Did Banks Pay Fair Returns to Taxpayers on TARP?
Published: 6/24/2024 | DOI: 10.1111/jofi.13367
THOMAS FLANAGAN, AMIYATOSH PURNANANDAM
Meeting Targets in Competitive Product Markets
Published: 6/24/2024 | DOI: 10.1111/jofi.13369
EMILIO BISETTI, STEPHEN A. KAROLYI
We show that public banks face negative stock return jumps after missing their earnings per share (EPS) targets, and theoretically and quantitatively link these jumps to bunching behavior in the EPS surprise distribution. Bunching banks cut deposit rates to meet their targets, but do so at the expense of deposit outflows and franchise value losses. Local competitors, including private banks unexposed to capital market pressure, increase deposit rates, compensating depositors for switching. Our results provide new evidence that performance targeting incentives can affect consumer product prices, and suggest that competition may provide a check on public firms' targeting efforts.
Half Banked: The Economic Impact of Cash Management in the Marijuana Industry
Published: 6/19/2024 | DOI: 10.1111/jofi.13364
ELIZABETH A. BERGER, NATHAN SEEGERT
We investigate the economic value of cash management. In the legal marijuana industry, where only half of businesses have access to cash management services from a financial institution, we examine dispensary profitability using administrative and survey data. Our results show that businesses with cash management charge higher retail prices (8.3%), pay lower wholesale prices (7.3%), and have higher sales volume (19%). Together, these advantages create a 40% increase in profitability. These results support our model in which reputational capital and administrative costs drive profitability regardless of whether national banks, credit unions, or fintech provide the cash management functions.
Published: 6/18/2024 | DOI: 10.1111/jofi.13362
CONSTANTIN CHARLES, CARY FRYDMAN, METE KILIC
We experimentally study the transmission of subjective expectations into actions. Subjects in our experiment report valuations that are far too insensitive to their expectations, relative to the prediction from a frictionless model. We propose that the insensitivity is driven by a noisy cognitive process that prevents subjects from precisely computing asset valuations. The empirical link between subjective expectations and actions becomes stronger as subjective expectations approach rational expectations. Our results highlight the importance of incorporating weak transmission into belief‐based asset pricing models. Finally, we discuss how cognitive noise can provide a microfoundation for inelastic demand in the stock market.
What Drives Variation in the U.S. Debt‐to‐Output Ratio? The Dogs that Did not Bark
Published: 6/11/2024 | DOI: 10.1111/jofi.13363
ZHENGYANG JIANG, HANNO LUSTIG, STIJN VAN NIEUWERBURGH, MINDY Z. XIAOLAN
A higher U.S. government debt‐to‐output (D‐O) ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current D‐O ratio. The market valuation of Treasurys is surprisingly insensitive to macro fundamentals. Instead, the future D‐O ratio accounts for most of the variation because the D‐O ratio is highly persistent. Systematic surplus forecast errors may help account for these findings. Since the start of the Global Financial Crisis, surplus projections have anticipated a large fiscal correction that failed to materialize.
Information Aggregation with Asymmetric Asset Payoffs
Published: 6/11/2024 | DOI: 10.1111/jofi.13361
ELIAS ALBAGLI, CHRISTIAN HELLWIG, ALEH TSYVINSKI
We study noisy aggregation of dispersed information in financial markets without imposing parametric restrictions on preferences, information, and return distributions. We provide a general characterization of asset returns by means of a risk‐neutral probability measure that features excess weight on tail risks. Moreover, we link excess weight on tail risks to observable moments such as forecast dispersion and accuracy, and argue that it provides a unified explanation for several prominent cross‐sectional return anomalies. Simple calibrations suggest the model can account for a significant fraction of empirical returns to skewness, returns to disagreement, and interaction effects between the two.
Inside and Outside Information
Published: 6/10/2024 | DOI: 10.1111/jofi.13360
DANIEL QUIGLEY, ANSGAR WALTHER
We study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and private silence,” which is achieved with tests that give insiders an incentive to stay quiet. We fully characterize optimal tests by developing tools for Bayesian persuasion with incentive constraints, and use these results to derive novel guidance for the design of bank stress tests, as well as benchmarks for socially optimal corporate credit ratings.
Money and Banking with Reserves and CBDC
Published: 6/5/2024 | DOI: 10.1111/jofi.13357
DIRK NIEPELT
We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision, and optimal monetary policy follows modified Friedman rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC provides liquidity more efficiently than deposits unless the central bank must refinance banks and this is very costly. Accordingly, the optimal share of CBDC in payments tends to exceed that of deposits.
The Time‐Varying Price of Financial Intermediation in the Mortgage Market
Published: 6/4/2024 | DOI: 10.1111/jofi.13358
ANDREAS FUSTER, STEPHANIE H. LO, PAUL S. WILLEN
We introduce a new measure of the price charged by financial intermediaries for connecting mortgage borrowers with capital market investors. Based on administrative lender pricing data, we document that the price of intermediation reacts strongly to variation in demand, reflecting capacity constraints of mortgage originators. This positive comovement of price with quantity reduced the pass‐through of quantitative easing. We also find a notable upward trend in this price between 2008 and 2014, likely due to increased legal and regulatory burden in the mortgage market. The trend led to an implicit cost to borrowers of nearly $100 billion over this period.
A (Sub)penny for Your Thoughts: Tracking Retail Investor Activity in TAQ
Published: 5/3/2024 | DOI: 10.1111/jofi.13334
BRAD M. BARBER, XING HUANG, PHILIPPE JORION, TERRANCE ODEAN, CHRISTOPHER SCHWARZ
We placed 85,000 retail trades in six retail brokerage accounts from December 2021 to June 2022 to validate the Boehmer et al. algorithm, which uses subpenny trade prices to identify and sign retail trades. The algorithm identifies 35% of our trades as retail, incorrectly signs 28% of identified trades, and yields uninformative order imbalance measures for 30% of stocks. We modify the algorithm by signing trades using the quoted spread midpoints. The quote midpoint method does not affect identification rates but reduces the signing error rates to 5% and provides informative order imbalance measures for all stocks.
Spending Less after (Seemingly) Bad News
Published: 4/29/2024 | DOI: 10.1111/jofi.13325
MARK J. GARMAISE, YARON LEVI, HANNO LUSTIG
Using high‐frequency spending data, we show that household consumption displays excess sensitivity to salient macroeconomic news, even when the news is not real. When the announced local unemployment rate reaches a 12‐month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 1.5% relative to consumers in areas with the same macroeconomic conditions. Low‐income households display greater excess sensitivity to salience. The decrease in spending is not later reversed. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.
Is Long‐Run Risk Really Priced? Revisiting Liu and Matthies (2022)
Published: 4/22/2024 | DOI: 10.1111/jofi.13340
PAULO MAIO
The claim by Liu and Matthies (LM) that their macro news risk factor (NI) prices 51 portfolios (associated with four different portfolio groups) is not appropriate. In fact, their single‐factor model is successful only in explaining the momentum deciles, while producing strongly negative performance for the remaining groups. The pricing performance is more doubtful in the case of the alternative news factor (HNI), as the respective risk price is not identified. LM's conclusions stem from a combination of questionable empirical choices and misinterpretation of their results. Moreover, the NI model cannot explain prominent capital asset pricing model anomalies not considered in their study.