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Three Essays in Empirical Asset Pricing

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Title: Three Essays in Empirical Asset Pricing
Author(s): Jacobs, Thomas A.
Director of Research: Pennacchi, George G.
Doctoral Committee Chair(s): Pennacchi, George G.
Doctoral Committee Member(s): Kahn, Charles M.; Pearson, Neil D.; Johnson, Timothy C.
Department / Program: Finance
Discipline: Finance
Degree Granting Institution: University of Illinois at Urbana-Champaign
Degree: Ph.D.
Genre: Dissertation
Subject(s): Too Big To Fail Crisis Moral Hazard Spillover Systemic Risk Systemically Important Firm Bank Run Subprime Wholesale Funding Securitization Government Support Government Agents Federal Reserve Federal Reserve Intervention Discount Window Open Market Operations OMO Term Auction Facility TAF Primary Dealer Credit Facility PDCF Term Securities Lending Facility TSLF Guarantee Deterministic Guarantee Stochastic Guarantee Deposit Insurance FDIC Treasury Lending Line Government Sponsored Enterprises GSE Fannie Mae Freddie Mac Conservatorship Government Agents Continental Illinois National Bank and Trust Continental Illinois Bear Stearns Failure Bear Stearns Rescue Purchase of Bear Stearns Lehman Bankruptcy American International Group AIG Derivative Exposure Purchase of Merrill Lynch Merrill Lynch IKB Industrie Deutschebank IKB Northern Rock Bank Run Purchase of Countrywide Countrywide Bank of America Citigroup JP Morgan Chase Big Three Banks Big Four Banks Failure of IndyMac Bank IndyMac Wachovia Wells Fargo Failure of Washington Mutual Washington Mutual WAMU Monoline Insurers Monoline Insurer Downgrade MBIA AMBAC Event Study Merton Model Model of Debt Return Model of Equity Return Cumulative Abnormal Return Credit Default Swap CDS Measuring CDS Returns CDX Index Monte Carlo Simulation Troubled Asset Relief Program TARP Morgan Stanley Goldman Sachs Arbitrage Limits to Arbitrage U.S. Treasury Markets Inflation Markets Inflation Derivatives Inflation Indexed Swaps Treasury Inflation Protected Securities TIPS Break Even Inflation BEI Inflation Indexed Swap Basis IIS Basis Liquidity On-the-run Off-the-run BLS CPI Consumer Price Index Bureau of Labor Statistics Blue Chip Economic Indicators Survey of Professional Forecasters SPF Bid Ask Spread Event Study Methodology Debt Based Event Study CDS Based Event Study Market Model Adjusted Spread Monte Carlo Experiments Moody's BAA Seasoned Bond Index LIBOR Swap Rate Size and Power Tests Investment Grade Firms Non-Investment Grade Firms Performance Measure
Abstract: The financial crisis of 2007-2008 led to extraordinary government intervention in firms and markets. The scope and depth of government action rivaled that of the Great Depression. Many traded markets experienced dramatic declines in liquidity leading to the existence of conditions normally assumed to be promptly removed via the actions of profit seeking arbitrageurs. These extreme events motivate the three essays in this work. The first essay seeks and fails to find evidence of investor behavior consistent with the broad 'Too Big To Fail' policies enacted during the crisis by government agents. Only in limited circumstances, where government guarantees such as deposit insurance or U.S. Treasury lending lines already existed, did investors impart a premium to the debt security prices of firms under stress. The second essay introduces the Inflation Indexed Swap Basis (IIS Basis) in examining the large differences between cash and derivative markets based upon future U.S. inflation as measured by the Consumer Price Index (CPI). It reports the consistent positive value of this measure as well as the very large positive values it reached in the fourth quarter of 2008 after Lehman Brothers went bankrupt. It concludes that the IIS Basis continues to exist due to limitations in market liquidity and hedging alternatives. The third essay explores the methodology of performing debt based event studies utilizing credit default swaps (CDS). It provides practical implementation advice to researchers to address limited source data and/or small target firm sample size.
Issue Date: 2010-08-20
Rights Information: Copyright 2010 Thomas A. Jacobs
Date Available in IDEALS: 2010-08-20
Date Deposited: 2010-08

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