Testing for Multiple-Horizon Predictability: Direct Regression Based versus Implication Based

2019 ◽  
Vol 33 (9) ◽  
pp. 4403-4443 ◽  
Author(s):  
Ke-Li Xu
Keyword(s):  
Equity Premium ◽  
Predictive Ability ◽  
Finite Sample ◽  
Simulation Experiments ◽  
Asset Return ◽  
Predictive Regression ◽  
Oxford University ◽  
Short Run ◽  
Direct Regression ◽  
Published Paper

Abstract Research in finance and macroeconomics has routinely employed multiple horizons to test asset return predictability. In a simple predictive regression model, we find the popular scaled test can have zero power when the predictor is not sufficiently persistent. A new test based on implication of the short-run model is suggested and is shown to be uniformly more powerful than the scaled test. The new test can accommodate multiple predictors. Compared with various other widely used tests, simulation experiments demonstrate remarkable finite-sample performance. We reexamine the predictive ability of various popular predictors for aggregate equity premium. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Macroeconomic Tail Risks and Asset Prices

2019 ◽  
Vol 33 (8) ◽  
pp. 3541-3582 ◽  
Author(s):  
David Schreindorfer
Keyword(s):  
Stock Market ◽  
Asset Prices ◽  
Equity Premium ◽  
Return Predictability ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Oxford University ◽  
Excess Volatility ◽  
Equity Index ◽  
Published Paper

Abstract I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment-averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premiums inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability, while preserving the model’s consistency with option moments. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals The Equity Premium and the One Percent

2019 ◽  
Vol 33 (8) ◽  
pp. 3583-3623 ◽  
Author(s):  
Alexis Akira Toda ◽  
Kieran James Walsh
Keyword(s):  
Equity Premium ◽  
International Markets ◽  
Market Returns ◽  
Stock Market Returns ◽  
Tax Rate ◽  
Oxford University ◽  
Out Of Sample ◽  
The Rich ◽  
The One ◽  
Published Paper

Abstract We show that in a general equilibrium model with heterogeneity in risk aversion or belief, shifting wealth from an agent who holds comparatively fewer stocks to one who holds more reduces the equity premium. From an empirical view, the rich hold more stocks, so inequality should predict excess stock market returns. Consistent with our theory, we find that when the U.S. top ($\textrm{e.g.}$, 1%) income share rises, subsequent 1-year excess market returns significantly decline. This negative relation is robust to controlling for classic return predictors, predicting out-of-sample, and instrumenting inequality with estate tax rate changes. It also holds in international markets. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Idiosyncratic Jump Risk Matters: Evidence from Equity Returns and Options

2019 ◽  
Vol 33 (1) ◽  
pp. 155-211 ◽  
Author(s):  
Jean-François Bégin ◽  
Christian Dorion ◽  
Geneviève Gauthier
Keyword(s):  
Risk Premium ◽  
Recent Literature ◽  
Equity Premium ◽  
Idiosyncratic Risk ◽  
Equity Returns ◽  
Jump Risk ◽  
Tail Risk ◽  
Oxford University ◽  
Editorial Decision ◽  
Published Paper

Abstract The recent literature provides conflicting empirical evidence about the pricing of idiosyncratic risk. This paper sheds new light on the matter by exploiting the richness of option data. First, we find that idiosyncratic risk explains 28% of the variation in the risk premium on a stock. Second, we show that the contribution of idiosyncratic risk to the equity premium arises exclusively from jump risk. Third, we document that the commonality in idiosyncratic tail risk is much stronger than that in total idiosyncratic risk documented in the literature. Tail risk thus plays a central role in the pricing of idiosyncratic risk. Received May 15, 2017; editorial decision September 12, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished code and an Internet Appendix, which are available on the Oxford University PressWeb site next to the link to the final published paper online.

A Transaction-Cost Perspective on the Multitude of Firm Characteristics

2020 ◽  
Vol 33 (5) ◽  
pp. 2180-2222 ◽  
Author(s):  
Victor DeMiguel ◽  
Alberto Martín-Utrera ◽  
Francisco J Nogales ◽  
Raman Uppal
Keyword(s):  
Transaction Costs ◽  
Stock Returns ◽  
Firm Characteristics ◽  
Pricing Models ◽  
Oxford University ◽  
Asset Pricing Models ◽  
Economic Rationale ◽  
Underlying Stocks ◽  
Different Characteristics ◽  
Published Paper

Abstract We investigate how transaction costs change the number of characteristics that are jointly significant for an investor’s optimal portfolio and, hence, how they change the dimension of the cross-section of stock returns. We find that transaction costs increase the number of significant characteristics from 6 to 15. The explanation is that, as we show theoretically and empirically, combining characteristics reduces transaction costs because the trades in the underlying stocks required to rebalance different characteristics often cancel out. Thus, transaction costs provide an economic rationale for considering a larger number of characteristics than that in prominent asset-pricing models. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Multinational Banks and Supranational Supervision

2018 ◽  
Vol 32 (8) ◽  
pp. 2997-3035 ◽  
Author(s):  
Giacomo Calzolari ◽  
Jean-Edouard Colliard ◽  
Gyongyi Lóránth
Keyword(s):  
Organizational Structure ◽  
Organizational Structures ◽  
Unintended Consequences ◽  
Coordination Failures ◽  
The Public ◽  
Oxford University ◽  
Multinational Banks ◽  
Editorial Decision ◽  
Public Costs ◽  
Published Paper

