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Futures Replication and the Law of One Futures Price Quarterly Journal of Finance Pub Date : 2024-02-28 Avi Bick
We define a synthetic futures contract as a pair consisting of a terminal futures price J (a prespecified random variable) and a zero-value trading strategy whose terminal cumulative cash flow is equal to J to within an additive constant. The construction of synthetic futures contracts is demonstrated for (i) futures on futures, (ii) futures on spot, (iii) quanto futures on futures, (iv) quanto futures
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Firm-Level Political Risk and the Cash Flow Sensitivity of Cash Quarterly Journal of Finance Pub Date : 2024-02-28 Hui Liang James, Hongxia Wang, Nilakshi Borah
We examine the impact of firm-level political risk on the cash flow sensitivity of cash. Using a large sample of U.S. firms from 2003 to 2018, we find that the cash flow sensitivity of cash decreases in political uncertainty and the impact of political risk is asymmetric to cash flow types (positive versus negative). Intensified political uncertainty induces positive/negative cash flow firms to reduce
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Institutional Quality, Trust, and Stock Market Participation: Learning to Forget Quarterly Journal of Finance Pub Date : 2024-01-05 Hossein Asgharian, Lu Liu, Frederik Lundtofte
In this paper, we explore the relations among institutional quality, households’ level of trust, and stock market participation. We find that institutional quality has a significant impact on both trust and participation. The individual level of trust significantly affects participation, but trust plays a small role in the effect of institutional quality on participation. Further, we demonstrate that
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Computing Arbitrage-Free Yields in Multi-Factor Gaussian Shadow Rate Term Structure Models Quarterly Journal of Finance Pub Date : 2023-12-30 Marcel A. Priebsch
This paper develops an approximation to arbitrage-free bond yields in Gaussian shadow rate term structure models. In this class of models, yields are constrained to be above an effective lower bound, thus rendering standard bond pricing methods inapplicable. I propose approximating the nonlinear relationship between yields and state variables using moments of the censored normal distribution. In an
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Does Random Auction Ending Curb Stock Price Manipulation? Quarterly Journal of Finance Pub Date : 2023-12-29 Yiping Lin, David Michayluk, Mi Zou
This paper examines the effect on stock market efficiency and potential market manipulation of introducing a random ending time for the call auctions that start and end continuous trading on three equity markets. We find that the probability of a price dislocation at the end of the auction declines, indicating a lower risk of market manipulation. In addition, the variance ratio and market-adjusted
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Price Discovery in the CDS Market: Evidence from Corporate Acquisitions Quarterly Journal of Finance Pub Date : 2023-11-23 Iuliana Ismailescu, Blake Phillips, Xiaowei Xu
This study examines the contribution of credit default swaps (CDS) to price discovery in the run-up period preceding an acquisition announcement. We find that the CDS market plays a significant role in price formation before cross-border acquisitions, especially when target firms are from emerging economies. Further, the information flow from the CDS to the equity market is more pronounced when the
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How Robust are Empirical Factor Models to the Choice of Breakpoints? Quarterly Journal of Finance Pub Date : 2023-11-08 Fabian Hollstein, Marcel Prokopczuk, Victoria Voigts
We comprehensively investigate the robustness of well-known factor models to altered factor formation breakpoints. Deviating from the standard 30th and 70th percentile selection, we use an extensive set of anomaly test portfolios to uncover two main findings: First, there is a trade-off between specification and diversification. More centered breakpoints tend to result in less (idiosyncratic) risk
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Venture Capital Exits and Investments: The Influences of Market Run-up, Market Timing, and Media Attention Quarterly Journal of Finance Pub Date : 2023-09-22 Y. Peter Chung, Yun Liu, Richard Smith
In this paper, we address the question of whether venture capital (VC) firms are able to add value through exit and investment timing. Considering all venture-backed exits, we find that VCs are able to time the initial public offerings (IPOs) to occur after market run-ups. However, we find no evidence that VCs can time IPOs to precede low or negative market returns. Focusing on the biotech sector,
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Old-Fashioned Deposit Runs Quarterly Journal of Finance Pub Date : 2023-08-07 Jonathan D. Rose
