-
An Empirical Assessment of Characteristics and Optimal Portfolios Review of Asset Pricing Studies (IF 13.1) Pub Date : 2024-03-18 Christopher G Lamoureux, Huacheng Zhang
We implement a dynamically regularized, bootstrapped two-stage out-of-sample parametric portfolio policy to evaluate characteristics’ efficacy in the conditional stock return-generating process in the metric of expected power utility. Traditional characteristics, such as momentum and size afforded large utility gains before 1999. These opportunities have since vanished. Overfitting—imprecision in weight
-
Equity Return Predictability with the ICAPM Review of Asset Pricing Studies (IF 13.1) Pub Date : 2024-03-14 Michael Hasler, Charles Martineau
This paper highlights a positive and significant beta-return relationship in high expected market return states, as suggested by the ICAPM. The ICAPM has strong out-of-sample predictive power for equity returns. As a result, timing strategies exploiting this predictive power have Sharpe ratios about double those of the buy-and-hold strategies, alphas of about 5% per annum, and average returns increasing
-
Contingent Claims and Hedging of Credit Risk with Equity Options Review of Asset Pricing Studies (IF 13.1) Pub Date : 2024-03-08 Davide E Avino, Enrique Salvador
Using contingent-claims valuation, we introduce novel hedge ratios for credit exposures using put options. Option hedge ratios are generally in line with the empirical sensitivities of credit spread changes to put option returns and, relative to stock hedge ratios, produce further reductions in volatility for a portfolio of North American firms. We show that option hedge ratios capture option-specific
-
Decomposing Uncertainty in Macro-Finance Term Structure Models Review of Asset Pricing Studies (IF 13.1) Pub Date : 2024-02-04 Joseph P Byrne, Shuo Cao
This paper studies the extent to which macro-finance term structure models are susceptible to predictive uncertainty. We propose a general form of arbitrage-free models and quantify the relative importance of unpredictable priced risk variance, as well as macro-finance model uncertainty and learning uncertainty in predictability. Predictive performance and relative contributions of uncertainty sources
-
Price of Regulations: Regulatory Costs and the Cross-section of Stock Returns Review of Asset Pricing Studies (IF 13.1) Pub Date : 2024-01-11 Baris Ince, Han Ozsoylev
Regulations introduce significant fixed costs and add to operating leverage. Fixed regulatory costs that contribute to operating leverage should generate a risk premium. To explore whether such a premium exists, we introduce a measure of “regulatory operating leverage” that reflects the importance of fixed regulatory costs in a firm’s cost structure. Regulatory operating leverage predicts stock returns
-
Oil Price Exposure and the Cross-Section of Stock Returns Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-12-20 Jordan Moore, Mihail Velikov
We provide evidence that equity investors are slow to process information about how current oil price changes affect future earnings announcements. Stock prices respond to lagged quarterly oil price changes when firms start announcing earnings in the next quarter. A cross-sectional equity trading strategy that exploits this predictability yields an annualized Sharpe ratio of 0.50. Our oil-response
-
A New Value Strategy Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-11-15 Baolian Wang
Traditional value measures performed poorly over the past three decades. We reevaluate the value strategy using a new measure—the ratio of cash-based operating profitability to price (COP/P)—and find a zero-investment portfolio that buys the highest-COP/P stocks and shorts the lowest-COP/P stocks earns monthly returns of 0.78% on a value-weighted basis and 1.04% on an equal-weighted basis. The COP/P
-
Is Firm-Level Political Risk Priced in the Equity Option Market? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-10-27 Thang Ho, Anastasios Kagkadis, George Wang
We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of
-
Investor Demand for Leverage: Evidence from Equity Closed-End Funds Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-07-20 Robert Dam, Shaun William Davies, S Katie Moon
We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes
-
Unconventional Monetary Policies and the Yield Curve: Estimating Non-Affine Term Structure Models with Unspanned Macro Risk by Factor Extraction Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-06-18 Adam Goliński, Peter Spencer
We show how the Joslin, Singleton, and Zhu (2011) factor extraction approach to estimating the Gaussian term structure model can be modified to handle the interest rate lower bound without the approximations used in other approaches. This drastically reduces the computation time and produces more robust estimates of the lower bound parameter and the shadow rate. It makes feasible the extensive specification
-
Factor Timing with Portfolio Characteristics Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-06-09 Anastasios Kagkadis, Ingmar Nolte, Sandra Nolte, Nikolaos Vasilas
