The Journal of Finance

Market Expectations in the Cross‐Section of Present Values

Published: 9/10/2013,  Volume: 68,  Issue: 5  |  DOI: 10.1111/jofi.12060  |  Cited by: 526

BRYAN KELLY, SETH PRUITT

Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross‐section of book‐to‐market ratios, we find an out‐of‐sample return forecasting R 2 of 13% at the annual frequency (0.9% monthly). We document similar out‐of‐sample predictability for returns on value, size, momentum, and industry portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratios in a latent factor system. Spreads in value portfolios’ exposures to economic shocks are key to identifying predictability and are consistent with duration‐based theories of the value premium.

Modeling Corporate Bond Returns

Published: 5/8/2023,  Volume: 78,  Issue: 4  |  DOI: 10.1111/jofi.13233  |  Cited by: 92

BRYAN KELLY, DIOGO PALHARES, SETH PRUITT

We propose a conditional factor model for corporate bond returns with five factors and time‐varying factor loadings. We have three main empirical findings. First, our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin. Second, our model recommends a systematic bond investment portfolio whose high out‐of‐sample Sharpe ratio suggests that the credit risk premium is notably larger than previously estimated. Third, we find closer integration between debt and equity markets than found in prior literature.

The Price of Political Uncertainty: Theory and Evidence from the Option Market

Published: 9/14/2016,  Volume: 71,  Issue: 5  |  DOI: 10.1111/jofi.12406  |  Cited by: 747

BRYAN KELLY, ĽUBOŠ PÁSTOR, PIETRO VERONESI

We empirically analyze the pricing of political uncertainty, guided by a theoretical model of government policy choice. To isolate political uncertainty, we exploit its variation around national elections and global summits. We find that political uncertainty is priced in the equity option market as predicted by theory. Options whose lives span political events tend to be more expensive. Such options provide valuable protection against the price, variance, and tail risks associated with political events. This protection is more valuable in a weaker economy and amid higher political uncertainty. The effects of political uncertainty spill over across countries.

(Re‐)Imag(in)ing Price Trends

Published: 8/13/2023,  Volume: 78,  Issue: 6  |  DOI: 10.1111/jofi.13268  |  Cited by: 129

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.

Equity Term Structures without Dividend Strips Data

Published: 10/24/2024,  Volume: 79,  Issue: 6  |  DOI: 10.1111/jofi.13394  |  Cited by: 27

STEFANO GIGLIO, BRYAN KELLY, SERHIY KOZAK

We use a large cross section of equity returns to estimate a rich affine model of equity prices, dividends, returns, and their dynamics. Our model prices dividend strips of the market and equity portfolios without using strips data in the estimation. Yet model‐implied equity yields closely match yields on traded strips. Our model extends equity term‐structure data over time (to the 1970s) and across maturities, and generates term structures for various equity portfolios. The novel cross section of term structures from our model covers 45 years and includes several recessions, providing a novel set of empirical moments to discipline asset pricing models.

The Virtue of Complexity in Return Prediction

Published: 12/21/2023,  Volume: 79,  Issue: 1  |  DOI: 10.1111/jofi.13298  |  Cited by: 202

BRYAN KELLY, SEMYON MALAMUD, KANGYING ZHOU

Much of the extant literature predicts market returns with “simple” models that use only a few parameters. Contrary to conventional wisdom, we theoretically prove that simple models severely understate return predictability compared to “complex” models in which the number of parameters exceeds the number of observations. We empirically document the virtue of complexity in U.S. equity market return prediction. Our findings establish the rationale for modeling expected returns through machine learning.

Principal Portfolios

Published: 12/27/2022,  Volume: 78,  Issue: 1  |  DOI: 10.1111/jofi.13199  |  Cited by: 49

BRYAN KELLY, SEMYON MALAMUD, LASSE HEJE PEDERSEN

We propose a new asset pricing framework in which all securities' signals predict each individual return. While the literature focuses on securities' own‐signal predictability, assuming equal strength across securities, our framework includes cross‐predictability—leading to three main results. First, we derive the optimal strategy in closed form. It consists of eigenvectors of a “prediction matrix,” which we call “principal portfolios.” Second, we decompose the problem into alpha and beta, yielding optimal strategies with, respectively, zero and positive factor exposure. Third, we provide a new test of asset pricing models. Empirically, principal portfolios deliver significant out‐of‐sample alphas to standard factors in several data sets.

