Why Do Listed Firms Pay for Market Making in Their Own Stock? by Bernt Ødegaard, Johannes Skjeltorp :: SSRN

Why Do Listed Firms Pay for Market Making in Their Own Stock? by Bernt Ødegaard, Johannes Skjeltorp :: SSRN:

" A recent innovation in equity markets is the introduction of market maker services paid for by the listed companies themselves. We investigate why firms are willing to pay a cost to improve the secondary market liquidity of their shares. We show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares. We also find significant reductions in liquidity risk and cost of capital for firms that hire a market maker."

a look-in gives a better summary:

"In several electronic limit order markets, market participants have appeared with promises to maintain an orderly market in a particular stock, for example by keeping the spread at or below some agreed upon maximum. The innovation of these Designated Market Makers (hereafter DMMs) is that they charge a fee to the firm that has issued the equity to keep an orderly market in the firm's stock.
DMMs have appeared in several countries such as the Netherlands, France, Germany and Sweden. The DMM introductions have been studied for all these markets, where the main question examined is whether liquidity improves following the initiation of DMM agreements. A consensus finding in this research is that liquidity improves...."

I did not know this. It will definitely make its way to class!

Cite: Ødegaard, Bernt Arne and Skjeltorp, Johannes Atle, Why Do Listed Firms Pay for Market Making in Their Own Stock? (October 20, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1944057

How to Lose Money Investing in Bonds - Yahoo! Finance

How to Lose Money Investing in Bonds - Yahoo! Finance:

" Maturity dates and durations are other good tools for assessing the impact rising interest rates will have on the value of your bonds. A bond's maturity is the scheduled date when an issuer stops making interest payments and returns your principal. Duration is a measure of how sensitive a bond's price is to changes in interest rates. It takes several factors into account, including time to maturity and the interest rate. Bonds with shorter maturity periods typically have a lower duration and are less at risk of declining in value than bonds with a longer maturity period."

Sound familiar class??? FYI for others. Here is a Bondpricing spreadsheet we use in class. It is a tad dated, but works for introductory classes and shows Duration.

Madoff Associate Says Fraud Went Back to 1970s - NYTimes.com

           Image via WikipediaMadoff Associate Says Fraud Went Back to 1970s - NYTimes.com:

Wow. Shocking how how long it has been going on.

"Madoff’s multibillion-dollar Ponzi scheme stretched back at least to the early 1970s, when his employees used historical information on stocks to create false trades that could be placed on customer statements, a former trader revealed as he pleaded guilty on Monday to criminal charges."

Related articles

• Ex-Madoff trader pleads guilty in plea deal in NYC (seattletimes.nwsource.com)
• Ex-Madoff trader admits to faking financial statements (usatoday.com)
• Madoff's financial fraud 'dates back to the 1970s' (independent.co.uk)
• S.E.C. Disciplines 8 Employees Over Madoff Failure - NYTimes.com (policyabcs.wordpress.com)

Risk Aversion vs. Individualism: What Drives Risk Taking in Household Finance? by Wolfgang Breuer, Michael Riesener, Astrid Salzmann :: SSRN

Image via WikipediaRisk Aversion vs. Individualism: What Drives Risk Taking in Household Finance? by Wolfgang Breuer, Michael Riesener, Astrid Salzmann :: SSRN:

"We ask why the prevalence of stockholding is so limited. We focus on individuals’ attitudes towards risk and identify relevant factors that affect the willingness to take financial risks. Our empirical evidence contradicts standard portfolio theory, as it does not indicate a significant relationship between risk aversion and financial risk taking. However, our analysis supports the behavioral view that psychological factors rooted in national culture affect portfolio choice. Individualism, which is linked to overconfidence and overoptimism, has a significantly positive effect on financial risk taking. In micro data from Germany and Singapore, as well as in cross-country data, we find evidence consistent with low levels of individualism being an important factor in explaining the limited participation puzzle."

Two studies in a week that find culture effects financial decision making. (here is the other one)

Models Behaving Badly Led to MF’s Global Collapse – People Too: Emanuel Derman

An over reliance on short-term financing is at the root of the problems according to Emmanuel Derman but he cautions it is not exactly a repeat of Long Term Capital Management.

My favorite line is that we should use models to predict what we should pay for an asset (i.e. intrinsic value) not for predicting what the market should be.  He is also very good talking about what Goldman's risk management was like when he was there (not just checking a box for regulatory reasons).

