How should long-term investors form portfolios in our time-varying, multi-factor and friction-filled world? Two conceptual frameworks may help: first, look directly at the stream of payments that a portfolio and payout policy can produce. Second, include a general equilibrium view of the markets’ economic purpose, and the nature of investors’ different preferences, risk-taking ability, and function in that equilibrium. These perspectives can rationalize some of investors’ behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is useful in practice.

In within-firm analysis of 1,805 executives, executives implicated in financial reporting fraud cases have significantly stronger equity incentives than their within-firm peers who are not implicated in the fraud. Executives implicated in fraud cases also have significantly stronger equity incentives than executives at non-fraud firms in similar roles. However, the equity incentives of non-implicated executives at fraud firms are no different than those for executives at non-fraud firms. The results are significant across executive roles and for equity incentives measured as wealth sensitivity to changes in stock price or stock price volatility. Executive-level analysis that considers which executives are implicated in the fraud may provide more precise measurement of the association and statistical significance of the relationship between equity incentives and fraud. Finally, firm-level measures that consider the equity incentives of all members of the top management team may better identify fraud firms than do measures focusing on one executive.

We present the first analysis of the effect of grade retention on adult criminal convictions, exploiting test cutoffs for ninth-grade promotion in Louisiana. Eighth-grade retention increases the likelihood of violent crime conviction by 1.05 percentage points (58.44%) and increases the number of violent crime convictions at first conviction. The effects are likely driven by declines in high school peer quality and reduced educational investments that result in lower noncognitive skill acquisition. Extrapolating effects away from the cutoff shows that our results are generalizable to a larger group of low-performing students and are evident for both property and drug crimes.

We investigate the equilibrium interest rate charges on non-recourse and recourse loans secured by stock. In such loans, the client retains the option to prepay and recover the collateral stock. We adopt a structural model of the firm where debt levels, with endogenous bankruptcy, affect equity dynamics. Complicating matters, the link between total equity and the price of a share of stock that forms the collateral depends on the extent of dilutions and buybacks that occur. For levered firms, due to dilution in bad states of nature, stock prices typically fall faster than equity values; and for firms that engage in buybacks in good states of nature, stock prices will rise faster than equity values. Banks that ignore these features underestimate the equilibrium interest rate charge on stock-based loans. We provide an analysis of individual stock-based loans and their portfolio characteristics, the latter of which can be used by banks to ascertain capital requirements.

There have been important methodological changes in the Consumer Price Index (CPI) over time. These distort comparisons of inflation from different periods, which have become more prevalent as inflation has risen to 40-year highs. To better contextualize the current run-up in inflation, this article constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period. Using these series, we find that current inflation levels are much closer to past inflation peaks than the official series would suggest. In particular, the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics.

We study how the recent run-up in housing and rental prices affects the outlook for inflation in the USA. Housing held down the overall inflation in 2021. Despite record growth in private market-based measures of home prices and rents, the government-measured residential services inflation was only 4% for the 12 months ending in January 2022. After explaining the mechanical cause for this divergence, we estimate that, if past relationships hold, the residential inflation components of the Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) are likely to move close to 7% during 2022. These findings imply that housing will make a significant contribution to overall inflation in 2022, ranging from one percentage point for headline PCE, to 2.6 percentage points for core CPI. We expect residential inflation to remain elevated in 2023.

Bank capital requirements reduce the probability of bank failure and help mitigate taxpayers’ sharing in the losses that result from bank failures. Under Basel III, direct capital requirements are supplemented with liquidity requirements. Our results suggest that liquidity provisions of banks are connected to bank capital and that changes in liquidity indirectly affect the capital structure of financial institutions. Liquidity appears to be another instrument for adjusting bank capital structure beyond just capital requirements. Consistent with Diamond and Rajan (2005), we find that liquidity and capital should be considered jointly for promoting financial stability.

We build on recent SWF literature that documents an equity discount for SWF investments and extend it to bond markets to investigate whether SWFs represent a threat or an opportunity to bondholders. We find robust evidence supporting the political agenda hypothesis which points to the existence of a “SWF bond risk premium”. Compared to other government shareholding types, we also find that SWF ownerships present higher risk to bondholders and result in higher increase in the target firm's cost of debt. Furthermore, this SWF bond risk premium is larger during non-crisis periods and for SWFs originating from autarchic countries. Interestingly, we show strong evidence that SWFs may signal a passive investment stance and reduce the SWF bond risk premiums by: i) investing through separate investment vehicles, ii) targeting firms with an existing major shareholder, iii) improving their internal governance, and iv) increasing their transparency.

We examine the impact of economic policy uncertainty (EPU) on bank liquidity hoarding. We create a comprehensive measure of bank liquidity hoarding that takes into account asset-, liability-, and off-balance sheet activities. Using over one million bank-quarter observations, we find that in response to EPU, banks hoard liquidity overall and through all three components. This behavior is more pronounced for banks with less liquidity, more peer-bank spillover effects, and more EPU exposure. Additional analyses of interest rate spreads on several bank products suggest that our findings reflect at least in part bank choices, rather than just the reactions of customers.