Pub Date : 2018-11-01DOI: 10.1146/ANNUREV-FINANCIAL-110217-023036
Manuel Adelino, A. Schoar, Felipe Severino
Ten years after the financial crisis of 2008, there is widespread agreement that the boom in mortgage lending and its subsequent reversal were at the core of the Great Recession. We survey the existing evidence, which suggests that inflated house-price expectations across the economy played a central role in driving both the demand for and the supply of mortgage credit before the crisis. The great misnomer of the 2008 crisis is that it was not a subprime crisis but rather a middle-class crisis. Inflated house-price expectations led households across all income groups, especially the middle class, to increase their demand for housing and mortgage leverage. Similarly, banks lent against increasing collateral values and underestimated the risk of defaults. We highlight how these emerging facts have essential implications for policy.
{"title":"The Role of Housing and Mortgage Markets in the Financial Crisis","authors":"Manuel Adelino, A. Schoar, Felipe Severino","doi":"10.1146/ANNUREV-FINANCIAL-110217-023036","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-023036","url":null,"abstract":"Ten years after the financial crisis of 2008, there is widespread agreement that the boom in mortgage lending and its subsequent reversal were at the core of the Great Recession. We survey the existing evidence, which suggests that inflated house-price expectations across the economy played a central role in driving both the demand for and the supply of mortgage credit before the crisis. The great misnomer of the 2008 crisis is that it was not a subprime crisis but rather a middle-class crisis. Inflated house-price expectations led households across all income groups, especially the middle class, to increase their demand for housing and mortgage leverage. Similarly, banks lent against increasing collateral values and underestimated the risk of defaults. We highlight how these emerging facts have essential implications for policy.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"1 1","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-110217-023036","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42543734","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-110217-022513
M. Richardson, Kermit L. Schoenholtz, L. White
We argue that implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has contributed significantly to the reduction of systemic risk in the United States. However, Dodd-Frank also introduced burdensome rules that have little to do with systemic risk. This article evaluates the trade-off between capital regulation and regulation of scope in the context of Dodd-Frank, with a particular emphasis on the Volcker Rule. Recent regulatory reforms aimed at rolling back Dodd-Frank are evaluated and discussed.
{"title":"Deregulating Wall Street","authors":"M. Richardson, Kermit L. Schoenholtz, L. White","doi":"10.1146/ANNUREV-FINANCIAL-110217-022513","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-022513","url":null,"abstract":"We argue that implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has contributed significantly to the reduction of systemic risk in the United States. However, Dodd-Frank also introduced burdensome rules that have little to do with systemic risk. This article evaluates the trade-off between capital regulation and regulation of scope in the context of Dodd-Frank, with a particular emphasis on the Volcker Rule. Recent regulatory reforms aimed at rolling back Dodd-Frank are evaluated and discussed.","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-110217-022513","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45947023","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-110217-022625
H. James
There is some evidence of deglobalization in the aftermath of the 2008 financial crisis. The economic data are mixed and indicate a stall, but not a collapse, of globalization. Cross-border financial flows have been reduced, but the overall outcome mostly reflects changes in European banking. Trade is not growing as quickly as before the crisis, but that may be the consequence of technology shortening supply chains. There are more protectionist measures, but they have not radically cut trade. But political deglobalization has advanced much further, and consequently, there is the prospect of more intense conflicts over trade and financial regulation in the future, as well as one of an increasing backlash against migration. Globalization depends on a complex system of regulating cross-border flows and on embedding domestic rules in an international order. The political momentum is directed against the existing methods or regulation and against the complex rules that had been established to manage globalization. The promise given by populist myth builders is that eliminating international entanglements can make life simpler, less regulated, and above all, less subject to the dictates of an administrative class. Modern economic nationalism or unilateralism can be understood as a reversal of the process of embedding and may thus be termed “disembedded unilateralism.”
