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 several economic mechanisms that might drive this result: overpricing due to investors' speculation on positive jumps or hedging against negative jumps, overpricing due to investors' chasing high market beta, and neoclassical frameworks that incorporate priced volatility or jump risk. We show that the documented option return predictability is largely driven by retail investors' overextrapolating the recent positive stock price jumps of growth-oriented firms and hence overpaying for the respective call options. 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.