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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Depositary Receipts, Country Funds, and the Peso Crash: The Intraday Evidence
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00303
Warren Bailey, Kalok Chan, Y. Peter Chung
We study the intraday impact of exchange rate news on emerging market American Depositary Receipts (ADRs) and closed‐end country funds during the 1994 Mexican peso crisis. Peso exchange‐rate changes affect prices and trading volumes of Latin American equities, and some closed‐end fund behavior is consistent with “noise trader” theories of small investors. However, there is no evidence that peso depreciation triggers a significant sell‐off of non‐Mexican securities or that other non‐Mexican trading patterns change at times of high peso news flow. Thus, the “Tequila Effect” is largely confined to price changes.
The Long‐Lasting Momentum in Weekly Returns
Published: 01/10/2008 | DOI: 10.1111/j.1540-6261.2008.01320.x
ROBERTO C. GUTIERREZ, ERIC K. KELLEY
Reversal is the current stylized fact of weekly returns. However, we find that an opposing and long‐lasting continuation in returns follows the well‐documented brief reversal. These subsequent momentum profits are strong enough to offset the initial reversal and to produce a significant momentum effect over the full year following portfolio formation. Thus, ex post, extreme weekly returns are not too extreme. Our findings extend to weekly price movements with and without public news. In addition, there is no relation between news uncertainty and the momentum in 1‐week returns.
Testing the Expectations Hypothesis on the Term Structure of Volatilities in Foreign Exchange Options
Published: 06/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb04794.x
JOSÉ MANUEL CAMPA, P. H. KEVIN CHANG
This article tests the expectations hypothesis in the term structure of volatilities in foreign exchange options. In particular, it addresses whether long‐dated volatility quotes are consistent with expected future short‐dated volatility quotes, assuming rational expectations. For options observed daily from December 1, 1989 to August 31, 1992 on dollar exchange rates against the pound, mark, yen, and Swiss franc, we are unable to reject the expectations hypothesis in the great majority of cases. The current spread between long‐ and short‐dated volatility rates proves to be a significant predictor of the direction of future short‐dated rates.
Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00415
Anil K. Kashyap, Raghuram Rajan, Jeremy C. Stein
What ties together the traditional commercial banking activities of deposit‐taking and lending? We argue that since banks often lend via commitments, their lending and deposit‐taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid‐asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically.
OPERATING ASPECTS OF REVENUE BOND FINANCING
Published: 05/01/1955 | DOI: 10.1111/j.1540-6261.1955.tb01267.x
C. J. Kushell
Why Option Prices Lag Stock Prices: A Trading‐based Explanation
Published: 12/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb05136.x
KALOK CHAN, Y. PETER CHUNG, HERB JOHNSON
While many studies find that option prices lead stock prices, Stephan and Whaley (1990) find that stocks lead options. We find no evidence that options, even deep out‐of‐the‐money options, lead stocks. After confirming Stephan and Whaley's results, we show their results can be explained as spurious leads induced by infrequent trading of options. We show that the stock lead disappears when the average of the bid and ask prices is used instead of transaction prices. Hence, we find no evidence of arbitrage opportunities associated with the stock lead.
It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans
Published: 04/15/2016 | DOI: 10.1111/jofi.12411
VERONIKA K. POOL, CLEMENS SIALM, IRINA STEFANESCU
This paper investigates whether mutual fund families acting as service providers in 401(k) plans display favoritism toward their own affiliated funds. Using a hand‐collected data set on the menu of investment options offered to plan participants, we show that fund deletions and additions are less sensitive to prior performance for affiliated than unaffiliated funds. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, we find that the subsequent performance of poorly performing affiliated funds indicates that this favoritism is not information driven.
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.
Risky Debt, Investment Incentives, and Reputation in a Sequential Equilibrium
Published: 07/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb05012.x
KOSE JOHN, DAVID C. NACHMAN
The agency relationship of corporate insiders and bondholders is modeled as a dynamic game with asymmetric information. The incentive effect of risky debt on the investment policy of a levered firm is studied in this context. In a sequential equilibrium of the model, a concept of reputation arises endogenously resulting in a partial resolution of the classic agency problem of underinvestment. The incentive of the firm to underinvest is curtailed by anticipation of favorable rating of its bonds by the market. This anticipated pricing of debt is consistent with rational expectations pricing by a competitive bond market and is realized in equilibrium. Some empirical implications of the model for bond rating, debt covenants, and bond price response to investment announcements are explored.
Individualism and Momentum around the World
Published: 01/13/2010 | DOI: 10.1111/j.1540-6261.2009.01532.x
ANDY C.W. CHUI, SHERIDAN TITMAN, K.C. JOHN WEI
This paper examines how cultural differences influence the returns of momentum strategies. Cross‐country cultural differences are measured with an individualism index developed by Hofstede (2001), which is related to overconfidence and self‐attribution bias. We find that individualism is positively associated with trading volume and volatility, as well as to the magnitude of momentum profits. Momentum profits are also positively related to analyst forecast dispersion, transaction costs, and the familiarity of the market to foreigners, and negatively related to firm size and volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits.
THE ADJUSTMENT OF BETA FORECASTS
Published: 09/01/1975 | DOI: 10.1111/j.1540-6261.1975.tb01027.x
Robert C. Klemkosky, John D. Martin
Why Do Money Fund Managers Voluntarily Waive Their Fees?
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00358
Susan E. K. Christoffersen
Over half of money fund managers voluntarily waive fees they have a contractual right to claim. Moreover, as a consequence of fee waivers, funds on average collect one half of reported expense ratios. Variation in fee waivers is significant and relates to differences in relative performance. Both low‐performing retail and institutional funds waive fees to improve their net performance. More interestingly, high‐performing retail, but not institutional, funds use fee waivers to strategically adjust net performance to increase expected fund flows. Despite fund flow incentives, high‐performing institutional funds do not waive more because they cannot significantly improve their relative performance.
Fundamentals and Stock Returns in Japan
Published: 12/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04642.x
LOUIS K. C. CHAN, YASUSHI HAMAO, JOSEF LAKONISHOK
This paper relates cross‐sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high‐quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. Our findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.