Research finds strong links between credit booms and macroeconomic outcomes like financial crises and output growth. Are impacts also seen in financial asset prices? We document this robust and significant connection for the first time using a large sample of historical data for many countries....

This paper studies the welfare impact of information spillover in divisible-good markets with heterogeneous traders and interdependent values. In a setting in which two groups of traders trade two distinct but correlated assets, one within each group, the information content in the price of one...

In recent years, the argument on capital market efficiency has shifted to alternative forms of the hypothesis. This research examines one of such alternatives, the Adaptive Market Hypothesis (AMH) with an aim to offer a framework for testing the dynamic notion of market efficiency. Using the...

Climate adaptation (reducing vulnerability to future climate change) could yield significant benefits. However, the uncertainty of which future climate scenarios will occur decreases the feasibility of proactively adapting. Fortunately, climate adaptation projects could be underwritten by...

This study investigates the pattern of mothly liquidity and volatility of Taiwan stock market from January 1998 to December 2015. In this study, the market liquidity is measured as the reciprocal value of Amihud illiquidity. The empirical results by using the VAR approach show that the...

The price of a safe asset reflects not only the expected discounted future cash flows but also future service flows, since retrading allows partial insurance of idiosyncratic risk in an incomplete markets setting. This lowers the issuers’ interest burden and allows the government to run a...

Does heterogeneity matter for asset pricing and in particular for risk premiums? Starting with an irrelevance result, I classify the literature into two groups of papers taking different routes to link investor heterogeneity and risk premiums. The first group contains models of investors who...

Stock prices are well known to exhibit behaviors that are difficult to model mathematically. Individual stocks are observed to exhibit short term price reversals and long term momentum, while their industries only exhibit momentum.Here we show that individual stocks can be modeled by simple mean...

Theory suggests that traders will be more reluctant to trade on negative private information about an ongoing merger if their trading will cause the merger to be canceled. This paper provides evidence on the existence of such endogenous limits to arbitrage and it's consequence on the...

This paper uses a unique security-level data set to demonstrate that foreign institutional investors shift their U.S. corporate bond portfolios toward bonds with higher credit spreads when U.S. monetary policy tightens, which reflects institutional factors related to nominal return targets and...

We examine the cross-section of international equity risk premia with machine learning methods. We identify, classify, and calculate 88 market characteristics and use them to forecast country returns with various machine learning techniques. While all algorithms produce substantial economic...

The steady-state turnover of a trading strategy is of clear interest to practitioners and portfolio managers, as is the steady-state Sharpe ratio. In this article, we show that in a convenient Gaussian process model, the steady-state turnover can be computed explicitly, and obeys a clear...

Insurers are the largest institutional investors of corporate bonds. However, a standard theory of insurance markets, in which insurers maximize firm value subject to regulatory or risk constraints, predicts no allocation to corporate bonds. We resolve this puzzle in an equilibrium asset pricing...

The Home Affordable Modification Program (HAMP) was a loan modification program introduced in 2009, in the U.S., to assist highly indebted homeowners with avoiding foreclosure. This program also encouraged private lenders to offer more sustainable modifications. This paper studies the role of...

We present and discuss a novel dataset on informal collaboration in financial economics, manually collected from more than 5,000 acknowledgement sections of published papers. We find that informal collaboration is the norm in financial economics, while generational differences in informal...

Campbell and Shiller’s “accounting identity” implies that the log dividend-price ratio (LDPR) predicts either returns or dividend growths, but neither is significantly predictable, a well-known puzzle. Existence of the long-term mean LDPR is an important assumption behind the accounting...

We provide a new theory for nodewise regression when the residuals from a fitted factor model are used to apply our results to the analysis of maximum Sharpe ratio when the number of assets in a portfolio is larger than its time span. We introduce a new hybrid model where factor models are...

We present and discuss a novel dataset on informal collaboration in financial economics, manually collected from more than 5,000 acknowledgement sections of published papers. We find that informal collaboration is the norm in financial economics, while generational differences in informal...

The Home Affordable Modification Program (HAMP) was a loan modification program introduced in 2009, in the U.S., to assist highly indebted homeowners with avoiding foreclosure. This program also encouraged private lenders to offer more sustainable modifications. This paper studies the role of...

We examine the predictability of expected stock returns across horizons using machine learning. We use neural networks, and gradient boosted regression trees on the U.S. and international equity datasets. We find that predictability of returns using neural networks models decreases with longer...

We frame linear factor models for asset pricing in a machine learning context and consider a numerical comparison of their performance against ordinary least squares linear regression over a dataset of anomaly portfolios. Specific regression models involved in the comparison include regularized...

This study assesses the effect of fund-level and systemic factors on the performance of mutual funds in the context of changing market conditions. A Markov regime-switching model is used to analyze the performance of 33 South African equity mutual funds from 2006 to 2019. From the results, fund...

Should monetary policymakers raise interest rates during a boom to rein in financial excesses? We theoretically investigate this question using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact...

This paper develops a new method informed by data and models to recover information about investor beliefs. Our approach uses information embedded in forward-looking asset prices in conjunction with asset pricing models. We step back from presuming rational expectations and entertain potential...

We compare low-frequency measures of effective spreads with their high-frequency counterparts. We find that some popular measures suffer from a volatility-induced bias and that volatility is the primary driver of the variation of these liquidity proxies. We show that such distortions arise when...

Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey...

Two intermediary-based factors - a broad financial distress measure and a dealer corporate bond inventory measure - explain about 50% of the puzzling common variation of credit spread changes beyond canonical structural factors. A simple model, in which intermediaries facing margin constraints...

We develop a dynamic asset-pricing model of cryptocurrencies/tokens that allow users to conduct peer-to-peer transactions on digital platforms. The equilibrium value of tokens is determined by aggregating heterogeneous users' transactional demand rather than discounting cashflows as in standard...

I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price...

This paper proposes a theoretical model that incorporates corporate governance into the basic CAPM, where corporate governance affects the disutility of managerial effort and the possibility of managers to divert company resources. It shows that corporate governance affects firms’ stock...

We propose testing asset-pricing models using multi-horizon returns (MHR). MHR effectively generate a new set of test assets that are endogenous to the model and that identify a broad set of possible conditional misspecifications. We apply MHR-based testing to prominent linear factor models and...

This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM Alphas outperform those with high ones, but this finding only appears after the CAPM's...

We use a unique sample of corporate bonds guaranteed by the full faith and credit of the U.S. to test recent theories about why asset prices may diverge from fundamental values. These theories emphasize the role of funding liquidity, slow-moving capital, and the leverage of financial...

We implement a dynamic asset pricing experiment in the spirit of Lucas (1978) with storable assets and non-storable cash. In the first treatment, we impose diminishing marginal returns to cash to incentivize consumption smoothing across periods. We find that subjects use the asset to smooth...