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How does the health of creditors affect the pass-through of monetary policy to households? In a financial crisis, asset losses among creditors can either dampen or amplify the effects of monetary policy on lending, depending on how these losses and policies interact with financial frictions. Frictions such as leverage constraints my hinder creditor responses, however easing may instead alleviate frictions that would otherwise constrain lending. Using data on the universe of US credit unions, I document that 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. I find that a one standard deviation asset loss increases the response of credit union lending to a 10 basis point fall in the two-year Treasury rate from a 0.86 to 1.15 percentage point increase. The estimates imply that constraints on monetary policy become more costly in a financial crisis characterized by creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.

We investigate the effect of climate change, through natural disasters, on corporate borrowing costs. We test for this relation by exploiting banks’ loan pricing to unaffected, but at-risk, borrowers after a climate change related disaster. We find that banks charge about 8 basis points higher rates to these indirectly affected borrowers, after controlling for a wide range of alternative explanations. Consistent with time varying attention to climate change, this effect increases to 17 basis points in years after major reports on climate change and is concentrated in the year around disasters. Borrowers with the largest exposure to climate change, and those with the least ability to absorb adverse shocks, suffer the highest increase in rates. Our analysis suggests that the total cost for U.S. borrowers from worsening climate change related natural disasters exceeds $250 million every year.

We document issuance overpricing of corporate debt securities in China, which is robust across subsamples with different credit ratings, maturities, and issuers. This phenomenon contrasts with underpricing of equity and debt securities in Western countries and reflects China's distinct institutional environment. The average overpricing dropped from 7.44 basis points to 2.41 basis points after the government prohibited underwriters from using rebates in issuances in October 2017. By analyzing overpricing before and after the rebate ban and across different issuers and underwriters, we uncover two channels for underwriters, who compete for future underwriting business, to drive up overpricing: rebates and self-purchases.

he transition from high- to lower-carbon production systems increasingly creates regulatory and market risks for high-emitting firms. We test to what extent equity market investors demand a premium to compensate for such risks and thus might raise firms' cost of equity capital (CoE). Using data for 1,897 firms spanning 50 countries over the years 2008–2016, we find a distinct and robust positive impact of carbon intensity (carbon emissions per unit of output) on CoE: On average, a standard deviation higher (sector-adjusted) carbon intensity is associated with a CoE premium of 6 (9) basis points or 1.7% (2.6%). This effect is primarily explained by systematic risk factors: high-emitting assets are significantly more sensitive to economy-wide fluctuations than low-emitting ones. The CoE impact of carbon intensity is more pronounced in high-emitting sectors, EU countries, and firms subject to carbon pricing regulation. Our results suggest that carbon emission reduction might serve as a valuable risk mitigation strategy.

The Secured Overnight Financing Rate (SOFR) is on a finishing path to replace US dollar LIBOR. A key issue remains, however, namely the lack of credit sensitive, termed rates equivalent to LIBOR rates. Back to SOFR’s root in the Treasury repo market, we compute SOFR term rates by pricing Treasury repos across different tenors. Recognizing that SOFR mixes in different segments of the overnight market, term rates are computed per segment and a volume weighted average is taken as the SOFR term rate. The tri-party segment shows three month repo spread of 45 basis points during the global financial crisis, and the bilateral segment has 59 bps. Contrary to the new risk-free-rates label, we show that SOFR has a credit component, but it is not strong enough comparing to LIBOR. A credit sensitive benchmark is still needed to fully replace LIBOR.

Purpose Political risk is an important determinant of portfolio returns. The basic purpose of this study is to revisit the importance of political risk in a constrained portfolio, namely, a Shariah-compliant equity portfolio (SCEP). Furthermore, the performance of such a constrained portfolio is also compared with a conventional portfolio that invests in all stocks. Design/methodology/approach The portfolios are constructed from stock-level data and invested in 61 international markets. The set of Shariah-compliant stocks is obtained with screening guidelines of Dow Jones Islamic Market indices. The weights of each constituent in both Shariah-compliant and conventional portfolios are driven by its relative exposure to political risk for the period 1996–2018. Findings Results show that, compared to conventional investors, Shariah-compliant investors gain substantial benefits when the allocation decision is based on political risk. A Shariah-compliant portfolio outperforms its conventional counterpart by 7.98% annually when tilted toward politically stable countries. The economic benefits further increase to 804 basis points when the portfolio allocates more funds to politically unstable countries. The tilted SCEP successfully reduces the downside risk, resulting in improved financial performance stability. Originality/value To the best of the authors’ knowledge, this is the first effort of its nature to highlight the importance of political risk in the context of SCEPs.

