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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Linear‐Rational Term Structure Models
Published: 12/16/2016 | DOI: 10.1111/jofi.12488
DAMIR FILIPOVIĆ, MARTIN LARSSON, ANDERS B. TROLLE
We introduce the class of linear‐rational term structure models in which the state price density is modeled such that bond prices become linear‐rational functions of the factors. This class is highly tractable with several distinct advantages: (i) ensures nonnegative interest rates, (ii) easily accommodates unspanned factors affecting volatility and risk premiums, and (iii) admits semi‐analytical solutions to swaptions. A parsimonious model specification within the linear‐rational class has a very good fit to both interest rate swaps and swaptions since 1997 and captures many features of term structure, volatility, and risk premium dynamics—including when interest rates are close to the zero lower bound.
(Why) Do Central Banks Care about Their Profits?
Published: 06/22/2023 | DOI: 10.1111/jofi.13257
IGOR GONCHAROV, VASSO IOANNIDOU, MARTIN C. SCHMALZ
We document that central banks are discontinuously more likely to report slightly positive profits than slightly negative profits, especially when political pressure is greater, the public is more receptive to extreme political views, and central bank governors are eligible for reappointment. The propensity to report small profits over small losses is correlated with higher inflation and lower interest rates. We conclude that there are agency problems at central banks, which give rise to discontinuous profit incentives that correlate with central banks’ policy choices and outcomes. These findings inform the debate about the political economy of central banking and central bank design.
Monetary Policy and Asset Valuation
Published: 01/19/2022 | DOI: 10.1111/jofi.13107
FRANCESCO BIANCHI, MARTIN LETTAU, SYDNEY C. LUDVIGSON
We document large, longer term, joint regime shifts in asset valuations and the real federal funds rate‐r*$r^{\ast }$ spread. To interpret these findings, we estimate a novel macrofinance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy rule, with long‐term consequences for the real interest rate. Estimates imply that two‐thirds of the decline in the real interest rate since the early 1980s is attributable to regime changes in monetary policy. The model explains how infrequent changes in the stance of monetary policy can generate persistent changes in asset valuations and the equity premium.
The Structure of Spot Rates and Immunization
Published: 06/01/1990 | DOI: 10.1111/j.1540-6261.1990.tb03708.x
EDWIN J. ELTON, MARTIN J. GRUBER, RONI MICHAELY
Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. Our findings indicate that the four‐year spot rate serves as the best proxy in the one‐state‐variable model. In the case of the two‐state‐variables model, the six‐year rate and eight‐month rate are identified as best. Tests of the out‐of‐sample prediction ability indicate that our model is superior to Macaulay's duration model and alternative proxies for state variables.
Discrete Expectational Data and Portfolio Performance
Published: 07/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04534.x
EDWIN J. ELTON, MARTIN J. GRUBER, SETH GROSSMAN
In this article we examine the information content in analysts' recommendations which are made on a five‐point buy, hold, or sell scale. Our data set includes data on 10,000 forecasts per month. Unlike most prior studies, our data set does not suffer from selection or survivorship bias. We find information in analysts' changes in recommendations. Approximately 4.5% extra return can be earned by purchasing new buys rather than new sells.
Arbitraging Arbitrageurs
Published: 09/16/2005 | DOI: 10.1111/j.1540-6261.2005.00805.x
MUKARRAM ATTARI, ANTONIO S. MELLO, MARTIN E. RUCKES
This paper develops a theory of strategic trading in markets with large arbitrageurs. If arbitrageurs are not well capitalized, capital constraints make their trades predictable. Other market participants can exploit this by trading against them. Competitors may find it optimal to lend to arbitrageurs that are financially fragile; additional capital makes the arbitrageurs more viable, and lenders can reap profits from trading against them for a longer time. The strategic behavior of these market participants has implications for the functioning of financial markets. Strategic trading may produce significant price distortions, increase price manipulation, and trigger forced liquidations of large traders.
Incentive Fees and Mutual Funds
Published: 03/21/2003 | DOI: 10.1111/1540-6261.00545
Edwin J. Elton, Martin J. Gruber, Christopher R. Blake
This paper examines the effect of incentive fees on the behavior of mutual fund managers. Funds with incentive fees exhibit positive stock selection ability, but a beta less than one results in funds not earning positive fees. From an investor's perspective, positive alphas plus lower expense ratios make incentive‐fee funds attractive. However, incentive‐fee funds take on more risk than non‐incentive‐fee funds, and they increase risk after a period of poor performance. Incentive fees are useful marketing tools, since more new cash flows go into incentive‐fee funds than into non‐incentive‐fee funds, ceteris paribus.
