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Some Simple Economics of Stablecoins Annual Review of Financial Economics (IF 2.741) Pub Date : 2022-04-28 Christian Catalini,Alonso de Gortari,Nihar Shah
Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins
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Sovereign Debt Sustainability and Central Bank Credibility Annual Review of Financial Economics (IF 2.741) Pub Date : 2022-03-22 Tim Willems,Jeromin Zettelmeyer
This article surveys the literature on sovereign debt sustainability from its origins in the mid-1980s to the present and focuses on four debates. First, we evaluate the shift from an accounting-based view of debt sustainability using government borrowing rates to a model-based view that uses stochastic discount rates. Second, we review empirical tests, focusing on the relationship between primary
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Venture Capital Booms and Start-Up Financing Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 William H. Janeway,Ramana Nanda,Matthew Rhodes-Kropf
We review the growing literature on the relationship between venture capital (VC) booms and start-up financing, focusing on three broad areas. First, we discuss the drivers of large inflows into the VC asset class, particularly in recent years, which are related to but also distinct from macroeconomic business cycles and stock market fluctuations. Second, we review the emerging literature on the real
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Banks and Negative Interest Rates Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Florian Heider,Farzad Saidi,Glenn Schepens
In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize
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Confronting Banking Crises: Lessons from the Field Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Marc Dobler,Marina Moretti,Alvaro Piris
Financial crises are a recurring feature of modern economies. This article summarizes the lessons learned from policy interventions and tools used to resolve banking crises from a practical, operational perspective and in light of the experiences and challenges faced during and since the 2008 global financial crisis. Managing a systemic banking crisis is a complex, multiyear process and requires a
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The Rise of State-Owned Investors: Sovereign Wealth Funds and Public Pension Funds Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 William L. Megginson,Diego Lopez,Asif I. Malik
State-owned investors (SOIs), including sovereign wealth funds and public pension funds, have $27 trillion in assets under management in 2020, making these funds the third largest group of asset owners globally. SOIs have become the largest and are among the most important private equity investors, and they are key investors in other alternative asset investments such as real estate, infrastructure
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The Economics of Central Clearing Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Albert J. Menkveld,Guillaume Vuillemey
Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007–2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are surveyed in this article. For example, multilateral
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Financial Architecture and Financial Stability Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Franklin Allen,Ansgar Walther
This article studies the links between financial stability and the architecture of financial systems. We review the existing literature and provide organizing frameworks for analyzing three empirically important aspects of financial architecture: the rise of nonbank financial intermediaries, the regulatory response to these structural changes, and the emergence of complex interbank networks. One of
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Recent Developments in Factor Models and Applications in Econometric Learning Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Jianqing Fan,Kunpeng Li,Yuan Liao
This article provides a selective overview of the recent developments in factor models and their applications in econometric learning. We focus on the perspective of the low-rank structure of factor models and particularly draw attention to estimating the model from the low-rank recovery point of view. Our survey mainly consists of three parts. The first part is a review of new factor estimations based
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Do Capital Structure Models Square with the Dynamics of Payout? Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Shiqi Chen,Bart M. Lambrecht
We explore whether theoretically the target leverage and pecking-order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment toward the NDR target facilitates payout smoothing. Under
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The Contributions of Stephen A. Ross to Financial Economics Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Stephen J. Brown,Philip H. Dybvig,William N. Goetzmann,Jonathan E. Ingersoll
Stephen A. Ross was one of the most influential scholars in the field of financial economics in the late twentieth century. Ross's work was central to several novel domains of economic inquiry. His contributions included the arbitrage pricing theory (APT), the risk-neutral pricing of contingent claims, the binomial option pricing model, a theory of the term structure of interest rates, a seminal contribution
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The Rise of Digital Money Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Tobias Adrian,Tommaso Mancini-Griffoli
Payment systems around the world are evolving with the emergence of digital money issued by private firms and central banks. We provide a conceptual framework to compare and contrast traditional forms of money with their new digital equivalents. We suggest that some forms of digital money, while less stable as a store of value, could be rapidly adopted given their advantages as a means of payment.
