The Journal of Finance

Understanding Systematic Risk: A High‐Frequency Approach

Published: 03/20/2020   |   DOI: 10.1111/jofi.12898

MARKUS PELGER

Based on a novel high‐frequency data set for a large number of firms, I estimate the time‐varying latent continuous and jump factors that explain individual stock returns. The factors are estimated using principal component analysis applied to a local volatility and jump covariance matrix. I find four stable continuous systematic factors, which can be well approximated by a market, oil, finance, and electricity portfolio, while there is only one stable jump market factor. The exposure of stocks to these risk factors and their explained variation is time‐varying. The four continuous factors carry an intraday risk premium that reverses overnight.

High‐Frequency Trading and Market Performance

Published: 01/23/2020   |   DOI: 10.1111/jofi.12882

MARKUS BALDAUF, JOSHUA MOLLNER

We study the consequences of, and potential policy responses to, high‐frequency trading (HFT) via the tradeoff between liquidity and information production. Faster speeds facilitate HFT, with consequences for this tradeoff: Information production decreases because informed traders have less time to trade before HFTs react, but liquidity (measured by the bid‐ask spread) improves because informational asymmetries decline. HFT also pushes outcomes inside the frontier of this tradeoff. However, outcomes can be restored to the frontier by replacing the limit order book with one of two alternative mechanisms: delaying all orders except cancellations or implementing frequent batch auctions.

Thinking about Prices versus Thinking about Returns in Financial Markets

Published: 08/08/2019   |   DOI: 10.1111/jofi.12835

MARKUS GLASER, ZWETELINA ILIEWA, MARTIN WEBER

Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors think of prices and returns in the same way? We present three studies in which subjects differ in the level of expertise, amount of information, and type of incentive scheme. The results are consistent across all studies: asking subjects to forecast returns as opposed to prices results in higher expectations, whereas showing them return charts rather than price charts results in lower expectations. Experience is not a useful remedy but cognitive reflection mitigates the impact of format changes.

Hedge Funds and the Technology Bubble

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00690.x

MARKUS K. BRUNNERMEIER, STEFAN NAGEL

This paper documents that hedge funds did not exert a correcting force on stock prices during the technology bubble. Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble: Hedge funds captured the upturn, but, by reducing their positions in stocks that were about to decline, avoided much of the downturn. Our findings question the efficient markets notion that rational speculators always stabilize prices. They are consistent with models in which rational investors may prefer to ride bubbles because of predictable investor sentiment and limits to arbitrage.

The Maturity Rat Race

Published: 11/26/2012   |   DOI: 10.1111/jofi.12005

MARKUS K. BRUNNERMEIER, MARTIN OEHMKE

Why do some firms, especially financial institutions, finance themselves so short‐term? We show that extreme reliance on short‐term financing may be the outcome of a maturity rat race: a borrower may have an incentive to shorten the maturity of an individual creditor's debt contract because this dilutes other creditors. In response, other creditors opt for shorter maturity contracts as well. This dynamic toward short maturities is present whenever interim information is mostly about the probability of default rather than the recovery in default. For borrowers that cannot commit to a maturity structure, equilibrium financing is inefficiently short‐term.

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.

Procyclical Capital Regulation and Lending

Published: 10/13/2015   |   DOI: 10.1111/jofi.12368

MARKUS BEHN, RAINER HASELMANN, PAUL WACHTEL

We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.

The Limits of Model‐Based Regulation

Published: 03/27/2022   |   DOI: 10.1111/jofi.13124

MARKUS BEHN, RAINER HASELMANN, VIKRANT VIG

Using loan‐level data from Germany, we investigate how the introduction of model‐based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks “optimized” model‐based regulation to lower their capital requirements. Banks systematically underreported risk, with underreporting more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.

Opening the Black Box: Internal Capital Markets and Managerial Power

Published: 03/19/2013   |   DOI: 10.1111/jofi.12046

MARKUS GLASER, FLORENCIO LOPEZ‐DE‐SILANES, ZACHARIAS SAUTNER

We analyze the internal capital markets of a multinational conglomerate, using a unique panel data set of planned and actual allocations to business units and a survey of unit CEOs. Following cash windfalls, more powerful managers obtain larger allocations and increase investment substantially more than their less connected peers. We identify cash windfalls as a source of misallocation of capital, as more powerful managers overinvest and their units exhibit lower ex post performance and productivity. These findings contribute to our understanding of frictions in resource allocation within firms and point to an important channel through which power may lead to inefficiencies.