Does gross or net debt matter for long-term sovereign spreads in emerging markets? The topic is important for undestanding the borrowing cost implications of public assetliability management decisions (e.g. using assets to lower debt). We investigate this question using data on emerging market economies (EMEs) over the period 1998–2014. We find that both gross debt and assets have a significant impact on long-term sovereign bond spreads in emerging markets, with effects roughly offsetting each other (coefficients of opposite sign and similar magnitude). Hence, net debt seems more appropriate than gross debt when evaluating the impact of indebtedness on spreads. The empirical results suggest that an increase in net debt by 10 percentage points of GDP implies an increase in the spread by 100–120 basis points, and the effect is larger during periods of domestic distress. The key results from this empirical study are quite robust to alternative specifications and subgroups of EMEs.

We are the first to investigate whether close-to-open overnight returns can measure firm-specific investor sentiment in China. Empirically, we find that in the short term, overnight returns persist for up to four weeks, and the persistence is stronger for hard-to-value firms, confirming the result for the US; in the longer run, stocks with high (low) overnight returns underperform (outperform), consistent with the US evidence too. We further show that overnight returns negatively predict future stock returns in the cross-section, and this predictability remains strong after controlling for firm characteristics. Finally, the strategy that buys stocks in the highest overnight-return decile and sells stocks short in the lowest decile generates abnormal returns of 41 and 40 basis points per month for the Fama-French three-factor model and Fama-French-Carhart four-factor model, respectively. Therefore, overnight returns seem to be a suitable proxy for measuring firm-specific sentiment in China.

By allowing different agency mortgage-backed securities (MBS) to be traded based on limited characteristics, the to-be-announced (TBA) market generates liquidity and benefits the MBS market broadly. We quantify effects of the TBA structure on mortgage borrowers. Exploiting discontinuities in TBA eligibility, we estimate that TBA eligibility reduces mortgage rates by 7 to 28 basis points. The TBA eligibility benefit is larger for mortgages with higher expected prepayments. We also find that TBA eligibility affects refinancing, which has implications for monetary policy transmission. Our finding is relevant for housing policies, such as housing finance reforms and uniform MBS. 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.

We find dealer-level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity. Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the U.K. leverage ratio framework. Dealers who are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients' demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a preexisting relationship.

This paper investigates price discovery in foreign exchange (FX) swaps. Using data on inter-dealer transactions, we find a 1 standard deviation increase in order flow (i.e. net pressure to obtain USD through FX swaps) increases the cost of dollar funding by up to 4 basis points after the 2008 crisis. This is explained by increased dispersion in dollar funding costs and quarter-end periods. We find central bank swap lines reduced the order flow to obtain USD through FX swaps, subsequently affecting the forward rate. In contrast, during quarter-ends and monetary announcements we observe high frequency adjustment of the forward rate.

We study the economic impact of changes in health focusing on one specific transmission channel: earnings. We develop a general equilibrium model where earnings are affected by health status and shocks, and workers may influence the level of their health status through investment. After calibrating the model for the U.S., we perform two sets of exercises. First, we simulate the occurrence of a large and transitory health shock that has the characteristics of one of the worst health catastrophes in modern times, the 1918 influenza pandemic. We estimate that efficient labor drops on impact by more than 4 % , inducing a fall of approximately 30 basis points in the return to assets and a moderate increase in the wage rate. The implied output loss amounts to roughly 3 % . These effects—especially on prices and consumption—are persistent. Second, we do a comparative steady-state analysis in order to measure the effects of permanent changes in health resulting from policy changes. We show that omitting general equilibrium effects (e.g., prices effects) produces a bias in measuring the impact of health risks’ changes.