Business News and Business Cycles

Published: 8/9/2024,  Volume: 79,  Issue: 5  |  DOI: 10.1111/jofi.13377  |  Cited by: 156

LELAND BYBEE, BRYAN KELLY, ASAF MANELA, DACHENG XIU

We propose an approach to measuring the state of the economy via textual analysis of business news. From the full text of 800,000 Wall Street Journal articles for 1984 to 2017, we estimate a topic model that summarizes business news into interpretable topical themes and quantifies the proportion of news attention allocated to each theme over time. News attention closely tracks a wide range of economic activities and can forecast aggregate stock market returns. A text‐augmented vector autoregression demonstrates the large incremental role of news text in forecasting macroeconomic dynamics. We retrieve the narratives that underlie these improvements in market and business cycle forecasts.

Is There a Replication Crisis in Finance?

Published: 6/9/2023,  Volume: 78,  Issue: 5  |  DOI: 10.1111/jofi.13249  |  Cited by: 512

THEIS INGERSLEV JENSEN, BRYAN KELLY, LASSE HEJE PEDERSEN

Several papers argue that financial economics faces a replication crisis because the majority of studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions. The majority of asset pricing factors (i) can be replicated; (ii) can be clustered into 13 themes, the majority of which are significant parts of the tangency portfolio; (iii) work out‐of‐sample in a new large data set covering 93 countries; and (iv) have evidence that is strengthened (not weakened) by the large number of observed factors.

Shaping Liquidity: On the Causal Effects of Voluntary Disclosure

Published: 9/12/2014,  Volume: 69,  Issue: 5  |  DOI: 10.1111/jofi.12180  |  Cited by: 632

KARTHIK BALAKRISHNAN, MARY BROOKE BILLINGS, BRYAN KELLY, ALEXANDER LJUNGQVIST

Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms actively shape their information environments by voluntarily disclosing more information than regulations mandate and that such efforts improve liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear motivated by a desire to reduce information asymmetries between retail and institutional investors. Liquidity improves as a result and in turn increases firm value. This suggests that managers can causally influence their cost of capital via voluntary disclosure.

Commercial Bank Portfolio Behavior and Endogenous Uncertainty

Published: 12/1986,  Volume: 41,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1986.tb02533.x  |  Cited by: 5

BRYAN STANHOUSE

This paper demonstrates how Bayesian information may be analyzed as a variable input in determining an optimal bank portfolio and investigates the impact of information in a way that is statistically satisfactory. A portfolio model is developed, and the impact of information is analyzed. Information is treated as an economic input that is used up to the point where its predicted marginal benefit is exactly equal to its marginal cost, and, from there, the optimal demand for information is derived. A comparative‐static analysis demonstrates that the reaction of optimal portfolio holdings to interest rate changes under variable uncertainty is dramatically different from portfolio behavior when uncertainty is exogenous. Finally, the elasticity of reserves with respect to scale is examined under the assumption of variable uncertainty.

BANK RESPONSES TO RESERVE CHANGES: COMMENT

Published: 9/1966,  Volume: 21,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1966.tb00254.x  |  Cited by: 0

William R. Bryan

BANK PURCHASES OF EARNING ASSETS A DECISION UNIT MODEL*

Published: 9/1962,  Volume: 17,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1962.tb04310.x  |  Cited by: 0

William R. Bryan

A Note on Information in the Loan Evaluation Process

Published: 12/1979,  Volume: 34,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1979.tb00072.x  |  Cited by: 2

BRYAN STANHOUSE, LARRY SHERMAN

THE DEMAND FOR INTERNATIONAL RESERVES*

Published: 6/1970,  Volume: 25,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1970.tb00543.x  |  Cited by: 9

Michael G. Kelly

THE REPETITIVE BIDDING PROCESS IN MUNICIPAL BOND UNDERWRITING, A CHANCE‐CONSTRAINED PROGRAMMING APPROACH*

Published: 9/1974,  Volume: 29,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1974.tb03112.x  |  Cited by: 0

James Michael Kelly

THE PROFITABILITY OF GROWTH THROUGH MERGERS*

Published: 6/1968,  Volume: 23,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1968.tb00835.x  |  Cited by: 0

Eamon M. Kelly

Generalized Disappointment Aversion and Asset Prices

Published: 7/15/2010,  Volume: 65,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2010.01571.x  |  Cited by: 212

BRYAN R. ROUTLEDGE, STANLEY E. ZIN

We characterize generalized disappointment aversion (GDA) risk preferences that can overweight lower‐tail outcomes relative to expected utility. We show in an endowment economy that recursive utility with GDA risk preferences generates effective risk aversion that is countercyclical. This feature comes from endogenous variation in the probability of disappointment in the representative agent's intertemporal consumption‐saving problem that underlies the asset pricing model. The variation in effective risk aversion produces a large equity premium and a risk‐free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment‐growth process.

