Person:

Campbell, John

The recent financial crisis has led many to question how well businesses deliver services and how well regulatory institutions address problems in consumer financial markets. This paper discusses consumer financial regulation, emphasizing the full range of arguments for regulation that derive from market failure and from limited consumer rationality in financial decision making. We present three case studies—of mortgage markets, payday lending, and financing retirement consumption—to illustrate the need for, and limits of, regulation. We argue that if regulation is to be beneficial, it must be tailored to specific problems and must be accompanied by research to measure the effectiveness of regulatory interventions.

In this paper, we consider the measurement and pricing of distress risk.We present a model of corporate failure in which accounting and market-based measures forecast the likelihood of future financial distress. Our best model is more accurate than leading alternative measures of corporate failure risk.We use our measure of financial distress to examine the performance of distressed stocks from 1981 to 2008. We find that distressed stocks have high stock return volatility and high market betas and that they tend to underperform safe stocks by more at times of high market volatility and risk aversion. However, investors in distressed stocks have not been rewarded for bearing these risks. Instead, distressed stocks have had very low returns, both relative to the market and after adjusting for their high risk. The underperformance of distressed stocks is present in all size and value quintiles. It is lower for stocks with low analyst coverage and institutional holdings, which suggests that information or arbitrage-related frictions may be partly responsible for the underperformance of distressed stocks.

The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model, as calibrated by Bansal and Yaron (BY, 2004) and Bansal et al. (BKY, 2011). U.S. data do not show as much univariate persistence in consumption or dividend growth as implied by the model. BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility, but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. The long-run risks model, particularly as calibrated by BKY, implies extremely low yields and negative term premia on inflation-indexed bonds. Finally, neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth.

This article explores the causes and consequences of cross-country variation in mortgage market structure. It draws on insights from several fields: urban economics, asset pricing, behavioral finance, financial intermediation, and macroeconomics. It discusses lessons from the credit boom, the challenges of mortgage modification in the aftermath of the boom, consumer financial protection, and alternative mortgage forms and funding models. The article argues that the USA has much to learn from mortgage finance in other countries, and specifically from the Danish implementation of the European covered bonds system.

Expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways. Furthermore, these shifts tend to persist for long periods. Changes in investment opportunities can alter the risk–return trade-off of bonds, stocks, and cash across investment horizons, thus creating a “term structure” of the risk–return trade-off. This term structure can be extracted from a parsimonious model of return dynamics, as is illustrated with data from the U.S. stock and bond markets.

This paper studies the refinancing behavior of Danish households during a recent period of declining interest rates. Danish data are particularly suitable for this purpose because the Danish mortgage system imposes few barriers to refinancing, and demographic and economic characteristics of mortgage borrowers can be accurately measured. The paper finds that household characteristics affect both inattention (a low responsiveness of mortgage refinancing to financial incentives) and inertia (a low unconditional probability of refinancing). Many characteristics move inattention and inertia in the same direction, implying a high cross-sectional correlation of 0.76 between these two household attributes. Middle-aged and older households show greater inertia and inattention than young households. Education and income reduce both inertia and inattention, but the effect of education is greater among more educated households, while the effect of income is greater among poorer households. Housing and financial wealth have opposite effects on inertia, consistent with the view that households manage their mortgages more actively when housing is relatively more important to them.

This paper extends the approximate closed-form intertemporal capital asset pricing model of Campbell (1993) to allow for stochastic volatility. The return on the aggregate stock market is modeled as one element of a vector autoregressive (VAR) system, and the volatility of all shocks to the VAR is another element of the system. Our estimates of this VAR reveal novel low-frequency movements in market volatility tied to the default spread. We show that growth stocks underperform value stocks because they hedge two types of deterioration in investment opportunities: declining expected stock returns, and increasing volatility.

Using a large representative sample of Indian retail equity investors, many of them new to the stock market, we show that both years of investment experience and feedback from investment returns have significant effects on investor behavior, favored stock styles, and performance. We identify two channels of feedback: performance relative to the market, and the directly experienced returns to behavior and styles of stock. Both of these vary across investors at a point in time because investors are imperfectly diversified and receive idiosyncratic returns. We find that experienced investors generally behave in a manner more consistent with the recommendations of finance theory, although this tendency is weakened by strong investment performance. High trading profits increase turnover, while high returns to equity styles have a short-term negative and a longer-term positive effect on investors' style demands, possibly reflecting the offsetting effects of disposition bias and style chasing. We document high returns on a portfolio of stocks held by experienced investors, and on individual Indian stocks with an experienced and low-turnover investor base.