Working papers
Macroeconomic announcements and the news that matters most to investors (with Samia Badidi and Martijn Boons)
We study a large set of macroeconomic announcements (MAs), disentangle their news content, and estimate risk premia for each type of news in the cross-section of stocks. Our most surprising finding is that a portfolio that pays off around MAs that negatively impact the stock market commands a large and positive premium. Adding this portfolio to a position in the stock market substantially increases Sharpe ratio, while reducing price impact exposure to MAs. We argue that this portfolio is risky because it pays off when the discount rate (=expected future wealth growth) increases, which are good times in models with large reinvestment risk. Our findings challenge equilibrium models that imply times of high discount rates are unambiguously bad as well as the idea that cash flow news arriving on MA days matters most.
(with Mathijs Cosemans)
This paper provides evidence on the financial consequences of insider trading for outsiders. We collect a novel data set that contains all equity trades of all corporate insiders and outsiders in an era without restrictions on informed trading. These data features allow us to study the profitability of insider trades and the expected loss outsiders incur due to insider trading. We show that access to private information creates a performance gap of 7% per year between insiders and outsiders. Nonetheless, outsiders' unconditional expected losses from insider trading are small because the probability of trading with an insider is low.
(with Gleb Gertsman and Bas Werker)
This paper studies the conjecture that investors prefer derivative markets over the equity market when hedging risks. An investor who wants to hedge, say inflation or crash risk, generally faces substantially more beta uncertainty in the stock market than in the derivatives market. We show that an investor with smooth ambiguity aversion preferences avoids a hedge portfolio consisting of stocks, which is typically subject to large beta uncertainty. The ambiguity averse investor prefers to hedge using derivatives (TIPS and options) which are not subject to beta uncertainty. More specifically, we show that equilibrium risk premiums for assets with large beta uncertainty (long-short portfolio of stocks) decline once derivatives with less beta uncertainty (TIPS and options) are introduced. In line with this theory, we find that the inflation risk premium decreases significantly, in absolute terms, when TIPS are introduced.