The Journal of Finance

Tracking Retail Investor Activity

Published: 5/14/2021,  Volume: 76,  Issue: 5  |  DOI: 10.1111/jofi.13033  |  Cited by: 559

EKKEHART BOEHMER, CHARLES M. JONES, XIAOYAN ZHANG, XINRAN ZHANG

We provide an easy method to identify marketable retail purchases and sales using recent, publicly available U.S. equity transactions data. Individual stocks with net buying by retail investors outperform stocks with negative imbalances by approximately 10 bps over the following week. Less than half of the predictive power of marketable retail order imbalance is attributable to order flow persistence, while the rest cannot be explained by contrarian trading (proxy for liquidity provision) or public news sentiment. There is suggestive, but only suggestive, evidence that retail marketable orders might contain firm‐level information that is not yet incorporated into prices.

International Stock Return Comovements

Published: 11/25/2009,  Volume: 64,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2009.01512.x  |  Cited by: 647

GEERT BEKAERT, ROBERT J. HODRICK, XIAOYAN ZHANG

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.

Which Shorts Are Informed?

Published: 4/2008,  Volume: 63,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2008.01324.x  |  Cited by: 805

EKKEHART BOEHMER, CHARLES M. JONES, XIAOYAN ZHANG

We construct a long daily panel of short sales using proprietary NYSE order data. From 2000 to 2004, shorting accounts for more than 12.9% of NYSE volume, suggesting that shorting constraints are not widespread. As a group, these short sellers are well informed. Heavily shorted stocks underperform lightly shorted stocks by a risk‐adjusted average of 1.16% over the following 20 trading days (15.6% annualized). Institutional nonprogram short sales are the most informative; stocks heavily shorted by institutions underperform by 1.43% the next month (19.6% annualized). The results indicate that, on average, short sellers are important contributors to efficient stock prices.

The Cross‐Section of Volatility and Expected Returns

Published: 1/20/2006,  Volume: 61,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2006.00836.x  |  Cited by: 3952

ANDREW ANG, ROBERT J. HODRICK, YUHANG XING, XIAOYAN ZHANG

We examine the pricing of aggregate volatility risk in the cross‐section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. Stocks with high idiosyncratic volatility relative to the Fama and French (1993, Journal of Financial Economics 25, 2349) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book‐to‐market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.

Monetary Policy Spillovers through Invoicing Currencies

Published: 8/17/2021,  Volume: 77,  Issue: 1  |  DOI: 10.1111/jofi.13071  |  Cited by: 34

TONY ZHANG

This paper explores the role of trade invoicing currencies in the international spillover of monetary policy. Using high‐frequency measures of Federal Reserve monetary policy shocks, I show that exchange rates, interest rates, and equity returns in countries with a larger share of dollar‐invoiced imports systematically respond more to U.S. monetary policy. I document similar transmission effects from European Central Bank (ECB) monetary policy shocks to countries with euro‐invoiced imports. I rationalize these findings within a New Keynesian framework. As a result of these spillovers, domestic monetary policy should be less effective in countries with traded goods invoiced in foreign currencies.

Limited Risk Sharing and International Equity Returns

Published: 12/16/2020,  Volume: 76,  Issue: 2  |  DOI: 10.1111/jofi.12994  |  Cited by: 6

SHAOJUN ZHANG

Limited stock market participation can potentially explain the disconnect between international asset prices and macro quantities. An incomplete markets model in which risk sharing for stockholders is high generates highly correlated equity returns and relatively smooth exchange rates. Risk sharing for nonstockholders is limited because of their nonparticipation in stock markets and borrowing constraints, reducing the aggregate consumption correlation and the correlation between aggregate consumption differentials and exchange rates. Financial integration widens the disconnect by benefiting stockholders but hurting nonstockholders. Survey data indicate that international risk sharing for stockholders is better than that for nonstockholders, consistent with the predictions.

The Value Premium

Published: 2/2005,  Volume: 60,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2005.00725.x  |  Cited by: 1117

LU ZHANG

The value anomaly arises naturally in the neoclassical framework with rational expectations. Costly reversibility and countercyclical price of risk cause assets in place to be harder to reduce, and hence are riskier than growth options especially in bad times when the price of risk is high. By linking risk and expected returns to economic primitives, such as tastes and technology, my model generates many empirical regularities in the cross‐section of returns; it also yields an array of new refutable hypotheses providing fresh directions for future empirical research.

