Adlai Fisher

Current Working Papers

The Global Implied Volatility Surface, Convexity, and Common Predictability of International Equity Premia, with Terry Zhang, July 2023 

Canadian Derivatives Institute Conference

Abstract: We construct a global implied volatility surface by combining information from the index options of twenty countries and regions. The convexity of the global surface positively predicts equity premia around the world, in- and out-of-sample, at horizons from one to twelve months. Semi-annually, R2 are 14.4% for S&P500 and 8.8% for twenty indexes on average, increasing to 20.8% and 11.4% out-of-sample. For U.S. forecasts, global convexity subsumes other option-based predictors, including global level and slope, U.S. convexity, VIX, SVIX, variance risk premium, and left-tail volatility. The predictability of global convexity comes from its left-tail contributions related to crash fears (left-tail volatility), and right-tail contributions related to speculative demand (short-sales and funding conditions). Our findings highlight the importance of global options markets for risk sharing and information aggregation.

How Valuable is Corporate Adaptation to Crisis? Estimates from Covid-19 Work-from-Home Announcements, with Jiri Knesl and Ryan Lee, July 2023 

Revise & Resubmit at Journal of Financial Economics

Conference: China International Conference in Finance, Midwest Finance Association 

Abstract: This article estimates value and risk impacts of corporate adaptation to crisis using a unique sample of work-from-home announcements scraped from company websites during Covid-19. We find a 3-5% valuation increase compared to event-studies benchmarks, with significant reductions in market and labor-inflexibility risk exposures. The study infers adaptation benefits from corporate action, expanding on previous studies of flexibility and resilience emphasizing corporate characteristics. We estimate the characteristics that predicted work-from-home adoption, develop methodological extensions for clustered events, and show faster price response following Bloomberg coverage. Corporate adaptation to crisis adds value and reduces risk, beyond information in firm characteristics.

Pricing Technological Innovators: Patent Intensity and Life-Cycle Dynamics, with Jan Bena, Jiri Knesl, and Julian Vahl, April 2023

Midwest Finance Association, Adam Smith Asset Pricing Conference, World Symposium on Investment Research, Asian Finance Association, China International Conference in Finance, NFA, Melbourne Asset Pricing Conference, UT Dallas Finance Conference

Abstract: Technological innovators are priced differently than other firms, earning high stock returns controlling for standard factors, with less punishment for high capital investment and weak profitability. We create the persistent new firm variable patent intensity (PI), patents received divided by market capitalization, available from 1926. On average, high PI firms account for ten percent of CRSP market value but generate over half of five-year-forward public-market patenting. Aged portfolios and standard factors show high alpha and low profitability lasting more than a decade past formation. Adding an expected growth factor, alphas become insignificant at most horizons, and loadings show strong life-cycle dynamics: high but declining growth, aggressive and increasing investment, and weak but improving profitability.

Why Divest? The Political and Informational Roles of Institutions in Asset Stranding, with Murray Carlson and Ali Lazrak, April 2023 

Best Paper Award at HEC-McGill Winter Finance Workshop

UBC Summer Conference, Asian Finance Association, Afrimed Finance Society, Stanford Institute of Theoretical Economics, European Economic Association, CEPR Conference on Politics, Corporations, and the Common Good, American Finance Association

Abstract: We model stakeholder-driven institutional divestiture that promotes stranding of harmful assets through both a political channel and financial prices. We introduce two novel mechanisms. First, institutional divestiture weakens stakeholders' asset exposures, improving political conditions for stranding. Second, institutional divestiture credibly communicates information about citizen preferences, environmental harm, and economic benefits to financial markets and political participants. These channels drive harmful-asset divestiture, which reduces the asset price and raises its strand probability. Support for divestiture increases under supermajority strand requirements, and when institutions internalize rest-of-world welfare. We detail the equilibrium interactions between information, divestiture, prices, and stranding in a dynamic, rational-expectations game.

