Moving Money
Who Pays the Price? Overdraft Fee Ceilings and the Unbanked
Jennifer Dlugosz, Brian Melzer & Donald Morgan
Federal Reserve Working Paper, November 2020
Abstract:
Nearly 25% of low-income households in the United States are unbanked. High fees are often cited as a reason they remain unbanked, leading some to believe that limiting bank fees would improve financial inclusion. We use the federal preemption of state limits on overdraft fees to study the impact of fee ceilings on low-income households. After preemption, national banks raise overdraft fees relative to state-chartered banks in affected states, consistent with ceilings binding. Banks in affected states also provide more overdraft credit, bouncing a smaller share of checks following preemption. The share of low-income households that are unbanked decreases, consistent with price ceilings causing the rationing of banking services.
Bury the Gold Standard? A Quantitative Exploration
Anthony Diercks, Jonathan Rawls & Eric Sims
NBER Working Paper, October 2020
Abstract:
This paper is one of the first to study the present-day properties of the gold standard in a quantitative model commonly used in central banks. We incorporate gold into an otherwise standard estimated New Keynesian model and compare the positive and normative implications of adopting a gold standard to other more commonly advocated policies. We show that under certain conditions, the gold standard is akin to a nominal GDP targeting framework and can at times be considered an improvement. However, unlike more conventional policies, the gold standard must react to shocks to the supply and demand for gold. We estimate the model for the post-2000 period using a novel dataset on the supply of gold and find that following a gold standard would result in dramatic increases in the volatilities of macroeconomic aggregates and a significant deterioration in household welfare. This is because the estimated shocks to gold supply and demand are significantly larger than for other more conventional aggregate shocks. In the end, what buries the gold standard turns out to be instability in the dynamics of gold itself.
Fund Manager Partisanship and Principal-Agent Conflicts: Evidence from the COVID-19 Crisis
Blair Vorsatz
University of Chicago Working Paper, November 2020
Abstract:
Investors ignore fund manager characteristics when choosing amongst actively-managed mutual funds. Such traits, like partisanship, are viewed as irrelevant for performance. However, during the early stages of the COVID-19 crisis, fund manager partisanship explained large performance differences -- strongly Republican teams underperformed and politically diverse teams outperformed. These performance differences are driven, in part, by Republican managers increasing market risk and decreasing exposures to technology and healthcare stocks, while Democratic managers and diverse teams did the opposite. Large, abnormal outflows from funds with misaligned manager-clientele partisanship suggest that conflicting partisan perceptions of risk were recognized as a problem ex-post.
Deleting Misconduct: The Expungement of BrokerCheck Records
Colleen Honigsberg & Matthew Jacob
Journal of Financial Economics, forthcoming
Abstract:
We examine a controversial process, known as expungement, which allows brokers to remove evidence of financial misconduct from public records. From 2007 to 2016, we identify 6,660 expungement requests, suggesting that brokers attempt to expunge 12% of the allegations of misconduct reported by customers and firms. When these requests are adjudicated on the merits, arbitrators approve expungement 84% of the time. We show that expungements significantly predict future misconduct; brokers with prior expungements are 3.3 times as likely to engage in new misconduct as the average broker. Further, using an instrumental variable based on the random assignment of arbitrators, we present evidence that brokers who receive expungement are more likely to reoffend than brokers who are denied expungement. We also show that successful expungements improve long-term career prospects.
A nonrandom walk down Hollywood Boulevard: Celebrity deaths and investor sentiment
Gabriele Lepori
Financial Review, forthcoming
Abstract:
Motivated by psychological evidence that shows the public experiences emotional distress in response to the deaths of popular figures, I employ the deaths of 1,391 Hollywood Walk of Fame celebrities as natural experiments to identify exogenous public mood changes over the period 1926–2009. Consistent with the psychological theories which maintain that sadness encourages individuals to favor high‐risk/high‐reward investments, I find that U.S. stock returns are abnormally high immediately after the death of a major celebrity. This effect is particularly large during periods of high market‐level uncertainty (+0.40%) and for stocks headquartered in the city where the celebrity died (+0.26%).
Rise of the “Quants” in Financial Services: Regulation and Crowding Out of Routine Jobs
Christos Makridis & Alberto Rossi
George Mason University Working Paper, September 2020
Abstract:
We document three recent trends in employment in financial services: (a) the share of science, technology, engineering, and math (STEM) workers grew by 30 percent between 2011 and 2017; (b) while the earnings premium of working in finance has grown, the STEM premium in finance has declined since 2011; and (c) regulatory restrictions in financial services have grown faster than in other sectors. We investigate three economic mechanisms underlying these patterns: (a) capital-skill complementarity, (b) relabeling of non-STEM degree programs as STEM degree programs, and (c) regulation. We show that only the rise in regulation can explain our observations.
'Repayment-by-Purchase' Helps Consumers to Reduce Credit Card Debt
Grant Donnelly et al.
