Does the famous idiom “stocks for the long run” have an empirical or a theoretical foundation? Bali et al. (2009) show that the cumulative return distributions of stocks and bonds intersect for all investment horizons, implying that stocks do not dominate bonds, regardless of the horizon. This paper shows that adding the riskless asset to the analysis yields a clear-cut dominance of stocks over bonds:

We evolve competitive measures of market discipline, and explore their associated ramifications for banking, by way of the effects of Basel II adoption. Using principal component analysis on the data of 706 banks from 34 countries, we generate measures that are better reflective of market discipline universally than any single variable that is popularly in use – e.g., subordinated debt activity. Interestingly

Examining the relationship between social capital and bank/consumer relations, we find banks in high social capital areas pay more interest and charge fewer fees on deposits, charge lower rates on loans, are less risky, more profitable, hold less capital, and display lower likelihoods of default and failure. Results reflect that commercial banks operating in high social capital areas do not solely

We investigate the impact of scheduled macroeconomic news announcements on the U.S. Treasury market’s efficiency. Using intraday data and controlling for microstructure noise, we employ a robust method to construct market inefficiency measures. We find that the U.S. Treasury market is less efficient in the five-minute interval before news arrival. Our findings are robust for different sample periods

In this paper, we propose a multivariate quantile regression framework to forecast Value at Risk (VaR) and Expected Shortfall (ES) of multiple financial assets simultaneously, extending Taylor (2019). We generalize the Multivariate Asymmetric Laplace (MAL) joint quantile regression of Petrella and Raponi (2019) to a time-varying setting, which allows us to specify a dynamic process for the evolution

This paper explores the changing relationship between current household repayment capacity and mortgage default during crisis and non-crisis periods in Ireland. We measure repayment capacity through changes in the current debt-service to income ratio to directly capture the affordability shock channel. We find that deteriorations in current debt servicing capacity have a positive and increasing effect

We investigate whether the stock market impact of tone in Moody's rating reports depends on negative news. Reports convey negative news through negative rating actions (downgrades, reviews for downgrade or negative outlooks) or negative tone if there is no rating action. Using data from U.S. firms during 1995-2016, we find a significant short-term market impact of tone in reports with and without rating

This paper investigates whether investors can earn higher profits by holding cryptocurrencies with higher downside risk. Both portfolio-level analyses and cryptocurrency-level cross-sectional regressions suggest a positive cross-sectional relation between downside risk and future returns in the cryptocurrency market. In addition to the risk-return tradeoff theory, the limits-to-arbitrage theory also

We investigate how the experience of extreme events, such as the COVID-19 market crash, influence risk-taking behavior. To isolate changes in risk-taking from other factors, we ran controlled experiments with finance professionals in December 2019 and March 2020. We observe that their investments in the experiment were 12 percent lower in March 2020 than in December 2019, although their price expectations

We formulate the optimal balance sheet management problem as a linear program and study it using a duality approach. In addition to helping determine the optimal balance sheet, the dual problem also provides us the interest rate risk and credit risk pricing. We deploy our methodology to determine premia on credit risk and interest rate risk for commercial banks, which allows us to manage the risk allocation

This study evaluates the impact of investor mood and mood contagion on the cross-section of Australian stock returns. While we document a day-of-the-week effect in Australia, there are noticeable differences to the US (Birru, 2018). Australian stock returns on Tuesday are significantly lower than other weekdays. This ‘Tuesday Blues’ effect is most prominent amongst speculative stocks which, being more

Using detailed administrative Pakistani credit registry data, we show that banks with low leverage ratios are both significantly slower and less likely to recognize a loan as nonperforming than other banks that lend to the same firm. Moreover, we find suggestive evidence that this lack of recognition impedes loan curing, with banks with low leverage ratios reporting significantly higher final default

Mini options are specially catered to retail investors with limited capital for trading options on extremely high-priced securities. The coexistence of both Mini and standard options for the same underlying security provides us a novel setting to investigate whether and how small retail investors use derivatives contracts differently compared to their counterparts. First, we find that the Mini option

We perform the longest study of long-run reversal in commodity returns. Using a unique dataset of 52 agricultural, industrial, and energy commodities, we examine the price behavior for the years 1265 to 2017. The findings reveal a strong and robust long-run reversal effect. The returns of the past one to three years negatively predict subsequent performance in the cross-section of returns. The effect

Complexity of banks can have important ramifications for the performance and the risks of the banking system. Financial sector reforms that were implemented in the past decade have thus aimed to reduce and to better manage the risk implications of bank complexity. Yet, surprisingly little is known about changes in complexity across countries, its drivers, and its effects. The International Banking

