Foreign Safe Asset Demand and the Dollar Exchange Rate
Pages: 1049-1089 | Published: 3/2021 | DOI: 10.1111/jofi.13003 | Cited by: 123
ZHENGYANG JIANG, ARVIND KRISHNAMURTHY, HANNO LUSTIG
We develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis, the yield gap between U.S. government and currency‐hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.
Banking on Deposits: Maturity Transformation without Interest Rate Risk
Pages: 1091-1143 | Published: 4/2021 | DOI: 10.1111/jofi.13013 | Cited by: 148
ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL
We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.
Monetary Policy and Reaching for Income
Pages: 1145-1193 | Published: 2/2021 | DOI: 10.1111/jofi.13004 | Cited by: 36
KENT DANIEL, LORENZO GARLAPPI, KAIRONG XIAO
Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.
Leverage Dynamics without Commitment
Pages: 1195-1250 | Published: 1/2021 | DOI: 10.1111/jofi.13001 | Cited by: 70
PETER M. DEMARZO, ZHIGUO HE
We characterize equilibrium leverage dynamics in a trade‐off model in which the firm can continuously adjust leverage and cannot commit to a policy ex ante. While the leverage ratchet effect leads shareholders to issue debt gradually over time, asset growth and debt maturity cause leverage to mean‐revert slowly toward a target. Investors anticipate future debt issuance and raise credit spreads, fully offsetting the tax benefits of new debt. Shareholders are therefore indifferent toward the debt maturity structure, even though their choice significantly affects credit spreads, leverage levels, the speed of adjustment, future investment, and growth.
Fire‐Sale Spillovers and Systemic Risk
Pages: 1251-1294 | Published: 4/2021 | DOI: 10.1111/jofi.13010 | Cited by: 85
FERNANDO DUARTE, THOMAS M. EISENBACH
We identify and track over time the factors that make the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing quickly in 2004, before most other major systemic risk measures, and triples by 2008. The fire‐sale‐specific factors of delevering speed and concentration of illiquid assets account for the majority of this increase. Individual banks' contributions to aggregate vulnerability predict other firm‐specific measures of systemic risk, including SRISK and ΔCoVaR. The balance‐sheet‐based measures we propose are therefore useful early indicators of when and where vulnerabilities are building up.
Leveraged Funds and the Shadow Cost of Leverage Constraints
Pages: 1295-1338 | Published: 3/2021 | DOI: 10.1111/jofi.13012 | Cited by: 12
ZHONGJIN LU, ZHONGLING QIN
Using the most comprehensive data set of leveraged funds known to the literature, we measure the market‐wide shadow cost of leverage constraints and examine its pricing implications. The shadow cost averages 0.53% per annum from 2006 to 2016, spikes upon quarter‐ends when banks face tighter capital requirements, positively predicts future betting‐against‐beta (BAB) returns, and negatively correlates with contemporaneous BAB returns. Stocks that experience lower returns when the shadow cost increases earn 0.85% more per month. Overall, our shadow cost measure fits the predictions of leverage‐constraint‐based theories better than the widely used TED spread.
Subjective Cash Flow and Discount Rate Expectations
Pages: 1339-1387 | Published: 3/2021 | DOI: 10.1111/jofi.13016 | Cited by: 94
RICARDO DE LA O, SEAN MYERS
Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price‐dividend and price‐earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short‐term, rather than long‐term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.
Who Wears the Pants? Gender Identity Norms and Intrahousehold Financial Decision‐Making
Pages: 1389-1425 | Published: 2/2021 | DOI: 10.1111/jofi.13002 | Cited by: 39
DA KE
Using microdata from U.S. household surveys, I document that families with a financially sophisticated husband are more likely to participate in the stock market than those with a wife of equal financial sophistication. This pattern is best explained by gender identity norms, which constrain women's influence over intrahousehold financial decision‐making. A randomized controlled experiment reveals that female identity hinders idea contribution by the wife. These findings underscore the roles of intrahousehold bargaining and traditional norms in shaping household financial decisions.
The Economics of Hedge Fund Startups: Theory and Empirical Evidence
Pages: 1427-1469 | Published: 3/2021 | DOI: 10.1111/jofi.13009 | Cited by: 13
CHARLES CAO, GRANT FARNSWORTH, HONG ZHANG
This paper examines how market frictions influence the managerial incentives and organizational structure of new hedge funds. We develop a stylized model in which new managers search for accredited investors and have stronger incentives to acquire managerial skill when encountering low investor demand. Fund families endogenously arise to mitigate frictions and weaken the performance incentives of affiliated new funds. Empirically, based on a TASS‐HFR‐BarclayHedge merged database, we find that ex ante identified cold inceptions facing low investor demand outperform existing hedge funds and hot inceptions facing high demand and that cold stand‐alone inceptions outperform all types of family‐affiliated inceptions.
Trading Costs and Informational Efficiency
Pages: 1471-1539 | Published: 3/2021 | DOI: 10.1111/jofi.13008 | Cited by: 33
EDUARDO DÁVILA, CECILIA PARLATORE
We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex ante identical: price informativeness is independent of the level of trading costs. When investors are ex ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.
For Richer, for Poorer: Bankers' Liability and Bank Risk in New England, 1867 to 1880
Pages: 1541-1599 | Published: 3/2021 | DOI: 10.1111/jofi.13011 | Cited by: 12
PETER KOUDIJS, LAURA SALISBURY, GURPAL SRAN
We study whether banks are riskier if managers have less liability. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that limited liability for newly wedded bankers. We find that banks with managers who married after a law had higher leverage, delayed loss recognition, made more risky and fraudulent loans, and lost more capital and deposits in the Long Depression of 1873 to 1878. These effects were most pronounced for bankers with the largest reduction in liability. We find no evidence that limiting liability increased firm investment at the county level.
Pages: 1604-1605 | Published: 5/2021 | DOI: 10.1111/jofi.12801 | Cited by: 0