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Volume 76: Issue 2 (April 2021)


ISSUE INFORMATION FM

Pages: 489-492  |  Published: 3/2021  |  DOI: 10.1111/jofi.12795  |  Cited by: 0


DIMENSIONAL FUND ADVISORS AND BRATTLE GROUP PRIZES FOR 2020

Pages: 493-493  |  Published: 3/2021  |  DOI: 10.1111/jofi.13007  |  Cited by: 0


The Private Production of Safe Assets

Pages: 495-535  |  Published: 12/2020  |  DOI: 10.1111/jofi.12997  |  Cited by: 4

MARCIN KACPERCZYK, CHRISTOPHE PÉRIGNON, GUILLAUME VUILLEMEY

Using high‐frequency, granular panel data on short‐term debt securities issued in Europe, we study the existence, empirical boundaries, and fragility of private assets' safety. We show that only securities with the shortest maturities, issued by banks (certificates of deposit, or CDs), benefit from a safety premium. The supply of such CDs responds positively to excess safety demand. During periods of stress, this relation vanishes for all issuers of private securities, even though their aggregate volumes do not collapse. Other dimensions of heterogeneity, including issuers' balance sheets or their domicile countries' fiscal capacity, are less relevant for private safety.


Mutual Fund Holdings of Credit Default Swaps: Liquidity, Yield, and Risk

Pages: 537-586  |  Published: 12/2020  |  DOI: 10.1111/jofi.12996  |  Cited by: 1

WEI JIANG, JITAO OU, ZHONGYAN ZHU

This study analyzes the motivations for and consequences of funds' credit default swap (CDS) investments using mutual funds' quarterly holdings from pre‐ to postfinancial crisis. Funds invest in CDS when facing unpredictable liquidity needs. Funds sell more in reference entities when the CDS is liquid relative to the underlying bonds and buy more when the CDS‐bond basis is more negative. To enhance yield, funds engage in negative basis trading and sell CDS with the highest spreads within rating categories, and with spreads higher than those of their bond portfolios. Funds with superior portfolio returns also demonstrate more skill in CDS trading.


The Misguided Beliefs of Financial Advisors

Pages: 587-621  |  Published: 12/2020  |  DOI: 10.1111/jofi.12995  |  Cited by: 3

JUHANI T. LINNAINMAA, BRIAN T. MELZER, ALESSANDRO PREVITERO

A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Within a large sample of Canadian financial advisors and their clients, however, we show that advisors typically invest personally just as they advise their clients. Advisors trade frequently, chase returns, prefer expensive and actively managed funds, and underdiversify. Advisors' net returns of −3% per year are similar to their clients' net returns. Advisors do not strategically hold expensive portfolios only to convince clients to do the same; they continue to do so after they leave the industry.


The Impact of Repossession Risk on Mortgage Default

Pages: 623-650  |  Published: 11/2020  |  DOI: 10.1111/jofi.12990  |  Cited by: 0

TERRY O'MALLEY

I study the effect of removing repossession risk on a mortgagor's decision to default. Reducing default costs may result in strategic default, particularly during crises when homeowners can be substantially underwater. I analyze difference‐in‐differences variation in repossession risk generated by an unexpected legal ruling in Ireland that prohibited collateral enforcement on delinquent residential mortgages originated before a particular date. I estimate that borrowers defaulted by 0.3 percentage points more each quarter after the ruling, a relative increase of approximately one‐half. High loan‐to‐value ratios and low liquidity are associated with a larger treatment effect, suggesting both equity and consumption‐based motivations.


Financial Fragility with SAM?

Pages: 651-706  |  Published: 12/2020  |  DOI: 10.1111/jofi.12992  |  Cited by: 1

DANIEL L. GREENWALD, TIM LANDVOIGT, STIJN VAN NIEUWERBURGH

Shared appreciation mortgages (SAMs) feature mortgage payments that adjust with house prices. They are designed to stave off borrower default by providing payment relief when house prices fall. Some argue that SAMs may help prevent the next foreclosure crisis. However, home owners' gains from payment relief are mortgage lenders' losses. A general equilibrium model in which financial intermediaries channel savings from saver to borrower households shows that indexation of mortgage payments to aggregate house prices increases financial fragility, reduces risk‐sharing, and leads to expensive financial sector bailouts. In contrast, indexation to local house prices reduces financial fragility and improves risk‐sharing.


Anonymous Trading in Equities

Pages: 707-754  |  Published: 12/2020  |  DOI: 10.1111/jofi.12988  |  Cited by: 0

TOM GRIMSTVEDT MELING

In this paper, I explore a reform at the Oslo Stock Exchange to assess the causal effect of posttrade trader anonymity on stock liquidity and trading volume. Using a regression discontinuity approach, I find that anonymity leads to a reduction in bid‐ask spreads of 40% and an increase in trading volume of more than 50%. The increase in trading volume is accounted for largely by increased trading activity by institutional investors, while retail investors do not adjust their trading behavior in response to anonymity. The results suggest that posttrade anonymity positively affects standard measures of market quality.


