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We label the degree to which individuals are more optimistic at long horizons relative to short horizons as the horizon bias. We examine whether time-series variation in the horizon bias can explain the time-series variation in the equity term structure. We use analyst earnings forecasts to measure the degree of the horizon bias in the stock market. Consistent with the intuition from a stylized present value model, we find that periods of above-average horizon bias are associated with negative term premiums, whereas periods of below-average horizon bias are associated with positive term premiums. 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.

Using comprehensive data on London Interbank Offer Rate (Libor) submissions from 2001 through 2012, we provide evidence consistent with banks manipulating Libor to profit from Libor-related positions and to signal their creditworthiness during distressed times. Evidence of manipulation is stronger for banks that were eventually sanctioned by regulators and disappears for all banks in the aftermath of the Libor investigations that began in 2010. Our findings suggest that the threat of large penalties and the loss of reputation that accompany public enforcement can be effective in deterring financial market misconduct. This paper was accepted by Adams, Renee, finance.

We study the impact of monetary policy on the term structure of equity prices. We find that short-term and long-term equity prices respond in opposite ways to changes in monetary policy. Following an unanticipated cut in the target federal funds rate, short-term equity prices fall while long-term equity prices rise on average. This pattern could arise if policy decisions signal information about economic conditions. We examine this mechanism and find that the price change of the short-term equity asset in the 30-minute window around an FOMC announcement significantly predicts both macroeconomic growth and professional forecast errors over subsequent quarters.

One of the most puzzling findings in asset pricing is that expected returns dominate variation in the dividend-to-price ratio, leaving little room for dividend growth rates. Even more puzzling is that this dominance only emerged after 1945. We develop a present value model to argue that a general increase in equity duration can explain these findings. As cash flows to investors accrue further into the future, shocks to highly persistent expected returns become relatively more important than shocks to growth rates. We provide supportive empirical evidence from dividend strips, the time-series, and the cross-section of stocks.

Most brokerage firms are owned by publicly traded financial conglomerates. As much as 5% of the stock of these conglomerates is held by mutual funds that are broker's clients. Moreover, in times of distress when investors tend to decrease exposure to financial companies, client funds increase ownership in their brokers' parent companies. Consistent with the theory on liquidity provision, we find that these trades are not driven by superior information, and they contribute to the financial stability of brokers' parent companies. This suggests that business networks between financial institutions and their clients have broader implications for the systemic risk of the financial sector. We also show that funds' investments in their brokers' stocks are positively associated with funds' performance on non-connected stocks. The documented effects are strongest for funds that have long-lasting business ties with their brokers. Our findings suggest that asset managers act as buyers of last resort for brokers that provide more valuable investment services. Exogenous changes in business ties due to brokerage firm acquisitions by large financial groups confirm the causal nature of this relation.

Investments in short-term dividend assets outperform investments in the market according to Binsbergen, Brandt, and Koijen (2012), but contrary to predictions of several asset pricing models. To examine these findings, we double the sample to 24 years. We also advocate an interest rate-invariant approach to estimate prices of dividend assets by combining put-call pairs. This approach avoids the bias in returns induced by exogenous interest rates. In our results, the term structure of dividend returns is flat throughout maturities and varies over the business cycle more than once thought. Moments of the dividend assets are in line with the index.

We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands and UK (1629–1812), UK (1813–1870), and US (1871–2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in- and out-of-sample, providing strong evidence that expected returns in stock markets are time-varying. In part, this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.

We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. The negative effect is stronger for high-beta stocks and stocks that are more difficult to sell short. In the cross-section of all stocks and the subset of the 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.

We study national newspaper reporting and investor beliefs across the U.S., Germany, and Japan. Using novel large-scale hand-coded media data for the automotive industry, we show that news about companies is systematically more positive in companies’ home countries than abroad. Home-country media slant increases during bad times for companies, and it correlates strongly with equity prices. Cross-country difference in news tone predicts temporary price deviations of cross-listed stocks. Abnormally high home-media news tone predicts low monthly domestic stock returns. The effects are strongest for confirmatory news and weakest when home-biased investors are likely distracted by sporting events.