In a factor timing context, academic research has focused on identifying a set of predictors that can explain the dynamics of factor portfolios. We propose an alternative approach for timing factor portfolio returns by exploiting the information from their portfolio characteristics. Different combinations of dimension reduction techniques are employed to independently reduce the number of both predictors
-
Mutual Fund Proliferation and Entry Deterrence Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-05-16 Sebastien Betermier, David Schumacher, Ali Shahrad
Why do so few mutual fund families launch so many funds and styles around the world? We argue that launching numerous funds on an increasingly granular style grid allows incumbent families to congest the product space and deter market entry. Key to this argument is the persistently low dimensionality of the mutual fund product space, a fact we establish by analyzing the names of over 40,000 equity
-
Never a Dull Moment: Entropy Risk in Commodity Markets Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-05-04 Fousseni Chabi-Yo, Hitesh Doshi, Virgilio Zurita
We develop a new approach to determine investors’ risk compensations for all distributional moments of a security. Using the concept of entropy, which is a summary of all moments of a risky security, we derive the relationship between expected returns and their compensation for entropy risk. Entropy risk premium (ERP), which is entropy under the physical minus the risk-neutral measure, indicates the
-
Short Interest and Aggregate Stock Returns: International Evidence Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-04-17 Arseny Gorbenko
I find that short interest significantly and negatively predicts aggregate stock returns in 24 of 32 countries examined. This predictability survives out-of-sample tests, persists outside of recessions, and is not subsumed by other well-known return predictors. The results indicate that short interest contains valuable information for forecasting international market returns that is distinct and more
-
Idiosyncratic Volatility, Growth Options, and the Cross-Section of Returns Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-04-03 Alexander Barinov, Georgy Chabakauri
The value effect and the idiosyncratic volatility (IVol) discount arise because growth firms and high IVol firms beat the CAPM during periods of increasing aggregate volatility (market volatility and average IVol), that makes their risk low. All else equal, growth options’ value increases with volatility, an effect that is stronger for high IVol firms, for which growth options take a larger fraction
-
Stochastic Interest Rates, Heterogeneous Valuations, and the Volatility-Volume Relation with Search Frictions Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-02-27 Sheen Liu, Junbo Wang, Chunchi Wu
We propose a dynamic equilibrium model with stochastic interest rates in which agents hold heterogeneous valuations for the same asset and take on positions against each other. The model shows that interest rate uncertainty and investor heterogeneity are key determinants of price dispersion. Higher search intensity reduces price dispersion, while raising volume, leading to a negative volatility-volume
-
Which Factors for Corporate Bond Returns? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-02-23 Thuy Duong Dang, Fabian Hollstein, Marcel Prokopczuk
Factors related to carry, duration, equity momentum, and the term structure are the most important risk factors in corporate bond markets. From a large set of factor candidates, we condense an optimal model with a two-step approach. First, we filter out factors that do not systematically move bond prices. Second, we use a Bayesian model selection approach to determine the optimal, parsimonious model
-
The Other Insiders: Personal Trading by Brokers, Analysts, and Fund Managers Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-02-11 Henk Berkman, Paul Koch, P Joakim Westerholm
When brokers, analysts, and fund managers buy or sell stocks for their own accounts, these “access employees” of financial institutions outperform retail investors over short windows up to a month. They earn particularly high abnormal returns when they trade before earnings announcements, revisions of analyst recommendations, and large stock price changes. We also find evidence consistent with profitable
-
Limits of Arbitrage and Primary Risk-Taking in Derivative Securities Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-02-11 Meng Tian, Liuren Wu
Classic option pricing theory values a derivative contract via dynamic delta hedging and treating the contract as redundant relative to the underlying security. Dynamic delta hedging proves highly effective in practice, but the remaining risk is still large because of the practical limits of arbitrage. Derivatives can play primary roles in risk allocation. This paper quantifies the percentage variance
-
