Samuel G. Hanson

Assistant Professor of Business Administration

Unit: Finance

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(617) 495-6137

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Samuel G. Hanson is an Assistant Professor in the Finance Unit of Harvard Business School, and a Faculty Research Fellow at the National Bureau of Economic Research. He teaches the Finance I course in the MBA required curriculum and a PhD course in Empirical Methods.

Professor Hanson holds a Ph.D. in Business Economics from Harvard University and a B.A. in Quantitative Economics and Philosophy from Tufts University. Before beginning his doctoral studies, he worked as an investment banking analyst at Lehman Brothers and as an assistant economist at the Federal Reserve Bank of New York. During 2009 Hanson worked at the U.S. Treasury Department where he served as a Special Assistant and Liaison to the White House National Economic Council.

Professor Hanson's research interests lie in corporate finance, behavioral finance, and asset pricing. His recent research has focused on corporate supply responses to fluctuations in investor demand for different types of securities and on optimal financial regulation. Hanson's research has appeared in the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, the Journal of Economic Perspectives, and the Review of Economics and Statistics.

Publications

Journal Articles

  1. A Comparative-Advantage Approach to Government Debt Maturity

    We study optimal government debt maturity in a model where investors derive monetary services from holding riskless short-term securities. In a setting where the government is the only issuer of such riskless paper, it trades off the monetary premium associated with short-term debt against the refinancing risk implied by the need to roll over its debt more often. We then extend the model to allow private financial intermediaries to compete with the government in the provision of short-term, money-like claims. We argue that if there are negative externalities associated with private money creation, the government should tilt its issuance more towards short maturities. The idea is that the government may have a comparative advantage relative to the private sector in bearing refinancing risk and, hence, should aim to partially crowd out the private sector's use of short-term debt.

    Keywords: Sovereign Finance; Debt Securities;

    Citation:

    Greenwood, Robin, Samuel G. Hanson, and Jeremy C. Stein. "A Comparative-Advantage Approach to Government Debt Maturity." Journal of Finance (forthcoming). (Internet Appendix Here.) View Details
  2. Mortgage Convexity

    Most home mortgages in the United States are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk that must be borne by professional bond investors. I develop a simple model in which the risk tolerance of bond investors is limited in the short run, so these fluctuations in MBS duration generate significant variation in bond risk premia. Specifically, bond risk premia are high when aggregate MBS duration is high. The model offers an explanation for why long-term rates could appear to be excessively sensitive to movements in short rates and explains how changes in MBS duration act as a positive-feedback mechanism that amplifies interest rate volatility. I find strong support for these predictions in the time series of US government bond returns.

    Keywords: Mortgages; Interest Rates; Volatility;

    Citation:

    Hanson, Samuel G. "Mortgage Convexity." Journal of Financial Economics 113, no. 2 (August 2014): 270–299. (Internet Appendix Here.) View Details
  3. The Growth and Limits of Arbitrage: Evidence from Short Interest

    We develop a novel methodology to infer the amount of capital allocated to quantitative equity arbitrage strategies. Using this methodology, which exploits time-variation in the cross section of short interest, we document that the amount of capital devoted to value and momentum strategies has grown significantly since the late 1980s. We provide evidence that this increase in capital has resulted in lower strategy returns. However, consistent with theories of limited arbitrage, we show that strategy-level capital flows are influenced by past strategy returns as well as strategy return volatility, and that arbitrage capital is most limited during times when strategies perform best. This suggests that the growth of arbitrage capital may not completely eliminate returns to these strategies.

    Keywords: Strategy; Financial Instruments; Capital Markets; Investment;

    Citation:

    Hanson, Samuel G., and Adi Sunderam. "The Growth and Limits of Arbitrage: Evidence from Short Interest." Review of Financial Studies 27, no. 4 (April 2014): 1238–1286. (Winner of the RFS Rising Scholar Prize 2014. Internet Appendix Here.) View Details
  4. Issuer Quality and Corporate Bond Returns

    We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.