Harvard Working Paper, November 2020
Abstract:
Many consumers struggle to repay their credit card debt, in part because paying small portions of large bills often feels fruitless. We introduce a novel credit card payment option – repayment-by-purchase – and examine its influence on both the amount consumers’ repay and their perception of progress toward reducing their debt. With typical repayment, consumers simply enter the amount they wish to pay toward their total balance– often the minimum required payment. With repayment-by-purchase, in contrast, consumers can select specific purchases (e.g., a coffee at Starbucks, a utility bill) that they wish to repay, and make payments specifically directed toward “eliminating” these purchases. Five studies reveal that repayment-by-purchase increases awareness of what is being repaid, which increases perceptions of progress toward reducing debt, which in turn encourages higher repayment. In a large field experiment, credit card customers who were given the opportunity to allocate their payment toward specific purchase categories paid 12.18% more toward their debt balance than a control group. These findings advance our practical understanding of how consumers can be encouraged to pay more toward credit card debt and offer conceptual insight into how both increased awareness and perceived goal progress enhance consumer motivation to get out of debt.
Timing to the Statement: Understanding Fluctuations in Consumer Credit Use
Sumit Agarwal, Amit Bubna & Molly Lipscomb
Management Science, forthcoming
Abstract:
We show that consumers spend 15% more per day in the first week following the receipt of a credit card statement than in the days just prior to the statement. This increase in spending includes both an increase in the likelihood that they use the credit card in the first weeks following their statement and an increase in transaction amount on days they use the credit card. In contrast to the effect on credit card spending, debit card spending is unaffected by credit card statement issuance, suggesting that consumers are not simply switching among modes of payment. Our estimates are based on exogenous variation from bank-assigned statement dates. We propose and test several alternative explanations to this spending puzzle: optimization of the free float, salience effect of the credit card statement, mental accounting, liquidity constraints, and automatic payments. We find that the consumers most apt to spend early in the credit card cycle tend to be those who do not revolve balances and are not close to their credit limit. Thus, this paper documents a puzzle with mixed support for several alternative explanations.
Forecasting the Equity Premium: Mind the News!
Philipp Adämmer & Rainer Schüssler
Review of Finance, November 2020, Pages 1313–1355
Abstract:
We introduce a novel strategy to predict monthly equity premia that is based on extracted news from more than 700,000 newspaper articles, which were published in The New York Times and Washington Post between 1980 and 2018. We propose a flexible data-adaptive switching approach to map a large set of different news-topics into forecasts of aggregate stock returns. The information that is embedded in our extracted news is not captured by established economic predictors. Compared with the prevailing historical mean between 1999 and 2018, we find large out-of-sample (OOS) gains with an R2OOS of 6.52% and sizeable utility gains for a mean–variance investor. The empirical results indicate that geopolitical news are at times more valuable than economic news to predict the equity premium and we also find that forecasting gains arise in down markets.
The Unintended Impact of Academic Research on Asset Returns: The Capital Asset Pricing Model Alpha
Alex Horenstein
Management Science, forthcoming
Abstract:
This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized capital asset pricing model (CAPM) alphas outperform those with high alphas, but this finding only appears after the CAPM’s publication in the 1960s. I find evidence consistent with the widespread application of the CAPM generating incentives to tilt portfolios systematically away from low CAPM alpha assets, causing such assets to be undervalued.
Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds
Robert Harris et al.
NBER Working Paper, November 2020
Abstract:
We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using cash-flow data sourced from Burgiss’s large sample of institutional investors. Previous research, studying largely pre-2000 data, finds strong persistence for both buyout and venture capital (VC) firms. Using ex post or most recent fund performance (as of June2019), we confirm the previous findings on persistence overall as well as for pre-2001 and post-2000 funds. However, when we look at the information an investor would actually have – previous fund performance at the time of fundraising rather than final performance – we find little or no evidence of persistence for buyouts, both overall and post-2000. For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold. Using previous fund PME at fundraising, we find modest persistence, but it is driven by bottom, not top quartile performance. On the other hand, persistence for VC funds persists even when using information available at the time of fundraising. Therefore, the conventional wisdom of investors holds for VC.
Does Collateral Value Affect Asset Prices? Evidence from a Natural Experiment in Texas
Albert Alex Zevelev
Review of Financial Studies, forthcoming
Abstract:
Does the ability to pledge an asset as collateral, after purchase, affect its price? This paper identifies the impact of collateral service flows on house prices, exploiting a plausibly exogenous constitutional amendment in Texas that legalized home equity loans in 1998. The law change increased Texas house prices 4%; this is price-based evidence that households are credit-constrained and value home equity loans to facilitate consumption smoothing. Prices rose more in locations with inelastic supply, higher prelaw house prices, higher income, and lower unemployment. These estimates reveal that richer households value the option to pledge their home as collateral more strongly.