Product Market Competition, Labor Mobility, and the Cross-Section of Stock Returns Review of Asset Pricing Studies (IF 13.1) Pub Date : 2023-01-09 Shamim Ahmed, Ziwen Bu, Xiaoxia Ye
This paper explores the impact of product market competition on the positive relation between labor mobility (LM) and future returns. We develop a production-based model and formalize the intuition that low exposure to systematic risk in a concentrated industry limits LM’s amplifying effect on operating leverage. Therefore, the model predicts a stronger positive relation between LM and expected returns
-
Predicting Returns Out of Sample: A Naïve Model Averaging Approach Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-12-19 Huafeng (Jason) Chen, Liang Jiang, Weiwei Liu
We propose a naïve model averaging (NMA) method that averages the OLS out-of-sample forecasts and the historical means and produces mostly positive out-of-sample R2s for the variables significant in sample in forecasting market returns. Surprisingly, more sophisticated weighting schemes that combine the predictive variable and historical mean do not consistently perform better. With unstable economic
-
Small Rebalanced Portfolios Often Beat the Market over Long Horizons Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-12-06 Adam Farago, Erik Hjalmarsson
The distribution of long-run compound returns to portfolio strategies is greatly affected by periodic rebalancing. Over time, buy-and-hold portfolios gradually lose diversification as extreme long-run skewness in individual stock returns leads to increasingly concentrated holdings. For long investment horizons, small rebalanced portfolios holding only a fraction of all stocks therefore achieve better
-
Cheaper Is Not Better: On the ‘Superior’ Performance of High-Fee Mutual Funds Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-11-21 Jinfei Sheng, Mikhail Simutin, Terry Zhang
In contrast with theoretical predictions, high-fee active equity funds generate worse net-of-expenses performance. We show that this fee-performance puzzle is driven by the preference of high-fee funds for stocks with low operating profitability and high investment rates, characteristics associated with low expected returns. After controlling for exposures to profitability and investment factors, we
-
In Search of Habitat Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-11-15 Xuanjuan Chen, Zhenzhen Sun, Tong Yao, Tong Yu
We perform portfolio-level analyses to understand insurance firms’ preferred habitat behavior in the government bond market. Based on portfolio durations and portfolio weights across maturities, we find that interest rate risk exposures of insurers’ portfolios are related to their operating liabilities and financing constraints. We show that this habitat behavior significantly affects bond pricing
-
The Geography of Subadvisors, Managerial Structure, and the Performance of International Equity Mutual Funds Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-11-08 Markus Broman, Michael Densmore, Pauline Shum Nolan
We study whether subadvising abroad provides an information advantage that improves the performance of international equity mutual funds. We find that it does not. In fact, internationally outsourced funds underperform on a risk-adjusted basis by up to 162 bps annually. The underperformance is concentrated in funds managed by single subadvisors, who are less likely to be terminated after poor performance
-
What Drives the Size and Value Factors? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-10-03 Jiacui Li
I find that approximately 30% of price fluctuations in the Fama-French size and value factors are nonfundamental price pressures driven by correlated fund flows, which generate price movements that revert over time. Is this really demand-based price pressure? I show that the price effects happen exclusively in periods when mutual funds place trades, a fact that is difficult to explain using traditional
-
Safe Asset Carry Trade Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-09-08 Benedikt Ballensiefen, Angelo Ranaldo
We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). Based on the temporal and cross-sectional variation in short-term rates, we form a carry that, together with a market factor, prices these near-money assets in a linear pricing model. The carry depicts heterogeneity in nonpecuniary convenience yields of collateral assets
-
The Effect of Innovation Similarity on Asset Prices: Evidence from Patents’ Big Data Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-08-05 Ron Bekkerman, Eliezer M Fich, Natalya Khimich
Through textual analyses of 7.7 million patents, we develop a novel intercompany innovation similarity measure which enables us to find that technologically connected firms cross-predict one another’s returns. Investors impound information about firms’ technological connectedness, although not immediately and fully. Buying (shorting) shares of technological peers earning high (low) returns during the
-
