Pub Date : 2026-01-21DOI: 10.1016/j.jfineco.2026.104236
Nuno Clara , João F. Cocco , S. Lakshmi Naaraayanan , Varun Sharma
Operation of residential buildings is responsible for roughly 22% of global energy consumption and 17% of CO2 emissions. We study the investments triggered by a regulatory intervention requiring rented properties to satisfy minimum energy efficiency standards. The analysis shows significant investments in low capital expenditure retrofits. Using an instrumented difference-in-differences methodology, we show that the investments do not have an economically significant impact on rents, so that landlords are not compensated for them.
{"title":"Investments that make our homes greener: The role of regulation","authors":"Nuno Clara , João F. Cocco , S. Lakshmi Naaraayanan , Varun Sharma","doi":"10.1016/j.jfineco.2026.104236","DOIUrl":"10.1016/j.jfineco.2026.104236","url":null,"abstract":"<div><div>Operation of residential buildings is responsible for roughly 22% of global energy consumption and 17% of CO<sub>2</sub> emissions. We study the investments triggered by a regulatory intervention requiring rented properties to satisfy minimum energy efficiency standards. The analysis shows significant investments in low capital expenditure retrofits. Using an instrumented difference-in-differences methodology, we show that the investments do not have an economically significant impact on rents, so that landlords are not compensated for them.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"177 ","pages":"Article 104236"},"PeriodicalIF":10.4,"publicationDate":"2026-01-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"146014272","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}
Pub Date : 2026-01-12DOI: 10.1016/j.jfineco.2025.104227
Stefano Cassella , A. Emanuele Rizzo , Oliver G. Spalt , Leah Zimmerer
We study the equity market implications of a reform in the fiduciary laws that govern trust investments (prudent man laws), implemented in a staggered fashion across U.S. states from 1985 to 2006. As trusts account for a substantial fraction of institutional equity holdings in our sample period, and since the reform does not pertain to other investors, our empirical setting provides a rare opportunity to study the impact of a regulatory change on institutional investor holdings and relative prices in the U.S. equity market. We show that, before the reform, trusts tilt their portfolios towards prudent stocks. After the law change, trusts undo these tilts, which leads to substantial changes in portfolio performance, investor demand, and stock returns, consistent with a model of inelastic equity markets. More broadly, our paper documents a striking case of investment distortions: while the concept of diversification has been playing a key role in asset pricing theory since the 1950s, fiduciary duties severely constrained trusts’ ability to diversify their portfolios for up to half a century later.
{"title":"Constrained by law: The impact of fiduciary duties on portfolios and prices in US equity markets","authors":"Stefano Cassella , A. Emanuele Rizzo , Oliver G. Spalt , Leah Zimmerer","doi":"10.1016/j.jfineco.2025.104227","DOIUrl":"10.1016/j.jfineco.2025.104227","url":null,"abstract":"<div><div>We study the equity market implications of a reform in the fiduciary laws that govern trust investments (prudent man laws), implemented in a staggered fashion across U.S. states from 1985 to 2006. As trusts account for a substantial fraction of institutional equity holdings in our sample period, and since the reform does not pertain to other investors, our empirical setting provides a rare opportunity to study the impact of a regulatory change on institutional investor holdings and relative prices in the U.S. equity market. We show that, before the reform, trusts tilt their portfolios towards prudent stocks. After the law change, trusts undo these tilts, which leads to substantial changes in portfolio performance, investor demand, and stock returns, consistent with a model of inelastic equity markets. More broadly, our paper documents a striking case of investment distortions: while the concept of diversification has been playing a key role in asset pricing theory since the 1950s, fiduciary duties severely constrained trusts’ ability to diversify their portfolios for up to half a century later.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"177 ","pages":"Article 104227"},"PeriodicalIF":10.4,"publicationDate":"2026-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145957090","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}
Pub Date : 2026-01-09DOI: 10.1016/j.jfineco.2025.104220
Felix Feng , Tom Nohel , Xuan Tian , Wenyu Wang , Yufeng Wu
Special Purpose Acquisition Companies (SPACs) took Wall Street by storm in 2020/2021 and continue to play a significant role in today’s capital markets. Estimating a structural model using a hand-collected comprehensive dataset, we find that SPACs add value by identifying and bringing high-potential firms to public markets, though contractual frictions skew the distribution of spoils away from SPAC shareholders and towards sponsors and target owners. Nonetheless, shareholder excess returns are positive once redemptions are accounted for. Policy analyses reveal that earnout provisions enhance welfare, while modest improvements in disclosure and limits on warrant usage have minimal impact on improving outcomes.
