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Volume 78: Issue 6 (December 2023)


ISSUE INFORMATION

Pages: 3051-3053  |  Published: 11/2023  |  DOI: 10.1111/jofi.13053  |  Cited by: 0


Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors

Pages: 3055-3098  |  Published: 9/2023  |  DOI: 10.1111/jofi.13271  |  Cited by: 8

KLAKOW AKEPANIDTAWORN, RICK DI MASCIO, ALEX IMAS, LAWRENCE D.W. SCHMIDT

Are market experts prone to heuristics, and do these heuristics transfer across buying and selling domains? We investigate this question using a unique data set of institutional investors with portfolios averaging $573 million. A striking finding emerges: While there is evidence of skill in buying, selling decisions underperform substantially, even relative to random‐selling strategies. This holds despite the similarity between the two decisions in frequency, substance, and consequences for performance. Evidence suggests an asymmetric allocation of cognitive resources such as attention can explain the discrepancy: We document a systematic, costly heuristic process for selling but not for buying.


Informational Black Holes in Financial Markets

Pages: 3099-3140  |  Published: 8/2023  |  DOI: 10.1111/jofi.13270  |  Cited by: 0

ULF AXELSON, IGOR MAKAROV

We show that information aggregation in primary financial markets fails precisely when investors hold socially useful information for screening projects. Being wary of the Winner's Curse, less optimistic investors refrain from making financing offers, since their offers would be accepted only when a project is unviable. Their information is therefore lost. The Winner's Curse and associated information loss grow with the number of informed market participants, so that larger markets can lead to worse financing decisions and higher cost of capital for firms seeking financing. Precommitment to ration fundraising allocations, collusive club bidding, and shorting markets can mitigate the inefficiency.


Option Momentum

Pages: 3141-3192  |  Published: 10/2023  |  DOI: 10.1111/jofi.13279  |  Cited by: 9

STEVEN L. HESTON, CHRISTOPHER S. JONES, MEHDI KHORRAM, SHUAIQI LI, HAITAO MO

This paper investigates the performance of option investments across different stocks by computing monthly returns on at‐the‐money straddles on individual equities. We find that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out‐of‐the‐money options or delta‐hedging the returns. Unlike stock momentum, option return continuation is not followed by long‐run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits.


(Re‐)Imag(in)ing Price Trends

Pages: 3193-3249  |  Published: 8/2023  |  DOI: 10.1111/jofi.13268  |  Cited by: 13

JINGWEN JIANG, BRYAN KELLY, DACHENG XIU

We reconsider trend‐based predictability by employing flexible learning methods to identify price patterns that are highly predictive of returns, as opposed to testing predefined patterns like momentum or reversal. Our predictor data are stock‐level price charts, allowing us to extract the most predictive price patterns using machine learning image analysis techniques. These patterns differ significantly from commonly analyzed trend signals, yield more accurate return predictions, enable more profitable investment strategies, and demonstrate robustness across specifications. Remarkably, they exhibit context independence, as short‐term patterns perform well on longer time scales, and patterns learned from U.S. stocks prove effective in international markets.


Household Liquidity Constraints and Labor Market Outcomes: Evidence from a Danish Mortgage Reform

Pages: 3251-3298  |  Published: 9/2023  |  DOI: 10.1111/jofi.13277  |  Cited by: 1

ALEX XI HE, DANIEL LE MAIRE

We study the causal effect of liquidity constraints on individual labor market outcomes by exploiting the 1992 mortgage reform in Denmark, which for the first time allowed homeowners to borrow against housing equity for nonhousing purposes. Following the reform, liquidity‐constrained homeowners increased debt levels and had higher earnings growth and lower employment rates. The option to borrow against housing equity enabled liquidity‐constrained individuals to move to high‐wage jobs and invest in valuable human and physical capital. The results imply that relaxing household liquidity constraints during recessions can create better job matches, potentially increasing earnings and output in the longer run.


Booms, Busts, and Common Risk Exposures

Pages: 3299-3341  |  Published: 10/2023  |  DOI: 10.1111/jofi.13283  |  Cited by: 1

ALEXANDR KOPYTOV

I present a dynamic general equilibrium model in which commonality in bank assets endogenously changes over the business cycle and shapes systemic risk. To reduce individual risks, banks diversify, increasing portfolio overlap and hence the similarity of their exposures to fundamental shocks. Systemic financial crises burst at the end of credit booms when productive investment opportunities are exhausted, banks' diversification incentives are strong, and their portfolios are highly correlated. A calibrated model is able to match key moments related to frequency, severity, and the economy's behavior around systemic crises.


Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash

Pages: 3343-3386  |  Published: 10/2023  |  DOI: 10.1111/jofi.13280  |  Cited by: 1

MARIUS A. K. RING

Using the dispersion in stock returns during the financial crisis as a source of exogenous variation in the wealth of Norwegian entrepreneurs who held listed stocks, I show that adverse shocks to the wealth of business owners had large effects on their firms' financing, employment, and investment. The effects on investment and employment are driven by young firms, that obtain differentially less bank financing following an owner wealth shock. The effects on employment operate primarily through reduced hiring. My findings highlight that equity‐financing frictions and the procyclicality of entrepreneurial wealth are important channels that can amplify economic shocks.


