Pub Date : 2019-12-26DOI: 10.1146/annurev-financial-110118-123049
L. Kogan, D. Papanikolaou
We review research on the asset pricing implications of models with innovation and intangible capital. In these models, technological innovation shocks propagate differently than standard total factor productivity shocks—and therefore have qualitatively distinct asset pricing implications. We discuss recent approaches to measuring intangible capital and innovation, many of which rely on the prices of financial securities. Last, we review models that explore the economic differences between intangible and innovation relative to other forms of investments—focusing on the role of human capital and cash-flow appropriability.
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Pub Date : 2019-12-26DOI: 10.1146/annurev-financial-110118-123057
Arthur Korteweg
This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio. Based on an expanded set of risk factors from the literature, VC resembles a small-growth investment, while BO loads mostly on value. I also discuss the empirical evidence on liquidity and idiosyncratic volatility risks.
{"title":"Risk Adjustment in Private Equity Returns","authors":"Arthur Korteweg","doi":"10.1146/annurev-financial-110118-123057","DOIUrl":"https://doi.org/10.1146/annurev-financial-110118-123057","url":null,"abstract":"This article reviews empirical methods to assess risk and return in private equity. I discuss data and econometric issues for fund-level, deal-level, and publicly traded partnerships data. Risk-adjusted return estimates vary substantially by method, time period, and data source. The weight of evidence suggests that, relative to a similarly risky investment in the stock market, the average venture capital (VC) fund earned positive risk-adjusted returns before the turn of the millennium, but net-of-fee returns have been zero or even negative since. Average leveraged buyout (BO) investments have generally earned positive risk-adjusted returns both before and after fees, compared with a levered stock portfolio. Based on an expanded set of risk factors from the literature, VC resembles a small-growth investment, while BO loads mostly on value. I also discuss the empirical evidence on liquidity and idiosyncratic volatility risks.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"14 3","pages":"131-152"},"PeriodicalIF":3.2,"publicationDate":"2019-12-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138514531","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-12-26DOI: 10.1146/annurev-financial-011019-040506
Zvi Bodie
Starting with his 1970 doctoral dissertation and continuing to today, Robert C. Merton has revolutionized the theory and practice of finance. In 1997, Merton shared a Nobel Prize in Economics “for a new method to determine the value of derivatives.” His contributions to the science of finance, however, go far beyond that. In this article I describe Merton's main contributions. They include the following: 1. The introduction of continuous-time stochastic models (the Ito calculus) to the theory of household consumption and investment decisions. Merton's technique of dynamic hedging in continuous time provided a bridge between the theoretical complete-markets equilibrium model of Kenneth Arrow and the real world of personal financial planning and management. 2. The derivation of the multifactor Intertemporal Capital Asset Pricing Model (ICAPM). The ICAPM generalizes the single-factor CAPM and explains why that model might fail to properly account for observed market excess returns. It also provides a theory to identify potential forward-looking risk premia for use in factor-based investment strategies. It is therefore both a positive and normative theory. 3. The invention of Contingent Claims Analysis (CCA) as a generalization of option pricing theory. CCA applies the technique of dynamic replication to the valuation and risk management of a wide range of corporate and government liabilities. Merton's CCA model for the valuation and analysis of risky debt is known among scholars and practitioners alike as the Merton Model. 4. The development of financial engineering, which employs CCA to design and produce new financial products. Merton was the first to apply CCA to analyze government guaranty programs such as deposit insurance, and to suggest improvements in the way those programs are managed. He and his students have applied his insights at both the micro and macro policy levels. 5. And finally, the development of a theory of financial intermediation that explains and predicts how financial systems differ across countries and change over time. Merton has applied that theory, called functional and structural finance, to guide the design and regulation of financial systems at the levels of the firm, the industry, and the nation. He has also used it to propose reforms in pensions, sovereign wealth funds, and macrostabilization policy.