    Keywords: Quality; Bonds; Forecasting and Prediction; Credit;

    Citation:

    Greenwood, Robin, and Samuel G. Hanson. "Issuer Quality and Corporate Bond Returns." Review of Financial Studies 26, no. 6 (June 2013): 1483–1525. (Internet Appendix Here.) View Details
  5. Are There Too Many Safe Securities? Securitization and the Incentives for Information Production

    We present a model that helps explain several past collapses of securitization markets. Originators issue too many informationally insensitive securities in good times, blunting investor incentives to become informed. The resulting endogenous scarcity of informed investors exacerbates primary market collapses in bad times. Inefficiency arises because informed investors are a public good from the perspective of originators. All originators benefit from the presence of additional informed investors in bad times, but each originator minimizes his reliance on costly informed capital in good times by issuing safe securities. Our model suggests regulations that limit the issuance of safe securities in good times.

    Keywords: Information; Debt Securities; Financial Crisis;

    Citation:

    Hanson, Samuel G., and Adi Sunderam. "Are There Too Many Safe Securities? Securitization and the Incentives for Information Production." Journal of Financial Economics 108, no. 3 (June 2013): 565–584. (Internet Appendix Here.) View Details
  6. The Variance of Non-Parametric Treatment Effect Estimators in the Presence of Clustering

    Non-parametric estimators of treatment effects are often applied in settings where clustering may be important. We provide a general methodology for consistently estimating the variance of a large class of non-parametric estimators, including the simple matching estimator, in the presence of clustering. Software for implementing our variance estimator is available in Stata.

    Keywords: treatment effects; matching estimators; clustering; Software; Mathematical Methods;

    Citation:

    Hanson, Samuel G., and Adi Sunderam. "The Variance of Non-Parametric Treatment Effect Estimators in the Presence of Clustering." Review of Economics and Statistics 94, no. 4 (November 2012). (Stata and Matlab Code Here.) View Details
  7. Share Issuance and Factor Timing

    We show that characteristics of stock issuers can be used to forecast important common factors in stocks' returns such as those associated with book-to-market, size, and industry. Specifically, we use differences between the attributes of stock issuers and repurchasers to forecast characteristic-related factor returns. For example, we show that large firms underperform following years when issuing firms are large relative to repurchasing firms. While our strongest results are for portfolios based on book-to-market, size (i.e., we forecast the HML and SMB factors), and industry, our approach is also useful for forecasting factor returns associated with distress, payout policy, and profitability.

    Keywords: Investment Portfolio; Stock Shares; Forecasting and Prediction; Investment Return; Policy; Profit;

    Citation:

    Greenwood, Robin, and Samuel G. Hanson. "Share Issuance and Factor Timing." Journal of Finance 67, no. 2 (April 2012): 761–798. (Internet Appendix Here.) View Details
  8. A Macroprudential Approach to Financial Regulation

    Keywords: Governing Rules, Regulations, and Reforms; Finance;

    Citation:

    Hanson, Samuel G., Anil Kashyap, and Jeremy C. Stein. "A Macroprudential Approach to Financial Regulation." Journal of Economic Perspectives 25, no. 1 (winter 2011). View Details
  9. A Gap-Filling Theory of Corporate Debt Maturity Choice

    We argue that time-series variation in the maturity of aggregate corporate debt issues arises because firms behave as macro liquidity providers, absorbing the large supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with relatively more short-term debt, firms fill the resulting gap by issuing more long-term debt, and vice-versa. This type of liquidity provision is undertaken more aggressively: i) in periods when the ratio of government debt to total debt is higher; and ii) by firms with stronger balance sheets. Our theory provides a new perspective on the apparent ability of firms to exploit bond-market return predictability with their financing choices.

