Finance & Trading
Walk a Tightrope: Could "Rational" Investors Well Manage Their "Irrational" Strategies?
CAIA,LSE & Reading Alumni;
The behaviour of debtors on restructuring, default and prepayment are underexplored. We present a framework of endogenous equilibrium effects of overconfidence and disposition on collateralised debt termination or modification. This is the first insight into the conceptual framework of debt termination which interacts with restructuring and partial prepayments. We document the first and foremost evidence. Analysing over 11,000 US office mortgages from 2001 to 2017, we apply the novel measure of office investors’ behaviour driven by overconfidence and disposition effects, including their direct and indirect effects, and the collateral supply responsiveness restricted by biases. We find that significant indirect effects lead to increase the likelihood of debt denial but decrease full and partial prepayment. More responsive biased investors have lower the likelihood of denial, less frequent restructuring but higher in full prepayment. Behavioural effects are more significant than non-behavioural on debt denial. We further investigate if institutional investors could control their irrational strategies and confirm that the irrational strategy driven by disposition effect is very likely to be well managed. This implies that self perception matters to investors. Investors are alert, thus re-default rates are extremely low after restructuring.
Deciphering Private Equity Incentive Contracting and Fund Leverage Choice
University of Wisconsin Madison-School of Business, United States of America;
I explain carried interest as a mechanism to induce incentive compatible fund leverage. Fee, leverage and target return data are used to calibrate the model. Steps in the modeling process include developing a tradeoff model of fund capital structure and a theory of LP return targeting. Because of the low cost of equity capital, GPs with convex incentive fee payoff functions limit debt even in the absence of distress costs. Catch-up fee provisions enable more skillful GPs to extract higher fees while also satisfying LP return targets. Fixed carry hurdle and share percentage contracting terms are used to screen lower-skill GPs from the market.
Volume Traders of Non-homogenous Assets
University of Georgia, United States of America;
This study conducts a comprehensive investigation of potential price impacts from volume trading in residential real property. The results demonstrate that volume traders obtain price advantages. The number of trades has the greatest impact on purchases. The price discounts range from almost 6 percent per transaction for the lower volume buyers to 17 percent for the highest. Additionally, higher volume sellers earn average price premiums of approximately 2–4 percent per transaction. Unlike the extant literature that suffers from omitted variables, we show that these discounts are in addition to the possible determinants of renovation, vacancy, foreclosure, bulk purchases, cash financing, the rental property discount, and the advice of high-volume real estate agents. Since prior studies suggest that they are at a bargaining disadvantage, a notable and robust finding is that individuals who are volume traders earn price advantages like other frequent investors.