Carbon Returns across the Globe

Published: 10/21/2024,  Volume: 80,  Issue: 1  |  DOI: 10.1111/jofi.13402  |  Cited by: 180

SHAOJUN ZHANG

The pricing of carbon transition risk is central to the debate on climate‐aware investments. Emissions are tightly linked to sales and are available to investors only with significant lags. The positive carbon return, or brown‐minus‐green return differential, documented in previous studies arises from forward‐looking firm performance information contained in emissions rather than a risk premium in ex ante expected returns. After accounting for the data release lag, carbon returns turn negative in the United States and insignificant globally. Developed markets experience lower carbon returns due to intense climate concern shocks, while countries with stringent climate policies exhibit higher carbon returns.

Information Uncertainty and Stock Returns

Published: 1/20/2006,  Volume: 61,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2006.00831.x  |  Cited by: 1553

X. FRANK ZHANG

There is substantial evidence of short‐term stock price continuation, which the prior literature often attributes to investor behavioral biases such as underreaction to new information. This paper investigates the role of information uncertainty in price continuation anomalies and cross‐sectional variations in stock returns. If short‐term price continuation is due to investor behavioral biases, we should observe greater price drift when there is greater information uncertainty. As a result, greater information uncertainty should produce relatively higher expected returns following good news and relatively lower expected returns following bad news. My evidence supports this hypothesis.

Endogenous Borrowing Constraints With Incomplete Markets

Published: 12/1997,  Volume: 52,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1997.tb02758.x  |  Cited by: 62

HAROLD H. ZHANG

This article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models. We allow the constraints to depend on an investor's characteristics such as time preference, risk aversion, and income streams. The proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default. Using a numerical algorithm, we find that for an array of structural parameters, the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies.

Labor‐Technology Substitution: Implications for Asset Pricing

Published: 3/27/2019,  Volume: 74,  Issue: 4  |  DOI: 10.1111/jofi.12766  |  Cited by: 107

MIAO BEN ZHANG

This paper studies the asset pricing implications of a firm's opportunities to replace routine‐task labor with automation. I develop a model in which firms optimally undertake such replacement when their productivity is low. Hence, firms with routine‐task labor maintain a replacement option that hedges their value against unfavorable macroeconomic shocks and lowers their expected returns. Using establishment‐level occupational data, I construct a measure of firms' share of routine‐task labor. Compared to their industry peers, firms with a higher share of routine‐task labor (i) invest more in machines and reduce more routine‐task labor during economic downturns, and (ii) have lower expected stock returns.

Tax‐Efficient Asset Management: Evidence from Equity Mutual Funds

Published: 11/12/2019,  Volume: 75,  Issue: 2  |  DOI: 10.1111/jofi.12843  |  Cited by: 40

CLEMENS SIALM, HANJIANG ZHANG

We investigate the relation between tax burdens and mutual fund performance from both a theoretical and an empirical perspective. The theoretical model introduces heterogeneous tax clienteles in an environment with decreasing returns to scale and shows that the equilibrium performance of mutual funds depends on the size of the tax clienteles. Our empirical results show that the performance of U.S. equity mutual funds is related to their tax burdens. We find that tax‐efficient funds exhibit not only superior after‐tax performance, but also superior before‐tax performance due to lower trading costs, favorable style exposures, and better selectivity.

Trading Activity and Price Volatility in the Municipal Bond Market

Published: 3/25/2004,  Volume: 59,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2004.00652.x  |  Cited by: 100

Chris Downing, Frank Zhang

Utilizing a comprehensive database of transactions in municipal bonds, we investigate the volume–volatility relation in the municipal bond market. We find a positive relation between the number of transactions and a bond's price volatility. In contrast to previous studies, we find a negative relation between average deal size and price volatility. These results are found to be robust throughout the sample. Our results are inconsistent with current theoretical models of the volume–volatility relation. These inconsistencies may arise because current models fail to account for the effects of overall market liquidity on the costs of large transactions.

Two‐Pass Tests of Asset Pricing Models with Useless Factors

Published: 2/1999,  Volume: 54,  Issue: 1  |  DOI: 10.1111/0022-1082.00102  |  Cited by: 237

Raymond Kan, Chu Zhang

In this paper we investigate the properties of the standard two‐pass methodology of testing beta pricing models with misspecified factors. In a setting where a factor is useless, defined as being independent of all the asset returns, we provide theoretical results and simulation evidence that the second‐pass cross‐sectional regression tends to find the beta risk of the useless factor priced more often than it should. More surprisingly, this misspecification bias exacerbates when the number of time series observations increases. Possible ways of detecting useless factors are also examined.