    Keywords: Business Ventures; Decision Choices and Conditions; Borrowing and Debt; Financial Liquidity; Investment Return; Government and Politics;

    Citation:

    Greenwood, Robin, Samuel G. Hanson, and Jeremy C. Stein. "A Gap-Filling Theory of Corporate Debt Maturity Choice." Journal of Finance 65, no. 3 (June 2010): 993–1028. (Supplementary results in Internet Appendix.) View Details
  10. Firm Heterogeneity and Credit Risk Diversification

    This paper examines the impact of neglected heterogeneity on credit risk. We show that neglecting heterogeneity in firm returns and/or default thresholds leads to under estimation of expected losses (EL), and its effect on portfolio risk is ambiguous. Once EL is controlled for, the impact of neglecting parameter heterogeneity is complex and depends on the source and degree of heterogeneity. We show that ignoring differences in default thresholds results in overestimation of risk, while ignoring differences in return correlations yields ambiguous results. Our empirical application, designed to be typical and representative, combines both and shows that neglected heterogeneity results in overestimation of risk. Using a portfolio of U.S. firms we illustrate that heterogeneity in the default threshold or probability of default, measured for instance by a credit rating, is of first order importance in affecting the shape of the loss distribution: including ratings heterogeneity alone results in a 20% drop in loss volatility and a 40% drop in 99.9% VaR, the level to which the risk weights of the New Basel Accord are calibrated.

    Keywords: Volatility; Credit; Investment Return; Outcome or Result; Risk and Uncertainty; Loss; Diversification; Complexity; United States;

    Citation:

    Hanson, Samuel G., M. Hashem Pesaran, and Til Schuermann. "Firm Heterogeneity and Credit Risk Diversification." Journal of Empirical Finance 15, no. 4 (September 2008): 583–612. View Details
  11. Confidence Intervals for Probabilities of Default

    In this paper we conduct a systematic comparison of confidence intervals around estimated probabilities of default (PD) using several analytical approaches as well as parametric and nonparametric bootstrap methods. We do so for two different PD estimation methods, cohort and duration (intensity), with 22 years of credit ratings data. We find that the bootstrapped intervals for the duration based estimates are relatively tight when compared to either analytic or bootstrapped intervals around the less efficient cohort estimator. We show how the large differences between the point estimates and confidence intervals of these two estimators are consistent with non-Markovian migration behavior. Surprisingly, even with these relatively tight confidence intervals, it is impossible to distinguish notch-level PDs for investment grade ratings, e.g. a PDAA- from a PDA+. However, once the speculative grade barrier is crossed, we are able to distinguish quite cleanly notch-level estimated PDs. Conditioning on the state of the business cycle helps: it is easier to distinguish adjacent PDs in recessions than in expansions.

    Keywords: Mathematical Methods; Investment; Business Cycles; Financial Crisis;

    Citation:

    Hanson, Samuel G., and Til Schuermann. "Confidence Intervals for Probabilities of Default." Journal of Banking & Finance 30, no. 8 (August 2006). View Details

Working Papers

  1. Fiscal Risk and the Portfolio of Government Programs

    This paper proposes a new approach to social cost-benefit analysis using a model in which a benevolent government chooses risky projects in the presence of market failures and tax distortions. The government internalizes market failures and therefore perceives project payoffs differently than do individual private actors. This gives it a "social risk management" motive—projects that generate social benefits are attractive, particularly if those benefits are realized in bad economic states. However, because of tax distortions, government financing is costly, creating a "fiscal risk management" motive. Government projects that require large tax-financed outlays are unattractive, particularly if those outlays tend to occur in bad economic times. At the optimum, the government trades off its social and fiscal risk management motives. Frictions in government financing create interdependence between two otherwise unrelated government projects. The fiscal risk of a project depends on how its fiscal costs covary with the fiscal costs of the government's overall portfolio of projects. This interdependence means that individual projects cannot be evaluated in isolation.

    Keywords: Risk Management; Programs; Government and Politics;

    Citation:

    Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "Fiscal Risk and the Portfolio of Government Programs." Working Paper, June 2014. View Details
  2. Banks as Patient Fixed-Income Investors

    We examine the business model of traditional commercial banks in the context of their co-existence with shadow banks. While both types of intermediaries create safe "money-like" claims, they go about this in different ways. Traditional banks create safe claims by relying on deposit insurance, supported by costly equity capital. This structure allows bank depositors to remain "sleepy": they do not have to pay attention to transient fluctuations in the mark-to-market value of bank assets. In contrast, shadow banks create safe claims by giving their investors an early exit option that allows them to seize collateral and liquidate it at the first sign of trouble. Thus traditional banks have a stable source of funding, while shadow banks are subject to runs and fire-sale losses. These different funding models in turn influence the kinds of assets that traditional banks and shadow banks hold in equilibrium: traditional banks have a comparative advantage at holding fixed-income assets that have only modest fundamental risk, but are relatively illiquid and have substantial transitory price volatility.

