March 10, 2006

Francis Longstaff and Mark GarmaiseLOS ANGELES – Francis Longstaff, Allstate Professor of Insurance and Finance and chair of the UCLA Anderson finance area was honored for his paper, "Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities." The paper was co-authored with former UCLA Anderson finance professor Jun Liu. The award recognizes important research in the field of finance and is given annually to the best paper published in The Review of Financial Studies. The award brings a $20,000 cash prize. The award is named after UCLA Anderson emeritus professor Michael J. Brennan who served as founding editor of the journal.

Award Announcement

Read "Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities," in The Review of Financial Studies (PDF)

We derive the optimal investment policy of a risk-averse investor in a market where there is a textbook arbitrage opportunity, but where liabilities must be secured by collateral. We find that it is often optimal to underinvest in the arbitrage by taking a smaller position than collateral constraints allow. Even when the optimal policy is followed, the arbitrage portfolio typically experiences losses before the final convergence date. In fact, its initial performance may be indistinguishable from that of a conventional portfolio with a poor track record. These results have important implications for the role of arbitrageurs in financial markets.

Mark Garmaise Named Runner-up
Mark Garmaise, assistant professor of finance at UCLA Anderson, was named runner up for the award for his paper, "Confronting Information Asymmetries: Evidence from Real Estate Markets," co-authored with Tobias J. Moskowitz.

Read "Confronting Information Asymmetries: Evidence from Real Estate Markets," in The Review of Financial Studies (PDF)

There are relatively few direct tests of the economic effects of asymmetric information because of the difficulty in identifying exogenous information measures. We propose a novel exogenous measure of information based on the quality of property tax assessments in different regions and apply this to the U.S. commercial real estate market. We find strong evidence that information considerations are significant. Market participants resolve information asymmetries by purchasing nearby properties, trading properties with long income histories, and avoiding transactions with informed professional brokers. The evidence that the choice of financing is used to address information concerns is mixed and weak.

Garmaise and Moskowitz also received the 2004 BGI Michael Brennan Award for their paper, "Informal Financial Networks: Theory and Evidence."

Read "Informal Financial Networks: Theory and Evidence," in The Review of Financial Studies (PDF)

We develop a model of informal financial networks and present corroborating evidence by studying the role of property brokers in the U.S. commercial real estate market. Our model demonstrates that service intermediaries, who do not themselves supply loans, can facilitate their clients’ access to finance through informal relationships with lenders. Empirically we find that, controlling for endogenous broker selection, hiring a broker strikingly increases the probability of obtaining bank finance. Our results demonstrate that even in the United States, with its well-developed capital markets, informal networks play an important role in controlling access to finance.

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