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Our popular course Introduction to QuantLib Development will be taking place June 18-20th, 2018.


Journal of Finance's Blog

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February 23, 2018 Comments (0)


February 23, 2018 Comments (0)

Deviations from Covered Interest Rate Parity

February 19, 2018 Comments (0)

We find that deviations from the covered interest rate parity (CIP) condition imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world. Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs. They are particularly strong for forward contracts that appear on banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on...

Margin Requirements and the Security Market Line

February 18, 2018 Comments (0)

Between 1934 and 1974, the Federal Reserve changed the initial margin requirement for the U.S. stock market 22 times. I use this variation to show that investors' leverage constraints affect the pricing of risk. Consistent with the theoretical predictions of Frazzini and Pedersen (2014), I find that tighter leverage constraints result in a flatter relation between betas and expected returns. My results provide strong empirical support for the idea that the constraints investors face...

Real Options Models of the Firm, Capacity Overhang, and the Cross‐Section of Stock Returns

February 17, 2018 Comments (0)

We use a stochastic frontier model to obtain a stock‐level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this “capacity overhang” estimate relates significantly negatively to the cross‐section of stock returns, even when controlling for popular pricing factors. The negative relation persists among small and large stocks, stocks with more or less reversible investments, and in good and bad economic states. Capacity...

Belief Dispersion in the Stock Market

February 16, 2018 Comments (0)

We develop a dynamic model of belief dispersion with a continuum of investors differing in beliefs. The model is tractable and qualitatively matches many of the empirical regularities in a stock price and its mean return, volatility, and trading volume. We find that the stock price is convex in cash‐flow news and increases in belief dispersion, while its mean return decreases when the view on the stock is optimistic, and vice versa when pessimistic. Moreover, belief dispersion leads to...

What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance

February 16, 2018 Comments (0)

Using laboratory experiments, we provide evidence on three factors influencing trader performance: fluid intelligence, cognitive reflection, and theory of mind. Fluid intelligence provides traders with computational skills necessary to conduct statistical inference. Cognitive reflection helps traders avoid behavioral biases and thereby extract signals from market orders and update their prior beliefs accordingly. Theory of mind describes the degree to which traders correctly assess the...