{"title":"The incentives of SPAC sponsors","authors":"Felix Feng , Tom Nohel , Xuan Tian , Wenyu Wang , Yufeng Wu","doi":"10.1016/j.jfineco.2025.104220","DOIUrl":"10.1016/j.jfineco.2025.104220","url":null,"abstract":"<div><div>Special Purpose Acquisition Companies (SPACs) took Wall Street by storm in 2020/2021 and continue to play a significant role in today’s capital markets. Estimating a structural model using a hand-collected comprehensive dataset, we find that SPACs add value by identifying and bringing high-potential firms to public markets, though contractual frictions skew the distribution of spoils away from SPAC shareholders and towards sponsors and target owners. Nonetheless, shareholder excess returns are positive once redemptions are accounted for. Policy analyses reveal that earnout provisions enhance welfare, while modest improvements in disclosure and limits on warrant usage have minimal impact on improving outcomes.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"177 ","pages":"Article 104220"},"PeriodicalIF":10.4,"publicationDate":"2026-01-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145927976","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}
Pub Date : 2026-01-07DOI: 10.1016/j.jfineco.2025.104229
Marco Sammon , John J. Shim
Value-weighted indexes must rebalance in response to stock market composition changes, e.g., issuance, buybacks, and IPOs. In doing so, existing index funds implicitly engage in market timing. Index funds’ long-short rebalancing portfolios have an annualized return of 4.61% and load negatively on value and profitability factors. We estimate these trades impose a 46–69 bps annual index-level performance drag. We explore alternative value-weighted indexes that rebalance less and delay responding to compositional changes. Despite still closely tracking the market, these indexes improve market timing and lower trading costs, saving 50 bps annually, an order of magnitude greater than index fund fees.
{"title":"Index rebalancing and stock market composition: Do indexes time the market?","authors":"Marco Sammon , John J. Shim","doi":"10.1016/j.jfineco.2025.104229","DOIUrl":"10.1016/j.jfineco.2025.104229","url":null,"abstract":"<div><div>Value-weighted indexes must rebalance in response to stock market composition changes, e.g., issuance, buybacks, and IPOs. In doing so, existing index funds implicitly engage in market timing. Index funds’ long-short rebalancing portfolios have an annualized return of 4.61% and load negatively on value and profitability factors. We estimate these trades impose a 46–69 bps annual index-level performance drag. We explore alternative value-weighted indexes that rebalance less and delay responding to compositional changes. Despite still closely tracking the market, these indexes improve market timing and lower trading costs, saving 50 bps annually, an order of magnitude greater than index fund fees.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"177 ","pages":"Article 104229"},"PeriodicalIF":10.4,"publicationDate":"2026-01-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145927975","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}
Pub Date : 2026-01-06DOI: 10.1016/j.jfineco.2025.104228
Andrés Sarto , Olivier Wang
Over the past two decades, shadow banks have significantly expanded their share of residential mortgage lending, even surpassing pre-financial crisis levels. This surge is often attributed to post-crisis regulatory changes and improvements in shadow banks’ technology. In this paper, we document a new driving force: the persistent decline in interest rates. When interest rates are high, cheap deposit funding provides banks with a significant competitive advantage against shadow banks relying on wholesale funding. As interest rates plummet and approach the zero lower bound, banks lose this advantage, experience a squeeze in their net interest margin, leading to diminished profitability, weaker growth, and cost-cutting measures such as branch closures. By contrast, shadow banks are able to gain market share. We test this mechanism using a shift-share empirical design based on differences in historical bank balance sheet composition. We find that banks more vulnerable to falling interest rates contracted lending as a response to lower profitability while also scaling back non-interest expenses on their branches. This created a fertile environment for non-banks to expand in areas with banks exposed to declining interest rates.
