Essays in government guaranteed credit and asset pricing

This dissertation is a comprehensive study on government guaranteed credit and on the behavior of mutual fund investors.;Chapter 1 Abstract. The SBA assists small businesses in obtaining access to bank credit by guaranteeing a portion of their loans. Despite the substantial federal guarantee and a history of modest default rates, borrowers are charged rates similar to those on low-grade bonds. We suggest several possible explanations for this phenomenon, including lack of competition between SBA lenders, and a relatively high cost of insured capital for guaranteed loans. Using comprehensive data obtained from SBA on all disbursed loans from 1988 to 2008, we find some evidence of market power in that large lenders charge borrowers relatively high rates. To evaluate the cost of capital on the guaranteed portion of SBA loans, we develop a Monte Carlo model of the cash flows on fully guaranteed SBA securitized pools, taking into account historical default and prepayment patterns. Comparing our model predictions to market prices provided by large dealer in SBA pools, we find that investors required a spread between 100 and 200 bps over the Treasury curve to hold these securities.;Chapter 2 Abstract. Mutual funds that recently outperformed receive a disproportionate share of new money, despite no clear evidence that good performance persists. In this paper I examine whether consumers also use past performance to identify funds with lower downside risk. I explore the response of fund ows to performance in declining markets compared to the performance in up markets. Estimates of up and down-market betas as well as down and up-market alphas are obtained from mutual funds' performance conditioned on the sign of the market's excess returns. Consumers invest more heavily in funds that recently produced higher relative down-market alpha and higher relative up-market beta. Fund ows react in a similar way to another proxy of down-market risk based on conditional absolute returns. The results of this research confirm that mutual fund investors seek portfolio insurance, in addition to performance.