The Journal of Finance

Disasters Implied by Equity Index Options

Published: 11/14/2011,  Volume: 66,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2011.01697.x  |  Cited by: 238

DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN

We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.

Sources of Entropy in Representative Agent Models

Published: 1/7/2014,  Volume: 69,  Issue: 1  |  DOI: 10.1111/jofi.12090  |  Cited by: 139

DAVID BACKUS, MIKHAIL CHERNOV, STANLEY ZIN

We propose two data‐based performance measures for asset pricing models and apply them to models with recursive utility and habits. Excess returns on risky securities are reflected in the pricing kernel's dispersion and riskless bond yields are reflected in its dynamics. We measure dispersion with entropy and dynamics with horizon dependence, the difference between entropy over several periods and one. We compare their magnitudes to estimates derived from asset returns. This exercise reveals tension between a model's ability to generate one‐period entropy, which should be large, and horizon dependence, which should be small.

Affine Term Structure Models and the Forward Premium Anomaly

Published: 2/2001,  Volume: 56,  Issue: 1  |  DOI: 10.1111/0022-1082.00325  |  Cited by: 425

David K. Backus, Silverio Foresi, Chris I. Telmer

One of the most puzzling features of currency prices is the forward premium anomaly : the tendency for high interest rate currencies to appreciate. We characterize the anomaly in the context of affine models of the term structure of interest rates. In affine models, the anomaly requires either that state variables have asymmetric effects on state prices in different currencies or that nominal interest rates take on negative values with positive probability. We find the quantitative properties of either alternative to have important shortcomings.

Accounting for Forward Rates in Markets for Foreign Currency

Published: 12/1993,  Volume: 48,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1993.tb05132.x  |  Cited by: 89

DAVID K. BACKUS, ALLAN W. GREGORY, CHRIS I. TELMER

Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time‐additive preferences cannot account for either of these properties. We show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence, but that the theory fails to reproduce some of the other properties of the data—in particular, the strong autocorrelation of forward premiums.

INCREASED TAXATION WITH INCREASED ACCEPTABILITY—A DISCUSSION OF NET WORTH TAXATION AS A FEDERAL REVENUE ALTERNATIVE

Published: 5/1973,  Volume: 28,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1973.tb01793.x  |  Cited by: 0

Martin David

DISCUSSION

Published: 7/1986,  Volume: 41,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1986.tb04539.x  |  Cited by: 0

DAVID FELDMAN

Political Connections and Allocative Distortions

Published: 1/7/2019,  Volume: 74,  Issue: 2  |  DOI: 10.1111/jofi.12751  |  Cited by: 296

DAVID SCHOENHERR

Exploiting a unique institutional setting in Korea, this paper documents that politicians can increase the amount of government resources allocated through their social networks to the benefit of private firms connected to these networks. After winning the election, the new president appoints members of his networks as CEOs of state‐owned firms that act as intermediaries in allocating government contracts to private firms. In turn, these state firms allocate significantly more procurement contracts to private firms with a CEO from the same network. Contracts allocated to connected private firms are executed systematically worse and exhibit more frequent cost increases through renegotiations.

Heterogeneous Beliefs, Speculation, and the Equity Premium

Published: 1/10/2008,  Volume: 63,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2008.01310.x  |  Cited by: 211

ALEXANDER DAVID

Agents with heterogeneous beliefs about fundamental growth do not share risks perfectly but instead speculate with each other on the relative accuracy of their models' predictions. They face the risk that market prices move more in line with the trading models of competing agents than with their own. Less risk‐averse agents speculate more aggressively and demand higher risk premiums. My calibrated model generates countercyclical consumption volatility, earnings forecast dispersion, and cross‐sectional consumption dispersion. With a risk aversion coefficient less than one, agents' speculation causes half the observed equity premium and lowers the riskless rate by about 1%.

A Theoretical Model for Valuing Preferred Stock

Published: 9/1983,  Volume: 38,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1983.tb02288.x  |  Cited by: 19

DAVID EMANUEL

This paper develops a model of preferred stock value which includes the possibility of dividends on the preferred stock being omitted. The analytical framework used is based on the option‐hedging methodology of Black and Scholes. Precise valuation formulae are obtained for cumulative and noncumulative preferred stock in a variety of contexts. The values obtained are quite different from those for either riskless or risky perpetual bonds, which have previously been proposed as being similar to preferred stock.

Individual Investors and Volatility

Published: 7/19/2011,  Volume: 66,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2011.01668.x  |  Cited by: 318

THIERRY FOUCAULT, DAVID SRAER, DAVID J. THESMAR

We show that retail trading activity has a positive effect on the volatility of stock returns, which suggests that retail investors behave as noise traders. To identify this effect, we use a reform of the French stock market that raises the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by 20 basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades.