I develop a structural model of mortgage demand and lender competition to study how leverage regulation affects the U.K. mortgage market. Using variation in risk‐weighted capital requirements across lenders and mortgages with different loan‐to‐values (LTVs), I show that a 1‐percentage‐point increase in risk‐weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11%) on average. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration by about 20%, and suggest that banning high‐LTV mortgages may reduce large lenders' equity buffer.

In 1985, James A. Baker III's “Program for Sustained Growth” proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the ten-year period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.6 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since the early 1990s.

A corporate criminal accountability is a corporate obligation to receive a reply for his crimes. These crimes can be appealed to corporations based on theories about how they handle criminal crimes. The study is aimed at understanding the form of corporate criminal accountability under the law no. 31 in 1999, Jo law no. 20 in 2001 on the elimination of corruption crimes, and understanding the corporate criminal accountability of those who are in the corruption management of goods and service ruling no.1 / ppd. SUS/ppd. PST. This study is a normative-law study, with legal sources being primary and secondary legal materials, with regulatory and case approaches, and is then studied descriptively by using deductive and inductive methods to address the problem. Based on research the authors conducted on corporate criminal accountability that underlie the 51st/pd. SUS/tipikor /2018/ pk. JKT. In the first semester of 2008, bank Indonesia the central bank/bi decided to raise its key rate by 25 basis points to 8.25 percent in the second quarter of this year.

We investigate the association between disclosures about key value drivers (i.e., growth, synergies, human capital, brands, customers and technology) in press releases announcing mergers and acquisitions (M&A) deals and acquirer stock returns upon the announcement. We find that, after controlling for the main characteristics of the deal, acquirers that use more terms about these value drivers in press releases exhibit more negative market returns around the M&A announcement. An increase of 10% in the number of terms used about generic value drivers is associated with a decrease in announcement market-adjusted returns of approximately 43 basis points. The negative association between terms about value drivers and acquirer stock returns is stronger for larger deals. We also find that disclosures about these value drivers in M&A announcement press releases are consistent with the subsequent subjective valuation of intangible assets recognized in acquirers’ financial statements through the purchase price allocation. Our findings are relevant for investors attempting to interpret early signals about the performance of M&As and for managers communicating about these strategic investment decisions.

The yield spread of South African to United States 10 year government bonds over the last 5 years has increased substantially to levels approaching those last seen during the mid-1980s. This yield spread increase is replicated in spreads relative to long-term German bonds, as well as for the spread of state owned enterprises (ESKOM) to United States and German bonds. This paper examines the association between the spread and macroeconomic fundamentals over the 1960-2019 sample period, under the GARCH and GARCH-M class of estimators. We find that higher South African economic growth, lower inflation, public and private debt, as well as Rand-Dollar appreciation are all associated with a statistically significantly lower South African - United States yield spread. The strongest impact is associated with the public debt-to-GDP ratio. Mean spread levels do not appear to be influenced by yield volatility. Finally, while there is no evidence of sign bias in the impact of shocks on yield volatility (negative shock impacts are no di¤erent than positive), there is evidence of size bias for both positive and negative shocks: larger shocks have a larger impact on volatility than small, regardless of their sign. Collectively, and even ignoring the impact of private sector leveraging, South Africa’s performance in these macroeconomic fundamentals is associated with an increase in the SA-US yield spread of 363 basis points (since 2012). This constitutes a substantial proportion of the current 741 basis point spread.

In this paper, we build an endogenous growth model into a stochastic small open economy framework to study the long-run economic cost of a sudden stop. In this economy, productivity growth is determined by successful implementation of business ideas, yet the quality of ideas is heterogeneous and good ideas are scarce. A representative financial intermediary screens and selects the most promising ideas, which gives rise to a trade-off between mass (quantity) and composition (quality) in the entrant cohort. Chilean firm-level data from the sudden stop triggered by the Russian sovereign default in 1998 confirms the main mechanism of the model, as firms born during the credit shortage are fewer, but better. A calibrated version of the economy shows the importance of accounting for heterogeneity and selection, as otherwise the permanent loss of output generated by the forgone entry after a 100 basis point increment in the interest rate is overestimated by 45%.