Alternative Information Sources and the Information Content of Bank Loans

Published: 9/1993,  Volume: 48,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1993.tb04765.x  |  Cited by: 151

RONALD BEST, HANG ZHANG

This paper examines the information content of bank loan agreements. We differentiate borrowers according to financial analysts' percentage earnings forecast errors and most recent forecast revisions. The empirical results suggest that banks rely on other indicators as initial screening devices to determine where to best deploy their evaluation and monitoring efforts. If these other indicators are reliable and signal‐improving prospects, banks do little further investigation. However, if the indicators are noisy and signal‐declining prospects, banks have incentives to expend resources to investigate the borrowers, resulting in the production of valuable information.

Credit Contagion from Counterparty Risk

Published: 9/28/2009,  Volume: 64,  Issue: 5  |  DOI: 10.1111/j.1540-6261.2009.01494.x  |  Cited by: 384

PHILIPPE JORION, GAIYAN ZHANG

Standard credit risk models cannot explain the observed clustering of default, sometimes described as “credit contagion.” This paper provides the first empirical analysis of credit contagion via direct counterparty effects. We find that bankruptcy announcements cause negative abnormal equity returns and increases in CDS spreads for creditors. In addition, creditors with large exposures are more likely to suffer from financial distress later. This suggests that counterparty risk is a potential additional channel of credit contagion. Indeed, the fear of counterparty defaults among financial institutions explains the sudden worsening of the credit crisis after the Lehman bankruptcy in September 2008.

Local Risk, Local Factors, and Asset Prices

Published: 1/12/2017,  Volume: 72,  Issue: 1  |  DOI: 10.1111/jofi.12465  |  Cited by: 118

SELALE TUZEL, MIAO BEN ZHANG

Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely, high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which are part of firm assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry‐adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production‐based equilibrium model explains these empirical findings.

Economic Stimulus at the Expense of Routine‐Task Jobs

Published: 10/4/2021,  Volume: 76,  Issue: 6  |  DOI: 10.1111/jofi.13080  |  Cited by: 55

SELALE TUZEL, MIAO BEN ZHANG

Do investment tax incentives improve job prospects for workers? We explore states' adoption of a major federal tax incentive that accelerates the depreciation of equipment investments for eligible firms but not for ineligible ones. Analyzing massive establishment‐level data sets on occupational employment and computer investment, we find that when states expand investment incentives, eligible firms immediately increase their equipment and skilled employees; whereas they reduce routine‐task employees after a delay of up to two years. These opposing effects constitute an overall insignificant effect on the firms' total employment and shed light on the nuances of job creation through investment incentives.

The Economics of Hedge Fund Startups: Theory and Empirical Evidence

Published: 3/5/2021,  Volume: 76,  Issue: 3  |  DOI: 10.1111/jofi.13009  |  Cited by: 19

CHARLES CAO, GRANT FARNSWORTH, HONG ZHANG

This paper examines how market frictions influence the managerial incentives and organizational structure of new hedge funds. We develop a stylized model in which new managers search for accredited investors and have stronger incentives to acquire managerial skill when encountering low investor demand. Fund families endogenously arise to mitigate frictions and weaken the performance incentives of affiliated new funds. Empirically, based on a TASS‐HFR‐BarclayHedge merged database, we find that ex ante identified cold inceptions facing low investor demand outperform existing hedge funds and hot inceptions facing high demand and that cold stand‐alone inceptions outperform all types of family‐affiliated inceptions.

Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

Published: 4/8/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13341  |  Cited by: 26

SYLVAIN CATHERINE, PAOLO SODINI, YAPEI ZHANG

Using Swedish administrative panel data, we document that workers facing higher left‐tail income risk when equity markets perform poorly have lower portfolio equity share. In line with theory, the relationship between cyclical skewness and stock holdings increases with the share of human capital in a worker's total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts portfolio differences within pairs of identical twins. Our findings show that households hedge against correlated tail risks, an important mechanism in asset pricing and portfolio choice models.

A Note on “Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraints Helps”

Published: 7/2/2019,  Volume: 74,  Issue: 5  |  DOI: 10.1111/jofi.12824  |  Cited by: 1

RAVI JAGANNATHAN, TONGSHU MA, JIAQI ZHANG

This note corrects an error in the proof of Proposition 2 of “Risk Reduction in Large Portfolios: Why Imposing the Wrong Constraint Helps” that appeared in the Journal of Finance, August 2003.

Market Orders and Market Efficiency

Published: 3/1997,  Volume: 52,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1997.tb03816.x  |  Cited by: 36

DAVID P. BROWN, ZHI MING ZHANG

This work compares a dealer market and a limit‐order book. Dealers commonly observe order flow and collect information from multiple market orders. They may be better informed than other traders, although they do not earn rents from this information. Dealers earn rents as suppliers of liquidity, and their decisions to enter or exit the market are independent of the degree of adverse selection. Introduction of a limit‐order book lowers the execution‐price risk faced by speculators and leads them to trade more aggressively on their information. Introduction of the book also lowers dealer profits, but increases the informational efficiency of prices.