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What Do We Know About Corporate Bond Returns? Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Jing-Zhi Huang,Zhan Shi
Recently, there has been a fast-growing literature on the determinants of corporate bond returns, in particular, the driving force of cross-sectional return variation. In this review, we first survey recent empirical studies on this important topic. We discuss cross-sectional evidence as well as time-series evidence. We then present a model-based analysis of individual corporate bond returns using
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Consumer Protection for Financial Inclusion in Low- and Middle-Income Countries: Bridging Regulator and Academic Perspectives Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Seth Garz,Xavier Giné,Dean Karlan,Rafe Mazer,Caitlin Sanford,Jonathan Zinman
Markets for consumer financial services are growing rapidly in low- and middle-income countries and are being transformed by digital technologies and platforms. With growth and change come concerns about protecting consumers from firm exploitation due to imperfect information and contracting as well as from their own decision-making limitations. We seek to bridge regulator and academic perspectives
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A Look Back and a Way Forward Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Andrew W. Lo,Robert C. Merton
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Does the Yield Curve Predict Output? Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Joseph G. Haubrich
Does the yield curve have the ability to predict output and recessions? At some times and in certain places, of course! But when and where, which aspects of the curve matter most, and which economic forces account for the predictive ability are matters of dispute. Over the years, an increasingly sophisticated set of tools, both statistical and theoretical, has addressed the issue. For the United States
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The Economics of Insurance: A Derivatives-Based Approach Annual Review of Financial Economics (IF 2.741) Pub Date : 2021-11-01 Robert A. Jarrow
This article revisits the economics of insurance using insights from derivatives pricing and hedging. Applying this perspective, I emphasize the following insights applicable to insurance. First, I provide a valid justification for the use of arbitrage-free insurance premiums. This justification applies in both complete and incomplete markets. Second, I demonstrate the importance of diversifiable idiosyncratic
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Macroeconomic Models for Monetary Policy: A Critical Review from a Finance Perspective Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Winston W. Dou,Andrew W. Lo,Ameya Muley,Harald Uhlig
We provide a critical review of macroeconomic models used for monetary policy at central banks from a finance perspective. We review the history of monetary policy modeling, survey the core monetary models used by major central banks, and construct an illustrative model for those readers who are unfamiliar with the literature. Within this framework, we highlight several important limitations of current
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Portfolio Choice Over the Life Cycle: A Survey Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Francisco Gomes
Life-cycle portfolio choice models capture the role of human capital, housing, borrowing constraints, background risk, and several other crucial ingredients for determining the savings and investment decisions of households. Over the last two decades, this literature has provided us with multiple insights regarding the asset allocation decisions of individual investors. This article provides a critical
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Informed Options Trading Before Corporate Events Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Patrick Augustin,Marti G. Subrahmanyam
There is sufficient evidence in the popular, legal, and financial literatures that informed options trading ahead of scheduled and unexpected corporate events is pervasive. In this review, we piece together the extant evidence on this topic into a cohesive picture, which includes abnormal activity ahead of announcements of earnings, mergers and acquisitions, as well as numerous other corporate events
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Conflicts of Interest in Asset Management and Advising Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Chester S. Spatt
This review addresses, from a unified perspective, the important role of conflicts of interest in various facets of asset management and advising, including managing individual portfolios, institutional asset management, and order routing. I use an agency framework to highlight the sources of the underlying incentive conflicts, the nature of efficient solutions, the role of the structure of compensation
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The Information View of Financial Crises Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Tri Vi Dang,Gary Gorton,Bengt Holmström
Short-term debt that can serve as a medium of exchange is designed to be information insensitive. No one should be tempted to acquire private information to gain an informational advantage in trading that could destabilize the value of the debt. Short-term debt minimizes the incentive to acquire information among all securities of equal value backed by the same underlying asset. Moreover, backing short-term
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The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Michael T. Kiley