This paper characterizes the deposit runs that occurred in the commercial banking system during 2008 and compares them with deposit runs during the 1930s. The importance of withdrawals by large depositors is a strong source of continuity across the two eras and reflects the longstanding concentration of deposit holdings. Runs occurred in 2008 despite the presence of national deposit insurance, which
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Post-FOMC Drift Quarterly Journal of Finance Pub Date : 2023-08-04 Liang Ma, Xiaowen Zhang
We study the patterns of stock returns around the Federal Reserve monetary policy announcements. Much of the existing literature interprets changes in short rates around the announcement windows as policy surprises. In contrast, we follow the “Fed information effect” literature, which posits that financial markets react to central bank announcements not just for unexpected changes in monetary policy
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Circular Economy, Stock Volatility, and Resilience to the COVID-19 Shock: Evidence from European Companies Quarterly Journal of Finance Pub Date : 2023-06-30 Claudio Zara, Luca Bellardini, Margherita Gobbi
Background: By decoupling economic growth from an intensive use of resources, preventing the impairment of natural capital, and enhancing resilience to system-wide shocks, the Circular Economy (CE) is a powerful opportunity to hedge against “linear” risk factors. In fact, it helps shielding against the risk of assets becoming stranded, can generate fresh and non-speculative demand for investments,
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Patents as Real Options: A Sensitivity Analysis of Option Valuation Using the Binomial Model Quarterly Journal of Finance Pub Date : 2023-06-30 Grid Thoma
Using the real option approach and the binomial decision tree model, patent value is discussed in terms of how patent protection gives firms flexibility in making investment decisions on whether or how to continue exploiting the underlying invention in the commercialisation phase. The results of this paper, in agreement with predictions of current financial theory, indicate that patent real option
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Sources of Funding in a Crisis: Evidence from Investment Banks Quarterly Journal of Finance Pub Date : 2023-06-26 Jean Helwege, Jan Jindra
In this paper, we evaluate changes in investment bank balance sheets to determine how these firms respond to shocks in a financial crisis. Contrary to theories that emphasize liquidity problems, we find that most investment banks maintain funding levels during these downturns. Investment banks typically respond to shocks with a shift into deposits or by raising equity, rather than selling assets at
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High Impact Research in Finance: Role of Bisociation and Creativity Quarterly Journal of Finance Pub Date : 2023-06-19 Kose John, Emma Xu
High impact research in our fields of banking and finance, and more broadly that of economics, can take three main forms: (1) solving the major unsolved problems in the field, (2) posing major questions/ problems to be solved, and (3) providing a new framework/ approach to synthesize current and extant knowledge in the field. We analyze some recent research in different areas of banking and finance
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Return of the NPLs to the Bright Side: Which Unlikely to Pay Firms are More Likely to Pay? Quarterly Journal of Finance Pub Date : 2023-06-17 Massimiliano Affinito, Giorgio Meucci
Bank loans are divided into performing and non-performing loans (NPLs). NPLs are in turn divided into categories characterized by different degrees of difficulty of the debtor and level of risk for the creditor bank. Unlikely to pay loans (UTPs) are NPLs that have a non-zero probability of returning to the performing status. This paper analyzes at the firm and bank level the entire pool of UTPs vis-à-vis
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Ascertaining the Inference of Bank Internal Default Probabilities Variations on Variable Rate Institutional Loan Prepayments Quarterly Journal of Finance Pub Date : 2023-06-15 Andre Horovitz
This paper aims to evaluate an inference of bank internal PDs (Default Probabilities) on subsequent prepayments of variable rate institutional loans. Since variable rate loans hardly present an economic motivation for early prepayments in that they would not offer a cheaper refinancing alternative, we test the conjecture of a correlation between improvements in obligors’ creditworthiness (as reflected
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Liquidity Creation, Bank Competition and Revenue Diversification Quarterly Journal of Finance Pub Date : 2023-05-26 Vuong Thao Tran, Hoa Nguyen
We examine the individual and joint effects of bank competition and revenue diversification on liquidity creation. We find that bank competition and revenue diversification have a positive impact on banks’ propensity to create liquidity. Competition appears to primarily impact on-balance-sheet liquidity creation while revenue diversification is a key driver of off-balance-sheet liquidity creation.