从1970年的博士论文开始，一直持续到今天，罗伯特·默顿(Robert C. Merton)彻底改变了金融理论和实践。1997年，默顿因“确定衍生品价值的新方法”而获得诺贝尔经济学奖。然而，他对金融科学的贡献远不止于此。在本文中，我将描述默顿的主要贡献。它们包括以下内容:将连续时间随机模型(伊藤演算)引入家庭消费和投资决策理论。默顿的连续时间动态套期保值技术在肯尼斯·阿罗的理论完全市场均衡模型和个人财务规划和管理的现实世界之间架起了一座桥梁。2.多因素跨期资本资产定价模型(ICAPM)的推导。ICAPM概括了单因素CAPM，并解释了为什么该模型可能无法正确地解释观察到的市场超额回报。它还为基于要素的投资策略提供了一种识别潜在前瞻性风险溢价的理论。因此，它既是一种实证理论，也是一种规范理论。3.作为期权定价理论推广的或有权利分析(CCA)的发明。CCA将动态复制技术应用于各种公司和政府负债的估值和风险管理。默顿对风险债务进行估值和分析的CCA模型被学者和实践者们称为默顿模型。金融工程的发展，利用CCA来设计和生产新的金融产品。默顿是第一个将CCA应用于分析存款保险等政府担保项目，并建议改进这些项目的管理方式的人。他和他的学生将他的见解应用于微观和宏观政策层面。5.最后，金融中介理论的发展，解释和预测金融体系在不同国家之间的差异和随时间的变化。默顿运用了这一理论，即所谓的功能性和结构性金融，来指导企业、行业和国家层面的金融体系设计和监管。他还利用这个机会提出了养老金、主权财富基金和宏观稳定政策的改革。
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Pub Date : 2019-12-26DOI: 10.1146/annurev-financial-110118-123019
Edward I. Altman, Robert Benhenni
Over the last 30 years, the distressed debt market has come a long way and is now a legitimate investment asset class, albeit with periodic dramatic activity. Despite the benign credit cycle in US ...
{"title":"The Anatomy of Distressed Debt Markets","authors":"Edward I. Altman, Robert Benhenni","doi":"10.1146/annurev-financial-110118-123019","DOIUrl":"https://doi.org/10.1146/annurev-financial-110118-123019","url":null,"abstract":"Over the last 30 years, the distressed debt market has come a long way and is now a legitimate investment asset class, albeit with periodic dramatic activity. Despite the benign credit cycle in US ...","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"8 4","pages":""},"PeriodicalIF":3.2,"publicationDate":"2019-12-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138514550","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2019-07-15DOI: 10.5089/9781498324908.063
T. Adrian, Tommaso Mancini Griffoli
Payments systems around the world are evolving with the emergence of digital money issued by private firms and central banks. We provide a conceptual framework to compare and contrast traditional forms of money with their new digital equivalents. We suggest that some forms of digital money, while less stable as a store of value, could be rapidly adopted given their advantages as a means of payment. We review the benefits and risks that would emerge. One approach to managing risks would be to require full backing of selected digital money with central bank reserves. We call the arrangement synthetic central bank digital currency (sCBDC), a private-public partnership that combines the advantages of private sector innovation and customer orientation with the safety and stability of central bank–backed money. We offer policy considerations, directions for research, and an overview of the literature to date. The analysis of digital currencies is an exciting new field crossing into monetary and financial economics that will reshape the monetary and financial systems for many years to come. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"The Rise of Digital Money","authors":"T. Adrian, Tommaso Mancini Griffoli","doi":"10.5089/9781498324908.063","DOIUrl":"https://doi.org/10.5089/9781498324908.063","url":null,"abstract":"Payments systems around the world are evolving with the emergence of digital money issued by private firms and central banks. We provide a conceptual framework to compare and contrast traditional forms of money with their new digital equivalents. We suggest that some forms of digital money, while less stable as a store of value, could be rapidly adopted given their advantages as a means of payment. We review the benefits and risks that would emerge. One approach to managing risks would be to require full backing of selected digital money with central bank reserves. We call the arrangement synthetic central bank digital currency (sCBDC), a private-public partnership that combines the advantages of private sector innovation and customer orientation with the safety and stability of central bank–backed money. We offer policy considerations, directions for research, and an overview of the literature to date. The analysis of digital currencies is an exciting new field crossing into monetary and financial economics that will reshape the monetary and financial systems for many years to come. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"1 1","pages":""},"PeriodicalIF":3.2,"publicationDate":"2019-07-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44878191","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-01DOI: 10.1146/ANNUREV-FINANCIAL-110217-022944
Stephen Figlewski
Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk-neutral density (RND) over the underlying price at expiration. The RND contains investors’ beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With a particular focus on US equity options, I review the historical development of this powerful concept, practical details of fitting an RND to options market prices, and the many ways in which investigators have tried to distill true expectations and risk premia from observed RNDs. I briefly discuss areas of active current research including the pricing kernel puzzle and the volatility surface, and offer thoughts on what has been learned about RNDs so far and fruitful directions for future research.
