The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade. This has occurred despite a significant increase in the share of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns during the 1990s but an average return of only 0.1% between 2010 and 2020. We investigate the drivers of this phenomenon and discuss implications for market efficiency. We document a similar decline in the index effect among other families of indices.
{"title":"The Disappearing Index Effect","authors":"ROBIN GREENWOOD, MARCO SAMMON","doi":"10.1111/jofi.13410","DOIUrl":"https://doi.org/10.1111/jofi.13410","url":null,"abstract":"The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade. This has occurred despite a significant increase in the share of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns during the 1990s but an average return of only 0.1% between 2010 and 2020. We investigate the drivers of this phenomenon and discuss implications for market efficiency. We document a similar decline in the index effect among other families of indices.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"32 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142869886","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
HARRY COOPERMAN, DARRELL DUFFIE, STEPHAN LUCK, ZACHRY WANG, YILIN (DAVID) YANG
Corporate credit lines are drawn more heavily when funding markets are stressed. This elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to a credit-sensitive reference rate like the London interbank offered rate (LIBOR). We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be deposited at the same bank, which happened at some of the largest banks during the global financial crisis and COVID recession.
{"title":"Bank Funding Risk, Reference Rates, and Credit Supply","authors":"HARRY COOPERMAN, DARRELL DUFFIE, STEPHAN LUCK, ZACHRY WANG, YILIN (DAVID) YANG","doi":"10.1111/jofi.13411","DOIUrl":"https://doi.org/10.1111/jofi.13411","url":null,"abstract":"Corporate credit lines are drawn more heavily when funding markets are stressed. This elevates expected bank funding costs. We show that credit supply is dampened by the associated debt-overhang cost to bank shareholders. Until 2022, this impact was reduced by linking the interest paid on lines to a credit-sensitive reference rate like the London interbank offered rate (LIBOR). We show that transition to risk-free reference rates may exacerbate this friction. The adverse impact on credit supply is offset if drawdowns are expected to be deposited at the same bank, which happened at some of the largest banks during the global financial crisis and COVID recession.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"1 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142869885","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show that two important issues in empirical asset pricing—the presence of weak factors and the selection of test assets—are deeply connected. Since weak factors are those to which test assets have limited exposure, an appropriate selection of test assets can improve the strength of factors. Building on this insight, we introduce supervised principal component analysis (SPCA), a methodology that iterates supervised selection, principal-component estimation, and factor projection. It enables risk premia estimation and factor model diagnosis even when weak factors are present and not all factors are observed. We establish SPCA's asymptotic properties and showcase its empirical applications.
{"title":"Test Assets and Weak Factors","authors":"STEFANO GIGLIO, DACHENG XIU, DAKE ZHANG","doi":"10.1111/jofi.13415","DOIUrl":"https://doi.org/10.1111/jofi.13415","url":null,"abstract":"We show that two important issues in empirical asset pricing—the presence of weak factors and the selection of test assets—are deeply connected. Since weak factors are those to which test assets have limited exposure, an appropriate selection of test assets can improve the strength of factors. Building on this insight, we introduce supervised principal component analysis (SPCA), a methodology that iterates supervised selection, principal-component estimation, and factor projection. It enables risk premia estimation and factor model diagnosis even when weak factors are present and not all factors are observed. We establish SPCA's asymptotic properties and showcase its empirical applications.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"31 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-12-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142849553","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I show that households work and earn more (less) when their floating‐rate mortgage payments quasi‐exogenously increase (decrease). The response is sizable and asymmetric: on average, households adjust their income by 35% of the change in their mortgage payment, but the response is significantly stronger following an increase in payments. While men in dual‐earner, childless households respond the most on average, the asymmetry is most pronounced for women and young workers, who respond particularly strongly to payment increases. The asymmetry of the labor supply elasticity may help explain the wide range of elasticities found in previous research.
{"title":"Working More to Pay the Mortgage: Household Debt, Interest Rates, and Family Labor Supply","authors":"Michał Zator","doi":"10.1111/jofi.13413","DOIUrl":"https://doi.org/10.1111/jofi.13413","url":null,"abstract":"I show that households work and earn more (less) when their floating‐rate mortgage payments quasi‐exogenously increase (decrease). The response is sizable and asymmetric: on average, households adjust their income by 35% of the change in their mortgage payment, but the response is significantly stronger following an increase in payments. While men in dual‐earner, childless households respond the most on average, the asymmetry is most pronounced for women and young workers, who respond particularly strongly to payment increases. The asymmetry of the labor supply elasticity may help explain the wide range of elasticities found in previous research.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"19 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-12-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142831920","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using contract-level data for the Canadian mortgage market, this paper provides evidence of an “invest-and-harvest” pricing pattern. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate the effects of market frictions and the resulting dynamic competition on borrowers' and banks' payoffs. We show that dynamic pricing and the presence of search and switching costs have important implications for public policies.
