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Linus Wilson
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Dr. Linus Wilson is an associate professor of finance at the University of Louisiana at Lafayette. He received his doctor of philosophy in financial economics from the University of Oxford in England in 2007. He has conducted extensive research into the Troubled Asset Relief Program (TARP). He... More
My company:
Oxriver Capital
My blog:
Academic Research
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  • To Trade Or Not To Trade, That Is The Question

    I got slapped with a $75 fee from Scottrade after I rolled over a IRA with that broker to Vanguard. I was more concerned about the free ETF trades for Vanguard ETF's and nobody at Scottrade, which loves to tout their "low cost" $7 trades, bothered to mention the $75 exit fee when they were begging me to keep my tiny IRA with their brokerage. Fees and brokerage commissions from places like (SCWB), (NASDAQ:ETFC), and (NASDAQ:IBKR), in other words, are the bane of any active investor. For passive investors, who have more enjoyable things to do than log into their various retirement account providers' sites, the cost of their dwindling leisure time is a big impediment to rebalancing their portfolio.

    In my most recent paper, I attempt to develop a simple model that can be easily inputted into an Excel spreadsheet to tell an investor if the next $7 trade or lost hour of leisure time is worth the desired portfolio adjustment. One academic study showed that brokerage customers typically eat up several percent per year in returns because of excessive trading and brokerage commissions. It found that on average men lost 2.7 percent of their returns to excessive trading and women lost 1.7 percent of their returns to over trading.

    A few things are clear from the study. The more your target portfolio weights are distant from your actual portfolio weights, the greater the benefits from rebalancing. In addition, it makes sense to do more trades in larger accounts or when brokerage fees are lower. Thus, a person with a $400,000 balance in a 401(k) should rebalance more often than one with a $100,000 account balance. If you want to increase your holdings of a risky asset, you should hesitate if your forecast of its returns is very noisy or you are very risk averse. Finally, a higher (lower) return to the risky asset should make you more likely to pay the trading costs to increase (decrease) your holdings of it if its expected return is higher (lower).

    I run a hedge fund Oxriver Capital which times U.S. equity markets, (NYSEARCA:SPY), (NYSEARCA:IVV), or (NYSEARCA:VOO), and brokerage commissions always give me pause when I think about the next trade. In investments to the main fund at Oxriver Capital or to separately managed accounts (SMA's) trades are only approved if the transaction cost model says they make sense. Investors judge the fund by its returns net of fees and commissions, thus a good transaction cost model correctly applied can often add more return than another alpha factor that helps the fund better predict the direction of the stock market. In other words not all "good" trade ideas are worth excecuting. Warren Buffett once compared his investing process to a batter who can be never struck out on called strikes. He only takes a swing when a really good trade comes along.

    Disclosure: I am long SPY, VOO.

    Tags: SPY, VOO, IVV
    Mar 08 9:18 AM | Link | Comment!
  • Did Black Owned Banks Suffer From Racial Discrimination In The TARP Bailout?

    Many Americans like to think of the U.S. as a color blind society. We have an African American president after all. State sponsored segregation is now a thing of distant memory in the United States. Yet, some recent, highly-respected academic studies have indicated that racial discrimination may hurt African Americans in economic transactions. One study found that applicants with identical resumes were much more likely to be called back for an interview if they had "white" sounding names than applicants sporting "black" names. Another study found African American cab drivers received 1/3 less money in tips on average than white cab divers.

    Yet, these studies point to private citizens' potential prejudices. Before embarking on my most recent study, I would have been skeptical that the federal government with its affirmative action programs would favor non-minority owned businesses over African American owned firms. Unfortunately, that is what my coauthor Lucas Puente ofStanford University and I found in our paper "Racial Discrimination in TARP Investments."

    We found that minority and black owned banks were significantly less likely to receive funds from the Troubled Asset Relief Program (TARP) Community Development Capital Initiative (CDCI). A non-minority bank with the median characteristics was approximately ten times more likely to obtain TARP funds than an African American owned bank after controlling for other factors. Thus, healthier black owned banks were much less likely to obtain TARP funds through this program than weaker non-minority owned banks.

    This finding makes me really sad. There needs to be more investigation of the investment process in TARP program. We cannot tolerate a government that hands out its funds preferentially to predominantly white owned firms. The TARP bailout was distasteful enough before finding out that the investment process may have been marred by racial prejudice.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I own some index funds that have holdings in some publicly trade banks.

    Tags: XLF, KBE
    Apr 10 3:20 PM | Link | Comment!
  • Bernanke And Fed Rewrite History One Lecture And One Editor At A Time

    The Federal Reserve Chairman Ben Bernanke has decided the best way to resuscitate his disastrous tenure as head of the Fed is to hold open lectures on why the Fed is not to blame for the financial crisis. The Wall Street Journal reports that "helicopter" Ben Bernanke argued that the historically low interest rates that poured gasoline on the red-hot housing market had nothing to do with the crash. I'm sure that he will also say that the Fed is not to blame for the lax supervision that led to the failure of Lehman Brothers and the Fed rescues of AIG and Bear Sterns. The net result is that 2.6 million Americans lost their jobs in 2008, and another 4.6 million lost their jobs in 2009. Unemployment went from 5.0 percent to 10.0 percent. I suspect that the statistics for Federal Reserve employment were much less brutal during the Great Recession.

    Unfortunately, there are few other Ph.D.'s in finance and economics willing to take on the Fed. The Fed's role as the biggest employer of U.S. based Ph.D.'s in those disciplines might have something to do with that. Yet, the Fed gets an assist from all those well placed and supposedly independent academics that it signs up for paid "visiting positions" to pad those scholars' university salaries.

    The editorial boards of supposedly independent journals that study the banking, the Fed, and monetary policy are regularly dominated by scholars on the Fed's payroll. A supposedly prestigious academic finance journal, the Journal of Financial Intermediation, refused to send a jointly written paper about a $2.3 TRILLION bailout of18 Wall Street banks to editors and referees without financial ties to the Fed. Below is a list of the top 5 borrowers from the program and the market value of the Treasuries borrowed from the Fed:

    Borrower

    Based Inside US

    MV of Treasuries Borrowed in Billions

    Citigroup (NYSE:C)

    Yes

    $348

    Royal Bank of Scotland (NYSE:RBS)

    No

    $291

    Deutsche Bank (NYSE:DB)

    No

    $277

    Credit Suisse Securities (NYSE:CS)

    No

    $261

    Goldman, Sachs (NYSE:GS)

    Yes

    $225

    100 percent of the top 5 editors of that journal held down paid visiting, advisory, or consulting jobs with the Fed, according to the CVs on their websites. If you want to publish at the Journal of Financial Intermediation, it appears that it must be approved by somebody on the Fed's payroll. I think that the Fed is getting its money's worth! Luckily, this journal is just the most reckless about its lack of concern for conflicts of interest in my experience.

    Today the Fed lets the too-big-to-fail banks buy back stock and pay big dividends. It supports the dangerous mergers of banks working towards the goal of being too-big-to-fail banks. Yet, there is little criticism from academics studying the Fed. My joint research finds finance academics lining up to pile their criticism on a $205 billion Treasury bank bailout, but the academic profession has ignored the numerous and much larger Fed sponsored bailouts. (Relatively, few economics of finance Ph.D.'s are on the Treasury's payroll.) Unfortunately, too often you cannot make people understand problems that they are paid to ignore.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I only own broad-based mutual funds.

    Mar 23 4:39 PM | Link | Comment!
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