Loan Terms and Collateral: Evidence from the Bilateral Repo Market
Pages: 2997-3036 | Published: 10/2022 | DOI: 10.1111/jofi.13184 | Cited by: 7
JUN KYUNG AUH, MATTIA LANDONI
We study secured lending contracts using a proprietary, loan‐level database of bilateral repurchase agreements containing groups of simultaneous loans backed by multiple tranches within a securitization. We show that lower‐quality loans (i.e., loans backed by lower‐rated collateral) have higher margins and spreads. We calibrate a model using collateral asset prices and find that lower‐quality loans are riskier despite the higher margins, yet cheaper for the borrower. This finding is consistent with a combination of lender optimism and reaching for yield. We also show that lower‐quality loans have longer maturity, consistent with models of rollover concerns with asymmetric information.
Import Competition and Household Debt
Pages: 3037-3091 | Published: 10/2022 | DOI: 10.1111/jofi.13185 | Cited by: 8
JEAN‐NOËL BARROT, ERIK LOUALICHE, MATTHEW PLOSSER, JULIEN SAUVAGNAT
We analyze the effect of import competition on household balance sheets using individual data on consumer finances. We exploit variation in local industry exposure to foreign competition to study households' response to the income shock triggered by China's accession to the World Trade Organization. We show that household debt increases significantly in regions where manufacturing industries are more exposed to import competition. The effects are driven by home equity extraction and are concentrated in areas with strong house price growth. Our results highlight the role played by mortgage markets in absorbing displacement shocks triggered by globalization.
The Two‐Pillar Policy for the RMB
Pages: 3093-3140 | Published: 10/2022 | DOI: 10.1111/jofi.13178 | Cited by: 6
URBAN J. JERMANN, BIN WEI, VIVIAN Z. YUE
This paper studies China's recent exchange rate policy for the renminbi (RMB). We demonstrate empirically that a two‐pillar policy is in place, aiming to balance exchange rate flexibility and RMB index stability via market and basket pillars. We further extend and validate the formulation that incorporates the so‐called countercyclical factor. Theoretically, we develop a flexible‐price monetary model for the RMB in which the two‐pillar policy arises endogenously as an optimal response of the government. We estimate the model by generalized method of moments and quantitatively assess various policy trade‐offs.
Attention‐Induced Trading and Returns: Evidence from Robinhood Users
Pages: 3141-3190 | Published: 10/2022 | DOI: 10.1111/jofi.13183 | Cited by: 147
BRAD M. BARBER, XING HUANG, TERRANCE ODEAN, CHRISTOPHER SCHWARZ
We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices. Using data from Robinhood, we find that Robinhood investors engage in more attention‐induced trading than other retail investors. For example, Robinhood outages disproportionately reduce trading in high‐attention stocks. While this evidence is consistent with Robinhood attracting relatively inexperienced investors, we show that it is also driven in part by the app's unique features. Consistent with models of attention‐induced trading, intense buying by Robinhood users forecasts negative returns. Average 20‐day abnormal returns are −4.7% for the top stocks purchased each day.
Belief Disagreement and Portfolio Choice
Pages: 3191-3247 | Published: 10/2022 | DOI: 10.1111/jofi.13179 | Cited by: 47
MAARTEN MEEUWIS, JONATHAN A. PARKER, ANTOINETTE SCHOAR, DUNCAN SIMESTER
Using proprietary financial data on millions of households, we show that likely‐Republicans increased the equity share and market beta of their portfolios following the 2016 presidential election, while likely‐Democrats rebalanced into safe assets. We provide evidence that this behavior was driven by investors interpreting public information based on different models of the world. We use detailed controls to rule out the main nonbelief‐based channels such as income hedging needs, preferences, and local economic exposures. These findings are driven by a small share of investors making big changes, and are stronger among investors who trade more ex ante.
Asset Pricing with Cohort‐Based Trading in MBS Markets
Pages: 3249-3287 | Published: 10/2022 | DOI: 10.1111/jofi.13180 | Cited by: 11
NICOLA FUSARI, WEI LI, HAOYANG LIU, ZHAOGANG SONG
Agency mortgage‐backed securities (MBSs) with diverse characteristics are traded in parallel through individualized specified pool (SP) contracts and standardized to‐be‐announced (TBA) contracts with delivery flexibility. This parallel trading environment generates distinctive effects on MBS pricing and trading: (i) Although cheapest‐to‐deliver (CTD) issues are present in TBA trading and absent from SP trading by design, MBS heterogeneity associated with CTD discounts affects SP yields positively, with the effect stronger for lower‐value SPs; (ii) high selling pressure amplifies the effects of MBS heterogeneity on SP yields; and (iii) greater MBS heterogeneity dampens SP and TBA trading activities but increases their ratio.
The Price of Higher Order Catastrophe Insurance: The Case of VIX Options
Pages: 3289-3337 | Published: 10/2022 | DOI: 10.1111/jofi.13182 | Cited by: 5
BJØRN ERAKER, AOXIANG YANG
We develop a tractable equilibrium pricing model to explain observed characteristics in equity returns, VIX futures, S&P 500 options, and VIX options data based on affine jump‐diffusive state dynamics and representative agents endowed with Duffie‐Epstein recursive preferences. Our calibrated model replicates consumption, dividends, and asset market data, including VIX futures returns, the average implied volatilities in SPX and VIX options, and first‐ and higher‐order moments of VIX options returns. We document a time variation in the shape of VIX‐option‐implied volatility and a time‐varying hedging relationship between VIX and SPX options that our model both captures.
Financial Crises and Political Radicalization: How Failing Banks Paved Hitler's Path to Power
Pages: 3339-3372 | Published: 7/2022 | DOI: 10.1111/jofi.13166 | Cited by: 13
SEBASTIAN DOERR, STEFAN GISSLER, JOSÉ‐LUIS PEYDRÓ, HANS‐JOACHIM VOTH
Do financial crises radicalize voters? We study Germany's 1931 banking crisis, collecting new data on bank branches and firm‐bank connections. Exploiting cross‐sectional variation in precrisis exposure to the bank at the center of the crisis, we show that Nazi votes surged in locations more affected by its failure. Radicalization in response to the shock was exacerbated in cities with a history of anti‐Semitism. After the Nazis seized power, both pogroms and deportations were more frequent in places affected by the banking crisis. Our results suggest an important synergy between financial distress and cultural predispositions, with far‐reaching consequences.
Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy
Pages: 3373-3421 | Published: 10/2022 | DOI: 10.1111/jofi.13181 | Cited by: 17
JULIAN DI GIOVANNI, GALINA HALE
We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks on country‐sector stock returns. We estimate a structural spatial autoregression (SAR) model that is consistent with an open‐economy production network framework. Using the SAR model, we decompose the total impact of U.S. monetary policy on global stock returns into direct and network effects. Nearly 70% of the total impact is due to the network effect of global production linkages. Empirical counterfactuals show that shutting down global production linkages halves the total impact of U.S. monetary policy shocks.
Pages: 3424-3425 | Published: 11/2022 | DOI: 10.1111/jofi.12946 | Cited by: 0