Liquidity Supply in the Corporate Bond Market

Pages: 755-796  |  Published: 12/2020  |  DOI: 10.1111/jofi.12991  |  Cited by: 2

JONATHAN GOLDBERG, YOSHIO NOZAWA

This paper examines dealer inventory capacity, or liquidity supply, as a driver of liquidity and expected returns in the corporate bond market. We identify shocks to aggregate liquidity supply using data on corporate bond yields and dealer positions. Liquidity supply shocks lead to persistent changes in market liquidity, are correlated with proxies for dealer financial constraints, and have significant explanatory power for cross‐sectional and time‐series variation in expected returns, beyond standard risk factors. Our findings point to liquidity supply by financially constrained intermediaries as a main driver of market liquidity and asset prices.


The Perception of Dependence, Investment Decisions, and Stock Prices

Pages: 797-844  |  Published: 12/2020  |  DOI: 10.1111/jofi.12993  |  Cited by: 2

MICHAEL UNGEHEUER, MARTIN WEBER

How do investors perceive dependence between stock returns; and how does their perception of dependence affect investments and stock prices? We show experimentally that investors understand differences in dependence, but not in terms of correlation. Participants invest as if applying a simple counting heuristic for the frequency of comovement. They diversify more when the frequency of comovement is lower even if correlation is higher due to dependence in the tails. Building on our experimental findings, we empirically analyze U.S. stock returns. We identify a robust return premium for stocks with high frequencies of comovement with the market return.


Public Thrift, Private Perks: Signaling Board Independence with Executive Pay

Pages: 845-891  |  Published: 11/2020  |  DOI: 10.1111/jofi.12989  |  Cited by: 0

PABLO RUIZ‐VERDÚ, RAVI SINGH

We analyze how boards' reputational concerns influence executive compensation and the use of hidden pay. Independent boards reduce disclosed pay to signal their independence, but are more likely than manager‐friendly boards to use hidden pay or to distort incentive contracts. Stronger reputational pressures lead to lower disclosed pay, weaker managerial incentives, and higher hidden pay, whereas greater transparency of executive compensation has the opposite effects. Although reputational concerns can induce boards to choose compensation contracts more favorable to shareholders, we show that there is a threshold beyond which stronger reputational concerns harm shareholders. Similarly, excessive pay transparency can harm shareholders.


Limited Risk Sharing and International Equity Returns

Pages: 893-933  |  Published: 12/2020  |  DOI: 10.1111/jofi.12994  |  Cited by: 1

SHAOJUN ZHANG

Limited stock market participation can potentially explain the disconnect between international asset prices and macro quantities. An incomplete markets model in which risk sharing for stockholders is high generates highly correlated equity returns and relatively smooth exchange rates. Risk sharing for nonstockholders is limited because of their nonparticipation in stock markets and borrowing constraints, reducing the aggregate consumption correlation and the correlation between aggregate consumption differentials and exchange rates. Financial integration widens the disconnect by benefiting stockholders but hurting nonstockholders. Survey data indicate that international risk sharing for stockholders is better than that for nonstockholders, consistent with the predictions.


Model‐Free International Stochastic Discount Factors

Pages: 935-976  |  Published: 8/2020  |  DOI: 10.1111/jofi.12970  |  Cited by: 5

MIRELA SANDULESCU, FABIO TROJANI, ANDREA VEDOLIN

We provide a theoretical framework to uncover in a model‐free way the relationships among international stochastic discount factors (SDFs), stochastic wedges, and financial market structures. Exchange rates are in general different from the ratio of international SDFs in incomplete markets, as captured by a stochastic wedge. We show theoretically that this wedge can be zero in incomplete and integrated markets. Market segmentation breaks the strong link between exchange rates and international SDFs, which helps address salient features of international asset returns while keeping the volatility and cross‐country correlation of SDFs at moderate levels.


Equilibrium Asset Pricing with Leverage and Default

Pages: 977-1018  |  Published: 11/2020  |  DOI: 10.1111/jofi.12987  |  Cited by: 3

JOÃO F. GOMES, LUKAS SCHMID

We develop a general equilibrium model linking the pricing of stocks and corporate bonds to endogenous movements in corporate leverage and aggregate volatility. The model features heterogeneous firms making optimal investment and financing decisions and connects fluctuations in macroeconomic quantities and asset prices to movements in the cross section of firms. Empirically plausible movements in leverage produce realistic asset return dynamics. Countercyclical leverage drives predictable variation in risk premia, and debt‐financed growth generates a high value premium. Endogenous default produces countercyclical aggregate volatility and credit spread movements that are propagated to the real economy through their effects on investment and output.


Report of the Editor of The Journal of Finance for the Year 2020

Pages: 1019-1028  |  Published: 3/2021  |  DOI: 10.1111/jofi.13015  |  Cited by: 0

STEFAN NAGEL


Report of the 2021 Annual Membership Meeting

Pages: 1029-1031  |  Published: 3/2021  |  DOI: 10.1111/jofi.13005  |  Cited by: 0


Report of the Executive Secretary and Treasurer for the Fiscal Year Ending June 30, 2020

Pages: 1033-1034  |  Published: 3/2021  |  DOI: 10.1111/jofi.13006  |  Cited by: 0


MISCELLANEA

Pages: 1035-1036  |  Published: 3/2021  |  DOI: 10.1111/jofi.13017  |  Cited by: 0


ANNOUNCEMENTS

Pages: 1037-1037  |  Published: 3/2021  |  DOI: 10.1111/jofi.13014  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 1038-1039  |  Published: 3/2021  |  DOI: 10.1111/jofi.12796  |  Cited by: 0