Pages: 1083-1085 | Published: 5/2019 | DOI: 10.1111/jofi.12634 | Cited by: 0
Pages: 1087-1089 | Published: 5/2019 | DOI: 10.1111/jofi.12774 | Cited by: 0
Pages: 1091-1137 | Published: 3/2019 | DOI: 10.1111/jofi.12759 | Cited by: 47
VINCENT VAN KERVEL, ALBERT J. MENKVELD
Liquidity suppliers lean against the wind. We analyze whether highâfrequency traders (HFTs) lean against large institutional orders that execute through a series of child orders. The alternative is HFTs trading with the wind, that is, in the same direction. We find that HFTs initially lean against these orders but eventually change direction and take positions in the same direction for the most informed institutional orders. Our empirical findings are consistent with investors trading strategically on their information. When deciding trade intensity, they seem to trade off higher speculative profits against higher risk of being detected and preyed on byÂ HFTs.
Pages: 1139-1173 | Published: 2/2019 | DOI: 10.1111/jofi.12757 | Cited by: 16
PĂTER KONDOR, DIMITRI VAYANOS
We develop a continuousâtime model of liquidity provision in which hedgers can trade multiple risky assets with arbitrageurs. Arbitrageurs have constant relative riskâaversion (CRRA) utility, while hedgers' asset demand is independent of wealth. An increase in hedgers' risk aversion can make arbitrageurs endogenously more riskâaverse. Because arbitrageurs generate endogenous risk, an increase in their wealth or a reduction in their CRRA coefficient can raise risk premia despite Sharpe ratios declining. Arbitrageur wealth is a priced risk factor because assets held by arbitrageurs offer high expected returns but suffer the most when wealth drops. Aggregate illiquidity, which declines in wealth, captures thatÂ factor.
Pages: 1175-1216 | Published: 1/2019 | DOI: 10.1111/jofi.12752 | Cited by: 4
JENNIFER N. CARPENTER, RICHARD STANTON, NANCY WALLACE
We develop an empirical model of employee stock option exercise that is suitable for valuation and allows for behavioral channels. We estimate exercise rates as functions of option, stock, and employee characteristics using all employee exercises at 88 public firms, 27 of them in the S&P 500. Increasing vesting frequency from annual to monthly reduces option value by 11% to 16%. Men exercise faster, reducing value by 2% to 4%, while top employees exercise slower, increasing value by 2% to 7%. Finally, we develop an analytic valuation approximation that is more accurate than methods used in practice.
Pages: 1217-1260 | Published: 3/2019 | DOI: 10.1111/jofi.12763 | Cited by: 27
I study how brokers distort household investment decisions. Using a novel convertible bond data set, I find that consumers often purchase dominated bondsâcheap and expensive otherwiseâidentical bonds coexist in the market. Brokers are incentivized to sell the dominated bonds, typically earning two times greater fees for selling them. I develop and estimate a brokerâintermediated search model that rationalizes this behavior. The estimates indicate that costly search is a key friction in financial markets, but the effects of search costs are compounded when brokers are incentivized to direct the search of consumers toward highâfee inferior products.
Pages: 1261-1314 | Published: 3/2019 | DOI: 10.1111/jofi.12756 | Cited by: 1
I show that venture capitalists' motivation to build reputation can have beneficial effects in the primary market, mitigating information frictions and helping firms go public. Because uninformed reputationâmotivated venture capitalists want to appear informed, they are biased against backing firmsâby not backing firms, they avoid taking lowâvalue firms to market, which would ultimately reveal their lack of information. In equilibrium, reputationâmotivated venture capitalists back relatively few bad firms, creating a certification effect that mitigates information frictions. However, they also back relatively few good firms, and thus, reputation motivation decreases welfare when good firms are abundant orÂ profitable.
Pages: 1315-1361 | Published: 2/2019 | DOI: 10.1111/jofi.12755 | Cited by: 24
ROBERT J. RICHMOND
I uncover an economic source of exposure to global risk thatÂ drives international asset prices. Countries that are more central inÂ the global trade network have lower interest rates and currencyÂ risk premia. To explain these findings, I present a generalÂ equilibrium model in which central countries' consumption growth is more exposedÂ to global consumption growth shocks. This causes the currenciesÂ of central countries to appreciate in bad times, resulting inÂ lower interest rates and currency risk premia. Empirically,Â central countries' consumption growth covaries more with worldÂ consumption growth, further validating the proposedÂ mechanism.
