Presidential Address: The Scientific Outlook in Financial Economics
Pages: 1399-1440 | Published: 8/2017 | DOI: 10.1111/jofi.12530 | Cited by: 368
CAMPBELL R. HARVEY
Retail Financial Advice: Does One Size Fit All?
Pages: 1441-1482 | Published: 5/2017 | DOI: 10.1111/jofi.12514 | Cited by: 166
STEPHEN FOERSTER, JUHANI T. LINNAINMAA, BRIAN T. MELZER, ALESSANDRO PREVITERO
Using unique data on Canadian households, we show that financial advisors exert substantial influence over their clients' asset allocation, but provide limited customization. Advisor fixed effects explain considerably more variation in portfolio risk and home bias than a broad set of investor attributes that includes risk tolerance, age, investment horizon, and financial sophistication. Advisor effects remain important even when controlling flexibly for unobserved heterogeneity through investor fixed effects. An advisor's own asset allocation strongly predicts the allocations chosen on clients' behalf. This one‐size‐fits‐all advice does not come cheap: advised portfolios cost 2.5% per year, or 1.5% more than life cycle funds.
Do Funds Make More When They Trade More?
Pages: 1483-1528 | Published: 5/2017 | DOI: 10.1111/jofi.12509 | Cited by: 147
ĽUBOŠ PÁSTOR, ROBERT F. STAMBAUGH, LUCIAN A. TAYLOR
We model fund turnover in the presence of time‐varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark‐adjusted return. We find such a relation for equity mutual funds. This time‐series relation between turnover and performance is stronger than the cross‐sectional relation, as the model predicts. Also as predicted, the turnover‐performance relation is stronger for funds trading less‐liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund's performance.
Term Structure of Consumption Risk Premia in the Cross Section of Currency Returns
Pages: 1529-1566 | Published: 5/2017 | DOI: 10.1111/jofi.12501 | Cited by: 35
IRINA ZVIADADZE
I relate the downward‐sloping term structure of currency carry returns to compensation for currency exposures to macroeconomic risk embedded in the joint dynamics of U.S. consumption, inflation, nominal interest rate, and their stochastic variance. The interest rate and inflation shocks play a prominent role. Higher yield currencies exhibit higher multiperiod exposures to these shocks. The prices of these risk exposures are positive and sizeable across all investment horizons. The interest rate shock is qualitatively similar to the long‐run risk of Bansal and Yaron.
Pages: 1567-1610 | Published: 6/2017 | DOI: 10.1111/jofi.12507 | Cited by: 67
BIGE KAHRAMAN, HEATHER E. TOOKES
Does trader leverage drive equity market liquidity? We use the unique features of the margin trading system in India to identify a causal relationship between traders’ ability to borrow and a stock's market liquidity. To quantify the impact of trader leverage, we employ a regression discontinuity design that exploits threshold rules that determine a stock's margin trading eligibility. We find that liquidity is higher when stocks become eligible for margin trading and that this liquidity enhancement is driven by margin traders’ contrarian strategies. Consistent with downward liquidity spirals due to deleveraging, we also find that this effect reverses during crises.
Pages: 1611-1644 | Published: 5/2017 | DOI: 10.1111/jofi.12513 | Cited by: 333
ALAN MOREIRA, TYLER MUIR
Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean‐variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting‐against‐beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk‐based explanations and is a challenge to structural models of time‐varying expected returns.
Advance Refundings of Municipal Bonds
Pages: 1645-1682 | Published: 5/2017 | DOI: 10.1111/jofi.12506 | Cited by: 33
ANDREW ANG, RICHARD C. GREEN, FRANCIS A. LONGSTAFF, YUHANG XING
The advance refunding of debt is a widespread practice in municipal finance. In an advance refunding, municipalities retire callable bonds early and refund them with bonds with lower coupon rates. We find that 85% of all advance refundings occur at a net present value loss, and that the aggregate losses over the past 20 years exceed $15 billion. We explore why municipalities advance refund their debt at loss. Financially constrained municipalities may face pressure to advance refund since it allows them to reduce short‐term cash outflows. We find strong evidence that financial constraints are a major driver of advance refunding activity.
Municipal Bond Liquidity and Default Risk
Pages: 1683-1722 | Published: 6/2017 | DOI: 10.1111/jofi.12511 | Cited by: 170
MICHAEL SCHWERT
This paper examines the pricing of municipal bonds. I use three distinct, complementary approaches to decompose municipal bond spreads into default and liquidity components, and find that default risk accounts for 74% to 84% of the average spread after adjusting for tax‐exempt status. The first approach estimates the liquidity component using transaction data, the second measures the default component with credit default swap data, and the third is a quasi‐natural experiment that estimates changes in default risk around pre‐refunding events. The price of default risk is high given the rare incidence of municipal default and implies a high risk premium.
Pages: 1723-1784 | Published: 6/2017 | DOI: 10.1111/jofi.12512 | Cited by: 95
JOÃO GRANJA, GREGOR MATVOS, AMIT SERU
The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.
Pages: 1785-1824 | Published: 5/2017 | DOI: 10.1111/jofi.12505 | Cited by: 2226
KARL V. LINS, HENRI SERVAES, ANE TAMAYO
During the 2008–2009 financial crisis, firms with high social capital, as measured by corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High‐CSR firms also experienced higher profitability, growth, and sales per employee relative to low‐CSR firms, and they raised more debt. This evidence suggests that the trust between a firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.
Capital Account Liberalization and Aggregate Productivity: The Role of Firm Capital Allocation
Pages: 1825-1858 | Published: 5/2017 | DOI: 10.1111/jofi.12497 | Cited by: 100
MAURICIO LARRAIN, SEBASTIAN STUMPNER
We study the effects of capital account liberalization on firm capital allocation and aggregate productivity in 10 Eastern European countries. Using a large firm‐level data set, we show that capital account liberalization decreases the dispersion in the return to capital across firms, particularly in sectors more dependent on external finance. We provide evidence that capital account liberalization improves capital allocation by allowing financially constrained firms to demand more capital and produce at a more efficient level. Finally, using a model of misallocation we document that capital account liberalization increases aggregate productivity through more efficient capital allocation by 10% to 16%.
Report of the Editor of the Journal of Finance for the Year 2016
Pages: 1859-1874 | Published: 8/2017 | DOI: 10.1111/jofi.12531 | Cited by: 0
STEFAN NAGEL
Minutes of the 2017 Annual Membership Meeting
Pages: 1875-1876 | Published: 8/2017 | DOI: 10.1111/jofi.12532 | Cited by: 0
Report of the Executive Secretary and Treasurer
Pages: 1877-1878 | Published: 8/2017 | DOI: 10.1111/jofi.12533 | Cited by: 0