Newsletter

The Rodney White Center’s newsletter, A Bite of Finance, is designed to highlight some of the Finance Department’s current research in a way that is interesting, relevant, and comprehensible to both academic and general audiences. Each month the topics will range from current trends to customary themes relating to financial economics. Scroll down for the latest issue.
MARCH ISSUE
2023
THE RODNEY WHITE CENTER FOR FINANCIAL RESEARCH
A Bite Of Finance: The Latest From Wharton
FEATURE
Why are the wealthiest so wealthy?
Do they inherit wealth, or do they earn more? Do they save more? Do they make better returns on their investments? Professor Sergio Salgado answers these questions using detailed Norwegian data spanning two decades. At age 50, the excess wealth of the top 0.1% group relative to mid-wealth households is accounted for in about equal terms by higher saving rates (34%), higher initial wealth (32%), and higher returns (27%), while higher labor income (5%) and inheritances (1%) account for the small residual. There is significant heterogeneity among the wealthiest: one-fourth of them—dubbed the “New Money”—start with negative wealth but experience rapid wealth growth early in life. For this group, higher-than-average saving rates (46%), returns (34%), and labor earnings (16%) account for the majority of their wealth holdings by age 50.
ARTICLE
(Almost) 200 years of news-based economic sentiment
New artificial intelligence algorithms have sparked a revolution in the analysis of textual data. Using 200 million pages of text from 13,000 U.S. local newspapers, Professor Jules van Binsbergen constructs a 170-year-long time series measure of economic sentiment at the country and state levels. The learning corpus includes roughly 1 billion newspaper articles and is 95 times larger than the total number of English-language Wikipedia entries combined. The new sentiment measure predicts economic fundamentals such as GDP (both nationally and locally), consumption, and employment growth, even after controlling for commonly used predictors, and materially predicts monetary policy decisions, particularly during recessions.
ARTICLE
Does the minimum wage help low-income workers?
The minimum wage aims to provide a living wage and reduce poverty and inequality. Does it achieve those goals? To answer that question, Professor Thomas Winberry develops a model with worker heterogeneity, firm monopsony power, and putty-clay technology. According to the model, in the long run, a large increase in the minimum wage — on the order of $15 per hour — induces firms to substitute away from low-wage workers, reducing their employment and earnings. However, these workers benefit in the short run because firms cannot immediately shift production to less labor-intensive practices.
ARTICLE
Why are OTC investors mostly trading against expert dealers?
Bonds, currencies, derivatives, and structured products are often traded in over-the-counter (OTC) markets. The most popular dealers in these markets are incredibly sophisticated, spending millions per year to acquire enough expertise (e.g., data, technology, and skills) so they have superior information when trading with their counterparties. Why would an unsophisticated OTC investor route its transactions to such an expert dealer, despite obvious adverse selection concerns? Professor Vincent Glode explains this conundrum with the help of a model. When sophisticated dealers are involved in many negotiations, their resources are spread thinly, reducing the apparent advantage coming from their expertise. Thus, the popularity of a few dealers is what allows them to provide their counterparties with liquidity without imposing severe adverse selection costs.
ARTICLE
Explaining asset concentration in OTC markets
Traders in OTC markets negotiate directly with each other rather than through a centralized exchange. How do OTC investors find counterparties? Professor Chaojun Wang introduces the first model in which investors direct their search for counterparties without observing prices, inventories, or any other investor characteristics. This search behavior gives rise to asset concentration, in line with the observed distribution of assets across investors in the interbank market.
Recent Past Issues
JANUARY 2023
In this issue: racial bias in bankruptcies, imperfect competition in the repo market, behavioral biases in the housing market, optimal strategies for crypto issuers, and the value of undiversified shareholder engagement.
NOVEMBER 2022
In this issue: How does democracy impact the stock market? Do growth stocks really have higher growth? How does under-diversification affect the economy? Who owns government debt? How passive are passive ETF
SEPTEMBER 2022
In this issue: a challenge to the risk-return tradeoff, the sources of wealth inequality, the effects of underfunded state pensions on households, the sensitivity of bank deposits to transparency, and arms sales in financial markets.
JULY 2022
In this issue: the impacts of impact investing, collusion in the distressed-loan market, the macro effects of aging, new predictability in stock market returns, and political pushback to ESG.
MAY 2022
In this issue: the economic effects of Roe v. Wade, the active side of passive ETFs, the post-LIBOR world, risk anomalies in stock returns, and the effects of interest rates on bank lending.
MARCH 2022
In this issue: the link between volatility and liquidity; the unintended consequences of Quantitative Easing; why some households hold more stocks than others; how size matters in bond trading; and the effects of technological progress on rent-seeking.
JANUARY 2022
In this issue: paying off the national debt, the effect of rising sea levels on muni bonds, gold’s value as an investment, the effects of capital controls on currency crises, and the environmental impacts of private equity.
NOVEMBER 2021
Reassessing stock versus bond performance, synergies in FinTech lending, fracking’s long-term effects, the performance of ESG strategies, and PE investors’ effects on healthcare costs
SEPTEMBER 2021
New findings on CEO stress, mutual fund flows, distressed stock returns, cash windfalls and entrepreneurship, information technology, and expectation errors
JULY 2021
Professor Erik Gilje organized a Virtual Conference on Climate and Commodities that took place on April 23 and included a panel discussion with Professor Jeremy Siegel.
Research includes important studies on inflation risks for investors and the recent behavior of the Yuan; a truly insightful new discussion on how government intervention can impact the renegotiation of private debts and help stop default waves across linked borrowers; as well as a historical assessment of the role of banks in pre-WWI sovereign defaults.
MAY 2021
Student loan forgiveness, decline in Entrepreneurship and collateralized debt obligations
MARCH 2021
Social Security, bank debt, COVID -19 financial fragility, venture capitalists and more
JANUARY 2021
COVID-19 bailouts, financing education and re-examining history

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