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How Do Investors Prefer for Banks to Transition to Basel Internal Models: Mandatorily or Voluntarily? Quarterly Journal of Finance Pub Date : 2023-05-26 Henry Penikas, Anastasia Skarednova, Mikhail Surkov
The recently finalised Basel Framework continues to allow banks to use internal data and models to define risk estimates and use them to compute their capital adequacy ratios. Globally, there are more than two thousand banks running Basel internal models. However, there are countries that have no such banks. They face the dilemma of which of the transition paths to adopt: the voluntary path, as in
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The Trust Risk Puzzle: The Impact of Trust on the Willingness to Take Financial Risk Quarterly Journal of Finance Pub Date : 2023-05-17 Andreas Oehler, Matthias Horn, Stefan Wendt
We provide a structural equation model to analyze the influence of both willingness to trust others and personality factors such as the Big Five characteristics and optimism on retail investors’ risky assets share and general willingness to take risks. The main findings are as follows: The personality trait agreeableness has a significant and positive impact on general willingness to trust. Willingness
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Why Does Volatility Uncertainty Predict Equity Option Returns? Quarterly Journal of Finance Pub Date : 2023-04-25 Jie Jay Cao, Aurelio Vasquez, Xiao Xiao, Xintong Eunice Zhan
Delta-hedged option returns consistently decrease in volatility of volatility changes (volatility uncertainty), for both implied and realized volatilities. We provide a thorough investigation of the underlying mechanisms including model-risk and gambling-preference channels. Uncertainty of both volatilities amplifies the model risk, leading to a higher option premium charged by dealers. Volatility
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Does Hiring M&A Advisers Matter for Private Sellers? Quarterly Journal of Finance Pub Date : 2023-03-11 Anup Agrawal, Tommy Cooper, Qin Lian, Qiming Wang
M&A advisers can find and negotiate better deals for sellers, but hiring them entails fees and potential agency costs. Using a novel, hand-collected dataset on the hiring of seller advisers for a large sample of M&A deals, we find that private sellers use advisers or top-tier advisers when it makes economic sense. After accounting for this selection effect, advisers and top-tier advisers positively
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Two Different Exits: Prediction and Performance of Stocks that are About to Stop Trading Quarterly Journal of Finance Pub Date : 2023-02-20 Ting Bai, Jens Hilscher, Yitian Xiao
This paper predicts the two most common stock market exits — mergers and drops — using logit models based on firm-level variables and analyzes the returns of stocks that have high exit probabilities. Such analysis is important for investors given that frequent exits are partly responsible for the large US listing gap (Doidge et al., 2017). High merger probability stocks have positive 3-factor alphas
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Accounting Information Completeness and Firm Default Risk Quarterly Journal of Finance Pub Date : 2023-01-31 Yaqin Hu, Xiaofei Zhao
Corporate debt market is crucial to raise capital for businesses and to maintain steady economic growth. Disclosure with more complete accounting information provides more informative signals for investors to assess a firm’s risk of defaulting on its debt, which is the fundamental mechanism of the seminal theory by Duffie and Lando [2001, Term Structures of Credit Spreads with Incomplete Accounting
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Why do Funds Make More When They Trade More? Quarterly Journal of Finance Pub Date : 2023-01-20 Jaden Jonghyuk Kim, Jung Hoon Lee, Shyam Venkatesan
In this paper, we introduce a conditional measure of skill, the correlation between funds’ residual trades, net of common trading motives, and future news about the stocks traded. Using this measure, we show that the average mutual fund manager in the cross-section has stock-picking skill. This result is robust to different benchmarks and is mainly driven by the manager’s ability to predict a firm’s
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Do Markets Price CEOs Health Hazards? Evidence from the COVID-19 Pandemic Quarterly Journal of Finance Pub Date : 2023-01-20 Juan Pedro Gómez, Maxim Mironov
We find evidence that markets anticipate the potential loss of firm value in the event of the CEO falling sick and eventually dying of COVID-19 in a sample of almost 3000 listed firms from across 137 regions in 10 European countries. First, we use soccer games as “super-spreader” events. The instrumented number of infected cases per capita in the region where company headquarters are located predicts
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Consumption Risk, Stock Returns, and Economic Cycles Quarterly Journal of Finance Pub Date : 2022-12-23 Victoria Atanasov
