The Journal of Finance

Factor‐Related and Specific Returns of Common Stocks: Serial Correlation and Market Inefficiency

Published: 05/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb03575.x

BARR ROSENBERG, ANDREW RUDD

The Value of the Tax Treatment of Original‐Issue Deep‐Discount Bonds: A Note

Published: 03/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03873.x

MARCELLE ARAK, ANDREW SILVER

Mortgage Redlining: Race, Risk, and Demand

Published: 03/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb04421.x

ANDREW HOLMES, PAUL HORVITZ

Charges that geographical redlining is widely practiced by mortgage lenders and is associated with racial discrimination have received much attention. However, empirical research in this area has yet to document a convincing answer to the question of whether redlining even exists. Much of the previous research in this area has suffered from failure to account for variations in risk, and/or failure to adequately control for geographical differences in demand. This study addresses these problems in an effort to determine whether the disparity in the flow of mortgage credit can be explained by differences in risk and demand.

Where Is the Risk in Value? Evidence from a Market‐to‐Book Decomposition

Published: 08/09/2019   |   DOI: 10.1111/jofi.12836

ANDREY GOLUBOV, THEODOSIA KONSTANTINIDI

We study the value premium using the multiples‐based market‐to‐book decomposition of Rhodes‐Kropf, Robinson, and Viswanathan (2005). The market‐to‐value component drives all of the value strategy return, while the value‐to‐book component exhibits no return predictability in either portfolio sorts or firm‐level regressions. Existing results linking market‐to‐book to operating leverage, duration, exposure to investment‐specific technology shocks, and analysts’ risk ratings derive from the unpriced value‐to‐book component. In contrast, results on expectation errors, limits to arbitrage, and certain types of cash flow risk and consumption risk exposure are due to the market‐to‐value component. Overall, our evidence casts doubt on several value premium theories.

Nonparametric Estimation of State‐Price Densities Implicit in Financial Asset Prices

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.215228

Yacine Aït‐Sahalia, Andrew W. Lo

Implicit in the prices of traded financial assets are Arrow–Debreu prices or, with continuous states, the state‐price density (SPD). We construct a nonparametric estimator for the SPD implicit in option prices and we derive its asymptotic sampling theory. This estimator provides an arbitrage‐free method of pricing new, complex, or illiquid securities while capturing those features of the data that are most relevant from an asset‐pricing perspective, for example, negative skewness and excess kurtosis for asset returns, and volatility “smiles” for option prices. We perform Monte Carlo experiments and extract the SPD from actual S&P 500 option prices.

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04973.x

CHUN H. LAM, ANDREW H. CHEN

The 1980 Depository Institution Deregulation and Monetary Control Act (DIDMCA) mandates that Regulation Q be phased out by 1986. With deregulation of interest rate ceilings, the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets. Thus, value‐maximizing bank managers would need to be concerned not only with the internal risk, but also with the external risk in bank portfolio management decisions. Based upon the cash flow version of the capital asset pricing model, this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm.

A Note on Optimal Credit and Pricing Policy under Uncertainty: A Contingent‐Claims Approach

Published: 12/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb02536.x

CHUN H. LAM, ANDREW H. CHEN

THE JOINT DETERMINATION OF PORTFOLIO AND TRANSACTION DEMANDS FOR MONEY

Published: 03/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb00033.x

Andrew H. Y. Chen, Frank C. Jen, Stanley Zionts

Organization Capital and the Cross‐Section of Expected Returns

Published: 02/15/2013   |   DOI: 10.1111/jofi.12034

ANDREA L. EISFELDT, DIMITRIS PAPANIKOLAOU

Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. Hence, both shareholders and key talent have a claim to its cash flows. We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from shareholders' perspective. We find that firms with more organization capital have average returns that are 4.6% higher than firms with less organization capital.

GROWTH OF AMERICAN INTERNATIONAL BANKING: IMPLICATIONS FOR PUBLIC POLICY

Published: 05/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01816.x

LawrenceB. Krause, Andrew F. Brimmer, Frederick R. Dahl

A Survey of Corporate Governance

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04820.x

Andrei Shleifer, Robert W. Vishny

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

Explaining Forward Exchange Bias…Intraday

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04061.x

RICHARD K. LYONS, ANDREW K. ROSE

Intraday interest rates are zero. Consequently, a foreign exchange dealer can short a vulnerable currency in the morning, close this position in the afternoon, and never face an interest cost. This tactic might seem especially attractive in times of fixed‐rate crisis, since it suggests an immunity to the central bank's interest rate defense. In equilibrium, however, buyers of the vulnerable currency must be compensated on average with an intraday capital gain as long as no devaluation occurs. That is, currencies under attack should typically appreciate intraday. Using data on intraday exchange rate changes within the European Monetary System, we find this prediction is borne out.

