The Journal of Finance

Asset Fire Sales and Purchases and the International Transmission of Funding Shocks

Published: 11/19/2012   |   DOI: 10.1111/j.1540-6261.2012.01780.x

CHOTIBHAK JOTIKASTHIRA, CHRISTIAN LUNDBLAD, TARUN RAMADORAI

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds' emerging market portfolio allocations. These forced trades or “fire sales” affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of “push” effects from funds' domicile countries and “co‐ownership spillover” between markets with overlapping fund ownership.

Consumption, Dividends, and the Cross Section of Equity Returns

Published: 08/12/2005   |   DOI: 10.1111/j.1540-6261.2005.00776.x

RAVI BANSAL, ROBERT F. DITTMAR, CHRISTIAN T. LUNDBLAD

We show that aggregate consumption risks embodied in cash flows can account for the puzzling differences in risk premia across book‐to‐market, momentum, and size‐sorted portfolios. The dynamics of aggregate consumption and cash flow growth rates, modeled as a vector autoregression, are used to measure the consumption beta of discounted cash flows. Differences in these cash flow betas account for more than 60% of the cross‐sectional variation in risk premia. The market price for risk in cash flows is highly significant. We argue that cash flow risk is important for interpreting differences in risk compensation across assets.

Global Growth Opportunities and Market Integration

Published: 05/08/2007   |   DOI: 10.1111/j.1540-6261.2007.01231.x

GEERT BEKAERT, CAMPBELL R. HARVEY, CHRISTIAN LUNDBLAD, STEPHAN SIEGEL

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings (PE) ratios. We find that these exogenous growth opportunities predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. We also find that financial development, external finance dependence, and investor protection measures are much less important in aligning growth opportunities with growth than is capital market openness. Finally, we formulate new tests of market integration and segmentation by linking local and global PE ratios to relative economic growth.

Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading

Published: 09/04/2015   |   DOI: 10.1111/jofi.12357

ANDREW ELLUL, CHOTIBHAK JOTIKASTHIRA, CHRISTIAN T. LUNDBLAD, YIHUI WANG

Accounting rules, through their interactions with capital regulations, affect financial institutions’ trading behavior. The insurance industry provides a laboratory to explore these interactions: life insurers have greater flexibility than property and casualty insurers to hold speculative‐grade assets at historical cost, and the degree to which life insurers recognize market values differs across U.S. states. During the financial crisis, insurers facing a lesser degree of market value recognition are less likely to sell downgraded asset‐backed securities. To improve their capital positions, these insurers disproportionately resort to gains trading, selectively selling otherwise unrelated bonds with high unrealized gains, transmitting shocks across markets.