Local Experiences, Search, and Spillovers in the Housing Market
Published: 2/6/2023 | DOI: 10.1111/jofi.13208
ANTONIO GARGANO, MARCO GIACOLETTI, ELVIS JARNECIC
Recent local price growth explains differences in search behavior across prospective homebuyers. Those experiencing higher growth in their postcode of residence search more broadly across locations and house characteristics, without changing attention devoted to individual sales listings, and have shorter search duration. Effects are stronger for homeowners, in particular those living in less wealthy areas and looking for a new primary residence. We use reduced‐form analysis and a quantitative equilibrium model to show that the expansion of search breadth translates into widespread spillovers onto house sales prices and inventories of listings across postcodes within a metropolitan area.
Model Secrecy and Stress Tests
Published: 2/4/2023 | DOI: 10.1111/jofi.13207
YARON LEITNER, BASIL WILLIAMS
Should regulators reveal the models they use to stress‐test banks? In our setting, revealing leads to gaming, but secrecy can induce banks to underinvest in socially desirable assets for fear of failing the test. We show that although the regulator can solve this underinvestment problem by making the test easier, some disclosure may still be optimal (e.g., if banks have high appetite for risk or if capital shortfalls are not very costly). Cutoff rules are optimal within monotone disclosure rules, but more generally optimal disclosure is single‐peaked. We discuss policy implications and offer applications beyond stress tests.
Information Aggregation via Contracting
Published: 2/2/2023 | DOI: 10.1111/jofi.13205
JIASUN LI
When a group of investors with dispersed private information jointly invest in a risky project, how should they divide the project's profit? We show that a simple contract dividing profits in proportion to investors' risk tolerances may facilitate information aggregation by altering investors' risk‐taking incentives when they decide on how investment strategies respond to private information. Our results provide a contracting‐based approach for information aggregation, which is an alternative to learning from endogenous market variables (e.g., prices) via contingent schedules as seen in well‐known rational expectations equilibrium models.
Published: 2/2/2023 | DOI: 10.1111/jofi.13203
MATHIEU AUBRY, ROMAN KRÄUSSL, GUSTAVO MANSO, CHRISTOPHE SPAENJERS
We construct a neural network algorithm that generates price predictions for art at auction, relying on both visual and nonvisual object characteristics. We find that higher automated valuations relative to auction house presale estimates are associated with substantially higher price‐to‐estimate ratios and lower buy‐in rates, pointing to estimates' informational inefficiency. The relative contribution of machine learning is higher for artists with less dispersed and lower average prices. Furthermore, we show that auctioneers' prediction errors are persistent both at the artist and at the auction house level, and hence directly predictable themselves using information on past errors.
Monetary Stimulus amidst the Infrastructure Investment Spree: Evidence from China's Loan‐Level Data
Published: 2//2023 | DOI: 10.1111/jofi.13204
KAIJI CHEN, HAOYU GAO, PATRICK HIGGINS, DANIEL F. WAGGONER, TAO ZHA
We study how a fiscal expansion via infrastructure investment influences the dynamic impacts of monetary stimulus on credit allocation. We develop a two‐stage approach and apply it to the Chinese economy with a confidential loan‐level data set that covers all sectors. We find that infrastructure investment significantly weakened monetary policy's transmission to credit allocated to private firms, while reinforcing the monetary effects on loans to state‐owned firms. This fiscal‐monetary interaction channel is key to understanding the preferential credit access enjoyed by state‐owned firms during the stimulus period. Consequently, monetary stimulus crowded out private investment and decreased capital allocation efficiency.
Published: 1/19/2023 | DOI: 10.1111/jofi.13206
BRUNO BIAIS, CHRISTOPHE BISIÈRE, MATTHIEU BOUVARD, CATHERINE CASAMATTA, ALBERT J. MENKVELD
We offer a general equilibrium analysis of cryptocurrency pricing. The fundamental value of the cryptocurrency is its stream of net transactional benefits, which depend on its future prices. This implies that, in addition to fundamentals, equilibrium prices reflect sunspots. This in turn implies multiple equilibria and extrinsic volatility, that is, cryptocurrency prices fluctuate even when fundamentals are constant. To match our model to the data, we construct indices measuring the net transactional benefits of Bitcoin. In our calibration, part of the variations in Bitcoin returns reflects changes in net transactional benefits, but a larger share reflects extrinsic volatility.
Discount‐Rate Risk in Private Equity: Evidence from Secondary Market Transactions*
Published: 1/15/2023 | DOI: 10.1111/jofi.13202
BRIAN BOYER, TAYLOR D. NADAULD, KEITH P. VORKINK, MICHAEL S. WEISBACH
Measures of private equity performance based on cash flows do not account for a discount‐rate risk premium that is a component of CAPM alpha. We create secondary market PE indices and find that PE discount rates vary considerably. NAVs are too smooth because they fail to reflect variation in discount rates. While the CAPM alpha for our index is zero, the GPME based on cash flows is large and positive. We obtain similar results for a set of synthetic funds that invest in small cap stocks. Ignoring variation in PE discount rates can lead to a misallocation of capital.
Published: 12//2022 | DOI: 10.1111/jofi.13190
MIKHAIL CHERNOV, MAGNUS DAHLQUIST, LARS LOCHSTOER
The currency market features a small cross‐section, and conditional expected returns can be characterized by few signals: interest differential, trend, and mean reversion. We exploit these properties to construct the ex ante mean‐variance efficient portfolio of individual currencies. The portfolio is updated in real time and prices all prominent currency trading strategies, conditionally and unconditionally. The fraction of risk in these assets that does not affect their risk premiums is at least 85%. Extant explanations of carry strategies based on intermediary capital or global volatility are related to these unpriced components, while consumption growth is related to the priced component of returns.