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Finance

Finance

    • May 2014
    • Article

    Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment

    By: Shawn A. Cole, Daniel Stein and Jeremy Tobacman

    This paper estimates how experimentally-manipulated experiences with a novel financial product, rainfall index insurance, affect subsequent insurance demand. Using a seven-year panel, we develop three main findings. First, recent experience matters for demand, consistent with overinference from small samples. Second, spillovers also matter, in the sense that the recent payout experience of village co-residents affects insurance demand about as much as one's own recent payout experience. Third, the spillover effect decays as time passes while the effect of one's own experience does not. We discuss implications of this analysis for commercial sustainability of this complicated but promising risk management technology.

    • May 2014
    • Article

    Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment

    By: Shawn A. Cole, Daniel Stein and Jeremy Tobacman

    This paper estimates how experimentally-manipulated experiences with a novel financial product, rainfall index insurance, affect subsequent insurance demand. Using a seven-year panel, we develop three main findings. First, recent experience matters for demand, consistent with overinference from small samples. Second, spillovers also matter, in the...

    • 2014
    • Article

    Expectations of Returns and Expected Returns

    By: Robin Greenwood and Andrei Shleifer

    We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated with model-based expected returns. The evidence is not consistent with rational expectations representative investor models of returns.

    • 2014
    • Article

    Expectations of Returns and Expected Returns

    By: Robin Greenwood and Andrei Shleifer

    We analyze time-series of investor expectations of future stock market returns from six data sources between 1963 and 2011. The six measures of expectations are highly positively correlated with each other, as well as with past stock returns and with the level of the stock market. However, investor expectations are strongly negatively correlated...

    • August 2014
    • Article

    Mortgage Convexity

    By: Samuel G. Hanson

    Most home mortgages in the United States are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk that must be borne by professional bond investors. I develop a simple model in which the risk tolerance of bond investors is limited in the short run, so these fluctuations in MBS duration generate significant variation in bond risk premia. Specifically, bond risk premia are high when aggregate MBS duration is high. The model offers an explanation for why long-term rates could appear to be excessively sensitive to movements in short rates and explains how changes in MBS duration act as a positive-feedback mechanism that amplifies interest rate volatility. I find strong support for these predictions in the time series of US government bond returns.

    • August 2014
    • Article

    Mortgage Convexity

    By: Samuel G. Hanson

    Most home mortgages in the United States are fixed-rate loans with an embedded prepayment option. When long-term rates decline, the effective duration of mortgage-backed securities (MBS) falls due to heightened refinancing expectations. I show that these changes in MBS duration function as large-scale shocks to the quantity of interest rate risk...

    • 2014
    • Working Paper

    Financial Repression in the European Sovereign Debt Crisis

    By: Bo Becker and Victoria Ivashina

    By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely to be a loan—i.e., the loan supply contracts—when local banks have purchased more domestic sovereign debt and when that debt is risky (as measured by CDS spreads). These effects are most pronounced in the period following the second Greek bailout in early 2010.

    • 2014
    • Working Paper

    Financial Repression in the European Sovereign Debt Crisis

    By: Bo Becker and Victoria Ivashina

    By the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice its 2007 level. We show that this type of increasing reliance on the domestic banking sector for absorbing government bonds generates a crowding out of corporate lending. For a given domestic firm, new debt is less likely...

Faculty Unit

The Finance Unit produces research addressing issues of present and future importance to managers, regulators, and policy-makers.
Finance Unit

Our intellectual roots are based in a long line of scholars from Robert Merton whose collaborative work on risk management and option pricing won him the Nobel Prize in Economics in 1997, to John Lintner who co-created the Capital Asset Pricing Model and made significant contributions to dividend policy, and Gordon Donaldson whose work helped shape the field of corporate finance. We strive to understand how managers and firms make value-enhancing decisions; and how financial institutions, markets, and instruments contribute to this process. Our approach to research is distinguished by its unique combination of theory, empirical analysis, mathematical modeling, and field observations at companies.

Faculty Unit

The Finance Unit produces research addressing issues of present and future importance to managers, regulators, and policy-makers.

