Research

Research Papers

Factor Dispersions, with D. Gerchik, V. Ruffo, and G. Vilkov, 2024

Dispersion strategies capture the difference in variance dynamics between a basket and its components. Even though smart-beta indices intend to load heavily on a particular factor, factor dispersions based on such baskets are exposed to risks of other factors and idiosyncratic variances. Analyzing factor dispersions through a linear factor model and equicorrelation representations, we recover driving forces behind dispersion dynamics and work out an attribution of a dispersion risk premium. As a balanced combination of systematic and idiosyncratic variance components, dispersion and its risk premium provide signals about future changes in systematic and alpha-based investment opportunities.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4853747

Decentralized and Centralized Options Trading, with A. Andolfatto, S. Naik, 2025

On-Chain options refer to option contracts implemented as smart contracts, traded on decentralized exchanges. We report a novel set of stylized facts about decentralized options trading and how automated market-making, a new model of liquidity provision for options, contributes to market fragmentation and segmentation. Empirically, we document that the prices of On-Chain options exceed those of Off-Chain options traded on centralized exchanges. Key factors driving this include blockchain-specific risks, the automated market-makers' risk mitigation mechanisms, and the impact of trading volume and net demand pressure. We propose a theory to explain the price difference and empirically verify its key implications.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4822783

Implied Impermanent Loss: A Cross-Sectional Analysis of Decentralized Liquidity Pools, with T. Li, S. Naik, A. Papanicolaou, 2025

We derive an option-implied valuation of impermanent loss for liquidity providers on decentralized exchanges and quantify it using option prices. We value impermanent loss through the variance of the tokens' relative price. Since options on the relative price are not traded, we introduce a model for its distribution and a valuation formula induced by a change of numéraire. We document a risk premium as the difference between implied and realized impermanent loss. We show that implied impermanent loss arises from the tokens' risks and their correlation risk, which are inversely related to pool sizes and explain cross-sectional liquidity pool returns.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4811111

Yield Farming for Liquidity Provision, with T. Li, S. Naik, A. Papanicolaou, 2025

Yield farming for liquidity provision is the practice of staking tokens on a decentralized exchange in return for a share of the fees paid by liquidity takers. We propose a mathematical model incorporating stochasticity of returns, impermanent loss as a source of risk, gas fees, and the price impact from staking. We use our calibrated model to analyze trade-offs between these quantities, revealing that liquidity providers invest more frequently when gas fees and impermanent loss are low, and when pool sizes are small. We validate these insights using observed transaction data.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4422213

Average Equity Correlations, Value Factor Returns, and Growth Options, 2025

This paper shows empirically and theoretically that the average equity correlation forecasts returns on growth stocks and the value factor. Innovation, such as IST shocks, favors growth option accumulation, leading to less synchronized price movements as firms grow at different rates, resulting in lower average equity correlation. A production-based asset-pricing model motivates these findings and provides a novel explanation for the market return predictability by average equity correlation. Consistently, I document that the option-implied average equity correlation is linked to IST shocks and to aggregated firm valuations, and hence embeds risks associated with the value premium and growth option dynamics.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3480606 

Investor Behavior under Prospect Theory: Evidence from Mutual Funds, with J. Guo, 2022

This paper studies the investment behavior of investors and fund managers within the mutual funds industry. We find that investors are biased in their fund purchase decisions in a way described by prospect theory: The prospect theory value i) predicts future fund flows, even though it is not related to the funds' future performance, ii) contains incremental information compared to existing historical performance measures, and iii) is mainly driven by the loss aversion property encapsulated in it. Fund managers are not subject to any behavioral bias identifiable by prospect theory when selecting stocks for their fund portfolio.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3754814 

• Revise and Resubmit

• Expected Correlation and Future Market Returns,  with A. Buss and G. Vilkov, 2019

Expected correlation extracted jointly from index and stock options, predicts future market excess returns for horizons of up to 1 year, in- and out-of-sample. The predictive power is superior and incremental to that of risk measures based on the marginal distribution of the market, including (semi)variance risk premiums, and works through three channels: market variance, idiosyncratic risk and the crosssectional dispersion of systematic betas, with each one linked to economic fundamentals in its own way. Jointly, option-implied versions of market and idiosyncratic variances, and dispersion of market betas predict market returns even better than the implied correlation.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3114063 

• Option-Implied Correlations, Factor Models, and Market Risk, with A. Buss and G. Vilkov, INSEAD Working Paper, 2016

Correlation risk is an integral part of the portfolio variance risk, yet playing a separate role and having distinct patterns in predicting future market returns, portfolio risks and macroeconomic conditions. Expected correlations predict market returns for a year ahead, and contrary to the accepted view of correlation as crash risk state variable, this link works through the ability of correlations to predict long-term diversification, namely, average correlations and the lower bound of non-diversifiable market risk. Economy-wide implied correlation built exclusively from combining option prices of sector ETFs and the index jointly predicts future market returns and systematic diversification risk. Newly developed implied correlations and correlation risk premiums for economic sectors provide industry-related information and are also used to extract option-implied risk factors.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2906484 

Published Papers

Pandemic Tail Risk, with M. Breugem, R. Corvino, R. Marfe, 2024, Journal of Banking and Finance (JBF)

This paper studies the measurement of forward-looking tail risk in US equity markets around the COVID-19 outbreak. We document that financial markets are informative about how pandemic risk has spread in the economy in advance of the actual outbreak. While the tail risk of the market index did not respond before the outbreak, investors identified less pandemic-resilient economic sectors whose tail risk boomed in advance of both the market drawdown and the implementation of social distancing provisions. This pattern is consistent across different methodologies for measuring forward-looking tail risk, using option contracts, and across various horizons.

• https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3741292