This paper studies how fund-family advisors use cross-fund subsidization to manipulate fund performances and maximize fund-family values, and how this activity shapes market equilibrium. The trade-off between subsidization efficiency and funds' endogenous profit-performance convexities determines the subsidization. When the effect of profit-performance convexities dominates, advisors optimally use low-value funds to subsidize high-value funds. When the effect of subsidization efficiency dominates, advisors use liquid funds to subsidize temporarily distressed funds. The subsidization induces negative asymmetric cross-fund flow-performance sensitivities: high-value (liquid) funds' performances strongly decrease low-value (temporarily distressed) funds' flows, whereas low-value (temporarily distressed) funds' performances weakly reduce high-value (liquid) funds' flows. (JEL G11, G14, G23, D02, D83)
Abstract This paper provides the first systematic evidence on a recent industry innovation: money market funds offering multiple intraday NAV strikes and redemption windows. Emerging after the 2016 floating-NAV reforms, these multistrike funds hold safer, more liquid assets than traditional single-strike funds offering end-of-day redemptions, yet face substantially larger outflows during periods of market stress. Our findings point to a structural concentration of liquidity-sensitive investors in multistrike funds, revealing how fund microstructure influences run dynamics among sophisticated institutions. Despite evolving liquidity requirements, the core behavioral and structural differences we identify remain highly relevant for evaluating ongoing and future regulatory reforms. (JEL G01, G18, G23, G28)
Underestimating discount rate volatility leads to asset pricing anomalies. Using analysts' return forecasts as proxies for subjective discount rates, I show that these forecasts exhibit systematically lower volatility than CAPM-based benchmarks, whose objective fluctuations negatively predict future returns, especially for high beta-volatility stocks. A misvaluation measure based on this underestimation significantly predicts cross-sectional CAPM alphas, while a tradable factor explains 12 prominent anomalies. These findings underscore discount rate volatility underestimation as a unifying explanation for analysts' forecast errors and cross-sectional return predictability, linking recent evidence on aggregate subjective belief dynamics with firm-level mispricing.
Using a unique regulatory data set with disclosed counterparty identities, we show that sophisticated clients in corporate bond markets outperform when splitting their orders across multiple dealers. The effect is stronger for informationally sensitive clients, for high-yield bonds, and during informationally intensive periods including COVID-19. Identifying clients who simultaneously trade in government and corporate bonds reveals that connections have larger and more persistent effects in the corporate bond market. (JEL G12, G14, G23, G24)Received: December 9, 2022; Editorial decision: September 25, 2025Editor: Norman Sch & uuml;rhoffAuthors 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.
We document that the COVID-19 pandemic triggered a surge in the comovement between nonfinancial corporate and sovereign credit default swaps in core European countries, characterized by strong fiscal capacity. In peripheral countries with lower fiscal capacity, the pandemic had essentially no impact on such comovement. We show that this result is primarily explained by a pandemic-induced repricing of widespread government support directed, for the first time, toward nonfinancial corporations. We interpret our findings within an asset pricing framework featuring defaultable corporate and sovereign debts.
This paper shows that trends typically used for monetary policy guidance are also effective in predicting market excess returns. Using a linear combination method across 14 economic and financial predictor variables, we find that moving-average trends outperform the variables' current values in forecasting market returns. Incorporating neural networks further improves these predictions. Our findings underscore the importance of trends, supporting the Federal Reserve's emphasis on integrating trends with lagged variables. When accounting for nonlinearity, we find that market return predictability is significantly greater than commonly believed. Our results are robust across both U.S. and global equity markets.
We document how mechanical buying by CRSP-index-tracking funds 5 days post-IPO affects stock returns and IPO deal structure. Using a difference-in-differences design, we show that expected indexer demand causes Fast-Track IPOs to outperform their non-Fast-Track counterparts by over five percentage points, peaking at the index inclusion date and reverting significantly within 3 weeks. Anticipated CRSP index inclusion also affects IPO terms, with Fast-Track IPOs raising 6% more capital than their non-Fast-Track counterparts. Our findings support a proposed index rule change to eliminate a $5.8 billion "shadow tax" paid to intermediaries by index fund investors and firms raising capital through IPOs. (JEL G12, G14)Received: 14 March 2025; Editorial decision: September 9, 2025Editor: Joel PeressAuthors 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.
Options contracts are listed on thousands of stocks with different numbers of contracts per stock. This paper proposes to construct four risk-targeting portfolios to consolidate information in all the option contracts on each stock. A cross-sectional regression identifies the market price of risk on each risk source for each stock at any given date. The market price of risk estimate strongly predicts the excess return of the corresponding risk-targeting portfolio. Long-short portfolio construction on the risk-targeting portfolios in proportion to the market price of risk estimates generates highly positive average excess returns per unit risk across all four risk dimensions.
Financial intermediaries manage myriad interest rate risk exposures. We propose a new method to measure financial intermediaries' residual interest rate risk using high-frequency financial market data. Our method exploits all available high-frequency information and is valid under extremely weak assumptions. Applying the method to U.S. life insurers, we find their interest rate risk management strategies are generally effective. However, life insurers are more sensitive to changes in long-term interest rates than property and casualty insurers. We show that the term premium helps to explain the difference in sensitivities between the two types of insurer.
In this paper, we analyze the key drivers of bond covenant prices by employing a novel measurement approach based on secondary market data. We find that covenant prices vary significantly over time and are associated with market-wide credit risk, volatility, and macroeconomic variables. Apart from the time-series dynamics, there is also significant variation across bond and firm characteristics. In particular, covenant prices increase with the riskiness of bonds and are higher for firms that have more growth options, more tangible assets, and are smaller. Furthermore, we document a positive correlation between the prices of covenants and their subsequent inclusion rates.