THE DETERMINANTS OF MEMBER BANK BORROWING: A CRITIQUE

Published: 12/1968,  Volume: 23,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1968.tb00320.x  |  Cited by: 2

Dennis J. Aigner, William R. Bryan

A Theoretical Framework for Evaluating the Impact of Universal Reserve Requirements

Published: 9/1981,  Volume: 36,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1981.tb04886.x  |  Cited by: 0

CASE M. SPRENKLE, BRYAN E. STANHOUSE

This paper provides an appropriate framework to evaluate the impact of the universal reserve requirements called for by the new DIDMC Act of 1980. We derived the optimal reserve ratios for a dual banking system under the objective of controlling the monetary aggregates and the level of output. Then optimal reserve requirements were calculated from illustrative money market and macroeconomic parameters since the usual comparative statics were not useful. The results, generally, suggested optimal reserve ratios which were significantly higher than the old dual or the new universal reserve regimes for all targets. However, the calculation of values for the loss functions under various reserve regimes suggests that attainment of and may not be imperative, since the discrepancy between losses for optimal and various nonoptimal reserve schemes were not large. A major result of this paper, observed for both monetary and real targets, was that the differences in the instability of the targets for the old dual reserve ratios and the Fed's new universal reserve scheme were small. This result clearly suggests that although the DIDMC Act may solve the Federal Reserve's membership problem, it will not significantly enhance the Fed's effectiveness in controlling monetary or real sector aggregates.

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

Published: 10/4/2017,  Volume: 72,  Issue: 6  |  DOI: 10.1111/jofi.12545  |  Cited by: 145

KELLY SHUE, RICHARD R. TOWNSEND

We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.

The Gender Gap in Housing Returns

Published: 3/10/2023,  Volume: 78,  Issue: 2  |  DOI: 10.1111/jofi.13212  |  Cited by: 70

PAUL GOLDSMITH‐PINKHAM, KELLY SHUE

Using detailed transactions data across the United States, we find that single women earn 1.5 percentage points lower annualized returns on housing relative to single men. Forty‐five percent of the gap is explained by transaction timing and location. The remaining gap arises from a 2% gender difference in execution prices at purchase and sale. Consistent with a negotiation channel, women list for less and experience worse negotiated discounts. The gender gap shrinks in tight markets, where negotiation is replaced by quasi‐auctions. Overall, gender differences in housing explain 30% of the gender gap in wealth accumulation for the median household.

A Tough Act to Follow: Contrast Effects in Financial Markets

Published: 5/24/2018,  Volume: 73,  Issue: 4  |  DOI: 10.1111/jofi.12685  |  Cited by: 112

SAMUEL M. HARTZMARK, KELLY SHUE

A contrast effect occurs when the value of a previously observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday's earnings surprise was bad and less impressive if yesterday's surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by an alternative explanation involving information transmission from previous earnings announcements.

Can the Market Multiply and Divide? Non‐Proportional Thinking in Financial Markets

Published: 6/15/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13059  |  Cited by: 59

KELLY SHUE, RICHARD R. TOWNSEND

We hypothesize that investors partially think about stock price changes in dollar rather than percentage units, leading to more extreme return responses to news for lower‐priced stocks. Consistent with such non‐proportional thinking, we find a doubling in price is associated with a 20% to 30% decline in volatility and beta (controlling for size/liquidity). To identify a causal price effect, we show that volatility jumps following stock splits and drops following reverse splits. Lower‐priced stocks also respond more strongly to firm‐specific news. Non‐proportional thinking helps explain asset pricing patterns such as the size‐volatility/beta relation, the leverage effect puzzle, and return drift and reversals.

