The Journal of Finance

(Almost) Model‐Free Recovery

Published: 11/28/2018,  Volume: 74,  Issue: 1  |  DOI: 10.1111/jofi.12737  |  Cited by: 69

PAUL SCHNEIDER, FABIO TROJANI

Under mild assumptions, we recover the model‐free conditional minimum variance projection of the pricing kernel on various tradeable realized moments of market returns. Recovered conditional moments predict future realizations and give insight into the cyclicality of equity premia, variance risk premia, and the highest attainable Sharpe ratios under the minimum variance probability. The pricing kernel projections are often U‐shaped and give rise to optimal conditional portfolio strategies with plausible market timing properties, moderate countercyclical exposures to higher realized moments, and favorable out‐of‐sample Sharpe ratios.

Model‐Free International Stochastic Discount Factors

Published: 8/8/2020,  Volume: 76,  Issue: 2  |  DOI: 10.1111/jofi.12970  |  Cited by: 39

MIRELA SANDULESCU, FABIO TROJANI, ANDREA VEDOLIN

We provide a theoretical framework to uncover in a model‐free way the relationships among international stochastic discount factors (SDFs), stochastic wedges, and financial market structures. Exchange rates are in general different from the ratio of international SDFs in incomplete markets, as captured by a stochastic wedge. We show theoretically that this wedge can be zero in incomplete and integrated markets. Market segmentation breaks the strong link between exchange rates and international SDFs, which helps address salient features of international asset returns while keeping the volatility and cross‐country correlation of SDFs at moderate levels.

When Uncertainty Blows in the Orchard: Comovement and Equilibrium Volatility Risk Premia

Published: 1/7/2014,  Volume: 69,  Issue: 1  |  DOI: 10.1111/jofi.12095  |  Cited by: 170

ANDREA BURASCHI, FABIO TROJANI, ANDREA VEDOLIN

We provide novel evidence for an equilibrium link between investors' disagreement, the market price of volatility and correlation, and the differential pricing of index and individual equity options. We show that belief disagreement is positively related to (i) the wedge between index and individual volatility risk premia, (ii) the different slope of the smile of index and individual options, and (iii) the correlation risk premium. Priced disagreement risk also explains returns of option volatility and correlation trading strategies in a way that is robust to the inclusion of other risk factors and different market conditions.

Correlation Risk and Optimal Portfolio Choice

Published: 1/13/2010,  Volume: 65,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2009.01533.x  |  Cited by: 211

ANDREA BURASCHI, PAOLO PORCHIA, FABIO TROJANI

We develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the degree of correlation across industries, countries, or asset classes is stochastic. Optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk. We find that the hedging demand is typically larger than in univariate models, and it includes an economically significant covariance hedging component, which tends to increase with the persistence of variance–covariance shocks, the strength of leverage effects, the dimension of the investment opportunity set, and the presence of portfolio constraints.

Liquidity Coinsurance, Moral Hazard, and Financial Contagion

Published: 9/4/2007,  Volume: 62,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2007.01275.x  |  Cited by: 148

SANDRO BRUSCO, FABIO CASTIGLIONESI

We study the propagation of financial crises among regions in which banks are protected by limited liability and may take excessive risk. The regions are affected by negatively correlated liquidity shocks, so liquidity coinsurance is Pareto improving. The moral hazard problem can be solved if banks are sufficiently capitalized. Under autarky a limited amount of capital is sufficient to prevent risk‐taking, but when financial markets are open capital becomes insufficient. Thus, bankruptcy occurs with positive probability and the crisis spreads to other regions via financial linkages. Opening financial markets is nevertheless Pareto improving; consumers benefit from liquidity coinsurance, although they pay the cost of excessive risk‐taking.

Why Do Companies Go Public? An Empirical Analysis

Published: 2/1998,  Volume: 53,  Issue: 1  |  DOI: 10.1111/0022-1082.25448  |  Cited by: 1233

Marco Pagano, Fabio Panetta, Luigi Zingales

Using a large database of private firms in Italy, we analyze the determinants of initial public offerings (IPOs) by comparing the ex ante and ex post characteristics of IPOs with those of private firms. The likelihood of an IPO is increasing in the company's size and the industry's market‐to‐book ratio. Companies appear to go public not to finance future investments and growth, but to rebalance their accounts after high investment and growth. IPOs are also followed by lower cost of credit and increased turnover in control.

Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy

Published: 4/14/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12896  |  Cited by: 79

FABIO SCHIANTARELLI, MASSIMILIANO STACCHINI, PHILIP E. STRAHAN

Italian firms delay payment to banks weakened by past loan losses. Exploiting Credit Register data, we fully absorb borrower fundamentals with firm‐quarter effects. Identification therefore reflects firm choices to delay payment to some banks, depending on their health. This selective delay occurs more where legal enforcement of collateral recovery is slow. Poor enforcement encourages borrowers not to pay when the value of their bank relationship comes into doubt. Selective delays occur even by firms able to pay all lenders. Credit losses in Italy have thus been worsened by the combination of weak banks and weak legal enforcement.