Knowledge that Transforms

This paper develops a difference-in-differences estimator that uses annual changes in the conforming loan limit and the 80% loan-to-value (LTV) threshold to isolate the impact of easier access to credit on house prices. Houses that become eligible for financing with an 80% LTV conforming loan increase in value by about $1.17 per square foot, controlling for a rich set of characteristics. Our estimates imply a local elasticity of house prices to interest rates below 6, which suggests that interest rates are capitalized into prices to a lesser extent than proposed by studies relying on more aggregate variation.

We study whether exit policies by financial institutions have financial and real consequences on the firms they target, using bank coal exit policies as a laboratory. In contrast to theories assuming high capital substitutability, we find large effects of these policies. Bank exit policies negatively affect both the financing and operation of coal assets. Substitution to other sources and providers of capital appears to be limited. Coal power plants owned by firms exposed to exit policies are more likely to retire, translating into lower CO2 emissions. Exit policies have reduced CO2e emissions from energy production by an estimated 0.62 gigaton.

We estimate financial institutions’ portfolio tilts related to U.S. stocks’ environmental, social, and governance (ESG) characteristics. From 2012 to 2023, ESG-related tilts consistently total about 6% of the investment industry’s assets and rise from 17% to 27% of institutions’ total portfolio tilts. Significant ESG tilts arise from the choice of stocks held and, especially, the weights on stocks held. The largest institutions tilt increasingly toward green stocks, while other institutions and households tilt increasingly brown. Divestment from brown stocks is typically partial rather than full, even for individual mutual funds. UNPRI signatories and European institutions tilt greener; banks tilt browner.

We study how information technology (IT) affects lender competition, entrepreneurs’ investment, and welfare in a spatial model. The effects of an IT improvement depend on whether it weakens the influence of lender–borrower distance on monitoring costs. If it does, it has a hump-shaped effect on entrepreneurs’ investment and social welfare. If not, competition intensity does not vary, improving lender profits, entrepreneurs’ investment, and social welfare. When entrepreneurs’ moral hazard problem is severe, IT-induced competition is more likely to reduce investment and welfare. We also find that lenders’ price discrimination is not welfare-optimal. Our results are consistent with received empirical work on lending to SMEs.

This paper shows that leading theories of the beta anomaly fail to explain the anomaly’s conditional performance. Abnormal returns and Sharpe ratios of betting-against-beta (BAB) factors rise following months with below-median realized volatility, even controlling for mispricing, limits to arbitrage, lottery preferences, analyst disagreement, and sentiment. Moreover, the leverage constraints theory counterfactually predicts that market and BAB Sharpe ratios increase with volatility. We further show that institutional investors shift their demand from high- to low-beta stocks as volatility increases, and the resulting price impact is sufficient to explain the difference in abnormal BAB returns between high- and low-volatility states.

We document that the currency denomination of the debt of large firms in developed countries is strongly associated with the geographical distribution of their sales. Furthermore, those firms exhibit significant home currency bias and international currency bias in borrowing: controlling for the geography of sales, they borrow more in their home currency and the two most traded currencies, the US dollar and the euro. We also show that the firms’ debt currency denomination choices are associated with export invoicing currency patterns in a way consistent with a currency hedging mechanism. In particular, firms domiciled in countries that invoice a larger share of their exports in either their home currency or in a vehicle currency exhibit a weaker connection between the currency denomination of their debt and the geography of their sales. Moreover, firms in countries that invoice more of their exports in an international currency are characterized by stronger international currency bias in debt issuance.

We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels — risky firms just above the IG cutoff — enjoyed subsidized bond financing in 2009–19. This effect is driven by Fed purchases of securities inducing long-duration IG-focused investors to rebalance their portfolios towards higher-yielding IG bonds. The benefiting firms (i) exploited the sluggish downward adjustment of credit ratings after M&A to finance risky acquisitions with bond issuances, and (ii) increased market share affecting competitors’ employment and investment, but (iii) suffered severe downgrades at the onset of the pandemic.

Do investors interpret central bank target rate decisions as signals about the current state of the economy? We study this question using a short-term equity asset that entitles the owner to the near-term dividends of the aggregate stock market. We develop a stylized model of monetary policy and the equity term structure and derive tests of Fed information effects using the short-term asset announcement return. Consistent with the existence of information effects, we find that the short-term asset return in a 30-minute window around FOMC announcements loads positively on monetary policy surprises. Furthermore, the announcement return predicts near-term macroeconomic growth.

We propose a fiscal policy expectations mechanism. When bad macro news arrives (in our study, when initial jobless claims (IJC) are higher than expected), investors may expect more generous government spending and drive up aggregate stock prices through the expected cash flow channel. Using a time-series sample from January 2013 to March 2021, we find that this phenomenon emerges when newspapers mention fiscal policy more. In the cross section, firms expected to receive more government spending – through stimulus supports during COVID-19 or procurement contracts before 2020 – exhibit higher individual stock returns when bad IJC shocks arrive.

This paper shows that supply shock uncertainty interacts with the monetary policy rule to drive bond risks in a New Keynesian asset pricing model. In my model, positive nominal bond-stock betas emerge as the result of volatile supply shocks but only if the monetary policy rule features a high inflation weight. Habit formation preferences generate endogenously time-varying risk premia, explaining the volatility and predictability of bond and stock excess returns in the data, and implying that bond-stock betas price the expected equilibrium mix of shocks rather than realized shocks. The model explains the change from positive nominal and real bond-stock betas in the 1980s to negative nominal and real bond-stock betas in the 2000s with a shift from dominant supply shocks and an inflation-focused monetary policy rule, to demand shocks in the 2000s. Post-pandemic nominal and real bond-stock betas are explained with dominant supply shocks and a late increase in the monetary policy inflation coefficient.