Forthcoming Articles

The Pricing of Volatility and Jump Risks in the Cross-Section of Index Option Returns

Guanglian Hu and Yuguo Liu

Existing studies relate the puzzling low average returns on out-of-the-money index call and put options to non-standard preferences. We argue the low option returns are primarily due to the pricing of market volatility risk. When volatility risk is priced, expected option returns match the realized average option returns. Moreover, consistent with its theoretical effect on expected option returns, the volatility risk premium is positively related to future index option returns and this relationship is stronger for OTM options and ATM straddles. Lastly, we find the jump risk premium contributes to some portion of OTM put option returns.

Market Development, Information Diffusion and the Global Anomaly Puzzle

Charlie Xiaowu Cai, Kevin Keasey, Peng Li, and Qi Zhang

Previous literature finds anomalies are at least as prevalent in developed markets as in emerging markets, namely, the global anomaly puzzle. We show that while market development and information diffusion are linearly related, information diffusion has a nonlinear impact on anomalies. This is consistent with theoretical developments concerning the process of information diffusion. In extremely low efficiency regimes, without newswatchers sowing the seeds of price discovery and ensuring the long-run convergence of price to fundamentals, initial mispricing and subsequent correction will not occur. The concentration of emerging countries in low efficiency regimes provides an explanation to the puzzle.

Flooded Through the Back Door: The Role of Bank Capital in Local Shock Spillovers

Oliver Rehbein and Steven Ongena

This paper demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in non-disaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce their total borrowing by 6.6% and tangible assets by 6.9% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Additionally, following a disaster event, banks reduce their exposure to currently unaffected but generally disaster-prone areas.

The Bond Pricing Implications of Rating-Based Capital Requirements

Scott Murray and Stanislava Nikolova

This paper demonstrates that rating-based capital requirements, through their impact on insurers’ investment demand, affect corporate bond prices. Consistent with insurers’ low demand for investment-grade (IG) bonds with a rating close to non-investment-grade, these bonds outperform. Consistent with insurers’ high (low) demand for IG bonds with high (low) systematic risk exposure, these bonds underperform (outperform). Insurer demand, measured by insurer holdings, explains most of these pricing effects. We identify rating-based capital requirements as the driver of insurer demand, and thus the pricing effects, by showing that the effects do not exist before these requirements’ implementation in 1993.

Underwriter Reputation, Issuer-Underwriter Matching, and SEO Performance

Charles W. Calomiris, Yehuda Izhakian, and Jaime F. Zender

The role of underwriters is altered in new seasoned equity offering deal types in which the offering follows quickly after its announcement. Controlling for the endogenous matching between issuing firms and underwriters, we find increased underwriter reputation mitigates the immediate price impact of announcing an accelerated bookbuilt offering, exacerbates the price impact of announcing a bought offering, and has no immediate price impact for fully marketed deals. In contrast, underwriter reputation positively affects price outcomes for fully marketed deals around the offer date. Reputation effects are not apparent in the absence of controlling for the endogenous matching.

Global Board Reforms and the Pricing of IPOs

Yangyang Chen, Abhinav Goyal, and Leon Zolotoy

We document that global board reforms are associated with a significant reduction in IPO underpricing. The effect is amplified for IPOs with greater agency problems and mitigated for IPOs certified by reputable intermediaries, IPOs with greater disclosure specificity, and IPOs in countries with better shareholder protection and stringent financial reporting regulations. Furthermore, global board reforms have led to an improvement in the long-term market performance, proceeds, and subscription level of IPOs, and have enhanced board independence in the issuing firms. Our findings suggest that global board reforms have strengthened board oversight in the issuing firms, leading to less underpriced IPOs.

Speculation Sentiment

Shaun William Davies

I exploit the leveraged exchange-traded funds’ (ETFs’) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs’ primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs’ shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use it to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

Cultivating Self-Control in FinTech: Evidence from a Field Experiment on Online Consumer Borrowing

Di Bu, Tobin Hanspal, Yin Liao, and Yong Liu

We report the results of a longitudinal intervention with students across five universities in China designed to reduce online consumer debt. Our research design allocates individuals to a self-control training program, a placebo financial literacy treatment, or a zero-touch control group. The self-control program features detailed tracking of spending and borrowing, budgeting, and introspection about consumption choices. These sessions reduce online borrowing and delinquency charges, mainly driven by a reduction in entertainment-related spending. Financial literacy interventions improve test scores but only marginally affect borrowing. Our results suggest that cultivating self-regulation can largely improve borrowing behavior on e-commerce platforms.