The Macroeconomics of Shadow Banking
Pages: 2381-2432 | Published: 8/2017 | DOI: 10.1111/jofi.12540 | Cited by: 170
ALAN MOREIRA, ALEXI SAVOV
We build a macrofinance model of shadow banking—the transformation of risky assets into securities that are money‐like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision, boosting asset prices and growth, but also building up fragility. A rise in uncertainty raises shadow banking spreads, forcing financial institutions to switch to collateral‐intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices and investment fall. The model generates slow recoveries, collateral runs, and flight‐to‐quality effects, and it sheds light on Large‐Scale Asset Purchases, Operation Twist, and other interventions.
Consumer Ruthlessness and Mortgage Default during the 2007 to 2009 Housing Bust
Pages: 2433-2466 | Published: 8/2017 | DOI: 10.1111/jofi.12523 | Cited by: 79
NEIL BHUTTA, JANE DOKKO, HUI SHAN
From 2007 to 2009 U.S. house prices plunged and mortgage defaults surged. While ostensibly consistent with widespread “ruthless default,” analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater—far deeper than traditional models predict. The evidence suggests that lender recourse is not the major driver of this result. We argue that emotional and behavioral factors play an important role in decisions to continue paying. Borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected.
Pages: 2467-2504 | Published: 8/2017 | DOI: 10.1111/jofi.12542 | Cited by: 77
JONATHAN B. BERK, JULES H. van BINSBERGEN, BINYING LIU
We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. The firm's decision to reallocate capital among its mutual fund managers adds at least $474,000 a month, which amounts to over 30% of the total value added of the industry. We provide evidence that this additional value added results from the firm's private information about the skill of its managers. The firm captures this value because investors reward the firm following a capital reallocation decision by allocating additional capital to the firm's funds.
Why Do Investors Hold Socially Responsible Mutual Funds?
Pages: 2505-2550 | Published: 9/2017 | DOI: 10.1111/jofi.12547 | Cited by: 754
ARNO RIEDL, PAUL SMEETS
To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.
How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?
Pages: 2551-2588 | Published: 10/2017 | DOI: 10.1111/jofi.12545 | Cited by: 92
KELLY SHUE, RICHARD R. TOWNSEND
We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.
Are CDS Auctions Biased and Inefficient?
Pages: 2589-2628 | Published: 7/2017 | DOI: 10.1111/jofi.12541 | Cited by: 12
SONGZI DU, HAOXIANG ZHU
We study the design of credit default swaps (CDS) auctions, which determine the payments by CDS sellers to CDS buyers following defaults of bonds. Using a simple model, we find that the current design of CDS auctions leads to biased prices and inefficient allocations. This is because various restrictions imposed in CDS auctions prevent certain investors from participating in the price discovery and allocation process. The imposition of a price cap or floor also gives dealers large influence on the final auction price. We propose an alternative double auction design that delivers more efficient price discovery and allocations.
Commodity Trade and the Carry Trade: A Tale of Two Countries
Pages: 2629-2684 | Published: 10/2017 | DOI: 10.1111/jofi.12546 | Cited by: 114
ROBERT READY, NIKOLAI ROUSSANOV, COLIN WARD
Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies” offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity‐producing countries from global productivity shocks, forcing final‐good producers to absorb them. Commodity‐currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.
Financial Transaction Taxes, Market Composition, and Liquidity
Pages: 2685-2716 | Published: 6/2017 | DOI: 10.1111/jofi.12510 | Cited by: 61
JEAN‐EDOUARD COLLIARD, PETER HOFFMANN
We use the introduction of a financial transaction tax (FTT) in France in 2012 to test competing theories on its impact. We find no support for the idea that an FTT improves market quality by affecting the composition of trading volume. Instead, our results are in line with the hypothesis that a lower trading volume reduces liquidity and in turn market quality. Consistent with theories of asset pricing under transaction costs, we document a shift in security holdings from short‐term to long‐term investors. Finally, we find that moderate aggregate effects on market quality can mask large adjustments made by individual agents.
Why Does Return Predictability Concentrate in Bad Times?
Pages: 2717-2758 | Published: 9/2017 | DOI: 10.1111/jofi.12544 | Cited by: 123
JULIEN CUJEAN, MICHAEL HASLER
We build an equilibrium model to explain why stock return predictability concentrates in bad times. The key feature is that investors use different forecasting models, and hence assess uncertainty differently. As economic conditions deteriorate, uncertainty rises and investors' opinions polarize. Disagreement thus spikes in bad times, causing returns to react to past news. This phenomenon creates a positive relation between disagreement and future returns. It also generates time‐series momentum, which strengthens in bad times, increases with disagreement, and crashes after sharp market rebounds. We provide empirical support for these new predictions.
Nonfundamental Speculation Revisited
Pages: 2759-2772 | Published: 8/2017 | DOI: 10.1111/jofi.12548 | Cited by: 7
LIYAN YANG, HAOXIANG ZHU
We show that a linear pure strategy equilibrium may not exist in the model of Madrigal (1996), contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second‐order condition. If the nonfundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.
Pages: 2777-2826 | Published: 12/2017 | DOI: 10.1111/jofi.12595 | Cited by: 1
Participant Schedule Report Participants in the AFA 2018 Philadelphia Meetings January 5–7, 2018
Pages: 2827-2888 | Published: 12/2017 | DOI: 10.1111/jofi.12596 | Cited by: 0
Pages: 2889-2889 | Published: 12/2017 | DOI: 10.1111/jofi.12597 | Cited by: 4
David Hirshleifer