Pricing Power
Political Endogeneity
Yosef Bonaparte
Journal of Macroeconomics, June 2026
Abstract:
This paper revisits the Presidential Puzzle, the finding that U.S. stock returns are higher under Democratic presidents, by arguing that political cycles are endogenous. Economic conditions shape electoral outcomes, biasing estimates that treat presidencies as exogenous. Using Election-Day weather changes across the 50 largest U.S. cities as an instrument for voter turnout and electoral outcomes, we account for this endogeneity. We first replicate the baseline partisan premium, but once instrumented, the effect diminishes and often reverses sign. Robustness checks across decile portfolios, 49 Fama-French sectors, and behavioral variables (sentiment, risk aversion, patience) confirm that the relationship disappears. Our results resolve the Presidential Puzzle and show that neither party delivers superior stock market performance once endogeneity is properly addressed.
The Hidden Cost of Stock Market Concentration: When Funds Hit Regulatory Limits
Lubos Pastor, Taisiya Sikorskaya & Jinrui Wang
NBER Working Paper, March 2026
Abstract:
As stock market concentration has risen, regulatory limits on fund portfolio concentration have become increasingly binding, especially for large-cap growth funds. When funds approach these limits, they trim their largest holdings and reduce equity exposure. Funds perform worse when constrained. A constraint-based ownership measure predicts stock returns, particularly among the largest firms. These findings suggest that high market concentration can distort stock prices by limiting the ability of optimistic investors to scale their positions. Just like short-sale constraints can produce overpricing by limiting pessimistic investors' views, constraints on long positions can generate underpricing by suppressing optimists' views.
Exchange-Traded Funds and the Wash Sale Loophole
Michael Dambra et al.
Management Science, forthcoming
Abstract:
Tax wash sale rules prohibit the recognition of capital losses when substantially identical securities are sold and immediately repurchased within short windows. This study examines whether institutional investors use exchange-traded funds (ETFs) to circumvent wash sale rules. Consistent with tax-motivated demand for ETFs, incumbent ETFs both create more shares and experience more trading volume upon the introduction of nearly identical ETFs, particularly when recent returns are negative. We show that tax-sensitive institutions' investment in highly correlated ETFs has proliferated in recent years, exceeding a quarter of their assets under management. Furthermore, tax-sensitive institutions holding more ETFs are significantly more likely to engage in swapping nearly identical ETFs. This swapping behavior has become widespread, with tax-sensitive institutional investors swapping $417 billion of nearly identical ETFs since 2001. We estimate that tax-sensitive institutions realized more than $84 billion dollars in losses in highly correlated ETFs associated with the swapping activity since 2001.
Private Credit, Balance Sheets and Financial Stability
Gregor Matvos, Tomasz Piskorski & Amit Seru
NBER Working Paper, March 2026
Abstract:
We document new evidence on the capitalization, funding structure, and performance of private credit funds using comprehensive fund- and asset-level data covering most of the industry. Private credit funds are highly capitalized, with equity typically accounting for 65-80% of total assets -- more than six times the capitalization of U.S. banks, where equity represents about 10%. Debt usage is moderate and largely reflects bank credit lines used for liquidity management. Fund lives average 10-12 years, while underlying loan maturities are generally shorter, implying little or no maturity mismatch -- unlike banks, which fund long-term assets with short-term callable deposits. Private credit portfolios are diversified across industries, geographies, and credit strategies, reducing exposure to correlated shocks. Performance data show positive average net annualized returns with limited downside risk to creditors, as losses are largely borne by equity investors. Overall, private credit funds appear conservatively structured and unlikely to pose systemic risks comparable to traditional banks under their current balance-sheet configurations. We conclude by discussing potential vulnerabilities that could emerge as the sector grows, including governance and disclosure frictions, stress-period dynamics, bank-nonbank linkages, and the transmission of losses through limited partner balance sheets and retail investment vehicles.
Credit Rating Purchases and S&P 500 Index Membership Decisions
Kun Li, Xin Liu & Shang-Jin Wei
Management Science, forthcoming
Abstract:
S&P 500 is commonly used in empirical finance and macroeconomics as a measure of overall capital market sentiment, and the associated VIX is taken as an indicator of economic uncertainty. While both assume that the S&P 500 index is objectively constructed, we show that its membership decisions have a nontrivial amount of discretion unexplained by its published methodology. Importantly, we show that firms' purchases of S&P ratings appear to improve their chance of entering the index (but purchases of Moody's ratings do not). Furthermore, openings in index membership tend to motivate firms to purchase more S&P ratings. This is also confirmed by an event study of a 2002 membership rule change. These patterns raise concerns over potential governance issues.
In the Fed's Mind
Ali Kakhbod, Amir Kermani & Bernardo Maciel
NBER Working Paper, March 2026
Abstract:
Does the Federal Reserve react to all inflation equally? We systematically analyze FOMC meeting records from 1937 to 2025 to construct meeting-level measures of the Fed's real-time attribution of inflation to demand and supply pressures. We document substantial variation in these narratives over time and show that, since Volcker, the Fed has responded more aggressively to perceived demand-driven inflation. Consistent with this asymmetry, supply pressures have more persistent effects on realized inflation, while demand pressures' impact dissipates quickly. Financial markets also reflect this distinction: demand imbalances primarily move risk-neutral yields, whereas supply imbalances raise term premia and equity risk premia.
Passive Ownership and the Value Effect
Min Jun Song
Columbia University Working Paper, October 2025
Abstract:
This study investigates whether passive ownership has weakened the positive association between adjusted book-to-price ratios and future stock returns, known as the value effect. Using firm-level panel data over the past 30 years, I document a strong negative association between passive ownership and the value effect. To corroborate the association results, I exploit the Pension Protection Act (PPA) of 2006, which spurred investments in index funds through Target Date Funds (TDFs). I find that the attenuation of the value effect intensifies with exposure to TDF flows, which are unlikely to reflect active firm-level fundamental analysis. Moreover, the negative relation between passive ownership and the value effect emerged with the PPA in 2006, preceding the 2008 financial crisis. In cross-sectional analyses, I find that the decline of the value effect is more pronounced for firms with low information production activity in capital markets and limited shareholder payouts. Finally, passive ownership weakens the value effect more strongly when non-index funds are net sellers, suggesting that withdrawals from actively managed funds reinforce the attenuation of the value effect. Collectively, the findings suggest that the relatively fundamentals-agnostic nature of passive ownership has eroded the value effect in the U.S. stock market.
Experts' ability to predict the future fosters unwarranted optimistic expectations
Massimiliano Ostinelli & Andrea Bonezzi
Journal of Experimental Psychology: Applied, forthcoming
Abstract:
We show that merely knowing that experts can predict future events with higher (vs. lower) accuracy can bias consumers' expectations about the outcomes of such events. We focus our investigation on predictions of assets' value and show that the mere belief that experts can predict the future value of a stock with higher (vs. lower) accuracy leads people to form unfounded optimistic expectations about the future value of the stock and invest more in that stock, even if experts' predictions remain undisclosed. Drawing on the concept of the community of knowledge, we suggest that this bias originates from a sense of empowerment that reduces the perceived likelihood of adverse outcomes. The phenomenon we uncover is important as unfounded expectations about an asset's value may lull consumers into making unwarranted investments, potentially harming personal finances and social welfare.