The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Published: 03/01/1959 | DOI: 10.1111/j.1540-6261.1959.tb00487.x
Charles B. Franklin, Marshall R. Colberg
Predictable Stock Returns: The Role of Small Sample Bias
Published: 06/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04731.x
CHARLES R. NELSON, MYUNG J. KIM
Predictive regressions are subject to two small sample biases: the coefficient estimate is biased if the predictor is endogenous, and asymptotic standard errors in the case of overlapping periods are biased downward. Both biases work in the direction of making t‐ratios too large so that standard inference may indicate predictability even if none is present. Using annual returns since 1872 and monthly returns since 1927 we estimate empirical distributions by randomizing residuals in the VAR representation of the variables. The estimated biases are large enough to affect inference in practice, and should be accounted for when studying predictability.
When It's Not The Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb04818.x
CHRISTOPHER G. LAMOUREUX, CHARLES R. SCHNITZLEIN
We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large—unlike in models with risk‐neutral, competitive dealers. However, when we allow traders to participate in the search market, dealer profits are close to zero. Dealers compete more aggressively with the alternative trading avenue than with each other. There is no evidence that price discovery is less efficient when the specialists are not the only game in town.
Which Shorts Are Informed?
Published: 04/01/2008 | DOI: 10.1111/j.1540-6261.2008.01324.x
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.
Do Banks Provide Financial Slack?
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00464
Charles J. Hadlock, Christopher M. James
We study the decision to choose bank debt rather than public securities in a firm's marginal financing choice. Using a sample of 500 firms over the 1980 to 1993 time period, we find that firms are relatively more likely to choose bank loans when variables that measure asymmetric information problems are elevated. The sensitivity of the likelihood of choosing bank debt to information problems is greater for firms with no public debt outstanding. These results are consistent with the hypothesis that banks help alleviate asymmetric information problems and that firms weigh these information benefits against a wide range of contracting costs when choosing bank financing.
Empirical Performance of Alternative Option Pricing Models
Published: 04/18/2012 | DOI: 10.1111/j.1540-6261.1997.tb02749.x
Gurdip Bakshi, Charles Cao, Zhiwu Chen
Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. We fill this gap by first deriving an option model that allows volatility, interest rates and jumps to be stochastic. Using S&P 500 options, we examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time‐series data, (2) out‐of‐sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance.
The Relative Termination Experience of Adjustable to Fixed‐Rate Mortgages
Published: 12/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb03737.x
DONALD F. CUNNINGHAM, CHARLES A. CAPONE
Our study uses a multinomial logit model to analyze the concurrent termination experience of adjustable‐rate and fixed‐rate mortgages. A new set of ARM‐specific interactive determinants expands the conventional FRM specification to isolate the unique termination behavior of ARMs. We find that expected rate adjustments and large lifetime caps are positively related to ARM termination probabilities while long adjustment frequencies are inversely related. Caps, both periodic and lifetime, have a secondary, inverse effect on termination probabilities when interest‐rate movements exceed cap limits. The model also shows that interest‐rate expectations affect FRM terminations more strongly than ARM terminations.
Do Portfolio Manager Contracts Contract Portfolio Management?
Published: 06/13/2019 | DOI: 10.1111/jofi.12823
JUNG HOON LEE, CHARLES TRZCINKA, SHYAM VENKATESAN
Most mutual fund managers have performance‐based contracts. Our theory predicts that mutual fund managers with asymmetric contracts and mid‐year performance close to their announced benchmark increase their portfolio risk in the second part of the year. As predicted by our theory, performance deviation from the benchmark decreases risk‐shifting only for managers with performance contracts. Deviation from the benchmark dominates incentives from the flow‐performance relation, suggesting that risk‐shifting is motivated more by management contracts than by a tournament to capture flows.
Sensitivity of Multivariate Tests of the Capital Asset‐Pricing Model to the Return Measurement Interval
Published: 09/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04767.x
PUNEET HANDA, S. P. KOTHARI, CHARLES WASLEY
The capital asset‐pricing model's (CAPM) primary empirical implication is a positively sloped linear relation between a security's expected rate of return and its relative risk (beta). Recent research indicates that inferences about the risk‐return relation are sensitive to the choice of the return measurement interval. We perform multivariate tests of the Sharpe‐Lintner CAPM using monthly and annual returns on market‐value‐ranked portfolios. The CAPM is rejected using monthly returns, a result consistent with previous research. In contrast, we fail to reject the CAPM when annual holding period returns are used.
Measuring Liquidity Mismatch in the Banking Sector
Published: 10/10/2017 | DOI: 10.1111/jofi.12591
JENNIE BAI, ARVIND KRISHNAMURTHY, CHARLES‐HENRI WEYMULLER
This paper constructs a liquidity mismatch index (LMI) to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities, for 2,882 bank holding companies over 2002 to 2014. The aggregate LMI decreases from +$4 trillion precrisis to −$6 trillion in 2008. We conduct an LMI stress test revealing the fragility of the banking system in early 2007. Moreover, LMI predicts a bank's stock market crash probability and borrowing decisions from the government during the financial crisis. The LMI is therefore informative about both individual bank liquidity and the liquidity risk of the entire banking system.
Inferring Trade Direction from Intraday Data
Published: 06/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb02683.x
CHARLES M. C. LEE, MARK J. READY
This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. We document two potential problems with quote‐based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. We then propose and test relatively simple procedures for improving trade classifications.
Corporate Equity Ownership and the Governance of Product Market Relationships
Published: 05/16/2006 | DOI: 10.1111/j.1540-6261.2006.00871.x
C. EDWARD FEE, CHARLES J. HADLOCK, SHAWN THOMAS
We assemble a sample of over 10,000 customer–supplier relationships and determine whether the customer owns equity in the supplier. We find that factors related to both contractual incompleteness and financial market frictions are important in the decision of a customer firm to take an equity stake in their supplier. Evidence on the variation in the size of observed equity positions suggests that there are limits to the size of optimal ownership stakes in many relationships. Finally, we find that relationships accompanied by equity ownership last significantly longer than other relationships, suggesting that ownership aids in bonding trading parties together.
Does Algorithmic Trading Improve Liquidity?
Published: 01/06/2011 | DOI: 10.1111/j.1540-6261.2010.01624.x
TERRENCE HENDERSHOTT, CHARLES M. JONES, ALBERT J. MENKVELD
Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade‐related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.
What is the Intrinsic Value of the Dow?
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00164
Charles M. C. Lee, James Myers, Bhaskaran Swaminathan
We model the time‐series relation between price and intrinsic value as a cointegrated system, so that price and value are long‐term convergent. In this framework, we compare the performance of alternative estimates of intrinsic value for the Dow 30 stocks. During 1963–1996, traditional market multiples (e.g., B/P, E/P, and D/P ratios) have little predictive power. However, a V/P ratio, where V is based on a residual income valuation model, has statistically reliable predictive power. Further analysis shows time‐varying interest rates and analyst forecasts are important to the success of V. Alternative forecast horizons and risk premia are less important.
Tracking Retail Investor Activity
Published: 04/28/2021 | DOI: 10.1111/jofi.13033
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.