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Very Noisy Option Prices and Inference Regarding the Volatility Risk Premium J. Financ. (IF 7.6) Pub Date : 2024-07-18 JEFFERSON DUARTE, CHRISTOPHER S. JONES, JUNBO L. WANG
The stylized fact that volatility is not priced in individual equity options does not withstand scrutiny. First, we show that the average return of heavily traded deep out‐of‐the‐money call options on stocks is −116 basis points per day. Second, Fama‐MacBeth estimates of the volatility risk premium in stock options are similar to those in S&P 500 Index call options. Third, the mean return of heavily
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On the Magnification of Small Biases in Hiring J. Financ. (IF 7.6) Pub Date : 2024-07-18 SHAUN WILLIAM DAVIES, EDWARD D. VAN WESEP, BRIAN WATERS
We analyze a setting in which a board must hire a chief executive officer (CEO) after exerting effort to learn about the quality of each candidate. Optimal effort is asymmetric, implying asymmetric likelihoods of each candidate being chosen. If the board has an infinitesimal bias in favor of one candidate, it allocates effort to maximize the likelihood of that candidate being chosen. Even when the
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Anomaly Time J. Financ. (IF 7.6) Pub Date : 2024-07-18 BOONE BOWLES, ADAM V. REED, MATTHEW C. RINGGENBERG, JACOB R. THORNOCK
We examine the timing of returns around the publication of anomaly trading signals. Using a database that captures when information is first publicly released, we show that anomaly returns are concentrated in the first month after information release dates, and these returns decay soon thereafter. We also show that the academic convention of forming portfolios in June underestimates predictability
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Treasury Richness J. Financ. (IF 7.6) Pub Date : 2024-07-17 MATTHIAS FLECKENSTEIN, FRANCIS A. LONGSTAFF
We provide estimates of Treasury convenience premia across the entire term structure of Treasury bills, notes, and bonds over more than a quarter of a century and document a variety of key stylized facts about their time‐series and cross‐sectional patterns. These results raise concerns about the evolving nature of Treasury markets and suggest that investors may now place less weight on the traditional
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Unobserved Performance of Hedge Funds J. Financ. (IF 7.6) Pub Date : 2024-07-11 VIKAS AGARWAL, STEFAN RUENZI, FLORIAN WEIGERT
We investigate hedge fund firms’ unobserved performance (UP), measured as the risk‐adjusted return difference between a firm's reported gross return and its portfolio return inferred from its disclosed long‐equity holdings. Firms with high UP outperform those with low UP by 6.36% per annum on a risk‐adjusted basis. UP is negatively associated with a firm's trading costs and positively associated with
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Liquidity, Liquidity Everywhere, Not a Drop to Use: Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity J. Financ. (IF 7.6) Pub Date : 2024-07-05 VIRAL V. ACHARYA, RAGHURAM RAJAN
Central bank balance sheet expansion, through actions like quantitative easing, is run through commercial banks. While this increases liquid central bank reserves held on commercial bank balance sheets, demandable uninsured deposits issued to finance the reserves also increase. Subsequent shrinkage in the central bank balance sheet may entail shrinkage in bank‐held reserves without a commensurate reduction
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Did Banks Pay Fair Returns to Taxpayers on TARP? J. Financ. (IF 7.6) Pub Date : 2024-06-25 THOMAS FLANAGAN, AMIYATOSH PURNANANDAM
Financial institutions received investments under the Troubled Asset Relief Program in a bad state of the world but repaid them in a relatively good state. We show that the recipients paid considerably lower returns to taxpayers compared to private‐market securities with similar risk over the same investment horizon, resulting in a subsidy of over $50 billion on the preferred equity investment by the
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Meeting Targets in Competitive Product Markets J. Financ. (IF 7.6) Pub Date : 2024-06-24 EMILIO BISETTI, STEPHEN A. KAROLYI
We show that public banks face negative stock return jumps after missing their earnings per share (EPS) targets, and theoretically and quantitatively link these jumps to bunching behavior in the EPS surprise distribution. Bunching banks cut deposit rates to meet their targets, but do so at the expense of deposit outflows and franchise value losses. Local competitors, including private banks unexposed