Real interest rates have been persistently below historical norms over the past decade, leading economists and policy makers to view the equilibrium real interest rate as likely to be low for some time. Various definitions and approaches to estimating the equilibrium real interest rate are examined, including approaches based on the term structure of interest rates and small macroeconomic models. The
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Robert C. Merton and the Science of Finance Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 Zvi Bodie
Starting with his 1970 doctoral dissertation and continuing to today, Robert C. Merton has revolutionized the theory and practice of finance. In 1997, Merton shared a Nobel Prize in Economics “for a new method to determine the value of derivatives.” His contributions to the science of finance, however, go far beyond that. In this article I describe Merton's main contributions. They include the following:
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Strategic Decisions in Takeover Auctions: Recent Developments Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-11-01 B. Espen Eckbo,Andrey Malenko,Karin S. Thorburn
We review recent research into how firms navigate four complex decisions in corporate takeovers: ( a) deal initiation, ( b) pre-offer toehold acquisition, ( c) the initial (public) offer price, and ( d) the payment method. We focus the evidence on public targets and the theory on first-price or English (ascending-price) auctions with two competing bidders and a single (pivotal) seller. The evidence
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Global Banking: Toward an Assessment of Benefits and Costs Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-08-25 Claudia M. Buch, Linda S. Goldberg
Global activities of banks are a core manifestation of broader patterns of globalization of production, trade, and finance. This article reviews the extensive recent empirical and theoretical liter...
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Credit Default Swaps: A Primer and Some Recent Trends Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-08-14 David Lando
The credit default swap (CDS) remains an important class of derivatives contract despite the declining activity in the single-name corporate market. I provide a quick introduction to the contracts,...
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Refinancing, Monetary Policy, and the Credit Cycle Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-08-03 Gene Amromin, Neil Bhutta, Benjamin J. Keys
We assess the complicated reality of monetary policy transmission through mortgage markets by synthesizing the existing literature on the role of refinancing in policy implementation. After briefly...
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Robert C. Merton: The First Financial Engineer Annual Review of Financial Economics (IF 2.741) Pub Date : 2020-07-14 Andrew W. Lo
This is an edited version of a talk given at the Robert C. Merton 75th Birthday Celebration Conference held at MIT on August 5 and 6, 2019. A video of the talk is available at https://bit.ly/2nvITM...
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Robert C. Merton and the Science of Finance Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Zvi Bodie
Starting with his 1970 doctoral dissertation and continuing to today, Robert C. Merton has revolutionized the theory and practice of finance. In 1997, Merton shared a Nobel Prize in Economics “for a new method to determine the value of derivatives.” His contributions to the science of finance, however, go far beyond that. In this article I describe Merton's main contributions. They include the following:
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Risk Adjustment in Private Equity Returns Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Arthur Korteweg
This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital
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The Anatomy of Distressed Debt Markets Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Edward I. Altman, Robert Benhenni
Over the last 30 years, the distressed debt market has come a long way and is now a legitimate investment asset class, albeit with periodic dramatic activity. Despite the benign credit cycle in US ...
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Commercial Real Estate as an Asset Class Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Andra C. Ghent, Walter N. Torous, Rossen I. Valkanov
We survey the properties of commercial real estate (CRE) as an asset class. We first illustrate its importance relative to the US economy and to other asset classes. We then discuss CRE ownership p...
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Debt Covenants and Corporate Governance Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Sudheer Chava, Shunlan Fang, Praveen Kumar, Saumya Prabhat
We review the recent theoretical and empirical literature on debt covenants with a particular focus on how creditor governance after covenant violations can influence the borrower's corporate polic...
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Direct Versus Iterated Multiperiod Volatility Forecasts Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Eric Ghysels, Alberto Plazzi, Rossen Valkanov, Antonio Rubia, Asad Dossani
Multiperiod-ahead forecasts of returns’ variance are used in most areas of applied finance where long-horizon measures of risk are necessary. Yet, the major focus in the variance forecasting litera...
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Digital Disruption in Banking Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Xavier Vives
This review surveys technological disruption in banking, examining its impact on competition and its potential to increase efficiency and customer welfare. It analyzes the possible strategies of th...
