Research articles for the 2020-02-13

A Parsimonious Approach for Higher-Order Moments in Portfolio Selection
Khashanah, Khaldoun,Simaan, Majeed,Simaan, Yusif
This paper investigates the economic value of higher moments in portfolio selection under estimation risk. It deploys a non-elliptical distribution for the asset returns, such that the return process constitutes a combination of two independent stochastic components: a Gaussian and a Bernoulli jump process. Given the adverse effects of estimation risk on the out-of-sample portfolio performance, the distribution imposes a parsimonious structure to identify the higher-order moments that can be easily calibrated using the expected maximization algorithm for maximum likelihood estimation. In terms of out-of-sample performance, we find that the corresponding portfolio outperforms the conventional mean-variance portfolio as well as the equally weighted (naive) portfolio. Nonetheless, the evidence is statistically significant when one considers a larger number of assets and a higher level of risk aversion. While this outperformance comes at the cost of larger turnover, we show that the portfolio still yields a higher risk-adjusted return for transaction costs of roughly 5\% per traded dollar.

A Study on Performance Evaluation of Equity Linked Saving Schemes (ELSS) of Mutual Funds
Panigrahi, CMA(Dr.) Ashok,Mistry, Mohit,Shukla, Raghav,Gupta, Abhishek
A mutual fund is a company that pools money from a group of investors and invests the money in different types of securities such as stocks, bonds, debt, etc. A mutual fund is one of the fastest-growing sectors in India and it plays a significant role in the Indian capital market. The equity-linked saving scheme is an open-ended equity diversified fund, which provides a tax benefit to investors under section 80 C of the Income Tax Act, 1961. Rs.1.5 lakh “income” gets tax benefit of up to Rs.45,000 at 30% tax without considering surcharge. However, with a large number of ELSS funds available, investors face the challenge of selecting suitable ELSS funds to suit their needs. This research paper is an attempt to evaluate the performance of the top five ELSS schemes of different mutual funds in India using various tools like Beta, Sharpe ratio, Jensen ratio, etc. It also suggests suitable ELSS schemes for investors so that they can achieve their investment objectives. The analysis reveals that the majority of funds have outperformed under Treynor's Ratio and Sharpe Ratio, giving constant and appreciable results during the course.

A class of stochastic games and moving free boundary problems
Xin Guo,Wenpin Tang,Renyuan Xu

In this paper we propose and analyze a class of stochastic $N$-player games that includes finite fuel stochastic games as a special case. We first derive sufficient conditions for the Nash equilibrium (NE) in the form of a verification theorem, which reveals an essential game component regarding the interaction among players. It is an analytical representation of the conditional optimality condition for NEs, largely missing in the existing literature on stochastic games. The derivation of NEs involves first solving a multi-dimensional free boundary problem and then a Skorokhod problem, where the boundary is "moving" in that it depends on both the changes of the system and the control strategies of other players. Finally, we reformulate NE strategies in the form of controlled rank-dependent stochastic differential equations.

A simple model suggesting economically rational sample-size choice drives irreproducibility
Oliver Braganza

Several systematic studies have suggested that a large fraction of published research is not reproducible. One probable reason for low reproducibility is insufficient sample size, resulting in low power and low positive predictive value. It has been suggested that insufficient sample-size choice is driven by a combination of scientific competition and 'positive publication bias'. Here we formalize this intuition in a simple model, in which scientists choose economically rational sample sizes, balancing the cost of experimentation with income from publication. Specifically, assuming that a scientist's income derives only from 'positive' findings (positive publication bias) and that individual samples cost a fixed amount, allows to leverage basic statistical formulas into an economic optimality prediction. We find that if effects have i) low base probability, ii) small effect size or iii) low grant income per publication, then the rational (economically optimal) sample size is small. Furthermore, for plausible distributions of these parameters we find a robust emergence of a bimodal distribution of obtained statistical power and low overall reproducibility rates, both matching empirical findings. Finally, we explore conditional equivalence testing as a means to align economic incentives with adequate sample sizes. Overall, the model describes a simple mechanism explaining both the prevalence and the persistence of small sample sizes, and is well suited for empirical validation. It proposes economic rationality, or economic pressures, as a principal driver of irreproducibility and suggests strategies to change this.