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Half Banked: The Economic Impact of Cash Management in the Marijuana Industry J. Financ. (IF 7.6) Pub Date : 2024-06-19 ELIZABETH A. BERGER, NATHAN SEEGERT
We investigate the economic value of cash management. In the legal marijuana industry, where only half of businesses have access to cash management services from a financial institution, we examine dispensary profitability using administrative and survey data. Our results show that businesses with cash management charge higher retail prices (8.3%), pay lower wholesale prices (7.3%), and have higher
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Insensitive Investors J. Financ. (IF 7.6) Pub Date : 2024-06-18 CONSTANTIN CHARLES, CARY FRYDMAN, METE KILIC
We experimentally study the transmission of subjective expectations into actions. Subjects in our experiment report valuations that are far too insensitive to their expectations, relative to the prediction from a frictionless model. We propose that the insensitivity is driven by a noisy cognitive process that prevents subjects from precisely computing asset valuations. The empirical link between subjective
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What Drives Variation in the U.S. Debt-to-Output Ratio? The Dogs that Did not Bark J. Financ. (IF 7.6) Pub Date : 2024-06-11 ZHENGYANG JIANG, HANNO LUSTIG, STIJN VAN NIEUWERBURGH, MINDY Z. XIAOLAN
A higher U.S. government debt-to-output (D-O) ratio does not forecast higher surpluses or lower returns on Treasurys in the future. Neither future cash flows nor discount rates account for the variation in the current D-O ratio. The market valuation of Treasurys is surprisingly insensitive to macro fundamentals. Instead, the future D-O ratio accounts for most of the variation because the D-O ratio
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Information Aggregation with Asymmetric Asset Payoffs J. Financ. (IF 7.6) Pub Date : 2024-06-11 ELIAS ALBAGLI, CHRISTIAN HELLWIG, ALEH TSYVINSKI
We study noisy aggregation of dispersed information in financial markets without imposing parametric restrictions on preferences, information, and return distributions. We provide a general characterization of asset returns by means of a risk-neutral probability measure that features excess weight on tail risks. Moreover, we link excess weight on tail risks to observable moments such as forecast dispersion
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Inside and Outside Information J. Financ. (IF 7.6) Pub Date : 2024-06-10 DANIEL QUIGLEY, ANSGAR WALTHER
We study an economy with financial frictions in which a regulator designs a test that reveals outside information about a firm's quality to investors. The firm can also disclose verifiable inside information about its quality. We show that the regulator optimally aims for “public speech and private silence,” which is achieved with tests that give insiders an incentive to stay quiet. We fully characterize
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Money and Banking with Reserves and CBDC J. Financ. (IF 7.6) Pub Date : 2024-06-05 DIRK NIEPELT
We analyze the role of retail central bank digital currency (CBDC) and reserves when banks exert deposit market power and liquidity transformation entails externalities. Optimal monetary architecture minimizes the social costs of liquidity provision, and optimal monetary policy follows modified Friedman rules. Interest rates on reserves and CBDC should differ. Calibrations robustly suggest that CBDC
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The Time-Varying Price of Financial Intermediation in the Mortgage Market J. Financ. (IF 7.6) Pub Date : 2024-06-04 ANDREAS FUSTER, STEPHANIE H. LO, PAUL S. WILLEN
We introduce a new measure of the price charged by financial intermediaries for connecting mortgage borrowers with capital market investors. Based on administrative lender pricing data, we document that the price of intermediation reacts strongly to variation in demand, reflecting capacity constraints of mortgage originators. This positive comovement of price with quantity reduced the pass-through
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A (Sub)penny for Your Thoughts: Tracking Retail Investor Activity in TAQ J. Financ. (IF 7.6) Pub Date : 2024-05-03 BRAD M. BARBER, XING HUANG, PHILIPPE JORION, TERRANCE ODEAN, CHRISTOPHER SCHWARZ
We placed 85,000 retail trades in six retail brokerage accounts from December 2021 to June 2022 to validate the Boehmer et al. algorithm, which uses subpenny trade prices to identify and sign retail trades. The algorithm identifies 35% of our trades as retail, incorrectly signs 28% of identified trades, and yields uninformative order imbalance measures for 30% of stocks. We modify the algorithm by