Price Informativeness and FOMC Return Reversals, with Oliver Boguth, Charles Martineau, and Vincent Gregoire, March 2023 

Tel Aviv University Finance Conference, Midwest Finance Association

Abstract: Building on the methodology of unbiasedness regressions, we show that stock-market returns on FOMC announcement days are abnormally uninformative about future prices. These results strongly contrast with returns to other asset classes on FOMC announcement days or market returns following other macroeconomic announcements such as employment, inflation, and GDP announcements. Standard predictive regressions show statistically and economically significant reversals of short-window returns following FOMC announcements (p<.01, R2=6.9%). We provide additional evidence that combining elements of theories of announcement-day information (Ai and Bansal, 2018) and price pressure (Hendershott and Menkveld, 2014) may help to explain the FOMC-return reversals.

Refereed Publications

The Term Structure of Equity Risk Premia: Levered Noise and New Estimates, with Oliver Boguth, Murray Carlson, and Mikhail Simutin

Review of Finance (2023), 27:1155-1182.  

Abstract: Levered noise occurs when no-arbitrage replication hedges fundamentals but amplifies price errors. Motivated by our theory, we use widely-available end-of-day OptionMetrics data to improve accuracy of synthetic dividend strip prices and provide longer samples than prior studies. Term structure point estimates are approximately flat in simple returns (88 bp/month vs. 87 bp/month for short-term dividends vs. index), and upward-sloping in measurement-error-robust logarithmic returns (43 bp/month vs. 77 bp/month). These results from prominent index options show the importance of diagnosing noise in no-arbitrage prices. Prior conclusions of an average downward slope in the equity term structure are not robust.

Macroeconomic Attention and Announcement Risk Premia, with Charles Martineau and Jinfei Sheng 

Review of Financial Studies (2022), 35:5057-5093. 

Abstract: We construct macroeconomic attention indexes (MAI), which are new measures of attention to different macroeconomic risks, including unemployment and monetary policy. Individual MAI tend to increase around related announcements and following changes in related fundamentals. Further, bad news raises attention more than good news. For unemployment and FOMC, attention predicts announcement risk premiums and implied volatility changes with large economic magnitudes. Our findings support theories of endogenous attention and announcement risk premiums, while demonstrating future research directions, including that announcements can raise new concerns. Macroeconomic announcements are important not only for contents and timing but also for attention.

Staying on Top of the Curve: A Cascade Model of Term Structure Dynamics, with Laurent Calvet and Liuren Wu

Journal of Financial and Quantitative Analysis (2018), 53:937-963.

Abstract: This paper specifies term structure dynamics by a recursive cascade of heterogeneously persistent factors. The cascade naturally orders economic shocks by their adjustment speeds, and generates smooth interest-rate curves in closed form. For a class of specifications, the number of parameters is invariant to the size of the state space, and the term structure converges to a stochastic limit as the state dimension goes to infinity. High-dimensional specifications fit observed term structure almost perfectly, match the observed low correlation between movements in different maturities, and produce stable interest-rate forecasts that outperform lower-dimensional specifications.

Horizon Effects in Average Returns: The Role of Slow Information Diffusion, with Oliver Boguth, Murray Carlson, and Mikhail Simutin

Review of Financial Studies (2016), 29:2241-2281.

Abstract: We characterize linkages between average returns calculated at different horizons. Theoretically, when stocks incorporate information slowly, average short-horizon returns are downward biased. Buy-and-hold strategies can amplify the effect. In contrast, existing theories analyze price noises that are independent of fundamentals, and buy-and-hold portfolio returns are unaffected. We document horizon effects as large as 10% annualized in daily and monthly style portfolios and international indices. Slow reaction to market information, identified by gradually declining lagged betas, is an important cause. These findings have natural consequences for performance evaluation.

What’s Beneath the Surface: Option Pricing with Multifrequency Latent States, with Laurent Calvet, Marcus Fearnley, and Markus Leippold

Journal of Econometrics (2015), 187:498-511.

Abstract: We introduce a tractable class of multi-factor price processes with regime-switching stochastic volatility and jumps, which flexibly adapt to changing market conditions and permit fast option pricing. A small set of structural parameters, whose dimension is invariant to the number of factors, fully specifies the joint dynamics of the underlying asset and options implied volatility surface. We develop a novel particle filter for efficiently extracting the latent state from joint S&P 500 returns and options data. The model outperforms standard benchmarks in- and out-of-sample, and remains robust even in the wake of seemingly large discontinuities such as the recent financial crisis.

