Household Finance and Non-Bank Institutions
Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)
- Chair: Constantine Yannelis, University of Chicago
Grit and Credit Risk: Evidence from Student Loans
AbstractWith a license to use individually identifiable information, including college transcripts, we find that students who quit courses during college are 13% more likely to default on student loans than their perseverant peers, controlling for conventional risk factors. This effect is especially strong when students quit courses in their chosen major and courses at more selective institutions. Similarly, students who voluntarily repeat courses after performing poorly are 13% less likely to default than peers who give up. This effect is stronger when social / monetary costs of repeating courses are especially high. Students’ early-life behavior provides an observable credit risk indicator.
Retail Financial Innovation and Stock Market Dynamics: The Case of Target Date Funds
AbstractThe rise of Target Date Funds (TDFs) has moved a significant share of retail investors into contrarian trading strategies that rebalance between stocks and bonds so as to maintain age-appropriate portfolio shares. We show that i) TDFs actively rebalance within a few months following differential asset-class returns to maintain stable portfolio shares, ii), this rebalancing drives contrarian rebalancing flows across funds held by TDFs, iii) investors do not move funds into or out of TDFs to offset these flows, and iv) these flows impact the prices of stocks. Across otherwise similar stocks, those with higher (indirect) TDF ownership experience lower returns after higher market-wide performance, a results that holds when looking only at variation in TDF ownership driven by S&P index inclusion. Consistent with this price impact, the stock market exhibits more reversion at the monthly frequency during the recent TDF era. Together, our results suggest that continued growth in TDFs may affect return dynamics and the relation between stock and bond returns.
Peer Effects in Product Adoption
AbstractWe study the nature of peer effects in the market for new cell phones. Our analysis builds on de-identified data from Facebook that combine information on social networks with information on users’ cell phone models. To identify peer effects, we use variation in friends’ new phone acquisitions resulting from random phone losses and carrier-specific contract terms. A new phone purchase by a friend has a large positive and long-term effect on an individual’s own demand for phones of the same brand, most of which is concentrated on the particular model purchased by the friend. We provide evidence that social learning is a central mechanism behind the observed peer effects. While peer effects increase the overall demand for cell phones, a friend’s purchase of a new phone of a particular brand can reduce individuals’ own demand for phones from competing brands—in particular those running on a different operating system. We discuss the implications of these findings for the nature of firm competition. We also find that stronger peer effects are exerted by more price-sensitive individuals. This positive correlation suggests that the elasticity of aggregate demand is substantially larger than the elasticity of individual demand. Through this channel, peer effects can reduce firms’ markups and, in many models, can contribute to relatively higher consumer surplus and more efficient resource allocation.
- G2 - Financial Institutions and Services