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Spending Less after (Seemingly) Bad News J. Financ. (IF 7.6) Pub Date : 2024-04-29 MARK J. GARMAISE, YARON LEVI, HANNO LUSTIG
Using high-frequency spending data, we show that household consumption displays excess sensitivity to salient macroeconomic news, even when the news is not real. When the announced local unemployment rate reaches a 12-month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 1.5% relative to consumers in areas with the same macroeconomic
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Is Long‐Run Risk Really Priced? Revisiting Liu and Matthies (2022) J. Financ. (IF 7.6) Pub Date : 2024-04-22 PAULO MAIO
The claim by Liu and Matthies (LM) that their macro news risk factor (NI) prices 51 portfolios (associated with four different portfolio groups) is not appropriate. In fact, their single‐factor model is successful only in explaining the momentum deciles, while producing strongly negative performance for the remaining groups. The pricing performance is more doubtful in the case of the alternative news
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Rent or Buy? Inflation Experiences and Homeownership within and across Countries J. Financ. (IF 7.6) Pub Date : 2024-04-19 ULRIKE MALMENDIER, ALEXANDRA STEINY WELLSJO
We show that past inflation experiences strongly predict homeownership within and across countries. First, we collect novel survey data, which reveal inflation protection to be a key motivation for homeownership, especially after high inflation experiences. Second, using household data from 22 European countries, we find that higher exposure to historical inflation predicts higher homeownership rates
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Broadband Internet and the Stock Market Investments of Individual Investors J. Financ. (IF 7.6) Pub Date : 2024-04-17 HANS K. HVIDE, TOM G. MELING, MAGNE MOGSTAD, OLA L. VESTAD
We study the effects of broadband internet use on the investment decisions of individual investors. A public program in Norway provides plausibly exogenous variation in internet use. Our instrumental variables estimates show that internet use causes a substantial increase in stock market participation, driven primarily by increased fund ownership. Existing investors tilt their portfolios toward funds
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Nonstandard Errors J. Financ. (IF 7.6) Pub Date : 2024-04-17 ALBERT J. MENKVELD, ANNA DREBER, FELIX HOLZMEISTER, JUERGEN HUBER, MAGNUS JOHANNESSON, MICHAEL KIRCHLER, SEBASTIAN NEUSÜß, MICHAEL RAZEN, UTZ WEITZEL, DAVID ABAD-DÍAZ, MENACHEM (MENI) ABUDY, TOBIAS ADRIAN, YACINE AIT-SAHALIA, OLIVIER AKMANSOY, JAMIE T. ALCOCK, VITALI ALEXEEV, ARASH ALOOSH, LIVIA AMATO, DIEGO AMAYA, JAMES J. ANGEL, ALEJANDRO T. AVETIKIAN, AMADEUS BACH, EDWIN BAIDOO, GAETAN BAKALLI,
In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses
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Monetary Policy and Asset Price Overshooting: A Rationale for the Wall/Main Street Disconnect J. Financ. (IF 7.6) Pub Date : 2024-04-12 RICARDO J. CABALLERO, ALP SIMSEK
We analyze optimal monetary policy and its implications for asset prices when aggregate demand has inertia. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (above their steady-state levels consistent with current potential output). Overshooting leads to a temporary disconnect between the performance of financial markets and the real economy, but accelerates
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Zombie Credit and (Dis-)Inflation: Evidence from Europe J. Financ. (IF 7.6) Pub Date : 2024-04-11 VIRAL V. ACHARYA, MATTEO CROSIGNANI, TIM EISERT, CHRISTIAN EUFINGER
We show that “zombie credit”—subsidized credit to nonviable firms—has a disinflationary effect. By keeping these firms afloat, zombie credit creates excess aggregate supply, thereby putting downward pressure on prices. Granular European data on inflation, firms, and banks confirm this mechanism. Markets affected by a rise in zombie credit experience lower firm entry and exit, capacity utilization,
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Goal Setting and Saving in the FinTech Era J. Financ. (IF 7.6) Pub Date : 2024-04-11 ANTONIO GARGANO, ALBERTO G. ROSSI
We study the effectiveness of saving goals in increasing individuals' savings using data from a Fintech app. Using a difference-in-differences identification strategy that randomly assigns users into a group of beta testers who can set goals and a group of users who cannot, we find that setting goals increases individuals' savings rate. The increased savings within the app do not reduce savings outside
