Current Research Reports

The Glucksman Institute for Research in Securities Markets awards fellowships each year to outstanding second year Stern MBA students to work on independent research projects under a faculty member's supervision. Five research projects completed by the Glucksman Fellows of 2021-2022 are available below. These papers focus on important topics in empirical financial economics.

Richard Levich, Director

2021-2022 Abstracts

The Financial Impact of Celebrity Involvement and Stated Specialization in SPACs
Sebastian Beltrame
This research paper is focused on whether celebrity involvement and stated specialization have a positive impact on a Special Acquisition Company’s (SPAC) performance. While previous research has been able to demonstrate a negative correlation between celebrity involvement and de-SPAC stock price performance, the SPAC boom of 2020-21was marked by an unprecedented number of celebrity attachments to SPAC prospectuses. This paper analyzes thirteen celebrity SPACs against a larger SPAC cohort as well as the S&P 500 Index. We find that while celebrity involvement does correlate to larger stock-price losses in the merged entity, celebrity involvement does have a statistically significant positive impact on a SPAC’s ability to successfully identify and merge with a target company. On the other hand, we find that a SPAC’s failure to state a specialization (as well as an overcommitted stated specialization) in either target industry or geography harms the SPAC’s ability to successfully identify a target company. Because sponsors are financially incentivized to locate a target company, our findings illustrate an underlying reason for an increase in stated specialization and celebrity involvement in SPACs: to help a SPAC’s sponsor successfully find and merge with a target in order to receive the desired financial reward.

Liquidity Management in Central Clearing: How the Default Waterfall can be Improved
Robert Dukich
Central counterparties’ (CCPs) mitigation of counterparty credit risk gives rise to liquidity risk, which can exacerbate financial shocks if not managed properly. CCPs shift this risk onto clearing members and end-users by having them unduly act as the effective sole contributors to the default waterfall. Because CCPs are generally prudent in handling this capital by allocating nearly all cash to central bank deposits where available, such access should be more widely offered. Initial margin model lookback periods should be increased to prevent procyclicality arising from prolonged low volatility, and additional consideration should be given to the practice of posting outsized portions of securities rather than cash during these periods, which can amplify market stress. Capital requirements for clearing members need to incorporate smaller clearing members’ contribution to CCP risk as well as the outsized systemic risk attributable to clearing members belonging to many CCPs; the current Cover 2 standard does not address these issues.

Is there a Future in Perpetual Futures?
Eugenio Duron-Carielo
In this paper, we examine the history of perpetual futures and the current use of perpetual futures in cryptocurrency. Perpetual futures were initially proposed as a derivative for illiquid assets like human capital and real estate. However, as computer processing power and technology improved, perpetual futures in cryptocurrency were developed. Cryptocurrency perpetual futures seem to offer a novel instrument with relatively low fees and no expiration date. Current volume for perpetual futures exceeds the volume of the spot market for Bitcoin. Perpetual futures offer large amounts of leverage to entice investors, but given the high volatility of cryptocurrency markets, many of these trades are often liquidated. We analyze the impact of leverage on liquidity in cryptocurrency perpetual futures, and analyze the fees collected by the exchanges for these trades. Exchanges have continued to implement new rules lowering the maximum leverage allowed on their specific exchange, but it is still unclear whether exchanges have implemented sufficient protections to prevent mass liquidations of traders’ positions as investors could misunderstand the risk of high leveraged positions. Some exchanges have reduced investors’ maximum permitted leverage after facing scrutiny from the media, with Binance recently preventing new customers from trading above 20x leverage for the first 60 days after opening their account. Furthermore, some exchanges, like Binance, have limited the amount of capital available at certain leverage positions. We propose three changes for exchanges to implement to further protect investors in cryptocurrency perpetual futures.

An Examination of Stacks Protocol Performance Compared to Other Layer-One Blockchains
Vivek Iyer
The purpose of this paper is to survey the Stacks ecosystem and analyze its goal of creating a smart contract programming layer to augment Bitcoin’s store-of-value properties. The study finds that the volume of activity on Stacks is currently very small relative to competing blockchains, but it has some promising features that differentiate it from competitors such as a growing monthly developer count. We conclude by discussing several initiatives in the implementation stage to ensure Stacks’ survival and ability to serve as an important element of the crypto universe. In particular, Stacks needs to execute on initiatives that achieve faster transaction speeds (one initiative currently in progress is called “Hyperchains”), a cross-chain bridge, and increased user adoption in order to fulfill its potential as a smart programming layer that augments Bitcoin’s store-of-value properties.

Level 3 Assets as Regulatory Arbitrage: An Analysis of Capital Requirements and Level 3 Assets at U.S. Global Systemically Important Banks
Angela Lu

The objective of this report is to analyze whether the introduction of the Supplementary Leverage Ratio incentivizes banks to hold riskier assets on the balance sheet. The Supplementary Leverage Ratio (SLR) was introduced in 2016 following the aftermath of the 2007-2008 financial crisis as a stop-gap measure to existing capital ratio requirements, including the Tier 1 capital ratio. Unlike the Tier 1 capital ratio, however, the SLR is non-risk-weighted, which introduces an incentive problem for banks– banks are less willing to hold safer assets in search of more returns by holding riskier assets. Risky assets, particularly those that are categorized as Level 3 due to a lack of significantly observable inputs and require a level of subjectivity to determine its value, may provide banks with the ideal vehicle to bypass strict regulatory requirements. While evidence in this study suggests that Level 3 assets have been decreasing over time and that the SLR has been more binding than the Tier 1 capital ratio since 2016, only the SLR shows a negative relationship between changes in SLR and changes in Level 3 assets. As the bank’s SLR gets closer to its required minimum, it is associated with an increase in Level 3 assets.