{"title":"Risk-Neutral Densities: A Review","authors":"Stephen Figlewski","doi":"10.1146/ANNUREV-FINANCIAL-110217-022944","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-022944","url":null,"abstract":"Trading in options with a wide range of exercise prices and a single maturity allows a researcher to extract the market's risk-neutral density (RND) over the underlying price at expiration. The RND contains investors’ beliefs about the true probabilities blended with their risk preferences, both of which are of great interest to academics and practitioners alike. With a particular focus on US equity options, I review the historical development of this powerful concept, practical details of fitting an RND to options market prices, and the many ways in which investigators have tried to distill true expectations and risk premia from observed RNDs. I briefly discuss areas of active current research including the pricing kernel puzzle and the volatility surface, and offer thoughts on what has been learned about RNDs so far and fruitful directions for future research.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1146/ANNUREV-FINANCIAL-110217-022944","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46601288","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-01DOI: 10.1146/ANNUREV-FINANCIAL-110217-022833
I. Drechsler, Alexi Savov, P. Schnabl
In recent years, there has been a resurgence of research on the transmission of monetary policy through the financial system, fueled in part by empirical findings showing that monetary policy affects asset prices and the financial system in ways not explained by the New Keynesian paradigm. In particular, monetary policy appears to impact risk premia in stock and bond prices and to effectively control the liquidity premium in the economy (the cost of holding liquid assets). We review these findings and recent theories proposed to explain them, and we outline a conceptual framework that unifies them. The framework revolves around the central role of liquidity in risk sharing and explains how monetary policy governs its production and use within the financial sector.
{"title":"Liquidity, Risk Premia, and the Financial Transmission of Monetary Policy","authors":"I. Drechsler, Alexi Savov, P. Schnabl","doi":"10.1146/ANNUREV-FINANCIAL-110217-022833","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-022833","url":null,"abstract":"In recent years, there has been a resurgence of research on the transmission of monetary policy through the financial system, fueled in part by empirical findings showing that monetary policy affects asset prices and the financial system in ways not explained by the New Keynesian paradigm. In particular, monetary policy appears to impact risk premia in stock and bond prices and to effectively control the liquidity premium in the economy (the cost of holding liquid assets). We review these findings and recent theories proposed to explain them, and we outline a conceptual framework that unifies them. The framework revolves around the central role of liquidity in risk sharing and explains how monetary policy governs its production and use within the financial sector.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1146/ANNUREV-FINANCIAL-110217-022833","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44640554","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-01DOI: 10.1146/ANNUREV-FINANCIAL-110217-023025
Kinda Hachem
Shadow banking and the Chinese economy are two subjects that have independently garnered much attention. A new but actively growing literature is now emerging at their intersection. I review this literature and argue that shadow banking in China is not fundamentally different from the textbook definition of shadow banking, namely credit intermediation with maturity mismatch that is structured to avoid regulation. I emphasize maturity mismatch because that is what creates run risk and makes any shadow banking system inherently fragile. I explain how the rise of shadow banking in China can be traced back to stricter liquidity regulation, how shadow banking has changed the financial landscape in China, and what the current state of the industry is. Interactions between shadow banking and the rest of the economy have some characteristics that reflect China's unique politico-economic structure, but this is because the rest of the economy has these characteristics, not because there is something fundamentally different about the forces behind shadow banking in China.