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A Portfolio Approach to Global Imbalances J. Financ. (IF 7.6) Pub Date : 2024-04-09 ZHENGYANG JIANG, ROBERT J. RICHMOND, TONY ZHANG
We use a portfolio-based framework to understand what drives the decline of the U.S. net foreign asset (NFA) position and the reversal in returns earned on the U.S. NFA (exorbitant privilege). We show that global savings gluts and monetary policies widened the U.S. NFA position, while investor demand shifts partially offset this widening. Moreover, U.S. privilege declined after 2010, in line with increasing
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Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden J. Financ. (IF 7.6) Pub Date : 2024-04-08 SYLVAIN CATHERINE, PAOLO SODINI, YAPEI ZHANG
Using Swedish administrative panel data, we document that workers facing higher left-tail income risk when equity markets perform poorly have lower portfolio equity share. In line with theory, the relationship between cyclical skewness and stock holdings increases with the share of human capital in a worker's total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts
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A Horizon-Based Decomposition of Mutual Fund Value Added Using Transactions J. Financ. (IF 7.6) Pub Date : 2024-04-04 JULES VAN BINSBERGEN, JUNGSUK HAN, HONGXUN RUAN, RAN XING
We decompose mutual fund value added by the length of funds' holdings using transaction-level data. We motivate our decomposition with a model featuring horizon-specific investment ideas, where short-term ideas are less scalable because the associated trades cannot be spread over time. Fund turnover correlates negatively with the horizon over which value is added and positively with price impact costs
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The Term Structure of Covered Interest Rate Parity Violations J. Financ. (IF 7.6) Pub Date : 2024-03-31 PATRICK AUGUSTIN, MIKHAIL CHERNOV, LUKAS SCHMID, DONGHO SONG
We quantify the impact of risk-based and nonrisk-based intermediary constraints (IC) on the term structure of covered interest rate parity (CIP) violations. Using a stochastic discount factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model-implied and observed derivative prices reflects the impact of nonrisk-based IC because our SDF incorporates risk-based
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Report of the Editor of The Journal of Finance for the Year 2023 J. Financ. (IF 7.6) Pub Date : 2024-03-16 ANTOINETTE SCHOAR
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BRATTLE GROUP AND DIMENSIONAL FUND ADVISORS PRIZES FOR 2023 J. Financ. (IF 7.6) Pub Date : 2024-03-16
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Report of the Executive Secretary and Treasurer for the Fiscal Year Ending June 30, 2023 J. Financ. (IF 7.6) Pub Date : 2024-03-16
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Modeling Conditional Factor Risk Premia Implied by Index Option Returns J. Financ. (IF 7.6) Pub Date : 2024-03-08 MATHIEU FOURNIER, KRIS JACOBS, PIOTR ORŁOWSKI
We propose a novel factor model for option returns. Option exposures are estimated nonparametrically, and factor risk premia can vary nonlinearly with states. The model is estimated using regressions with minimal assumptions on factor and option return dynamics. We estimate the model using index options to characterize the conditional risk premia for factors of interest, such as the market return,
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Does Alternative Data Improve Financial Forecasting? The Horizon Effect J. Financ. (IF 7.6) Pub Date : 2024-03-07 OLIVIER DESSAINT, THIERRY FOUCAULT, LAURENT FRESARD
Existing research suggests that alternative data are mainly informative about short-term future outcomes. We show theoretically that the availability of short-term-oriented data can induce forecasters to optimally shift their attention from the long term to the short term because it reduces the cost of obtaining short-term information. Consequently, the informativeness of their long-term forecasts
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Due Diligence J. Financ. (IF 7.6) Pub Date : 2024-03-04 BRENDAN DALEY, THOMAS GEELEN, BRETT GREEN
We propose a model of due diligence and analyze its effect on prices, payoffs, and deal completion. In our model, if the seller accepts an offer, the winning bidder (or “acquirer”) can gather information and chooses when to complete the transaction. In equilibrium, the acquirer engages in “too much” due diligence. Our quantitative results suggest that the magnitude of the distortion is economically