A look-in: from Yahoo's Daily Ticker

"MF Global's collapse — and the inability of investigators to find about $1.2 billion in "missing" customer funds, which is twice the amount previously thought — has only further undermined confidence among investors and market participants alike.

Emanuel Derman, a professor at Columbia University and former Goldman Sachs managing director, says MF Global was undone by an over-reliance on short-term funding, which dried up as revelations of its leveraged bets on European sovereign debt came to light."

The Neuroeconomics Revolution - Robert J. Shiller - Project Syndicate

The Neuroeconomics Revolution - Robert J. Shiller - Project Syndicate

just one short look-in:

"Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial."

Crushing the Cost of Predicting the Future - NYTimes.com

Crushing the Cost of Predicting the Future - NYTimes.com:

Gee, I wish I knew how this one would turn out:

" A company called Recorded Future looks at 100,000 Web pages an hour, scanning across 50,000 sources that include everything from Securities and Exchange Commission filings to Twitter comments. The idea is to look for statements about the future, like notice of an annual meeting or predictions about when a product might be released, look at past developments and then create a “temporal index” that suggests trends.

“The Web has come to reflect the world,” says Christopher Ahlberg, the co-founder and chief executive of Recorded Future. “We can use that to predict things.”"

Charter jet passengers hit up for cash mid-flight - CNN.com

Charter jet passengers hit up for cash mid-flight - CNN.com:

"Comtel Air passengers on a Tuesday flight from to Birmingham, England, from the Indian city of Amritsar were hit up for 130 pounds -- about $200 each -- during a layover in Vienna. They were allowed off the aircraft to take the money from teller machines, a process that took about seven hours. There were varying accounts of what the money was to pay for, ranging from fuel to fees.

Lal Dadrah, a freelance photographer who captured the scene, called it "a complete, utter sham."....

"I could not believe what I was witnessing," Dadrah told British network ITN. "It was as if we'd been held hostage against our wills, with the 24,000 pounds we all eventually had to pay being the ransom.""

Well, I guess we have more reasons to "fly by the balance sheet"...Wow!

Cultural Values, CEO Risk Aversion and Corporate Takeovers by Thorsten Lehnert, Bart Frijns, Aaron Gilbert, Alireza Tourani-Rad :: SSRN

Cultural Values, CEO Risk Aversion and Corporate Takeovers by Thorsten Lehnert, Bart Frijns, Aaron Gilbert, Alireza Tourani-Rad :: SSRN:

Another in a growing list of papers that claim to show managers' biases influence firm decisions. In this paper the authors take a tack away from manager's individual characteristics and focus on where they are from:

"... argue that managerial risk aversion at a national level is a cultural trait and affects the net synergies. CEOs of firms located in countries with higher level of risk aversion, measured by Hofstede’s (2001) uncertainty avoidance score, show less takeover activity, engage more in diversifying takeovers and require higher premiums on takeovers...."

one look-in:

" In this paper, we explore the question of how risk aversion as a cultural trait impacts acquisition decisions at a country level using a national measure of risk aversion, Hofstede’s (2001) uncertainty avoidance measure. We argue that since takeovers are a risk to the firm’s value and hence a CEO’s position, a more risk averse CEO will require higher compensation before undertaking an acquisition. Hence, a more risk-averse CEO will only engage in a takeover if the expected net synergies are large enough."

and that is exactly what they find. Interesting.

Cite: Lehnert, Thorsten, Frijns, Bart, Gilbert, Aaron B. and Tourani Rad, Alireza , Cultural Values, CEO Risk Aversion and Corporate Takeovers (October 12, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1942971

Voices: John Longo, On Behavorial Finance - Financial Adviser - WSJ

Voices: John Longo, On Behavorial Finance - Financial Adviser - WSJ:

"There are two broad types of mistakes that investors make. The first is cognitive biases....

The second type of mistake is a behavioral bias, which is more insidious. A non-financial example of this is a smoker who knows that smoking is bad for his or her health but continues to smoke anyways because of the short-term pleasure of the experience."

Which is a nice introduction to behavioral finance. But what is more interesting and why the article gets mentioned is what his firm does with this information:

"We cover the first 12% of losses, and then the product doubles the return of the S&P, up to a cap. This gives our clients peace of mind because they are essentially shielded from small market downturns, such as the two we’ve seen this year. This makes them less likely to panic and make mistakes."

