The Journal of Finance

Flattening of Bond Yield Curves for Long Maturities

Published: 3/1982,  Volume: 37,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1982.tb01101.x  |  Cited by: 9

MILES LIVINGSTON, SURESH JAIN

The paper presents a theoretical proof that flattening of yield curves for par bonds is inevitable for long maturities. This proof implies that behavioral explanations of flattening are unnecessary. The proof also implies that the use of yields to maturity of couponbearing bonds to estimate the true term structure (as well as forward rates) for long maturities has potentially infinite bias, suggesting that a greater effort should be made to directly estimate the true term structure in empirical work.

Continuous‐Time Methods in Finance: A Review and an Assessment

Published: 8/2000,  Volume: 55,  Issue: 4  |  DOI: 10.1111/0022-1082.00261  |  Cited by: 130

Suresh M. Sundaresan

I survey and assess the development of continuous‐time methods in finance during the last 30 years. The subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing, term structure theory, asset pricing, and optimal consumption and portfolio choices. During the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance. This latter subperiod has seen significant progress in econometric theory, computational and estimation methods to test and implement continuous‐time models. Capital market frictions and bargaining issues are being increasingly incorporated in continuous‐time theory.

An Explanation of Negative Swap Spreads: Demand for Duration from Underfunded Pension Plans

Published: 1/17/2019,  Volume: 74,  Issue: 2  |  DOI: 10.1111/jofi.12750  |  Cited by: 108

SVEN KLINGLER, SURESH SUNDARESAN

The 30‐year U.S. swap spreads have been negative since September 2008. We offer a novel explanation for this persistent anomaly. Through an illustrative model, we show that underfunded pension plans optimally use swaps for duration hedging. Combined with dealer banks' balance sheet constraints, this demand can drive swap spreads to become negative. Empirically, we construct a measure of the aggregate funding status of defined benefit pension plans and show that this measure helps explain 30‐year swap spreads. We find a similar link between pension funds' underfunding and swap spreads for two other regions.

The Impact of Collateralization on Swap Rates

Published: 1/11/2007,  Volume: 62,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2007.01210.x  |  Cited by: 83

MICHAEL JOHANNES, SURESH SUNDARESAN

Interest rate swap pricing theory traditionally views swaps as a portfolio of forward contracts with net swap payments discounted at LIBOR rates. In practice, the use of marking‐to‐market and collateralization questions this view as they introduce intermediate cash flows and alter credit characteristics. We provide a swap valuation theory under marking‐to‐market and costly collateral and examine the theory's empirical implications. We find evidence consistent with costly collateral using two different approaches; the first uses single‐factor models and Eurodollar futures prices, and the second uses a formal term structure model and Treasury/swap data.

On the Design of Contingent Capital with a Market Trigger

Published: 3/12/2015,  Volume: 70,  Issue: 2  |  DOI: 10.1111/jofi.12134  |  Cited by: 152

SURESH SUNDARESAN, ZHENYU WANG

Contingent capital (CC), which aims to internalize the costs of too‐big‐to‐fail in the capital structure of large banks, has been under intense debate by policy makers and academics. We show that CC with a market trigger, in which direct stakeholders are unable to choose optimal conversion policies, does not lead to a unique competitive equilibrium unless value transfer at conversion is not expected ex ante. The “no value transfer” restriction precludes penalizing bank managers for taking excessive risk. Multiplicity or absence of equilibrium introduces the potential for price uncertainty, market manipulation, inefficient capital allocation, and frequent conversion errors.

The Effect of Voluntary Sell‐off Announcements on Shareholder Wealth

Published: 3/1985,  Volume: 40,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1985.tb04945.x  |  Cited by: 150

PREM C. JAIN

Sell‐off activities arise when a firm sells part of its assets (e.g., a segment, a division, etc.) but continues to exist in essentially the same form. This study investigates the effect of voluntary sell‐offs on stock returns. From a sample of over 1000 sell‐off events (first public announcements), the evidence shows that both sellers and buyers earn significant positive excess returns from these transactions. The excess returns earned by buyers are smaller than those earned by sellers. There is also evidence that sell‐off announcements are preceded by a period of significant negative returns for the sellers which suggests that the sellers, on average, performed poorly prior to their sell‐off activities.

Financial Market Design and the Equity Premium: Electronic versus Floor Trading

Published: 11/10/2005,  Volume: 60,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2005.00822.x  |  Cited by: 160

PANKAJ K. JAIN

We assemble the announcement and actual introduction dates of electronic trading by the leading exchanges of 120 countries to examine the impact of automation, controlling for risk factors and economic conditions. Dividend growth models and international CAPM suggest a significant decline in the equity premium, especially in emerging markets. Consistent with this reduction in the equity premium in the long run, there is a positive short‐term price reaction to the switch. Further analysis of trading turnover supports the notion that electronic trading enhances the liquidity and informativeness of stock markets, leading to a reduction in the cost of capital.

