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Behavioral Finance “Noise Traders and the Limits to Arbitrage” – Part V

Behavioral Finance “Noise Traders and the Limits to Arbitrage” – Part V. Economics 437. Make-Up Class. There is no class on Tuesday, Jan 30 th This class will be made up on Sunday, Feb 11, 2007 at 3:30 PM in the big Wilson Auditorium (Wilson 402). Blackstone – Vornado dual over EOP.

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Behavioral Finance “Noise Traders and the Limits to Arbitrage” – Part V

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  1. Behavioral Finance“Noise Traders and the Limits to Arbitrage” – Part V Economics 437

  2. Make-Up Class • There is no class on Tuesday, Jan 30th • This class will be made up on Sunday, Feb 11, 2007 at 3:30 PM in the big Wilson Auditorium (Wilson 402)

  3. Blackstone – Vornado dual over EOP • Blackstone bids $ 48.5 per share ($ 20 billion in cash), assume $ 16 billion in debt • Vornado (VNO) counters with $ 52, half stock, half cash • Blackstone counters with $ 54 per share – all cash • Vornado counters with $ 56: part stock, part cash • Morning of shareholder vote: Blackstone sweetens bid to $ 55.5

  4. Blackstone Acquires Equity Office Properties for $ 39 Billion • Terms • Compensation • $ 23 billion in cash ($ 55.50 per share) • Assume $ 16 billion in existing EOP debt • EOP shareholder vote successful on Wed • Closing is Friday, Feb 9 • Announces sale of $ 7 billion (6.5 million square feet of office space in NYC) to Harry Macklowe (who bought the GM Building)

  5. Lessons • Funds, like Blackstone, have an easier time bidding because: • No public shareholders (no votes or notice required before acting) • In real estate market, they have cash while REITs (Real Estate Investment Trusts) do not • Winner’s Curse • Principle/Agent Problems with Funds • But how to explain Macklowe

  6. Other Readings on Noise Trading • Fisher Black’s Presidential Address • Hirshleifer Etal on “Feedback” • Duffie on “Short Selling” • Huravy & Nussair on “Bubbles & Short Selling” • Kondor on “Gap Convergence”

  7. Other Readings on Noise Trading • Fisher Black’s Presidential Address • Hirshleifer Etal on “Feedback” • Duffie on “Short Selling” • Huravy & Nussair on “Bubbles & Short Selling” • Kondor on “Gap Convergence”

  8. Huravy & Nussair • Published in November of 2006 • Deals with bubble experiments that show • Bubbles even when true values are known by all • Question: Will short selling: 1) prevent bubbles; 2) make price equal to correct value • Short selling mainly lowers price • Cash available to buyers can offset and partially return prices to “correct” prices

  9. Other Readings on Noise Trading • Fisher Black’s Presidential Address • Hirshleifer Etal on “Feedback” • Duffie on “Short Selling” • Huravy & Nussair on “Bubbles & Short Selling” • Kondor on “Gap Convergence”

  10. Kondor on “Gap Convergence” • Unpublished paper, circulated widely, based on Univ of Chicago Ph.d. dissertation • Deals with “Royal Dutch Shell” issue • Two “identical securities,” trading at different prices (at a price “gap”) • Shows that arbitrageurs can go broke trying to do the arbitrage • Notice page 17 gap analysis

  11. Page 17 Gap Analysis g*

  12. End

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