Flotation Cost Allowance in Rate of Return Regulation: A Reply

Published: 09/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02305.x

ENRIQUE R. ARZAC, MATITYAHU MARCUS

The Economics of Deferral and Clawback Requirements

Published: 05/28/2022   |   DOI: 10.1111/jofi.13160

FLORIAN HOFFMANN, ROMAN INDERST, MARCUS OPP

We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting incentive compensation of material risk‐takers in the financial sector. Moderate deferral requirements have a robustly positive effect on risk‐management effort only if the bank manager's outside option is sufficiently high; otherwise, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. Our normative analysis characterizes whether and how deferral and clawback requirements should supplement capital regulation as part of the optimal policy mix.

THE EFFECTIVENESS OF CANADIAN FISCAL POLICY

Published: 12/01/1952   |   DOI: 10.1111/j.1540-6261.1952.tb02483.x

Edward Marcus

INFLATION AND GROWTH: AN ASSET PREFERENCE ANALYSIS, WITH A CASE STUDY OF THE CHILEAN INFLATION*

Published: 09/01/1963   |   DOI: 10.1111/j.1540-6261.1963.tb02854.x

Markos Mamalakis

THE OUTLOOK FOR MONEY RATES*

Published: 05/01/1956   |   DOI: 10.1111/j.1540-6261.1956.tb00703.x

Marcus Nadler

Earnings and Dividend Announcements: Is There a Corroboration Effect?

Published: 09/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03894.x

ALEX KANE, YOUNG KI LEE, ALAN MARCUS

We examine abnormal stock returns surrounding contemporaneous earnings and dividend announcements in order to determine whether investors evaluate the two announcements in relation to each other. We find that there is a statistically significant interaction effect. The abnormal return corresponding to any earnings or dividend announcement depends upon the value of the other announcement. This evidence suggests the existence of a corroborative relationship between the two announcements. Investors give more credence to unanticipated dividend increases or decreases when earnings are also above or below expectations, and vice versa.

Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash

Published: 09/17/2023   |   DOI: 10.1111/jofi.13280

MARIUS A. K. RING

Using the dispersion in stock returns during the financial crisis as a source of exogenous variation in the wealth of Norwegian entrepreneurs who held listed stocks, I show that adverse shocks to the wealth of business owners had large effects on their firms' financing, employment, and investment. The effects on investment and employment are driven by young firms, that obtain differentially less bank financing following an owner wealth shock. The effects on employment operate primarily through reduced hiring. My findings highlight that equity‐financing frictions and the procyclicality of entrepreneurial wealth are important channels that can amplify economic shocks.

Spinoff/Terminations and the Value of Pension Insurance

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05018.x

ALAN J. MARCUS

This paper derives the value of Pension Benefit Guarantee Corporation (PBGC) pension insurance under two scenarios of interest. The first allows for voluntary plan termination, which appears to be legal under current statutes. In the second scenario, termination is prohibited unless the firm is bankrupt. Empirical estimates of PBGC liabilities are calculated. These show that prospective PBGC liabilities greatly exceed current reserves for plan terminations, that even under a bankruptcy‐only termination rule, PBGC liabilities still would be quite sensitive to discretionary funding policy, and that the increasingly common practice of pension spinoff/terminations, substantially increases the present value of the PBGC's contingent liabilities.

Flotation Cost Allowance in Rate of Return Regulation: A Note

Published: 12/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb01087.x

ENRIQUE R. ARZAC, MATITYAHU MARCUS

DISCUSSION

Published: 05/01/1971   |   DOI: 10.1111/j.1540-6261.1971.tb00909.x

Marcus Alexis

How Big is the Tax Advantage to Debt?

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03678.x

ALEX KANE, ALAN J. MARCUS, ROBERT L. McDONALD

This paper uses an option valuation model of the firm to answer the question, “What magnitude tax advantage to debt is consistent with the range of observed corporate debt ratios?” We incorporate into the model differential personal tax rates on capital gains and ordinary income. We conclude that variations in the magnitude of bankruptcy costs across firms can not by itself account for the simultaneous existence of levered and unlevered firms. When it is possible for the value of the underlying assets to jump discretely to zero, differences across firms in the probability of this jump can account for the simultaneous existence of levered and unlevered firms. Moreover, if the tax advantage to debt is small, the annual rate of return advantage offered by optimal leverage may be so small as to make the firm indifferent about debt policy over a wide range of debt‐to‐firm value ratios.