The Valuation of Options on Futures Contracts

Published: 12/1985,  Volume: 40,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1985.tb02385.x  |  Cited by: 96

KRISHNA RAMASWAMY, SURESH M. SUNDARESAN

Rational restrictions are derived for the values of American options on futures contracts. For these options, the optimal policy, in general, involves premature exercise. A model is developed for valuing options on futures contracts in a constant interest rate setting. Despite the fact that premature exercise may be optimal, the value of this American feature appears to be small and a European formula due to Black serves as a useful approximation. Finally, a model is developed to value these options in a world with stochastic interest rates. It is shown that the pricing errors caused by ignoring the location of the interest rate (relative to its long‐run mean) range from −5% to 7%, when the current rate is ±200 basis points from its long‐run value. The role of interest rate expectations is, therefore, crucial to the valuation. Optimal exercise policies are found from numerical methods for both models.

Optimal Debt and Equity Values in the Presence of Chapter 7 and Chapter 11

Published: 5/8/2007,  Volume: 62,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2007.01238.x  |  Cited by: 153

MARK BROADIE, MIKHAIL CHERNOV, SURESH SUNDARESAN

Explicit presence of reorganization in addition to liquidation leads to conflicts of interest between borrowers and lenders. In the first–best outcome, reorganization adds value to both parties via higher debt capacity, lower credit spreads, and improved overall firm value. If control of the ex ante reorganization timing and the ex post decision to liquidate is given to borrowers, most of the benefits are appropriated by borrowers ex post. Lenders can restore the first–best outcome by seizing this control or by the ex post transfer of control rights. Reorganization is more likely and liquidation is less likely relative to the benchmark case with liquidation only.

An Analysis of the Recommendations of the “Superstar” Money Managers at Barron's Annual Roundtable

Published: 9/1995,  Volume: 50,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1995.tb04057.x  |  Cited by: 29

HEMANG DESAI, PREM C. JAIN

We examine the performance of common stock recommendations made by prominent money managers at Barron's Annual Roundtable from 1968 to 1991. To avoid survivorship bias, we examine the performance of recommendations by all the participants. The buy recommendations earn significant abnormal returns of 1.91 percent from the recommendation day to the publication day, a period of about 14 days. However, the abnormal returns are essentially zero for one to three year postpublication day holding periods. Thus, an individual investing according to the Roundtable recommendations published in Barron's would not benefit from the advice.

The Post‐Issue Operating Performance of IPO Firms

Published: 12/1994,  Volume: 49,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1994.tb04778.x  |  Cited by: 396

BHARAT A. JAIN, OMESH KINI

This article investigates the change in operating performance of firms as they make the transition from private to public ownership. A significant decline in operating performance subsequent to the initial public offering (IPO) is found. Additionally, there is a significant positive relation between post‐IPO operating performance and equity retention by the original entrepreneurs, but no relation between post‐IPO operating performance and the level of initial underpricing. Post‐issue declines in the market‐to‐book ratio, price/earnings ratio, and earnings per share are also documented.

Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows

Published: 4/2000,  Volume: 55,  Issue: 2  |  DOI: 10.1111/0022-1082.00232  |  Cited by: 388

Prem C. Jain, Joanna Shuang Wu

We examine a sample of 294 mutual funds that are advertised in Barron's or Money magazine. The preadvertisement performance of these funds is significantly higher than that of the benchmarks. We test whether the sponsors select funds to signal continued superior performance or they use the past superior performance to attract more money into the funds. Our analysis shows that there is no superior performance in the postadvertisement period. Thus, the results do not support the signaling hypothesis. On the other hand, we find that the advertised funds attract significantly more money in comparison with a group of control funds.

International Evidence on Institutional Trading Behavior and Price Impact

Published: 3/25/2004,  Volume: 59,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2004.00651.x  |  Cited by: 227

Chiraphol N. Chiyachantana, Pankaj K. Jain, Christine Jiang, Robert A. Wood

This study characterizes institutional trading in international stocks from 37 countries during 1997 to 1998 and 2001. We find that the underlying market condition is a major determinant of the price impact and, more importantly, of the asymmetry between price impacts of institutional buy and sell orders. In bullish markets, institutional purchases have a bigger price impact than sells; however, in the bearish markets, sells have a higher price impact. This differs from previous findings on price impact asymmetry. Our study further suggests that price impact varies depending on order characteristics, firm‐specific factors, and cross‐country differences.