We document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that skilled individual investors exploit market inefficiencies (or perhaps conditional risk premiums) to earn abnormal profits, above and beyond any profits available from well-known strategies based on size, value, momentum, or earnings announcements. (JEL G11, G14, G40, G51) Received: October 11, 2020 Editorial decision: January 4, 2021 Editor: Jeffrey Pontiff

Management quality is known to influence depository institution performance, but less understood are the characteristics of managers that influence performance. We empirically examine how the political ideology of a credit union’s CEO influenced decision making and performance during the financial crisis. Our results indicate that the return on assets of credit unions run by conservative CEOs are 22 basis points lower during the crisis relative to liberal CEOs. Returns are shown to be lower as a direct result of credit unions with conservative CEOs applying more conservative accounting practices for loan losses than their counterparts during the crisis, despite similar loan quality.

We study the effect of retail investor attention on odd lot trading. We observe that increases in abnormal Google search volume predict odd-lot trading. Importantly, this relationship is share price-sensitive: For stocks priced below $11, an increase in abnormal search volume leads to less odd lot trading. For stocks priced above $46, on the other hand, an increase in abnormal search volume leads to more odd lot trading. For a stock priced at $78 – the mean share price in our sample – a one standard deviation increase of abnormal search volume increases the average share of odd lot trading by 10 basis points. This effect is even stronger for more expensive stocks. Our results are consistent with attention-induced trading when investors face wealth constraints and are robust to alternative channels including news and institutional investor attention.

We study the influence of credit default swaps (CDS) trading on the costs of bond intermediation. After CDS initiation, CDS firms pay 12% to 28% (8 to 20 basis points) lower underwriting fees than similar non-CDS firms do. Underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable. In bond offerings, participation by investors facing risk-based regulatory requirements increases after CDS initiation. Our evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds. This paper was accepted by Karl Diether, finance.

This study examines the impact of the 2007–08 global financial crisis on issuance activity and yield spreads in the Regulation S private debt market. We explore the implications of the flight-to-quality effect by comparing two types of Regulation S issues subject to different jurisdictions and territorial boundaries - standalone Regulation S issuance and combined Regulation S and Rule 144A issues. Our results suggest that flight-to-quality is the main effect during the crisis; this effect partially reversed after the crisis. We find that debt issuance declined by more than 70% during the crisis, and the yield spreads jumped by 50 basis points relative to the pre-crisis period. This effect is more pronounced for the combined Regulation S and Rule 144A issues that comprise mostly speculative-grade issues. After the crisis, the number of Regulation S debt issues more than doubled, but the average credit rating declined. We also find the yield spread difference between the standalone and combined issuance shrank after the crisis. Our evidence supports market segmentation between the two types of issuances due to substantial differences in geographical jurisdictions, investor base, and credit quality.

Using security-level holdings for all euro-area investors, we study portfolio rebalancing during the quantitative easing program from March 2015 to December 2017. Foreign investors outside the euro area accommodated most of the Eurosystem’s purchases. Duration, government credit, and corporate credit risk did not get concentrated in particular regions or investor sectors. We estimate a demand system for government bonds by instrumental variables to relate portfolio rebalancing to yield changes. Government bond yields decreased by 65 basis points on average, and this estimate varies from 38 to 83 basis points across countries.

This paper uses a quasi-natural experiment to estimate the premium for money-likeness. The 2014 Securities and Exchange Commission (SEC) reform of the money market fund (MMF) industry reduced the money-likeness of prime MMFs by increasing their information sensitivity, while leaving government MMFs unaffected. Investors fled from prime to government MMFs, with total outflows exceeding one trillion dollars. Using a difference-in-differences design, we estimate the premium for money-likeness to be between 20 and 30 basis points (bps). These premiums are not due to changes in investors’ risk tolerance or funds’ risk taking. Our results support recent developments in monetary theory identifying information insensitivity as a key feature of money.

We show that U.S. dollar movements affect syndicated loan terms for U.S. borrowers, even for those without trade exposure. We identify the effect of dollar movements using spread and loan amount adjustments during the syndication process. Using this high-frequency, within loan variation, we find that a one standard deviation increase in the dollar index increases spreads by up to 15 basis points and reduces loan amounts and underpricing by up to 2 percent and 7 basis points, respectively. These effects are concentrated in dollar appreciations. Our results suggest that global factors reflected in the dollar affect U.S. borrowing costs.