During an IPO offering, issuers may revise both the offer price and quantity (number of shares). These revisions are of comparable magnitude and are nearly uncorrelated. We show theoretically that these two revisions should be interpreted differently. Shocks to growth options induce price and quantity to move together, whereas shocks to assets-in-place induce movements in opposing directions. Using

Employing standard informed trading intuition, we develop testable hypotheses regarding short selling before and after bank enforcement action (EA) initiations. For U.S.-listed bank firm data for 2007 to 2012, we find strong support for differentiated short seller activity and skill in crisis versus non-crisis periods. In financial crises, short sellers predominantly position prior to EAs. The EA initiations

This paper addresses a problem that may damage the reliability of an interbank offered rate (IBOR) system. Using evidence from the Shanghai Interbank Offered Rate (SHIBOR), we show that some SHIBOR panel banks imitate peers’ quotes after observing them on the next business day. The strength of the intertemporal behavior can be measured by a “Signed Active-minus-Stationary (SAmS)” index, which significantly

This paper examines hedge fund portfolio selection approaches in isolation and in the context of an investor’s overall portfolio. Characteristics-based portfolios that minimize risk delivers superior out-of-sample performance. For instance, a minimum variance portfolio tilting toward small funds with high alpha and strategy distinctiveness index and low systematic risk delivers an annualized Sharpe

This paper addresses the recent mixed evidence on the relationship between interest rates and corporate liquidity. I find that high (low) interest rates are associated with high (low) short-term investments and low (high) cash due to the opportunity cost of holding the latter. Further, I show that interest rates are negatively related to total liquid assets, i.e., the sum of cash and short-term investments

We examine how changes in capital requirements and monetary policy shocks affect corporate investment during a credit boom. Our empirical analysis uses data on SMEs in the UK between 1998 and 2006, a period when monetary policy and microprudential regulation were set by independent institutions. We find that an increase in bank-specific capital requirements led to a contraction in corporate debt and

This paper examines how European banks adjusted lending at the onset of the pandemic depending on their local exposure to the COVID-19 outbreak and capitalization. Using a bank-level COVID-19 exposure measure, we show that higher exposure to COVID-19 led to a relative increase in worse-capitalized banks’ loans whereas their better-capitalized peers decreased their lending more. At the same time, only

A severe economic downturn brought on by the COVID-19 pandemic, combined with high debt levels globally, raises the specter of mounting nonperforming loans (NPLs) in global banking systems. This paper investigates the impact of higher NPL ratios on the availability of bank credit among international lenders and emerging market borrowers. The paper finds that a rise in NPL ratios in both lender and

Bank prudential supervision is designed to enhance financial stability, but we are unaware of extant empirical research linking this supervision to financial system risk. In particular, there are no prior findings on how supervisory enforcement actions (EAs) – major tools of supervisors – affect systemic risk. We empirically investigate relations between EAs and banks’ contributions to systemic risk

Raising capital on wholesale debt markets is an important source of funding for banks and non-banking institutions throughout the world. We investigate the determinants of wholesale funding costs for the Global Systematically Important Banks (G-SIBs) using credit default swaps, the proxy for the cost of wholesale debt funding. Using 25 G-SIBs which are heavily reliant on debt capital markets across

We use a unique data set that comprises each Euro area bank’s daily recourse to the ECB’s marginal lending facility (MLF) and all its bids placed in the ECB’s main refinancing operations (MROs) that were conducted as variable rate tenders until October 2008. We show that the more aggressive a bank bids in a MRO, the higher is its propensity to subsequently draw on the MLF. Our results indicate that

I analyze 70,000 transactions by retail impact investors on a peer-to-peer lending platform that intermediates loans to firms in low-income countries. Loans pay interest to investors and publicize indicators of expected social impact. Financial returns significantly influence investors’ decisions: a one percentage point increase in the interest rate increases funding speed seven-fold, investment probability

In response to the COVID-19 crisis, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, creating the Paycheck Protection Program (PPP), among others, to aid small businesses and their employees. Most PPP loans were administered by commercial banks in return for fees, and the banks bore little monitoring costs or risks, since PPP loans were forgivable

We investigate the relationship between IPO long-run underperformance (Ritter, 1991; Loughran and Ritter, 1995) and the idiosyncratic risk puzzle (Ang, Hodrick, Xing, and Zhang, 2006) or the phenomenon of abnormally low returns for stocks with high idiosyncratic risk. We find that IPO long-run underperformance is a manifestation of surprisingly low returns for high idiosyncratic risk stocks. IPO underperformance

We examine the effect of technology spillovers on the duration of executive compensation contracts. We find that in the presence of greater technology spillovers, firms tend to grant longer duration compensation contracts to their executives. This finding is consistent with theoretical predictions by Manso (2011) who argues that firms should choose longer-term contracts to encourage managerial incentives