Knowledge that Transforms

Journal Article Cover Get access The Review of Financial Studies, Volume 26, Issue 9, September 2013, Page i1, https://doi.org/10.1093/rfs/hhs146 Published: 01 September 2013

Journal Article Volume 26 Number 10 October 2013The Review of Financial Studies - Table of Contents Get access The Review of Financial Studies, Volume 26, Issue 10, October 2013, Page i4, https://doi.org/10.1093/rfs/hhs169 Published: 01 January 2013

Journal Article Cover Get access The Review of Financial Studies, Volume 26, Issue 11, November 2013, Page i1, https://doi.org/10.1093/rfs/hhs137 Published: 01 November 2013

We find that the empirical volatilities of corporate bond and CDS returns are higher than implied by equity return volatilities and the Merton model. This excess volatility may arise because structural models inadequately capture either fundamentals or illiquidity. Our evidence supports the latter explanation. We find little relation between excess volatility and measures of firm fundamentals and the volatility of firm fundamentals but some relation with variables proxying for time-varying illiquidity. Consistent with an illiquidity explanation, firm-level bond portfolio returns, which average out bond-specific effects, significantly decrease excess volatility.

Journal Article Volume 26 Number 12 December 2013The Review of Financial Studies - Table of Contents Get access The Review of Financial Studies, Volume 26, Issue 12, December 2013, Page i4, https://doi.org/10.1093/rfs/hhs171 Published: 11 November 2013

We develop a parsimonious model in which frictions in the labor market may turn small, continuous labor productivity declines into large drops in employment, endogenously causing disasters. Assuming one state variable and CRRA agents, we solve for prices in closed form, calibrate the model using labor market data, and show that this simple setting captures the high, countercyclical volatility and equity premium observed in the United States. Moreover, returns in our model are conditionally predicted by dividend yields. Finally, as in the data, in our setting the disasters are larger when the capital's share of income is higher.

What determines the sustainability of sovereign debt? In this paper, we develop a model where myopic governments seek electoral popularity but can nevertheless commit credibly to service external debt. They do not default when they are poor because they would lose access to debt markets and be forced to reduce spending; they do not default when they become rich because of the adverse consequences to the domestic financial sector. Interestingly, the more myopic a government, the greater the advantage it sees in borrowing, and therefore the less likely it will be to default (in contrast to models where sovereigns repay because they are concerned about their long term reputation). More myopic governments are also likely to tax in a more distortionary way, and create more dependencies between the domestic financial sector and government debt that raise the costs of default. We use the model to explain recent experiences in sovereign debt markets.

In 2002, the editors of the RFS, JF, and JFE simultaneously published an editorial that urged authors to make good use of the advice and input provided by referees.1 Recent informal communications have suggested to us that it is time to renew that advice. Many papers are submitted to our journals, and the scarcest resource we have as a profession is the supply of time donated by referees to read, consider, and comment on their colleagues' work. In general, the author does not know the identity of the referee, so referees can express honest opinions about the quality of the work without alienating the author. However, this system has the counterproductive consequence that authors can undervalue the services they receive.We are particularly troubled by two practices that we see too frequently. First, some authors submit papers to journals at a relatively early stage of production in the hope that “the referee will help me figure out how to revise it to make it publishable.” This strategy imposes substantial costs on both sides. It burdens the referees with responsibilities that are not theirs. For the submitter, it raises the probability that the referee and editor will reject the paper as being too distant from acceptability. By submitting a paper that is unpolished, an author can cut off a potentially valuable publication outlet.

A new methodology for equity valuation arises from the perspective of managers' supply of capital assets. Under q-theory, managers optimally adjust the supply of assets to changes in their market value. The first-order condition of investment then provides a valuation equation that infers asset prices from managers' costs of supplying the assets. This equation fits well the Tobin's q levels across many testing assets, including portfolios formed on q. With current investment-to-capital as the only input, the supply approach does not require cash flow forecasts or discount rate estimates, both of which are notoriously difficult to obtain in practice.

We assess the procyclical effects of bank capital regulation in a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that under cyclically-varying risk-based capital requirements (e.g. Basel II) banks hold larger buffers in expansions than in recessions. Yet, these buffers are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level underlying Basel II can reduce its procyclical effects on the supply of credit without compromising banks’ long-run solvency targets.