Test Assets and Weak Factors

Published: 12/18/2024,  Volume: 80,  Issue: 1  |  DOI: 10.1111/jofi.13415  |  Cited by: 46

STEFANO GIGLIO, DACHENG XIU, DAKE ZHANG

We show that two important issues in empirical asset pricing—the presence of weak factors and the selection of test assets—are deeply connected. Since weak factors are those to which test assets have limited exposure, an appropriate selection of test assets can improve the strength of factors. Building on this insight, we introduce supervised principal component analysis (SPCA), a methodology that iterates supervised selection, principal‐component estimation, and factor projection. It enables risk premia estimation and factor model diagnosis even when weak factors are present and not all factors are observed. We establish SPCA's asymptotic properties and showcase its empirical applications.

Corrigendum for Dividend Dynamics, Learning, and Expected Stock Index Returns

Published: 5/30/2019,  Volume: 74,  Issue: 4  |  DOI: 10.1111/jofi.12786  |  Cited by: 0

RAVI JAGANNATHAN, BINYING LIU, JIAQI ZHANG

Financially Constrained Stock Returns

Published: 7/16/2009,  Volume: 64,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2009.01481.x  |  Cited by: 215

DMITRY LIVDAN, HORACIO SAPRIZA, LU ZHANG

We study the effect of financial constraints on risk and expected returns by extending the investment‐based asset pricing framework to incorporate retained earnings, debt, costly equity, and collateral constraints on debt capacity. Quantitative results show that more financially constrained firms are riskier and earn higher expected stock returns than less financially constrained firms. Intuitively, by preventing firms from financing all desired investments, collateral constraints restrict the flexibility of firms in smoothing dividend streams in the face of aggregate shocks. The inflexibility mechanism also gives rise to a convex relation between market leverage and expected stock returns.

A Portfolio Approach to Global Imbalances

Published: 4/9/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13333  |  Cited by: 41

ZHENGYANG JIANG, ROBERT J. RICHMOND, TONY ZHANG

We use a portfolio‐based framework to understand what drives the decline of the U.S. net foreign asset (NFA) position and the reversal in returns earned on the U.S. NFA (exorbitant privilege). We show that global savings gluts and monetary policies widened the U.S. NFA position, while investor demand shifts partially offset this widening. Moreover, U.S. privilege declined after 2010, in line with increasing foreign demand for U.S. equity. We also highlight a quantity dimension of the U.S. privilege: The U.S. can issue substantially more debt than other countries for a given yield increase. 

Neglected Risks in the Communication of Residential Mortgage‐Backed Securities Offerings

Published: 9/23/2023,  Volume: 79,  Issue: 1  |  DOI: 10.1111/jofi.13278  |  Cited by: 11

HAROLD H. ZHANG, FENG ZHAO, XIAOFEI ZHAO

Examining the contractual disclosures during the sale of private‐label residential mortgage‐backed securities before the 2008 financial crisis, we find that textual contents in the risk‐factor section predict subsequent losses and yet were not reflected in pricing. Insurance companies, especially life insurers and insurers with low regulatory capital ratios, are more exposed to textual risks. Consistent with issuers hedging litigation risks with disclosure, we find that textual contents are associated with second‐lien underreporting and preissuance written communications. Overall, we find that investors neglected risks in the purportedly safe assets before the crisis.

Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms

Published: 5/16/2006,  Volume: 61,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2006.00869.x  |  Cited by: 141

SOMNATH DAS, RE‐JIN GUO, HUAI ZHANG

This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst's underlying expectation of a firm's future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable.

Complex Asset Markets

Published: 8/8/2023,  Volume: 78,  Issue: 5  |  DOI: 10.1111/jofi.13264  |  Cited by: 15

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.

Defined Contribution Pension Plans: Sticky or Discerning Money?

Published: 3/12/2015,  Volume: 70,  Issue: 2  |  DOI: 10.1111/jofi.12232  |  Cited by: 188

CLEMENS SIALM, LAURA T. STARKS, HANJIANG ZHANG

Participants in defined contribution (DC) retirement plans rarely adjust their portfolio allocations, suggesting that their investment choices and consequent money flows are sticky and not discerning. However, participants’ inertia could be offset by DC plan sponsors, who adjust the plan's investment options. We examine these countervailing influences on flows into U.S. mutual funds. We find that flows into funds from DC assets are more volatile and exhibit more performance sensitivity than non‐DC flows, primarily due to adjustments to the investment options by the plan sponsors. Thus, DC retirement money is less sticky and more discerning than non‐DC money.

