{"title":"Option Value of Cash","authors":"Jialin Yu","doi":"10.2139/ssrn.1328920","DOIUrl":"https://doi.org/10.2139/ssrn.1328920","url":null,"abstract":"This paper uses a dynamic model of heterogeneous beliefs (where investors agree to disagree) to study the positive price-volume correlation during a housing downturn. It shows: (i) beliefs may diverge, which prevents some pessimists from buying; (ii) in the case that beliefs cross (i.e., buyers become more optimistic than the sellers), home sales occur but are delayed due to the buyers' option to sell cash higher (using house as numeraire) if the downturn worsens. Such option to wait also has implications for the velocity of money during deflation, troubled assets in the crisis since 2007, IPO waves, and fire sales.","PeriodicalId":261137,"journal":{"name":"Third Singapore International Conference on Finance 2009 (Archive)","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116929576","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"An Anatomy of Pairs Trading: The Role of Idiosyncratic News, Common Information and Liquidity","authors":"Joseph Engelberg, P. Gao, R. Jagannathan","doi":"10.2139/ssrn.1330689","DOIUrl":"https://doi.org/10.2139/ssrn.1330689","url":null,"abstract":"\"Pairs trading\" involves taking a bet that the price paths of two stocks that have historically moved together will converge again after any divergence. Consistent with the view that profits to pairs trading comes through market making, i.e., short term liquidity provision and price discovery; we find that pairs trading profits are higher when the initial divergence is due to (a) news that temporarily reduces the liquidity of one of the stocks in the pair, or (b) news that affects both stocks in the pair, and there are a priori reasons to believe that one stock reacts faster to such news. Profits are lower when the initial divergence in prices is associated with value relevant news specific to a stock in the pair. Pairs involving smaller, less liquid and more volatile stocks tend to converge faster after initial divergence. When one of the stocks in the pair is more likely to have sluggish response to common information as evidenced by less common sell side coverage and institutional holdings, the risk of a margin call due to further divergence is lower. Closing out positions that do not converge within 10 days leads to higher risk adjusted returns ignoring transactions costs when compared to holding positions for 6 months.","PeriodicalId":261137,"journal":{"name":"Third Singapore International Conference on Finance 2009 (Archive)","volume":"570 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127068276","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}