{"title":"Deglobalization: The Rise of Disembedded Unilateralism","authors":"H. James","doi":"10.1146/ANNUREV-FINANCIAL-110217-022625","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-022625","url":null,"abstract":"There is some evidence of deglobalization in the aftermath of the 2008 financial crisis. The economic data are mixed and indicate a stall, but not a collapse, of globalization. Cross-border financial flows have been reduced, but the overall outcome mostly reflects changes in European banking. Trade is not growing as quickly as before the crisis, but that may be the consequence of technology shortening supply chains. There are more protectionist measures, but they have not radically cut trade. But political deglobalization has advanced much further, and consequently, there is the prospect of more intense conflicts over trade and financial regulation in the future, as well as one of an increasing backlash against migration. Globalization depends on a complex system of regulating cross-border flows and on embedding domestic rules in an international order. The political momentum is directed against the existing methods or regulation and against the complex rules that had been established to manage globalization. The promise given by populist myth builders is that eliminating international entanglements can make life simpler, less regulated, and above all, less subject to the dictates of an administrative class. Modern economic nationalism or unilateralism can be understood as a reversal of the process of embedding and may thus be termed “disembedded unilateralism.”","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-110217-022625","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46001120","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-110217-022737
Hao Zhou
This article reviews the predictability evidence on the variance risk premium: (a) It predicts significant positive risk premia across equity, bond, currency, and credit markets; (b) the predictability peaks at few-month horizons and dies out afterward; (c) such a short-run predictability is complementary to the long-run predictability offered by the price-to-earnings ratio, forward rate, interest differential, and leverage ratio. Several structural approaches based on the notion of economic uncertainty are discussed for generating these stylized facts about the variance risk premium, which has broad implications for various empirical asset pricing puzzles.
{"title":"Variance Risk Premia, Asset Predictability Puzzles, and Macroeconomic Uncertainty","authors":"Hao Zhou","doi":"10.1146/annurev-financial-110217-022737","DOIUrl":"https://doi.org/10.1146/annurev-financial-110217-022737","url":null,"abstract":"This article reviews the predictability evidence on the variance risk premium: (a) It predicts significant positive risk premia across equity, bond, currency, and credit markets; (b) the predictability peaks at few-month horizons and dies out afterward; (c) such a short-run predictability is complementary to the long-run predictability offered by the price-to-earnings ratio, forward rate, interest differential, and leverage ratio. Several structural approaches based on the notion of economic uncertainty are discussed for generating these stylized facts about the variance risk premium, which has broad implications for various empirical asset pricing puzzles.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"16 5","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138514540","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-110217-022700
Stephen G. Ryan
Banks’ financial reporting requirements and discretionary choices may affect financial stability by altering one or more of the likelihood that banks violate regulatory capital requirements, banks’ internal discipline over risk management and financial reporting, and external market and regulatory discipline over banks. In this article, I discuss five recent empirical papers that examine these channels linking banks’ financial reporting to financial stability. I explain how these papers identify economic contexts and associated financial reporting constructs that enable powerful examinations of these channels, and how they employ research designs that meaningfully address the issues regarding valid causal inference raised by Acharya & Ryan (2016) . I conclude that, while each study examines a specific channel or two in a specific setting, collectively the literature is making steady progress in enhancing our understanding of the causal forces at play in the channels linking banks’ financial reporting and financial stability, the goal set forth by Acharya & Ryan (2016) . I also identify open questions that these papers suggest for future research on the effects of banks’ financial reporting on financial stability.
{"title":"Recent Research on Banks’ Financial Reporting and Financial Stability","authors":"Stephen G. Ryan","doi":"10.1146/ANNUREV-FINANCIAL-110217-022700","DOIUrl":"https://doi.org/10.1146/ANNUREV-FINANCIAL-110217-022700","url":null,"abstract":"Banks’ financial reporting requirements and discretionary choices may affect financial stability by altering one or more of the likelihood that banks violate regulatory capital requirements, banks’ internal discipline over risk management and financial reporting, and external market and regulatory discipline over banks. In this article, I discuss five recent empirical papers that examine these channels linking banks’ financial reporting to financial stability. I explain how these papers identify economic contexts and associated financial reporting constructs that enable powerful examinations of these channels, and how they employ research designs that meaningfully address the issues regarding valid causal inference raised by Acharya & Ryan (2016) . I conclude that, while each study examines a specific channel or two in a specific setting, collectively the literature is making steady progress in enhancing our understanding of the causal forces at play in the channels linking banks’ financial reporting and financial stability, the goal set forth by Acharya & Ryan (2016) . I also identify open questions that these papers suggest for future research on the effects of banks’ financial reporting on financial stability.","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-110217-022700","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49362265","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-110217-022636
Zhiguo He, Arvind Krishnamurthy
"Intermediary asset pricing'' understands asset prices and risk premia through the lens of frictions in financial intermediation. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastest growing areas of research in finance. This article explains the theory behind intermediary asset pricing and in particular how it is different from other approaches to asset pricing. The article also covers selective empirical evidence in favor of intermediary asset pricing.