Operating Hedge and Gross Profitability Premium

Published: 9/27/2023,  Volume: 78,  Issue: 6  |  DOI: 10.1111/jofi.13275  |  Cited by: 29

LEONID KOGAN, JUN LI, HAROLD H. ZHANG

We show theoretically that variable production costs reduce systematic risk of firms' cash flows if capital and variable inputs are complementary in firms' production and input prices are procyclical. In our dynamic model, this operating hedge effect is weaker for more profitable firms, giving rise to a gross profitability premium. Moreover, gross profitability and value factors are distinct and negatively correlated, and their premia are not captured by the capital asset pricing model (CAPM). We estimate the model by simulated method of moments, and find that its main implications for stock returns and cash flow dynamics are quantitatively consistent with the data.

Why Does the Law Matter? Investor Protection and Its Effects on Investment, Finance, and Growth

Published: 1/17/2012,  Volume: 67,  Issue: 1  |  DOI: 10.1111/j.1540-6261.2011.01713.x  |  Cited by: 430

R. DAVID MCLEAN, TIANYU ZHANG, MENGXIN ZHAO

Investor protection is associated with greater investment sensitivity to q and lower investment sensitivity to cash flow. Finance plays a role in causing these effects; in countries with strong investor protection, external finance increases more strongly with q, and declines more strongly with cash flow. We further find that q and cash flow sensitivities are associated with ex post investment efficiency; investment predicts growth and profits more strongly in countries with greater q sensitivities and lower cash flow sensitivities. The paper's findings are broadly consistent with investor protection promoting accurate share prices, reducing financial constraints, and encouraging efficient investment.

Political Polarization Affects Households' Financial Decisions: Evidence from Home Sales

Published: 2/11/2024,  Volume: 79,  Issue: 2  |  DOI: 10.1111/jofi.13315  |  Cited by: 53

W. BEN MCCARTNEY, JOHN ORELLANA‐LI, CALVIN ZHANG

Political identity and partisanship are salient features of today's society. Using deeds records and voter rolls, we show that current residents are more likely to sell their homes when opposite‐party neighbors move in nearby than when unaffiliated or same‐party neighbors do. This is especially true when the new neighbors are politically active, consistent with an animosity between parties mechanism. We conclude that affective polarization is not limited to purely political settings and affects one of the household's most important financial decisions, their home transactions.

Bank Competition Amid Digital Disruption: Implications for Financial Inclusion

Published: 5/17/2026,  Volume: 81,  Issue: 4  |  DOI: 10.1111/jofi.70051  |  Cited by: 2

ERICA XUEWEI JIANG, GLORIA YANG YU, JINYUAN ZHANG

We examine how digital disruption affects bank competition using the staggered rollout of 3G mobile networks. 3G expansion increased mobile banking adoption among tech‐savvy households, reducing branch networks—especially in younger counties. Banks' strategies diverged: Less branch‐reliant banks closed branches and competed on price, while more branch‐reliant banks maintained branches but raised spreads. A structural model shows that perceived digital service improvements among younger consumers drove these shifts, reducing welfare for older savers. Counterfactuals demonstrate that subsidizing adoption for older savers can cost‐effectively reduce these disparities, facilitating a smoother digital transition.

Tests of the Relations Among Marketwide Factors, Firm‐Specific Variables, and Stock Returns Using a Conditional Asset Pricing Model

Published: 12/1996,  Volume: 51,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1996.tb05230.x  |  Cited by: 22

JIA HE, RAYMOND KAN, LILIAN NG, CHU ZHANG

In this article we generalize Harvey's (1989) empirical specification of conditional asset pricing models to allow for both time‐varying covariances between stock returns and marketwide factors and time‐varying reward‐to‐covariabilities. The model is then applied to examine the effects of firm size and book‐to‐market equity ratios. We find that the traditional asset pricing model with commonly used factors can only explain a small portion of the stock returns predicted by firm size and book‐to‐market equity ratios. The results indicate that allowing time‐varying covariances and time‐varying reward‐to‐covariabilities does little to salvage the traditional asset pricing models.

Optimal Asset Location and Allocation with Taxable and Tax‐Deferred Investing

Published: 6/2004,  Volume: 59,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2004.00655.x  |  Cited by: 200

Robert M. Dammon, Chester S. Spatt, Harold H. Zhang

We investigate optimal intertemporal asset allocation and location decisions for investors making taxable and tax‐deferred investments. We show a strong preference for holding taxable bonds in the tax‐deferred account and equity in the taxable account, reflecting the higher tax burden on taxable bonds relative to equity. For most investors, the optimal asset location policy is robust to the introduction of tax‐exempt bonds and liquidity shocks. Numerical results illustrate optimal portfolio decisions as a function of age and tax‐deferred wealth. Interestingly, the proportion of total wealth allocated to equity is inversely related to the fraction of total wealth in tax‐deferred accounts.

