Valentin Haddad

Associate Professor, UCLA Anderson School of Management

Research Associate, NBER

Email: valentin.haddad@anderson.ucla.edu

Virtual Finance Workshop

NEW PRELIMINARY PAPER: Whatever it Takes? The Impact of Conditional Policy Promises (with Alan Moreira and Tyler Muir)


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)

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, Forthcoming

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.

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.

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

(with Paul Huebner and Erik Loualiche)

2021 Q-Group Jack Treynor Prize

SSRN | Slides

NEW!

We develop a framework to theoretically and empirically analyze investor competition on financial markets. The classic view assumes that markets are very competitive: if a group of investors changes its behavior, other investors react such that nothing happens in equilibrium. Our framework quantifies the strength of the competitive response. We estimate a demand system of institutional investors in the US stock market accounting for two layers of equilibrium: how investors compete with each other in setting their strategies and how prices adjust to clear asset markets. We find that investors react to the behavior of others in the market: when an investor is surrounded by less aggressive traders she trades more aggressively. This reaction reduces the equilibrium consequences of changes in individual behavior by 50%. However, it also implies that the stock market is far from the competitive ideal. A consequence of this result is that the large increase in passive investing over the last 20 years has led to substantially more inelastic aggregate demand curves for individual stocks, by 15%.


Whatever it Takes? The Impact of Conditional Policy Promises

(with Alan Moreira and Tyler Muir)

The announcement of an economic rescue tool often comes with implicit promises of more intense intervention if conditions worsen. We propose and implement a method to identify conditional policy promises and quantify their impact using data from options markets. When the Federal Reserve introduced corporate bond purchases during the COVID-19 crisis, markets expected five times more price support in crash scenarios relative to the median case. This implicit promise to significantly expand the size of the intervention in bad states explains half of the market response to the announcement. Furthermore, we document that the behavior of the price and tail risk of corporate bonds remains substantially distorted even after purchases have ceased. We confirm the pervasive influence of conditional promises across several policy announcements: U.S. quantitative easing, Bank of Japan asset purchases, TARP during the 2008 crisis, and FOMC releases.


Safe Assets

(with Markus Brunnermeier)