This article studies the performance improvement of technical analysis with the application of empirical mode decomposition. The study employs data from the Hong Kong stock market and addresses issues arising from gaps in intraday data. The results support the use of empirical mode decomposition in technical analysis to improve performance. TOPICS:Security analysis and valuation, technical analysis, emerging markets, statistical methods, performance measurement Key Findings ▪ Empirical mode decomposition improves technical analysis profitability via denoising before candlestick construction. ▪ Empirical results show 68 basis points of profitability improvement a year on average in the Hong Kong stock market. ▪ Empirical results are robust regardless of the methods to handle the lunch gap in the data.

This article asks how costly targeted trade sanctions imposed by the US government are for domestic firms. I argue that, as a result of sanctions, the firm value of US companies that have supply relationships with sanctioned entities is likely to suffer from lost revenue, reputational damage, and business model uncertainty. I test this expectation by applying an event study to the important case of targeted trade sanctions against Chinese technology companies. I find that sanctions against these companies reduced their US suppliers’ risk-adjusted stock returns by 220 basis points. Firm-level cross-sectional analysis shows that businesses with stronger ties to the sanctioned entities are more negatively affected, which supports the direct connection between sanctions and relevant suppliers. Measuring the domestic economic ramifications of sanctions for the sender country has been elusive. These findings, which are statistically and economically significant, indicate that US companies face notable costs from sanctions against internationally active firms.

Regression discontinuity estimates indicate that home buying is highly responsive to interest rates in a large segment of the population. A surprise 50 basis point cut in the effective interest rate for mortgages insured by the Federal Housing Administration (FHA) led to an immediate 14 percent increase in home buying among the FHA-reliant population. We show that this large, extensive-margin effect arises from the rate cut helping borrowers overcome maximum debt payment to income (DTI) thresholds. We conclude that binding DTI constraints are an important feature of the mortgage market that amplify the effect of interest rate shocks.

This paper examines whether a premium for green bonds, called “greenium”, found in previous studies, exists in primary and secondary bond markets. Using a universe of about 2000 green and 180,000 non-green bonds from 650 international issuers, we apply both propensity score matching and coarsened exact matching to determine a sample of conventional bonds that is most similar to the sample of green bonds. We find that green bonds have larger issue sizes and lower rated issuers, on average, compared to conventional bonds. The estimates show that the yield for green bonds is, on average, 15–20 basis points lower than that of conventional bonds, both on primary and secondary markets, thus a “greenium” exists.