{"title":"The secular decline in interest rates and the rise of shadow banks","authors":"Andrés Sarto , Olivier Wang","doi":"10.1016/j.jfineco.2025.104228","DOIUrl":"10.1016/j.jfineco.2025.104228","url":null,"abstract":"<div><div>Over the past two decades, shadow banks have significantly expanded their share of residential mortgage lending, even surpassing pre-financial crisis levels. This surge is often attributed to post-crisis regulatory changes and improvements in shadow banks’ technology. In this paper, we document a new driving force: the persistent decline in interest rates. When interest rates are high, cheap deposit funding provides banks with a significant competitive advantage against shadow banks relying on wholesale funding. As interest rates plummet and approach the zero lower bound, banks lose this advantage, experience a squeeze in their net interest margin, leading to diminished profitability, weaker growth, and cost-cutting measures such as branch closures. By contrast, shadow banks are able to gain market share. We test this mechanism using a shift-share empirical design based on differences in historical bank balance sheet composition. We find that banks more vulnerable to falling interest rates contracted lending as a response to lower profitability while also scaling back non-interest expenses on their branches. This created a fertile environment for non-banks to expand in areas with banks exposed to declining interest rates.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"177 ","pages":"Article 104228"},"PeriodicalIF":10.4,"publicationDate":"2026-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145902440","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}
Pub Date : 2026-01-03DOI: 10.1016/j.jfineco.2025.104222
Hui Chen , Antoine Didisheim , Simon Scheidegger
We introduce “deep surrogates” – high-precision approximations of structural models based on deep neural networks, which speed up model evaluation and estimation by orders of magnitude and allow for various compute-intensive applications that were previously infeasible. As an application, we build a deep surrogate for a high-dimensional workhorse option pricing model. The surrogate enables us to re-estimate the model at high frequency to construct an option-implied tail risk measure, which is highly predictive of future market crashes. It also helps us systematically examine the model’s out-of-sample performance, which reveals the tradeoffs between structural and reduced-form approaches for option pricing. Moreover, we construct a measure for the degree of parameter instability and connect it to option market illiquidity in the data. Finally, we use the surrogate to construct conditional distributions of option returns, which is useful for risk management and provides a new way to test the model.
{"title":"Deep surrogates for finance: With an application to option pricing","authors":"Hui Chen , Antoine Didisheim , Simon Scheidegger","doi":"10.1016/j.jfineco.2025.104222","DOIUrl":"10.1016/j.jfineco.2025.104222","url":null,"abstract":"<div><div>We introduce “deep surrogates” – high-precision approximations of structural models based on deep neural networks, which speed up model evaluation and estimation by orders of magnitude and allow for various compute-intensive applications that were previously infeasible. As an application, we build a deep surrogate for a high-dimensional workhorse option pricing model. The surrogate enables us to re-estimate the model at high frequency to construct an option-implied tail risk measure, which is highly predictive of future market crashes. It also helps us systematically examine the model’s out-of-sample performance, which reveals the tradeoffs between structural and reduced-form approaches for option pricing. Moreover, we construct a measure for the degree of parameter instability and connect it to option market illiquidity in the data. Finally, we use the surrogate to construct conditional distributions of option returns, which is useful for risk management and provides a new way to test the model.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"177 ","pages":"Article 104222"},"PeriodicalIF":10.4,"publicationDate":"2026-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145886171","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}
Pub Date : 2025-12-26DOI: 10.1016/j.jfineco.2025.104223
Bryan Seegmiller
Stocks with similar characteristics but different levels of ownership by financial institutions have returns and risk premia that comove very differently with shocks to the risk-bearing capacity of dealer banks. After observable stock characteristics are accounted for, excess returns on more intermediated stocks have higher betas on contemporaneous shocks to intermediary willingness to take risk and are more predictable by state variables that proxy for intermediary health. Intermediary risk-bearing capacity also explains a substantial and increasing fraction of the variation in conditional risk premia for portfolios sorted on intermediation. These effects are concentrated in stocks held by hedge funds or mutual fund investors who are more likely to be exposed to dealer banks. The empirical evidence supports the predictions of asset pricing models in which financial intermediaries are marginal investors but face frictions that induce changes in their risk-bearing capacity.
