Low-Risk Anomalies?

This paper shows that low-risk anomalies in the capital asset pricing model and in traditional factor models arise when investors require compensation for coskewness risk. Empirically, we find that option-implied ex ante skewness is strongly related to ex post residual coskewness, which allows us to construct coskewness factor-mimicking portfolios. Controlling for skewness renders the alphas of betting-against-beta and betting-against-volatility insignificant. We also show that the returns of beta- and volatility-sorted portfolios are driven largely by a single principal component, which in turn is explained largely by skewness.     

Identifying Price Reviews by Firms: An Econometric Approach

Price reviews are a potentially costly activity. A significant fraction of unchanged prices may stem from firms not reviewing prices, rather than from obstacles to changing prices per se, such as menu costs. In this paper, we disentangle these two causes of price stickiness by estimating an inflated ordered probit model on a panel of French manufacturing firms. The results point to a low frequency of price reviews, suggestive of the relevance of information costs as a determinant of the observed price stickiness. In view of the “inattentive producers” literature, pointing that the source of price rigidity matters, this is suggestive of a large real effect of monetary policy.     

Should Derivatives Be Privileged in Bankruptcy?

Derivatives enjoy special status in bankruptcy: they are exempt from the automatic stay and effectively senior to virtually all other claims. We propose a corporate finance model to assess the effect of these exemptions on a firm's cost of borrowing and incentives to engage in derivative transactions. While derivatives are value‐enhancing risk management tools, seniority for derivatives can lead to inefficiencies: it transfers credit risk to debtholders, even though this risk is borne more efficiently in the derivative market. Seniority for derivatives is efficient only if it provides sufficient cross‐netting benefits to derivative counterparties that provide hedging services.     

SEQUENTIAL VOTING WHEN LONG ELECTIONS ARE COSTLY

This paper analyzes sequential voting in binary elections when voters are motivated by a desire both to elect their preferred candidate and to avoid a long and costly election. I find a unique equilibrium in which a voter's action depends both on the intensity of the voter's preferences as well as how well the candidates have done in earlier voting rounds. This equilibrium results in momentum in which voters are more likely to vote for the candidate currently in the lead. Furthermore, the probability a voter votes for a candidate is increasing in the size of the candidate's lead. As a consequence, a candidate is more likely to win the election if the candidate's stronger supporters vote earlier in the election.     

RESALE PRICE MAINTENANCE AND INTERLOCKING RELATIONSHIPS*

Dampening of interbrand as well intrabrand competition is often advanced to justify per se illegality of RPM. We analyze this argument in a context where rival manufacturers distribute their products through the same competing retailers. We show that RPM indeed limits the exercise of competition at both levels and can generate industry‐wide monopoly pricing. The impact on prices depends on the extent of potential competition at either level as well as on the parties' influence in determining the terms of the contracts. Our analysis sheds a new light on ongoing legal developments and is supported by recent empirical studies.     

Do Consumers Care about Ethics? Willingness to Pay for Fair‐Trade Coffee

Consumers’ buying behavior is not consistent with their positive attitude toward ethical products. In a survey of 808 Belgian respondents, the actual willingness to pay for fair‐trade coffee was measured. It was found that the average price premium that the consumers were willing to pay for a fair‐trade label was 10%. Ten percent of the sample was prepared to pay the current price premium of 27% in Belgium. Fair‐trade lovers (11%) were more idealistic, aged between 31 and 44 years and less “conventional.” Fair‐trade likers (40%) were more idealistic but sociodemographically not significantly different from the average consumer.     

A Rational Expectations Equilibrium with Informative Trading Volume

A large number of empirical studies find that trading volume contains information about the distribution of future returns. While these studies indicate that observing volume is helpful to an outside observer of the economy it is not clear how investors within the economy can learn from trading volume. In this paper, I show how trading volume helps investors to evaluate the precision of the aggregate information in the price. I construct a model that offers a closed‐form solution of a rational expectations equilibrium where all investors learn from (1) private signals, (2) the market price, and (3) aggregate trading volume.