Analysis of intra-day fluctuations in the Mexican financial market index
Léster Alfonso,Danahe E. Garcia-Ramirez,Ricardo Mansilla,César A. Terrero-Escalante

In this paper, a statistical analysis of high frequency fluctuations of the IPC, the Mexican Stock Market Index, is presented. A sample of tick-to-tick data covering the period from January 1999 to December 2002 was analyzed, as well as several other sets obtained using temporal aggregation. Our results indicates that the highest frequency is not useful to understand the Mexican market because almost two thirds of the information corresponds to inactivity. For the frequency where fluctuations start to be relevant, the IPC data does not follows any alpha-stable distribution, including the Gaussian, perhaps because of the presence of autocorrelations. For a long range of lower-frequencies, but still in the intra-day regime, fluctuations can be described as a truncated L\'evy flight, while for frequencies above two-days, a Gaussian distribution yields the best fit. Thought these results are consistent with other previously reported for several markets, there are significant differences in the details of the corresponding descriptions.

Applications of the Deep Galerkin Method to Solving Partial Integro-Differential and Hamilton-Jacobi-Bellman Equations
Ali Al-Aradi,Adolfo Correia,Danilo de Frietas Naiff,Gabriel Jardim,Yuri Saporito

We extend the Deep Galerkin Method (DGM) introduced in Sirignano and Spiliopoulos (2018) to solve a number of partial differential equations (PDEs) that arise in the context of optimal stochastic control and mean field games. First, we consider PDEs where the function is constrained to be positive and integrate to unity, as is the case with Fokker-Planck equations. Our approach involves reparameterizing the solution as the exponential of a neural network appropriately normalized to ensure both requirements are satisfied. This then gives rise to a partial integro-differential equation (PIDE) where the integral appearing in the equation is handled using importance sampling. Secondly, we tackle a number of Hamilton-Jacobi-Bellman (HJB) equations that appear in stochastic optimal control problems. The key contribution is that these equations are approached in their unsimplified primal form which includes an optimization problem as part of the equation. We extend the DGM algorithm to solve for the value function and the optimal control simultaneously by characterizing both as deep neural networks. Training the networks is performed by taking alternating stochastic gradient descent steps for the two functions, a technique similar in spirit to policy improvement algorithms.

Are American options European after all?
Sören Christensen,Jan Kallsen,Matthias Lenga

We call a given American option representable if there exists a European claim which dominates the American payoff at any time and such that the values of the two options coincide in the continuation region of the American option. This concept has interesting implications from a probabilistic, analytic, financial, and numeric point of view. Relying on methods from Jourdain and Martini (2001, 2002), Chrsitensen (2014) and convex duality, we make a first step towards verifying representability of American options.

Are Government Owned Investment Funds Created Equal? Evidence From Sovereign Wealth Fund Real Estate Acquisitions
Liu, Peng,Mauck, Nathan,Price, S. McKay
Sovereign Wealth Funds (SWFs) are an institutional investor class about which relatively little is known. Even though they have trillions of dollars in assets under management, their (typically) highly secretive nature renders them difficult to analyze in an academic context. We utilize transactional data from the Sovereign Wealth Fund Institute to provide the first academic analysis of SWF real estate investment activity of which we are aware. To better understand this growing investor class, we compare SWFs with their most closely related institutional group, public pension funds (PPFs). While both SWFs and PPFs are state owned investment funds, we find SWFs have lower Stone and Truman (2016) best practice scores (based on fund structure, governance, transparency and accountability, and behavior.) Further, while both SWFs and PPFs show increasing levels of cross-border real estate investment, SWFs are significantly more likely than PPFs to invest across international borders. We find the percentage of SWF cross-border real estate investment to be substantially higher than the percentage of SWF cross-border investment in public and private equity documented in other studies. Moreover, in a subsample of acquisitions in the U.S., cross-border real estate investments are in locations with lower capitalization rates than domestic acquisitions for both SWFs and PPFs, and there is no discernable difference in rates across the two fund types, on average.

