Working Papers

Firm Growth Potential and Option Returns (with P. Andreou, T. Bali and N. Lambertides)

We find a negative cross-sectional relation between firm growth potential and future returns on delta-hedged equity options. We investigate three economic mechanisms: overpricing due to investors' speculation on positive jumps or hedging against negative jumps, overpricing due to investors' chasing high market beta, and rational incorporation of negative volatility risk premium. We show that option return predictability is largely driven by retail investors' overreacting to recent cases of high growth potential and subsequent positive jumps and hence overpaying for the call options of growth-oriented firms. Overall, we provide novel insights into how investors perceive the uncertainties associated with real options.

Power Sorting (with H. Lohre, I. Nolte, S. Nolte and N. Vasilas)

First Prize, 2023 CQA academic competition

We propose a novel approach for constructing characteristic-based equity factors, termed "power sorting". Power sorting exploits the non-linearities and asymmetries inherent in the characteristic-return relations, while it remains computationally simple and avoids excessive weights. We demonstrate that power sorting achieves consistently superior out-of-sample performance compared to traditional quantile sorting and other factor portfolio construction methods. Our results are pervasive across factors, robust through time, cannot be attributed to increased turnover or tail risk, and can be extended to multi-factor strategies. Finally, we show that power sorted versions of well-known asset pricing factor models outperform the original ones.

Bear Factor and Hedge Fund Performance (with T. Ho and J. Wang)

We find that hedge funds that have low (negative) return covariance with the return of a bear spread portfolio (i.e., Bear factor) after controlling for the market factor, earn significantly higher returns in the cross-section. The return spread does not reflect bear risk premia; instead, it represents a low risk-high return relation. We decompose the Bear factor into different components to identify the one driving the bear beta effect on fund performance and show that the return spread can be attributed to the differential ability of low bear beta funds to reduce their market exposures when the market declines and the VIX increases (i.e., downside timing). Further analysis suggests that these fund managers are more skilled at selling overpriced insurance during volatile market periods. Overall, we propose a simple option-implied predictor of hedge fund returns and unravel a novel economic mechanism that associates the Bear factor exposure with fund perfor-mance.