Job Market Paper
1. Growth of Passive Investments and Asset Prices, with Ilan Gildin.
Abstract: This paper examines the impact of the rise of index-tracking investments on stock prices. In Israel, a regulatory shock reduced the cost of passive investment in index-tracking securities and induced massive capital allocation to the index market. Indices comprising stocks with smaller market capitalization were disproportionately affected by these changes. We use the growth of passive ownership across market index cutoffs to identify the price effects of inflows to index-tracking securities. We find a significant effect. We then show that algorithmic traders, in aggregate, accumulate stocks when index inflows are low, and sell stocks when they are high. Our results suggest that algorithmic traders earn excessive returns by providing liquidity to the originators of index-tracking securities. Our findings provide new evidence for the effect that the rise of passive investments has on the financial markets, and offer insight into the trading activity against inflows to index-tracking securities.
2. The Housing Market in Israel 2008-2010: Are House Prices a 'Bubble'?, with Sigal Ribon and Yossi Yakhin, Israel Economic Review, (10)1, January 2013, 1-38.
Abstract: Housing prices have risen rapidly over the past three years. Between December 2007 and August 2010, prices rose by 35 percent in real terms – an average annual rise of 12 percent, much faster than their long-term rate of increase. Given this surge in prices, concerns have been raised that the price rise is unrelated to market fundamentals and has been driven by expectations of capital gains, which suggests the development of a bubble in house prices.
The purpose of this article is to assess whether a bubble has developed in house prices in this period. To that end, we first review the course of prices retrospectively over the last few decades relative to rents and income; and then use three different approaches to derive the "fundamental price” from a standard asset-pricing equation. Our analysis suggests that while the prices at the end of the examined period are somewhat high relative to market fundamentals, from a long-term perspective their level is not exceptional in comparison with past episodes of rising house prices. According to various measurements, the actual price is between 3 percent below and 10 percent above the fundamental price. We therefore do not find evidence of a bubble in house prices (as of August 2010). If a bubble exists, it is at an early stage, and cannot yet be detected from the data.
3. Corporate Payouts: dividends and repurchases. Working Paper (revised: June 2020).
Abstract: This work presents a dynamic model of corporate payout policy that combines a policy of ongoing dividend payments and special payments. The model provides a formal framework to analyze how firms use different payout structures to achieve the desired payout policy. The model emphasizes the value of dividends as a liable payout strategy that allows the firm to mitigate cash carrying costs. However, dividends also prevent the firm from adjusting its payout plan when the opportunity cost of flexibility is high. This trade-off is a vital driving force of the optimal payout structure, and it helps to explain diverse payout dynamics. Cash-flow volatility plays a significant role in the decision about the optimal payout form and on payout smoothing.
4. Business Cycles in Israel and Macroeconomic Crises - Their Duration and Severity. Bank of Israel Discussion Paper, August 2010.
Abstract: This study examines the time-varying characteristics of business cycles in Israel in 1960-2009. During the 1990s the Israeli economy underwent many structural changes and reforms, which gradually turned it from an emerging to an advanced economy. The study shows that the characteristics of business cycles in 1991–2009 were different than those of business cycles in 1960–90. Until the 1990s, business cycles were more similar to those of emerging markets, while since the early 1990s they share more similarities with those of advanced economies. In addition, Israel's transition from an emerging to an advanced economy is reflected in its GDP elasticity to macroeconomic shocks—after 1995 economic activity became more sensitive to financial crises and monetary shocks, whereas its sensitivity to other macroeconomic shocks declined. This is consistent with the transition of Israel's economy to price stability and the decentralization of the financial sector.