    Citation:

    Hanson, Samuel G., Andrei Shleifer, Jeremy C. Stein, and Robert W. Vishny. "Banks as Patient Fixed-Income Investors." NBER Working Paper Series, No. 20288, July 2014. View Details
  3. The Rise and Fall of Securitization

    The rise and fall of nontraditional securitizations—collateralized debt obligations and mortgage-backed securities backed by nonprime loans—played a central role in the financial crisis. Little is known, however, about the factors that drove the pre-crisis surge in investor demand for these products. Examining insurance companies' and mutual funds' holdings of fixed income securities, we find evidence suggesting that both agency problems and neglected risks played an important role in driving investor demand for nontraditional securitizations prior to crisis. We also use our holdings data to shed light on the factors that drove the dramatic collapse of securitization markets beginning in mid-2007. Contrary to conventional crisis narratives, we find little evidence of widespread fire sales. Instead, our evidence is more consistent with the idea that a self-amplifying buyers' strike drove the dramatic collapse of securitization markets.

    Keywords: Debt Securities; Financial Markets; Financial Crisis;

    Citation:

    Chernenko, Sergey, Samuel G. Hanson, and Adi Sunderam. "The Rise and Fall of Securitization." Working Paper, December 2013. View Details
  4. Waves in Ship Prices and Investment

    We study the returns to owning dry bulk cargo ships. Ship earnings exhibit a high degree of mean reversion, driven by industry participants' competitive investment responses to shifts in demand. Ship prices are far too volatile given the mean reversion in earnings. We show that high current ship earnings are associated with high secondhand ship prices and heightened industry investment in fleet capacity but forecast low future returns. We propose and estimate a behavioral model that can account for the evidence. In our model, firms over-extrapolate exogenous demand shocks and partially neglect the endogenous investment responses of their competitors. Formal estimation of the model confirms that both types of expectational errors are needed to account for our findings.

    Keywords: Demand and Consumers; Price; Ship Transportation; Investment; Shipping Industry;

    Citation:

    Greenwood, Robin, and Samuel G. Hanson. "Waves in Ship Prices and Investment." NBER Working Paper Series, No. 19246, July 2013. (Internet Appendix Here.) View Details
  5. An Evaluation of Money Market Fund Reform Proposals

    U.S. money market mutual funds (MMFs) are an important source of dollar funding for global financial institutions, particularly those headquartered outside the U.S. MMFs proved to be a source of considerable instability during the financial crisis of 2007-2009, resulting in extraordinary government support to help stabilize the funding of global financial institutions. In light of the problems that emerged during the crisis, a number of MMF reforms have been proposed, which we analyze in this paper. We assume that the main goal of MMF reform is safeguarding global financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers could generate significant financial stability benefits. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that an MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. Other reform alternatives based on market forces, such as converting MMFs to a floating NAV, may be less effective in protecting financial stability. Our analysis sheds light on the fundamental tensions inherent in regulating the global shadow banking system.

    Keywords: Risk Management; Balance and Stability; Investment Funds;

    Citation:

    Hanson, Samuel G., David S. Scharfstein, and Adi Sunderam. "An Evaluation of Money Market Fund Reform Proposals." Working Paper, May 2014. View Details
  6. Monetary Policy and Long-Term Real Rates

    Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis point increase in the two-year nominal yield on an FOMC announcement day is associated with a 42 basis point increase in the ten-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects due to the existence of what we call "yield-oriented" investors. We find some evidence supportive of this channel.