We show that demand pressure from retail investors makes options on low-price stocks relatively expensive-delta-hedged options on low-price stocks underperform those on high-price stocks by 0.63% per week for calls and 0.36% for puts. Natural experiments corroborate this finding: options become more expensive following stock splits, options on mini indices are more expensive than those on main indices, and mini contract options are more expensive than standard options. We attribute our findings to retail investors' preference for skewness and divergence of opinion. Limits to arbitrage and strategic quote setting by market makers contribute to, but do not fully explain, this effect. (JEL G13, G14)
We propose a new private information measure based on a model of strategic trade optimization in the cross section of securities. Investors receive liquidity and private information shocks and optimize trading across securities, accounting for price impact (Kyle's lambda). The model yields a simple private information measure: lambda xOIB (order imbalance). Intuitively, order imbalance is more likely to be information-driven when trading is expensive. We validate our measure by showing that it is greater for smaller firms with higher analyst dispersion, peaks with insider trades, helps explain return reversals, predicts return volatility, and increases before M&A announcements and after analyst coverage terminations. (JEL G11, G12, G14)
This study investigates the role of passive investors in the equity lending market by utilizing the expansion of exchange-traded fund (ETF) markets due to the Bank of Japan's (BOJ) ETF purchasing program. We find that the BOJ's purchases increase equity prices particularly for stocks with limited availability in the equity lending market. However, over the longer term, the BOJ's cumulative purchases reduce lending fees, thus weakening the program's effects. These findings suggest that ETF managers supply stocks that constitute ETFs to the equity lending market, and the lending behavior of ETFs, influenced by the BOJ's program, alleviates short-selling constraints.
This study examines the relationship between corporate asset growth rates and bond performance, uncovering a strong inverse relationship between the two. Higher asset growth increases asset value, potentially offering greater protection to bondholders and leading to lower bond returns. By decomposing bond returns into initial yields and subsequent yield changes, our analysis supports this expectation and suggests that investors may overreact to asset growth, as investor sentiment significantly influences bond yields in response to it. Finally, drawing on insights from leverage-based Q-theory, we examine how stock returns respond to asset growth, accounting for its effect on bond performance. (JEL G12, G02)
This paper examines global sources of short sellers' informational advantage by analyzing their trading around public news releases in 38 countries. I find that shorts on negative news have stronger predictive power than nonnews shorts, but only in countries with high-quality public information, more news per stock, and higher illiquidity. These results indicate that some country-level factors discourage short sellers from trading on public information. Short sellers' informational advantage in most countries seems to arise from their access to private information, as evidenced by their ability to anticipate future negative news and their trading in unison with insiders. (JEL: G12, G14, G15)
Internalization happens when orders submitted through the same broker are intentionally matched to each other on-exchange or off-exchange. We study the impact of allowing (modes of) internalization on trading rates, investor welfare, and payment for order flow (PFOF). Internalization affects the choice between limit orders and market orders and the participation of dealers in trading. Greater dealer participation creates a greater scope for PFOF. A crucial determinant is the size of the tick. For small ticks, compared with the absence of internalization, its presence leads to higher trading rates, lower investor welfare, and more PFOF. The opposite holds for wide ticks. (JEL G10)
We apply machine learning techniques to predict international stock returns using firm characteristics. Market-specific training is important, as neural network models (NNs) achieve stronger results when they are trained in each market separately than in a global model trained with U.S. data. NNs outperform linear models in predicting stock return rankings and forming profitable portfolios. In contrast, regression trees underperform linear models when the number of observations is low. We also show that adding variables constructed from U.S. firm characteristics, which may contain information beyond the characteristics of international stocks, further enhances the return predictability of market-specific NNs. (JEL C52, G10, G12, G15)
Firms with more positive employee expectations tend to earn higher future returns, delivering annualized abnormal returns ranging from 8% to 11%. Employees' forward-looking expectations are a stronger return predictor than employee satisfaction, which is backward-looking. Employee expectations can predict returns because they reflect information about firms' fundamentals that has not yet been reflected in traditional data sources, such as earnings reports. Hedge funds actively trade on this information, consistent with a decay in forecasting power over longer holding horizons. Overall, this paper highlights the importance of labor in asset pricing, specifically from the perspective of employee expectations. (JEL G12, G14)Received: 20 December 2023; Editorial Decision: 20 August 2024Editor: Hui ChenAuthors 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.
We investigate intraday return dynamics in currency markets around FOMC announcements. Using comprehensive high-frequency exchange rate data, we reveal that post-FOMC announcement returns are significantly low, cancelling out approximately 65% of positive pre-FOMC announcement drifts. These post-announcement reversals mainly result from uncertainty resolution and are mostly realized between 12 and 24 hours after FOMC announcements. This return behavior is significantly related to the negative jump volatilities driven by FOMC announcements. Our findings suggest that our signed jump volatility measures capture informational shocks and uncertainty resolutions and tend to be high under illiquid market conditions. (JEL G14, G15)
We hypothesize that when managers do not exercise their options, they signal valuable private information. Accordingly, we construct a proxy to capture managers' private information from their in-the-money vested options unexercised (VOU) and find that high VOU firms' stocks are underpriced. A long-short portfolio based on VOU generates a 5% alpha annually. Additionally, we find a positive relation with subsequent operating performance. Firms with higher VOU also receive more favorable analyst recommendations and upgraded credit ratings. Firms with higher VOU are more likely to issue news releases, share repurchases, and stock splits to convey that private information to the public. (JEL G11, G14, G32, G35, G40)
