Three Essays in Empirical Asset Pricing

Jacobs, Thomas A.

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Description

Title

Three Essays in Empirical Asset Pricing

Author(s)

Jacobs, Thomas A.

Issue Date

2010-08-20T18:01:21Z

Director of Research (if dissertation) or Advisor (if thesis)

Pennacchi, George G.

Doctoral Committee Chair(s)

Pennacchi, George G.

Committee Member(s)

• Kahn, Charles M.
• Pearson, Neil D.
• Johnson, Timothy C.

Department of Study

Finance

Discipline

Finance

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(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
• Federal Deposit Insurance Corporation (FDIC)
• Treasury Lending Line
• Government Sponsored Enterprises (GSE)
• Fannie Mae
• Freddie Mac
• Conservatorship
• 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
• 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
• Municipal Bond Insurance Association (MBIA)
• American Municipal Bond Assurance Corporation (AMBAC)
• Event Study
• Merton Model
• Model of Debt Return
• Model of Equity Return
• Cumulative Abnormal Return
• Credit Default Swaps (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
• Inflation Indexed Swap Basis (IIS Basis)
• Liquidity
• On-the-run
• Off-the-run
• Consumer Price Index (CPI)
• Bureau of Labor Statistics (BLS)
• 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.

Graduation Semester

2010-08

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http://hdl.handle.net/2142/16903

Copyright and License Information

Copyright 2010 Thomas A. Jacobs

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