We decompose the standard consumption beta into two components that measure consumption risk in high and low economic activity states. Recessionary consumption risk commands a positive and statistically significant compensation, while the market price of expansionary consumption risk is not robust. The two-beta model explains well the cross-section of excess returns on book-to-market-, size-, and momentum-sorted
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Dividends on Unearned Shares and Corporate Payout Policy: An Analysis of Dividend Equivalent Rights Quarterly Journal of Finance Pub Date : 2022-11-09 Z. Tingting Jia, Don M. Chance
We investigate a little-known executive compensation device called dividend equivalents, which are provisions on some options and performance-based equity awards permitting executives to receive dividends on shares not owned and which they may ultimately never own. We find that up to 30% of sample firms have had this policy. While dividend equivalents may appear to exacerbate agency problems, they
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Corporate Culture, Innovation, and Female Board Representation: Evidence from Earnings Conference Calls Quarterly Journal of Finance Pub Date : 2022-09-17 Tanakorn Likitapiwat, Sirimon Treepongkaruna, Pornsit Jiraporn, Ali Uyar
Exploiting a novel measure of corporate culture based on cutting-edge machine learning algorithms, we examine how female board representation influences a culture of innovation, and also whether female directors spur innovation culture in the presence of an active takeover market. Our results show that higher board gender diversity improves a corporate innovation culture considerably. Specifically
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A Portfolio Model of Quantitative Easing Quarterly Journal of Finance Pub Date : 2022-09-02 Jens H. E. Christensen, Signe Krogstrup
This paper presents a portfolio model of asset price effects arising from central bank large-scale asset purchases, or quantitative easing (QE). Two financial frictions — segmentation of the market for central bank reserves and imperfect asset substitutability — give rise to two distinct portfolio effects. One is well known and derives from the reduced supply of the purchased assets. The other is new
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Stock Liquidity and Issuing Activity Quarterly Journal of Finance Pub Date : 2022-08-12 Alexander Barinov
Issuing activity does not result in superior post-issue liquidity. New issues are just as liquid as their peer non-issuers. Even the kinds of new issues that are supposed to be more liquid than others (initial public offerings (IPOs) backed by venture capital, new issues with high-prestige underwriters, severely underpriced IPOs) have the same liquidity as other similar issuers. The paper thus refutes
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Tick Size, Institutional Trading, and Market Making: A Study of the SEC Tick Size Pilot Program Quarterly Journal of Finance Pub Date : 2022-08-10 Xin Gao, Kaitao Lin, Rui Liu
Using the 2016 SEC Tick Size Pilot Program, we study the effects of an increase in tick size on institutional trading, market making costs, profitability, and activities. We find that increasing the tick size deters institutional trading participation, as it results in unfavorable stock characteristics, such as greater price impact and depressed share prices. In particular, we show that the implementation
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Glassdoor: Are the Top CEOs Representing the Best Investments Quarterly Journal of Finance Pub Date : 2022-07-30 Greg Filbeck, Xin Zhao
In 2013, Glassdoor launched the Employees’ Choice Awards for the Top CEOs. Glassdoor’s awards are unique in that feedback from employees exclusively determines the winners. Given Glassdoor’s notoriety, claiming 64 million unique visitors and 11 million job listings monthly, being listed as a Top CEO certainly has reputational value — but does it translate to higher shareholder returns? We find that
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Public and Private Information: Firm Disclosure, SEC Letters, and the JOBS Act Quarterly Journal of Finance Pub Date : 2022-06-20 Sumit Agarwal, Sudip Gupta, Ryan Israelsen
This paper examines the impact of the recently passed Jumpstart Our Business Startups (JOBS) Act on the behavior of market participants. Using the JOBS Act — which relaxed mandatory information disclosure requirements — as a natural experiment on firms’ choices of the mix of hard, accounting information and textual disclosures, we find that relative to a peer group of firms, initial public offering
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Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence Quarterly Journal of Finance Pub Date : 2022-05-31 Massimo Guidolin, Alexei G. Orlov
