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, M. Pham 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 characteristic-return relations, while remaining computationally simple and avoiding excessive weights. It clearly outperforms conventional quantile sorting and is at least on par with sophisticated parametric and tree-based alternatives. Beyond performance, power sorting carries direct asset pricing implications. It recovers premia that conventional sorting leaves undetected, its factor returns load on cross-sectional comoments up to the fourth order, and their time variation is linked to investor sentiment. Finally, power-sorted versions of leading factor models span a larger mean-variance frontier.