Leaders, Followers, and Risk Dynamics in Industry Equilibrium, with Murray Carlson, Engelbert Dockner, and Ron Giammarino

Journal of Financial and Quantitative Analysis (2014), 49:321-349.

Abstract: We study the distinct impacts of own and rival actions on risk and return when firms strategically compete in the product market. Contrary to simple intuition, a competitor’s options to adjust capacity reduce own-firm risk. For example, if a rival possesses a growth option, an increase in industry demand directly enhances profits but also encourages value-reducing competitor expansion. The rival option thus acts as a natural hedge. Within the industry, we obtain endogenous differences in expected returns. In a leader-follower equilibrium, own-firm and competitor risks and required returns move together through contractions and oppositely during expansions, providing testable new predictions.

Extreme Risk and Fractal Regularity in Finance, with Laurent Calvet 

Contemporary Mathematics (2013)

Abstract: As the Great Financial Crisis reminds us, extreme movements in the level and volatility of asset prices are key features of financial markets. These phenomena are difficult to quantify using traditional approaches that specify extreme risk as a singular rare event detached from ordinary dynamics. Multifractal analysis, whose use in finance has considerably expanded over the past fifteen years, reveals that price series observed at different time horizons exhibit several major forms of scale-invariance. Building on these regularities, researchers have developed a new class of multifractal processes that permit the extrapolation from high-frequency to low-frequency events and generate accurate forecasts of asset volatility. The new models provide a structured framework for studying the likely size and price impact of events that are more extreme than the ones historically observed.

Monetary Policy and Corporate Default, with Harjoat S. Bhamra and Lars-Alexander Kuehn

Journal of Monetary Economics (2011), 58:480-494.

Abstract: When a corporation issues debt with a fixed nominal coupon, the real value of future payments decreases with the price level. Forward-looking corporate default decisions therefore depend on monetary policy through its impact on expected inflation. We build a general equilibrium economy with deadweight bankruptcy costs that demonstrates how nominal rigidities in corporate debt create an important role for monetary policy even in the absence of standard nominal frictions such as staggered price setting in the output market. Under a passive nominal interest rate peg, the direct effects of a negative productivity shock combine with deflation to produce strong incentives for corporate default. A debt-deflationary spiral results when there are real costs of financial distress. Inflation targeting eliminates this amplification mechanism but full inflation targeting requires permitting the nominal interest rate to depend explicitly on credit market conditions.

Conditional Risk and Performance Evaluation: Volatility Timing, Overconditioning, and the Performance of Momentum Strategies, with Oliver Boguth, Murray Carlson, and Mikhail Simutin

Journal of Financial Economics (2011), 102:363-389. 

Abstract: Unconditional alphas are biased when conditional beta covaries with the market risk premium (market timing) or volatility (volatility timing). We demonstrate an additional bias (overconditioning) that can occur any time an empiricist estimates risk using information, such as a realized beta, that is not available to investors ex ante. Calibrating to U.S. equity returns, volatility timing and overconditioning can plausibly impact alphas more than market timing, which has been the focus of prior literature. To correct market- and volatility-timing biases without overconditioning, we show that incorporating realized betas into instrumental variables estimators is effective. Empirically, instrumentation reduces momentum alphas by 20–40%. Overconditioned alphas overstate performance by up to 2.5 times. We explain the sources of both the volatility-timing and overconditioning biases in momentum portfolios.

SEO Risk Dynamics, with Murray Carlson and Ron Giammarino

Review of Financial Studies (2010), 23:4026-4077.

Abstract: We theoretically and empirically investigate firm-level risk dynamics around seasoned equity offerings (SEOs). Empirically, beta increases before SEOs and decreases gradually thereafter. Using real options theory, commitment-to-invest generates a gradual post-issuance beta decline whereas instantaneous investment and time-to-build do not. In a behavioral theory, systematic mispricing can cause increasing pre-issuance and decreasing post-issuance risk but idiosyncratic mispricing cannot. In the empirical cross-section, investment, own-firm runup, SEO proceeds, and primary issuance—associated with the real options theory—predict beta declines. Sentiment proxies have weaker effects in the full sample, but are significant in a post-1996 subsample. SEOs coincide with low firm- and market-volatility, suggesting volatility-timing in corporate decisions.

