Research articles for the 2019-09-28

Bad Bad Contagion
Londono, Juan M.
This paper proposes a new measure of contagion as the coincidence of large left-tail events in the idiosyncratic disturbances of international stock returns after controlling for their exposure to a global factor. Episodes of bad contagion, especially those involving a large number of countries, are followed by a significant drop in international stock returns. This predictability pattern can be understood as an international transmission effect, as bad contagion only affects countries that did not experience tail events. In addition, the negative effect of bad contagion spills over to real growth, sovereign default risk, and financial stability indicators.

How to Clean Academic TRACE Data
Dick-Nielsen, Jens,Poulsen, Thomas K.
This note updates the data filter from the previous note "How to clean Enhanced TRACE data" to handle the Academic TRACE data. The Academic TRACE data include masked dealer identifiers and allow for improved handling of inter-dealer transactions. We include SAS code for the new filter in the appendix.

Salient Peers and Consumption: Evidence from the Warranty Claims of Neighbors
Agarwal, Sumit,Chomsisengphet, Souphala,Scholnick, Barry,Zhang, Man
We provide novel evidence that peer induced saliency bias acts as a mechanism to explain consumption peer effects. This bias occurs when consumers overweight the influence of a single, salient peer when assessing brand quality, and underweight more objective, aggregate quality data. We exploit data on durable good warranty claims, as an indicator of poor brand quality. We find that a warranty claim from a single neighbor, causes other neighbors to reduce their subsequent purchases of that brand. These peer induced biases are more likely to generate brand switching away from objectively higher quality brands, thus making consumers worse off.

The Pricing of Volatility and Jump Risks in the Cross-Section of Index Option Returns
Hu, Guanglian,Liu, Yuguo
In the data, out-of-the-money (OTM) S&P 500 call and put options both have puzzling low average returns. Existing studies relate these results to models with non-standard preferences. We argue that the low returns on OTM index options are primarily due to the pricing of market volatility risk. When volatility risk is priced, expected option returns match the average returns of call and put options across all strikes as well as returns of option portfolios. Consistent with the differential impact of the volatility risk premium on expected option returns, we also find that the market volatility risk premium is positively related to future index option returns and this relationship is stronger for OTM options and ATM straddles. Lastly, we find some portion of OTM put option returns are attributable to the jump risk premium.