Firm‐Level Climate Change Exposure

Published: 3/31/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13219  |  Cited by: 1273

ZACHARIAS SAUTNER, LAURENCE VAN LENT, GRIGORY VILKOV, RUISHEN ZHANG

We develop a method that identifies the attention paid by earnings call participants to firms' climate change exposures. The method adapts a machine learning keyword discovery algorithm and captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The measures are available for more than 10,000 firms from 34 countries between 2002 and 2020. We show that the measures are useful in predicting important real outcomes related to the net‐zero transition, in particular, job creation in disruptive green technologies and green patenting, and that they contain information that is priced in options and equity markets.

Capital Gains Taxes and Asset Prices: Capitalization or Lock‐in?

Published: 4/2008,  Volume: 63,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2008.01329.x  |  Cited by: 129

ZHONGLAN DAI, EDWARD MAYDEW, DOUGLAS A. SHACKELFORD, HAROLD H. ZHANG

This paper demonstrates that the equilibrium impact of capital gains taxes reflects both the capitalization effect (i.e., capital gains taxes decrease demand) and the lock‐in effect (i.e., capital gains taxes decrease supply). Depending on time periods and stock characteristics, either effect may dominate. Using the Taxpayer Relief Act of 1997 as our event, we find evidence supporting a dominant capitalization effect in the week following news that sharply increased the probability of a reduction in the capital gains tax rate and a dominant lock‐in effect in the week after the rate reduction became effective.

Does Idiosyncratic Risk Really Matter?

Published: 3/2/2005,  Volume: 60,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2005.00750.x  |  Cited by: 340

TURAN G. BALI, NUSRET CAKICI, XUEMIN (STERLING) YAN, ZHE ZHANG

Goyal and Santa‐Clara (2003) find a significantly positive relation between the equal‐weighted average stock volatility and the value‐weighted portfolio returns on the NYSE/AMEX/Nasdaq stocks for the period of 1963:08 to 1999:12. We show that this result is driven by small stocks traded on the Nasdaq, and is in part due to a liquidity premium. In addition, their result does not hold for the extended sample of 1963:08 to 2001:12 and for the NYSE/AMEX and NYSE stocks. More importantly, we find no evidence of a significant link between the value‐weighted portfolio returns and the median and value‐weighted average stock volatility.

Subprime Mortgage Defaults and Credit Default Swaps

Published: 3/12/2015,  Volume: 70,  Issue: 2  |  DOI: 10.1111/jofi.12221  |  Cited by: 37

ERIC ARENTSEN, DAVID C. MAUER, BRIAN ROSENLUND, HAROLD H. ZHANG, FENG ZHAO

We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.

Nonstandard Errors

Published: 4/17/2024,  Volume: 79,  Issue: 3  |  DOI: 10.1111/jofi.13337  |  Cited by: 107