Why Do Predicted Stock Issuers Earn Low Returns? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-07-22 Charles M C Lee, Ken Li
Predicted stock issuers (PSIs) are firms with expected high-investment and low-profit profiles that earn extremely low returns. We evaluate alternative explanations for this empirical phenomenon. Our results show top-PSI firms are cash-strapped, have lottery-like payoffs, high volatility, high beta, low liquidity, and high shorting costs. Over the next 2 years, top-PSI firms earn return on assets of
-
Asset Pricing Implications of Firms’ Government Sales Dependency Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-04-26 Bharat Raj Parajuli
This paper investigates the firm-level, asset pricing implications of government expenditures. Higher government sales dependency (GD), unconditional on political partisanship cycles, significantly predicts positive future returns, and a GD-weighted portfolio substantially improves the tangency portfolio’s ex post Sharpe ratio. Conditionally, the results are stronger during Republican presidencies
-
Liquidation Cascade and Anticipatory Trading: Evidence from the Structured Equity Product Market Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-04-04 Jun Kyung Auh, Wonho Cho
We show that structured equity derivatives can cause significant price pressure of the underlying stock upon an event of dramatic payoff change. Moreover, one event causes another: the event cascade amplifies the magnitude of the impact. We find that a single event accounts for a -6.4% return on the event day, and it increases the probability of a subsequent event by 21.3%. Given the negative price
-
Investor Information Choice with Macro and Micro Information Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-03-11 Paul Glasserman, Harry Mamaysky
We develop a model of information and portfolio choice in which ex ante identical investors choose to specialize because of fixed attention costs required in learning about securities. Without this friction, investors would invest in all securities and would be indifferent across a wide range of information choices. When securities’ dividends depend on an aggregate (macro) risk factor and idiosyncratic
-
Self-Fulfilling Asset Prices Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-03-10 Alexander K Zentefis
This paper explains that anticipated market liquidity is an important concern for arbitrageurs considering entry into a market, a concern that can generate self-fulfilling asset prices. In the model, fixed investment costs turn a market illiquid and generate an arbitrage opportunity. The worst-case return on pledged collateral constrains arbitrageurs’ leverage. The interaction between this return and
-
The Cross-Section of Cryptocurrency Returns Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-03-03 Nicola Borri, Kirill Shakhnov
At a given point in time, bitcoin prices are different on exchanges located in different countries, or against different currencies. While existing literature attributes the largest price differences to frictions, like market segmentation, trading platforms advertize how to execute trades based on this information. We provide a novel risk-based explanation of these price differences for a sample containing
-
Is Economic Uncertainty a Valid Intertemporal CAPM State Variable? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-02-09 Qi Lin
ABSTARCT This paper evaluates whether economic uncertainty is consistent with the Merton (1973) intertemporal CAPM (ICAPM) theory. The economic uncertainty index of Jurado, Ludvigson and Ng (2015) consistently predicts a significant increase in stock market volatility. However, its innovation carries a statistically insignificant price of covariance risk in the cross-section, thereby failing to satisfy
-
The Marketing Capability Premium Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-02-01 Tze Chuan (Chewie) Ang, Tarun Chordia, Vivian Van-Anh Mai, Harminder Singh
Marketing capability refers to a firm’s ability to optimally deploy and integrate different marketing inputs to achieve high sales at low cost. This paper examines whether the value of marketing capability is incorporated into stock returns. High-level marketing capability predicts better future operating performance and stock returns. A marketing capability-based long-short portfolio strategy earns
-
Short Selling ETFs Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-01-27 Frank Weikai Li, Qifei Zhu
We provide novel evidence that arbitrageurs use exchange-traded funds (ETFs) as an avenue to circumvent short-sale constraints at the stock level. Using a large sample of U.S. equity ETF holdings, we document that shorting activity on ETFs rises with the difficulty of shorting underlying stocks. Stocks heavily shorted via their holding ETFs underperform those that are lightly shorted. The return predictability
-
Capital Structure Priority Effects in Durations, Stock-Bond Comovements, and Factor Pricing Models Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-01-25 Jaewon Choi, Matthew Richardson, Robert F Whitelaw