{"title":"Intermediation frictions in equity markets","authors":"Bryan Seegmiller","doi":"10.1016/j.jfineco.2025.104223","DOIUrl":"10.1016/j.jfineco.2025.104223","url":null,"abstract":"<div><div>Stocks with similar characteristics but different levels of ownership by financial institutions have returns and risk premia that comove very differently with shocks to the risk-bearing capacity of dealer banks. After observable stock characteristics are accounted for, excess returns on more intermediated stocks have higher betas on contemporaneous shocks to intermediary willingness to take risk and are more predictable by state variables that proxy for intermediary health. Intermediary risk-bearing capacity also explains a substantial and increasing fraction of the variation in conditional risk premia for portfolios sorted on intermediation. These effects are concentrated in stocks held by hedge funds or mutual fund investors who are more likely to be exposed to dealer banks. The empirical evidence supports the predictions of asset pricing models in which financial intermediaries are marginal investors but face frictions that induce changes in their risk-bearing capacity.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"176 ","pages":"Article 104223"},"PeriodicalIF":10.4,"publicationDate":"2025-12-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145839809","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}
Pub Date : 2025-12-19DOI: 10.1016/j.jfineco.2025.104224
Jennifer N. Carpenter , Fangzhou Lu , Robert F. Whitelaw
We propose a new approach to modeling bond risk and risk premia, inspired by the equity risk-return literature, which does not impose the tight restrictions found in models that generate closed-form bond prices. We estimate the joint dynamics of the volatility and Sharpe ratio of principal-component bond-factor portfolios for the US and China. Predictors include yield curve variables and, for the US, VIX. We document complex time-varying relations between the price and quantity of interest rate risk inconsistent with the frameworks in existing studies. Interesting differences between the US and China further highlight the need for our more flexible approach.
{"title":"Government bond risk and return in the US and China","authors":"Jennifer N. Carpenter , Fangzhou Lu , Robert F. Whitelaw","doi":"10.1016/j.jfineco.2025.104224","DOIUrl":"10.1016/j.jfineco.2025.104224","url":null,"abstract":"<div><div>We propose a new approach to modeling bond risk and risk premia, inspired by the equity risk-return literature, which does not impose the tight restrictions found in models that generate closed-form bond prices. We estimate the joint dynamics of the volatility and Sharpe ratio of principal-component bond-factor portfolios for the US and China. Predictors include yield curve variables and, for the US, VIX. We document complex time-varying relations between the price and quantity of interest rate risk inconsistent with the frameworks in existing studies. Interesting differences between the US and China further highlight the need for our more flexible approach.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"176 ","pages":"Article 104224"},"PeriodicalIF":10.4,"publicationDate":"2025-12-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145797110","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}
Pub Date : 2025-12-18DOI: 10.1016/j.jfineco.2025.104226
Quinn Maingi
I develop and estimate a quantitative spatial model featuring banks’ spatial lending networks to study the real effects of bank funding shocks. I apply the model to the 2023 regional bank panic. I show that, during the panic, deposits were reallocated towards regional banks with better marginal lending opportunities, which offered higher deposit rates. This reallocation substantially mitigated the otherwise negative aggregate output effects of the remaining, panic-related deposit flows. This positive reallocation effect is primarily driven by inflows into banks with good lending opportunities, suggesting that fundamental forces, rather than panic-driven idiosyncratic runs, are behind the positive reallocation effect.
{"title":"Regional Banks, Aggregate Effects","authors":"Quinn Maingi","doi":"10.1016/j.jfineco.2025.104226","DOIUrl":"10.1016/j.jfineco.2025.104226","url":null,"abstract":"<div><div>I develop and estimate a quantitative spatial model featuring banks’ spatial lending networks to study the real effects of bank funding shocks. I apply the model to the 2023 regional bank panic. I show that, during the panic, deposits were reallocated towards regional banks with better marginal lending opportunities, which offered higher deposit rates. This reallocation substantially mitigated the otherwise negative aggregate output effects of the remaining, panic-related deposit flows. This positive reallocation effect is primarily driven by inflows into banks with good lending opportunities, suggesting that fundamental forces, rather than panic-driven idiosyncratic runs, are behind the positive reallocation effect.</div></div>","PeriodicalId":51346,"journal":{"name":"Journal of Financial Economics","volume":"176 ","pages":"Article 104226"},"PeriodicalIF":10.4,"publicationDate":"2025-12-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145785807","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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