We report systematic, out-of-sample evidence on the benefits to an already well-diversified investor that may derive from further diversification into various hedge fund strategies. We investigate dynamic strategic asset allocation decisions that take into account investors’ preferences, realistic transaction costs, return predictability, and the parameter uncertainty that such predictability implies
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Index Design: Hedging and Manipulation Quarterly Journal of Finance Pub Date : 2022-05-27 Robert Jarrow, Siguang Li
This paper studies optimal index design to facilitate both hedging and alleviate illegal manipulation in a competitive equilibrium paradigm, modified to deal with manipulation. Specifically, a large trader is trading both derivatives and assets that effectively hides her trades behind the competitive market clearing mechanism. Unlike the strategic game paradigm, a volume-weighted average pricing (VWAP)
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Do Stable Institutional Investors Influence Employee Safety? Quarterly Journal of Finance Pub Date : 2022-05-18 Md Ruhul Amin, Hamid Sakaki
Using establishment-level data compiling incidents of work-related injuries from the Occupational Safety and Health Administration (OSHA), we find that workplace injury and illness rates decrease with institutional ownership stability. Our further analyses show that firms with more stable institutional ownership are likely to initiate socially responsible investing proposals and have lower employee
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Informed Trading in Dark Pools: Fair-Access Dark Venue vs. Restricted-Access Dark Venues Quarterly Journal of Finance Pub Date : 2022-04-18 Nguyet Nguyen
Prior empirical studies find that dark pools are, on average, associated with uninformed order flow. The “exemption from fair-access requirement” has been conjectured as a necessary condition for dark venues to segment uninformed order flow. This study presents direct evidence contrasting a dark venue that offers equal access to all market participants to other dark pools which have the ability to
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Informed Trading in Dark Pools: Fair-Access Dark Venue vs. Restricted-Access Dark Venues Quarterly Journal of Finance Pub Date : 2022-04-18 Nguyet Nguyen
Prior empirical studies find that dark pools are, on average, associated with uninformed order flow. The “exemption from fair-access requirement” has been conjectured as a necessary condition for dark venues to segment uninformed order flow. This study presents direct evidence contrasting a dark venue that offers equal access to all market participants to other dark pools which have the ability to
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Major Customers and Corporate Payout Flexibility Quarterly Journal of Finance Pub Date : 2022-02-16 Hui Liang James, Bo Li, Thanh Ngo, Hongxia Wang
Using a sample of 17,453 firm-year observations from 1993 to 2017, we find that firms with major customers maintain higher levels of payout flexibility. The positive impact of major customers on payout flexibility is contingent upon cash flow risk, stronger in firms with financial distress, higher cash flow volatility, lower customer switching costs, and greater R&D intensity. The results suggest that
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Does Momentum Trading Generate Extra Downside Risk? Quarterly Journal of Finance Pub Date : 2021-12-29 Victoria Dobrynskaya
Momentum strategies tend to provide low returns during market crashes, and they crash themselves when the market rebounds after significant crashes. This is reflected by positive downside market betas and negative upside market betas of zero-cost momentum portfolios. Such asymmetry in upside and downside risks is unfavorable for investors and requires a risk premium. It arises mechanically because
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Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation Quarterly Journal of Finance Pub Date : 2021-10-22 Jose M. Berrospide
I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the global financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures
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Bank Liquidity Hoarding and the Financial Crisis: An Empirical Evaluation Quarterly Journal of Finance Pub Date : 2021-10-24 Jose M. Berrospide
I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the global financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures
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Anomalies in Commodity Futures Markets Quarterly Journal of Finance Pub Date : 2021-10-07 Fabian Hollstein, Marcel Prokopczuk, Björn Tharann
In recent years, commodity markets have become increasingly popular among financial investors. While previous studies document a factor structure, not much is known about how prominent anomalies are priced in commodity futures markets. We examine a large set of such anomaly variables. We identify sizable premia for jump risk, momentum, skewness, and volatility-of-volatility. Other prominent variables
