"Informed Trading By Hedge Funds" with Pankaj Jain
Using daily equity transactions, we create a hedge fund informed trading measure (ITM) that separates information related trades from liquidity driven trades. We find that stocks with higher hedge fund informed trading are associated with higher future stock performance. The long-short portfolio delivers 4% annual alpha after controlling for size, value, momentum, and illiquidity factors. The results are mainly driven by the long side of informed trading. We attribute the informed trading to funds' ability to identify and correct stock underpricing. The results are robust to various ways of constructing and sorting the measure, and we do not find a return reversal in 4 quarters, indicating that the measure is information related.
"Sea Level Rise Risk and Mortgage Lending Standards" with Chengbo Fu, Meimei Lin, and Salman Tahsin
We study the relationship between sea level rise (SLR) risk and access to residential mortgage credit at the census tract level from 2018 to 2020. Three different levels of SLR risk, ranging from imminent to long-term risks, are estimated using the elevations from sea level. We find significantly lower loan approval rates in census tracts that are exposed to all three different levels of SLR risks. Additionally, we find that the climate risk beliefs do not matter if the location is under imminent risk. However, in areas under medium or long-term risks, approval rates are affected by SLR only if climate risk beliefs are high. We also find that both local and diversified banks reduce loan acceptance rates in locations that are under imminent risk, but local banks approve significantly more loans if the risks are more medium to long term. The local bank effects are not driven by the size of banks. Overall, we uncover a significant impact of SLR risks on mortgage approval rates and we also find that the effects vary based on the level of SLR risks.