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Measuring “Dark Matter” in Asset Pricing Models J. Financ. (IF 7.6) Pub Date : 2024-03-03 HUI CHEN, WINSTON WEI DOU, LEONID KOGAN
We formalize the concept of “dark matter” in asset pricing models by quantifying the additional informativeness of cross-equation restrictions about fundamental dynamics. The dark-matter measure captures the degree of fragility for models that are potentially misspecified and unstable: a large dark-matter measure indicates that the model lacks internal refutability (weak power of optimal specification
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Mergers, Product Prices, and Innovation: Evidence from the Pharmaceutical Industry J. Financ. (IF 7.6) Pub Date : 2024-03-01 ALICE BONAIMÉ, YE (EMMA) WANG
Using novel data from the pharmaceutical industry, we study product prices and innovation around mergers. Exploiting within-deal variation in product market consolidation, we show that prices increase more for drugs in consolidating markets than for matched control drugs. Estimates indicate a 2% average price effect that persists for about one year. Price increases expand with acquirer-target product
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Informed Trading Intensity J. Financ. (IF 7.6) Pub Date : 2024-02-27 VINCENT BOGOUSSLAVSKY, VYACHESLAV FOS, DMITRIY MURAVYEV
We train a machine learning method on a class of informed trades to develop a new measure of informed trading, informed trading intensity (ITI). ITI increases before earnings, mergers and acquisitions, and news announcements, and has implications for return reversal and asset pricing. ITI is effective because it captures nonlinearities and interactions between informed trading, volume, and volatility
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Fee Variation in Private Equity J. Financ. (IF 7.6) Pub Date : 2024-02-23 JULIANE BEGENAU, EMIL N. SIRIWARDANE
We study how investment fees vary within private equity funds. Net-of-fee return clustering suggests that most funds have two tiers of fees, and we decompose differences across tiers into both management- and performance-based fees. Managers of venture capital funds and those in high demand are less likely to use multiple fee schedules. Some investors consistently pay lower fees relative to others
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The Dark Side of Circuit Breakers J. Financ. (IF 7.6) Pub Date : 2024-02-23 HUI CHEN, ANTON PETUKHOV, JIANG WANG, HAO XING
Market-wide circuit breakers are trading halts aimed at stabilizing the market during dramatic price declines. Using an intertemporal equilibrium model, we show that a circuit breaker significantly alters market dynamics and affects investor welfare. As the market approaches the circuit breaker, price volatility rises drastically, accelerating the chance of triggering the circuit breaker—the so-called
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Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets J. Financ. (IF 7.6) Pub Date : 2024-02-18 SNEHAL BANERJEE, JESSE DAVIS, NAVEEN GONDHI
The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices
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Leverage Is a Double-Edged Sword J. Financ. (IF 7.6) Pub Date : 2024-02-15 AVANIDHAR SUBRAHMANYAM, KE TANG, JINGYUAN WANG, XUEWEI YANG
We use proprietary data on intraday transactions at a futures brokerage to analyze how implied leverage influences trading performance. Across all investors, leverage is negatively related to performance, due partly to increased trading costs and partly to forced liquidations resulting from margin calls. Defining skill out-of-sample, we find that relative performance differentials across unskilled
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The Equilibrium Size and Value-Added of Venture Capital J. Financ. (IF 7.6) Pub Date : 2024-02-14 FRANCESCO SANNINO
I model positive sorting of entrepreneurs across the high and low value-added segments of the venture capital market. Aiming to attract high-quality entrepreneurs, inefficiently many venture capitalists (VCs) commit to provide high value-added by forming small portfolios. This draws the marginal entrepreneur away from the low value-added segment, reducing match quality in the high value-added segment
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Overconfidence and Preferences for Competition J. Financ. (IF 7.6) Pub Date : 2024-02-13 ERNESTO REUBEN, PAOLA SAPIENZA, LUIGI ZINGALES
