Valentin Haddad

Associate Professor, UCLA Anderson School of Management

Research Associate, NBER

Email: valentin.haddad@anderson.ucla.edu

Virtual Finance Workshop



Research 

Buyout Activity: the Impact of Aggregate Discount Rates

(with Erik Loualiche and Matthew Plosser)

Journal of Finance, February 2017, 72:1

JF version | Internet Appendix | Data | BibTeX | NY Fed Summary

Buyout booms form in response to declines in the aggregate risk premium. We document that the equity risk premium is the primary determinant of buyout activity rather than credit-specific conditions. We articulate a simple explanation for this phenomenon: a low risk premium increases the present value of performance gains and decreases the cost of holding an illiquid investment. A panel of U.S. buyouts confirms this view. The risk premium shapes changes in buyout characteristics over the cycle, including their riskiness, leverage, and performance. Our results underscore the importance of the risk premium in corporate finance decisions.

Information Aversion

(with Marianne Andries)

Journal of Political Economy, May 2020, 128:5

JPE version | Internet Appendix | BibTeX | NBER WP | Anderson Review Summary

Information aversion, a preference-based fear of news flows, has rich implications for decisions involving information and risk-taking. It can explain key empirical patterns on how households pay attention to savings, namely that investors observe their portfolios infrequently, particularly when stock prices are low or volatile. Receiving state-dependent alerts following sharp market downturns such as during the financial crisis of 2008 improves welfare. Information averse investors display an ostrich behavior: overhearing negative news prompts more inattention. Their fear of frequent news encourages them to hold undiversified portfolios.

The Banking View of Bond Risk Premia

(with David Sraer)

Journal of Finance, October 2020, 75:5

JF version | SSRN | Replication Package

Banks' balance-sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations supporting this view, but also discuss several challenges to this interpretation.

Factor Timing

(with Serhiy Kozak and Shrihari Santosh)

Review of Financial Studies, May 2020, 33:5

2018 Q-Group Jack Treynor Prize

RFS version | BibTeX | SSRN | NBER WP | Data

The optimal factor timing portfolio is equivalent to the stochastic discount factor. We propose and implement a method to characterize both empirically. Our approach imposes restrictions on the dynamics of expected returns which lead to an economically plausible SDF. Market-neutral equity factors are strongly and robustly predictable. Exploiting this predictability leads to substantial improvement in portfolio performance relative to static factor investing. The variance of the corresponding SDF is larger, more variable over time, and exhibits different cyclical behavior than estimates ignoring this fact. These results pose new challenges for theories that aim to match the cross-section of stock returns.

Asset Insulators

(with Gabriel Chodorow-Reich and Andra Ghent)

Review of Financial Studies, March 2021, 34:3

RFS version | NBER Summary

We construct a new dataset tracking the daily value of life insurers' assets at the security level. Outside of the 2008-09 crisis, a $1 drop in the market value of assets reduces an insurer's market equity by $0.10. During the financial crisis, this pass-through rises to 1. We propose a theory of financial intermediaries as asset insulators to account for this pattern. The theory also rationalizes insurers' portfolio choices and liability structure. Finally, we document that insurers' market equity declined by $50 billion less than the duration-adjusted value of their securities during the crisis, illustrating the macroeconomic importance of insulation.

When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response 

(with Alan Moreira and Tyler Muir)

Review of Financial Studies, November 2021, 34:11

RFS version | Slides 

We document extreme disruption in debt markets during the COVID-19 crisis: a severe price crash accompanied by significant dislocations at the safer end of the credit spectrum. Investment-grade corporate bonds traded at a discount to CDS; ETFs traded at a discount to their NAV, more so for safer bonds. The Fed’s announcement of corporate bond purchases caused these dislocations to disappear and prices to recover. We use these facts to evaluate potential explanations of the disruption. The evidence is most suggestive of an acute liquidity need for specific bond investors, such as mutual funds, leading them to liquidate large positions.

Do Intermediaries Matter for Aggregate Asset Prices?

(with Tyler Muir)

Journal of Finance, December 2021, 76:6 (Lead Article)

2022 Journal of Finance DFA Prize, First Prize

Internet Appendix | Replication package

Poor financial health of intermediaries coincides with low asset prices and high risk premiums. Is this because intermediaries matter for asset prices, or simply because their health correlates with economy-wide risk aversion? In the first case, return predictability should be more pronounced for asset classes in which households are less active. We provide evidence supporting this prediction, suggesting that a quantitatively sizable fraction of risk premium variation in several large asset classes such as credit or MBS is due to intermediaries. Movements in economy-wide risk aversion create the opposite pattern, and we find this channel also matters.