ALBERT J. MENKVELD, ANNA DREBER, FELIX HOLZMEISTER, JUERGEN HUBER, MAGNUS JOHANNESSON, MICHAEL KIRCHLER, SEBASTIAN NEUSÜß, MICHAEL RAZEN, UTZ WEITZEL, DAVID ABAD‐DÍAZ, MENACHEM (MENI) ABUDY, TOBIAS ADRIAN, YACINE AIT‐SAHALIA, OLIVIER AKMANSOY, JAMIE T. ALCOCK, VITALI ALEXEEV, ARASH ALOOSH, LIVIA AMATO, DIEGO AMAYA, JAMES J. ANGEL, ALEJANDRO T. AVETIKIAN, AMADEUS BACH, EDWIN BAIDOO, GAETAN BAKALLI, LI BAO, ANDREA BARBON, OKSANA BASHCHENKO, PARAMPREET C. BINDRA, GEIR H. BJØNNES, JEFFREY R. BLACK, BERNARD S. BLACK, DIMITAR BOGOEV, SANTIAGO BOHORQUEZ CORREA, OLEG BONDARENKO, CHARLES S. BOS, CIRIL BOSCH‐ROSA, ELIE BOURI, CHRISTIAN BROWNLEES, ANNA CALAMIA, VIET NGA CAO, GUNTHER CAPELLE‐BLANCARD, LAURA M. CAPERA ROMERO, MASSIMILIANO CAPORIN, ALLEN CARRION, TOLGA CASKURLU, BIDISHA CHAKRABARTY, JIAN CHEN, MIKHAIL CHERNOV, WILLIAM CHEUNG, LUDWIG B. CHINCARINI, TARUN CHORDIA, SHEUNG‐CHI CHOW, BENJAMIN CLAPHAM, JEAN‐EDOUARD COLLIARD, CAROLE COMERTON‐FORDE, EDWARD CURRAN, THONG DAO, WALE DARE, RYAN J. DAVIES, RICCARDO DE BLASIS, GIANLUCA F. DE NARD, FANY DECLERCK, OLEG DEEV, HANS DEGRYSE, SOLOMON Y. DEKU, CHRISTOPHE DESAGRE, MATHIJS A. VAN DIJK, CHUKWUMA DIM, THOMAS DIMPFL, YUN JIANG DONG, PHILIP A. DRUMMOND, TOM DUDDA, TEODOR DUEVSKI, ARIADNA DUMITRESCU, TEODOR DYAKOV, ANNE HAUBO DYHRBERG, MICHAŁ DZIELIŃSKI, ASLI EKSI, IZIDIN EL KALAK, SASKIA TER ELLEN, NICOLAS EUGSTER, MARTIN D. D. EVANS, MICHAEL FARRELL, ESTER FELEZ‐VINAS, GERARDO FERRARA, EL MEHDI FERROUHI, ANDREA FLORI, JONATHAN T. FLUHARTY‐JAIDEE, SEAN D. V. FOLEY, KINGSLEY Y. L. FONG, THIERRY FOUCAULT, TATIANA FRANUS, FRANCESCO FRANZONI, BART FRIJNS, MICHAEL FRÖMMEL, SERVANNA M. FU, SASCHA C. FÜLLBRUNN, BAOQING GAN, GE GAO, THOMAS P. GEHRIG, ROLAND GEMAYEL, DIRK GERRITSEN, JAVIER GIL‐BAZO, DUDLEY GILDER, LAWRENCE R. GLOSTEN, THOMAS GOMEZ, ARSENY GORBENKO, JOACHIM GRAMMIG, VINCENT GRÉGOIRE, UFUK GÜÇBILMEZ, BJÖRN HAGSTRÖMER, JULIEN HAMBUCKERS, ERIK HAPNES, JEFFREY H. HARRIS, LAWRENCE HARRIS, SIMON HARTMANN, JEAN‐BAPTISTE HASSE, NIKOLAUS HAUTSCH, XUE‐ZHONG (TONY) HE, DAVIDSON HEATH, SIMON HEDIGER, TERRENCE HENDERSHOTT, ANN MARIE HIBBERT, ERIK HJALMARSSON, SETH A. HOELSCHER, PETER HOFFMANN, CRAIG W. HOLDEN, ALEX R. HORENSTEIN, WENQIAN HUANG, DA HUANG, CHRISTOPHE HURLIN, KONRAD ILCZUK, ALEXEY IVASHCHENKO, SUBRAMANIAN R. IYER, HOSSEIN JAHANSHAHLOO, NAJI JALKH, CHARLES M. JONES, SIMON JURKATIS, PETRI JYLHÄ, ANDREAS T. KAECK, GABRIEL KAISER, ARZÉ KARAM, EGLE KARMAZIENE, BERNHARD KASSNER, MARKKU KAUSTIA, EKATERINA KAZAK, FEARGHAL KEARNEY, VINCENT VAN KERVEL, SAAD A. KHAN, MARTA K. KHOMYN, TONY KLEIN, OLGA KLEIN, ALEXANDER KLOS, MICHAEL KOETTER, ALEKSEY KOLOKOLOV, ROBERT A. KORAJCZYK, ROMAN KOZHAN, JAN P. KRAHNEN, PAUL KUHLE, AMY KWAN, QUENTIN LAJAUNIE, F. Y. ERIC C. LAM, MARIE LAMBERT, HUGUES LANGLOIS, JENS LAUSEN, TOBIAS LAUTER, MARKUS LEIPPOLD, VLADIMIR LEVIN, YIJIE LI, HUI LI, CHEE YOONG LIEW, THOMAS LINDNER, OLIVER LINTON, JIACHENG LIU, ANQI LIU, GUILLERMO