Knowledge that Transforms

We obtain a model-driven measure of gender norms on intra-household financial decision making by leveraging dramatic variation across Italian cohorts and regions in the gender of the household head. We use these estimates to identify the effects of gender parity on household financial decisions. More egalitarian norms increase household participation in financial markets, equity holdings, asset diversification, and returns on investments . This evidence suggests that gender roles can have large economic costs . Consistent with this view, we show that patriarchal norms began receding in the early 1990s, when a pension reform made it too costly to comply with traditional roles.

On many important multi-dealer platforms, customers mostly request quotes from very few dealers. I build a model of multi-dealer platforms, where dealers strategically choose to respond to or ignore a request. If the customer contacts more dealers, each dealer responds with a lower probability and offers a stochastically worse price when responding. Dealers’ strategic avoidance of competition overturns the customer’s benefit from potentially receiving more quotes, worsening her best-overall price. In equilibrium, the customer contacts only two dealers. Multi-dealer platforms have limited ability to promote price competition: No design of information disclosure can improve the customer’s payoff above this outcome.

Black and Hispanic homeowners pay significantly higher mortgage interest rates than white and Asian homeowners. We show that the main reason is that white and Asian borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic borrowers face challenges refinancing because, on average, they have lower credit scores, equity and income. But even holding those factors constant, Black and Hispanic borrowers refinance less, suggesting that other factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs can reduce racial mortgage pricing inequality.

We investigate how different components in firm characteristics affect expected returns and comovements in international stock markets. We decompose characteristics into country, industry, and country- and industry-adjusted (i.e., orthogonal) components. Then, we use these components to capture time-series and cross-sectional variations in stock-level alphas and factor exposures. Decomposing characteristics is crucial to explain jointly expected returns and comovements: (i) adjusted (country) components are the most important determinant of alphas (comovements), (ii) component-based models outperform benchmark models, and (iii) alphas are statistically significant. However, alphas have been trending down over time, and alpha-chasing strategies are not profitable once we account for estimation risk and trading costs.

Machine-learning methods exploit fund characteristics to select tradable long-only portfolios of mutual funds that earn significant out-of-sample annual alphas of 2.4% net of all costs. The methods unveil interactions in the relation between fund characteristics and future performance. For instance, past performance is a particularly strong predictor of future performance for more active funds. Machine learning identifies managers whose skill is not sufficiently offset by diseconomies of scale, consistent with informational frictions preventing investors from identifying the outperforming funds. Our findings demonstrate that investors can benefit from active management, but only if they have access to sophisticated prediction methods.

We study how firms respond to an unexpected demand shock, exploiting the 2006 boycott of Danish products after publication of Muhammad caricatures. On average, affected firms lose the majority of their exports to Muslim countries and experience a significant decrease in total sales. However, firms with low financial leverage redirect sales to new and existing product-destination markets in non-Muslim countries, which allows them to fully offset their losses. In contrast, high-leverage firms do not enter new markets and instead actively downsize. Our results highlight the importance of financial flexibility in times of crisis, consistent with declarations of practitioners.

We test the conditional consumption-CAPM using asset holders’ consumption and find that the time variation in the prices of asset holders’ consumption risk is procyclical. This puzzling time variation is at odds with the implication of existing consumption-based equilibrium asset pricing models. We show that our finding is a salient feature of the data observed in multiple asset classes (aggregate equity market, equity portfolios, bond portfolios, and commodities portfolios), using different measures of consumption (household survey data and high-frequency retail shopping data) and alternative empirical methodologies.

Debt-repayment flexibility should help temporarily liquidity-constrained households but not necessarily households struggling to save. In a natural experiment in which households can apply for free mortgage-repayment flexibility, I find that two-thirds of liquidity-constrained applicants with high-cost debt voluntarily restrict flexibility and forgo, on average, 4,070 EUR of low-cost liquidity. An overconsumption tendency reflecting self-control problems can explain the voluntary liquidity restrictions as well as the persistent liquidity constraints, the consumption drop at the predictable end of flexibility, and saving in other illiquid assets. Self-imposed liquidity constraints reflect characteristics instead of circumstances and reduce the potency of debt-forbearance offers in recessions.

I model and structurally estimate the equilibrium rates and volume in the Triparty repo market to study imperfect competition in wholesale funding. Even in this systemically important market, where seemingly homogeneous repos trade, I document persistent rate differences paid by dealers. I characterize the Triparty market as cash-lenders allocating their portfolios among differentiated dealers who set repo rates. I find that cash-lenders’ aversion to portfolio concentration and preference for stable lending grant dealers substantial market power: between 2011 and 2017, dealers borrowed at rates that were 26 bps lower than their marginal value from intermediating the borrowed repo funds. Dealers’ market power makes the observed wholesale repo rate understate the financing rate available to market participants who rely on repo funding, and offers a novel explanation for funding spreads such as the Treasury cash-futures basis and the Treasury swap spread.

We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such an alignment.