The Term Structure of Interest Rates in a Partially Observable Economy

Published: 7/1989,  Volume: 44,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1989.tb04391.x  |  Cited by: 29

DAVID FELDMAN

This paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information. Unable to observe their stochastic investment opportunities, investors engage in dynamic Bayesian inference. This results in the endogenous identification of a more complex production function which generates a richer term structure, resembling the one that actual market prices imply. In addition, this paper introduces a characteristic function of the term structure and demonstrates that, in contrast with a fully observable economy, the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic.

Transactions Costs and the Theory of Portfolio Selection

Published: 9/1976,  Volume: 31,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1976.tb01964.x  |  Cited by: 26

David Goldsmith

MERGERS, DIVERSIFICATION AND THE THEORIES OF THE FIRM

Published: 3/1973,  Volume: 28,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1973.tb01368.x  |  Cited by: 0

David Gilbert

Testing the Efficiency of the Canadian‐U.S. Exchange Market under the Assumption of no Risk Premium

Published: 3/1981,  Volume: 36,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1981.tb03533.x  |  Cited by: 45

DAVID LONGWORTH

The efficiency of the Canadian‐U.S. exchange market for the current float is examined more extensively than previously. Semi‐strong‐form tests which admit the lagged spot rate as a predictor are considered in addition to the standard weak‐form test. These stronger tests reject the joint null hypothesis of an efficient exchange market and no risk premium for the period ending in October 1976, although not for the entire period. For almost every year the current spot rate provided a better forecast of the future spot rate than did the current forward rate.

Remuneration, Retention, and Reputation Incentives for Outside Directors

Published: 10/2004,  Volume: 59,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2004.00699.x  |  Cited by: 624

DAVID YERMACK

I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Previous research has only shown these relations to apply under limited circumstances such as financial distress. Together these incentive mechanisms provide directors with wealth increases of approximately 11 cents per $1,000 rise in firm value. Although smaller than the performance sensitivities of CEOs, outside directors' incentives imply a change in wealth of about $285,000 for a 1 standard deviation (SD) change in typical firm performance. Cross‐sectional patterns of director equity awards conform to agency and financial theories.

STATE OF THE FINANCE FIELD: FURTHER COMMENT

Published: 12/1968,  Volume: 23,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1968.tb00322.x  |  Cited by: 10

David Durand

DISCUSSION

Published: 7/1984,  Volume: 39,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1984.tb03648.x  |  Cited by: 0

DAVID EMANUEL

A QUARTERLY SERIES OF CORPORATE BASIC YIELDS, 1952–57, AND SOME ATTENDANT RESERVATIONS*

Published: 9/1958,  Volume: 13,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1958.tb04200.x  |  Cited by: 3

David Durand

GROWTH STOCKS AND THE PETERSBURG PARADOX*

Published: 9/1957,  Volume: 12,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1957.tb04143.x  |  Cited by: 13

David Durand

Good Timing: CEO Stock Option Awards and Company News Announcements

Published: 6/1997,  Volume: 52,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1997.tb04809.x  |  Cited by: 622

DAVID YERMACK

This article analyzes the timing of CEO stock option awards, as a method of investigating corporate managers' influence over the terms of their own compensation. In a sample of 620 stock option awards to CEOs of Fortune 500 companies between 1992 and 1994, I find that the timing of awards coincides with favorable movements in company stock prices. Patterns of companies' quarterly earnings announcements are consistent with an interpretation that CEOs receive stock option awards shortly before favorable corporate news. I evaluate and reject several alternative explanations of the results, including insider trading and the manipulation of news announcement dates.

Presidential Address: Social Transmission Bias in Economics and Finance

Published: 5/27/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12906  |  Cited by: 272

DAVID HIRSHLEIFER

I discuss a new intellectual paradigm, social economics and finance—the study of the social processes that shape economic thinking and behavior. This emerging field recognizes that people observe and talk to each other. A key, underexploited building block of social economics and finance is social transmission bias: systematic directional shift in signals or ideas induced by social transactions. I use five “fables” (models) to illustrate the novelty and scope of the transmission bias approach, and offer several emergent themes. For example, social transmission bias compounds recursively, which can help explain booms, bubbles, return anomalies, and swings in economic sentiment.