{"title":"Shadow Banking in China","authors":"Kinda Hachem","doi":"10.1146/ANNUREV-FINANCIAL-110217-023025","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-023025","url":null,"abstract":"Shadow banking and the Chinese economy are two subjects that have independently garnered much attention. A new but actively growing literature is now emerging at their intersection. I review this literature and argue that shadow banking in China is not fundamentally different from the textbook definition of shadow banking, namely credit intermediation with maturity mismatch that is structured to avoid regulation. I emphasize maturity mismatch because that is what creates run risk and makes any shadow banking system inherently fragile. I explain how the rise of shadow banking in China can be traced back to stricter liquidity regulation, how shadow banking has changed the financial landscape in China, and what the current state of the industry is. Interactions between shadow banking and the rest of the economy have some characteristics that reflect China's unique politico-economic structure, but this is because the rest of the economy has these characteristics, not because there is something fundamentally different about the forces behind shadow banking in China.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1146/ANNUREV-FINANCIAL-110217-023025","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47418648","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-01DOI: 10.1146/ANNUREV-FINANCIAL-110217-023056
R. Engle
Ten years ago, the financial crisis spurred research focused on systemic risk. This article examines the history and application of the SRISK measure, which was developed at that time and is now widely used in monitoring systemic risk around the globe. The concept is explained and a variety of ways to measure SRISK are developed. In this article, new results are presented on the uncertainty associated with the SRISK measure and on how it compares with other related measures from both academics and regulators. By focusing on the mechanism by which undercapitalization of the financial sector initiates a financial crisis, new research examines how the probability of a financial crisis is affected by the level of SRISK and, consequently, how much SRISK a country can stand without having a high probability of crisis. The model used to evaluate this probability recognizes the externalities between financial institutions that make an undercapitalized firm or country more fragile if other firms and countries are also undercapitalized.
{"title":"Systemic Risk 10 Years Later","authors":"R. Engle","doi":"10.1146/ANNUREV-FINANCIAL-110217-023056","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-023056","url":null,"abstract":"Ten years ago, the financial crisis spurred research focused on systemic risk. This article examines the history and application of the SRISK measure, which was developed at that time and is now widely used in monitoring systemic risk around the globe. The concept is explained and a variety of ways to measure SRISK are developed. In this article, new results are presented on the uncertainty associated with the SRISK measure and on how it compares with other related measures from both academics and regulators. By focusing on the mechanism by which undercapitalization of the financial sector initiates a financial crisis, new research examines how the probability of a financial crisis is affected by the level of SRISK and, consequently, how much SRISK a country can stand without having a high probability of crisis. The model used to evaluate this probability recognizes the externalities between financial institutions that make an undercapitalized firm or country more fragile if other firms and countries are also undercapitalized.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1146/ANNUREV-FINANCIAL-110217-023056","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45963070","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2018-11-01DOI: 10.1146/annurev-financial-110217-022605
Samuel M. Hartzmark, David H. Solomon
We review the literature on recurring firm events and predictable returns. Many common firm events recur on a predictable basis, such as earnings and dividends, among others. These events tend to be associated with large positive returns in the period when the events are predicted to occur (without conditioning on the outcome or existence of the event itself). These returns occur mainly on the long side of the portfolio, are statistically and economically large when value weighted, and replicate internationally. It is difficult to explain the observed patterns with a unified risk theory. Some of the underlying causes seem to be related to idiosyncratic risk, predictable attention, probability mistakes, and demand for corporate distributions.
{"title":"Recurring Firm Events and Predictable Returns: The Within-Firm Time Series","authors":"Samuel M. Hartzmark, David H. Solomon","doi":"10.1146/annurev-financial-110217-022605","DOIUrl":"https://doi.org/10.1146/annurev-financial-110217-022605","url":null,"abstract":"We review the literature on recurring firm events and predictable returns. Many common firm events recur on a predictable basis, such as earnings and dividends, among others. These events tend to be associated with large positive returns in the period when the events are predicted to occur (without conditioning on the outcome or existence of the event itself). These returns occur mainly on the long side of the portfolio, are statistically and economically large when value weighted, and replicate internationally. It is difficult to explain the observed patterns with a unified risk theory. Some of the underlying causes seem to be related to idiosyncratic risk, predictable attention, probability mistakes, and demand for corporate distributions.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1146/annurev-financial-110217-022605","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45076822","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"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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