Asset Pricing, Asset Allocation and Risk-Adjusted Performance with Multiple Goals and Agency: The Goals and Risk-based Asset Pricing Model
Muralidhar, Arun
Investment managers require a consistent asset pricing model, asset allocation recommendations and risk-adjusted performance measures (or the “three facets of investing”) to be effective in managing portfolios. Incorporating three critical realities of investing into these models (i.e., that investors have many stochastic goals, seek to delegate to skillful agents, and maximize risk-adjusted returns as opposed to expected utility) provides recommendations on the three facets that are markedly different from the foundational papers of Modern Portfolio Theory (MPT). This is important as Goals-based Investing (GBI) and delegation are now the norm, and investors globally are not meeting their goals by adopting traditional MPT. The paper briefly surveys the literature on MPT, GBI, and agency before providing a normative Goals- and Risk-Based Asset Pricing Model (GRAPM) that includes these three realities of investing and articulates the three new facets. GRAPM exploits a simple idea that a relatively risk-free asset for one stochastic goal is a risky asset for another, and vice versa. These two assets, plus the traditional absolute risk-free rate of MPT, allow us to triangulate to establish returns for all other assets based on the return of any goal-replicating asset and multiple correlations (as opposed to a single relationship with the unobservable “market” portfolio). This approach creates a “pair-wise equilibrium” for all assets â€" very different from MPT - and also lends itself easily to a new asset pricing model with heterogeneous investors (i.e., each investor has a unique goal). GRAPM incorporates a “risk-aversion” parameter that is also easily observable, unlike MPT, and appears to explain why seemingly similar investors can have markedly different asset allocations or expected returns.

Banks’ Home-Bias in Government Bonds Holdings. Will Banks in Low-Rated Countries Invest in European Safe Bonds (ESBies)?
Dermine, Jean
This paper offers two new explanations for banks’ home bias in government bond holdings: a sovereign-based rating cap on corporates and the existence of a ‘bank tax’. These are complementary to the four explanations offered in the literature: risk shifting, gambling for resurrection, moral suasion, and a means to store liquidity for financing future investment. Collectively, they cast doubt on the European Union’s demand-led approach to investment in European safe bonds (ESBies) by banks in low-rated countries. Bank regulations such as constraints on large exposure or risk-based capital on credit risk concentration will be needed if the objective is to break the so-called “deadly embrace”.

Debt Relief for the EMU Countries: A Chance to Restore Europe’s Power and to Stabilize the Euro. â€" A Discussion Paper
Eibner, Wolfgang
Government spending on bailing out banks and financing a variety of stimulus packages following the US real estate and financial crisis led to a sharp increase in the already very high level of public debt also of the member countries of the European Monetary Union (EMU).Countries such as Greece, Italy, Belgium, France and even Germany in particular depend on very low or at least low interest rates to stabilize their financial situation. Thus, the central reason for the European Central Bank's low interest rate policy, which has been in place for almost 10 years, is to provide the highly indebted countries of the EMU with a significant reduction in the interest burden in favor of a solution to the debt problem: giving time for a lot of necessary reforms to increase economic development. But none of this has succeeded in the last 10 years.Instead, the budgetary situation in the euro countries is getting worse, the disparities in economic development are increasing rather than diminishing, thereby endangering the stability of the euro and thus the future of the single currency.There is an urgent need for sustained higher net investments in nearly all sectors of all countries from Greece to Germany: instead, net investment in the countries of the EMU is clearly decreasing and Europe is in danger of being left behind not only by the two economic powers USA and China.This outlines a problem that is as pressing as it is topical: the question of how to restore Europes’ economic power. The key lies in the question of how can we be able to solve the crippling debt problem of European countries quickly and sustainably.The answer given by the discussion paper is a kind of debt relief, implemented as a conversion of a relevant amount of the government bonds held by the ECB. Conversion means extending the repayment to 80-100 years and the interest rate to be set very low. Of course a binding agreement is inevitable that net new debt can only be taken up to the maximum value of the GDP growth of a certain period. Only countries can participate in the debt conversion which commit themselves to making higher net investments to be specified more precisely, to carry out reforms especially concerning the efficiency of taxation, respectively set lower and upper limits for some taxes of the central government, and harmonize them within narrow ranges. Also it is necessary to reasonably reduce and largely deregulate bureaucracy and put an end to shadow economy and corruption.By regaining financial strength as a result of a debt conversion, which is only possible within a strong supranational framework, the advantages of membership in the European Monetary Union will once again become evident, and the European Union can again become a shining example of freedom and prosperity, the way that Robert Schuman did formulate as a vision in.

