The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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Shorting in Speculative Markets
Published: 01/22/2020 | DOI: 10.1111/jofi.12871
MARCEL NUTZ, JOSÉ A. SCHEINKMAN
In models of trading with heterogeneous beliefs following Harrison‐Kreps, short selling is prohibited and agents face constant marginal costs‐of‐carry. The resale option guarantees that prices exceed buy‐and‐hold prices and the difference is identified as a bubble. We propose a model where risk‐neutral agents face asymmetric increasing marginal costs on long and short positions. Here, agents also value an option to delay, and a Hamilton‐Jacobi‐Bellman equation quantifies the influence of costs on prices. An unexpected decrease in shorting costs may deflate a bubble, linking financial innovations that facilitated shorting of mortgage‐backed securities to the collapse of prices.
Yesterday's Heroes: Compensation and Risk at Financial Firms
Published: 11/06/2014 | DOI: 10.1111/jofi.12225
ING‐HAW CHENG, HARRISON HONG, JOSÉ A. SCHEINKMAN
Many believe that compensation, misaligned from shareholders’ value due to managerial entrenchment, caused financial firms to take risks before the financial crisis of 2008. We argue that, even in a classical principal‐agent setting without entrenchment and with exogenous firm risk, riskier firms may offer higher total pay as compensation for the extra risk in equity stakes borne by risk‐averse managers. Using long lags of stock price risk to capture exogenous firm risk, we confirm our conjecture and show that riskier firms are also more productive and more likely to be held by institutional investors, who are most able to influence compensation.
Misspecified Recovery
Published: 02/29/2016 | DOI: 10.1111/jofi.12404
JAROSLAV BOROVIČKA, LARS PETER HANSEN, JOSÉ A. SCHEINKMAN
Asset prices contain information about the probability distribution of future states and the stochastic discounting of those states as used by investors. To better understand the challenge in distinguishing investors' beliefs from risk‐adjusted discounting, we use Perron–Frobenius Theory to isolate a positive martingale component of the stochastic discount factor process. This component recovers a probability measure that absorbs long‐term risk adjustments. When the martingale is not degenerate, surmising that this recovered probability captures investors' beliefs distorts inference about risk‐return tradeoffs. Stochastic discount factors in many structural models of asset prices have empirically relevant martingale components.