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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Equity Volatility and Corporate Bond Yields
Published: 11/07/2003 | DOI: 10.1046/j.1540-6261.2003.00607.x
John Y. Campbell, Glen B. Taksler
This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm‐level volatility can explain as much cross‐sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.
Order Arrival, Quote Behavior, and the Return‐Generating Process
Published: 09/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb03926.x
JOEL HASBROUCK, THOMAS S. Y. HO
This paper establishes three empirical results. We find positive autocorrelation in actual intra‐day stock returns, in intra‐day returns computed from quote midpoints, and in the arrival of buy and sell orders. We present a model of return generation that incorporates these features via lagged adjustment of the limit‐order price and positive dependence in bid and ask transactions. The return model is observationally equivalent to an ARMA process, which is consistent with the observed return behavior.
Employee Stock Options and Investment
Published: 05/23/2011 | DOI: 10.1111/j.1540-6261.2011.01657.x
ILONA BABENKO, MICHAEL LEMMON, YURI TSERLUKEVICH
Exercises of employee stock options generate substantial cash inflows to the firm. These cash inflows substitute for costly external finance in those states of the world in which the demand for investment is high. Using the fact that the proceeds from option exercises exhibit a distinct nonlinearity around the point where options fall out of the money, we estimate that firms increase investment by $0.34 for each dollar received from the exercise of stock options. Firms that face higher external financing costs allocate more of the proceeds from option exercises to investment.
The Fragility of Market Risk Insurance
Published: 02/11/2022 | DOI: 10.1111/jofi.13118
RALPH S.J. KOIJEN, MOTOHIRO YOGO
Variable annuities, which package mutual funds with minimum return guarantees over long horizons, accounted for $1.5 trillion or 35% of U.S. life insurer liabilities in 2015. Sales decreased and fees increased during the global financial crisis, and insurers made guarantees less generous or stopped offering guarantees to reduce risk exposure. These effects persist in the low‐interest rate environment after the global financial crisis, and variable annuity insurers suffered large equity drawdowns during the COVID‐19 crisis. We develop and estimate a model of insurance markets in which financial frictions and market power determine pricing, contract characteristics, and the degree of market completeness.
Effects of Capital Gains Taxation on Life‐Cycle Investment and Portfolio Management
Published: 07/01/1987 | DOI: 10.1111/j.1540-6261.1987.tb04583.x
YVES BALCER, KENNETH L. JUDD
We examine the impact of capital income taxation, both accrual forms of taxation and taxation of realized capital gains, on total savings and the demand for corporate financial instruments. We find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system. We also find that the two taxes will have substantially different effects on saving and consumption behavior, making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate.
Asset Returns, Discount Rate Changes, and Market Efficiency
Published: 09/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb02368.x
MICHAEL SMIRLOCK, JESS YAWITZ
The primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets. The crux of this reconciliation is the distinction between “technical” discount rate changes that are endogenous and “nontechnical” changes which contain some informative policy implications. In essence, we attempt to separate expected discount rate changes from unexpected changes, or equivalently, the expected component of discount rate changes from the unexpected component. If markets are efficient, the former should have no announcement effects while the latter may be associated with an announcement effect. Accordingly, the focus of the empirical analysis is on the interaction between discount rate exogeneity, the specific monetary policy regime, and accouncement effects. In addition, we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency.
Liquidity, Maturity, and the Yields on U.S. Treasury Securities
Published: 09/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04623.x
YAKOV AMIHUD, HAIM MENDELSON
The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.
Volatility, Efficiency, and Trading: Evidence from the Japanese Stock Market
Published: 12/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04643.x
YAKOV AMIHUD, HAIM MENDELSON
We study the joint effect of the trading mechanism and the time at which transactions take place on the behavior of stock returns using data from Japan. The Tokyo Stock Exchange employs a periodic clearing procedure twice a day, at the opening of both the morning and the afternoon sessions. This enables us to discern the effect of the clearing mechanism from the effect of the overnight trading halt. While the periodic clearing at the beginning of the trading day is noisy and inefficient, the midday clearing transaction appears to be no worse than the two closing transactions.
