Asaf Bernstein

We study the effects of the first-ever ratings for corporate securities. In 1909, John Moody published a book that partitioned the majority of listed railroad bonds into letter-graded ratings based on his assessments of their credit risk. These ratings had no regulatory implications and were largely explainable using publicly available information. Despite this, we find that lower than market-implied ratings caused a rise in secondary market bond yields. Using an instrumental-variables design, we show that bonds that were rated experienced a substantial decline in their bid-ask spreads, which is consistent with reduced information asymmetries and improved liquidity. Our findings suggest that ratings can improve information transmission, even in settings with the highest monetary stakes, and highlight their potential value for the functioning of financial markets.

In 2013, the Dutch government mandated that new conforming mortgages must fully amortize. Within a difference-in-difference design, we estimate that the marginal wealth accumulation from amortization is close to one, even five years later. Households purchasing after the reform primarily cut consumption and leisure over other savings, leading to a rise in wealth. This holds if we use life-events to instrument for the timing of home purchase. Estimates are similar for seemingly unconstrained households and movers suggesting a broad applicability of our results. Consistent with a simple model, we find lower estimates for households who appear less financially sophisticated or willing to adjust short-term consumption. Mortgage amortization schedules are among the largest savings plans in the world and our results highlight their critical importance for household wealth-building and macroprudential policies.

We examine innovation following the Great Depression using data on a century’s worth of U.S. patents and a difference-in-differences design that exploits regional variation in the crisis severity. Harder-hit areas experienced large and persistent declines in independent patenting, mostly reflecting the disruption in access to finance during the crisis. This decline was larger for young and inexperienced inventors and lower-quality patents. In contrast, innovation by large firms increased, especially among young and inexperienced inventors. Overall, the Great Depression contributed to the decline in technological entrepreneurship and accelerated the shift of innovation into larger firms.

Is climate change partisanship reflected in residential decisions? Comparing individual properties in the same zip code with similar elevation and proximity to the coast, houses exposed to sea level rise (SLR) are increasingly more likely to be owned by Republicans and less likely to be owned by Democrats. We find a partisan residency gap for even moderately SLR exposed properties of more than 5 percentage points, which has more than doubled over the past six years. Findings are unchanged controlling flexibly for other individual demographics and a variety of granular property characteristics, including the value of the home. Residential sorting manifests among owners regardless of occupancy, but not among renters, and is driven by long-run SLR exposure but not current flood risk. Anticipatory sorting on climate change suggests that households that are most likely to vote against climate friendly policies and least likely to adapt may ultimately bear the burden of climate change.

Abstract This paper employs Dutch administrative population data to test the “housing lock hypothesis”: the conjecture that homeowners with negative home equity, low levels of financial assets and restricted opportunities to borrow reduce their mobility. We exploit variation in home equity solely driven by the timing of home purchase within a municipality and the harshness of Dutch recourse laws, which allow us to isolate the housing lock channel. Instrumented negative home equity is associated with a 74-79% decline in mobility, and the effects are substantially larger for households with low financial asset holdings or moves over longer distances.

I find that negative home equity causes a 2%-6% reduction in household labor supply. I utilize U.S. household-level data and plausibly exogenous variation in the location-timing of home purchases with a single lender. Supporting causality, households are observationally equivalent at origination and equally sensitive to local housing shocks that don’t cause negative equity. Results also hold comparing purchases within the same year-MSA, that differ by only a few months. Though multiple channels are likely at work, evidence of non-linear effects is broadly consistent with costs associated with housing lock and financial distress.

The recent financial crisis suggests that counterparty risk in markets without multilateral net settlement through a centralized clearing party (CCP) may pose a threat to financial stability. We study the effect of clearing on counterparty risk by examining a unique historical experiment, the establishment of a clearinghouse on the New York Stock Exchange (NYSE) in 1892. During this period, the largest NYSE stocks were also listed on the Consolidated Stock Exchange (CSE), which already had a clearinghouse netting trades. Using identical securities on the CSE as a control, we find that the introduction of netting on the NYSE reduced the average counterparty risk premium by 24bps and volatility by 26-42bps. Prior to clearing, shocks to overnight lending rates reduced the value of stocks on the NYSE, relative to identical stocks on the CSE, but this was no longer true after the establishment of clearing. We also show that at least ½ of the average reduction in counterparty risk is driven by a reduction in contagion risk through spillovers in the trader network. Our results indicate that clearing can cause a significant improvement in market stability and value through a reduction in network contagion and the counterparty risk premium.

Homes exposed to sea level rise (SLR) sell for approximately 7% less than observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long horizon SLR costs, we find no relation between SLR exposure and rental rates and a 4% discount among properties not projected to be flooded for almost a century. Our findings contribute to the literature on the pricing of long-run risky cash flows and provide insights for optimal climate change policy.

We study effects of state pension windfalls on property prices near state borders, where theory suggests real estate reflects the value of additional public resources. Windfalls have grown to half the size of total state tax revenues and provide plausibly well-identified variation in fiscal conditions. We find one dollar of exogenous variation in pension asset returns increases border house prices by approximately two dollars. These estimates suggest governments, rather than wasting incremental resources, allocate additional funds towards high value projects or tax abatement. Evidence of larger effects in financially constrained municipalities highlight how fiscal resources amplify welfare effects of economic shocks.

In 1936, regulators unexpectedly banned banks from purchasing “speculative” bonds. This announcement caused a sudden persistent rise in speculative bond yields, even comparing securities within the same firm. In contrast to prior evidence during credit booms, I document a substantial decline in equity values for firms reliant on speculative debt financing. Regulations to curb bank speculation are provoked by economic distress, but my findings suggest recoveries may be costly periods for such restrictions. Costs are also exacerbated by reliance on rating agencies. Firms reduce debt to “game” ratings, causing slower investment and asset growth in subsequent years.