Published in Annual Review of Financial Economics
Central clearing counterparties (CCPs) have a variety of economic rationales. The Great Recession of 2007–2009 led regulators to mandate CCPs for most interest-rate and credit derivatives, markets in which large amounts of risks are transferred across agents. This change led to a large increase in CCP studies, which along with classical studies are...
Published in Annual Review of Financial Economics
This article revisits the economics of insurance using insights from derivatives pricing and hedging. Applying this perspective, I emphasize the following insights applicable to insurance. First, I provide a valid justification for the use of arbitrage-free insurance premiums. This justification applies in both complete and incomplete markets. Seco...
Published in Annual Review of Financial Economics
Recently, there has been a fast-growing literature on the determinants of corporate bond returns, in particular, the driving force of cross-sectional return variation. In this review, we first survey recent empirical studies on this important topic. We discuss cross-sectional evidence as well as time-series evidence. We then present a model-based a...
Published in Annual Review of Financial Economics
This article provides a selective overview of the recent developments in factor models and their applications in econometric learning. We focus on the perspective of the low-rank structure of factor models and particularly draw attention to estimating the model from the low-rank recovery point of view. Our survey mainly consists of three parts. The...
Published in Annual Review of Financial Economics
We explore whether theoretically the target leverage and pecking-order models can be reconciled with payout smoothing. Investment absorbs a significant part of income and asset volatility if the firm follows both a payout target and a net debt ratio (NDR) target. A positive (negative) NDR amplifies (dampens) shocks in assets. Slow adjustment toward...
Published in Annual Review of Financial Economics
In this article, we review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macrofinance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes, including real estate, equi...
Published in Annual Review of Financial Economics
In this article, we review the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit ...
Published in Annual Review of Financial Economics
Does the yield curve have the ability to predict output and recessions? At some times and in certain places, of course! But when and where, which aspects of the curve matter most, and which economic forces account for the predictive ability are matters of dispute. Over the years, an increasingly sophisticated set of tools, both statistical and theo...
Published in Annual Review of Financial Economics
We review an empirical literature that studies the role of social interactions in driving economic and financial decision-making. We first summarize recent work that documents an important role of social interactions in explaining household decisions in housing and mortgage markets. This evidence shows, for example, that there are large peer effect...
Published in Annual Review of Financial Economics
Life-cycle portfolio choice models capture the role of human capital, housing, borrowing constraints, background risk, and several other crucial ingredients for determining the savings and investment decisions of households. Over the last two decades, this literature has provided us with multiple insights regarding the asset allocation decisions of...