Abstract Supervision of multinational banks (MNBs) by national supervisors suffers from coordination failures. We show that supranational supervision solves this problem and decreases the public costs of an MNB’s failure, taking its organizational structure as given. However, the MNB strategically adjusts its structure to supranational supervision. It converts its subsidiary into a branch (or vice versa) to reduce supervisory monitoring. We identify the cases in which this endogenous reaction leads to unintended consequences, such as higher public costs and lower welfare. Current reforms should consider that MNBs adapt their organizational structures to changes in supervision. Received January 9, 2017; editorial decision September 15, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals The Effects of Losing a Business Group Affiliation

2018 ◽  
Vol 32 (8) ◽  
pp. 3036-3074 ◽  
Author(s):  
Borja Larrain ◽  
Giorgo Sertsios ◽  
Francisco Urzúa I
Keyword(s):  
Business Group ◽  
The Other ◽  
Group Affiliation ◽  
Oxford University ◽  
Capital Misallocation ◽  
Editorial Decision ◽  
Business Group Affiliation ◽  
Industry Peers ◽  
Published Paper ◽  
Identification Strategy

Abstract We propose a novel identification strategy for estimating the effects of business group affiliation. We study two-firm business groups, some of which split up during the sample period, leaving some firms as stand-alone firms. We instrument for stand-alone status using shocks to the industry of the other group firm. We find that firms that become stand-alone reduce leverage and investment. Consistent with collateral cross-pledging, the effects are more pronounced when the other firm had high tangibility. Consistent with capital misallocation in groups, the reduction in leverage is stronger in firms that had low (high) profitability (leverage) relative to industry peers. Received July 3, 2017; editorial decision April 7, 2018 by Editor Wei Jiang. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Impediments to Financial Trade: Theory and Applications

2019 ◽  
Vol 33 (6) ◽  
pp. 2697-2727 ◽  
Author(s):  
Nicolae Gârleanu ◽  
Stavros Panageas ◽  
Jianfeng Yu
Keyword(s):  
Performance Evaluation ◽  
Web Site ◽  
Theoretical Basis ◽  
Style Analysis ◽  
Trade Theory ◽  
Noise Traders ◽  
Oxford University ◽  
Asset Class ◽  
General Preferences ◽  
Published Paper

Abstract We propose a tractable model of an informationally inefficient market featuring nonrevealing prices, general preferences and payoff distributions, but not noise traders. We show the equivalence between our model and a substantially simpler one in which investors face distortionary investment taxes depending on both their identity and the asset class. This equivalence allows us to account for such phenomena as underdiversification. We further employ the model to assess approaches to performance evaluation and find that it provides a theoretical basis for some intuitive practices, such as style analysis, that have been adopted by finance professionals. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Destructive Creation at Work: How Financial Distress Spurs Entrepreneurship

2019 ◽  
Vol 33 (9) ◽  
pp. 4061-4101 ◽  
Author(s):  
Tania Babina
Keyword(s):  
Economic Activity ◽  
Financial Distress ◽  
Web Site ◽  
High Tech ◽  
High Wage ◽  
New Firms ◽  
Oxford University ◽  
Service Sectors ◽  
The Impact ◽  
Published Paper

Abstract Using U.S. Census firm-worker data, I document that firms’ financial distress has an economically important effect on employee departures to entrepreneurship. The impact is amplified in the high-tech and service sectors, where employees are key assets. In states with enforceable noncompete contracts, the effect is mitigated. Compared to typical entrepreneurs, distress-driven entrepreneurs are high-wage workers who found better firms, as measured by jobs, pay, and survival. Startup jobs compensate for 33% of job losses at the constrained incumbents. Overall, the financial inability of incumbent firms to pursue productive opportunities increases the reallocation of economic activity into new firms. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Noncognitive Abilities and Financial Distress: Evidence from a Representative Household Panel

2019 ◽  
Vol 32 (10) ◽  
pp. 3884-3919 ◽  
Author(s):  
Gianpaolo Parise ◽  
Kim Peijnenburg
Keyword(s):  
Financial Distress ◽  
Web Site ◽  
Income Shocks ◽  
Oxford University ◽  
Editorial Decision ◽  
Differential Exposure ◽  
Published Paper ◽  
Oxford University Press ◽  
Low Ability

AbstractThis paper provides evidence of how noncognitive abilities affect financial distress. In a representative panel of households, we find that people in the bottom quintile of noncognitive abilities are 10 times more likely to experience financial distress than those in the top quintile. We provide evidence that this relation largely arises from worse financial choices and lack of financial insight by low-ability individuals and reflects differential exposure to income shocks only to a lesser degree. We mitigate endogeneity concerns using an IV approach and an extensive set of controls. Implications for policy and finance research are discussed.Received September 24, 2017; editorial decision September 26, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Career Risk and Market Discipline in Asset Management

2019 ◽  
Vol 33 (2) ◽  
pp. 783-828 ◽  
Author(s):  
Andrew Ellul ◽  
Marco Pagano ◽  
Annalisa Scognamiglio
Keyword(s):  
Adverse Selection ◽  
Asset Management ◽  
Significant Loss ◽  
Relative Performance ◽  
Oxford University ◽  
Top Managers ◽  
The Impact ◽  
Asset Managers ◽  
Published Paper ◽  
Scarring Effects

Abstract We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer demotion coupled with a significant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve mid-level employees. Seen through the lens of a model with moral hazard and adverse selection, these scarring effects can be ascribed to a drop in asset managers’ reputation. The findings suggest that performance-induced liquidations supplement compensation-based incentives. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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