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Measuring the Cost of Bailouts Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Deborah Lucas
This review develops a theoretical framework that highlights the principles governing economically meaningful estimates of the cost of bailouts. Drawing selectively on existing cost estimates and a...
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Technological Innovation, Intangible Capital, and Asset Prices Annual Review of Financial Economics (IF 2.741) Pub Date : 2019-12-26 Leonid Kogan, Dimitris Papanikolaou
We review research on the asset pricing implications of models with innovation and intangible capital. In these models, technological innovation shocks propagate differently than standard total fac...
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Recurring Firm Events and Predictable Returns: The Within-Firm Time Series Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Samuel M. Hartzmark,David H. Solomon
We review the literature on recurring firm events and predictable returns. Many common firm events recur on a predictable basis, such as earnings and dividends, among others. These events tend to be associated with large positive returns in the period when the events are predicted to occur (without conditioning on the outcome or existence of the event itself). These returns occur mainly on the long
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Variance Risk Premia, Asset Predictability Puzzles, and Macroeconomic Uncertainty Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Hao Zhou
This article reviews the predictability evidence on the variance risk premium: (a) It predicts significant positive risk premia across equity, bond, currency, and credit markets; (b) the predictability peaks at few-month horizons and dies out afterward; (c) such a short-run predictability is complementary to the long-run predictability offered by the price-to-earnings ratio, forward rate, interest
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Capital Structure and a Firm's Workforce Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 David A. Matsa
While businesses require funding to start and grow, they also rely on human capital, which affects how they raise funds. Labor market frictions make financing labor different than financing capital...
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Intermediary Asset Pricing and the Financial Crisis Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Zhiguo He, Arvind Krishnamurthy
"Intermediary asset pricing'' understands asset prices and risk premia through the lens of frictions in financial intermediation. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastest growing areas of research in finance. This article explains the theory behind intermediary asset pricing and in particular how it is different from other approaches
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Deglobalization: The Rise of Disembedded Unilateralism Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Harold James
There is some evidence of deglobalization in the aftermath of the 2008 financial crisis. The economic data are mixed and indicate a stall, but not a collapse, of globalization. Cross-border financi...
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Deregulating Wall Street Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Matthew Richardson, Kermit L. Schoenholtz, Lawrence J. White
We argue that implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has contributed significantly to the reduction of systemic risk in the United States. However, Dodd-Frank also introduced burdensome rules that have little to do with systemic risk. This article evaluates the trade-off between capital regulation and regulation of scope in the context of Dodd-Frank, with a
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Liquidity, Risk Premia, and the Financial Transmission of Monetary Policy Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Itamar Drechsler, Alexi Savov, Philipp Schnabl
In recent years, there has been a resurgence of research on the transmission of monetary policy through the financial system, fueled in part by empirical findings showing that monetary policy affects asset prices and the financial system in ways not explained by the New Keynesian paradigm. In particular, monetary policy appears to impact risk premia in stock and bond prices and to effectively control
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Risk-Neutral Densities: A Review Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Stephen Figlewski
Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk-neutral density (RND) over the underlying price at expiration. The RND contains investors’ beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With a particular focus on US equity
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Liquidity, Leverage, and Regulation 10 Years After the Global Financial Crisis Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Tobias Adrian, John Kiff, Hyun Song Shin
The financial system has undergone far-reaching changes since the global financial crisis of 2008. We cast those changes in terms of shifts in the manner in which financial intermediaries manage their balance sheets. We also discuss the regulatory reform agenda, and we review the impact of regulations on market liquidity and credit availability. Current evidence suggests that the financial system has
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Forecasting Methods in Finance Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Allan Timmermann
Our review highlights some of the key challenges in financial forecasting problems along with opportunities arising from the unique features of financiall data. We analyze the difficulty of establishing predictability in an environment with a low signal-to-noise ratio, persistent predictors, and instability in predictive relations arising from competitive pressures and investors' learning. We discuss
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Recent Research on Banks’ Financial Reporting and Financial Stability Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Stephen G. Ryan
Banks’ financial reporting requirements and discretionary choices may affect financial stability by altering one or more of the likelihood that banks violate regulatory capital requirements, banks’...