We construct optimal portfolios of mutual funds whose objectives include socially responsible investment (SRI). Comparing portfolios of these funds to those constructed from the broader fund universe reveals the cost of imposing the SRI constraint on investors seeking the highest Sharpe ratio. This SRI cost crucially depends on the investor’s views about asset pricing models and stock-picking skill by fund managers. To an investor who strongly believes in the CAPM and rules out managerial skill, that is, a market index investor, the cost of the SRI constraint is typically just a few basis points per month, measured in certainty-equivalent loss. To an investor who still disallows skill but instead believes to some degree in pricing models that associate higher returns with exposures to size, value, and momentum factors, the SRI constraint is much costlier, typically by at least 30 basis points per month. The SRI constraint imposes large costs on investors whose beliefs allow a substantial amount of fund-manager skill, that is, investors who heavily rely on individual funds’ track records to predict future performance. ( JEL G11, G12, C11)In 2005, when we released what ultimately proved to be the final version of this study, socially responsible investment (SRI) had already become a major presence on the investment landscape. In the years since, this approach, now often called “sustainable” investment, has grown even more rapidly and often encompasses a broad set of “ESG” (environmental, social, and governance) criteria. As evidence of the rapid growth, Morningstar (2020) notes, “one need look no further than the nearly fourfold increase in assets that flowed into sustainable funds in the United States in 2019.”Sustainable investing has also received increased attention in the academic literature, in subsequent studies too numerous to list. Some of the studies are especially related to ours in that they also examine mutual funds. In our study, mutual funds constitute an asset universe faced by an investor imposing an SRI/ESG constraint. A number of the subsequent studies use mutual funds to address other dimensions of sustainable investing. For example, Bollen (2007), Benson and Humphrey (2008), Renneboog, Ter Horst, and Zhang (2011), Bialkowski and Starks (2016) and Hartzmark and Sussman (2019) investigate determinants of mutual fund flows into sustainable funds versus other funds. Riedl and Smeets (2017) use survey and experimental data to explore investors’ preferences for sustainable funds. Madhavan et al. (2020) examine sustainable active equity mutual funds, relating factor loadings and residual returns to ESG characteristics. While we focus on mutual funds, our study also intends that the basic aspects of the SRI setting extend to other institutional investors. That intent is supported, for example, by the recent evidence of Bolton and Kacperczyk (forthcoming, 2020) providing broader perspectives on the SRI portfolio tilts of various types of institutional investors.One conclusion of our study is that an SRI/ESG constraint is especially binding for investors wishing to tilt toward value or small-cap funds. It seems reasonable to infer that such is still the case, though we have not updated our formal analysis. For example, Morningstar (2020) identifies, as of 2019, 99 sustainable U.S. equity funds categorized within its 3 × 3 style box that sorts along the dimensions of value/blend/growth and small/mid-cap/large. Of those 99 funds, only 8 are classified as value, versus 24 as growth and 67 as blend. Only 7 of the 99 are small-cap funds, versus 79 large-cap and 13 mid-cap. More generally, our 2005 study is early in noting meaningful differences in factor loadings between sustainable versus other funds, in both three- and four-factor models.An SRI/ESG constraint is also especially binding for investors who see much information in individual funds’ historical alphas. The basic reason we discuss in our study is seemingly still at work. That is, despite the rapid growth noted earlier, the number of sustainable funds is still well less than those in the total fund universe, so many of the highest track records appear among funds outside that subset. Not mentioned in our original study is that the case of an investor who sees much information in historical alpha confronts the argument of Berk and Green (2004): if fund flows rationally respond to historical alpha, an investor will not view historical alpha as being informative about future alpha. That argument relies on investors correctly assessing the degree of fund-level decreasing returns to scale. One might view an investor who sees historical alpha as informative about future alpha as also having beliefs that favor a lower degree of decreasing returns to scale, as compared to other investors. Moreover, the equilibrating effects of fund flows might interact with the nonpecuniary utility that SRI-conscious investors derive from their fund choices, as suggested by the evidence of Bollen (2007) that flows respond to returns differently for SRI funds versus conventional funds. In any event, when prior beliefs admit substantial information from historical alphas, Busse and Irvine (2006) find that Bayesian predictive alphas computed as in Pástor and Stambaugh (2002a, 2002b), as are the alphas in our study, do predict future performance.While not one we address, a question often asked is whether sustainable investments perform better or worse than other investments. A number of studies do pursue this question, obtaining a range of findings that include both higher and lower performance for sustainable investments. Pástor, Stambaugh, and Taylor (forthcoming) discuss the challenge in interpreting such findings’ implications about expected future performance. A wedge between ex ante and ex post performance of sustainable investments arises during any period that witnesses unanticipated shifts in either customers’ demands for sustainable products or investors’ demands for sustainable holdings.1 As those authors note, sorting out such effects is an important challenge for future research. Our study conducts its analysis under a variety of asset pricing models and prior beliefs. In each case, an investor conditions on funds’ past returns and thus takes account of any historical performance differences between the sustainable funds and other funds in our sample. We do not, however, include models in which expected asset returns depend on sustainability. In this respect, our study does not attempt to provide direct evidence about a potential relation between sustainability and expected investment performance.We are grateful to the Review of Asset Pricing Studies for the opportunity to publish our original study, which follows below with only the references updated to reflect subsequent publications. The study’s abstract is also unchanged from its original version.

This paper suggests innovative investment strategies drawing on return seasonalities. By means of an out-of-sample study of the German stock market, we report that these long–short investment strategies earn on average raw returns up to 233 basis points per month throughout two decades from 1998 to 2017. On a monthly basis, this documents an outperformance of the corresponding Heston and Sadka (J Financ Econ 87(2):418–445, 2008) strategy by 66%. This outperformance is robust in magnitude even after adjusting for common risk factors along both the three-factor Fama and French (J Financ Econ 33(1):3–56, 1993) model and the four-factor Carhart (J Finance 52(1):57–82, 1997) model. Categorizing stocks into three risk profiles lets us conclude that long–short momentum portfolios of stocks with a low-risk profile generate robust investment performance.