customers. This paper culminates with the recommendation to consider tolerating “honest mistakes” on the part of financial institutions in order to achieve the goals of integrity and inclusion in the international financial system.
Advisor: Connel Fullenkamp | JEL Codes: G18 | Tagged: De-Risking, Financial Inclusion, Money Laundering, Terrorism Financing
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
Deterring Ineffcient Gambling in Risk-Taking Agents
By Ryan Westphal
This paper proposes a model describing the incentive issues faced by principals and agents when the agent has limited liability and is capable of undertaking unidentifiable, inefficient risky behavior. We propose a contract structure by which the principal deters risk by deferring payment to the agent until she reaches an absorbing steady-state in which promised equity alone deters inefficient behavior. The paper discusses the effect of exogenous parameters on the tradeoffs facing the principal as well as the implications they have on the efficient choice of contract. We also outline extensions to the model in which the principal has access to a costly monitoring technology to identify inefficient risk taking. The theoretical results have implications for real-world employment contracts and practices in financial firms such as investment banks and private equity funds.
Advisor: Curtis Taylor | JEL Codes: D82, D86, G32, L14 | Tagged: Contract Theory, Moral Hazard., Optimal Contracts, Risk Management
Google Search Volume Index: Predicting Returns, Volatility and Trading Volume of Tech Stocks
By Rui Xu
This paper investigates the efficacy of using Google Search Volume Index (SVI), a publicly available tool Google provides via Google Trends, to predict stock movements within the tech sector. Relative changes in weekly search volume index are recorded from April 2004 to March 2015 and correlated with weekly returns, realized volatility and trading volume of 10 actively traded tech stocks. Correlations are drawn for three different time periods, each representing a different stage of the financial business cycle, to find out how Search Volume Index correlates with stock market movements in economic recessions and booms. Google SVI is found to be significantly and positively correlated with trading volume and weekly closing price across 2004 to 2015, and positively correlated with realized volatility from 2009-2015. There exists a positive correlation between weekly stock returns and SVI for half of the stocks sampled across all 3 periods. The regression model was a better fit before and during the recession, suggesting the possibility of stronger “herding” behavior during those periods than in recent years.
Advisor: Edward Tower | JEL Codes: G1, G14, G17 | Tagged: Analysis, Information, market efficiency, Stock Returns
How does being a Serial Creator affect Probability of Campaign Success on Kickstarter?
By Minn Khine
This paper seeks to address the issue of how being a serial creator impacts campaign success on Kickstarter. My hypothesis is that being a serial creator – someone who has created 2 or more projects on Kickstarter – has a positive effect on probability of campaign success but there are diminishing marginal returns to this effect. A regression analysis over a sample of over 187 thousand Kickstarter projects from its inception in 2008 until December 2014 yields the following findings, which supports my hypothesis. I found that being a serial creator does have a positive effect on campaign success but there is diminishing marginal returns to being a serial creator. Furthermore, number of updates, number of reward levels, having a video, number of backers, FB Shares, FB Friends, and Number of Projects Backed all have positive effects on campaign success. On the other hand, comments, funding goal, and duration have negative effects on campaign success. The effect of the Fed Fund Rate on campaign success is inconclusive. In terms of how project characteristics and creator characteristics affect first time creators and serial creators differently, I found that Updates, Video, FBShares, FBFriends, and Goal matter less as number of projects created increases, in other words, for serial creators who’ve gathered more project experience. On the other hand, Rewards, Backers, ProjectsBacked, Comments, and Duration matter more as number of projects created increases.
Advisor: Edward Tower, Grace Kim, Kent Kimbrough | JEL Codes: G21, G24, L26 | Tagged: Crowdfunding, Kickstarter, Serial creator
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
