The Review of Financial Studies

Jiang, Erica Xuewei

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad031

Using novel shadow bank funding data, I find that shadow banks are funded by the very banks they compete with when originating mortgages. Evidence suggests that banks have market power in the upstream market for shadow banks’ funding, which in turn softens mortgage market competition through their strategic behaviors in both markets. I build and calibrate a quantitative model of vertical integration and competition to show that those consumers who would most benefit from shadow bank services are the ones to bear the costs. Secondary market innovation could increase downstream competition by reducing shadow banks’ reliance on their competitors.Authors 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.

Chava, Sudheer; Ganduri, Rohan; Paradkar, Nikhil; Zeng, Linghang

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad039

Using the near universe of U.S. consumer credit cards, we show that banks transmit their wholesale funding shocks to consumers by reducing their credit card limits. Credit-constrained consumers who are unable to hedge against the transmitted shock by accessing other credit cards experience a stronger and more persistent reduction in aggregate credit card limits at the consumer level. Consequently, these credit-constrained consumers reduce their aggregate credit card borrowing. Our results document a credit card lending channel for the transmission of adverse bank shocks and show who bears the costs of fragile bank funding structures.Authors 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.

Agarwal, Sumit; Hadzic, Muris; Song, Changcheng; Yildirim, Yildiray

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad024

Using account-level credit card data from a large Turkish bank, we study the impact of a unique credit card policy that increases minimum payment on consumption and debt repayment. We show that the policy reduces credit card spending and debt, boosts existing debt repayment, and reduces credit card delinquency. The credit card debt of affected consumers falls on average by 50$\%$ two years into the policy’s implementation. An increase in minimum payment has a stronger effect than does a decrease of a similar magnitude. We build a benchmark life cycle model with soft liquidity constraint to explain the reduction in credit card spending.Authors 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.

Tzur-Ilan, Nitzan

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad035

This study provides novel evidence regarding the effects of loan-to-value (LTV) limits on housing choices. Using a detailed loan-level dataset, I exploit the introduction of LTV limits in Israel. I find that the LTV limits led borrowers to choose housing units that were more affordable, farther from the central business district, and in lower socioeconomic neighborhoods. Additionally, these LTV limits increase interest rates and decrease loan amounts. The findings of this study indicate that macroprudential policies, which focus on the stability of the financial system, have micro implications on location choices, commuting costs, and movement to less-advantaged areas.

Indarte, Sasha

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad036

How does creditor health affect the pass-through of monetary policy to households? Using data on the universe of U.S. credit unions, I document that creditor asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high-frequency identification of monetary policy shocks. Weaker lenders can respond more if they face financial frictions that easing alleviates. The estimates imply constraints on monetary policy become more costly in financial crises featuring creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.Authors 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

Greenwood, Robin; Laarits, Toomas; Wurgler, Jeffrey

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad025

We study the stock market effects of the arrival of the three rounds of “stimulus checks” to U.S. taxpayers and the single round of direct payments to Hong Kong citizens. The first two rounds of U.S. checks appear to have increased retail buying and share prices of retail-dominated portfolios. The Hong Kong payments increased overall turnover and share prices on the Hong Kong Stock Exchange. We cannot rule out that these price effects were permanent. The findings raise novel questions about the role of fiscal stimulus in the stock market.Authors 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.

An, Yu; Song, Zhaogang

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad032

Many of the Federal Reserve’s (the Fed’s) monetary policy operations involve trading with primary dealers. We find that, for agency MBS, dealers charge 2.5 cents (per $100 face value) higher selling to the Fed than to non-Fed customers. Controlling for the same dealer, same security, and same trading time, this discriminatory pricing likely arises from dealers’ market power rather than inventory costs. Further, matching trade size reduces the price differential by more than half, implying that dealers’ market power greatly relates to the Fed’s purchases in large amounts, whereas the Fed’s limited breadth of counterparty choice also plays some role.

Ballensiefen, Benedikt; Ranaldo, Angelo; Winterberg, Hannah

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad022

A repurchase agreement (repo) is a source of cash and collateral. We document that the money market is more segmented when the collateral motive prevails. Two crucial aspects of the central bank framework lead to this disconnect: banks’ access to the central bank’s deposit facility and assets’ eligibility for quantitative easing (QE). We show that repo rates lent by banks with access to the deposit facility and secured by QE eligible assets are more collateral-driven and disconnected from funding-based money market rates. Our results are relevant for different monetary policies and have suggestive implications for the monetary policy pass-through.Authors 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.

Jahan-Parvar, Mohammad R; Zikes, Filip

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad028

We present evidence that several popular low-frequency measures of effective spread suffer from a volatility-induced bias and that volatility is the primary driver of the variation of these liquidity proxies. Using data for U.S. equities and major foreign exchange rates, we show that the bias arises when the effective spread is small relative to volatility. We document that the bias has become more acute over time and show that volatility-biased measures fail to replicate some well-known results in empirical finance. We conclude by providing guidance on the choice of low-frequency measures in empirical applications.Authors 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.

Bacchetta, Philippe; Tièche, Simon; van Wincoop, Eric

2023 The Review of Financial Studies

doi: 10.1093/rfs/hhad027

Using data on international equity portfolio allocations by U.S. mutual funds, we estimate a portfolio expression derived from a standard mean-variance portfolio model extended with portfolio frictions. The optimal portfolio depends on the previous month and the buy-and-hold portfolio shares, and a present discounted value of expected excess returns. We estimate expected return differentials and use them in the portfolio regressions. The estimates imply significant portfolio frictions and a modest rate of risk aversion. While mutual fund portfolios significantly respond to expected returns, portfolio frictions lead to a weaker and a more gradual portfolio response to changes in expected returns.Authors 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.