Sumit Agarwal, M. Ayyagari, Yuxi Cheng, Pulak Ghosh
We study the impact of a national road construction program that brought access to previously unconnected pincodes in India, on stock market participation. Using a unique dataset on the trading behavior of over 13 million individuals, we find that construction of new feeder roads to a pincode increases the number of new investors by 6.8% and the number of trades by 7.9% and the effects are larger for rural vs. urban areas and for pincodes at intermediate levels of development. The stock market participation effects are largely driven by new bank branch openings within three years of the road construction suggesting a financial inclusion channel. We also see greater effects for pincodes more distant from the nearest big city, greater portfolio diversification, and increased trading in companies located farther away, all suggesting an information channel.
{"title":"Road to Stock Market Participation","authors":"Sumit Agarwal, M. Ayyagari, Yuxi Cheng, Pulak Ghosh","doi":"10.2139/ssrn.3897168","DOIUrl":"https://doi.org/10.2139/ssrn.3897168","url":null,"abstract":"We study the impact of a national road construction program that brought access to previously unconnected pincodes in India, on stock market participation. Using a unique dataset on the trading behavior of over 13 million individuals, we find that construction of new feeder roads to a pincode increases the number of new investors by 6.8% and the number of trades by 7.9% and the effects are larger for rural vs. urban areas and for pincodes at intermediate levels of development. The stock market participation effects are largely driven by new bank branch openings within three years of the road construction suggesting a financial inclusion channel. We also see greater effects for pincodes more distant from the nearest big city, greater portfolio diversification, and increased trading in companies located farther away, all suggesting an information channel.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"87 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114404372","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Combining county-level natural disaster data with individual investor transactions, I document an increased disposition effect for investors impacted by a natural disaster. This effect is increasing in disaster severity and decreasing in the length of time following the event, suggesting that extreme natural disasters can significantly influence investor behavior, especially in the short term. These findings are not explained by liquidity needs, tax incentives, or informed trading. The effect strengthens with local stocks and investors’ duration at their residence. Moreover, the increased disposition effect of disaster-affected investors is consistent with investors deriving utility from environmental damages and realized gains/losses.
{"title":"Disastrous Selling Decisions: The Disposition Effect and Natural Disasters","authors":"Matthew Henriksson","doi":"10.2139/ssrn.3358609","DOIUrl":"https://doi.org/10.2139/ssrn.3358609","url":null,"abstract":"Combining county-level natural disaster data with individual investor transactions, I document an increased disposition effect for investors impacted by a natural disaster. This effect is increasing in disaster severity and decreasing in the length of time following the event, suggesting that extreme natural disasters can significantly influence investor behavior, especially in the short term. These findings are not explained by liquidity needs, tax incentives, or informed trading. The effect strengthens with local stocks and investors’ duration at their residence. Moreover, the increased disposition effect of disaster-affected investors is consistent with investors deriving utility from environmental damages and realized gains/losses.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117109306","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper we provide new evidence of investor inattention by showing that personal occurrences such as birthdays are able to drive attention away from the stock market. We document that individual investors significantly reduce their trading activity in the three days around their birthday. The reduction in the propensity to trade is larger for more active traders, in the event of a decade birthday and when this celebrative event falls on a Friday. Results are robust to analyses focusing only on days when investor attention should be at its peak, as expressed by excess news coverage and trading volumes.
{"title":"I’ll Trade, Just Not Today: Individual Investor Trading Activity around Birthdays","authors":"E. Bajo, Otto Randl, Giorgia Simion","doi":"10.2139/ssrn.3911308","DOIUrl":"https://doi.org/10.2139/ssrn.3911308","url":null,"abstract":"In this paper we provide new evidence of investor inattention by showing that personal occurrences such as birthdays are able to drive attention away from the stock market. We document that individual investors significantly reduce their trading activity in the three days around their birthday. The reduction in the propensity to trade is larger for more active traders, in the event of a decade birthday and when this celebrative event falls on a Friday. Results are robust to analyses focusing only on days when investor attention should be at its peak, as expressed by excess news coverage and trading volumes.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127777997","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document a surprising finding that foreign portfolio inflows delegated through global mutual funds reduce the income of the top 1%. To rationalize this observation, we utilize a comprehensive database on the worldwide ownership of private and public firms for 2001–2013 to trace income inequality to its micro foundation of sales revenue accrued to rich families. We find that large delegated foreign inflows induce local rich families to sell concentrated yet profitable assets, consistent with a diversification channel through which financial globalization mitigates income inequality. Alternative mechanisms fail to explain these findings. Our results have important normative implications.
