Knowledge that Transforms

Predictive regressions of market returns on option-implied moments measured before pre-scheduled FOMC meetings show that tail risks play an important role in understanding the market risk premium around FOMC announcement days. Skewness and kurtosis, which capture investors’ expectations of the tails of the return distribution, robustly predict post-FOMC returns both in-sample and out-of-sample. The predictability lasts up to 1 week and is stronger for expansionary monetary policy shocks. The signs of the corresponding risk premiums are consistent with economic intuition, illustrating the role of periods with high risk premiums to confirm theoretical predictions.

This article studies how cultural heritage influences the differences in risk taking in financial markets. We combine data on the asset allocation of second-generation immigrants in Sweden with risk-taking culture in their parents’ countries of origin. We find that descendants of risk loving cultures are more likely to participate in equity markets, and, conditional on participation, allocate a larger share of financial wealth to equities. Moreover, they take on more idiosyncratic risk by favoring directly held stocks over mutual funds and forming more volatile portfolios. These findings are not driven by selective migration or other country of origin characteristics.

Using firms’ online job postings, we identify economically related peer firms in the labor market. Firms’ labor peers are vastly different from their industry peers, where the overlap is about 20%. Returns of labor-linked firms strongly comove, suggesting common responses to labor market shocks on average. However, industry shocks can affect firms outside the industry through the labor network, leading to substitution effects between labor peers. Last, we show that investors do not promptly incorporate news about labor-linked firms, leading to predictable subsequent returns. A long-short strategy exploiting this delay generates an average annualized excess return of 9%.

We conduct the first comprehensive study of blockchain currencies—stablecoins pegged to fiat currencies and traded on decentralized exchanges (DEXs). Using transaction-level data linked to wallet characteristics, we show that prices in these markets are generally efficient, though constrained by blockchain frictions such as gas fees and Ether volatility. DEX rates closely track traditional currency markets through arbitrage and informed trading. Traders with substantial market share and access to primary markets exert greater price impact, reflecting informational advantages. While blockchain markets may improve access for customers excluded from traditional venues, their scalability depends on addressing frictions inherent to decentralized trading.

This article studies how ESG and conventional mutual funds trade stocks during the COVID-19 crash. Both fund types trade individual stocks similarly: Net purchases of ESG stocks are less sensitive than other stocks to fund flows pre-crash, but sensitivities increase for all stocks during the crash. In contrast, ESG funds’ aggregate net purchases are less sensitive than those of conventional funds during the crash. This difference is due to ESG funds’ portfolio tilt toward the less flow-sensitive ESG stocks. There is no evidence of an ESG clientele effect in trading decisions, as both fund types trade individual stocks similarly.

We construct a measure ( fLMA ) of the extent to which neighboring firms hire similar types of workers, based on the similarity between the labor profile of a firm and that of its locality. We show that a firm’s innovation is positively related to fLMA. The enhanced labor mobility induced by higher fLMA is an important channel for this positive relation. This relation is stronger when firms have increased outside job opportunities for employees, increased knowledge spillovers via coworkership, and more employee stock options. Innovation is higher when intellectual property ownership is with employers, not employees. This effect increases in fLMA.

We analyze the effects of limited investor attention on the stock market reaction to innovation announcements and develop a new measure of patents’ economic value. We hypothesize that, when some investors pay delayed attention to innovation announcements, there will be a post-announcement drift in addition to the announcement effect, with the former decreasing and the latter increasing in investor attention. Using media coverage and abnormal Google search volume as investor attention proxies, we find consistent evidence. Our new attention-weighted measure of patents’ economic value has greater predictive power for future firm performance than measures based on the announcement effect alone.

This article shows that exchange-traded funds (ETFs) “sample” their indexes, systematically underweighting or omitting illiquid index stocks. As a result, arbitrage activity between the ETF and its index has heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs reduces liquidity and price efficiency and increases volatility and co-movement for liquid stocks but has no effect on illiquid stocks. Our results demonstrate that the effects of passive investing on asset markets depend on how passive funds replicate their target index.

We investigate how the government, as a customer, affects a supplier’s environmental policies. We find that government contractors have significantly lower levels of toxic pollution. Exploring the mechanisms, we show that government contractors reduce pollution by strengthening internal environmental governance and increasing investments in pollution abatement. Further analysis rules out alternative explanations related to reduced economic activities and financial constraints. Overall, our results highlight the government’s important role in disciplining corporate environmental misbehavior.

Stablecoins are a new form of private money. They are fragile but largely trade at par. How? We present a model and empirical work to examine a novel source of demand for stablecoins. Stablecoin owners are indirectly compensated for run risk by lending their coins to crypto speculators. The stablecoin can then support its $1 peg, but this arrangement links crypto speculation to traditional financial markets where stablecoins invest their reserves.