The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Volatility‐Managed Portfolios
Published: 04/06/2017 | DOI: 10.1111/jofi.12513
ALAN MOREIRA, TYLER MUIR
Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean‐variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting‐against‐beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk‐based explanations and is a challenge to structural models of time‐varying expected returns.
The Macroeconomics of Shadow Banking
Published: 06/22/2017 | DOI: 10.1111/jofi.12540
ALAN MOREIRA, ALEXI SAVOV
We build a macrofinance model of shadow banking—the transformation of risky assets into securities that are money‐like in quiet times but become illiquid when uncertainty spikes. Shadow banking economizes on scarce collateral, expanding liquidity provision, boosting asset prices and growth, but also building up fragility. A rise in uncertainty raises shadow banking spreads, forcing financial institutions to switch to collateral‐intensive funding. Shadow banking collapses, liquidity provision shrinks, liquidity premia and discount rates rise, asset prices and investment fall. The model generates slow recoveries, collateral runs, and flight‐to‐quality effects, and it sheds light on Large‐Scale Asset Purchases, Operation Twist, and other interventions.