Finance Unit

Recent Publications

Honest Jobs: A Path to Redemption

By: Paul A. Gompers and Jeffrey Barkas
  • September 2023 |
  • Case |
  • Faculty Research
Founded by a formerly incarcerated job seeker, Honest Jobs' mission is to be the hub where people with criminal records come to build careers and employers come to find great talent. Honest Jobs faced early challenges as a two-sided platform for justice-involved job seekers and employers, but by 2022, the organization had partnered with 1,200+ employers and supported 40,000+ job seekers who were reintegrating with society. As 2023 approached, founder and CEO Harley Blakeman looked to raise a Series A round to supplement the $3M+ that had been raised in prior rounds. The decision Blakeman faced was whether to pursue impact-oriented VC firms or traditional firms and how much money to raise given hiring needs and expansion plans.
Keywords: Business Startups; Venture Capital; Recruitment; Employment Industry; United States; Colorado; Ohio; Texas
Citation
Educators
Related
Gompers, Paul A., and Jeffrey Barkas. "Honest Jobs: A Path to Redemption." Harvard Business School Case 224-010, September 2023.

Contagious Anomalies

By: Angela Ma and Miles Zheng
  • 2023 |
  • Working Paper |
  • Faculty Research
This paper shows that anomaly strategy contagion contributes a key component of risks induced by arbitrageur trading. We present three main findings: (1) Contagion deteriorates the market liquidity of the contaminated strategy. (2) Increased contagion risk predicts higher strategy covariance with the leverage factor. (3) Due to the 2009 momentum crash, strategies that are ex-ante more connected to momentum experience greater declines in performance. Our results suggest that while diversification generates private risk reduction benefits for arbitrageurs, it also leads to increased contagion risks borne by other market participants.
Keywords: Contagion; Anomalies; Non-bank Intermediaries; Arbitrage; Intermediary Asset Pricing; Price; Financial Institutions
Citation
Related
Ma, Angela, and Miles Zheng. "Contagious Anomalies." Working Paper, 2023.

Large Shocks Travel Fast

By: Alberto Cavallo, Francesco Lippi and Ken Miyahara
  • 2023 |
  • Working Paper |
  • Faculty Research
We leverage the inflation upswing of 2022 and various granular datasets to identify robust price-setting patterns following a large supply shock. We show that the frequency of price changes increases dramatically after a large shock. We set up a parsimonious New Keynesian model and calibrate it to fit the steady-state data before the shock. The model features a significant component of state-dependent decisions, implying that large cost shocks incite firms to react more swiftly than usual, resulting in a rapid pass-through to prices--large shocks travel fast. Understanding this feature is crucial for interpreting recent inflation dynamics.
Keywords: Macroeconomics; Analytics and Data Science; Inflation and Deflation; Cost; Mathematical Methods
Citation
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Cavallo, Alberto, Francesco Lippi, and Ken Miyahara. "Large Shocks Travel Fast." NBER Working Paper Series, No. 31659, September 2023.

Diamond Standard

By: Lauren H. Cohen, Zhaoheng Gong and Grace Headinger
  • September 2023 |
  • Case |
  • Faculty Research
Cormac Kinney, Founder and CEO of Diamond Standard, was on a mission to transform the U.S. diamond market through unlocking the precious gems as market-traded assets. As a serial FinTech entrepreneur, he hoped to add an additional service to his vault: Carats. The commodity currency would be backed by a fungible resource, being the first in its field to have a physical-digital combination. Following the recent crypto-market crash, Kinney wondered if this was the right opportunity to launch his product. Although Kinney saw Carats as the best of both gold and other decentralized currencies, his advisors were wary of the potential regulatory risks that could ensue, in addition to the current dreary landscape of the crypto-market. Should Diamond Standard pursue Kinney’s vision of Carats, or focus its limited resources on other diamond-backed financial products?
Keywords: Tokenization; Fintech; Cryptocurrency; Liquidity; Digital; Rare Earth Minerals; Decentralized; Crypto Economy; Financial Product; Metals; Diamonds; Commodity; Assets; Financial Instruments; Financial Institutions; Financial Markets; Investment; Technological Innovation; Natural Resources; Financial Services Industry; United States
Citation
Educators
Related
Cohen, Lauren H., Zhaoheng Gong, and Grace Headinger. "Diamond Standard." Harvard Business School Case 224-009, September 2023.

Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement

By: George Serafeim and Aaron Yoon
  • Article |
  • Review of Accounting Studies
We investigate whether ESG ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. Relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens while the rating with most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.
Keywords: ESG; ESG (Environmental, Social, Governance) Performance; ESG Disclosure; ESG Ratings; ESG Reporting; ESG Disclosure Metrics; Sustainability; Investments; Disagreement; Rating Disagreement; Ratings; Environmental Sustainability; Social Issues; Corporate Social Responsibility and Impact; Performance; News; Investment; Financial Markets; Stocks; Price
Citation
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Related
Serafeim, George, and Aaron Yoon. "Stock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement." Special Issue on RAST 2022 Conference. Review of Accounting Studies 28, no. 3 (September 1, 2023): 1500–1530.

Arla Foods: Data-Driven Decarbonization (A)

By: Michael Parzen, Michael W. Toffel, Susan Pinckney and Amram Migdal
  • August 2023 |
  • Case |
  • Faculty Research
Arla implemented a data based price incentive systems to measure, track, and influence climate friendly changes to reduce CO2 emissions across the world’s fourth largest dairy cooperative.
Keywords: Dairy Industry; Business Earnings; Agribusiness; Animal-Based Agribusiness; Acquisition; Mergers and Acquisitions; Decision Making; Decisions; Voting; Environmental Management; Climate Change; Environmental Regulation; Environmental Sustainability; Green Technology; Pollution; Moral Sensibility; Values and Beliefs; Financial Strategy; Price; Profit; Revenue; Food; Geopolitical Units; Global Strategy; Ownership Type; Cooperative Ownership; Performance Efficiency; Performance Evaluation; Problems and Challenges; Natural Environment; Science-Based Business; Business Strategy; Commercialization; Cooperation; Corporate Strategy; Food and Beverage Industry; Europe; United Kingdom; European Union; Germany; Denmark; Sweden; Luxembourg; Belgium
Citation
Educators
Related
Parzen, Michael, Michael W. Toffel, Susan Pinckney, and Amram Migdal. "Arla Foods: Data-Driven Decarbonization (A)." Harvard Business School Case 624-003, August 2023.

Plug Power (A)

By: Jonas Heese, Joseph Pacelli and James Barnett
  • August 2023 |
  • Case |
  • Faculty Research
Set immediately after a December 2019 short-seller attack, the case explores Plug Power’s long challenging history. It then focuses on two key issues raised in the short-seller report related to lease accounting and stock warrants that Plug purportedly used to boost profits.
Keywords: Accounting; Environmental Accounting; Financial Reporting; Ethics; Finance; Management; Social Enterprise; Energy Industry; Green Technology Industry; United States; Europe
Citation
Educators
Related
Heese, Jonas, Joseph Pacelli, and James Barnett. "Plug Power (A)." Harvard Business School Case 124-009, August 2023.

How People Use Statistics

By: Pedro Bordalo, John J. Conlon, Nicola Gennaioli, Spencer Yongwook Kwon and Andrei Shleifer
  • 2023 |
  • Working Paper |
  • Faculty Research
We document two new facts about the distributions of answers in famous statistical problems: they are i) multi-modal and ii) unstable with respect to irrelevant changes in the problem. We offer a model in which, when solving a problem, people represent each hypothesis by attending “bottom up” to its salient features while neglecting other, potentially more relevant, ones. Only the statistics associated with salient features are used, others are neglected. The model unifies biases in judgments about i.i.d. draws, such as the Gambler’s Fallacy and insensitivity to sample size, with biases in inference such as under- and overreaction and insensitivity to the weight of evidence. The model makes predictions about how changes in the salience of specific features should jointly shape the prevalence of these biases and measured attention to features, but also create entirely new biases. We test and confirm these predictions experimentally. Bottom-up attention to features emerges as a unifying framework for biases conventionally explained using a variety of stable heuristics or distortions of the Bayes rule.
Keywords: Decision Choices and Conditions; Microeconomics; Mathematical Methods; Behavioral Finance
Citation
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Related
Bordalo, Pedro, John J. Conlon, Nicola Gennaioli, Spencer Yongwook Kwon, and Andrei Shleifer. "How People Use Statistics." NBER Working Paper Series, No. 31631, August 2023.

