Knowledge that Transforms

Abstract Using data from a Twitter-like investor social platform, we document evidence consistent with self-enhancing transmission bias. We find investors are more likely to post about their better-performing stocks. Their followers are more likely to buy the posted stocks than other non-posted stocks. The effect of the postings on follow-up purchases is consistent with an attention-based interpretation: the postings bring the discussed stocks into the followers’ choice set and increase their purchases. We also find that postings’ effect on follow-up purchases is related to postings’ perceived credibility. The performance-postings relationship is stronger among more volatile stocks and the relationship between postings and follow-up purchases is stronger among stocks with higher recent returns, shedding light on the spread of high-variance and extrapolative strategies. We also document that the social network features influential nodes.

Abstract The paper introduces a novel two-beta currency pricing model, which decomposes the conventional dollar factor beta into a beta with risk-premium news and a beta with real-interest-rate news. These betas capture distinct features of currency returns and explain cross-sectional variations in currency risk premiums. The risk-premium beta is associated with an unconditionally positive price of risk, while the real-rate beta has an unconditionally negative price of risk due to precautionary savings. The prices of these beta risks exhibit conditional variations tied to economic conditions. Furthermore, the model explains the abnormal performance of various currency trading strategies.

Abstract …is “should I buy any?”. Under Bayesian portfolio theory, ongoing zero weights in cryptocurrency are surprisingly difficult to generate. With 10 years of prior data, equity investors would need very pessimistic priors on mean returns to never buy cryptocurrency: −10.6 percent per month for Bitcoin, and −19.6 percent for a diversified cryptocurrency portfolio. Most priors that involve never purchasing cryptocurrency imply shorting it. Optimal weights are generally small, non-trivial (1–5 percent magnitude), frequently positive, and smooth. The certainty equivalent gains from cryptocurrency are comparable to international diversification and prominent anomaly portfolios. Costs (storage and fees) would need to exceed 21–39 percent annually to deter trading.

Abstract Data-driven lending relies on the calibration of models using training periods. We find that this type of lending is not resilient in the presence of economic conditions that are materially different from those experienced during the training period. Using data from a small business fintech lending platform, we document that the small business credit supply collapsed during the COVID-19 crisis of March 2020 even though the demand for loans doubled relative to pre-pandemic levels. As the month progressed, most lenders significantly reduced or halted their lending activities, likely due to the heightened risk of model miscalibration under the new economic conditions.

Abstract This article studies how corporate tax hikes transmit across countries through multinationals’ internal networks of subsidiaries. We build a parsimonious multicountry model to highlight two opposing spillover effects: while tax competition between countries generates positive investment spillover, intra-firm production linkages predict negative spillover. Using subsidiary-level data and exogenous corporate tax hikes, we find that local business units cut investment by 0.5 percent for a 1 percent increase in foreign corporate tax. This result highlights the importance of production linkages in propagating foreign tax shocks, as the supply-chain-induced negative spillover dominates the positive spillover effect suggested by the conventional wisdom of tax competition.

Abstract This article extends the rare disaster framework by introducing a model with a time-varying disaster recovery feature. The model yields closed-form pricing formulas for stocks and dividend strips. Calibrated using international disaster data, it quantitatively captures both the unconditional and conditional term structures of equity risk premia. It replicates key empirical patterns, including a downward-sloping unconditional term structure of one-period returns and a countercyclical conditional slope, and generates novel predictions for capital asset pricing model beta, alpha, and price.

Abstract This article explores a new channel through which exchange-traded funds (ETFs) can affect underlying asset prices. In over-the-counter markets, daily disclosure of ETF portfolio holdings increases price transparency and therefore retail investors’ bargaining power. I show that ETF-held municipal bonds have significantly lower dealer markups than observationally similar non-ETF-held bonds. This effect cannot be explained by bond selection or ETFs’ own trading activity. Rather, ETFs’ disclosure of end-of-day bond pricing is associated with lower retail markups by 5–9 basis points.

Abstract How can managers be incentivized to create both financial and social value? Since managers can anticipate how their decisions impact social performance metrics, they may game a compensation scheme based on these measures. Nevertheless, the optimal compensation contract still incorporates social performance metrics when the board’s preferred level of social investment exceeds the level that maximizes the stock price. In this case, gaming distorts social investments, and the sensitivity of pay to social performance is reduced to mitigate this effect. When multiple independent social performance measures are available, the inefficiencies caused by gaming can be alleviated. Our findings suggest that efforts to harmonize social performance measurement may have unintended negative consequences.

Abstract We investigate the importance of time-varying discount rates for commodity prices using an index based on twenty-three commodities for the period 1959–2024. We show that in commodities markets, unlike other financial markets, time variation in discount rates plays a much smaller role. Instead, prices forecast cash flows as well as discount rates. A high price for a commodity today, measured as a low percentage net convenience yield, forecasts both a high future convenience yield and a low expected return. For longer horizons, variation in percentage net convenience yields seems mainly driven by net convenience yield growth, making commodities much closer to the classical textbook view of price changes representing news about cash flows.

Abstract We construct tradable risk factors using combinations of large and liquid mutual funds (long leg) and ETFs (exchange-traded funds) (long and short legs), based on their holdings, for both retail and institutional investors. Exploiting a novel dataset, our tradable factors take into account ETF shorting costs. Assessing the performance of our tradable factors against standard “on-paper” factors, we uncover an implementation shortfall of 2–4 percent annually. Shorting fees and transaction costs contribute to 58 percent of the performance differential between tradable and “on-paper” factors, assigning a non-trivial role to the opportunity cost of not trading the exact “on-paper” portfolio.