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Conference Paper
Transforming payment choices by doubling fees on the Illinois Tollway
On January 1, 2005, Illinois doubled the highway toll for travelers paying with cash, but kept the price unchanged for those paying electronically. This paper combines a theoretical model of payment choice with empirical analysis based on this rare natural experiment of differential pricing depending on the method of payment: cash versus electronic payment. An actual response to a price change allows the authors to estimate the sensitivity of consumer payment demand to prices.
Working Paper
Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks
Technology-focused Third-Party Service Providers (TPSPs) have become important players in the operations of financial institutions and the financial markets. This paper summarizes the micro- and macro-prudential regulatory frameworks in place to address risks that TPSPs may pose to the financial system.
Working Paper
Technology Providers and Financial Stability: Overview of Risks and Regulatory Frameworks
Technology-focused Third-Party Service Providers (TPSPs) have become important players in the operations of financial institutions and the financial markets. This paper summarizes micro- and macro-prudential regulatory frameworks in place to address risks that TPSPs pose to the financial system. The key takeaways are as follows: First, in the U.S., TPSPs operate under limited comprehensive prudential regulatory oversight, aimed primarily at ensuring that their products are safe and resilient on an ongoing basis. Second, while banks rely on multiple TPSPs and hundreds of their services daily ...
Conference Paper
Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?
Data obtained from special questions on the Michigan Survey of Consumer Attitudes are used to analyze stock market beliefs and portfolio choices of household investors. We find that expected risk and return are strongly influenced by economic prospects. When investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This implies that household Sharpe ratios are procyclical, which is inconsistent with the view that stock market returns should compensate investors for exposure to macroeconomic risks. The finding of procyclical ...
Working Paper
From the horse's mouth: gauging conditional expected stock returns from investor surveys
We use data obtained from a series of Michigan Surveys of Consumer Attitudes to study stock market beliefs and portfolio choices of individual investors. We find that expected returns over the medium- and long-term horizon appear to be extrapolated from past realized returns. The findings also indicate that a more optimistic assessment of macroeconomic conditions coincides with higher expected returns and lower expected volatility, implying strongly procyclical Sharpe ratios. These results are given added credence by the empirical finding that reported portfolio concentrations in equities ...
Working Paper
How did the 2003 dividend tax cut affect stock prices and corporate payout policy?
We examine the effects of the 2003 dividend tax cut on U.S. stock prices and corporate payout policies. First, using an event-study methodology, we compare the performance of U.S. stocks to that of other securities that should not have benefited from the tax change. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting little if any aggregate stock market effect from the tax change. In cross-sectional analysis, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the ...
Working Paper
Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?
Data obtained from special questions on the Michigan Survey of Consumer Attitudes over several years are used to analyze stock market beliefs and portfolio choices of household investors. Consistent with other survey results, expected future returns appear to be extrapolated from past realized returns. The data also indicate that expected risk and return are strongly influenced by economic prospects. When investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility, which implies that household Sharpe ratios are procyclical. ...
Working Paper
How did the 2003 dividend tax cut affect stock prices?
We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered the cost of equity. Using an event-study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of U.S. common stock prices to that of European stocks and real estate investment trusts. We also examine the relative cross-sectional response of stock prices for high-dividend and low-dividend stocks. We find that U.S. large-cap and small-cap indexes do not outperform their European counterparts, nor REIT stocks, over the event windows, suggesting the absence of ...
Working Paper
Precautionary savings motives and tax efficiency of household portfolios: an empirical analysis
Tax efficiency is the dominant consideration in theoretical portfolio models that allow for both taxable and tax-deferred accounts (TDAs). Investors are advised to locate higher-tax assets in their tax-deferred accounts, which in the Unites States commonly translates into "holding bonds inside TDAs and holding equities outside." Yet, observed portfolio allocations are not tax efficient. This paper empirically evaluates the predictions of a recent model designed to bridge the existing gap by explicitly incorporating uninsurable labor income risk and limited accessibility of TDA assets in ...