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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Repo Runs: Evidence from the Tri‐Party Repo Market
Published: 08/11/2014 | DOI: 10.1111/jofi.12205
ADAM COPELAND, ANTOINE MARTIN, MICHAEL WALKER
The repo market has been viewed as a potential source of financial instability since the 2007 to 2009 financial crisis, based in part on findings that margins increased sharply in a segment of this market. This paper provides evidence suggesting that there was no system‐wide run on repo. Using confidential data on tri‐party repo, a major segment of this market, we show that, the level of margins and the amount of funding were surprisingly stable for most borrowers during the crisis. However, we also document a sharp decline in the tri‐party repo funding of Lehman in September 2008.
A Note from the Editors
Published: 09/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb02309.x
Edwin J. Elton, Martin J. Gruber
Capital Share Risk in U.S. Asset Pricing
Published: 03/30/2019 | DOI: 10.1111/jofi.12772
MARTIN LETTAU, SYDNEY C. LUDVIGSON, SAI MA
A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and nonequity asset classes, with risk price estimates that are of the same sign and similar in magnitude. Positive exposure to capital share risk earns a positive risk premium, commensurate with recent asset pricing models in which redistributive shocks shift the share of income between the wealthy, who finance consumption primarily out of asset ownership, and workers, who finance consumption primarily out of wages and salaries.
Anticompetitive Effects of Common Ownership
Published: 05/25/2018 | DOI: 10.1111/jofi.12698
JOSÉ AZAR, MARTIN C. SCHMALZ, ISABEL TECU
Many natural competitors are jointly held by a small set of large institutional investors. In the U.S. airline industry, taking common ownership into account implies increases in market concentration that are 10 times larger than what is “presumed likely to enhance market power” by antitrust authorities. Within‐route changes in common ownership concentration robustly correlate with route‐level changes in ticket prices, even when we only use variation in ownership due to the combination of two large asset managers. We conclude that a hidden social cost—reduced product market competition—accompanies the private benefits of diversification and good governance.
Volatility, Valuation Ratios, and Bubbles: An Empirical Measure of Market Sentiment
Published: 07/13/2021 | DOI: 10.1111/jofi.13068
CAN GAO, IAN W. R. MARTIN
We define a sentiment indicator based on option prices, valuation ratios, and interest rates. The indicator can be interpreted as a lower bound on the expected growth in fundamentals that a rational investor would have to perceive to be happy to hold the market. The bound was unusually high in the late 1990s, reflecting dividend growth expectations that in our view were unreasonably optimistic. Our approach exploits two key ingredients. First, we derive a new valuation ratio decomposition that is related to the Campbell–Shiller loglinearization but that resembles the Gordon growth model more closely and has certain other advantages. Second, we introduce a volatility index that provides a lower bound on the market's expected log return.
What Is the Expected Return on a Stock?
Published: 04/18/2019 | DOI: 10.1111/jofi.12778
IAN W. R. MARTIN, CHRISTIAN WAGNER
We derive a formula for the expected return on a stock in terms of the risk‐neutral variance of the market and the stock's excess risk‐neutral variance relative to that of the average stock. These quantities can be computed from index and stock option prices; the formula has no free parameters. The theory performs well empirically both in and out of sample. Our results suggest that there is considerably more variation in expected returns, over time and across stocks, than has previously been acknowledged.
BANKRUPTCY COSTS: SOME EVIDENCE
Published: 05/01/1977 | DOI: 10.1111/j.1540-6261.1977.tb03274.x
Martin J. Gruber, Jerold B. Warner
Corporate Performance, Corporate Takeovers, and Management Turnover
Published: 06/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb02679.x
KENNETH J. MARTIN, JOHN J. MCCONNELL
This paper examines the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. We document that the turnover rate for the top manager of target firms in tender offer‐takeovers significantly increases following completion of the takeover and that prior to the takeover these firms were significantly under‐performing other firms in their industry as well as other target firms which had no post‐takeover change in the top executive. We interpret the results to indicate that the takeover market plays an important role in controlling the nonvalue maximizing behavior of top corporate managers.
Disasters Implied by Equity Index Options
Published: 11/14/2011 | DOI: 10.1111/j.1540-6261.2011.01697.x
DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN
We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.
Do Expected Shifts in Inflation Affect Estimates of the Long‐Run Fisher Relation?
Published: 03/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb05172.x
MARTIN D. D. EVANS, KAREN K. LEWIS
Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one‐for‐one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. We characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, we reexamine the long‐run relationship between nominal interest rates and inflation. Interestingly, we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one‐for‐one.