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Working Paper
Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures?
This paper examines changes in the redefault rate of mortgages that were selected for modification during 2008?2011, compared with that of similarly situated self-cured mortgages. We find a large decline in the redefault rate of both modified and self-cured mortgages over this period, but the improvement was greatest for modifications. Our analysis has identified several important factors contributing to the greater improvement for modified loans, including an increasing share of principal-reduction modifications, which appear to be more effective than other types of modification and ...
Report
Noncognitive Skills at the Time of COVID-19: An Experiment with Professional Traders and Students
We study the stability of noncognitive skills by comparing experimental results gathered before and during the COVID-19 pandemic. Using a sample of professional traders, we find a significant decrease in agreeableness and locus of control and a moderate decrease in grit. These patterns are primarily driven by those with more negative experiences of the pandemic. Other skills, such as trust, conscientiousness, and self-monitoring, are unchanged. We contrast these results with those from a sample of undergraduate students whose noncognitive skills remain constant (except conscientiousness). Our ...
Working Paper
Not Cashing In on Cashing Out: An Analysis of Low Cash-Out Refinance Rates
Lowering a borrower’s interest rate is one of the most effective ways to reduce a borrower’s debt burden. Mortgage refinancing offers a chance to shift debt balances from high-interest loans into a low-interest mortgage through “cashing out” some of the home’s equity. Borrowers could reduce their monthly payments by up to 13 percent by folding a student loan with a 6 percent interest rate into a mortgage with a 3 percent interest rate. Using anonymized data on mortgage refinancing behavior, we find that over half of borrowers with high-interest loans and available home equity do not ...
Working Paper
What's the Story? A New Perspective on the Value of Economic Forecasts
We apply textual analysis tools to measure the degree of optimism versus pessimism of the text that describes Federal Reserve Board forecasts published in the Greenbook. The resulting measure of Greenbook text sentiment, ?Tonality,? is found to be strongly correlated, in the intuitive direction, with the Greenbook point forecast for key economic variables such as unemployment and inflation. We then examine whether Tonality has incremental power for predicting unemployment, GDP growth, and inflation up to four quarters ahead. We find it to have significant and substantive predictive power for ...
Working Paper
Who Pays For Your Rewards? Redistribution in the Credit Card Market
We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit ...
Working Paper
Who Pays For Your Rewards? Redistribution in the Credit Card Market
We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit ...
Working Paper
Retail Investors’ Contrarian Behavior Around News, Attention, and the Momentum Effect
Using a large panel of U.S. brokerage accounts trades and positions, we show that a large fraction of retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to post earnings announcement drift (PEAD) and price momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in ...
Working Paper
Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More Than Self-Cures?
This paper examines changes in the redefault rate of mortgages that were selected for modification during 2008?2011, compared with that of similarly situated self-cured mortgages during the same period. We find that while the performance of both modified and self-cured loans improved dramatically over this period, the decline in the redefault rate for modified loans was substantially larger, and we attribute this difference to a few key factors. First, the modification terms regarding repayments have become increasingly more generous, including more principal reduction, resulting in greater ...
Working Paper
Consumption-Based Asset Pricing When Consumers Make Mistakes
I analyze the implications of allowing consumers to make mistakes on the risk-return relationships predicted by consumption-based asset pricing models. I allow for consumption mistakes using a model in which a portfolio manager selects investments on a consumer's behalf. The consumer has an arbitrary consumption policy that could reflect a wide range of mistakes. For power utility, expected returns do not generally depend on exposure to single-period consumption shocks, but robustly depend on exposure to both long-run consumption and expected return shocks. I empirically show that separately ...
Working Paper
FinTech and Banks: Strategic Partnerships That Circumvent State Usury Laws
Previous research has found evidence suggesting that financial technology (FinTech) lenders seek out opportunities in markets that have been underserved by mainstream banks. The research focuses primarily on the effect of bank market structure, limited income, and economic hardship in attracting FinTech companies to underserved markets. This paper expands the scope of FinTech research by investigating the role of interest rate regulation of consumer credit and institutional risk segmentation in FinTech lenders' efforts to solicit new customers in the personal loan market. We find that ...