View All Issues

Volume 77: Issue 2 (April 2022)


ISSUE INFORMATION FM

Pages: 809-812  |  Published: 3/2022  |  DOI: 10.1111/jofi.12921  |  Cited by: 0


BRATTLE GROUP AND DIMENSIONAL FUND ADVISORS PRIZES FOR 2021

Pages: 813-813  |  Published: 3/2022  |  DOI: 10.1111/jofi.13121  |  Cited by: 0


The Fragility of Market Risk Insurance

Pages: 815-862  |  Published: 2/2022  |  DOI: 10.1111/jofi.13118  |  Cited by: 6

RALPH S.J. KOIJEN, MOTOHIRO YOGO

Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low‐interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID‐19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.


Predictable Financial Crises

Pages: 863-921  |  Published: 3/2022  |  DOI: 10.1111/jofi.13105  |  Cited by: 4

ROBIN GREENWOOD, SAMUEL G. HANSON, ANDREI SHLEIFER, JAKOB AHM SØRENSEN

Using historical data on postwar financial crises around the world, we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth is elevated. Our evidence challenges the view that financial crises are unpredictable “bolts from the sky” and supports the Kindleberger‐Minsky view that crises are the byproduct of predictable, boom‐bust credit cycles. This predictability favors policies that lean against incipient credit‐market booms.


Late to Recessions: Stocks and the Business Cycle

Pages: 923-966  |  Published: 12/2021  |  DOI: 10.1111/jofi.13100  |  Cited by: 2

ROBERTO GÓMEZ‐CRAM

I find that returns are predictably negative for several months after the onset of recessions, becoming high only thereafter. I identify business cycle turning points by estimating a state‐space model using macroeconomic data. Conditioning on the business cycle further reveals that returns exhibit momentum in recessions, whereas in expansions they display the mild reversals expected from discount rate changes. A strategy exploiting this pattern produces positive alphas. Using analyst forecast data, I show that my findings are consistent with investors' slow reaction to recessions. When expected returns are negative, analysts are too optimistic and their downward expectation revisions are exceptionally high.


Monetary Policy and Asset Valuation

Pages: 967-1017  |  Published: 1/2022  |  DOI: 10.1111/jofi.13107  |  Cited by: 3

FRANCESCO BIANCHI, MARTIN LETTAU, SYDNEY C. LUDVIGSON

We document large, longer term, joint regime shifts in asset valuations and the real federal funds rate‐r*$r^{\ast }$ spread. To interpret these findings, we estimate a novel macrofinance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy rule, with long‐term consequences for the real interest rate. Estimates imply that two‐thirds of the decline in the real interest rate since the early 1980s is attributable to regime changes in monetary policy. The model explains how infrequent changes in the stance of monetary policy can generate persistent changes in asset valuations and the equity premium.


Payment System Externalities

Pages: 1019-1053  |  Published: 2/2022  |  DOI: 10.1111/jofi.13110  |  Cited by: 0

CHRISTINE A. PARLOUR, UDAY RAJAN, JOHAN WALDEN

We examine how the payment processing role of banks affects their lending activity. In our model, banks operate in separate zones, and issue claims to entrepreneurs who purchase some inputs outside their own zone. Settling bank claims across zones incurs a cost. In equilibrium, a liquidity externality arises when zones are sufficiently different in their outsourcing propensities—a bank may restrict its own lending because it needs to hold liquidity against claims issued by another bank. Our work highlights that the disparate motives for interbank borrowing (investing in productive projects and managing liquidity) can have different effects on efficiency.


Volatility Expectations and Returns

Pages: 1055-1096  |  Published: 2/2022  |  DOI: 10.1111/jofi.13120  |  Cited by: 1

LARS A. LOCHSTOER, TYLER MUIR

We provide evidence that agents have slow‐moving beliefs about stock market volatility that lead to initial underreaction to volatility shocks followed by delayed overreaction. These dynamics are mirrored in the VIX and variance risk premiums, which reflect investor expectations about volatility, and are also supported in both surveys and firm‐level option prices. We embed these expectations into an asset pricing model and find that the model can account for a number of stylized facts about market returns and return volatility that are difficult to reconcile, including a weak or even negative risk‐return trade‐off.


Dissecting Conglomerate Valuations

Pages: 1097-1131  |  Published: 3/2022  |  DOI: 10.1111/jofi.13117  |  Cited by: 1

OLIVER BOGUTH, RAN DUCHIN, MIKHAIL SIMUTIN

We develop a new method to estimate Tobin's Qs of conglomerate divisions without relying on standalone firms. Divisional Qs differ considerably from those of standalone firms across industries, over time, and in their sensitivity to economic shocks. The differences are explained by intraconglomerate covariance structures and access to internal capital markets that mitigate external financing frictions. Consequently, the Qs capture variation in the allocation of assets in the economy: within firms through internal capital markets and across focused and diversified firms through diversifying acquisitions. Overall, our method provides opportunities to study the economic mechanisms that explain corporate diversification.