Operating Hedge and Gross Profitability Premium

Pages: 3387-3422  |  Published: 9/2023  |  DOI: 10.1111/jofi.13275  |  Cited by: 2

LEONID KOGAN, JUN LI, HAROLD H. ZHANG

We show theoretically that variable production costs reduce systematic risk of firms' cash flows if capital and variable inputs are complementary in firms' production and input prices are procyclical. In our dynamic model, this operating hedge effect is weaker for more profitable firms, giving rise to a gross profitability premium. Moreover, gross profitability and value factors are distinct and negatively correlated, and their premia are not captured by the capital asset pricing model (CAPM). We estimate the model by simulated method of moments, and find that its main implications for stock returns and cash flow dynamics are quantitatively consistent with the data.


The Legal Origins of Financial Development: Evidence from the Shanghai Concessions

Pages: 3423-3464  |  Published: 10/2023  |  DOI: 10.1111/jofi.13284  |  Cited by: 4

ROSS LEVINE, CHEN LIN, CHICHENG MA, YUCHEN XU

The primary challenge to assessing the legal origins view of comparative financial development is identifying exogenous changes in legal systems. We assemble new data on Shanghai's British and French concessions between 1845 and 1936. Two regime changes altered British and French legal jurisdiction over their respective concessions. By examining the changing application of different legal traditions to adjacent neighborhoods within the same city and controlling for military, economic, and political characteristics, we offer new evidence consistent with the legal origins view: the financial development advantage in the British concession widened after Western legal jurisdiction intensified and narrowed after it abated.


Retail Trading in Options and the Rise of the Big Three Wholesalers

Pages: 3465-3514  |  Published: 10/2023  |  DOI: 10.1111/jofi.13285  |  Cited by: 19

SVETLANA BRYZGALOVA, ANNA PAVLOVA, TAISIYA SIKORSKAYA

We document a rapid increase in retail trading in options in the United States. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of total market volume. Nearly 90% of PFOF comes from three wholesalers. Exploiting new flags in transaction‐level data, we isolate wholesaler trades and build a novel measure of retail options trading. Our measure comoves with equity‐based retail activity proxies and drops significantly during U.S. brokerage platform outages and trading restrictions. Retail investors prefer cheaper, weekly options with average bid‐ask spread of 12.6%, and lose money on average.


Attention Spillover in Asset Pricing

Pages: 3515-3559  |  Published: 10/2023  |  DOI: 10.1111/jofi.13281  |  Cited by: 6

XIN CHEN, LI AN, ZHENGWEI WANG, JIANFENG YU

Exploiting a screen display feature whereby the order of stock display is determined by the stock's listing code, we lever a novel identification strategy and study how the interaction between overconfidence and limited attention affect asset pricing. We find that stocks displayed next to those with higher returns in the past two weeks are associated with higher returns in the future week, which are reverted in the long run. This is consistent with our conjectures that investors tend to trade more after positive investment experience and are more likely to pay attention to neighboring stocks, both confirmed using trading data.


Discount Rates, Debt Maturity, and the Fiscal Theory

Pages: 3561-3620  |  Published: 10/2023  |  DOI: 10.1111/jofi.13282  |  Cited by: 0

ALEXANDRE CORHAY, THILO KIND, HOWARD KUNG, GONZALO MORALES

This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory depend directly on the conditional nominal term premium, giving rise to an optimal debt‐maturity policy that is state‐dependent. In a calibrated macrofinance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.


Optimal Forbearance of Bank Resolution

Pages: 3621-3675  |  Published: 8/2023  |  DOI: 10.1111/jofi.13273  |  Cited by: 3

LINDA M. SCHILLING

This paper analyzes a regulator's optimal strategic delay of resolving banks when the regulator's announcement of the intervention delay endogenously affects the depositors' run propensity. Given intervention, the regulator either liquidates the remaining illiquid assets (“prompt corrective action”) or continues managing the assets at a reduced skill level (“resolution under receivership”). In either case, I show that if the regulator tolerates fewer withdrawals until intervention, the depositors may react by preempting the regulator: they run on the bank more often ex ante. A policy of never intervening can leave the bank more stable than a conservative intervention policy.


Global Pricing of Carbon‐Transition Risk

Pages: 3677-3754  |  Published: 8/2023  |  DOI: 10.1111/jofi.13272  |  Cited by: 75

PATRICK BOLTON, MARCIN KACPERCZYK

The energy transition away from fossil fuels exposes companies to carbon‐transition risk. Estimating the market‐based premium associated with carbon‐transition risk in a cross section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.


ANNOUNCEMENTS

Pages: 3755-3755  |  Published: 11/2023  |  DOI: 10.1111/jofi.13286  |  Cited by: 0


AMERICAN FINANCE ASSOCIATION

Pages: 3756-3757  |  Published: 11/2023  |  DOI: 10.1111/jofi.13054  |  Cited by: 0