{"title":"Intermediary Asset Pricing and the Financial Crisis","authors":"Zhiguo He, Arvind Krishnamurthy","doi":"10.1146/annurev-financial-110217-022636","DOIUrl":"https://doi.org/10.1146/annurev-financial-110217-022636","url":null,"abstract":"\"Intermediary asset pricing'' understands asset prices and risk premia through the lens of frictions in financial intermediation. Perhaps motivated by phenomena in the financial crisis, intermediary asset pricing has been one of the fastest growing areas of research in finance. This article explains the theory behind intermediary asset pricing and in particular how it is different from other approaches to asset pricing. The article also covers selective empirical evidence in favor of intermediary asset pricing.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"8 20","pages":""},"PeriodicalIF":3.2,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138514542","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 : 2017-11-01DOI: 10.1146/annurev-financial-110716-032445
Johannes Muhle-Karbe, Max Reppen, H. Mete Soner
This review is an introduction to asymptotic methods for portfolio choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and how to simplify them in the small-cost limit. This allows one to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.
{"title":"A Primer on Portfolio Choice with Small Transaction Costs","authors":"Johannes Muhle-Karbe, Max Reppen, H. Mete Soner","doi":"10.1146/annurev-financial-110716-032445","DOIUrl":"https://doi.org/10.1146/annurev-financial-110716-032445","url":null,"abstract":"This review is an introduction to asymptotic methods for portfolio choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and how to simplify them in the small-cost limit. This allows one to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"8 6","pages":""},"PeriodicalIF":3.2,"publicationDate":"2017-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138514549","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 : 2017-11-01DOI: 10.1146/annurev-financial-110716-032355
Itay Goldstein,Liyan Yang
Information disclosure is an essential component of regulation in financial markets. In this article, we provide a cohesive analytical framework to review certain key channels through which disclosure in financial markets affects market quality, information production, efficiency of real investment decisions, and traders’ welfare. We use our framework to address four main aspects. First, we demonstrate the conventional wisdom that disclosure improves market quality in an economy with exogenous information. Second, we illustrate that disclosure can crowd out the production of private information and that its overall market-quality implications are subtle and depend on the specification of information-acquisition technology. Third, we review how disclosure affects the efficiency of real investment decisions when financial markets are not just a side show, as real decision makers can learn information from them to guide their decisions. Last, we discuss how disclosure in financial markets affects investors’ welfare through changing trading opportunities and through beauty-contest motives. Overall, our review suggests that information disclosure is an important factor for understanding the functioning of financial markets and that there are several trade-offs that should be considered in determining its optimal level.
{"title":"Information Disclosure in Financial Markets","authors":"Itay Goldstein,Liyan Yang","doi":"10.1146/annurev-financial-110716-032355","DOIUrl":"https://doi.org/10.1146/annurev-financial-110716-032355","url":null,"abstract":"Information disclosure is an essential component of regulation in financial markets. In this article, we provide a cohesive analytical framework to review certain key channels through which disclosure in financial markets affects market quality, information production, efficiency of real investment decisions, and traders’ welfare. We use our framework to address four main aspects. First, we demonstrate the conventional wisdom that disclosure improves market quality in an economy with exogenous information. Second, we illustrate that disclosure can crowd out the production of private information and that its overall market-quality implications are subtle and depend on the specification of information-acquisition technology. Third, we review how disclosure affects the efficiency of real investment decisions when financial markets are not just a side show, as real decision makers can learn information from them to guide their decisions. Last, we discuss how disclosure in financial markets affects investors’ welfare through changing trading opportunities and through beauty-contest motives. Overall, our review suggests that information disclosure is an important factor for understanding the functioning of financial markets and that there are several trade-offs that should be considered in determining its optimal level.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":"17 7","pages":"101-125"},"PeriodicalIF":3.2,"publicationDate":"2017-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138514534","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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