We show theoretically and empirically that the durations of corporate securities are monotonically related to their capital structure priority, with equity often having a negative duration. The magnitude of this effect increases with firm leverage. We use these insights to challenge existing results on stock-bond comovements and factor pricing. For example, though overlooked, higher leverage and lower
-
Asset Pricing Tests of Infrequently Traded Securities: The Case of Municipal Bonds Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-01-12 Yao-Tsung Chen, Chunchi Wu, Chung-Ying Yeh
Using a dynamic selection model, we obtain consistent and unbiased estimates of risk and returns for infrequently traded bonds and conduct the first comprehensive asset pricing test of municipal bonds using the multifactor approach. Correction for sample selection and infrequent trading problems results in substantially higher beta estimates. Besides conventional risk factors, illiquidity and taxes
-
Equity Risk Premium Predictability from Cross-Sectoral Downturns Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-01-04 José Afonso Faias, Juan Arismendi Zambrano
We illustrate the role of left tail dependence—left tail mean (LTM)—in equity risk premium (ERP) predictability. LTM measures the average of pairwise left tail dependency among major equity sectors incorporating shocks imperceptible at the aggregate level. LTM, as well as the variance risk premium, significantly predicts the ERP in and out of sample, which is not the case with commonly used predictors
-
Inventory-Constrained Underwriters and Corporate Bond Offerings Review of Asset Pricing Studies (IF 13.1) Pub Date : 2022-01-01 Florian Nagler, Giorgio Ottonello
We empirically study how inventory constraints of underwriters affect corporate bond offerings. Using underwriter-insurer-level transaction data, we find that a more constrained underwriter is more likely to place a bond and increases the allocation in the primary market to an insurer with a stronger preexisting relationship. The same underwriter is also more likely to buy back part of an allocation
-
Learning from Noise? Price and Liquidity Spillovers around Mutual Fund Fire Sales Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-12-11 Pekka Honkanen, Daniel Schmidt
We study the extent of cross-asset learning in financial markets by examining the spillover effects around mutual fund fire sales, which lead to a well-documented impact-reversal pattern in returns. We find that the returns of fire sale stocks spill over onto the stock returns of economic peers with a magnitude of around one-third of the original effect. These spillovers extend to liquidity and are
-
Revealed Heuristics: Evidence from Investment Consultants’ Search Behavior Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-11-23 Sudheer Chava, Soohun Kim, Daniel Weagley
Using proprietary data from a major fund data provider, we analyze the screening activity of investment consultants (ICs). We find that ICs frequently shortlist funds using threshold screens clustered at $500MM for AUM, 0% for benchmark-adjusted return, and quartiles for return percentile rank screens. Funds just above the $500MM AUM threshold get 14%–18% more page views and 5–9 pp greater flows over
-
Working Remotely and the Supply-Side Impact of COVID-19 Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-11-15 Papanikolaou D, Schmidt L, Pontiff J.
AbstractWe analyze the supply-side disruptions associated with COVID-19. We find that sectors in which a higher fraction of the workforce is not able to work remotely experienced greater declines in employment and expected revenue growth, worse stock market performance, and higher likelihood of default. The stock market overweights low-exposure industries. Thus, our findings cast light on the disconnect
-
Characterizing the Variance Risk Premium: The Role of the Leverage Effect Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-11-10 Guanglian Hu, Kris Jacobs, Sang Byung Seo
The conditional covariance between the market return and its variance, which we refer to as the leverage effect, is positively related to the variance risk premium. It contains incremental information about the variance risk premium after controlling for other return moments and additional variables suggested by the literature as determinants of the variance risk premium. This empirical finding is
-
Measuring Operating Leverage Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-10-04 Chen H, Chen J, Li F, et al.
AbstractWe examine a simple measure of operating leverage: the ratio of fixed costs (measured by depreciation and amortization plus selling, general, and administrative expenses) to the market (or book) value of assets. We find that this measure of operating leverage positively predicts returns. This operating leverage measure is not explained by common factors and performs better than the traditional
-
Cross-Sectional Skewness Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-10-04 Oh S, Wachter J, Chen H.
