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.
AFA members can log in to view full-text articles below.
View past issues
Search the Journal of Finance:
Search results: 12.
Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00345
Hee‐Joon Ahn, Kee‐Hong Bae, Kalok Chan
We investigate the role of limit orders in the liquidity provision in a pure order‐driven market. Results show that market depth rises subsequent to an increase in transitory volatility, and transitory volatility declines subsequent to an increase in market depth. We also examine how transitory volatility affects the mix between limit orders and market orders. When transitory volatility arises from the ask (bid) side, investors will submit more limit sell (buy) orders than market sell (buy) orders. This result is consistent with the existence of limit‐order traders who enter the market and place orders when liquidity is needed.
DIRECT VS. FISCAL‐MONETARY CONTROLS: A CRITIQUE1
Published: 03/01/1950 | DOI: 10.1111/j.1540-6261.1950.tb02469.x
Everett E. Hagen
Efficiently Inefficient Markets for Assets and Asset Management
Published: 05/11/2018 | DOI: 10.1111/jofi.12696
NICOLAE GÂRLEANU, LASSE HEJE PEDERSEN
We consider a model where investors can invest directly or search for an asset manager, information about assets is costly, and managers charge an endogenous fee. The efficiency of asset prices is linked to the efficiency of the asset management market: if investors can find managers more easily, more money is allocated to active management, fees are lower, and asset prices are more efficient. Informed managers outperform after fees, uninformed managers underperform, while the average manager's performance depends on the number of “noise allocators.” Small investors should remain uninformed, but large and sophisticated investors benefit from searching for informed active managers since their search cost is low relative to capital. Hence, managers with larger and more sophisticated investors are expected to outperform.
Dynamic Trading with Predictable Returns and Transaction Costs
Published: 07/26/2013 | DOI: 10.1111/jofi.12080
NICOLAE GÂRLEANU, LASSE HEJE PEDERSEN
We derive a closed‐form optimal dynamic portfolio policy when trading is costly and security returns are predictable by signals with different mean‐reversion speeds. The optimal strategy is characterized by two principles: (1) aim in front of the target, and (2) trade partially toward the current aim. Specifically, the optimal updated portfolio is a linear combination of the existing portfolio and an “aim portfolio,” which is a weighted average of the current Markowitz portfolio (the moving target) and the expected Markowitz portfolios on all future dates (where the target is moving). Intuitively, predictors with slower mean‐reversion (alpha decay) get more weight in the aim portfolio. We implement the optimal strategy for commodity futures and find superior net returns relative to more naive benchmarks.
Determinants of Contract Choice: The Use of Warrants to Compensate Underwriters of Seasoned Equity Issues
Published: 03/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05213.x
CHEE K. NG, RICHARD L. SMITH
The issuer's decision to include warrants as compensation to underwriters is studied for a sample of 1,991 negotiated firm commitment issues of seasoned equity. Using a two‐stage logit model to correct for self‐selection bias, we find direct evidence that warrant compensation functions as a bond, substituting for reputational capital and enabling the underwriter to certify the issue price. To a lesser degree, the decision also is affected by regulations on underwriter compensation and on the use of underwriter warrants. Issuers' decisions are consistent with an objective of minimizing total underwriting cost, including cash compensation, warrants, and underpricing.
Predatory Trading
Published: 08/12/2005 | DOI: 10.1111/j.1540-6261.2005.00781.x
MARKUS K. BRUNNERMEIER, LASSE HEJE PEDERSEN
This paper studies predatory trading, trading that induces and/or exploits the need of other investors to reduce their positions. We show that if one trader needs to sell, others also sell and subsequently buy back the asset. This leads to price overshooting and a reduced liquidation value for the distressed trader. Hence, the market is illiquid when liquidity is most needed. Further, a trader profits from triggering another trader's crisis, and the crisis can spill over across traders and across markets.
Principal Portfolios
Published: 12/14/2022 | DOI: 10.1111/jofi.13199
BRYAN KELLY, SEMYON MALAMUD, LASSE HEJE PEDERSEN
We propose a new asset pricing framework in which all securities' signals predict each individual return. While the literature focuses on securities' own‐signal predictability, assuming equal strength across securities, our framework includes cross‐predictability—leading to three main results. First, we derive the optimal strategy in closed form. It consists of eigenvectors of a “prediction matrix,” which we call “principal portfolios.” Second, we decompose the problem into alpha and beta, yielding optimal strategies with, respectively, zero and positive factor exposure. Third, we provide a new test of asset pricing models. Empirically, principal portfolios deliver significant out‐of‐sample alphas to standard factors in several data sets.
Is There a Replication Crisis in Finance?
Published: 05/26/2023 | DOI: 10.1111/jofi.13249
THEIS INGERSLEV JENSEN, BRYAN KELLY, LASSE HEJE PEDERSEN
Several papers argue that financial economics faces a replication crisis because the majority of studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions. The majority of asset pricing factors (i) can be replicated; (ii) can be clustered into 13 themes, the majority of which are significant parts of the tangency portfolio; (iii) work out‐of‐sample in a new large data set covering 93 countries; and (iv) have evidence that is strengthened (not weakened) by the large number of observed factors.
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.
Modeling Sovereign Yield Spreads: A Case Study of Russian Debt
Published: 02/12/2003 | DOI: 10.1111/1540-6261.00520
Darrell Duffie, Lasse Heje Pedersen, Kenneth J. Singleton
We construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring, and allows for compensation for illiquidity. Using a new and relatively efficient method, we estimate the model using Russian dollar‐denominated bonds. We consider the determinants of the Russian yield spread, the yield differential across different Russian bonds, and the implications for market integration, relative liquidity, relative expected recovery rates, and implied expectations of different default scenarios.
Evidence on the Determinants of Credit Terms Used in Interfirm Trade
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00138
Chee K. Ng, Janet Kiholm Smith, Richard L. Smith
Trade credit is created whenever a supplier offers terms that allow the buyer to delay payment. In this paper we document the rich variation in interfirm credit terms and credit policies across industries. We examine empirically the firm's basic credit policy choices: whether to extend credit or to require cash payment; and, if credit is extended, whether to adopt simple net terms or terms with discounts for prompt payment. We also examine determinants of variations in two‐part terms. Results are supportive primarily of theories that explain credit terms as contractual solutions to information problems concerning product quality and buyer creditworthiness.
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.