Knowledge that Transforms

The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the Review of Asset Pricing Studies, (2) the Review of Corporate Finance Studies, and (3) the Review of Financial Studies. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs several smaller, specialized conferences and financially supports and co-sponsors other independent conferences. Its governing board is the SFS Council. This annual report provides an overview of SFS activities during 2019-2020, including all three journals, both Cavalcade conferences, and the SFS financial and policy report. The purpose of this annual report is to share this information more broadly with SFS members and friends and to create a permanent record for the long-run (i.e., institutional memory). 2020 was a busy year for the Review of Asset Pricing Studies (RAPS). We renewed Associate Editors Clemens Sialm and Dimitri Vayanos. We added a special COVID-19 issue. This issue contained 11 papers and an introduction by Lars Peter Hansen. We expect that these papers will provide a foundation for future finance and economics research that is related to COVID.

Abstract I compare the direct issuance costs of inflation-linked debt (the liquidity premium) with nominal government debt (the inflation risk premium) in developed countries. On average, it is cheaper to issue nominal debt at medium maturities (5–10 years) and inflation-linked debt at long maturities (20 or more years), although results vary somewhat based on whether survey-based or statistical inflation expectations are used. Issuance costs exhibit pronounced time and cross-country variation. Lower inflation-linked debt issuance costs are associated with more countercyclical inflation and higher proportions of inflation-linked debt. International inflation-linked zero-coupon yields are available as an Internet Appendix to this paper. (JEL E31, E43, G12, G15, H30, H63) Received November 22, 2018; editorial decision March 9, 2021 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract We analyze fund managers’ reputation concerns in an equilibrium model, in which we tie together a number of seemingly unrelated phenomena. The model shows that because of reputation concerns, hedge fund managers, especially those with an average reputation, prefer strategies with negatively skewed return distributions. One subtle consequence of this preference is that capital sometimes appears slow moving, leaving profitable investment opportunities unexploited, yet other times appears fast moving, causing large capital relocation and price fluctuations in the absence of fundamental news. More broadly, the analysis demonstrates a limitation of market discipline: fund managers may distort their investments precisely because of market discipline.

Abstract We document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that skilled individual investors exploit market inefficiencies (or perhaps conditional risk premiums) to earn abnormal profits, above and beyond any profits available from well-known strategies based on size, value, momentum, or earnings announcements. (JEL G11, G14, G40, G51) Received: October 11, 2020 Editorial decision: January 4, 2021 Editor: Jeffrey Pontiff

Abstract When short selling is costly, owners of an asset have greater incentive to become informed than nonowners because trading on negative information is easier for them. Thus, information acquisition concentrates among investors owning the asset. A short selling ban restricts selling to only the relatively more informed investors who own the asset, increasing adverse selection but only on the sell side of the market. Price efficiency declines due to less overall information acquisition because a ban magnifies the disincentive to gather information for investors not owning the asset. Empirical evidence from the 2008 U.S. short selling ban is consistent with these theoretical predictions.

We document significant persistence in the market timing performance of active individual investors, suggesting that some investors are skilled at timing. Using data on all trades by active Finnish individual investors over almost 15 years, we also show that the net purchases of skilled versus unskilled investors predict monthly market returns. Our results lend credibility to the view that market returns are predictable, without having to specify which variables active investors use to successfully time the market. (JEL G10, G11, G12, G14, G15).

Abstract We show there is a much stronger negative, dynamic relation between changes in economic uncertainty and Treasury yields over weaker economic times since at least 1990. We document this economic-state variation in uncertainty-yield dynamics for weekly and monthly change horizons, for nominal yields and real-yield proxies, for multiple economic-state identification methods, and for different economic uncertainty metrics. We present additional findings that suggest short-term fluctuations in precautionary-savings and consumption-smoothing forces are more impactful on interest rate dynamics during weaker economic times, especially relying on surveys of expected economic growth and inflation. Received February 8, 2019; editorial decision August 24, 2020 by Editor Nikolai Roussanov. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract Amihud’s stock (il)liquidity measure averages daily ratios of the absolute close-to-close return to dollar volume, including overnight returns. Our modified measure uses open-to-close returns matching return and trading volume measurement windows. It is more strongly correlated with trading-cost measures (by 8%–37%) and better explains cross-sections of returns, doubling estimated liquidity premiums. Using nonsynchronous trading near close, we show overnight returns are primarily information driven: including them in Amihud’s proxy for price impacts of trading magnifies measurement error, understating liquidity premiums. Our modification helps wherever Amihud’s measure is required. Our measures are publicly available for 1964–2019 and can be updated. (JEL G12, G14) Received June 2, 2020; editorial decision September 11, 2020 by Editor Jeffrey Pontiff.

Abstract I estimate a dynamic term structure model on an unbalanced panel of Treasury coupon bonds, without relying on an interpolated zero-coupon yield curve. A linearity-generating model, which separates the parameters that govern the cross-sectional and time-series moments of the model, takes about 8 min to estimate on a sample of over 1 million bond prices. The traditional exponential affine model takes about 2 hr, because of a convexity term in coupon-bond prices that cannot be concentrated out of the cross-sectional likelihood. I quantify the on-the-run premium and a “notes versus bonds” premium from 1990 to 2017 in a single, easy-to-estimate no-arbitrage model. (JEL G12, G14, C33) Received: April 30, 2018; editorial decision November 3, 2020 by Editor Nikolai Roussanov

Abstract This paper proposes that computational complexity generates noise. The same asset is often held for completely different reasons by many funds following a wide variety of threshold-based trading rules. Under these conditions, we show it can be computationally infeasible to predict how these various trading rules will interact with one another, turning the net demand from these funds into unpredictable noise. This noise-generating mechanism can operate in a wide range of markets and also predicts how noise volatility will vary across assets. We confirm this prediction empirically using data on exchange-traded funds. (JEL G00, G02, G14). Received May 28 2019; editorial decision December 16 2020 by Editor Thierry Foucault. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.