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 IC. There is no wedge at short horizons, while the wedge accounts for 40% of long-term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF-implied interest rate is a weighted average of collateralized and uncollateralized interest rates.
{"title":"The Term Structure of Covered Interest Rate Parity Violations","authors":"PATRICK AUGUSTIN, MIKHAIL CHERNOV, LUKAS SCHMID, DONGHO SONG","doi":"10.1111/jofi.13336","DOIUrl":"10.1111/jofi.13336","url":null,"abstract":"<div>\u0000 \u0000 <p>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 IC. There is no wedge at short horizons, while the wedge accounts for 40% of long-term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF-implied interest rate is a weighted average of collateralized and uncollateralized interest rates.</p>\u0000 </div>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140333603","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}
{"title":"BRATTLE GROUP AND DIMENSIONAL FUND ADVISORS PRIZES FOR 2023","authors":"","doi":"10.1111/jofi.13328","DOIUrl":"https://doi.org/10.1111/jofi.13328","url":null,"abstract":"","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140139186","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}
{"title":"Report of the Editor of The Journal of Finance for the Year 2023","authors":"ANTOINETTE SCHOAR","doi":"10.1111/jofi.13329","DOIUrl":"https://doi.org/10.1111/jofi.13329","url":null,"abstract":"","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140139174","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}
{"title":"Report of the 2024 Annual Membership Meeting","authors":"","doi":"10.1111/jofi.13326","DOIUrl":"https://doi.org/10.1111/jofi.13326","url":null,"abstract":"","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140139220","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}
{"title":"Report of the Executive Secretary and Treasurer for the Fiscal Year Ending June 30, 2023","authors":"","doi":"10.1111/jofi.13327","DOIUrl":"https://doi.org/10.1111/jofi.13327","url":null,"abstract":"","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140139221","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 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, market variance, tail and intermediary risk factors, higher moments, and the VIX term structure slope. Together, market return and variance explain more than 90% of option return variation. Unconditionally, the magnitude of the variance risk premium is plausible. It displays pronounced time variation, spikes during crises, and always has the expected sign.
{"title":"Modeling Conditional Factor Risk Premia Implied by Index Option Returns","authors":"MATHIEU FOURNIER, KRIS JACOBS, PIOTR ORŁOWSKI","doi":"10.1111/jofi.13324","DOIUrl":"10.1111/jofi.13324","url":null,"abstract":"<p>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, market variance, tail and intermediary risk factors, higher moments, and the VIX term structure slope. Together, market return and variance explain more than 90% of option return variation. Unconditionally, the magnitude of the variance risk premium is plausible. It displays pronounced time variation, spikes during crises, and always has the expected sign.</p>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.13324","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140069820","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}
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 decreases, even though the informativeness of their short-term forecasts increases. We test and confirm this prediction by considering how the informativeness of equity analysts' forecasts at various horizons varies over the long run and with their exposure to social media data.
{"title":"Does Alternative Data Improve Financial Forecasting? The Horizon Effect","authors":"OLIVIER DESSAINT, THIERRY FOUCAULT, LAURENT FRESARD","doi":"10.1111/jofi.13323","DOIUrl":"10.1111/jofi.13323","url":null,"abstract":"<p>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 decreases, even though the informativeness of their short-term forecasts increases. We test and confirm this prediction by considering how the informativeness of equity analysts' forecasts at various horizons varies over the long run and with their exposure to social media data.</p>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.13323","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140064305","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 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 significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller's payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and breakup fees.
{"title":"Due Diligence","authors":"BRENDAN DALEY, THOMAS GEELEN, BRETT GREEN","doi":"10.1111/jofi.13322","DOIUrl":"10.1111/jofi.13322","url":null,"abstract":"<p>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 significant. Nevertheless, allowing for due diligence can improve both total surplus and the seller's payoff compared to a setting without due diligence. We use our framework to explore the timing of due diligence, bidder heterogeneity, and breakup fees.</p>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://onlinelibrary.wiley.com/doi/epdf/10.1111/jofi.13322","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140032370","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 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 tests) and external validity (high overfitting tendency and poor out-of-sample fit). The measure can be computed at low cost even for complex dynamic structural models. To illustrate its applications, we provide quantitative examples applying the measure to (time-varying) rare-disaster risk and long-run risk models.
{"title":"Measuring “Dark Matter” in Asset Pricing Models","authors":"HUI CHEN, WINSTON WEI DOU, LEONID KOGAN","doi":"10.1111/jofi.13317","DOIUrl":"10.1111/jofi.13317","url":null,"abstract":"<div>\u0000 \u0000 <p>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 tests) and external validity (high overfitting tendency and poor out-of-sample fit). The measure can be computed at low cost even for complex dynamic structural models. To illustrate its applications, we provide quantitative examples applying the measure to (time-varying) rare-disaster risk and long-run risk models.</p></div>","PeriodicalId":15753,"journal":{"name":"Journal of Finance","volume":null,"pages":null},"PeriodicalIF":8.0,"publicationDate":"2024-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"140032377","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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