Equilibrium Forward Curves for Commodities

Published: 6/2000,  Volume: 55,  Issue: 3  |  DOI: 10.1111/0022-1082.00248  |  Cited by: 346

Bryan R. Routledge, Duane J. Seppi, Chester S. Spatt

We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded timing option that is absent in forward contracts. This option's value changes over time due to both endogenous inventory and exogenous transitory shocks to supply and demand. Our model makes predictions about volatilities of forward prices at different horizons and shows how conditional violations of the ‘Samuelson effect’ occur. We extend the model to incorporate a permanent second factor and calibrate the model to crude oil futures data.

Variance and Lower Partial Moment Measures of Systematic Risk: Some Analytical and Empirical Results

Published: 6/1982,  Volume: 37,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1982.tb02227.x  |  Cited by: 119

KELLY PRICE, BARBARA PRICE, TIMOTHY J. NANTELL

As a measure of systematic risk, the lower partial moment measure requires fewer restrictive assumptions than does the variance measure. However, the latter enjoys far wider usage than the former, perhaps because of its familiarity and the fact that two measures of systematic risk are equivalent when return distributions are normal. This paper shows analytically that there are systematic differences in the two risk measures when return distributions are lognormal. Results of empirical tests show that there are indeed systematic differences in measured values of the two risk measures for securities with above average and with below average systematic risk.

CEO Contracting and Antitakeover Amendments

Published: 9/1997,  Volume: 52,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1997.tb01118.x  |  Cited by: 84

KENNETH A. BOROKHOVICH, KELLY R. BRUNARSKI, ROBERT PARRINO

This article examines incentives for adopting antitakeover charter amendments (ATAs) that are associated with compensation contracts. The evidence is consistent with the hypothesis that antitakeover measures such as ATAs help managers protect above‐market levels of compensation. Chief executive officers (CEOs) of firms that adopt ATAs receive higher salaries and more valuable option grants than CEOs at similar firms that do not adopt them. Furthermore, the magnitude of this difference increases following ATA adoption. The evidence is inconsistent with the hypothesis that ATAs facilitate the writing of efficient compensation contracts.

Sending Out an SMS: Automatic Enrollment Experiments for Overdraft Alerts

Published: 12/26/2024,  Volume: 80,  Issue: 1  |  DOI: 10.1111/jofi.13404  |  Cited by: 4

MICHAEL D. GRUBB, DARRAGH KELLY, JEROEN NIEBOER, MATTHEW OSBORNE, JONATHAN SHAW

At‐scale field experiments at major U.K. banks show that automatic enrollment into “just‐in‐time” text alerts reduces unarranged overdraft and unpaid item charges 17% to 19% and arranged overdraft charges 4% to 8%, implying annual market‐wide savings of £170 million to £240 million. Incremental benefits from “early‐warning” alerts are statistically insignificant, although economically significant effects are not ruled out. Prior to the experiments, over half of overdrafts could have been avoided by using lower‐cost liquidity available in savings and credit card accounts. Alerts help consumers achieve less than half of these potential savings.

The Drivers and Implications of Retail Margin Trading

Published: 5/15/2026,  Volume: 81,  Issue: 4  |  DOI: 10.1111/jofi.70049  |  Cited by: 1

JIANGZE BIAN, ZHI DA, ZHIGUO HE, DONG LOU, KELLY SHUE, HAO ZHOU

Using granular data covering both regulated (brokerage‐financed) and unregulated (shadow‐financed) margin accounts in China, we provide novel evidence on retail investors' margin trading behavior and its price implications. We first show that retail investors' decisions to lever up in stock trading despite the hefty borrowing cost is related to their lottery preferences. We then show that margin borrowing affects investors' trading behavior—investors are more likely to liquidate their holdings as they approach margin calls. Finally, we show that margin‐induced trading aggregates to affect asset prices and contributes to shock spillovers across stocks (e.g., from lottery stocks to nonlottery stocks).

Finance Research Productivity and Influence

Published: 12/1995,  Volume: 50,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1995.tb05193.x  |  Cited by: 101

KENNETH A. BOROKHOVICH, ROBERT J. BRICKER, KELLY R. BRUNARSKI, BETTY J. SIMKINS

This study examines differences in finance research productivity and influence across 661 academic institutions over the five‐year period from 1989 through 1993. We find that 40 institutions account for over 50 percent of all articles published by 16 leading journals over the five‐year period; 66 institutions account for two‐thirds of the articles. Influence is more skewed, with as few as 20 institutions accounting for 50 percent of all citations to articles in these journals. The number of publications and publication influence increase with faculty size and academic accreditation. Prestigious business schools are associated with high publication productivity and influence.