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Mortgage-Default Research and the Recent Foreclosure Crisis Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Christopher L. Foote, Paul S. Willen
This paper reviews recent research on mortgage default, focusing on the relationship of this research to the recent foreclosure crisis. Research on defaults was advanced both theoretically and empirically by the time the crisis began, but economists have moved the frontier further by improving data sources, building dynamic optimizing models of default, and explicitly addressing reverse causality between
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Common-Ownership Concentration and Corporate Conduct Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Martin C. Schmalz
The question of whether and how partial common-ownership links between strategically interacting firms affect firm behavior has been the subject of theoretical inquiry for decades. Since then, consolidation and increasing concentration in the asset-management industry has led to more pronounced common ownership concentration (CoOCo). Moreover, recent empirical research has provided evidence consistent
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The Role of Housing and Mortgage Markets in the Financial Crisis Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Manuel Adelino, Antoinette Schoar, Felipe Severino
Ten years after the financial crisis of 2008, there is widespread agreement that the boom in mortgage lending and its subsequent reversal were at the core of the Great Recession. We survey the existing evidence, which suggests that inflated house-price expectations across the economy played a central role in driving both the demand for and the supply of mortgage credit before the crisis. The great
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Systemic Risk 10 Years Later Annual Review of Financial Economics (IF 2.741) Pub Date : 2018-11-01 Robert Engle
Ten years ago, the financial crisis spurred research focused on systemic risk. This article examines the history and application of the SRISK measure, which was developed at that time and is now wi...
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Information Disclosure in Financial Markets Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Itay Goldstein,Liyan Yang
Information disclosure is an essential component of regulation in financial markets. In this article, we provide a cohesive analytical framework to review certain key channels through which disclosure in financial markets affects market quality, information production, efficiency of real investment decisions, and traders’ welfare. We use our framework to address four main aspects. First, we demonstrate
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What Shapes Consumer Choice and Financial Products? A Review Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Sumit Agarwal,Souphala Chomsisengphet,Cheryl Lim
Central to the field of consumer finance is that consumers make financial decisions that do not always coincide with the financial decisions ideally depicted in optimal economic models. In this review, we discuss developments in the field of household finance, focusing on how consumers make suboptimal financial decisions across different types of settings and factors that affect their decisions. Rather
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A Firm's Cost of Capital Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Ravi Jagannathan, José Liberti, Binying Liu, Iwan Meier
To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors’ consumption, savings, and portfolio decisions. We review the academic literature on firms’ cost of financial capital and the estimation of the different components: cost of equity, cost of debt, and their relative
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A Primer on Portfolio Choice with Small Transaction Costs Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Johannes Muhle-Karbe, Max Reppen, H. Mete Soner
This review is an introduction to asymptotic methods for portfolio choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and how to simplify them in the small-cost limit. This allows one to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction
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Market Liquidity After the Financial Crisis Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Tobias Adrian, Michael Fleming, Or Shachar, Erik Vogt
This article examines market liquidity in the postcrisis era in light of concerns that regulatory changes might have reduced dealers’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including an overview of regulations and their potential effects on dealer balance sheets and market making, but also considering additional drivers of market liquidity
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Do the Effects of Accounting Requirements on Banks' Regulatory Capital Adequacy Undermine Financial Stability? Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Stephen G. Ryan
During the 2007–2009 financial crisis, many parties criticized aspects of accounting requirements for banks as undermining financial stability. These criticisms generally reflect the view that these requirements primarily affect stability through their effects on banks’ regulatory capital adequacy. I criti-cally evaluate whether this idea can be sustained on logical and evidential grounds. I explain
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Agent-Based Models for Financial Crises Annual Review of Financial Economics (IF 2.741) Pub Date : 2017-11-01 Richard Bookstaber
This article describes the agent-based approach to modeling financial crises. It focuses on the interactions of agents and on how these interactions feed back to change the financial environment. It explains how these models embody the contagion and cascades that occur owing to the financial leverage and market concentration of the agents and the liquidity of the markets. This article also compares