Reputation and Managerial Truth-Telling as Self-Insurance, with Robert Heinkel

Journal of Economics and Management Strategy (2008), 17:489-540.

Abstract: We investigate truth-telling by an informed insider, or manager, who repeatedly forecasts cash flows to competitive investors in a standard message game. The insider cannot trade on or sell private information, but faces imperfectly hedgeable nonwage income shocks. When compensation depends on the current stock price, a partially revealing equilibrium may exist in which the manager manipulates his reports, and hence the stock price, to reduce consumption variance. Intuitively, the manager builds reputation in good times when honesty is affordable, and exploits reputation in times of need. Endogenous reputation for honesty thus follows from a self-insurance motive.

Multifrequency Jump-Diffusions: An Equilibrium Approach, with Laurent Calvet

Journal of Mathematical Economics (2008), 44:207-226.

Abstract: This paper proposes that equilibrium valuation is a powerful method to generate endogenous jumps in asset prices. We specify an economy with continuous consumption and dividend paths, in which endogenous price jumps originate from the market impact of regime-switches in the drifts and volatilities of fundamentals. We parsimoniously incorporate regimes of heterogeneous durations and verify that the persistence of a shock endogenously increases the magnitude of the induced price jump. As the number of frequencies driving fundamentals goes to infinity, the price process converges to a novel stochastic process, which we call a multifractal jump-diffusion.

Multifrequency News and Stock Returns, with Laurent Calvet

Journal of Financial Economics (2007), 86:178-212.

Abstract: Equity prices are driven by shocks with persistence levels ranging from intraday horizons to several decades. To accommodate this diversity, we introduce a parsimonious equilibrium model with regime shifts of heterogeneous durations in fundamentals, and estimate specifications with up to 256 states on daily aggregate returns. The multifrequency equilibrium has higher likelihood than the Campbell and Hentschel [1992. No news is good news: an asymmetric model of changing volatility in stock returns. Journal of Financial Economics 31, 281–318] specification, while producing volatility feedback 10 to 40 times larger. Furthermore, Bayesian learning about volatility generates a novel trade-off between skewness and kurtosis as information quality varies, complementing the uncertainty channel [e.g., Veronesi, 1999. Stock market overreaction to bad news in good times: a rational expectations equilibrium model. Review of Financial Studies 12, 975–1007]. Economies with intermediate information best match daily returns.

Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance, with Murray Carlson and Ron Giammarino

Journal of Finance (2006), 61:1009-1034. 

Lead article, Brattle Prize finalist.

Abstract: We present a rational theory of SEOs that explains a pre-issuance price run-up, a negative announcement effect, and long-run post-issuance underperformance. When SEOs finance investment in a real options framework, expected returns decrease endogenously because growth options are converted into assets in place. Regardless of their risk, the new assets are less risky than the options they replace. Although both size and book-to-market effects are present, standard matching procedures fail to fully capture the dynamics of risk and expected return. We calibrate the model and show that it closely matches the primary features of SEO return dynamics.

Volatility Comovement: A Multifrequency Approach, with Laurent Calvet and Samuel Thompson

Journal of Econometrics (2006), 131:179-215.

Abstract: We implement a multifrequency volatility decomposition of three exchange rates and show that components with similar durations are strongly correlated across series. This motivates a bivariate extension of the Markov-Switching Multifractal (MSM) introduced in Calvet and Fisher (J. Econ. 105 (2001) 27, J. Financ. Econ. 2 (2004) 49). Bivariate MSM is a stochastic volatility model with a closed-form likelihood. Estimation can proceed by maximum likelihood for state spaces of moderate size, and by simulated likelihood via a particle filter in high-dimensional cases. We estimate the model and confirm its main assumptions in likelihood ratio tests. Bivariate MSM compares favorably to a standard multivariate GARCH both in- and out-of-sample. A parsimonious multifrequency factor structure is finally proposed for multivariate settings with potentially many assets.

Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns, with Murray Carlson and Ron Giammarino

Journal of Finance (2004), 59:2577-2603. 