Can Unemployment Insurance Spur Entrepreneurial Activity? Evidence from France

Published: 2/5/2020,  Volume: 75,  Issue: 3  |  DOI: 10.1111/jofi.12880  |  Cited by: 128

JOHAN HOMBERT, ANTOINETTE SCHOAR, DAVID SRAER, DAVID THESMAR

We evaluate the effect of downside insurance on self‐employment. We exploit a large‐scale reform of French unemployment benefits that insured unemployed workers starting businesses. The reform significantly increased firm creation without decreasing the quality of new entrants. Firms started postreform were initially smaller, but their employment growth, productivity, and survival rates are similar to those prereform. New entrepreneurs' characteristics and expectations are also similar. Finally, jobs created by new entrants crowd out employment in incumbent firms almost one‐for‐one, but have a higher productivity than incumbents. These results highlight the benefits of encouraging experimentation by lowering barriers to entry.

Housing Collateral and Entrepreneurship

Published: 1/12/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12468  |  Cited by: 346

MARTIN C. SCHMALZ, DAVID A. SRAER, DAVID THESMAR

We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.

Minutes of the Annual Membership Meeting

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/0022-1082.00061-i1  |  Cited by: 0

David H. Pyle

Tender Offers and Management Resistance

Published: 5/1983,  Volume: 38,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1983.tb02237.x  |  Cited by: 56

DAVID P. BARON

Presidential Address: Pension Policy and the Financial System

Published: 8/2018,  Volume: 73,  Issue: 4  |  DOI: 10.1111/jofi.12710  |  Cited by: 64

DAVID S. SCHARFSTEIN

In this paper, I examine the effect of pension policy on the structure of financial systems around the world. In particular, I explore the hypothesis that policies that promote pension savings also promote the development of capital markets. I present a model that endogenizes the extent to which savings are intermediated through banks or capital markets, and derive implications for corporate finance, household finance, banking, and the size of the financial sector. I then present a number of facts that are broadly consistent with the theory and examine a variety of alternative explanations of my findings.

Report of the Executive Secretary and Treasurer for the Year Ending September 30, 1999

Published: 8/2000,  Volume: 55,  Issue: 4  |  DOI: 10.1111/0022-1082.00272  |  Cited by: 0

David H. Pyle

Minutes of the Annual Membership Meeting, January 7, 2012

Published: 7/19/2012,  Volume: 67,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2012.01756.x  |  Cited by: 0

DAVID H. PYLE

AN ECONOMIC ANALYSIS OF CREDIT UNIONS IN MICHIGAN*

Published: 12/1966,  Volume: 21,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1966.tb00285.x  |  Cited by: 1

David L. McKee

MONEY SUPPLY CONTROL: RESERVES AS THE INSTRUMENT UNDER LAGGED ACCOUNTING

Published: 6/1976,  Volume: 31,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1976.tb01927.x  |  Cited by: 0

David A. Pierce

THE EFFECT OF A CHANGE IN THE CEILING RATE ON DEPOSITS AT COMMERCIAL BANKS*

Published: 9/1967,  Volume: 22,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1967.tb02985.x  |  Cited by: 0

David E. Bond

PREMIUMS ON CONVERTIBLE BONDS: COMMENT

Published: 9/1970,  Volume: 25,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1970.tb00567.x  |  Cited by: 2

David Tell Duvel

The Equilibrium Valuation of Risky Discrete Cash Flows in Continuous Time

Published: 12/1989,  Volume: 44,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1989.tb02659.x  |  Cited by: 9

DAVID C. SHIMKO

This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy. Assuming the conditions of an intertemporal capital aset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage‐backed securities.

ON THE UTILITY THEORETIC FOUNDATIONS OF MEAN‐VARIANCE ANALYSIS

Published: 12/1977,  Volume: 32,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1977.tb03363.x  |  Cited by: 47

David P. Baron

INTERDEPENDENCE OF UTILITY RATE‐BASE TYPE, PERMITTED RATE OF RETURN, AND UTILITY EARNINGS*

Published: 3/1962,  Volume: 17,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1962.tb04247.x  |  Cited by: 2

David K. Eiteman

Report of the Executive Secretary and Treasurer

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/0022-1082.00380-i1  |  Cited by: 0

David H. Pyle

DISCUSSION

Published: 7/1984,  Volume: 39,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1984.tb03668.x  |  Cited by: 1

DAVID S. KIDWELL

The Manipulation of Executive Stock Option Exercise Strategies: Information Timing and Backdating

Published: 11/25/2009,  Volume: 64,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2009.01513.x  |  Cited by: 70

DAVID C. CICERO

I identify three option exercise strategies executives engage in, including (i) exercising with cash and immediately selling the shares, (ii) exercising with cash and holding the shares, and (iii) delivering some shares to the company to cover the exercise costs and holding the remaining shares. Stock price patterns suggest executives manipulate option exercises. They use private information to increase the profitability of all three strategies, and likely backdated some exercise dates in the pre‐Sarbanes‐Oxley period to enhance the profitability of the latter two strategies, where the executive's company is the only counterparty. Backdating is associated with reporting of internal control weaknesses.