    Keywords: Money; Investment; Policy; Interest Rates;

    Citation:

    Hanson, Samuel G., and Jeremy C. Stein. "Monetary Policy and Long-Term Real Rates." Working Paper, April 2014. View Details

Other Publications and Materials

  1. Comment on 'The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds'

    Citation:

    Hanson, Samuel G. "Comment on 'The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds'." Brookings Papers on Economic Activity (Spring 2013): 263–271. View Details
  2. An Analysis of the Impact of 'Substantially Heightened' Capital Requirements on Large Financial Institutions

    We examine the impact of "substantially heightened" capital requirements on large financial institutions, and on their customers. Our analysis yields three main conclusions. First, the frictions associated with raising new external equity finance are likely to be greater than the ongoing costs of holding equity on the balance sheet, implying that the new requirements should be phased in gradually. Second, the long-run steady-state impact on loan rates is likely to be modest, in the range of 25 to 45 basis points for a ten percentage-point increase in the capital requirement. Third, due to the unique nature of competition in financial services, even these modest effects raise significant concerns about migration of credit-creation activity to the shadow-banking sector, and the potential for increased fragility of the overall financial system that this might bring. Thus to avoid tilting the playing field in such a way as to generate a variety of damaging unintended consequences, increased regulation of the shadowbanking sector should be seen as an important complement to the reforms that are contemplated for banks and other large financial institutions.

    Keywords: Financial Institutions; Governing Rules, Regulations, and Reforms; Capital; Equity; Financing and Loans; Credit;

    Citation:

    Kashyap, Anil, Jeremy C. Stein, and Samuel G. Hanson. "An Analysis of the Impact of 'Substantially Heightened' Capital Requirements on Large Financial Institutions." 2010. Mimeo. View Details
  3. Do Hedge Funds Profit from Mutual-Fund Distress?

    This paper explores the question of whether hedge funds engage in frontrunning strategies that exploit the predictable trades of others. One potential opportunity for front-running arises when distressed mutual funds—those suffering large outflows of assets under management—are forced to sell stocks they own. We document two pieces of evidence that are consistent with hedge funds taking advantage of this opportunity. First, in the time series, the average returns of long/short equity hedge funds are significantly higher in those months when a larger fraction of the mutual-fund sector is in distress. Second, at the individualstock level, short interest rises in advance of sales by distressed mutual funds.

    Keywords: Investment Funds; Profit; Strategy; Forecasting and Prediction; Investment Return; Opportunities; Asset Management; Sales;

    Citation:

    Chen, Joseph, Samuel G. Hanson, Harrison Hong, and Jeremy C. Stein. "Do Hedge Funds Profit from Mutual-Fund Distress?" 2008. Mimeo. View Details

Cases and Teaching Materials

  1. Lighting the Way at the Manor House Hotel

    Citation:

    Hanson, Samuel Gregory, Joel Heilprin, and Charles Andersen. "Lighting the Way at the Manor House Hotel." Harvard Business School Spreadsheet Supplement 214-701, July 2013. View Details
  2. Lighting the Way at the Manor House Hotel

    Citation:

    Hanson, Samuel G., Joel Heilprin, and Charles Andersen. "Lighting the Way at the Manor House Hotel." Harvard Business School Case 214-006, July 2013. View Details
  3. Grantham, Mayo, and Van Otterloo, 2012: Estimating the Equity Risk Premium (CW)

    Citation:

    Hanson, Samuel Gregory, Erik Stafford, and Luis M. Viceira. "Grantham, Mayo, and Van Otterloo, 2012: Estimating the Equity Risk Premium (CW)." Harvard Business School Spreadsheet Supplement 213-717, February 2013. View Details
  4. Grantham, Mayo, and Van Otterloo, 2012: Estimating the Equity Risk Premium

    Keywords: investment banking; Equity Valuation;

    Citation:

    Hanson, Samuel, Erik Stafford, and Luis Viceira. "Grantham, Mayo, and Van Otterloo, 2012: Estimating the Equity Risk Premium." Harvard Business School Case 213-051, October 2012. (Revised February 2013.) View Details

        Awards & Honors

      1. Rising Scholar Award: Winner of the 2014 Rising Scholar Award from The Review of Financial Studies for his paper with Adi Sunderam, “The Growth and Limits of Arbitrage: Evidence from Short Interest.”