The Journal of Finance

Asset Pricing and Sports Betting

Published: 09/21/2021   |   DOI: 10.1111/jofi.13082

TOBIAS J. MOSKOWITZ

Sports betting markets offer a novel laboratory to test theories of cross‐sectional asset pricing anomalies. Two features of this market—no systematic risk and terminal values exogenous to betting activity—evade the joint hypothesis problem, allowing mispricing to be detected. Examining a large and diverse set of liquid betting contracts, I find strong evidence of momentum, consistent with delayed overreaction and inconsistent with underreaction and rational pricing. Returns are a fraction of those in financial markets and fail to overcome transactions costs, preventing arbitrage from eliminating them. An insight from betting also predicts value and momentum returns in U.S. equities.

Asset Pricing and Sports Betting

Published: 09/21/2021   |   DOI: 10.1111/jofi.13082

TOBIAS J. MOSKOWITZ

Sports betting markets offer a novel laboratory to test theories of cross‐sectional asset pricing anomalies. Two features of this market—no systematic risk and terminal values exogenous to betting activity—evade the joint hypothesis problem, allowing mispricing to be detected. Examining a large and diverse set of liquid betting contracts, I find strong evidence of momentum, consistent with delayed overreaction and inconsistent with underreaction and rational pricing. Returns are a fraction of those in financial markets and fail to overcome transactions costs, preventing arbitrage from eliminating them. An insight from betting also predicts value and momentum returns in U.S. equities.

The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01560.x

EFRAIM BENMELECH, TOBIAS J. MOSKOWITZ

Financial regulation was as hotly debated a political issue in the 19th century as it is today. We study the political economy of state usury laws in 19th century America. Exploiting the wide variation in regulation, enforcement, and economic conditions across states and time, we find that usury laws when binding reduce credit and economic activity, especially for smaller firms. We examine the motives of regulation and find that usury laws coincide with other economic and political policies favoring wealthy political incumbents, particularly when they have more voting power. The evidence suggests financial regulation is driven by private interests capturing rents from others rather than public interests protecting the underserved.

Do Industries Explain Momentum?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00146

Tobias J. Moskowitz, Mark Grinblatt

This paper documents a strong and prevalent momentum effect in industry components of stock returns which accounts for much of the individual stock momentum anomaly. Specifically, momentum investment strategies, which buy past winning stocks and sell past losing stocks, are significantly less profitable once we control for industry momentum. By contrast, industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, appear highly profitable, even after controlling for size, book‐to‐market equity, individual stock momentum, the cross‐sectional dispersion in mean returns, and potential microstructure influences.

Home Bias at Home: Local Equity Preference in Domestic Portfolios

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00181

Joshua D. Coval, Tobias J. Moskowitz

The strong bias in favor of domestic securities is a well‐documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well‐documented asset pricing anomalies.

Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00847.x

MARK J. GARMAISE, TOBIAS J. MOSKOWITZ

Using a unique sample of commercial loans and mergers between large banks, we provide micro‐level (within‐county) evidence linking credit conditions to economic development and find a spillover effect on crime. Neighborhoods that experience more bank mergers are subject to higher interest rates, diminished local construction, lower prices, an influx of poorer households, and higher property crime in subsequent years. The elasticity of property crime with respect to merger‐induced banking concentration is 0.18. We show that these results are not likely due to reverse causation, and confirm the central findings using state branching deregulation to instrument for bank competition.

Catastrophic Risk and Credit Markets

Published: 03/13/2009   |   DOI: 10.1111/j.1540-6261.2009.01446.x

MARK J. GARMAISE, TOBIAS J. MOSKOWITZ

We provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe‐susceptible properties. Using unique micro‐level data, we find that earthquake risk decreased commercial real estate bank loan provision by 22% in California properties in the 1990s, with more severe effects in African–American neighborhoods. We show that the 1994 Northridge earthquake had only a short‐term disruptive effect. Our basic findings are confirmed for hurricane risk, and our model and empirical work have implications for terrorism and political perils.

Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price

Published: 12/12/2022   |   DOI: 10.1111/jofi.13198

TODD M. HAZELKORN, TOBIAS J. MOSKOWITZ, KAUSHIK VASUDEVAN

Deviations from the law of one price between futures and spot prices—the futures‐cash basis—capture information about liquidity demand for equity market exposure in global markets. We show that the basis comoves with dealer and investor futures positions, is contemporaneously positively correlated with futures and spot market returns, and negatively predicts futures and spot returns. These findings are consistent with the futures‐cash basis reflecting liquidity demand that is common to futures and cash equity markets. We find persistent supply‐demand imbalances for equity index exposure reflected in the basis, giving rise to an annual premium of 5% to 6%.

Long‐Run Stockholder Consumption Risk and Asset Returns

Published: 11/25/2009   |   DOI: 10.1111/j.1540-6261.2009.01507.x

CHRISTOPHER J. MALLOY, TOBIAS J. MOSKOWITZ, ANNETTE VISSING‐JØRGENSEN

We provide new evidence on the success of long‐run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting microlevel household consumption data, we show that long‐run stockholder consumption risk better captures cross‐sectional variation in average asset returns than aggregate or nonstockholder consumption risk, and implies more plausible risk aversion estimates. We find that risk aversion around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French portfolios, the market portfolio, bond portfolios, and the entire cross‐section of stocks.

The Effects of Stock Lending on Security Prices: An Experiment

Published: 04/09/2013   |   DOI: 10.1111/jofi.12051

STEVEN N. KAPLAN, TOBIAS J. MOSKOWITZ, BERK A. SENSOY

We examine the impact of short selling by conducting a randomized stock lending experiment. Working with a large, anonymous money manager, we create an exogenous and sizeable shock to the supply of lendable shares by taking high loan fee stocks in the manager's portfolio and randomly making available and withholding stocks from the lending market. The experiment ran in two independent phases: the first, from September 5 to 18, 2008, with over $580 million of securities lent, and the second, from June 5 to September 30, 2009, with over $250 million of securities lent. While the supply shocks significantly reduce market lending fees and raise quantities, we find no evidence that returns, volatility, skewness, or bid–ask spreads are affected. The results provide novel evidence on the impact of shorting supply and do not indicate any adverse effects on stock prices from securities lending.

Testing Agency Theory with Entrepreneur Effort and Wealth

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00739.x

MARIANNE P. BITLER, TOBIAS J. MOSKOWITZ, ANNETTE VISSING‐JØRGENSEN

We develop a principal‐agent model in an entrepreneurial setting and test the model's predictions using unique data on entrepreneurial effort and wealth in privately held firms. Accounting for unobserved firm heterogeneity using instrumental‐variables techniques, we find that entrepreneurial ownership shares increase with outside wealth and decrease with firm risk; effort increases with ownership; and effort increases firm performance. The magnitude of the effects in the cross‐section of firms suggests that agency costs may help explain why entrepreneurs concentrate large fractions of their wealth in firm equity.

Value and Momentum Everywhere

Published: 01/30/2013   |   DOI: 10.1111/jofi.12021

CLIFFORD S. ASNESS, TOBIAS J. MOSKOWITZ, LASSE HEJE PEDERSEN

We find consistent value and momentum return premia across eight diverse markets and asset classes, and a strong common factor structure among their returns. Value and momentum returns correlate more strongly across asset classes than passive exposures to the asset classes, but value and momentum are negatively correlated with each other, both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three‐factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum jointly across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities.