The Journal of Finance

A Macrofinance View of U.S. Sovereign CDS Premiums

Published: 05/20/2020   |   DOI: 10.1111/jofi.12948

MIKHAIL CHERNOV, LUKAS SCHMID, ANDRES SCHNEIDER

Premiums on U.S. sovereign credit default swaps (CDS) have risen to persistently elevated levels since the financial crisis. We examine whether these premiums reflect the probability of a fiscal default—a state in which a balanced budget can no longer be restored by raising taxes or eroding the real value of debt by increasing inflation. We develop an equilibrium macrofinance model in which the fiscal and monetary policy stances jointly endogenously determine nominal debt, taxes, inflation, and growth. We show that the CDS premiums reflect the endogenous risk‐adjusted probabilities of fiscal default. The calibrated model is consistent with elevated levels of CDS premiums but leaves dynamic implications quantitatively unresolved.

Creating Controversy in Proxy Voting Advice

Published: 03/16/2025   |   DOI: 10.1111/jofi.13438

ANDREY MALENKO, NADYA MALENKO, CHESTER SPATT

We analyze how a profit‐maximizing proxy advisor designs vote recommendations and research reports. The advisor benefits from producing informative, unbiased reports, but only partially informative recommendations, biased against the a priori likely alternative. Such recommendations induce close votes, increasing controversy and thereby the relevance and value of proxy advice. Our results suggest shifting from an exclusive emphasis on recommendations, highlighting the importance of both reports and recommendations in proxy advisors' information provision. They rationalize the one‐size‐fits‐all approach and help reinterpret empirical patterns of voting behavior, suggesting that proxy advisors' recommendations may not be a suitable benchmark for evaluating shareholders' votes.

The October 1979 Change in the U.S. Monetary Regime: Its Impact on the Forecastability of Canadian Interest Rates

Published: 03/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02598.x

JAMES E. PESANDO, ANDRÉ PLOURDE

Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels but also exhibited unprecedented volatility. Using Canadian data, the authors show that anticipated quarterly changes in long‐term rates associated with the rational‐expectations model have remained small during this post‐shift period. The authors examine three sets of recorded forecasts of long‐term interest rates in Canada and note their failure to improve upon the no‐change prediction. The “perverse” relationship between the slope of the yield curve and the subsequent movement in long‐term rates exists in the Canadian data but is of only modest value in a forecasting context. The excess returns on long‐term bonds implicit in the recorded forecasts of the level of interest rates vary sharply, yet there is little evidence that forecasters have identified a predictable component of time‐varying term premia.

A Survey of Corporate Governance

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb04820.x

Andrei Shleifer, Robert W. Vishny

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

Portfolio Analysis with Factors and Scenarios

Published: 09/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb04889.x

HARRY M. MARKOWITZ, ANDRÉF. PEROLD

Recently there has been a growing interest in the scenario model of covariance as an alternative to the one‐factor or many‐factor models. We show how the covariance matrix resulting from the scenario model can easily be made diagonal by adding new variables linearly related to the amounts invested; note the meanings of these new variables; note how portfolio variance divides itself into “within scenario” and “between scenario” variances; and extend the results to models in which scenarios and factors both appear where factor distributions and effects may or may not be scenario sensitive.

Personal Bankruptcy and Credit Market Competition

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01547.x

ASTRID A. DICK, ANDREAS LEHNERT

We document a link between U.S. credit supply and rising personal bankruptcy rates. We exploit the exogenous variation in market contestability brought on by banking deregulation—the relaxation of entry restrictions in the 1980s and 1990s—at the state level. We find deregulation explains at least 10% of the rise in bankruptcy rates. We also find that deregulation leads to increased lending, lower loss rates on loans, and higher lending productivity. Our findings indicate that increased competition prompted banks to adopt sophisticated credit rating technology, allowing for new credit extension to existing and previously excluded households.

Rational Expectations and the Measurement of a Stock's Elasticity of Demand

Published: 09/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03896.x

FRANKLIN ALLEN, ANDREW POSTLEWAITE

Scholes [1] considered the effect of secondary sales of large blocks of stock on the price of the stock. However, he only looked at price changes occurring just before and just after the sale took place. It is argued here, using a simple model, that if traders have rational expectations they may anticipate the sale, and prices could reflect this possibility long before it actually occurs. To determine the full effect, it may therefore be necessary to consider the price path many months, or even years, before the sale.

Financial Contracting and Organizational Form: Evidence from the Regulation of Trade Credit

Published: 08/04/2016   |   DOI: 10.1111/jofi.12439

EMILY BREZA, ANDRES LIBERMAN

We present evidence that restrictions to the set of feasible financial contracts affect buyer‐supplier relationships and the organizational form of the firm. We exploit a regulation that restricted the maturity of the trade credit contracts that a large retailer could sign with some of its small suppliers. Using a within‐product difference‐in‐differences identification strategy, we find that the restriction reduces the likelihood of trade by 11%. The retailer also responds by internalizing procurement to its own subsidiaries and reducing overall purchases. Finally, we find that relational contracts can mitigate the inability to extend long trade credit terms.

Nonparametric Estimation of State‐Price Densities Implicit in Financial Asset Prices

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.215228

Yacine Aït‐Sahalia, Andrew W. Lo

Implicit in the prices of traded financial assets are Arrow–Debreu prices or, with continuous states, the state‐price density (SPD). We construct a nonparametric estimator for the SPD implicit in option prices and we derive its asymptotic sampling theory. This estimator provides an arbitrage‐free method of pricing new, complex, or illiquid securities while capturing those features of the data that are most relevant from an asset‐pricing perspective, for example, negative skewness and excess kurtosis for asset returns, and volatility “smiles” for option prices. We perform Monte Carlo experiments and extract the SPD from actual S&P 500 option prices.

Joint Effects of Interest Rate Deregulation and Capital Requirements on Optimal Bank Portfolio Adjustments

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04973.x

CHUN H. LAM, ANDREW H. CHEN

The 1980 Depository Institution Deregulation and Monetary Control Act (DIDMCA) mandates that Regulation Q be phased out by 1986. With deregulation of interest rate ceilings, the cost of raising capital funds for commercial banks would become more volatile and more closely related with interest rates in the money and capital markets. Thus, value‐maximizing bank managers would need to be concerned not only with the internal risk, but also with the external risk in bank portfolio management decisions. Based upon the cash flow version of the capital asset pricing model, this paper analyzes the joint impact of interest rate deregulation and capital requirements on the portfolio behavior of a banking firm.

A Note on Optimal Credit and Pricing Policy under Uncertainty: A Contingent‐Claims Approach

Published: 12/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb02536.x

CHUN H. LAM, ANDREW H. CHEN

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

Published: 06/01/2017   |   DOI: 10.1111/jofi.12526

ANDRES ALMAZAN, ZHAOHUI CHEN, SHERIDAN TITMAN

This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.

Taxes on Tax‐Exempt Bonds

Published: 03/19/2010   |   DOI: 10.1111/j.1540-6261.2009.01545.x

ANDREW ANG, VINEER BHANSALI, YUHANG XING

Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.

The Efficient Use of Conditioning Information in Portfolios

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00351

Wayne E. Ferson, Andrew F. Siegel

We study the properties of unconditional minimum‐variance portfolios in the presence of conditioning information. Such portfolios attain the smallest variance for a given mean among all possible portfolios formed using the conditioning information. We provide explicit solutions for n risky assets, either with or without a riskless asset. Our solutions provide insights into portfolio management problems and issues in conditional asset pricing.

Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00265

Andrew W. Lo, Harry Mamaysky, Jiang Wang

Technical analysis, also known as “charting,” has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis—the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution—conditioned on specific technical indicators such as head‐and‐shoulders or double bottoms—we find that over the 31‐year sample period, several technical indicators do provide incremental information and may have some practical value.

An Economic Analysis of Interest Rate Swaps

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04527.x

JAMES BICKSLER, ANDREW H. CHEN

Interest rate swaps, a financial innovation in recent years, are based upon the principle of comparative advantage. An interest rate swap is a useful tool for active liability management and for hedging against interest rate risk. The purpose of this paper is to provide a simple economic analysis of interest rate swaps. Alternative uses of and the appropriate valuation procedure for interest rate swaps are described.

A Bayesian Approach to Real Options: The Case of Distinguishing between Temporary and Permanent Shocks

Published: 09/21/2010   |   DOI: 10.1111/j.1540-6261.2010.01599.x

STEVEN R. GRENADIER, ANDREY MALENKO

Traditional real options models demonstrate the importance of the “option to wait” due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional “option to learn.” The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows.

Agency Problems and Dividend Policies around the World

Published: 03/31/2007   |   DOI: 10.1111/0022-1082.00199

Rafael La Porta, Florencio Lopez‐de‐Silanes, Andrei Shleifer, Robert W. Vishny

This paper outlines and tests two agency models of dividends. According to the “outcome model,” dividends are paid because minority shareholders pressure corporate insiders to disgorge cash. According to the “substitute model,” insiders interested in issuing equity in the future pay dividends to establish a reputation for decent treatment of minority shareholders. The first model predicts that stronger minority shareholder rights should be associated with higher dividend payouts; the second model predicts the opposite. Tests on a cross section of 4,000 companies from 33 countries with different levels of minority shareholder rights support the outcome agency model of dividends.

What Works in Securities Laws?

Published: 01/20/2006   |   DOI: 10.1111/j.1540-6261.2006.00828.x

RAFAEL PORTA, FLORENCIO LOPEZ‐DE‐SILANES, ANDREI SHLEIFER

We examine the effect of securities laws on stock market development in 49 countries. We find little evidence that public enforcement benefits stock markets, but strong evidence that laws mandating disclosure and facilitating private enforcement through liability rules benefit stock markets.

Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades

Published: 03/18/2016   |   DOI: 10.1111/jofi.12378

LUKAS MENKHOFF, LUCIO SARNO, MAIK SCHMELING, ANDREAS SCHRIMPF

We study the information in order flows in the world's largest over‐the‐counter market, the foreign exchange (FX) market. The analysis draws on a data set covering a broad cross‐section of currencies and different customer segments of FX end‐users. The results suggest that order flows are highly informative about future exchange rates and provide significant economic value. We also find that different customer groups can share risk with each other effectively through the intermediation of a large dealer, and differ markedly in their predictive ability, trading styles, and risk exposure.