Research

"The Capitalization of Consumer Financing into Durable Goods Prices" with Taylor Nadauld, Chris Palmer, and Ryan Pratt.
A central question in the study of the relationship between business cycles and credit is the degree to which equilibrium asset prices reflect borrowing conditions. In this paper, we investigate the link between willingness to pay for durable goods and financing terms, testing whether consumers will pay more for a given good if it secures a debt contract that is particularly valued by the consumer. Given differentiation across durables, a key empirical challenge in this literature is holding demand and the composition of purchased goods constant to separately identify the effect of credit-supply shocks on prices. Using loan-level data from hundreds of auto-loan lenders and millions of borrowers, a quasi-experimental regression discontinuity design, and year-make-model-trim fixed effects that allow us to hold fixed the good quality, we document that loan maturity is capitalized into the price consumers pay for otherwise identical cars; borrowers pay for longer maturity in the form of higher car prices. Our estimates suggest that one year of exogenously offered maturity is worth about 6% of the car’s purchase price to the average consumer in our data. We conclude that a key source of credit-market specialness is the empirical importance of borrowing conditions in explaining equilibrium demand. 

"Monthly Payment Targeting and the Demand for Maturity" with Taylor Nadauld and Chris Palmer
In this paper, we provide evidence of mental accounting in the market for consumer installment debt and argue that increases in credit supply have been an important contributor in the recent rise in auto debt through a demand-for-maturity channel. Since the Great Recession, auto debt has grown faster than any other category of U.S. consumer credit and now eclipses credit cards in total debt outstanding. Simultaneously, auto-loan maturities have increased such that more than half of 2016 auto-loan originations had a term of over 65 months. We document three phenomena we jointly refer to as monthly payment targeting using data from millions of auto loans issued by hundreds of credit unions. First, using discontinuities in the contract terms offered by lenders with an instrumental-variables regression-discontinuity design to estimate demand elasticities, we find borrowers to be much more sensitive to maturity than to interest rate, consistent with existing work finding that payment size is more salient to borrowers than the total cost of a loan. Second, many consumers appear to employ segregated mental accounts, spending much of unanticipated monthly payment savings on larger loans as if having budgeted a set amount per month for a given category of spending. Third, consumers bunch at salient round-number monthly payment amounts, suggesting the use of monthly budgeting heuristics. The resulting strong preference for long-maturity loans, combined with increases in aggregate credit supply, explains around 15% of the growth in household debt since 2012.

We estimate how search frictions in credit markets distort consumption, contribute to substantial price dispersion, and modulate the pass-through of interest-rate shocks. Using rich microdata from millions of auto-loan applications and originations by hundreds of financial providers, we isolate plausibly exogenous variation in interest rates due to institution-specific step-function pricing rules. These discontinuities lead to substantial variation in the benefits of search, affect physical search behavior, and distort extensive- and intensive-margin loan and car choices through quasi-random interest-rate markups. We further show that these discontinuities are more consequential in areas we measure as having high search costs. Overall, our results provide evidence of the real effects of the costliness of shopping for credit, the continued importance of local bank branches, and how search frictions inhibit the transmission of monetary policy to durable goods purchases. More broadly, we conclude that the welfare consequences of costly search include inefficient consumption in both primary and related markets.

We link a seemingly biased trading behavior to equilibrium asset prices. Mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we find that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are significantly more likely to manifest this trading pattern, and unrealized profits from such funds have stronger return predictability. This return predictability is difficult to reconcile with alternative explanations.


Portfolio Spillovers and a limit to Diversification 
Securities are exposed to the return shocks of seemingly unrelated securities in common mutual fund portfolios. Shocks to firm returns mechanically affect fund returns that hold these securities, which induce investor-driven flows and rebalancing, resulting in temporary flow-induced price pressure (FIPP) on other firms in common portfolios. Instrumenting to address flow/return endogeneity, a one standard deviation increase in the FIPP corresponds to a 15-60 bps increase in daily abnormal firm returns. This pressure reverses in 5-6 days and is larger for liquid firms and for funds experiencing outflows. Failing to properly estimate this correlation implies that an investor is exposed to nonsystematic risk.
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