Decreasing market value of variable renewables is a result of policy, not variability
T. Brown,L. Reichenberg

Although recent studies have shown that electricity systems with shares of wind and solar above 80% can be affordable, economists have raised concerns about market integration. Correlated generation from variable renewable sources depresses market prices, which can cause wind and solar to cannibalize their own revenues and prevent them from covering their costs from the market. This cannibalization appears to set limits on the integration of wind and solar, and thus contradict studies that show that high shares are cost effective. Here we show from theory and with numerical examples how policies interact with prices, revenue and costs for renewable electricity systems. The decline in average revenue seen in some recent literature is due to an implicit policy assumption that technologies are forced into the system, whether it be with subsidies or quotas. If instead the driving policy is a carbon dioxide cap or tax, wind and solar shares can rise without cannibalising their own market revenue, even at penetrations of wind and solar above 80%. Policy is thus the primary factor driving lower market values; the variability of wind and solar is only a secondary factor that accelerates the decline if they are subsidised. The strong dependence of market value on the policy regime means that market value needs to be used with caution as a measure of market integration.

Dominant Money
Huber, Joseph
This paper outlines a theory of dominant money, i.e. the means of payment that determines the money system and monetary policy during a certain epoch. In modern times, there have been three tidal changes in the composition of the money supply with a new type of money on the rise: unregulated paper money since the 1660s, the rise of central-bank legal tender notes towards the middle of the 19th century, and the rise of bank deposit money from around 1900. An analysis of the current situation suggests we are now entering another such era in which sovereign digital currency issued by the central banks (CBDC) is set to becoming the next dominant type of money.

Fast mean-reversion asymptotics for large portfolios of stochastic volatility models
Ben Hambly,Nikolaos Kolliopoulos

We consider an SPDE description of a large portfolio limit model where the underlying asset prices evolve according to certain stochastic volatility models with default upon hitting a lower barrier. The asset prices and their volatilities are correlated via systemic Brownian motions, and the resulting SPDE is defined on the positive half-space with Dirichlet boundary conditions. We study the convergence of the loss from the system, a function of the total mass of a solution to this stochastic initial-boundary value problem under fast mean reversion of the volatility. We consider two cases. In the first case the volatility converges to a limiting distribution and the convergence of the system is in the sense of weak convergence. On the other hand, when only the mean reversion of the volatility goes to infinity we see a stronger form of convergence of the system to its limit. Our results show that in a fast mean-reverting volatility environment we can accurately estimate the distribution of the loss from a large portfolio by using an approximate constant volatility model which is easier to handle.

Geographic Diversification in Real Estate Investment Trusts
Feng, Zhilan,Pattanapanchai, Maneechit,Price, S. McKay,Sirmans, C. F.
Whether geographic diversification within property portfolios is ideal remains an open question, with most studies finding either a diversification discount or no evidence of benefits. Using a sample of equity real estate investment trusts (REITs) from 2010 â€" 2016, we find a nonlinear relation between geographic diversification and firm value. Specifically, geographic diversification is associated with higher REIT values for firms that can be described as being more transparent (i.e., they have high levels of institutional ownership or invest in core property types.) Whereas, geographic concentration is associated with higher REIT values for firms that can be described as being less transparent (i.e., they have low levels of institutional ownership or invest in non-core property types.) Operating efficiency, at both the property- and firm-levels, are the means by which the diversification value is realized. Operations improve as property portfolios become more geographically diversified for more transparent firms. When the improvements are decomposed into revenue generation and expense efficiency portions, we find revenue generation to be the main operational channel through which the benefits are obtained.

Information Value in EU-Wide Bank Stress Test
Dermine, Jean
The paper starts with an evaluation of the banks’ solvency information disclosed in the 2018 and 2016 EU-wide stress tests, asking do they add value to the information available in the bank capital ratios observed at the start of the stress exercise? It argues that information from price-to-book, degree of imperfect information on the value of assets and relative holding of domestic government bonds all require a bank-specific approach in the supervisory review and evaluation process (SREP) exercise. In short, one size does not fit all.

