NBER Working Papers by Burton Hollifield

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Working Papers

July 2010The Role of Mortgage Brokers in the Subprime Crisis
with Antje Berndt, Patrik Sandås: w16175
Prior to the subprime crisis, mortgage brokers originated about 65% of all subprime mortgages. Yet little is known about their behavior during the runup to the crisis. Using data from New Century Financial Corporation, we find that brokers earned an average revenue of $5,300 per funded loan. We decompose the broker revenues into a cost and a profit component and find evidence consistent with brokers having market power. The profits earned are different for different types of loans and vary with borrower, broker, regulation and neighborhood characteristics. We relate the broker profits to the subsequent performance of the loans and show that brokers earned high profits on loans that turned out to be riskier ex post.

Published: The Role of Mortgage Brokers in the Subprime Crisis, Antje Berndt, Burton Hollifield, Patrik Sandås. in Market Institutions and Financial Market Risk, Carey, Kashyap, Rajan, and Stulz. 2012

June 2009Is Investor Rationality Time Varying? Evidence from the Mutual Fund Industry
with Vincent Glode, Marcin Kacperczyk, Shimon Kogan: w15038
We provide new empirical evidence suggesting that the marginal investor in mutual funds behaves differently across market conditions. If the marginal investor allocates capital across mutual funds rationally, then the relative performance of funds should be unpredictable. We find however that relative fund performance is predictable after periods of high market returns but not after periods of low market returns. The asymmetric predictability in performance we document cannot be explained by time-varying differences in transaction costs or style exposures between funds, or by sample selection. Consistent with the hypothesis that the asymmetric predictability in performance may be driven by unsophisticated investors' mistakes when allocating capital, we document that performance predictabil...
July 2007Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models
with Michael F. Gallmeyer, Francisco Palomino, Stanley E. Zin: w13245
We examine the relationship between monetary-policy-induced changes in short interest rates and yields on long-maturity default-free bonds. The volatility of the long end of the term structure and its relationship with monetary policy are puzzling from the perspective of simple structural macroeconomic models. We explore whether richer models of risk premiums, specifically stochastic volatility models combined with Epstein-Zin recursive utility, can account for such patterns. We study the properties of the yield curve when inflation is an exogenous process and compare this to the yield curve when inflation is endogenous and determined through an interest-rate/Taylor rule. When inflation is exogenous, it is difficult to match the shape of the historical average yield curve. Capturing its up...

Published: Michael F. Gallmeyer & Burton Hollifield & Francisco J. Palomino & Stanley E. Zin, 2007. "Arbitrage-free bond pricing with dynamic macroeconomic models," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 305-326. citation courtesy of

April 2005Taylor Rules, McCallum Rules and the Term Structure of Interest Rates
with Michael Gallmeyer, Stanley E. Zin: w11276
Recent empirical research shows that a reasonable characterization of federal-funds-rate targeting behavior is that the change in the target rate depends on the maturity structure of interest rates and exhibits little dependence on lagged target rates. See, for example, Cochrane and Piazzesi (2002). The result echoes the policy rule used by McCallum (1994) to rationalize the empirical failure of the `expectations hypothesis' applied to the term- structure of interest rates. That is, rather than forward rates acting as unbiased predictors of future short rates, the historical evidence suggests that the correlation between forward rates and future short rates is surprisingly low. McCallum showed that a desire by the monetary authority to adjust short rates in response to exogenous shocks to ...

Published: Gallmeyer, Michael F., Burton Hollifield and Stanley E. Zin. "Taylor Rules, McCallum Rules And The Term Structure Of Interest Rates," Journal of Monetary Economics, 2005, v52(5,Jul), 921-950. citation courtesy of

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