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Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model Quarterly Journal of Finance Pub Date : 2021-10-05 Liao Zhu, Robert A. Jarrow, Martin T. Wells
This paper tests a multi-factor asset pricing model that does not assume that the return’s beta coefficients are constants. This is done by estimating the generalized arbitrage pricing theory (GAPT) using price differences. An implication of the GAPT is that when using price differences instead of returns, the beta coefficients are constant. We employ the adaptive multi-factor (AMF) model to test the
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Communications Between Borrowers and Servicers: Evidence from COVID-19 Mortgage Forbearance Program Quarterly Journal of Finance Pub Date : 2021-09-30 Arka Prava Bandyopadhyay
In this paper, I utilize proprietary servicer call transcripts between a single servicer and the corresponding borrowers, whose loans they service, to shed light on borrower responses to the mortgage forbearance program contained in the CARES Act. My analysis reveals that borrowers (especially with non-performing loans) did not actively seek out mortgage forbearance (conditional on communication) in
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Risk and Ambiguity in Turbulent Times Quarterly Journal of Finance Pub Date : 2021-09-30 Menachem Brenner, Yehuda Izhakian
This paper focuses on the 2008–2020 period during which two major crises, affecting the economy and the financial markets, occurred. Between 2008 and 2020, there were less extreme tail events, including the lingering Eurozone and Greece crises. In particular, after extremely high stock market volatility and volatility of volatility (VoV) during 2008, the long-run average volatility declined to about
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Credit Transition and Structural Shocks Quarterly Journal of Finance Pub Date : 2021-09-30 Camilla Ferretti, Giampaolo Gabbi, Piero Ganugi, Pietro Vozzella
Credit risk involves not only the complexity of screening but also monitoring and estimating rating transition. The adoption of inadequate transition matrices causes a misevaluation of credit risk, a consequent misallocation of capital, with the prospect that the lending process will be affected by increasing transaction costs and limited rationality, especially after a shock. Comparing the mover–stayer
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Modeling Non-Maturing Demand Deposits: A Proposed Methodology to Determining the Idiosyncratic Confidence Level Used for Separating Stable Deposit Volumes From Volatile Deposit Volumes Quarterly Journal of Finance Pub Date : 2021-09-30 Sophie Döpp, Andre Horovitz, Alexander Szimayer
This paper aims to develop a methodology for the estimation of the idiosyncratic confidence level inherent within the process of determining the threshold of separation between volatile and stable deposit volumes. The idiosyncratic confidence level must be reflective of the institution’s specific risk preferences and liquidity risk management policies as anchored into the Principle 9 of the European
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Designing Bankers’ Pay: Using Contingent Capital to Reduce Risk-Shifting Incentives Quarterly Journal of Finance Pub Date : 2021-09-27 Jens Hilscher, Sharon Peleg Lazar, Alon Raviv
Including contingent convertible bonds (coco) in the capital structure of a bank affects the sensitivity to risk of its equity-based compensation. Such risk-shifting incentives can be reduced if the coco bonds are well-designed. Similarly, we show that compensating executives with well-designed coco bonds can also reduce risk-shifting incentives. In practice, however, most coco bonds have characteristics
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Asset Prices and Pandemics: The Effects of Lockdowns Quarterly Journal of Finance Pub Date : 2021-09-25 Jerome Detemple
We examine the impact of pandemics on equilibrium in an integrated epidemic-economy model with production. Two types of technologies are considered: a neo-classical technology and one capturing the notion of time-to-produce. The impact of a shelter-in-place policy with and without layoffs is studied. The paper documents adjustments in interest rate, market price of risk, stock market and real wage
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Knowns and Unknowns. Risk Management in a Context of Increasing Uncertainty Quarterly Journal of Finance Pub Date : 2021-09-08 Giampaolo Gabbi,Dan Galai,Zvi Wiener
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Flooded Social Connections Quarterly Journal of Finance Pub Date : 2021-08-20 Dimuthu Ratnadiwakara