Fundamental Economic Variables, Expected Returns, and Bond Fund Performance
Published: 09/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb04056.x
EDWIN J. ELTON, MARTIN J. GRUBER, CHRISTOPHER R. BLAKE
In this article, we develop relative pricing (APT) models that are successful in explaining expected returns in the bond market. We utilize indexes as well as unanticipated changes in economic variables as factors driving security returns. An innovation in this article is the measurement of the economic factors as changes in forecasts. The return indexes are the most important variables in explaining the time series of returns. However, the addition of the economic variables leads to a large improvement in the explanation of the cross‐section of expected returns. We utilize our relative pricing models to examine the performance of bond funds.
Momentum Investing and Business Cycle Risk: Evidence from Pole to Pole
Published: 11/07/2003 | DOI: 10.1046/j.1540-6261.2003.00614.x
John M. Griffin, Xiuqing Ji, J. Spencer Martin
We examine whether macroeconomic risk can explain momentum profits internationally. Neither an unconditional model based on the Chen, Roll, and Ross (1986) factors nor a conditional forecasting model based on lagged instruments provides any evidence that macroeconomic risk variables can explain momentum. In addition, momentum profits around the world are economically large and statistically reliable in both good and bad economic states. Further, these momentum profits reverse over 1‐ to 5‐year horizons, an action inconsistent with existing risk‐based explanations of momentum.
Housing Collateral and Entrepreneurship
Published: 09/21/2016 | DOI: 10.1111/jofi.12468
MARTIN C. SCHMALZ, DAVID A. SRAER, DAVID THESMAR
We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross‐sectional variation in local house‐price appreciation as shocks to collateral values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.
The Market Impact of Trends and Sequences in Performance: New Evidence
Published: 09/16/2005 | DOI: 10.1111/j.1540-6261.2005.00807.x
GREGORY R. DURHAM, MICHAEL G. HERTZEL, J. SPENCER MARTIN
Bloomfield and Hales (2002) find strong evidence that experimental market subjects are influenced by trends and patterns in a manner supportive of the shifting regimes model of Barberis, Shleifer, and Vishny (1998). We subject the model to further empirical scrutiny using the football wagering market as our price laboratory. Sports betting markets have several advantages over traditional capital markets as an empirical setting, and commonalities with traditional markets allow for useful insights. We find scant evidence that investors behave in accordance with the model.
Valuation Risk and Asset Pricing
Published: 08/04/2016 | DOI: 10.1111/jofi.12437
RUI ALBUQUERQUE, MARTIN EICHENBAUM, VICTOR XI LUO, SERGIO REBELO
Standard representative‐agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.
The Determinants of Credit Spread Changes
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00402
Pierre Collin-Dufresn, Robert S. Goldstein, J. Spencer Martin
Using dealer's quotes and transactions prices on straight industrial bonds, we investigate the determinants of credit spread changes. Variables that should in theory determine credit spread changes have rather limited explanatory power. Further, the residuals from this regression are highly cross‐correlated, and principal components analysis implies they are mostly driven by a single common factor. Although we consider several macroeconomic and financial variables as candidate proxies, we cannot explain this common systematic component. Our results suggest that monthly credit spread changes are principally driven by local supply/demand shocks that are independent of both credit‐risk factors and standard proxies for liquidity.
A First Look at the Accuracy of the CRSP Mutual Fund Database and a Comparison of the CRSP and Morningstar Mutual Fund Databases
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00410
Edwin J. Elton, Martin J. Gruber, Christopher R. Blake
This paper examines problems in the CRSP Survivor Bias Free U.S. Mutual Fund Database (CRSP, 1998) and compares returns contained in it to those in Morningstar. The CRSP database has an omission bias that has the same effects as survivorship bias. Although all mutual funds are listed in CRSP, return data is missing for many and the characteristics of these funds differ from the populations. The CRSP return data is biased upward and merger months are inaccurately recorded about half the time. Differences in returns in Morningstar and CRSP are a problem for older data and small funds.