The Journal of Finance

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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Unspanned Stochastic Volatility: Evidence from Hedging Interest Rate Derivatives

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00838.x

HAITAO LI, FENG ZHAO

Most existing dynamic term structure models assume that interest rate derivatives are redundant securities and can be perfectly hedged using solely bonds. We find that the quadratic term structure models have serious difficulties in hedging caps and cap straddles, even though they capture bond yields well. Furthermore, at‐the‐money straddle hedging errors are highly correlated with cap‐implied volatilities and can explain a large fraction of hedging errors of all caps and straddles across moneyness and maturities. Our results strongly suggest the existence of systematic unspanned factors related to stochastic volatility in interest rate derivatives markets.


Survival Bias and the Equity Premium Puzzle

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00486

Haitao Li, Yuewu Xu

Previous authors have raised the concern that there could be serious survival bias in the observed U.S. equity premium. Contrary to conventional wisdom, we argue that the survival bias in the U.S. data is unlikely to be significant. To reach this conclusion, we introduce a general framework for modeling survival and derive a mathematical relationship between the ex ante survival probability and the average survival bias. This relationship reveals the fundamental difficulty facing the survival argument: High survival bias requires an ex ante probability of market failure, which seems unrealistically high given the history of world financial markets.


Interest Rate Caps “Smile” Too! But Can the LIBOR Market Models Capture the Smile?

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2007.01209.x

ROBERT JARROW, HAITAO LI, FENG ZHAO

Using 3 years of interest rate caps price data, we provide a comprehensive documentation of volatility smiles in the caps market. To capture the volatility smiles, we develop a multifactor term structure model with stochastic volatility and jumps that yields a closed‐form formula for cap prices. We show that although a three‐factor stochastic volatility model can price at‐the‐money caps well, significant negative jumps in interest rates are needed to capture the smile. The volatility smile contains information that is not available using only at‐the‐money caps, and this information is important for understanding term structure models.


Are Liquidity and Information Risks Priced in the Treasury Bond Market?

Published: 01/23/2009   |   DOI: 10.1111/j.1540-6261.2008.01439.x

HAITAO LI, JUNBO WANG, CHUNCHI WU, YAN HE

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.


Regulation Fair Disclosure and Earnings Information: Market, Analyst, and Corporate Responses

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00613.x

Warren Bailey, Haitao Li, Connie X. Mao, Rui Zhong

With the adoption of Regulation Fair Disclosure (Reg FD), market behavior around earnings releases displays no significant change in return volatility (after controlling for decimalization of stock trading) but significant increases in trading volume due to difference in opinion. Analyst forecast dispersion increases, and increases in other measures of disagreement and difference of opinion suggest greater difficulty in forming forecasts beyond the current quarter. Corporations increase the quantity of voluntary disclosures, but only for current quarter earnings. Thus, Reg FD seems to increase the quantity of information available to the public while imposing greater demands on investment professionals.