The dividend-price ratio is a noisy proxy for expected returns when expected dividend growth is time-varying. This paper uses a new and forward-looking measure of dividend growth extracted from S&P 500 futures and options to correct the dividend-price ratio for changes in expected dividend growth. Over January 1994 through June 2011, dividend growth implied by derivative markets reliably forecasts future dividend growth, and the corrected dividend-price ratio predicts S&P 500 returns substantially better than the standard dividend-price ratio, in-sample and out-of-sample. Time-varying expected dividend growth is important to explain price movements, especially because it is highly correlated with expected returns.

Fund managers are double agents; they serve both fund investors and owners of management firms. This conflict of interest may result in trading to support securities prices. Tests of this hypothesis in the Spanish mutual fund industry indicate that bank-affiliated mutual funds systematically increase their holdings in the controlling bank stock around seasoned equity issues, at the time of bad news about the controlling bank, before anticipated price drops, and after non-anticipated price drops. The results seem mainly driven by bank managers' incentives. Ownership of asset management companies thus matters and can distort capital allocation and asset prices. (C) 2014 Elsevier B.V. All rights reserved. Both authors acknowledge Financial support from the Spanish Ministry of the Economy and Competitiveness (MEC Grant ECO2012-39423)

We provide new evidence for diseconomies of scale at the mutual fund level. Building on Berk and Green (2004) and allowing for gradual adjustment to equilibrium, we show that (quarterly) changes in fund performance are strongly negatively related to lagged predicted fund ows. We nd that alphas would be more cross-sectionally dispersed and more persistent without the damping eect of ows. Thus, ows are an important factor behind the lack of predictability in mutual fund performance. This ow mechanism is strongest for smaller and more active funds with higher expense ratios, suggesting that it is related to the stock illiquidity and costly search for investment opportunities.

We derive a funding illiquidity measure based on synthetic borrowing in the S&P 500 derivative markets. Our measure captures funding constraints of option liquidity providers and affects importantly the returns of leveraged managed portfolios. Hedge funds with negative exposure to changes in the funding illiquidity earn high returns in normal times and low returns in crises periods when funding liquidity deteriorates. The results are not driven by the existing measures of funding or market illiquidity. To an extent, our funding illiquidity measure also affects leveraged closed-end mutual funds and asset classes where leveraged investors are marginal investors.

Using data on Libor submissions from 1999 to 2012, wend weak support for the hypothesis that banks manipulate submissions to appear less risky and strong support for the hypothesis that banks manipulate Libor to generate higher cash ows. Our results are stronger for the manipulation period as identied by regulators (January 2005 to May 2009), for currencies and maturities with substantial notional amounts of interest-rate derivatives outstanding, for European banks, and for banks that have already paidnes related to manipulation. We calculate the cumulative gains in bank market capitalization due to manipulation to be $16 to $19 billion.

We show that Standard & Poor's (S&P) 500 futures are pulled toward the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning) and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning). These effects are driven by the interplay of market makers' rebalancing of delta hedges due to the time decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. The associated shift in notional futures value is at least $115 million per expiration day.

The dividend-price ratio is a noisy proxy for expected returns when expected dividend growth is time-varying. This paper uses a new and forward-looking measure of dividend growth extracted from S&P 500 futures and options to correct the dividend-price ratio for changes in expected dividend growth. Over January 1994 through June 2011, dividend growth implied by derivative markets reliably forecast future dividend growth, and the corrected dividend-price ratio predicts S&P 500 returns substantially better than the standard dividend-price ratio, in-sample and out-of-sample. Time-varying expected dividend growth is important to explain price movements, especially because it is highly correlated with expected returns.

The interplay of delegated portfolio management and asset management ownership generates a double agency problem that may result on trading to support security prices. We test this hypothesis analyzing the trading patterns of mutual funds affiliated with banks with the stocks of their controlling banks. We show that affiliated mutual funds tend to increase the holdings of the parent bank stock following a large drop in the stock price of the bank. Further, we provide evidence that these patterns of trading are not consistent with portfolio rebalancing into the banking sector, contrarian trading or timing skills. We also provide evidence that the patterns of trading are not information-driven. This leads us to conclude that affiliated mutual funds follow this strategy to support the price of the parent bank.