How Much Are Car Purchases Driven by Home Equity Withdrawal?

Previous research indicates that changes in housing wealth affect consumer spending on cars. We find that home equity extraction plays only a small role in this relationship. Consumers rarely use funds from equity extraction to purchase a car directly, even during the mid‐2000s’ housing boom; this finding holds across three nationally representative household surveys. We find in credit bureau data that equity extraction does lead to a statistically significant increase in auto loan originations, consistent with equity extraction easing borrowing constraints in the auto loan market. This channel, though, accounts for only a tiny share of overall car purchases.     

Small Business and the Value of Community Financial Institutions

This paper examines whether community banks have a niche in the production of soft information when lending to small firms. A composite measure of soft information production is created from owner ratings of bank performance characteristics using survey data from a national sample of U.S. small firms. These characteristics capture some important aspects of soft information such as the bank’s knowledge of the owner’s business. This composite measure is related to the size of the owner’s primary bank, a measure of the intensity of market competition and proxies for the strength of banking relationships. After controlling for several sources of endogeneity, this composite measure is found to be significantly higher if the owner currently banks at a CFI and experiences less loan officer turnover.     

How Much Can Marketability Affect Security Values?

How marketability affects security prices is one of the most important issues in finance. We derive a simple analytical upper bound on the value of marketability using option-pricing theory. We show that discounts for lack of marketability can potentially be large even when the illiquidity period is very short. This analysis also provides a benchmark for assessing the potential costs of exchange rules and regulatory requirements restricting the ability of investors to trade when desired. Furthermore, these results provide new insights into the relation between discounts for lack of marketability and the length of the marketability restriction.     

Can Time‐Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?

Why is the equity premium so high, and why are stocks so volatile? Why are stock returns in excess of government bill rates predictable? This paper proposes an answer to these questions based on a time‐varying probability of a consumption disaster. In the model, aggregate consumption follows a normal distribution with low volatility most of the time, but with some probability of a consumption realization far out in the left tail. The possibility of this poor outcome substantially increases the equity premium, while time‐variation in the probability of this outcome drives high stock market volatility and excess return predictability.