{"title":"Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Portfolio Flows in Taming the Top 1%","authors":"S. Cheng, M. Massa, H. Zhang","doi":"10.2139/ssrn.3668048","DOIUrl":"https://doi.org/10.2139/ssrn.3668048","url":null,"abstract":"We document a surprising finding that foreign portfolio inflows delegated through global mutual funds reduce the income of the top 1%. To rationalize this observation, we utilize a comprehensive database on the worldwide ownership of private and public firms for 2001–2013 to trace income inequality to its micro foundation of sales revenue accrued to rich families. We find that large delegated foreign inflows induce local rich families to sell concentrated yet profitable assets, consistent with a diversification channel through which financial globalization mitigates income inequality. Alternative mechanisms fail to explain these findings. Our results have important normative implications.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"217 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130386243","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Recent U.S. tax proposals under various names (e.g., wealth taxes, estate tax reform, etc.) center on mark-to-market (MTM) taxation, which eliminates investors’ ability to defer or avoid capital gains taxes. To provide insight on potential effects of these tax proposals, we exploit a unique U.S. setting where “index” options on the S&P 500 Index (SPX) face MTM taxation whereas nearly identical “non-index” options on the exchange traded fund (ETF) tracking the S&P 500 Index (SPY) do not. We find new evidence of asset price consequences to MTM taxation, suggesting that MTM taxation depresses asset prices as investors appear to avoid assets subject to MTM near year-end. Additional analysis suggests this result is driven by tax, rather than administrative, costs of MTM. From a policy perspective, this suggests that 1) MTM taxation has negative, unintended market consequences in the U.S. and 2) U.S. investors will engage in actions to avoid MTM taxation. Both attributes caution policymakers in any attempts to broaden MTM taxation.
{"title":"Mark-to-Market (or Wealth) Taxation in the U.S.: Evidence from Options","authors":"Paul J. Mason, Steven Utke","doi":"10.2139/ssrn.3894574","DOIUrl":"https://doi.org/10.2139/ssrn.3894574","url":null,"abstract":"Recent U.S. tax proposals under various names (e.g., wealth taxes, estate tax reform, etc.) center on mark-to-market (MTM) taxation, which eliminates investors’ ability to defer or avoid capital gains taxes. To provide insight on potential effects of these tax proposals, we exploit a unique U.S. setting where “index” options on the S&P 500 Index (SPX) face MTM taxation whereas nearly identical “non-index” options on the exchange traded fund (ETF) tracking the S&P 500 Index (SPY) do not. We find new evidence of asset price consequences to MTM taxation, suggesting that MTM taxation depresses asset prices as investors appear to avoid assets subject to MTM near year-end. Additional analysis suggests this result is driven by tax, rather than administrative, costs of MTM. From a policy perspective, this suggests that 1) MTM taxation has negative, unintended market consequences in the U.S. and 2) U.S. investors will engage in actions to avoid MTM taxation. Both attributes caution policymakers in any attempts to broaden MTM taxation.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122528955","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper revisits how coexistence of money and bonds can make a society better off. For this purpose, a model is constructed in which payment instruments matter for settling real transactions and savings instruments matter because agents differ in how they discount future utility. Because bonds and money differ in their characteristics as payment and savings instruments, the model is able to explain the coexistence puzzle for an optimally chosen monetary policy. Such a policy trades-offs efficiency in financial markets, in which money is traded for bonds, with efficiency in goods markets, in which money is traded for a real good. Financial markets can achieve a better distribution of savings when agents are constrained by their money holdings, but this is bad for efficiency in goods markets. The former effect can dominate the latter so that optimal policy deviates from the Friedman rule.
