Knowledge that Transforms

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 as functions of yield curve variables and VIX. We uncover an important second factor in risk premia and document a complex time-varying relation between the price and quantity of interest rate risk inconsistent with the frameworks in existing studies. Exploiting this predictability in dynamic portfolio choice appears to enhance portfolio performance. Abstract 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 as functions of yield curve variables and VIX. We uncover an important second factor in risk premia and document a complex time-varying relation between the price and quantity of interest rate risk inconsistent with the frameworks in existing studies. Exploiting this predictability in dynamic portfolio choice appears to enhance portfolio performance.

We use individual-level credit data to study how recent declines in Appalachian coal mining affected household finances between 2011 and 2018. Using exogenous variation in electricity sector demand for coal, we find declines in coal demand decreased credit scores and increased financial distress within two years of coal shocks. These effects cannot be explained solely by job losses in coal mine worker households. Credit score declines and financial distress were largest among older individuals and people with lower-middle credit scores. Our results suggest the transition away from fossil fuels may impose meaningful costs on other fossil fuel extraction communities.

To safeguard its technological leadership, the U.S. has restricted domestic suppliers from exporting cutting-edge technologies to selected Chinese firms. Domestic firms affected by these export controls halt sales to Chinese customers, as intended, but struggle to establish new relations with alternative customers domestically or in politically aligned regions. Consequently, domestic suppliers experience sizable losses in market capitalization, along with reductions in profitability, employment, and bank lending. Chinese firms are more proactive in reconfiguring supply chains, though not without costs. Overall, export controls impose larger costs on U.S. firms developing the very technologies these policies aim to protect.

We document implicit extrapolation in investment decision-making that exceeds the extrapolation inferable from stated expectations. Locally experienced returns predict individual real-estate investment decisions even conditional on an investor’s forecasted home-price growth and risk aversion. Moreover, estimates of this experience effect on investment are larger than implied by the combined effect of past returns on stated expectations and stated expectations on investment. We demonstrate that heterogeneous forecast confidence helps explain why many investors rely on past returns over their survey-elicited forecasts. As their rationale, such survey respondents frequently cite intentional extrapolation or a lack of confidence in other belief factors.

Using more than 4900 personality assessments, we study changes in the characteristics of CEOs and top executives since 2001. The same four factors explain roughly half of the variation in executive characteristics in this larger sample of assessments as in Kaplan and Sorensen (2021). In later years, CEO candidates have shown declining general ability, are increasingly execution-oriented, less interpersonal, less charismatic, and less creative-strategic, and many of these differences persist for hired CEOs. We find no evidence of increasing prevalence or importance of interpersonal and softer skills. Executives assessed for the same company have positively correlated abilities, suggesting that high-ability executives complement each other. Finally, we consider corporate objectives and CEO characteristics.