We study when preferences for competition are a positive economic trait among high earners and the extent to which this trait can explain the gender gap in income among a master's degree in business administration (MBAs). Consistent with the experimental evidence, preferences for competition are a positive economic trait only for individuals who are not overconfident. Preferences for competition correlate
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Political Polarization Affects Households' Financial Decisions: Evidence from Home Sales J. Financ. (IF 7.6) Pub Date : 2024-02-11 W. BEN MCCARTNEY, JOHN ORELLANA-LI, CALVIN ZHANG
Political identity and partisanship are salient features of today's society. Using deeds records and voter rolls, we show that current residents are more likely to sell their homes when opposite-party neighbors move in nearby than when unaffiliated or same-party neighbors do. This is especially true when the new neighbors are politically active, consistent with an animosity between parties mechanism
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The Narrow Channel of Quantitative Easing: Evidence from YCC Down Under J. Financ. (IF 7.6) Pub Date : 2023-12-18 DAVID O. LUCCA, JONATHAN H. WRIGHT
We study the recent Australian experience with yield curve control (YCC) as perhaps the best evidence of how this policy might work in other developed economies. YCC seemingly worked well in 2020, when the market expected short rates to stay at zero for a long period of time. As the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased
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Foreign Exchange Fixings and Returns around the Clock J. Financ. (IF 7.6) Pub Date : 2023-12-18 INGOMAR KROHN, PHILIPPE MUELLER, PAUL WHELAN
The U.S. dollar appreciates in the run-up to foreign exchange (FX) fixes and depreciates thereafter, tracing a W-shaped return pattern around the clock. Return reversals for the top nine traded currencies over a 21-year period are pervasive and highly statistically significant, and they imply daily swings of more than one billion U.S. dollars based on spot volumes. Using natural experiments, we document
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The Decline of Secured Debt J. Financ. (IF 7.6) Pub Date : 2023-12-18 EFRAIM BENMELECH, NITISH KUMAR, RAGHURAM RAJAN
The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high-quality borrowers will respect their claims even if creditors do not obtain security upfront. Consequently, such borrowers prefer retaining financial flexibility by not giving
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Artificial Intelligence, Education, and Entrepreneurship J. Financ. (IF 7.6) Pub Date : 2023-12-12 MICHAEL GOFMAN, ZHAO JIN
We document an unprecedented brain drain of Artificial Intelligence (AI) professors from universities from 2004 to 2018. We find that students from the affected universities establish fewer AI startups and raise less funding. The brain-drain effect is significant for tenured professors, professors from top universities, and deep-learning professors. Additional evidence suggests that unobserved city-
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How Integrated are Credit and Equity Markets? Evidence from Index Options J. Financ. (IF 7.6) Pub Date : 2023-12-12 PIERRE COLLIN-DUFRESNE, BENJAMIN JUNGE, ANDERS B. TROLLE
We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit-risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX
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Lender Automation and Racial Disparities in Credit Access J. Financ. (IF 7.6) Pub Date : 2023-12-11 SABRINA T. HOWELL, THERESA KUCHLER, DAVID SNITKOF, JOHANNES STROEBEL, JUN WONG
Process automation reduces racial disparities in credit access by enabling smaller loans, broadening banks' geographic reach, and removing human biases from decision making. We document these findings in the context of the Paycheck Protection Program (PPP), where private lenders faced no credit risk but decided which firms to serve. Black-owned firms obtained PPP loans primarily from automated fintech
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Legal Risk and Insider Trading J. Financ. (IF 7.6) Pub Date : 2023-12-11 MARCIN KACPERCZYK, EMILIANO S. PAGNOTTA
Do illegal insiders internalize legal risk? We address this question with hand-collected data from 530 SEC (the U.S. Securities and Exchange Commission) investigations. Using two plausibly exogenous shocks to expected penalties, we show that insiders trade less aggressively and earlier and concentrate on tips of greater value when facing a higher risk. The results match the predictions of a model where