Forthcoming Articles

Asset Pricing with Cohort‐Based Trading in MBS Markets

Published: 9/19/2022  |  DOI: 10.1111/jofi.13180

NICOLA FUSARI, WEI LI, HAOYANG LIU, ZHAOGANG SONG

Agency mortgage‐backed securities (MBSs) with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to‐be‐announced (TBA) contracts with delivery flexibility. This parallel trading environment generates distinctive effects on MBS pricing and trading: (1) Although cheapest‐to‐deliver (CTD) issues are present in TBA trading and absent from SP trading by design, MBS heterogeneity associated with CTD discounts affects SP yields positively, with the effect stronger for lower‐value SPs; (2) high selling pressure amplifies the effects of MBS heterogeneity on SP yields; and (3) greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.


Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy

Published: 9/19/2022  |  DOI: 10.1111/jofi.13181

JULIAN DI GIOVANNI, GALINA HALE

We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks on country‐sector stock returns. We estimate a structural spatial autoregression (SAR) model that is consistent with an open‐economy production network framework. Using the SAR model, we decompose the total impact of U.S. monetary policy on global stock returns into direct and network effects. Nearly 70% of the total impact are due to the network effect of global production linkages. Empirical counterfactuals show that shutting down global production linkages halves the total impact of U.S. monetary policy shocks.


Belief Disagreement and Portfolio Choice

Published: 9/18/2022  |  DOI: 10.1111/jofi.13179

MAARTEN MEEUWIS, JONATHAN A. PARKER, ANTOINETTE SCHOAR, DUNCAN SIMESTER

Using proprietary financial data on millions of households, we show that likely‐Republicans increased the equity share and market beta of their portfolios following the 2016 presidential election, while likely‐Democrats rebalanced into safe assets. We provide evidence that this behavior was driven by investors interpreting public information based on different models of the world. We use detailed controls to rule out the main nonbelief‐based channels like income hedging needs, preferences, and local economic exposures. These findings are driven by a small share of investors making big changes, and are stronger among investors who trade more ex ante.


The Two‐Pillar Policy for the RMB

Published: 9/18/2022  |  DOI: 10.1111/jofi.13178

URBAN J. JERMANN, BIN WEI, VIVIAN Z. YUE

This paper studies China's recent exchange rate policy for the renminbi (RMB). We demonstrate empirically that a two‐pillar policy is in place, aiming to balance exchange rate flexibility and RMB index stability via market and basket pillars. We further extend and validate the formulation that incorporates the so‐called countercyclical factor. Theoretically, we develop a flexible‐price monetary model for the RMB in which the two‐pillar policy arises endogenously as an optimal response of the government. We estimate the model by generalized method of moments (GMM) and quantitatively assess various policy trade‐offs.


Financial Crises and Political Radicalization: How Failing Banks Paved Hitler's Path to Power

Published: 7/8/2022  |  DOI: 10.1111/jofi.13166

SEBASTIAN DOERR, STEFAN GISSLER, JOSÉ‐LUIS PEYDRÓ, HANS‐JOACHIM VOTH

Do financial crises radicalize voters? We study Germany's 1931 banking crisis, collecting new data on bank branches and firm‐bank connections. Exploiting cross‐sectional variation in precrisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti‐Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far‐reaching consequences.