Smith Breeden Distinguished Paper Prize, Northern Finance Association Meetings Best Paper in Corporate Finance.

Abstract: We show that corporate investment decisions can explain the conditional dynamics in expected asset returns. Our approach is similar in spirit to Berk, Green, and Naik (1999), but we introduce to the investment problem operating leverage, reversible real options, fixed adjustment costs, and finite growth opportunities. Asset betas vary over time with historical investment decisions and the current product market demand. Book-to-market effects emerge and relate to operating leverage, while size captures the residual importance of growth options relative to assets in place. We estimate and test the model using simulation methods and reproduce portfolio excess returns comparable to the data.

How to Forecast Long-Run Volatility: Regime-Switching and the Estimation of Multifractal Processes, with Laurent Calvet 

Journal of Financial Econometrics (2004), 2:49-83. 

Abstract: We propose a discrete-time stochastic volatility model in which regime switching serves three purposes. First, changes in regimes capture low-frequency variations. Second, they specify intermediate-frequency dynamics usually assigned to smooth autoregressive transitions. Finally, high-frequency switches generate substantial outliers. Thus a single mechanism captures three features that are typically viewed as distinct in the literature. Maximum-likelihood estimation is developed and performs well in finite samples. Using exchange rates, we estimate a version of the process with four parameters and more than a thousand states. The multifractal outperforms GARCH, MS-GARCH, and FIGARCH in- and out-of-sample. Considerable gains in forecasting accuracy are obtained at horizons of 10 to 50 days.

Multifractality in Asset Returns: Theory and Evidence, with Laurent Calvet 

Review of Economics and Statistics (2002), 84:381-406. 

Lead article

Abstract: This paper investigates the multifractal model of asset returns (MMAR), a class of continuous-time processes that incorporate the thick tails and volatility persistence exhibited by many financial time series. The simplest version of the MMAR compounds a Brownian motion with a multifractal time-deformation. Prices follow a semi-martingale, which precludes arbitrage in a standard two-asset economy. Volatility has long memory, and the highest finite moments of returns can take any value greater than 2. The local variability of a sample path is highly heterogeneous and is usefully characterized by the local Hölder exponent at every instant. In contrast with earlier processes, this exponent takes a continuum of values in any time interval. The MMAR predicts that the moments of returns vary as a power law of the time horizon. We confirm this property for Deutsche mark/U.S. dollar exchange rates and several equity series. We develop an estimation procedure and infer a parsimonious generating mechanism for the exchange rate. In Monte Carlo simulations, the estimated multifractal process replicates the scaling properties of the data and compares favorably with some alternative specifications.

Forecasting Multifractal Volatility, with Laurent Calvet 

Journal of Econometrics (2001), 105:27-58. Reprinted in Complexity in Economics, J.B. Rosser, ed., Elsevier Science, 2004.

Abstract: This paper develops analytical methods to forecast the distribution of future returns for a new continuous-time process, the Poisson multifractal. The process captures the thick tails, volatility persistence, and moment scaling exhibited by many financial time series. It can be interpreted as a stochastic volatility model with multiple frequencies and a Markov latent state. We assume for simplicity that the forecaster knows the true generating process with certainty but only observes past returns. The challenge in this environment is long memory and the corresponding infinite dimension of the state space. We introduce a discretized version of the model that has a finite state space and an analytical solution to the conditioning problem. As the grid step size goes to zero, the discretized model weakly converges to the continuous-time process, implying the consistency of the density forecasts.

Monograph

Multifractal Volatility: Theory, Forecasting, and Pricing (2008), with Laurent Calvet  Academic Press, Burlington, MA.

Other Contributions

A Multifractal Model of Asset Returns, with Laurent Calvet and Benoit Mandelbrot (1997), Cowles Foundation Discussion Paper #1144.

Large Deviations and the Distribution of Price Changes, with Laurent Calvet and Benoit Mandelbrot (1997), Cowles Foundation Discussion Paper #1145.

Multifractality of Deutsche Mark / U.S. Dollar Exchange Rates, with Laurent Calvet and Benoit Mandelbrot (1997), Cowles Foundation Discussion Paper #1146.