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- The risk-return tradeoff among equity factorsPublication . Barroso, Pedro; Maio, PauloWe examine the time-series risk-return trade-off among equity factors. We obtain a positive tradeoff for profitability and investment factors. Such relationship subsists conditional on the covariance with the market factor, which represents consistency with Merton’s ICAPM. Critically, we obtain an insignificant risk-return relationship for the market factor. The factor risk-return trade-off tends to be weaker among international equity markets. The out-of-sample forecasting power (of factor variances for future own returns) tends to be economically significant for the investment and profitability factors. Our results suggest that the risk-return trade-off is stronger within segments of the stock market than for the whole.
- Vocational high school graduates wage gap: the role of cognitive skills and firmsPublication . Hartog, Joop; Raposo, Pedro Miguel; Reis, HugoComparing cohorts born between 1951 and 1994, we document and interpret changes in the wage differential among graduates from secondary education with a vocational and a general curriculum. The wage gap initially increased and then decreased. We find that these changes cannot be attributed to simple compositional shifts in the economy, but instead relate to important changes in worker allocation to firms that are heterogeneous in wage policies: the demise of assortative matching between workers and firms that worked out favourably for vocational graduates.
- Expressions of gratitude applied to business: a lesson for managing online reviewsPublication . Simão, Claudia; Farias, Ana Rita; Reis, JoanaOnline reviews are critical for business thriving, but their management is not often effective. Using data from one Social Media platform, with more than 600 observations of public online interactions between business owners and customers, we showed that a strategic management of online reviews predicts a positive increment of online reputation. Publicly expressing gratitude (Study 1), and specifically, directing these expressions towards beneficial online reviews (Study 2), are effective strategies supporting a general increase of the business online score. These findings identify public expressions of gratitude as a responsive, attentive gesture that signals care and consideration towards customers. Such gesture promotes the online reputation through satisfaction between business-community relationships.
- When Muth's entrepreneurs meet Schrödinger's catPublication . Ferreira, Rodolphe dos SantosIn his 1961 seminal paper, Muth applied his "rational expectations" hypothesis to a simple model of a competitive market for a homogeneous good produced under random shocks. The hypothesis goes beyond the Marshallian expectational approach to equilibrium in attributing to entrepreneurs the capacity to form theory-based price predictions. We find this capacity already in Cournot [1838], although in a model without explicit fundamental uncertainty. The purpose of this note is to show within the same model that oligopolistic competition adds indeterminacy, hence market uncertainty, to the picture, weakening in some sense the rational expectations hypothesis. Before equilibrium is realised, each entrepreneur stands in a hawkish-dovish superposition, very much as the Schrödinger's cat is in a dead-living superposition.
- On-site inspecting zombie lendingPublication . Bonfim, Diana; Cerqueiro, Geraldo; Degryse, Hans; Ongena, Steven R. G.In spite of growing regulatory pressure in most developed economies, “zombie lending” remains a widespread practice by banks. In this paper we exploit a series of large-scale on-site inspections made on the credit portfolios of several Portuguese banks to investigate how these inspections affect banks’ future lending decisions. We find that an inspected bank becomes 20% less likely to refinance zombie firms, immediately spurring their default. Overall, banks seemingly reduce zombie lending because the incentives to hold these loans disappear once they are forced to recognize losses.
- Lest we forget: learn from out-of-sample errors when optimizing portfoliosPublication . Barroso, Pedro; Saxena, KonarkPortfolio optimization often struggles in realistic out-of-sample contexts. We de-construct this stylized fact, comparing historical forecasts of portfolio optimization inputs with subsequent out of sample values. We confirm that historical forecasts are imprecise guides of subsequent values but also find the resulting forecast errors are not entirely random. They have predictable patterns and can be partially reduced using their own history. Learning from past forecast errors to calibrate inputs (akin to empirical Bayesian learning) results in portfolio performance that reinforces the case for optimization. Furthermore, the portfolios achieve performance that meets expectations, a desirable yet elusive feature of optimization methods.
- How do people respond to small probability events with large, negative consequences?Publication . Eichenbaum, Martin; Matos, Miguel Godinho de; Lima, Francisco; Trabandt, Mathias; Rebelo, SergioWe study how people react to small probability events with large negative consequences using the outbreak of the COVID-19 epidemic as a natural experiment. Our analysis is based on a unique administrative data set with anonymized monthly expenditures at the individual level. We find that older consumers reduced their spending by more than younger consumers in a way that mirrors the age dependency in COVID-19 case-fatality rates. This differential expenditure reduction is much more prominent for high-contact goods than for low-contact goods and more pronounced in periods with high COVID-19 cases. Our results are consistent with the hypothesis that people react to the risk of contracting COVID-19 in a way that is consistent with a canonical model of risk taking.
- Crowding and tail risk in momentum returnsPublication . Barroso, Pedro; Edelen, Roger M.; Karehnke, PaulSeveral theoretical studies suggest that coordination problems can cause arbitrageur crowding to push asset prices beyond fundamental value as investors feedback trade on each others' emands. Using this logic we develop a crowding model for momentum returns that predicts tail risk when arbitrageurs ignore feedback effects. However, crowding does not generate tail risk when arbitrageurs rationally condition on feedback. Consistent with rational demands, our empirical analysis generally finds a negative relation between crowding proxies constructed from institutional holdings and expected crash risk. Thus our analysis casts both theoretical and empirical doubt on crowding as a stand-alone source of tail risk.
- Is macroprudential policy driving savings?Publication . Teixeira, André; Venter, ZoëThis paper assesses the impact of macroprudential policy (MaPP) on aggregate demand in the EU between 2000-2019. Using a difference-in-differences approach, we find that MaPP reduces household consumption and increases firm investment. These effects are relatively mild in the short run but become more pronounced in the long run. Our findings point to a weaker macroeconomic impact than suggested in previous studies.
- Bank risk-taking and impaired monetary policy transmissionPublication . Koenig, Philipp; Schliephake, EvaWe consider a standard banking model with agency frictions to simultaneously study the weakening and reversal of monetary transmission and banks’ risk-taking in a low-interest environment. Both, weaker monetary transmission and higher risk-taking arise because lower policy rates impair banks’ net worth.The pass-through to deposit rates, the level of excess reserves and the extent of the agency problem between banks and depositors are crucial determinants of monetary transmission. If the deposit pass-through is sufficiently impaired, a reversal rate exists. For policy rates below the reversal rate further interest rate reductions lead to a disproportionate increase in risk-taking and a contraction in loan supply.