{"title":"Coexistence of Money and Interest-Bearing Bonds","authors":"Hugo van Buggenum","doi":"10.2139/ssrn.3889455","DOIUrl":"https://doi.org/10.2139/ssrn.3889455","url":null,"abstract":"This paper revisits how coexistence of money and bonds can make a society better off. For this purpose, a model is constructed in which payment instruments matter for settling real transactions and savings instruments matter because agents differ in how they discount future utility. Because bonds and money differ in their characteristics as payment and savings instruments, the model is able to explain the coexistence puzzle for an optimally chosen monetary policy. Such a policy trades-offs efficiency in financial markets, in which money is traded for bonds, with efficiency in goods markets, in which money is traded for a real good. Financial markets can achieve a better distribution of savings when agents are constrained by their money holdings, but this is bad for efficiency in goods markets. The former effect can dominate the latter so that optimal policy deviates from the Friedman rule.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123792002","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We estimate the willingness-to-pay to bypass a loan-to-value (LTV) cap. Our identification relies on exogenous variation in debt exempt from the LTV regulation that can only be used as a substitute for a personal mortgage. Our baseline estimate reveals that homebuyers pay 7.3 Swedish Kroner (SEK) to avoid 1 SEK of equity down payment. The supply of debt not part of the LTV calculation increased by approximately 50% within 2 years after the LTV regulation. Financially weaker households drive the results.
{"title":"Inefficient Regulation: Mortgages versus Total Credit","authors":"Artashes Karapetyan, J. Kvaerner, M. Rohrer","doi":"10.2139/ssrn.3854860","DOIUrl":"https://doi.org/10.2139/ssrn.3854860","url":null,"abstract":"\u0000 We estimate the willingness-to-pay to bypass a loan-to-value (LTV) cap. Our identification relies on exogenous variation in debt exempt from the LTV regulation that can only be used as a substitute for a personal mortgage. Our baseline estimate reveals that homebuyers pay 7.3 Swedish Kroner (SEK) to avoid 1 SEK of equity down payment. The supply of debt not part of the LTV calculation increased by approximately 50% within 2 years after the LTV regulation. Financially weaker households drive the results.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"257 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124225173","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the relation between US inflation and the performance of global asset classes (including bonds, stocks, industry portfolios, factor premiums, commodities, and REITs), both over a long sample period (1927–2020) and over the most recent 30 years (1991–2020). We find that most assets had positive average real returns in both low- and high-inflation years. While average real returns were lower in years with higher inflation for most assets, many of the differences are not statistically reliable, especially among non-bond assets and in more recent times. We also find mostly weak correlations over time between nominal returns and inflation, including contemporaneous, lagged, expected, and unexpected inflation. The notable exceptions are energy stocks and commodities, where there are reliably positive correlations with both expected and unexpected inflation, but our results also suggest both assets are too volatile to be an effective inflation hedge. Our results confirm the potential of most asset classes to outpace inflation over the long term and suggest that, for investors prioritizing the preservation of purchasing power, inflation-indexed securities may be a more appropriate inflation hedge than commonly suggested alternatives.
