Copyright (c) 2009 All rights reserved. http://works.bepress.com/zitzewitz Recent documents in Eric Zitzewitz en-us Sat, 31 Oct 2009 23:18:56 PDT 3600 http://works.bepress.com/zitzewitz/9 http://works.bepress.com/zitzewitz/9 Fri, 30 Oct 2009 12:43:32 PDT This paper examines the negotiated settlements of 20 market timing and late trading cases, comparing the restitution obtained for shareholders with an estimate of shareholder dilution. This restitution ratio varies from 0.04 to 5, or from 0.1 to 10 if penalties are included. While some of this variation is explained by differences in the defendants' conduct, controlling for this, settlement negotiations that involved New York as well as the Security and Exchange Commission (SEC) resulted in restitution ratios that were higher by a factor of 5-10. An analysis that uses the firms' headquarters location and customers' state of residence as instruments for New York's involvement suggests that this difference is causal, and not the result of New York involving itself in cases likely to lead to large settlements. Given the much larger staff and institutional expertise of the SEC, it is likely that these differences in outcomes are due to differences in effective aggressiveness, not prosecutorial resources. Differences in aggressiveness are consistent with popular conceptions of the regulators' career concerns, as well as with theories of industry focus and regulatory capture. Eric W. Zitzewitz K32 L51 H77 G28 K42 http://works.bepress.com/zitzewitz/8 http://works.bepress.com/zitzewitz/8 Thu, 14 Dec 2006 15:35:19 PST This paper exploits nationalistic biases in Olympic winter sports judging to study the problem of designing a decision-making process that uses the input of potentially biased agents. Judges score athletes from their own countries higher than other judges do, and they appear to vary their biases strategically in response to the stakes, the scrutiny given the event, and the degree of subjectivity of the performance aspect being scored. Ski jumping judges display a taste for fairness in that they compensate for the nationalistic biases of other panel members, while figure skating judges appear to engage in vote trading and bloc judging. Career concerns create incentives for judges: biased judges are less likely to be chosen to judge the Olympics in ski jumping but more likely in figure skating; this is consistent with judges being chosen centrally in ski jumping and by national federations in figure skating. The sports truncate extreme scores to different degrees; both ski jumping and, especially, figure skating are shown to truncate too aggressively. Extreme truncation not only discards information, but may also make the vote trading in figure skating easier to implement. These findings have implications for both the current proposals for reforming the judging of figure skating and for designing decision making in organizations more generally. Eric Zitzewitz Other (IO, Development) http://works.bepress.com/zitzewitz/7 http://works.bepress.com/zitzewitz/7 Thu, 14 Dec 2006 15:30:59 PST We analyze the extent to which simple markets can be used to aggregate disperse information into efficient forecasts of uncertain future events. Drawing together data from a range of prediction contexts, we show that market-generated forecasts are typically fairly accurate, and that they outperform most moderately sophisticated benchmarks. Carefully designed contracts can yield insight into the market's expectations about probabilities, means and medians, and also uncertainty about these parameters. Moreover, conditional markets can effectively reveal the market's beliefs about regression coefficients, although we still have the usual problem of disentangling correlation from causation. We discuss a number of market design issues and highlight domains in which prediction markets are most likely to be useful. Justin Wolfers Prediction markets http://works.bepress.com/zitzewitz/6 http://works.bepress.com/zitzewitz/6 Thu, 14 Dec 2006 15:25:41 PST As is becoming increasingly widely known, mutual funds often calculate their net asset values (NAVs) using stale prices, which causes their daily returns to be predictable. By trading on this predictability, investors can earn 35-70% per year in international funds and 10-25% in asset classes such as small-cap equity and high-yield and convertible bonds. These abnormal returns come at the expense of long-term shareholders, dilution of whom has grown in international funds from 56 basis points in 1998-99 to 114 basis points in 2001. Despite these losses and pressure from the Securities and Exchange Commission (SEC), the vast majority of funds are not market-updating their prices to eliminate NAV predictability and dilution, but are instead pursuing solutions that are only partly effective. The speed and efficacy of a fund's actions to protect shareholders from dilution is negatively correlated with its expense ratios and the share of insiders on its board, suggesting that agency problems may be the root cause of the arbitrage problem. Eric W. Zitzewitz Mutual funds http://works.bepress.com/zitzewitz/5 http://works.bepress.com/zitzewitz/5 Thu, 14 Dec 2006 15:22:11 PST This paper uses daily fund flow data to examine the extent of late trading in the U.S. mutual fund industry. Trading decisions that are required by law to have been made before 4 PM Eastern Time are correlated with market movements from 4 to 9 PM that evening. The cross-sectional variation in this correlation is consistent with late trading being its primary cause and inconsistent with alternative explanations. For example, apparent late trading ceases in September 2003 after the announcement of the investigation into mutual fund trading practices, it is three times greater in fund families that have been cited by regulators for allowing late trading, and it is greater in funds and asset classes that are also receiving heavy stale price arbitrage flows. In my sample, which includes 75 percent of non-specialized equity mutual funds and 48 percent of assets, late trading led to average annual shareholder dilution from 1998 to 2003 of 3.8 and 0.9 basis points in international and U.S. equity funds, respectively. If these dilution rates prevailed industry wide, they would imply shareholder losses of about $400 million per year. Furthermore, there is statistically significant evidence of late trading in the funds of 39 of 66 fund families. Eric W. Zitzewitz Mutual funds http://works.bepress.com/zitzewitz/4 http://works.bepress.com/zitzewitz/4 Thu, 14 Dec 2006 15:16:42 PST Analyses of the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during Election Day. Analyzing high frequency financial fluctuations following the release of flawed exit poll data on Election Day 2004, and then during the vote count, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields. Erik Snowberg Prediction markets http://works.bepress.com/zitzewitz/1 http://works.bepress.com/zitzewitz/1 Thu, 14 Dec 2006 14:53:19 PST Betting on elections has been of interest to economists and political scientists for some time. We recently persuaded TradeSports to run experimental contingent betting markets, in which one bets on whether President Bush will be re-elected, conditional on other specified events occurring. Early results suggest that market participants strongly believe that Osama bin Laden's capture would have a substantial effect on President Bush's electoral fortunes, and interestingly that the chance of his capture peaks just before the election. More generally, these markets suggest that issues outside the campaign -- like the state of the economy, and progress on the war on terror -- are the key factors in the forthcoming election. Justin Wolfers Prediction markets http://works.bepress.com/zitzewitz/3 http://works.bepress.com/zitzewitz/3 Thu, 14 Dec 2006 14:53:01 PST The independence of editorial content from advertisers' influence is a cornerstone of journalistic ethics. We test whether this independence is observed in practice. We find that mutual fund recommendations are correlated with past advertising in three personal finance publications but not in two national newspapers. Our tests control for numerous fund characteristics, total advertising expenditures, and past mentions. While positive mentions significantly increase fund inflows, they do not successfully predict returns. Future returns are similar for the funds we predict would have been mentioned in the absence of bias, suggesting that the cost of advertising bias to readers is small. Jonathan Reuter Mutual funds