Journal Article Announcements Get access The Review of Asset Pricing Studies, Volume 5, Issue 2, December 2015, Page 155, https://doi.org/10.1093/rapstu/rav009 Published: 03 November 2015

As a result of poor asset allocation decisions by 401(k) participants, 72% of all plans now offer target date funds, and participants heavily invest in them. Here, we study the characteristics and performance of TDFs, providing a unique view by employing data on TDFs holdings. We show that additional expenses charged by TDFs are largely offset by the low-cost share classes they hold, not normally open to their investors. Additionally, TDFs are very active in their allocation decisions and increasingly bet on nonstandard asset classes. However, TDFs do not earn alpha from timing or their selection of individual assets.

Using structural credit risk models to estimate default dependence requires estimates of correlations of changes in distance-to-default. We present a structural model that yields simple relations between asset value, distance-to-default, and CDS spreads, allowing the correlations to be estimated from CDS spreads. We generalize the model to include a randomly varying default boundary; in this version the distance-to-default dynamics also depend on the movement of the default boundary. The CDS spread correlations we estimate exceed equity correlations, consistent with a randomly varying default boundary. We also present evidence that variations in funding liquidity affect the correlations, consistent with recent models.

Journal Article Subscription Page Get access The Review of Asset Pricing Studies, Volume 5, Issue 2, December 2015, Page i3, https://doi.org/10.1093/rapstu/rau016 Published: 03 November 2015

We construct a simple measure of the aggregate illiquidity of hedge fund portfolios, based on the cross-sectional average first-order autocorrelation coefficient of hedge fund returns, and show that it has strong and robust in- and out-of-sample forecasting power for 72 portfolios of international equities, U.S. corporate bonds, and currencies over the 1994 to 2013 period. The forecasting ability of hedge fund illiquidity for asset returns is in most cases greater than, and provides independent information relative to, well-known predictive variables. We rationalize these findings using a simple equilibrium model, in which hedge funds provide liquidity in asset markets.

Reduced-form models of default calibrated to expected default losses and comovements between default losses and an equity-based pricing kernel generate CDS spreads that tend to fall below historical values. In frictionless markets, resolving this credit spread puzzle requires credit-market investors, especially those in high-quality debt, to be more risk adverse than equity-market investors. In the absence of market segmentation, however, the puzzle points to a liquidity component that, depending on themodel specification, can account for more than half of historical CDS spreads. These findings caution against fitting reduced-formmodels to CDS spreads without accounting for market segmentation or frictions. (JEL G12, G13, G22, G24) It has been a long-standing puzzle that structural credit riskmodels calibrated to historical default and recovery rates produce investment-grade (IG) cor-porate bond yield spreads that are below historical values. While structural models offer much needed economic content to credit risk modeling, this credit spread puzzle cautions against their unconditional use. Reduced-form credit risk models, on the other hand, offer less economic content but

Stock returns are characterized by extreme observations, jumps that would not occur under the smooth variation typical of a Gaussian process. Jumps are prevalent in most countries, but their cross-country comovements have not been extensively documented. This is important because international diversification is less effective if jumps are frequent, unpredictable, and strongly correlated. We investigate using returns on broad equity indexes from eighty-two countries and modern statistical measures of jumps. We find that jumps are weakly correlated internationally, except within Europe. Although the variation in ordinary returns seems to reflect systematic global factors, jumps are more idiosyncratic.

We study how product-market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals’ entry intensifies. Incumbents reduce investment by 7.2% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: it concentrates in markets in which competitive actions are strategic substitutes, where deterring entry is costly and investment makes incumbents look soft. Our results provide novel evidence on how and why firms’ interactions influence corporate investment.

Journal Article The Review of Corporate Finance Studies Volume 4 • Number 1 • March 2015 - Front Cover Get access The Review of Corporate Finance Studies, Volume 4, Issue 1, March 2015, Page i1, https://doi.org/10.1093/rcfs/cfu014 Published: 13 February 2015