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Volume 76: Issue 5 (October 2021)


ISSUE INFORMATION FM

Pages: 2083-2085  |  Published: 9/2021  |  DOI: 10.1111/jofi.12810  |  Cited by: 0


Matteo Maggiori: Winner of the 2021 Fischer Black Prize

Pages: 2087-2091  |  Published: 9/2021  |  DOI: 10.1111/jofi.13075  |  Cited by: 0

HANNO LUSTIG


The Cross Section of MBS Returns

Pages: 2093-2151  |  Published: 6/2021  |  DOI: 10.1111/jofi.13055  |  Cited by: 0

PETER DIEP, ANDREA L. EISFELDT, SCOTT RICHARDSON

We present a simple, linear asset pricing model of the cross section of Mortgage‐Backed Security (MBS) returns. MBS earn risk premia as compensation for their exposure to prepayment risk. We measure prepayment risk and estimate risk loadings using prepayment forecasts versus realizations. Estimated loadings on prepayment risk decrease monotonically in securities' coupons relative to the par coupon, consistent with the predicted effect of prepayment on bond value. Prepayment risk appears to be priced by specialized MBS investors. The price of prepayment risk changes sign over time with the sign of a representative MBS investor's exposure to prepayment shocks.


Reinvestment Risk and the Equity Term Structure

Pages: 2153-2197  |  Published: 5/2021  |  DOI: 10.1111/jofi.13035  |  Cited by: 7

ANDREI S. GONÇALVES

The equity term structure is downward sloping at long maturities. I estimate an Intertemporal Capital Asset Pricing Model (ICAPM) to show that the trade‐off between market and reinvestment risk explains this pattern. Intuitively, while long‐term dividend claims are highly exposed to market risk, they are good hedges for reinvestment risk because dividend prices rise as expected returns decline, and longer‐term claims are more sensitive to discount rates. In the estimated ICAPM, reinvestment risk dominates at long maturities, inducing relatively low risk premia on long‐term dividend claims. The model is also consistent with the equity term structure cyclicality and the upward‐sloping bond term structure.


Inventory Management, Dealers' Connections, and Prices in Over‐the‐Counter Markets

Pages: 2199-2247  |  Published: 5/2021  |  DOI: 10.1111/jofi.13034  |  Cited by: 0

JEAN‐EDOUARD COLLIARD, THIERRY FOUCAULT, PETER HOFFMANN

We propose a new model of trading in over‐the‐counter markets. Dealers accumulate inventories by trading with end‐investors and trade among each other to reduce their inventory holding costs. Core dealers use a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers' aggregate inventory position differs from zero. Price dispersion increases in the size of this position. The model generates new predictions about the effects of dealers' connectedness and dealers' aggregate inventories on prices.


Tracking Retail Investor Activity

Pages: 2249-2305  |  Published: 5/2021  |  DOI: 10.1111/jofi.13033  |  Cited by: 23

EKKEHART BOEHMER, CHARLES M. JONES, XIAOYAN ZHANG, XINRAN ZHANG

We provide an easy method to identify marketable retail purchases and sales using recent, publicly available U.S. equity transactions data. Individual stocks with net buying by retail investors outperform stocks with negative imbalances by approximately 10 bps over the following week. Less than half of the predictive power of marketable retail order imbalance is attributable to order flow persistence, while the rest cannot be explained by contrarian trading (proxy for liquidity provision) or public news sentiment. There is suggestive, but only suggestive, evidence that retail marketable orders might contain firm‐level information that is not yet incorporated into prices.


Can the Market Multiply and Divide? Non‐Proportional Thinking in Financial Markets

Pages: 2307-2357  |  Published: 6/2021  |  DOI: 10.1111/jofi.13059  |  Cited by: 0

KELLY SHUE, RICHARD R. TOWNSEND

We hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower‐priced stocks. Consistent with such non‐proportional thinking, we find a doubling in price is associated with a 20% to 30% decline in volatility and beta (controlling for size/liquidity). To identify a causal price effect, we show that volatility jumps following stock splits and drops following reverse splits. Lower‐priced stocks also respond more strongly to firm‐specific news. Non‐proportional thinking helps explain asset pricing patterns such as the size‐volatility/beta relation, the leverage effect puzzle, and return drift and reversals.


The Misallocation of Finance

Pages: 2359-2407  |  Published: 5/2021  |  DOI: 10.1111/jofi.13031  |  Cited by: 1

TONI M. WHITED, JAKE ZHAO

We estimate real losses arising from the cross‐sectional misallocation of financial liabilities. Extending a production‐based framework of misallocation measurement to the liabilities side of the balance sheet and using manufacturing firm data from the United States and China, we find significant misallocation of debt and equity in China but not the United States. Reallocating liabilities of firms in China to mimic U.S. efficiency would produce gains of 51% to 69% in real value‐added, with only 17% to 21% stemming from inefficient debt‐equity combinations. For Chinese firms that are large or in developed cities, we estimate lower distortionary financing costs.