Pages: 1363-1429 | Published: 3/2019 | DOI: 10.1111/jofi.12761 | Cited by: 31
PATRICK BOLTON, NENG WANG, JINQIANG YANG
A riskâaverse entrepreneur with access to a profitable venture needsÂ to raise funds from investors. She cannot indefinitely commit her humanÂ capital to the venture, which limits the firm's debt capacity, distortsÂ investment and compensation, and constrains the entrepreneur's risk sharing. ThisÂ puts dynamic liquidity and stateâcontingent risk allocation at the centerÂ of corporate financial management. The firm balances meanâvarianceÂ investment efficiency and the preservation of financial slack. We show that inÂ general the entrepreneur's net worth is overexposed to idiosyncratic riskÂ and underexposed to systematic risk. These distortions are greater theÂ closer the firm is to exhausting its debtÂ capacity.
Pages: 1431-1471 | Published: 3/2019 | DOI: 10.1111/jofi.12758 | Cited by: 7
HITESH DOSHI, KRIS JACOBS, PRAVEEN KUMAR, RAMON RABINOVITCH
Building on theoretical asset pricing literature, we examine the roleÂ of market risk and the size, bookâtoâmarket (BTM), and volatility anomaliesÂ in the crossâsection of unlevered equity returns. Compared with levered (stock) returns, unlevered market beta plays a more important role in explainingÂ the crossâsection of unlevered equity returns, even after controlling for sizeÂ and BTM. The size effect is weakened, while the value premium and theÂ volatility puzzle virtually disappear for unlevered returns. We show thatÂ leverage induces heteroskedasticity in returns. Unlevering returns removesÂ this pattern, which is otherwise difficult to address by controlling forÂ leverage inÂ regressions.
Pages: 1473-1502 | Published: 3/2019 | DOI: 10.1111/jofi.12760 | Cited by: 12
JASON RODERICK DONALDSON, GIORGIA PIACENTINO, ANJAN THAKOR
We use a laborâsearch model to explain why the worst employment slumps often follow expansions of householdÂ debt. We find that households protected by limited liability suffer from a householdâdebtâoverhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy posting effect implies that high household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a householdâdebt externality. We analyze the role that a financial regulator can play in mitigating thisÂ externality.
Pages: 1503-1557 | Published: 3/2019 | DOI: 10.1111/jofi.12764 | Cited by: 6
JESS BENHABIB, XUEWEN LIU, PENGFEI WANG
We develop a model of informationalÂ interdependence between financial markets and the real economy, linking economicÂ uncertainty to information production and aggregate economic activities in general equilibrium. The mutual learning between financial markets and the real economy createsÂ a strategic complementarity in their information production, leadingÂ to selfâfulfilling surges in economic uncertainties. In a dynamic setting,Â our model characterizes selfâfulfilling uncertainty traps with twoÂ steadyâstate equilibria and a twoâstage economic crisis in transitionalÂ dynamics.
Pages: 1559-1576 | Published: 3/2019 | DOI: 10.1111/jofi.12762 | Cited by: 7
GEORGE PENNACCHI, ALEXEI TCHISTYI
This paper identifies an error in Sundaresan and Wang (2015, hereafter SW) that invalidates its Theorem 1. The paper develops a model of contingent capital (CC) with a stock price trigger that is consistent with SW's framework and yields closedâform solutions for stock and CC prices. Yet, the model shows that unique stock price equilibria exist for a broader range of CC contractual terms than those required by SW. Specifically, when conversion terms benefit CC investors and penalize shareholders, a unique equilibrium can exist rather than the multiple equilibria stated inÂ SW.
Pages: 1577-1578 | Published: 5/2019 | DOI: 10.1111/jofi.12631 | Cited by: 0
Pages: 1579-1579 | Published: 5/2019 | DOI: 10.1111/jofi.12632 | Cited by: 0
Pages: 1580-1581 | Published: 5/2019 | DOI: 10.1111/jofi.12635 | Cited by: 0