{"title":"US Inflation and Global Asset Returns","authors":"Wei Dai, M. Medhat","doi":"10.2139/ssrn.3882899","DOIUrl":"https://doi.org/10.2139/ssrn.3882899","url":null,"abstract":"We study the relation between US inflation and the performance of global asset classes (including bonds, stocks, industry portfolios, factor premiums, commodities, and REITs), both over a long sample period (1927–2020) and over the most recent 30 years (1991–2020). We find that most assets had positive average real returns in both low- and high-inflation years. While average real returns were lower in years with higher inflation for most assets, many of the differences are not statistically reliable, especially among non-bond assets and in more recent times. We also find mostly weak correlations over time between nominal returns and inflation, including contemporaneous, lagged, expected, and unexpected inflation. The notable exceptions are energy stocks and commodities, where there are reliably positive correlations with both expected and unexpected inflation, but our results also suggest both assets are too volatile to be an effective inflation hedge. Our results confirm the potential of most asset classes to outpace inflation over the long term and suggest that, for investors prioritizing the preservation of purchasing power, inflation-indexed securities may be a more appropriate inflation hedge than commonly suggested alternatives.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"253 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131736242","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the different pricing strategies of lenders who originate both government-sponsored enterprise (GSE) and non-GSE loans. We find that, conditional on loan and borrower characteristics and some observable local economic factors, mortgage rates on GSE loans vary significantly across regions. However, no sizable regional variation is observed in the loan amount or default risk. By contrast, the mortgage rates on non-GSE loans depend almost entirely on borrowers and loan characteristics. In addition, spatial variations in GSE mortgage rates are highly responsive to regional prepayment risk. The results are robust to various controls for neighborhood characteristics, including regional-level bank competition, household income, and racial composition. Overall, the findings offer a novel insight into how lenders adjust pricing strategies in response to a changing lending environment. It provides implications for the present and imminent dangers of housing bubbles predictions and the intensified refinancing wave following the COVID-19 pandemic.
{"title":"Lenders’ Pricing Strategy: Do Neighborhood Risks Matter?","authors":"Sumit Agarwal, Yongheng Deng, Jia He, Yonglin Wang, Qi Zhang","doi":"10.2139/ssrn.3889465","DOIUrl":"https://doi.org/10.2139/ssrn.3889465","url":null,"abstract":"This paper explores the different pricing strategies of lenders who originate both government-sponsored enterprise (GSE) and non-GSE loans. We find that, conditional on loan and borrower characteristics and some observable local economic factors, mortgage rates on GSE loans vary significantly across regions. However, no sizable regional variation is observed in the loan amount or default risk. By contrast, the mortgage rates on non-GSE loans depend almost entirely on borrowers and loan characteristics. In addition, spatial variations in GSE mortgage rates are highly responsive to regional prepayment risk. The results are robust to various controls for neighborhood characteristics, including regional-level bank competition, household income, and racial composition. Overall, the findings offer a novel insight into how lenders adjust pricing strategies in response to a changing lending environment. It provides implications for the present and imminent dangers of housing bubbles predictions and the intensified refinancing wave following the COVID-19 pandemic.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129260935","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We explore whether beneficiaries of pension plans should have a voice in the fund’s sustainable investments. We hypothesize that the answer to this question depends on a fund’s legal and societal contexts, benchmarking pressure, and fund-specific factors such as the fund’s size and the board’s composition. We uncover heterogeneity in the degree to which beneficiaries are involved in decision-making. Some pension funds have started a dialogue with their participants, mainly using survey instruments. We provide an example of a fund that gave its participants a real vote, while avoiding the pitfalls that come with hypothetical surveys on individual preferences.
{"title":"Eliciting Pension Beneficiaries’ Sustainability Preferences: Why and How?","authors":"Rob Bauer, Paul Smeets","doi":"10.2139/ssrn.3890879","DOIUrl":"https://doi.org/10.2139/ssrn.3890879","url":null,"abstract":"We explore whether beneficiaries of pension plans should have a voice in the fund’s sustainable investments. We hypothesize that the answer to this question depends on a fund’s legal and societal contexts, benchmarking pressure, and fund-specific factors such as the fund’s size and the board’s composition. We uncover heterogeneity in the degree to which beneficiaries are involved in decision-making. Some pension funds have started a dialogue with their participants, mainly using survey instruments. We provide an example of a fund that gave its participants a real vote, while avoiding the pitfalls that come with hypothetical surveys on individual preferences.","PeriodicalId":428959,"journal":{"name":"Household Finance eJournal","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124146806","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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