Market Making and Proprietary Trading in the US Corporate Bond Market
Dastarac, Hugues
I study broker-dealers' trading activity in the US corporate bond market. I find evidence of broker-dealer market making when customers both buy and sell a bond in a day, which happens half of the time: as predicted by market making theories with adverse selection or inventory costs, prices go down (up) as customers sell (buy). Otherwise, evidence is in favor of proprietary trading as in limits of arbitrage theories: prices go up (down) when customers sell (buy), and dealers buy (sell) bonds that are relatively cheap (expensive). Proprietary trading is reduced after the crisis. Relatedly I show that before the crisis, large broker-dealers borrowed and sold Treasury bonds in amounts similar to their corporate bond holding, but not after. I give suggestive evidence that they were subject to a severe tightening of their margin constraints as early as July 2007, in particular following increased Treasury bond volatility

Neglected Risk: Evidence from the Eurozone Sovereign Credit Market
Lotfi, Somayyeh,Milidonis, Andreas,Zenios, Stavros A.
We find evidence of neglected risk during sovereign debt expansions (DE), by analyzing the sovereign debt markets for both crisis and non-crisis Eurozone countries from 2002-2017. After showing that DE predicts increased default probability, we first provide initial evidence that conditional on large DE, future risk premia are negative. Second, we document the negative relation between DE and future risk premia in a panel regression framework. Third, we document the impact that the Deauville summit in October 2010 had on neglected risk, by using panel regressions one year before and after this event. Our results provide evidence of neglected risk before, but not immediately after Deauville. Finally, analyzing the most recent data (2012-2017) we show that DE still predicts lower risk premia, however this effect is neutralized by quantitative easing (QE), therefore raising the public policy question of what will happen after QE ends.

Online Quantification of Input Model Uncertainty by Two-Layer Importance Sampling
Tianyi Liu,Enlu Zhou

Stochastic simulation has been widely used to analyze the performance of complex stochastic systems and facilitate decision making in those systems. Stochastic simulation is driven by the input model, which is a collection of probability distributions that model the stochasticity in the system. The input model is usually estimated using a finite amount of data, which introduces the so-called input model uncertainty to the simulation output. How to quantify input uncertainty has been studied extensively, and many methods have been proposed for the batch data setting, i.e., when all the data are available at once. However, methods for "streaming data" arriving sequentially in time are still in demand, despite that streaming data have become increasingly prevalent in modern applications. To fill this gap, we propose a two-layer importance sampling framework that incorporates streaming data for online input uncertainty quantification. Under this framework, we develop two algorithms that suit different application scenarios: the first scenario is when data come at a fast speed and there is no time for any new simulation in between updates; the second is when data come at a moderate speed and a few but limited simulations are allowed at each time stage. We prove the consistency and asymptotic convergence rate results, which theoretically show the efficiency of our proposed approach. We further demonstrate the proposed algorithms on a numerical example of the news vendor problem.

Risk Preferences and Economic Shocks: Experimental Evidence
Dorlöchter, Jonas,Amann, Erwin
We demonstrate in our experiment that an exogenous shock does not lead to increasing risk aversion, and has ultimately no significant impact on investors’ risk preference in general. To do so, we keep subjects’ risk and return expectations fixed and focus solely on loss in wealth. As a theoretical framework, we use the expected utility approach and take the class of HARA-utility functions to analyse subjects’ preferences. Particularly, our methodical approach affords insights into the impact of economic fluctuations on investors’ risk-taking and the measurement of risk preferences per se. We conclude that cautious investment behavior after an economic crisis might rather be due to changes in the perception of risk and return. Moreover, we give evidence that, in general, it is not sufficient to explain investors’ risk-taking solely by preferences.

Rule- vs. Principle-Based Accounting Standard and Earnings Characteristics : An Analysis Using ASC 606
Lee, Kyungran,Lee, ShinWoo
We examine the effect of the adoption of the new revenue recognition standard (ASC 606) on earnings characteristics and how it, in turn, affects the stock and the debt market. The new rule standardizes, simplifies, and harmonizes previous revenue recognition practices among companies, which is a transition from a rule-based accounting standard to a principle-based accounting standard. We find that the new rule decreases earnings predictability and it is associated with the increased discretion in preparing earnings numbers. In addition, the use of earnings-based covenants decreases in debt contracting. However, we do not find evidence that the new standard is associated with an increase in earnings management behavior. In terms of the stock market response, the earnings response coefficient (ERC) does not change after the new rule overall. However, it has increased for firms with high institutional holdings after the adoption and decreased for firms with low institutional holdings. Our analysis supports the idea that this is due to different investors interpreting the new disclosure associated with ASC 606 differently.