Which is exactly the type of thing that should be developed to protect ourselves from ourselves.

(note to my students: tying this to Ariely's comments that we wear glasses for our eyes, but must develop similar type technologies to deal with our mental biases, would make a great test question :) )

Can the Fed Talk the Hind Legs Off the Stock Market? by Louis Raes, Sylvester Eijffinger, Ronald Mahieu :: SSRN

Can the Fed Talk the Hind Legs Off the Stock Market? by Louis Raes, Sylvester Eijffinger, Ronald Mahieu :: SSRN:
They find that central bank "talk" acts somewhat as a counterbalance to prevailing market conditions. This effect is most pronounces where we think it would be: cash constrained, cyclical firms.

From the abstract:

"...central banks influence financial markets' expectations of its future policy. In bad times, monetary policy communication inducing an upward revision of the path of future policy is good news for stocks. During an expansion the effect is weak and on average negative...."

and from the paper itself:

"We show that there is a role for central bank communication. In contrast to earlier studies we find that central bank communication has an impact on stocks. The impact is expected to be the most pronounced for financially constrained companies in cyclical industries during a recession"

Incidentally, this is also my new winner of the best title for a paper, EVER. Can the Fed Talk the Hind Legs Off the Stock Market? (June 13, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1943558

Congress: Trading stock on inside information? - CBS News

Congress: Trading stock on inside information? - CBS News:

"Schweizer: There are all sorts of forms of honest grafts that congressmen engage in that allow them to become very, very wealthy. So it's not illegal, but I think it's highly unethical, I think it's highly offensive, and wrong.

Steve Kroft: What do you mean honest graft?

Schweizer: For example insider trading on the stock market. If you are a member of Congress, those laws are deemed not to apply.

Kroft: So congressman get a pass on insider trading?

Schweizer: They do. The fact is, if you sit on a healthcare committee and you know that Medicare, for example, is-- is considering not reimbursing for a certain drug that's market moving information. And if you can trade stock on-- off of that information and do so legally, that's a great profit making opportunity. And that sort of behavior goes on."

Wow. Just wow.



a Dec 13, 2011 video update from Senator Joseph Lieberman:

Related articles

• Congress: Trading stock on inside information (politics.ie)
• Even Congress's Insider Trading Reform is a Scam (ritholtz.com)
• Senator Gillibrand's New and Improved STOCK Act (professorbainbridge.com)

Sisters of St. Francis, the Quiet Shareholder Activists - NYTimes.com

Sisters of St. Francis, the Quiet Shareholder Activists - NYTimes.com:

"Long before Occupy Wall Street, the Sisters of St. Francis were quietly staging an occupation of their own. In recent years, this Roman Catholic order of 540 or so nuns has become one of the most surprising groups of corporate activists around.

The nuns have gone toe-to-toe with Kroger, the grocery store chain, over farm worker rights; with McDonald’s, over childhood obesity; and with Wells Fargo, over lending practices. They have tried, with mixed success, to exert some moral suasion over Fortune 500 executives, a group not always known for its piety.

”We want social returns, as well as financial ones,” Sister Nora...."

I sit on the investment board for a The Franciscan Sisters of Allegany and will vouch for their sagacity when it comes to socially responsible investing.

When Markets Move in Sync - Finding the Downbeat - NYTimes.com

When Markets Move in Sync - Finding the Downbeat - NYTimes.com:

"Stocks have been moving largely in lock step with one another, and with many other assets as well. Especially when prices fall, this can be a source of great frustration. After all, when markets become more highly correlated, it not only makes diversifying a portfolio seem like a pointless exercise, it also reinforces the feeling that there’s no place to hide."

and

"As investors have grown more fearful of macroeconomic threats like the European debt crisis and weakness in the global recovery, fundamental factors that typically drive individual security prices have taken a back seat.

which leads to potential buying opportunties:

"The good news is that whenever the good gets thrown out with the bad in periods of high correlations, mispricing and distortions take place in the market that create wonderful buying opportunities,” said Robert D. Arnott, chairman of the investment management firm Research Affiliates in Newport Beach, Calif. "

Related articles

• NEUROSCIENCE: Stock Market Correlations Aren't As High As You Think - The Business Insider (businessinsider.com)
• Positively in Sync? Examining Positive Correlation Between Managed Futures and Stocks (managed-futures-blog.attaincapital.com)