ESSAYS ON FINANCIAL INSTITUTIONS
Open AccessChapter 1Understanding the underwriting in prime market: the GSE caseThis paper studies the underwriting standards of the prime market. I develop a multinomial logistic model to jointly model the prepayment and default behavior. Three separate regimes are identified, with cutoff points at 2005 and 2008. Underwriting standards in the prime market only become very conservative after 2008, with no abnormal changes before that. The modeling results together with the counterfactual analysis suggest that the observed underwriting does not contribute much to the changes in default rates of these prime mortgages. Instead, macroeconomic conditions and unobserved underwriting, possibly the “soft information”, are the high impact factors. House prices also play an important role. Additional questions are studied to further establish the robustness of the model, such as LTV at 80, top sellers, origination channel, early default, acceleration effect of updated LTV, and first-time home buyers.Chapter 2Analyst Bias and Institutional Holdings: Who do Large Investors Listen to?Evidence shows that some sell-side analysts send buy (sell) signals through their recommendations, while simultaneously their forecasts convey negative (positive) information about the firm. These analysts are considered to behave ‘strategically’, compared to ‘consistent’ analysts who hint the same direction on both recommendations and forecasts. This paper finds that strategic behavior carries a negative signal to the institutional investors in general. Institutional investors ‘listen’ to consistent analysts as they increase holdings when these analysts upgrade a stock, and lower holdings when there is a downgrade. Surprisingly, institutions ‘listen’ more to strategic analysts and decrease their holdings only when these analysts downgrade a stock. While there’re 50% of the analysts who behave strategically in the sample, the motivation of such behavior is questionable. Additionally, there’re more strategic analysts giving higher-than-consensus recommendation in bad times. It is conceivable that strategic analysts may be misleading the smaller institutions as well as individual investors and deriving benefits from them.
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