Sharing of longevity basis risk in pension schemes with income-drawdown guarantees
Ankush Agarwal,Christian-Oliver Ewald,Yongjie Wang

This work studies a stochastic optimal control problem for a pension scheme which provides an income-drawdown policy to its members after their retirement. To manage the scheme efficiently, the manager and members agree to share the investment risk based on a pre-decided risk-sharing rule. The objective is to maximise both sides' utilities by controlling the manager's investment in risky assets and members' benefit withdrawals. We use stochastic affine class models to describe the force of mortality of the members' population and consider a longevity bond whose coupon payment is linked to a survival index. In our framework, we also investigate the longevity basis risk, which arises when the members' and the longevity bond's reference populations show different mortality behaviours. By applying the dynamic programming principle to solve the corresponding HJB equations, we derive optimal solutions for the single- and sub-population cases. Our numerical results show that by sharing the risk, both manager and members increase their utility. Moreover, even in the presence of longevity basis risk, we demonstrate that the longevity bond acts as an effective hedging instrument.

Social Connections and Liquidity Hoarding
Gupta, Abhinav
This paper aims to quantify liquidity hoarding - the over-accumulation of cash by a firm in expectation of a supply side credit reduction. Changes in expectations on future credit supply are identified using credit shocks to distant social connections. I believe this novel identification is able to isolate the effects of change in expectations not driven by changes in own credit supply. I find evidence of liquidity hoarding by counties not affected by financial crisis themselves but whose distant friends were affected by credit supply cuts. This effect appears to be large and multiplicative. The results seem to be confirmed in the time series and also consistent with spread of fin-tech lending for small businesses. The results are not explained by spillover, productivity shift, bank supply shift or homophily based explanations. I believe I am able to add to a long line of literature on liquidity hoarding and its potential negative externalities including credit runs. The paper also shows that social connections may matter in firm credit decisions.

Tax Knowledge Diffusion via Strategic Alliances
Mueller, Jens,Weinrich, Arndt
This study examines strategic alliances as channels for tax knowledge diffusion between firms. Although strategic alliances are primarily expected to foster their main business purposes, we focus on whether tax knowledge potentially diffuses as a second order effect of peer-to-peer cooperation. To tease out diffusion of tax knowledge, we investigate changes in the tax planning behavior of high-tax firms in strategic alliances with low-tax firms in comparison to high-tax firms in strategic alliances with other high-tax firms. Our results suggest an economically meaningful decrease of high-tax firms’ cash effective tax rates when cooperating with low-tax firms. Additionally, we find that this adjustment occurs within two years of a strategic alliance’s initiation. We apply textual analysis to control for the strategic alliances’ main business purposes in our analyses. Because these activities do not appear to drive our findings, we argue to identify tax knowledge diffusion as a second order effect and conjecture that strategic alliances are not intended to be tax planning investments. Finally, we test whether partner characteristics intensify or mitigate the identified effects. Overall, our results provide robust evidence for tax knowledge diffusion via strategic alliances.

The Effects of Canadian SOX on the Price Discount of Canadian Equity Offerings
Rubalcava, Arturo
This study studies the effects of Canadian SOX on the price discount of seasoned equality offerings of Canadian issuers. Canadian SOX is legislation similar to the U.S. Sarbanes-Oxley of 2002. It passed in October 2002 and became effective December 2005. It finds Canadian SOX did not have a significant effect on the offer price discount of all Canadian issuers. These include those listed on the Toronto Stock Exchange only and those simultaneously listed on the Toronto Stock Exchange and major U.S. exchanges (cross-listed). On the other hand, when distinguishing offers by underwriting method, the price discount is not different between bought deals and marketed underwritten offers after the passage of Canadian SOX. These findings are consistent with the general hypothesis the Canadian law should not have a significant effect in the price discount of equity offers. This is because the 3-year period allowed regulators, issuers, investors, and investment banks enough time to adapt to the new law with minimum effects. Unlike Sarbanes-Oxley, where many difficulties have occurred in its implementation.

Top of the Batch: Interviews and the Match
Federico Echenique,Ruy Gonzalez,Alistair Wilson,Leeat Yariv

Most doctors in the NRMP are matched to one of their most-preferred internship programs. Since various surveys indicate similarities across doctors' preferences, this suggests a puzzle. How can nearly everyone get a position in a highly-desirable program when positions in each program are scarce? We provide one possible explanation for this puzzle. We show that the patterns observed in the NRMP data may be an artifact of the interview process that precedes the match. Our analysis highlights the importance of interactions occurring outside of a matching clearinghouse for resulting outcomes, and casts doubts on analysis of clearinghouses that take reported preferences at face value.