A limited understanding of mortgage contracts and the risks involved may have contributed to the outbreak of the 2007–2008 financial crisis. We developed a special questionnaire relating mortgage loan decisions to financial knowledge and financial advice. Our results demonstrate that homeowners appear to be well aware of mortgage risks. Large loans relative to home value are perceived as riskier, as are loans with large mortgage payments relative to income and loans linked to investment vehicles. Homeowners with riskier mortgages indicated that they could encounter financial problems should house prices or their income decline. Homeowners with relatively low debt literacy are more likely to take out traditional mortgages with principal repayments over the maturity of the loan. Riskier mortgages are more prevalent among homeowners with a better understanding of loan contracts. Financially less sophisticated homeowners consulting mortgage brokers, too, hold riskier mortgages.

This study investigates how Schwartz’s cultural dimensions of embeddedness and mastery affect the corporate cost of debt through bankruptcy risk and sensitivity to agency activity channels. Using data from 33 countries, we find a strong and robust negative relation between embeddedness and the cost of debt. The estimated relation between mastery and the corporate cost of debt is negative and significant in most of the tests. Further analyses reveal that the development of financial intermediation and the enforcement of insider trading law moderate the relation between culture and the cost of debt. Confirming our hypotheses, we document that embeddedness is negatively related to bankruptcy risk and sensitivity to agency activity. We find that mastery is positively related to bankruptcy risk across countries as well, but this relation is weaker. We also show that mastery is positively related to sensitivity to agency activity among countries with highly leveraged firms.

We examine how voluntary monthly earnings disclosures relate to monthly analyst behavior. We focus on the number of analysts following a firm and several properties that characterize analysts’ earnings forecasts for the upcoming annual earnings. We find firms that disclose monthly earnings attract more analysts, have more accurate and less dispersed analyst earnings forecasts, and have lower overall uncertainty and less commonality of information in analysts’ earnings forecasts. In addition, the effect of monthly earnings disclosure on analyst behavior is more pronounced for the firms that regularly disclose monthly earnings. Our results are consistent with the notion that an important role played by a voluntary increase in reporting frequency is to trigger the generation of idiosyncratic information by financial analysts. In other words, analysts tend to complement rather than substitute for firm-provided voluntary disclosures.

We propose a parsimonious, comprehensive proxy for innovations in limited arbitrage: innovations in ETFs’ premium. Consistent with a common component, we confirm limited arbitrage factors, LAFs, constructed from ETFs’ premium innovations spanning four asset classes are correlated. Further, we find that equity LAFs are negatively priced in the cross-section of stock returns. Our pricing tests also confirm that LAFs provide pricing information beyond well-known limits of arbitrage: illiquidity and idiosyncratic volatility. Overall, our findings suggest that limited arbitrage risk is priced and LAF is a relevant risk-factor.

This paper analyzes the relationship between individuals’ locus of control and their savings behavior, i.e. wealth accumulation, savings rates, and portfolio choices. Locus of control is a psychological concept that captures individuals’ beliefs about the causal relationship between their own behavior and life events. We find that households with an internal reference person (a main respondent who believes that he/she can generally control relevant aspects of life) save more in terms of levels and, in some cases, as a percentage of their permanent incomes. Although the locus-of-control gap in savings rates is largest among rich households, the gap in wealth accumulation is particularly large for poor households. Finally, our findings indicate that households with an internal reference person are in a better position to save in forms that are harder to access (such as pension wealth) than otherwise similar households with an external reference person.

We examined downside and upside risk spillovers from exchange rates to stock prices and vice versa for a set of emerging economies. We characterized the dependence structure between currency and stock returns using copulas and computed downside and upside value-at-risk and conditional value-at-risk. We documented a positive relationship between stock prices and currency values in emerging economies with respect to the US dollar and the euro, with downside and upside spillover risk effects transmitted both ways. Finally, we also documented asymmetries in upside and downside risk spillovers and asymmetric differences in the size of risk spillovers when the domestic currency values against the US dollar and the euro. Our results, consistent with flight-to-quality phenomena, have implications for downside and upside risk management of international investor portfolios in emerging markets.

Many commodity markets contain a strong seasonal component not only at the price level, but also in volatility. In this paper, the importance of seasonal behavior in the volatility for the pricing of commodity options is analyzed. We propose a seasonally varying long-run mean variance process that is capable of capturing empirically observed patterns. Semi-closed-form option valuation formulas are derived. We then empirically study the impact of the proposed Seasonal Stochastic Volatility Model on the pricing accuracy of natural gas futures options traded at the New York Mercantile Exchange (NYMEX) and corn futures options traded at the Chicago Board of Trade (CBOT). Our results demonstrate that allowing stochastic volatility to fluctuate seasonally significantly reduces pricing errors for these contracts.

Whether, and how, the introduction of deposit insurance affects non-bank financial market development depends on whether banks and non-bank financial markets are substitutes or complements and theory has conflicting views. Using data on 134 countries over a 28-year period and several identification strategies we find that the introduction of deposit insurance retards the equity market, the non-bank depositaries sector, and the banking sector when law and order is weak. While strong law and order mitigates this effect, it does not lead to a positive outcome for all markets. For non-bank financial markets, the effect is greater in the long run so that while deposit insurance increases banking sector development in the long run, it retards non-bank financial markets regardless of the level of law and order. Finally, several design features exacerbate the negative outcomes. Our results have important policy implications for implementing or altering deposit insurance schemes.

We investigate the impact of family control on corporate social responsibility (CSR) performance. Using newly collected data on the ultimate ownership structure of publicly traded firms in nine East Asian economies, we find that family-controlled firms exhibit lower CSR performance, consistent with the expropriation hypothesis of family control. The negative relationship between family control and CSR is robust to alternative measures of family control, different components of CSR, as well as to endogeneity tests, subsample tests, and alternative estimation methods. We further find that CSR underperformance concentrates in family firms with greater agency problems and in countries with weaker institutions. Moreover, the underperformance of East Asian family firms holds when controlling for the effects of other large shareholders and when comparing with family firms from other countries. These findings contribute to understanding the determinants of CSR and highlight the importance of corporate governance and the institutional environment in improving CSR performance of family-controlled firms.