LLORENTE, MATTHIJS LOF, ARIEL LOHR, FRANCIS LONGSTAFF, ALEJANDRO LOPEZ‐LIRA, SHAWN MANKAD, NICOLA MANO, ALEXIS MARCHAL, CHARLES MARTINEAU, FRANCESCO MAZZOLA, DEBRAH MELOSO, MICHAEL G. MI, ROXANA MIHET, VIJAY MOHAN, SOPHIE MOINAS, DAVID MOORE, LIANGYI MU, DMITRIY MURAVYEV, DERMOT MURPHY, GABOR NESZVEDA, CHRISTIAN NEUMEIER, ULF NIELSSON, MAHENDRARAJAH NIMALENDRAN, SVEN NOLTE, LARS L. NORDEN, PETER O'NEILL, KHALED OBAID, BERNT A. ØDEGAARD, PER ÖSTBERG, EMILIANO PAGNOTTA, MARCUS PAINTER, STEFAN PALAN, IMON J. PALIT, ANDREAS PARK, ROBERTO PASCUAL, PAOLO PASQUARIELLO, LUBOS PASTOR, VINAY PATEL, ANDREW J. PATTON, NEIL D. PEARSON, LORIANA PELIZZON, MICHELE PELLI, MATTHIAS PELSTER, CHRISTOPHE PÉRIGNON, CAMERON PFIFFER, RICHARD PHILIP, TOMÁŠ PLÍHAL, PUNEET PRAKASH, OLIVER‐ALEXANDER PRESS, TINA PRODROMOU, MARCEL PROKOPCZUK, TALIS PUTNINS, YA QIAN, GAURAV RAIZADA, DAVID RAKOWSKI, ANGELO RANALDO, LUCA REGIS, STEFAN REITZ, THOMAS RENAULT, REX W. RENJIE, ROBERTO RENO, STEVEN J. RIDDIOUGH, KALLE RINNE, PAUL RINTAMÄKI, RYAN RIORDAN, THOMAS RITTMANNSBERGER, IÑAKI RODRÍGUEZ LONGARELA, DOMINIK ROESCH, LAVINIA ROGNONE, BRIAN ROSEMAN, IOANID ROŞU, SAURABH ROY, NICOLAS RUDOLF, STEPHEN R. RUSH, KHALADDIN RZAYEV, ALEKSANDRA A. RZEŹNIK, ANTHONY SANFORD, HARIKUMAR SANKARAN, ASANI SARKAR, LUCIO SARNO, OLIVIER SCAILLET, STEFAN SCHARNOWSKI, KLAUS R. SCHENK‐HOPPÉ, ANDREA SCHERTLER, MICHAEL SCHNEIDER, FLORIAN SCHROEDER, NORMAN SCHÜRHOFF, PHILIPP SCHUSTER, MARCO A. SCHWARZ, MARK S. SEASHOLES, NORMAN J. SEEGER, OR SHACHAR, ANDRIY SHKILKO, JESSICA SHUI, MARIO SIKIC, GIORGIA SIMION, LEE A. SMALES, PAUL SÖDERLIND, ELVIRA SOJLI, KONSTANTIN SOKOLOV, JANTJE SÖNKSEN, LAIMA SPOKEVICIUTE, DENITSA STEFANOVA, MARTI G. SUBRAHMANYAM, BARNABAS SZASZI, OLEKSANDR TALAVERA, YUEHUA TANG, NICK TAYLOR, WING WAH THAM, ERIK THEISSEN, JULIAN THIMME, IAN TONKS, HAI TRAN, LUCA TRAPIN, ANDERS B. TROLLE, M. ANDREEA VADUVA, GIORGIO VALENTE, ROBERT A. VAN NESS, AURELIO VASQUEZ, THANOS VEROUSIS, PATRICK VERWIJMEREN, ANDERS VILHELMSSON, GRIGORY VILKOV, VLADIMIR VLADIMIROV, SEBASTIAN VOGEL, STEFAN VOIGT, WOLF WAGNER, THOMAS WALTHER, PATRICK WEISS, MICHEL VAN DER WEL, INGRID M. WERNER, P. JOAKIM WESTERHOLM, CHRISTIAN WESTHEIDE, HANS C. WIKA, EVERT WIPPLINGER, MICHAEL WOLF, CHRISTIAN C. P. WOLFF, LEONARD WOLK, WING‐KEUNG WONG, JAN WRAMPELMEYER, ZHEN‐XING WU, SHUO XIA, DACHENG XIU, KE XU, CAIHONG XU, PRADEEP K. YADAV, JOSÉ YAGÜE, CHENG YAN, ANTTI YANG, WOONGSUN YOO, WENJIA YU, YIHE YU, SHIHAO YU, BART Z. YUESHEN, DARYA YUFEROVA, MARCIN ZAMOJSKI, ABALFAZL ZAREEI, STEFAN M. ZEISBERGER, LU ZHANG, S. SARAH ZHANG, XIAOYU ZHANG, LU ZHAO, ZHUO ZHONG, Z. IVY ZHOU, CHEN ZHOU, XINGYU S. ZHU, MARIUS ZOICAN, REMCO ZWINKELS

In statistics, samples are drawn from a population in a data‐generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence‐generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer‐review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.