Reputation Effects in Trading on the New York Stock Exchange

Published: 05/08/2007   |   DOI: 10.1111/j.1540-6261.2007.01235.x

ROBERT BATTALIO, ANDREW ELLUL, ROBERT JENNINGS

Theory suggests that reputations allow nonanonymous markets to attenuate adverse selection in trading. We identify instances in which New York Stock Exchange (NYSE) stocks experience trading floor relocations. Although specialists follow the stocks to their new locations, most brokers do not. We find a discernable increase in liquidity costs around a stock's relocation that is larger for stocks with higher adverse selection and greater broker turnover. We also find that floor brokers relocating with the stock obtain lower trading costs than brokers not moving and brokers beginning trading post‐move. Our results suggest that reputation plays an important role in the NYSE's liquidity provision process.

Diagnostic Expectations and Credit Cycles

Published: 09/26/2017   |   DOI: 10.1111/jofi.12586

PEDRO BORDALO, NICOLA GENNAIOLI, ANDREI SHLEIFER

We present a model of credit cycles arising from diagnostic expectations—a belief formation mechanism based on Kahneman and Tversky's representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, and thus is immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified framework. In our model, credit spreads are excessively volatile, overreact to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.

The Efficient Use of Conditioning Information in Portfolios

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00351

Wayne E. Ferson, Andrew F. Siegel

We study the properties of unconditional minimum‐variance portfolios in the presence of conditioning information. Such portfolios attain the smallest variance for a given mean among all possible portfolios formed using the conditioning information. We provide explicit solutions for n risky assets, either with or without a riskless asset. Our solutions provide insights into portfolio management problems and issues in conditional asset pricing.

Estimating Private Equity Returns from Limited Partner Cash Flows

Published: 05/10/2018   |   DOI: 10.1111/jofi.12688

ANDREW ANG, BINGXU CHEN, WILLIAM N. GOETZMANN, LUDOVIC PHALIPPOU

We introduce a methodology to estimate the historical time series of returns to investment in private equity funds. The approach requires only an unbalanced panel of cash contributions and distributions accruing to limited partners and is robust to sparse data. We decompose private equity returns from 1994 to 2015 into a component due to traded factors and a time‐varying private equity premium not spanned by publicly traded factors. We find cyclicality in private equity returns that differs according to fund type and is consistent with the conjecture that capital market segmentation contributes to private equity returns.

Predictably Unequal? The Effects of Machine Learning on Credit Markets

Published: 10/28/2021   |   DOI: 10.1111/jofi.13090

ANDREAS FUSTER, PAUL GOLDSMITH‐PINKHAM, TARUN RAMADORAI, ANSGAR WALTHER

Innovations in statistical technology in functions including credit‐screening have raised concerns about distributional impacts across categories such as race. Theoretically, distributional effects of better statistical technology can come from greater flexibility to uncover structural relationships or from triangulation of otherwise excluded characteristics. Using data on U.S. mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups, with these changes attributable primarily to greater flexibility.

The October 1979 Change in the U.S. Monetary Regime: Its Impact on the Forecastability of Canadian Interest Rates

Published: 03/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02598.x

JAMES E. PESANDO, ANDRÉ PLOURDE

Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels but also exhibited unprecedented volatility. Using Canadian data, the authors show that anticipated quarterly changes in long‐term rates associated with the rational‐expectations model have remained small during this post‐shift period. The authors examine three sets of recorded forecasts of long‐term interest rates in Canada and note their failure to improve upon the no‐change prediction. The “perverse” relationship between the slope of the yield curve and the subsequent movement in long‐term rates exists in the Canadian data but is of only modest value in a forecasting context. The excess returns on long‐term bonds implicit in the recorded forecasts of the level of interest rates vary sharply, yet there is little evidence that forecasters have identified a predictable component of time‐varying term premia.

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00265

Andrew W. Lo, Harry Mamaysky, Jiang Wang

Technical analysis, also known as “charting,” has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis—the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution—conditioned on specific technical indicators such as head‐and‐shoulders or double bottoms—we find that over the 31‐year sample period, several technical indicators do provide incremental information and may have some practical value.

The Cross‐Section of Volatility and Expected Returns

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00836.x

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.