Bubbles and the Value of Innovation

(with Paul Ho and Erik Loualiche)

Journal of Financial Economics, July 2022, 145:1 (Editor's choice)

Internet Appendix

Booming innovation often coincides with intense speculation in financial markets. Using over a million patents, we document two ways the market valuation of innovation and its economic impact become disconnected during bubbles. Specifically, an innovation raises the stock price of its creator by 40\% more than is justified by future outcomes. In contrast, competitors' stock prices move little despite their profits suffering. We develop a theory of investor disagreement about which firms will succeed that reconciles both the facts, unlike existing models of bubbles. Optimal innovation policy during bubbles must account for the disconnect.  

How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing

(with Paul Huebner and Erik Loualiche)

Conditionally Accepted, American Economic Review

Best paper on financial institutions (Elsevier sponsored; WFA 2022)

2021 Q-Group Jack Treynor Prize

Internet Appendix | SSRN 

The conventional wisdom in finance is that competition is fierce among investors: if a group changes its behavior, others adjust their strategies such that nothing happens to prices. We estimate a demand system with flexible strategic responses for institutional investors in the US stock market. When less aggressive traders surround an investor, she adjusts by trading more aggressively. However, this strategic reaction only counteracts two thirds of the impact of the initial change in behavior. In light of these estimates, the rise in passive investing over the last 20 years has made the demand for individual stocks 11% more inelastic.

Whatever it Takes? The Impact of Conditional Policy Promises

(with Alan Moreira and Tyler Muir)

Revise and Resubmit

Peter Carr Memorial Grant Best Paper Award (CDI Derivatives Conference 2022)

At the announcement of a new policy, agents form a view of state-contingent policy actions and impact. We develop a method to estimate this state-contingent perception and implement it for many asset-purchase interventions worldwide. Expectations of larger support in bad states—“policy puts”—explain a large fraction of the announcements’ impact. For example, when the Fed introduced purchases of corporate bonds in March 2020, markets expected five times more price support had conditions worsened relative to the median scenario. Perceived promises of additional support in bad states distort asset prices, risk, and the response to future announcements. 

Concentrated Ownership and Equilibrium Asset Prices

Investors can choose to hold diversified or levered, concentrated portfolios of risky assets. This paper studies the dynamics of asset prices in an economy in which both investment styles coexist in equilibrium even though all agents are ex-ante identical. I capture the tradeoff between risk sharing and productivity gains by introducing what I call “active capital.” People who participate in such investments are restricted in their outside opportunities but receive extra compensation for the productivity gains they bring to the corresponding enterprises. I show that fluctuations in the quantity of active capital increase the volatility of asset prices relative to a standard economy. Not all shocks shift the distribution of ownership: risk considerations determine the willingness to provide active capital, whereas current and expected future economic activity do not play a role. Therefore, active capital fluctuates jointly with risk premia, amplifying their variations. As a consequence, the price of volatility risk exposure can be large, and return volatility is mainly induced by fluctuations in future expected returns. These results are particularly strong when fundamental volatility is low, because at such times, a large number of concentrated owners are likely to exit their positions and sell off their assets.

 

The Federal Reserve and Market Confidence

(with Nina Boyarchenko and Matthew Plosser)

Slides

We discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions and market confidence. Our shock can be summarized by the response of long-horizon yields to FOMC announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage issuance, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy.



Bank Fragility when Depositors are the Asset

(with Barney Hartman-Glaser and Tyler Muir)

Banks' relationships with their depositors are valuable when depositors remain sticky, but this value evaporates if they leave. This tension makes banks fragile when interest rates increase and long-term asset values are depressed. In this scenario, if all of its depositors leave, the bank fails, which justifies depositors' departure in the first place. Such failures can happen even when banks only invest in liquid assets and when deposits are insured, and they are more likely for banks with the most valuable relationships. This fragility leads to sharp changes in the exposure of bank values to interest rate risk: insensitive most of the time but highly responsive when asset losses are about to catch up with them. This non-linearity complicates the evaluation of capital adequacy, with neither mark-to-market nor hold-to-maturity providing an accurate picture of bank health. We find evidence consistent with these mechanisms during the rate increase of 2022 and 2023, culminating with the failure of Silicon Valley Bank.

 What do Financial Markets Say About the Exchange Rate?

(with Mikhail Chernov and Oleg Itskhoki)

Financial markets play two roles with implications for the exchange rate: they accommodate risk sharing and act as a source of shocks. In prevailing theories, these roles are seen as mutually exclusive and individually face challenges in explaining exchange rate dynamics. However, we demonstrate that this is not necessarily the case. We develop an analytical framework that characterizes the link between exchange rates and finance across all conceivable market structures. Our findings indicate that full market segmentation is not necessary for financial shocks to explain exchange rates. Moreover, financial markets can accommodate a significant extent of international risk sharing without leading to the traditional puzzles associated with the macro-finance exchange rate disconnect. We identify plausible market structures where both roles coexist, addressing challenges faced when examined separately.

Safe Assets

(with Markus Brunnermeier)

Asset Purchase Rules: How Quantitative Easing Transformed the Bond Market

(with Alan Moreira and Tyler Muir)