Does salient information on social media influence individuals’ economic decisions and beliefs? Using aggregated data from Facebook and a difference-in-differences strategy, I show that individuals who are socially connected to someone affected by Hurricane Harvey are more likely to purchase flood insurance policies after the event. This effect is stronger in areas at higher risk of flooding. Being
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State Income Tax Changes and the Demand for Municipal Bond Funds Quarterly Journal of Finance Pub Date : 2021-06-16 Jon A. Fulkerson, Nancy L. Haskell
We consider how state income tax changes affect the demand for municipal bonds by in-state investors. A tax increase (decrease) makes investing in municipal bonds more (less) desirable, and theory predicts a change in demand by investors until the yields on municipal bonds reach a new equilibrium. Using a sample of state-specific municipal bond funds, we find states with tax decreases have net outflows
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Secured Debt, Agency Problems, and the Classic Model of the Firm Quarterly Journal of Finance Pub Date : 2021-03-29 Javier F. Navas
In the traditional literature on firm models it is generally accepted that secured debt reduces the agency costs of debt, as it alleviates the underinvestment and overinvestment problems. We demonstrate that secured debt can also produce the opposite effects. Under the [Merton 1974, On the Pricing of Corporate Debt: The Risk Structure of Interest Rates, Journal of Finance 29, 442–470] framework, we
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The Volatility Premium Quarterly Journal of Finance Pub Date : 2021-03-02 Bjorn Eraker
The difference, average risk-neutral and physical volatility, is substantial and translates into a large return premium for sellers of index options. This paper studies a general equilibrium model based on long-run risk in an effort to explain the premium. In estimating the model using data on stock returns and volatility (VIX), the model captures the premium and also the large negative correlation
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Sequential Learning of Cryptocurrency Volatility Dynamics: Evidence Based on a Stochastic Volatility Model with Jumps in Returns and Volatility Quarterly Journal of Finance Pub Date : 2021-02-02 Jing-Zhi Huang, Zhijian James Huang, Li Xu
This paper studies the dynamics of cryptocurrency volatility using a stochastic volatility model with simultaneous and correlated jumps in returns and volatility. We estimate the model using an efficient sequential learning algorithm that allows for learning about multiple unknown model parameters simultaneously, with daily data on four popular cryptocurrencies. We find that these cryptocurrencies
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The Use of ETFs in Internationally-Focused Mutual Fund Portfolios Quarterly Journal of Finance Pub Date : 2021-02-02 D. Eli Sherrill, Sara E. Shirley, Jeffrey R. Stark
We explore the implications of US-based, internationally-focused equity mutual funds holding exchange traded funds (ETFs). We observe significant differences in how ETFs are used by international mutual funds compared to their domestic equity counterparts. Internationally-focused mutual funds use ETFs to alter the return-based and country risk exposures of the mutual fund. In addition to altering the
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Non-Conflicted Trader “Maker-Taker” Decisions and Execution Quality Quarterly Journal of Finance Pub Date : 2021-02-02 Ryan Garvey, Tao Huang, Fei Wu
Under U.S. equity transaction-based pricing systems, prior research suggests retail brokers (i.e., conflicted traders) maximize their order flow payments at the expense of their client limit order execution quality. In our study, we examine order type decisions for those who execute their own orders (i.e., non-conflicted traders) and the relation between trading rebates-fees and execution quality.
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Efficient Market Managers Quarterly Journal of Finance Pub Date : 2020-12-18 Vladimir Atanasov, Christo Pirinsky, Qinghai Wang
We examine the effect of the Efficient Market Hypothesis (EMH) on the investment behavior of mutual fund managers. We show that managers who are more likely to be exposed to the ideas of EMH throughout their higher education are more “passive” than their unexposed peers: they are more likely to manage index funds, and when managing active funds, they hold portfolios with larger numbers of stocks and
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Role of Institutional Investors: Evidence from the Foreign Rule-144A Debt Market Quarterly Journal of Finance Pub Date : 2020-12-05 Alan G. Huang, Madhu Kalimipalli, Subhankar Nayak, Latha Ramchand
We examine the unique role played by institutional investors in the private corporate debt market for Rule 144A debt. We use the recent global financial crisis as a quasi-natural experiment to study how qualified institutional buyers (QIBs) facilitated funding to the foreign debt issuers in U.S. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and