{"title":"Dynamic Competition in Negotiated Price Markets","authors":"JASON ALLEN, SHAOTENG LI","doi":"10.1111/jofi.13408","DOIUrl":"https://doi.org/10.1111/jofi.13408","url":null,"abstract":"Using contract-level data for the Canadian mortgage market, this paper provides evidence of an “invest-and-harvest” pricing pattern. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate the effects of market frictions and the resulting dynamic competition on borrowers' and banks' payoffs. We show that dynamic pricing and the presence of search and switching costs have important implications for public policies.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"41 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-12-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142820660","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine the effect of personal, two‐way communication on the payment behavior of delinquent borrowers. Borrowers who speak with a randomly assigned bank agent are significantly more likely to successfully resolve the delinquency relative to borrowers who do not speak with a bank agent. Call characteristics related to the human touch of the call, such as the likeability of the agent's voice, significantly affect payment behavior. Borrowers who speak with a bank agent are also significantly less likely to become delinquent again. Our findings highlight the value of a human element in interactions between financial institutions and their customers.
{"title":"Personal Communication in an Automated World: Evidence from Loan Repayments","authors":"CHRISTINE LAUDENBACH, STEPHAN SIEGEL","doi":"10.1111/jofi.13388","DOIUrl":"https://doi.org/10.1111/jofi.13388","url":null,"abstract":"We examine the effect of personal, two‐way communication on the payment behavior of delinquent borrowers. Borrowers who speak with a randomly assigned bank agent are significantly more likely to successfully resolve the delinquency relative to borrowers who do not speak with a bank agent. Call characteristics related to the human touch of the call, such as the likeability of the agent's voice, significantly affect payment behavior. Borrowers who speak with a bank agent are also significantly less likely to become delinquent again. Our findings highlight the value of a human element in interactions between financial institutions and their customers.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"5 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-11-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142753061","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the role of private equity (PE) in failed‐bank resolutions after the 2008 financial crisis, using proprietary Federal Deposit Insurance Corporation failed‐bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi‐random empirical design based on detailed bidding information, we show that PE‐acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors played a positive role in stabilizing the financial system through their involvement in failed‐bank resolution.
{"title":"Private Equity and Financial Stability: Evidence from Failed‐Bank Resolution in the Crisis","authors":"EMILY JOHNSTON‐ROSS, SONG MA, MANJU PURI","doi":"10.1111/jofi.13399","DOIUrl":"https://doi.org/10.1111/jofi.13399","url":null,"abstract":"This paper investigates the role of private equity (PE) in failed‐bank resolutions after the 2008 financial crisis, using proprietary Federal Deposit Insurance Corporation failed‐bank acquisition data. PE investors made substantial investments in underperforming and riskier failed banks, particularly in geographies where local banks were also distressed, filling the gap created by a weak, undercapitalized banking sector. Using a quasi‐random empirical design based on detailed bidding information, we show that PE‐acquired banks performed better ex post, with positive real effects for the local economy. Overall, PE investors played a positive role in stabilizing the financial system through their involvement in failed‐bank resolution.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"15 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-11-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142753062","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This address reviews macrofinance from the perspective of resilience. It argues for a shift in mindset, away from risk management toward resilience management. It proposes a new resilience measure, and contrasts micro- and macro-resilience. It also classifies macrofinance models in first- (log-linearized) and second-generation models, and links the important themes of macrofinance to resilience.
{"title":"Presidential Address: Macrofinance and Resilience","authors":"MARKUS K. BRUNNERMEIER","doi":"10.1111/jofi.13403","DOIUrl":"10.1111/jofi.13403","url":null,"abstract":"<p>This address reviews macrofinance from the perspective of resilience. It argues for a shift in mindset, away from risk management toward resilience management. It proposes a new resilience measure, and contrasts micro- and macro-resilience. It also classifies macrofinance models in first- (log-linearized) and second-generation models, and links the important themes of macrofinance to resilience.</p>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"79 6","pages":"3683-3728"},"PeriodicalIF":7.6,"publicationDate":"2024-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.13403","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142599294","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We provide evidence using firm 10‐Ks that over the past 30 years, U.S. firms have expanded their scope of operations. Increases in scope were achieved largely without increasing traditional operating segments. Scope expansion significantly increases valuation and is realized primarily through acquisitions and investment in R&D, but not through capital expenditures. Traditional concentration ratios do not capture this expansion of scope. Our findings point to a new type of firm that increases scope through related expansion, which is highly valued by the market.
{"title":"Scope, Scale, and Concentration: The 21st‐Century Firm","authors":"GERARD HOBERG, GORDON M. PHILLIPS","doi":"10.1111/jofi.13400","DOIUrl":"https://doi.org/10.1111/jofi.13400","url":null,"abstract":"We provide evidence using firm 10‐Ks that over the past 30 years, U.S. firms have expanded their scope of operations. Increases in scope were achieved largely without increasing traditional operating segments. Scope expansion significantly increases valuation and is realized primarily through acquisitions and investment in R&D, but not through capital expenditures. Traditional concentration ratios do not capture this expansion of scope. Our findings point to a new type of firm that increases scope through related expansion, which is highly valued by the market.","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":"17 1","pages":""},"PeriodicalIF":8.0,"publicationDate":"2024-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142580327","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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