The Imperfect Intermediation of Money-Like Assets

By: Jonathan Wallen and Jeremy C. Stein
  • 2023 |
  • Working Paper |
  • Faculty Research
We study supply-and-demand effects in the U.S. Treasury bill market by comparing the returns on T-bills to the administered policy rate on the Federal Reserve’s reverse repurchase (RRP) facility. In spite of the arguably more money-like properties of an investment in RRP, we observe repeated episodes where one-month T-bill rates fall well below expected RRP rates. This gap frequently exceeds 50 basis points in 2022, before spiking to over 160 basis points during the initial period of uncertainty over the debt ceiling in March and April of 2023. In an effort to understand this phenomenon, we develop and test a simple model where the RRP-bill spread is policed by a group of heterogeneous money funds, who differ in their elasticity of substitution between the two assets. Our main finding is that when T-bills are scarce, and the spread is large, the marginal money fund is more inelastic, as the more elastic funds have already exhausted their holdings of T-bills. As a result, for a given shift in T-bill supply, the effect on rates is an order of magnitude larger when T-bills are scarce, and when more money funds are out of the market.
Keywords: Debt Securities; Demand and Consumers; Price
Citation
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Related
Wallen, Jonathan, and Jeremy C. Stein. "The Imperfect Intermediation of Money-Like Assets." Working Paper, August 2023.

The 5G Spectrum Auction in Chile

By: Juan Escobar, Rafael Epstein, Jose Correa, Pamela Gidi, Jozsef Markovits, Natalie Epstein, Yerko Montenegro and Abner Turkieltaub
  • August 2023 |
  • Article |
  • Telecommunications Policy
In 2021, the Chilean government implemented a first-price package auction to allocate electromagnetic spectrum for 5G mobile services. The auction was run sequentially for different spectrum bands, allowing firms to exploit band complementarities. It was a combinatorial auction, so firms could bid for any combination of blocks within a band. It contemplated spectrum caps – upper limits on the spectrum for each firm – to ensure competitiveness. The beauty contests used in previous processes became obsolete, as there was a need to promote competitiveness and transparency in the telecommunication sector. Four incumbents and one potential entrant participated in the auction. The auction raised more than USD $450 million, which was six times more than the sum of the revenues of all previous contests in the country. We discuss this experience and show how different aspects of the context justified our design choices.
Keywords: Bids and Bidding; Competition; Revenue; Telecommunications Industry; Chile
Citation
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Related
Escobar, Juan, Rafael Epstein, Jose Correa, Pamela Gidi, Jozsef Markovits, Natalie Epstein, Yerko Montenegro, and Abner Turkieltaub. "The 5G Spectrum Auction in Chile." Art. 102580. Telecommunications Policy 47, no. 7 (August 2023).
More Publications

Faculty

Josh Lerner
William A. Sahlman
Paul A. Gompers
Kenneth A. Froot
Robert S. Kaplan
Laura Alfaro
Robert C. Merton
Andre F. Perold
Benjamin C. Esty
W. Carl Kester
George Serafeim
Stuart C. Gilson
→See All

Seminars & Conferences

Sep 27
  • 27 Sep 2023
HBS Finance Unit/Harvard Economics Department Seminars
Tania Babina, Columbia Business School
Oct 04
  • 04 Oct 2023
HBS Finance Unit/Harvard Economics Department Seminars
Paul Tetlock, Columbia Business School
→Seminars & Conferences

HBS Working Knowlege

    • 12 Sep 2023

    How Can Financial Advisors Thrive in Shifting Markets? Diversify, Diversify, Diversify

    Re: Marco Di Maggio
    • 17 Aug 2023

    ‘Not a Bunch of Weirdos’: Why Mainstream Investors Buy Crypto

    Re: Marco Di Maggio
    • 17 Jul 2023

    Money Isn’t Everything: The Dos and Don’ts of Motivating Employees

    Re: Brian J. Hall
→More Articles

Harvard Business Publishing

    • December 9, 2020
    • Article

    Give Employees Cash to Purchase Their Own Insurance

    By: Regina E. Herzlinger and Barak D. Richman
    • June 2023
    • Case

    Launching Egypt’s First Digital Banking Platform: QNB Bebasata

    By: Mark Egan, Billy Chan and Ahmed Dahawy
    • 2017
    • Book

    HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company

    By: Richard S. Ruback and Royce Yudkoff
→More Harvard Business Publishing
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