Investment Decisions Depend on Portfolio Disclosures

Published: 6/1999,  Volume: 54,  Issue: 3  |  DOI: 10.1111/0022-1082.00132  |  Cited by: 146

David K. Musto

Abstract A weekly database of retail money fund portfolio statistics is uneconomical for retail investors to observe, so it allows direct comparison of disclosed and undisclosed portfolios. This makes possible a more direct and unambiguous test for “window dressing” than elsewhere in the literature. The analysis shows that funds allocating between government and private issues hold more in government issues around disclosures than at other times, consistent with the theory that intermediaries prefer to disclose safer portfolios. Cross‐sectional comparisons locate the most intense rebalancing in the worst recent performers.

THE IMPACT OF CORPORATE GROWTH ON THE RISK OF COMMON STOCKS

Published: 5/1975,  Volume: 30,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1975.tb01827.x  |  Cited by: 18

David R. Fewings

Chaos and Nonlinear Dynamics: Application to Financial Markets

Published: 12/1991,  Volume: 46,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1991.tb04646.x  |  Cited by: 760

DAVID A. HSIEH

After the stock market crash of October 19, 1987, interest in nonlinear dynamics, especially deterministic chaotic dynamics, has increased in both the financial press and the academic literature. This has come about because the frequency of large moves in stock markets is greater than would be expected under a normal distribution. There are a number of possible explanations. A popular one is that the stock market is governed by chaotic dynamics. What exactly is chaos and how is it related to nonlinear dynamics? How does one detect chaos? Is there chaos in financial markets? Are there other explanations of the movements of financial prices other than chaos? The purpose of this paper is to explore these issues.

REGIONAL INTEREST RATES: MUNICIPAL BONDS IN CALIFORNIA, 1900–1957*

Published: 9/1962,  Volume: 17,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1962.tb04307.x  |  Cited by: 0

David Alexander Baerncopf

Portfolio Disclosures and Year‐End Price Shifts

Published: 9/1997,  Volume: 52,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1997.tb01121.x  |  Cited by: 82

DAVID K. MUSTO

Commercial paper sells at an extra discount if it matures in the next calendar year but Treasury bills do not. The discount is apparent in downward price shifts before the year‐end, and upward price shifts at the turn of the year that are significantly correlated with the simultaneous returns to small stocks, and that cannot reflect tax‐loss selling. Cross‐sectional and time‐series tests on prices, as well as low of funds evidence on trades by institutional investors, indicate that both the debt and equity patterns reflect agency problems related to portfolio disclosures.

A SUGGESTION FOR THE CONTROL OF PEACETIME INFLATION*

Published: 12/1949,  Volume: 4,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1949.tb02359.x  |  Cited by: 0

David Gordon Tyndall

CORPORATE FINANCIAL POLICIES—DEBT VERSUS EQUITY*

Published: 6/1975,  Volume: 30,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1975.tb01873.x  |  Cited by: 0

David Patrick Rochester

SECURITY‐BASED CONGLOMERATE ACQUISITIONS: THE EFFECT ON RESIDUAL OWNERSHIP*

Published: 3/1971,  Volume: 26,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1971.tb00611.x  |  Cited by: 0

David Foster Rankin

THE S.E.C. SPECIAL STUDY AND THE EXCHANGE MARKETS

Published: 5/1966,  Volume: 21,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1966.tb00230.x  |  Cited by: 2

David K. Eiteman

THE RESPONSE OF STATE AND LOCAL GOVERNMENTS TO FEDERAL GRANT‐IN‐AID PAYMENTS*

Published: 6/1968,  Volume: 23,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1968.tb00839.x  |  Cited by: 0

David L. Smith

What Do Entrepreneurs Pay for Venture Capital Affiliation?

Published: 8/2004,  Volume: 59,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2004.00680.x  |  Cited by: 1057

David H. Hsu

This study empirically evaluates the certification and value‐added roles of reputable venture capitalists (VCs). Using a novel sample of entrepreneurial start‐ups with multiple financing offers, I analyze financing offers made by competing VCs at the first professional round of start‐up funding, holding characteristics of the start‐up fixed. Offers made by VCs with a high reputation are three times more likely to be accepted, and high‐reputation VCs acquire start‐up equity at a 10–14% discount. The evidence suggests that VCs' “extra‐financial” value may be more distinctive than their functionally equivalent financial capital. These extra‐financial services can have financial consequences.

DISCUSSION

Published: 5/1973,  Volume: 28,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1973.tb01795.x  |  Cited by: 0

David J. Ott