The Price of Higher Order Catastrophe Insurance: The Case of VIX Options
Published: 09/27/2022 | DOI: 10.1111/jofi.13182
BJØRN ERAKER, AOXIANG YANG
We develop a tractable equilibrium pricing model to explain observed characteristics in equity returns, VIX futures, S&P 500 options, and VIX options data based on affine jump‐diffusive state dynamics and representative agents endowed with Duffie‐Epstein recursive preferences. Our calibrated model replicates consumption, dividends, and asset market data, including VIX futures returns, the average implied volatilities in SPX and VIX options, and first‐ and higher‐order moments of VIX options returns. We document a time variation in the shape of VIX‐option‐implied volatility and a time‐varying hedging relationship between VIX and SPX options that our model both captures.
General Properties of Option Prices
Published: 12/01/1996 | DOI: 10.1111/j.1540-6261.1996.tb05218.x
YAACOV Z. BERGMAN, BRUCE D. GRUNDY, ZVI WIENER
When the underlying price process is a one‐dimensional diffusion, as well as in certain restricted stochastic volatility settings, a contingent claim's delta is bounded by the infimum and supremum of its delta at maturity. Further, if the claim's payoff is convex (concave), the claim's price is a convex (concave) function of the underlying asset's value. However, when volatility is less specialized, or when the underlying process is discontinuous or non‐Markovian, a call's price can be a decreasing, concave function of the underlying price over some range, increasing with the passage of time, and decreasing in the level of interest rates.
Estimation and Test of a Simple Model of Intertemporal Capital Asset Pricing
Published: 11/27/2005 | DOI: 10.1111/j.1540-6261.2004.00678.x
Michael J. Brennan, Ashley W. Wang, Yihong Xia
A simple valuation model with time‐varying investment opportunities is developed and estimated. The model assumes that the investment opportunity set is completely described by the real interest rate and the maximum Sharpe ratio, which follow correlated Ornstein–Uhlenbeck processes. The model parameters and time series of the state variables are estimated using U.S. Treasury bond yields and expected inflation from January 1952 to December 2000, and as predicted, the estimated maximum Sharpe ratio is related to the equity premium. In cross‐sectional asset‐pricing tests, both state variables have significant risk premia, which is consistent with Merton's ICAPM.
Beliefs Aggregation and Return Predictability
Published: 12/10/2022 | DOI: 10.1111/jofi.13195
ALBERT S. KYLE, ANNA A. OBIZHAEVA, YAJUN WANG
We study return predictability using a model of speculative trading among competitive traders who agree to disagree about the precision of private information. Although traders apply Bayes' Law consistently, returns are predictable. In addition to trading on long‐term fundamental value, traders also trade on perceived short‐term opportunities arising from foreseen future disagreement, as in a Keynesian beauty contest. Contradicting conventional wisdom, this short‐term speculation dampens price fluctuations and generates time‐series momentum. Model calibration shows quantitatively realistic patterns of return dynamics. Consistent with empirical evidence, our model predicts more pronounced momentum for stocks with higher trading volume.
The Pollution Premium
Published: 02/27/2023 | DOI: 10.1111/jofi.13217
PO‐HSUAN HSU, KAI LI, CHI‐YANG TSOU
This paper studies the asset pricing implications of industrial pollution. A long‐short portfolio constructed from firms with high versus low toxic emission intensity within an industry generates an average annual return of 4.42%, which remains significant after controlling for risk factors. This pollution premium cannot be explained by existing systematic risks, investor preferences, market sentiment, political connections, or corporate governance. We propose and model a new systematic risk related to environmental policy uncertainty. We use the growth in environmental litigation penalties to measure regime change risk and find that it helps price the cross section of emission portfolios' returns.
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.