AbstractWhat distribution best characterizes the time series and cross-section of individual stock returns? To answer this question, we estimate the degree of cross-sectional return skewness relative to a benchmark that nests many models considered in the literature. We find that cross-sectional skewness in monthly returns far exceeds what this benchmark model predicts. However, cross-sectional skewness
-
Firm Characteristics and Global Stock Returns: A Conditional Asset Pricing Model Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-09-30 Steffen Windmüller
This paper studies the relation between 36 firm-level characteristics and stock returns in 48 countries using instrumented principal components analysis. A non-U.S. country-neutral conditional factor model performs well in describing risk and returns and generates small and statistically insignificant anomaly intercepts when allowing for three or more latent factors. The non-U.S. model performs better
-
Embedded Leverage Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-09-22 Frazzini A, Pedersen L, Pontiff J.
AbstractMany financial instruments are designed with embedded leverage, such as options and leveraged exchange-traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints, and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find empirically that options and leveraged ETFs provide significant amounts of embedded leverage;
-
Active and Passive Investing: Understanding Samuelson’s Dictum Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-08-13 Nicolae Gârleanu, Lasse Heje Pedersen
We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing
-
Valuation Risk in Mutual Fund Portfolio Disclosure Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-08-07 Chen H.
AbstractValuation risk of a security—uncertainty about its fair value—is a subject of considerable concern in the mutual fund industry. If funds report different values for identical securities, investors cannot easily compare their performance. Yet it is not unusual to see identical illiquid stocks, small-cap stocks, stocks with high analyst dispersion, stocks with less analyst coverage, and newly
-
Pricing Implications of Covariances and Spreads in Currency Markets Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-07-21 Maurer T, Tô T, Tran N, et al.
AbstractWe introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single- and multifactor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing that is not captured by well-known factors. The time-varying conditional
-
Volatility-of-Volatility Risk in Asset Pricing Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-07-20 Chen T, Chordia T, Chung S, et al.
AbstractThis paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. Market and volatility risks are not priced in
-
Can Individual Investors Beat the Market? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-06-28 Joshua D Coval, David Hirshleifer, Tyler Shumway
We document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that
-
When and Where Is It Cheaper to Issue Inflation-Linked Debt? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-06-15 Andrey Ermolov
I compare the direct issuance costs of inflation-linked debt (the liquidity premium) with nominal government debt (the inflation risk premium) in developed countries. On average, it is cheaper to issue nominal debt at medium maturities (5–10 years) and inflation-linked debt at long maturities (20 or more years), although results vary somewhat based on whether survey-based or statistical inflation expectations
-
The Annual Report of the Society for Financial Studies for 2019–2020 Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-05-19 Chan K, Ellul A, Goldstein I, et al.
The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the Review of Asset Pricing Studies, (2) the Review of Corporate Finance Studies, and (3) the Review of Financial Studies. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs
-
Global Risk in Long-Term Sovereign Debt Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-05-18 Nicola Borri, Kirill Shakhnov
This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large
-
What Information Drives Asset Prices? Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-05-15 Anisha Ghosh, George M Constantinides
We contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflation and wage earnings rationalizes the moments of consumption
-
In Memoriam: Craig W. Holden Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-05-11
We are deeply saddened by the passing of our colleague and friend, Craig Holden. Craig was the Gregg T. and Judith A. Summerville Chair of Finance at the Kelley School of Business at Indiana University and the current Department Chair. He was a prolific scholar and advisor to many students. In his role as SFS Secretary/Treasurer, which he began in 2012, Craig was a tremendous contributor to the SFS
-
Fundamental Arbitrage under the Microscope: Evidence from Detailed Hedge Fund Transaction Data Review of Asset Pricing Studies (IF 13.1) Pub Date : 2021-05-08 von Beschwitz B, Lunghi S, Schmidt D, et al.
AbstractWe exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about one-third of the trades’ potential profitability. We explain this behavior with the limits of arbitrage: hedge