No Job, No Money, No Refi: Frictions to Refinancing in a Recession
Pages: 2327-2376 | Published: 6/2020 | DOI: 10.1111/jofi.12952 | Cited by: 41
ANTHONY A. DEFUSCO, JOHN MONDRAGON
We study how employment documentation requirements and out‐of‐pocket closing costs constrain mortgage refinancing. These frictions, which bind most severely during recessions, may significantly inhibit monetary policy pass‐through. To study their effects on refinancing, we exploit a Federal Housing Administration policy change that excluded unemployed borrowers from refinancing and increased others' out‐of‐pocket costs substantially. These changes dramatically reduced refinancing rates, particularly among the likely unemployed and those facing new out‐of‐pocket costs. Our results imply that unemployed and liquidity‐constrained borrowers have a high latent demand for refinancing. Cyclical variation in these factors may therefore affect both the aggregate and distributional consequences of monetary policy.
Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports
Pages: 2377-2419 | Published: 6/2020 | DOI: 10.1111/jofi.12954 | Cited by: 48
WILL DOBBIE, PAUL GOLDSMITH‐PINKHAM, NEALE MAHONEY, JAE SONG
We study the financial and labor market impacts of bad credit reports. Using difference‐in‐differences variation from the staggered removal of bankruptcy flags, we show that bankruptcy flag removal leads to economically large increases in credit limits and borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate economically small effects of flag removal on employment and earnings outcomes. We rationalize these contrasting results by showing that, conditional on basic observables, “hidden” bankruptcy flags are strongly correlated with adverse credit market outcomes but have no predictive power for measures of job performance.
Declining Labor and Capital Shares
Pages: 2421-2463 | Published: 5/2020 | DOI: 10.1111/jofi.12909 | Cited by: 241
SIMCHA BARKAI
This paper presents direct measures of capital costs, equal to the product of the required rate of return on capital and the value of the capital stock. The capital share, equal to the ratio of capital costs and gross value added, does not offset the decline in the labor share. Instead, a large increase in the share of pure profits offsets declines in the shares of both labor and capital. Industry data show that increases in concentration are associated with declines in the labor share.
The Banking View of Bond Risk Premia
Pages: 2465-2502 | Published: 6/2020 | DOI: 10.1111/jofi.12949 | Cited by: 40
VALENTIN HADDAD, DAVID SRAER
Banks' balance sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations that support this view, but also discuss several challenges to this interpretation.
False (and Missed) Discoveries in Financial Economics
Pages: 2503-2553 | Published: 6/2020 | DOI: 10.1111/jofi.12951 | Cited by: 54
CAMPBELL R. HARVEY, YAN LIU
Multiple testing plagues many important questions in finance such as fund and factor selection. We propose a new way to calibrate both Type I and Type II errors. Next, using a double‐bootstrap method, we establish a t‐statistic hurdle that is associated with a specific false discovery rate (e.g., 5%). We also establish a hurdle that is associated with a certain acceptable ratio of misses to false discoveries (Type II error scaled by Type I error), which effectively allows for differential costs of the two types of mistakes. Evaluating current methods, we find that they lack power to detect outperforming managers.
The Mismatch Between Mutual Fund Scale and Skill
Pages: 2555-2589 | Published: 6/2020 | DOI: 10.1111/jofi.12950 | Cited by: 57
YANG SONG
I demonstrate that skill and scale are mismatched among actively managed equity mutual funds. Many mutual fund investors confuse the effects of fund exposures to common systematic factors with managerial skill when allocating capital among funds. Active mutual funds with positive factor‐related past returns thus accumulate assets to the point that they significantly underperform. I also show that the negative aggregate benchmark‐adjusted performance of active equity mutual funds is driven mainly by these oversized funds.