Common Risk Factors in Cryptocurrency

Pages: 1133-1177  |  Published: 2/2022  |  DOI: 10.1111/jofi.13119  |  Cited by: 24

YUKUN LIU, ALEH TSYVINSKI, XI WU

We find that three factors—cryptocurrency market, size, and momentum—capture the cross‐sectional expected cryptocurrency returns. We consider a comprehensive list of price‐ and market‐related return predictors in the stock market and construct their cryptocurrency counterparts. Ten cryptocurrency characteristics form successful long‐short strategies that generate sizable and statistically significant excess returns, and we show that all of these strategies are accounted for by the cryptocurrency three‐factor model. Lastly, we examine potential underlying mechanisms of the cryptocurrency size and momentum effects.


Do Market Prices Improve the Accuracy of Court Valuations in Chapter 11?

Pages: 1179-1218  |  Published: 2/2022  |  DOI: 10.1111/jofi.13111  |  Cited by: 0

CEM DEMIROGLU, JULIAN FRANKS, RYAN LEWIS

The average difference between the court value and postemergence market value of newly issued stocks in Chapter 11 reorganizations exceeds 50%. We show that public dissemination of transactions in defaulted bonds reduces this difference by 23% and largely eliminates interclaimant wealth transfers. The effects of dissemination are only significant when the bonds are sufficiently traded around the court valuation date and when they receive significant amounts of postemergence equity, indicating that the bond's value is sensitive to the size and allocation of the pie. These findings imply that security prices have real effects: they improve the valuations of bankruptcy participants.


Regulation of Charlatans in High‐Skill Professions

Pages: 1219-1258  |  Published: 2/2022  |  DOI: 10.1111/jofi.13112  |  Cited by: 0

JONATHAN B. BERK, JULES H. VAN BINSBERGEN

We model a market for a skill in short supply and high demand, where the presence of charlatans (professionals who sell a service they do not deliver on) is an equilibrium outcome. In the model, reducing the number of charlatans through regulation lowers consumer surplus because of the resulting reduction in competition among producers. Producers can benefit from this reduction, potentially explaining the regulation we observe. The effect on total surplus depends on the type of regulation. We derive the factors that drive the cross‐sectional variation in charlatans (regulation) across professions.


Going the Extra Mile: Distant Lending and Credit Cycles

Pages: 1259-1324  |  Published: 2/2022  |  DOI: 10.1111/jofi.13114  |  Cited by: 3

JOÃO GRANJA, CHRISTIAN LEUZ, RAGHURAM G. RAJAN

The average distance of U.S. banks from their small corporate borrowers increased before the global financial crisis, especially for banks in competitive counties. Small distant loans are harder to make, so loan quality deteriorated. Surprisingly, such lending intensified as the Fed raised interest rates from 2004. Why? We show that banks' responses to higher rates led bank deposits to shift into competitive counties. Short‐horizon bank management recycled these inflows into risky loans to distant uncompetitive counties. Thus, rate hikes, competition, and managerial short‐termism explain why inflows “burned a hole” in banks' pockets and, more generally, increased risky lending.


Liquidity Fluctuations in Over‐the‐Counter Markets

Pages: 1325-1369  |  Published: 2/2022  |  DOI: 10.1111/jofi.13106  |  Cited by: 1

VINCENT MAURIN

This paper proposes a theory of excess price fluctuations in over‐the‐counter secondary markets. When heterogeneous assets trade under asymmetric information, a quality effect emerges: high liquidity lowers the quality of the pool of sellers and decreases future liquidity. Cyclical equilibria can arise even without fundamental shocks. In a cycle, investors speculate by bidding up the price of low‐quality assets, anticipating a high resale price at the peak. When this resale effect is strong, cycles disappear and multiple steady states coexist with different levels of liquidity. The model rationalizes empirical patterns for corporate bonds and housing in particular.


Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure

Pages: 1371-1411  |  Published: 3/2022  |  DOI: 10.1111/jofi.13113  |  Cited by: 6

YIHUI PAN, ELENA S. PIKULINA, STEPHAN SIEGEL, TRACY YUE WANG

We examine equity markets’ reaction to the first‐time disclosure of the CEO‐worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality‐averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality‐averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within‐firm pay dispersion, and investors’ inequality aversion is a channel through which high pay ratios negatively affect firm value.


Report of the Editor of The Journal of Finance for the Year 2021

Pages: 1413-1421  |  Published: 3/2022  |  DOI: 10.1111/jofi.13115  |  Cited by: 0

STEFAN NAGEL


Report of the 2022 Annual Membership Meeting

Pages: 1423-1425  |  Published: 3/2022  |  DOI: 10.1111/jofi.13108  |  Cited by: 0


Report of the Executive Secretary and Treasurer for the Fiscal Year Ending June 30, 2021

Pages: 1427-1428  |  Published: 3/2022  |  DOI: 10.1111/jofi.13109  |  Cited by: 0


ANNOUNCEMENTS

Pages: 1429-1429  |  Published: 3/2022  |  DOI: 10.1111/jofi.13116  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 1430-1431  |  Published: 3/2022  |  DOI: 10.1111/jofi.12922  |  Cited by: 0