Most banks pay corporate income taxes, but securitization vehicles do not. Our model shows that, when a bank faces strong loan demand but limited deposit market power, this tax asymmetry creates an incentive to sell loans despite less-efficient screening and monitoring of sold loans. Moreover, loan-selling increases as a bank's corporate income tax rate and capital requirement rise. Our empirical tests show that U.S. commercial banks sell more of their mortgages when they operate in states that impose higher corporate income taxes. A policy implication is that tax-induced loanselling will rise if banks' required equity capital increases.PRIOR to 2009 financial crisis, securitization grew rapidly for several decades.1 Securitization is a process whereby banks and nonbank lenders sell mortgages or other loans to special purpose vehicles that issue mortgageor asset-backed securities. Securitization permits a bank to originate loans and then transfer their interest rate and credit risks to mortgage-and assetbacked security investors. A potential benefit to the banking system is reduced exposure to risks that threaten its stability. For example, banks that securitize long-duration fixed-rate mortgages can avoid the extreme interest rate risk that decimated U.S. thrift institutions during the 1980s. However, the recent revelation of mortgage-backed securities' poor credit quality has highlighted problems with the securitization process. 2Academic research has long recognized that securitization can have detrimental side effects. Models such as those in Diamond (1984), Ramakrishnan * JoongHo Han is at Sungkyunkwan University, Kwangwoo Park is at the Korea Advanced Institute of Science and Technology, and George Pennacchi is at the University of Illinois. We are grateful for valuable comments from an anonymous referee, Adam Ashcraft, Mark Flannery, the Editor Campbell Harvey, Edward Kane, Hayne Leland, Greg Nini, and participants of the 2010 Financial Intermediation Research Society Conference and of seminars at Bocconi University, the Federal Deposit Insurance Corporation, the Federal Reserve Banks of Chicago and New York, KAIST, KDI School, Seoul National University, Sungkyunkwan University, Tilburg University, and the University of Venice. Hakkon Kim and Hyun-Dong Kim provided excellent research assistance. 1 The total value of U.S. agency-and government-sponsored enterprise-backed mortgage pools and private issue mortgage, consumer, and trade credit loan pools grew at average annual continuously compounded rates of 33. 5%, 25.2%, 12.9%, and 11.6% during the decades 1967 to 1977, 1977 to 1987, 1987 to 1997, and 1997 to 2007, respectively The Journal of Finance R and Thakor (1984), and Rajan (1992) explain why a financial contract resembling a bank is the most efficient means of funding borrowers whose creditworthiness is not public information. The contract requires that a bank's owner-manager bear its loans' credit risks to have the incentive to efficiently screen loan applicants and monitor borrowers' ac...

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Previous research highlights the importance of two distinct types of informed trading in the options market: trading on the price direction of underlying stocks, and trading on their uncertainty. Surprisingly, however, the studies considering these in a unified framework are scant. This study attempts to fill the gap. We predict that when both directional and volatility information could motivate options trading, the return predictability of options volume hinges on the shape of the volatility smirk. Consistent with this prediction, we find that the negative relationship between options volume and future stock returns is concentrated in stocks exhibiting steep volatility smirks. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark 37:1053–1093, 2017

The seminal research by Stein (Journal of Finance 1989, 44, 1011) shows that long‐term options overreact to short‐term volatility shocks. In contrast, recent studies show that such irrational responses disappear when model‐free implied volatilities are used. We extend this literature by examining overreactions in the over‐the‐counter currency options market. Using model‐free implied volatility and by considering the estimated structural breaks around recent financial crises, we find consistent evidence for volatility overreactions during non‐crisis periods but no conclusive evidence of such behavior during recent crises periods. Overall, our findings suggest that it is crucial to consider structural changes when testing for overreactions in options markets.