The Journal of Finance

Matteo Maggiori: Winner of the 2021 Fischer Black Prize

Published: 09/03/2021   |   DOI: 10.1111/jofi.13075

HANNO LUSTIG

Size Anomalies in U.S. Bank Stock Returns

Published: 12/05/2014   |   DOI: 10.1111/jofi.12235

PRIYANK GANDHI, HANNO LUSTIG

The largest commercial bank stocks, ranked by total size of the balance sheet, have significantly lower risk‐adjusted returns than small‐ and medium‐sized bank stocks, even though large banks are significantly more levered. We uncover a size factor in the component of bank returns that is orthogonal to the standard risk factors, including small minus big, which has the right covariance with bank returns to explain the average risk‐adjusted returns. This factor measures size‐dependent exposure to bank‐specific tail risk. These findings are consistent with government guarantees that protect shareholders of large banks, but not small banks, in disaster states.

Complex Asset Markets

Published: 07/20/2023   |   DOI: 10.1111/jofi.13264

ANDREA L. EISFELDT, HANNO LUSTIG, LEI ZHANG

Investors' individual arbitrage models introduce idiosyncratic risk into complex asset strategies, driving up average returns and Sharpe ratios. However, despite the attractive risk‐return trade‐off, participation is limited. This is because effective Sharpe ratios in complex asset markets vary with investors' expertise. Investors with higher expertise, better models, and lower resulting idiosyncratic risk exposures realize higher Sharpe ratios. Their demand deters entry by less sophisticated investors. As predicted by our model, market dislocations are characterized by an increase in idiosyncratic risk, investor exit, and persistently elevated alphas and Sharpe ratios. The selection effect from higher expertise agents' more favorable Sharpe ratios is unique to our model and key to our main results.

Foreign Safe Asset Demand and the Dollar Exchange Rate

Published: 02/02/2021   |   DOI: 10.1111/jofi.13003

ZHENGYANG JIANG, ARVIND KRISHNAMURTHY, HANNO LUSTIG

We develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis, the yield gap between U.S. government and currency‐hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.

Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective

Published: 05/03/2005   |   DOI: 10.1111/j.1540-6261.2005.00759.x

HANNO N. LUSTIG, STIJN G. VAN NIEUWERBURGH

In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the United States, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains 80% of the cross‐sectional variation in annual size and book‐to‐market portfolio returns.

The TIPS‐Treasury Bond Puzzle

Published: 01/30/2013   |   DOI: 10.1111/jofi.12032

MATTHIAS FLECKENSTEIN, FRANCIS A. LONGSTAFF, HANNO LUSTIG

We show that the price of a Treasury bond and an inflation‐swapped Treasury Inflation‐Protected Securities (TIPS) issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS‐Treasury mispricing has exceeded $56 billion, representing nearly 8% of the total amount of TIPS outstanding. We find direct evidence that the mispricing narrows as additional capital flows into the markets. This provides strong support for the slow‐moving‐capital explanation of arbitrage persistence.

Spending Less after (Seemingly) Bad News

Published: 04/29/2024   |   DOI: 10.1111/jofi.13325

MARK J. GARMAISE, YARON LEVI, HANNO LUSTIG

Using high‐frequency spending data, we show that household consumption displays excess sensitivity to salient macroeconomic news, even when the news is not real. When the announced local unemployment rate reaches a 12‐month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 1.5% relative to consumers in areas with the same macroeconomic conditions. Low‐income households display greater excess sensitivity to salience. The decrease in spending is not later reversed. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.

Capital Share Dynamics When Firms Insure Workers

Published: 03/30/2019   |   DOI: 10.1111/jofi.12773

BARNEY HARTMAN‐GLASER, HANNO LUSTIG, MINDY Z. XIAOLAN

Although the aggregate capital share of U.S. firms has increased, capital share at the firm‐level has decreased. This divergence is due to mega‐firms that produce a larger output share without a proportionate increase in labor compensation. We develop a model in which firms insure workers against firm‐specific shocks, with more productive firms allocating more rents to shareholders, while less productive firms endogenously exit. Increasing firm‐level risk delays exit and increases the measure of mega‐firms, raising (lowering) the aggregate (average) capital share. An increase in the level of rents magnifies this effect. We present evidence that supports this mechanism.

What Drives Variation in the U.S. Debt‐to‐Output Ratio? The Dogs that Did not Bark

Published: 06/11/2024   |   DOI: 10.1111/jofi.13363

ZHENGYANG JIANG, HANNO LUSTIG, STIJN VAN NIEUWERBURGH, MINDY Z. XIAOLAN

A higher U.S. government debt‐to‐output (D‐O) ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current D‐O ratio. The market valuation of Treasurys is surprisingly insensitive to macro fundamentals. Instead, the future D‐O ratio accounts for most of the variation because the D‐O ratio is highly persistent. Systematic surplus forecast errors may help account for these findings. Since the start of the Global Financial Crisis, surplus projections have anticipated a large fiscal correction that failed to materialize.