The Journal of Finance

Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

Published: 7/12/2018,  Volume: 73,  Issue: 5  |  DOI: 10.1111/jofi.12691  |  Cited by: 284

JOHAN HOMBERT, ADRIEN MATRAY

We study whether R&D‐intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax‐induced changes to R&D costs. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained by R&D allowing firms to increase product differentiation. As a result, while firms in import‐competing industries cut capital expenditures and employment, R&D‐intensive firms downsize considerably less.

A Habit‐Based Explanation of the Exchange Rate Risk Premium

Published: 1/13/2010,  Volume: 65,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2009.01525.x  |  Cited by: 330

ADRIEN VERDELHAN

This paper presents a model that reproduces the uncovered interest rate parity puzzle. Investors have preferences with external habits. Countercyclical risk premia and procyclical real interest rates arise endogenously. During bad times at home, when domestic consumption is close to the habit level, the representative investor is very risk averse. When the domestic investor is more risk averse than her foreign counterpart, the exchange rate is closely tied to domestic consumption growth shocks. The domestic investor therefore expects a positive currency excess return. Because interest rates are low in bad times, expected currency excess returns increase with interest rate differentials.

The Share of Systematic Variation in Bilateral Exchange Rates

Published: 11/7/2017,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12587  |  Cited by: 237

ADRIEN VERDELHAN

Sorting countries by their dollar currency betas produces a novel cross section of average currency excess returns. A slope factor (long in high beta currencies and short in low beta currencies) accounts for this cross section of currency risk premia. This slope factor is orthogonal to the high‐minus‐low carry trade factor built from portfolios of countries sorted by their interest rates. The two high‐minus‐low risk factors account for 18% to 80% of the monthly exchange rate movements. The two risk factors suggest that stochastic discount factors in complete markets' models should feature at least two global shocks to describe exchange rates.

Treasury Bill Shortages and the Pricing of Short‐Term Assets

Published: 8/26/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13376  |  Cited by: 32

ADRIEN D'AVERNAS, QUENTIN VANDEWEYER

We propose a model of post‐Great Financial Crisis (GFC) money markets and monetary policy implementation. In our framework, capital regulation may deter banks from intermediating liquidity derived from holding reserves to shadow banks. Consequently, money markets can be segmented, and the scarcity of Treasury bills available to shadow banks is the main driver of short‐term spreads. In this regime, open market operations have an inverse effect on net liquidity provision when swapping ample reserves for scarce T‐bills or repos. Our model quantitatively accounts for post‐2010 time series for repo rates, T‐bill yields, and the Fed's reverse repo facility usage.

Deviations from Covered Interest Rate Parity

Published: 5/24/2018,  Volume: 73,  Issue: 3  |  DOI: 10.1111/jofi.12620  |  Cited by: 574

WENXIN DU, ALEXANDER TEPPER, ADRIEN VERDELHAN

We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices. The CIP deviations also appear significantly correlated with other fixed income spreads and with nominal interest rates.

Bonds versus Equities: Information for Investment

Published: 10/20/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13396  |  Cited by: 8

HUIFENG CHANG, ADRIEN D'AVERNAS, ANDREA L. EISFELDT

We provide a simple model of investment by a firm funded with debt and equity and empirical evidence to demonstrate that, once we control for the debt overhang problem with credit spreads, asset volatility is an unambiguously positive signal for investment, while equity volatility sends a mixed signal: Elevated volatility raises the option value of equity and increases investment for financially sound firms, but exacerbates debt overhang and decreases investment for firms close to default. Our study provides a simple unified understanding of the structural and empirical relationships between investment, credit spreads, equity versus asset volatility, leverage, and Tobin's .