Price and Probability: Decomposing the Takeover Effects of Anti‐Takeover Provisions
Pages: 2591-2629 | Published: 5/2020 | DOI: 10.1111/jofi.12908 | Cited by: 17
VICENTE CUÑAT, MIREIA GINÉ, MARIA GUADALUPE
We study the effects of anti‐takeover provisions (ATPs) on the takeover probability, the takeover premium, and target selection. Voting to remove an ATP increases both the takeover probability and the takeover premium, that is, there is no evidence of a trade‐off between premiums and takeover probabilities. We provide causal estimates based on shareholder proposals to remove ATPs and address the endogenous selection of targets through bounding techniques. The positive premium effect in less protected firms is driven by better bidder‐target matching and merger synergies.
The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies
Pages: 2631-2672 | Published: 5/2020 | DOI: 10.1111/jofi.12947 | Cited by: 92
YONGQIANG CHU, DAVID HIRSHLEIFER, LIANG MA
We examine the causal effect of limits to arbitrage on 11 well‐known asset pricing anomalies using the pilot program of Regulation SHO, which relaxed short‐sale constraints for a quasi‐random set of pilot stocks, as a natural experiment. We find that the anomalies became weaker on portfolios constructed with pilot stocks during the pilot period. The pilot program reduced the combined anomaly long–short portfolio returns by 72 basis points per month, a difference that survives risk adjustment with standard factor models. The effect comes only from the short legs of the anomaly portfolios.
Pages: 2673-2718 | Published: 6/2020 | DOI: 10.1111/jofi.12910 | Cited by: 93
PAUL SCHNEIDER, CHRISTIAN WAGNER, JOSEF ZECHNER
This paper shows that low‐risk anomalies in the capital asset pricing model and in traditional factor models arise when investors require compensation for coskewness risk. Empirically, we find that option‐implied ex ante skewness is strongly related to ex post residual coskewness, which allows us to construct coskewness factor‐mimicking portfolios. Controlling for skewness renders the alphas of betting‐against‐beta and betting‐against‐volatility insignificant. We also show that the returns of beta‐ and volatility‐sorted portfolios are driven largely by a single principal component, which in turn is explained largely by skewness.
Market Structure and Transaction Costs of Index CDSs
Pages: 2719-2763 | Published: 6/2020 | DOI: 10.1111/jofi.12953 | Cited by: 39
PIERRE COLLIN‐DUFRESNE, BENJAMIN JUNGE, ANDERS B. TROLLE
Despite regulatory efforts to promote all‐to‐all trading, the post–Dodd‐Frank index credit default swap market remains two‐tiered. Transaction costs are higher for dealer‐to‐client than interdealer trades, but the difference is explained by the higher, largely permanent, price impact of client trades. Most interdealer trades are liquidity motivated and executed via low‐cost, low‐immediacy trading protocols. Dealer‐to‐client trades are nonanonymous; they almost always improve upon contemporaneous executable interdealer quotes, and dealers appear to price discriminate based on the perceived price impact of trades. Our results suggest that the market structure is a consequence of the characteristics of client trades: relatively infrequent, large, and differentially informed.
The Impact of Supervision on Bank Performance
Pages: 2765-2808 | Published: 7/2020 | DOI: 10.1111/jofi.12964 | Cited by: 108
BEVERLY HIRTLE, ANNA KOVNER, MATTHEW PLOSSER
We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors' time use, we demonstrate that the top‐ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top‐ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.
A Macrofinance View of U.S. Sovereign CDS Premiums
Pages: 2809-2844 | Published: 6/2020 | DOI: 10.1111/jofi.12948 | Cited by: 36
MIKHAIL CHERNOV, LUKAS SCHMID, ANDRES SCHNEIDER
Premiums on U.S. sovereign credit default swaps (CDS) have risen to persistently elevated levels since the financial crisis. We examine whether these premiums reflect the probability of a fiscal default—a state in which a balanced budget can no longer be restored by raising taxes or eroding the real value of debt by increasing inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stances jointly endogenously determine nominal debt, taxes, inflation, and growth. We show that the CDS premiums reflect the endogenous risk‐adjusted probabilities of fiscal default. The calibrated model is consistent with elevated levels of CDS premiums but leaves dynamic implications quantitatively unresolved.
Pages: 2848-2849 | Published: 9/2020 | DOI: 10.1111/jofi.12675 | Cited by: 0