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Full-Text Articles in Business
Testing Market Efficiency Using Statistical Arbitrage With Applications To Momentum And Value Strategies, Steve Hogan, Robert Jarrow, Melvyn Teo, Mitch Warachka
Testing Market Efficiency Using Statistical Arbitrage With Applications To Momentum And Value Strategies, Steve Hogan, Robert Jarrow, Melvyn Teo, Mitch Warachka
Business Faculty Articles and Research
This paper introduces the concept of statistical arbitrage, a long horizon trading opportunity that generates a riskless profit and is designed to exploit persistent anomalies. Statistical arbitrage circumvents the joint hypothesis dilemma of traditional market efficiency tests because its definition is independent of any equilibrium model and its existence is incompatible with market efficiency. We provide a methodology to test for statistical arbitrage and then empirically investigate whether momentum and value trading strategies constitute statistical arbitrage opportunities. Despite adjusting for transaction costs, the influence of small stocks, margin requirements, liquidity buffers for the marking-to-market of short-sales, and higher borrowing rates, …
The Effect Of Taxes On The Pricing Of Defaultable Debt, Kian Guan Lim, Fenghua Song, Mitch Warachka
The Effect Of Taxes On The Pricing Of Defaultable Debt, Kian Guan Lim, Fenghua Song, Mitch Warachka
Business Faculty Articles and Research
Empirical studies have documented the dependence of corporate credit spreads on default risk, equity premiums, and taxes. However, taxes have previously not been incorporated into reduced-form credit risk models. Therefore, we first extend the existing literature by considering a default intensity that depends on taxes as well as the default-free short rate and a market index. Consequently, we establish a theoretical basis to explain previous empirical findings regarding the significant impact of taxation on defaultable bond prices. Unlike previous models, tax implications for defaultable debt cannot be constructed from a sum of tax effects on zero coupon bonds. Our empirical …