Property Rights to Client Relationships and Financial Advisor Incentives

Pages: 2409-2445  |  Published: 6/2021  |  DOI: 10.1111/jofi.13058  |  Cited by: 2

CHRISTOPHER P. CLIFFORD, WILLIAM C. GERKEN

We study the effect of a change in property rights on employee behavior in the financial advice industry. Our identification comes from staggered firm‐level entry into the Protocol for Broker Recruiting, which waived nonsolicitation clauses for advisor transitions among member firms, effectively transferring ownership of client relationships from the firm to the advisor. After the shock, advisors appear to tend to client relationships more by investing in client‐facing industry licenses, shifting to fee‐based advising, and reducing customer complaints. Our findings support property rights based investment theories of the firm and document offsetting costs to restricting labor mobility.


The Limits of p ‐Hacking: Some Thought Experiments

Pages: 2447-2480  |  Published: 5/2021  |  DOI: 10.1111/jofi.13036  |  Cited by: 1

ANDREW Y. CHEN

Suppose that the 300+ published asset pricing factors are all spurious. How much p‐hacking is required to produce these factors? If 10,000 researchers generate eight factors every day, it takes hundreds of years. This is because dozens of published t‐statistics exceed 6.0, while the corresponding p‐value is infinitesimal, implying an astronomical amount of p‐hacking in a general model. More structure implies that p‐hacking cannot address ≈100 published t‐statistics that exceed 4.0, as they require an implausibly nonlinear preference for t‐statistics or even more p‐hacking. These results imply that mispricing, risk, and/or frictions have a key role in stock returns.


Do Physiological and Spiritual Factors Affect Economic Decisions?

Pages: 2481-2523  |  Published: 5/2021  |  DOI: 10.1111/jofi.13032  |  Cited by: 1

CEM DEMIROGLU, OGUZHAN OZBAS, RUI C. SILVA, MEHMET FATİH ULU

We examine the effects of physiology and spiritual sentiment on economic decision‐making in the context of Ramadan, an entire lunar month of daily fasting and increased spiritual reflection in the Muslim faith. Using an administrative data set of bank loans originated in Turkey during 2003 to 2013, we find that small business loans originated during Ramadan are 15% more likely to default within two years of origination. Loans originated in hot Ramadans, when adverse physiological effects of fasting are greatest, and those approved by the busiest bank branches perform worse. Despite their worse performance, Ramadan loans have lower credit spreads.


Structuring Mortgages for Macroeconomic Stability

Pages: 2525-2576  |  Published: 6/2021  |  DOI: 10.1111/jofi.13056  |  Cited by: 3

JOHN Y. CAMPBELL, NUNO CLARA, JOÃO F. COCCO

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of borrowers and an infinitely lived risk‐averse representative lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable‐rate mortgage with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. The option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and enhances welfare. The cyclical properties of the contract are attractive to a risk‐averse lender so that the mortgage can be provided at a relatively low cost.


Out‐of‐Town Home Buyers and City Welfare

Pages: 2577-2638  |  Published: 6/2021  |  DOI: 10.1111/jofi.13057  |  Cited by: 3

JACK FAVILUKIS, STIJN VAN NIEUWERBURGH

Many cities have attracted a flurry of out‐of‐town (OOT) home buyers. Such capital inflows affect house prices, rents, construction, labor income, wealth, and ultimately welfare. We develop an equilibrium model to quantify the welfare effects of OOT home buyers for the typical U.S. metropolitan area. When OOT investors buy 10% of the housing in the city center and 5% in the suburbs, welfare among residents falls by 0.61% in consumption‐equivalent units. House prices and rents rise substantially, resulting in welfare gains for owners and losses for renters. Policies that tax OOT buyers or mandate renting out vacant property mitigate welfare losses.


Prospect Theory and Stock Market Anomalies

Pages: 2639-2687  |  Published: 6/2021  |  DOI: 10.1111/jofi.13061  |  Cited by: 2

NICHOLAS BARBERIS, LAWRENCE J. JIN, BAOLIAN WANG

We present a new model of asset prices in which investors evaluate risk according to prospect theory and examine its ability to explain 23 prominent stock market anomalies. The model incorporates all of the elements of prospect theory, accounts for investors' prior gains and losses, and makes quantitative predictions about an asset's average return based on empirical estimates of the asset's return volatility, return skewness, and past capital gain. We find that the model can help explain a majority of the 23 anomalies.


Risk Management in Financial Institutions: A Replication

Pages: 2689-2707  |  Published: 7/2021  |  DOI: 10.1111/jofi.13063  |  Cited by: 0

PAUL M. GUEST

Rampini, Viswanathan, and Vuillemey (RVV) show empirically that net worth drives hedging. I identify discrepancies to which RVV's key findings are not robust: the positive correlation between net worth and hedging is not independent of institution size, house price decline shocks to net worth (which RVV use for identification) have mixed effects on hedging that are not robust across alternative specifications, and the treatment effects on net worth and hedging are not increasing in real estate exposure, inconsistent with a causal explanation. Overall, my analysis does not support the conclusion of RVV that higher net worth causes more hedging.


Retracted: Risk Management in Financial Institutions

Pages: 2709-2709  |  Published: 7/2021  |  DOI: 10.1111/jofi.13064  |  Cited by: 0


ANNOUNCEMENTS

Pages: 2711-2711  |  Published: 9/2021  |  DOI: 10.1111/jofi.13076  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 2712-2713  |  Published: 9/2021  |  DOI: 10.1111/jofi.12811  |  Cited by: 0