Research
Research Papers
Decentralized and Centralized Options Trading: A Risk Premia Perspective, with A. Andolfatto, S. Naik, 2024
On-Chain options refer to option contracts, traded directly on a decentralized exchange on the Ethereum blockchain. We report a novel set of stylized facts about the functioning of this so-called automated market making for options trading. We document the extent to which the On-Chain options differ from their Off-Chain counterparts traded on centralized exchanges. In particular, we identify a difference in implied volatilities between On-Chain and Off-Chain options, attributing it to factors like the complex On-Chain fee structure, trading volume, and net demand pressure.
Implied Impermanent Loss: A Cross-Sectional Analysis of Decentralized Liquidity Pools, with T. Li, S. Naik, A. Papanicolaou, 2024
We propose a continuous-time stochastic model to analyze the dynamics of the impermanent loss, as the variance of the relative price on the underlying tokens, in decentralized liquidity provision. We estimate the risk-neutral joint distribution of the tokens by minimizing the Hansen–Jagannathan bound, which we then use to value the impermanent loss and for calculating an implied correlation of the token pair. We explore how implied volatilities and correlations affect impermanent loss, revealing their role in explaining the cross-sectional returns of liquidity pools. We test our hypothesis on options data from a major centralized derivative exchange.
Yield Farming for Liquidity Provision, with T. Li, S. Naik, A. Papanicolaou, 2024
Yield farming in decentralized finance is the practice of providing liquidity in exchange for a share of transaction fees paid by liquidity takers. In this article, we analyze yield farming's risks and returns using on-chain data from major decentralized exchanges. We propose a mathematical model that incorporates stochasticity of returns, impermanent loss as a source of risk, and gas fees paid by liquidity providers. By calibrating the model to the data, we gain insights into the trade-off between future earnings and upfront gas fees, offering a valuable understanding of yield farming's economic dynamics.
Presentation @ Algorand Bocconi Fintech Lab: https://youtu.be/dir2CG6Id74?t=2828
Presentation @ 5th UWA Blockchain and Cryptocurrency Conference: https://www.youtube.com/watch?v=PEZeIHiqu1c
Pandemic Tail Risk, with M. Breugem, R. Corvino, R. Marfe, 2024
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.
Correlations, Value Factor Returns, and Growth Options, 2023
This paper shows theoretically and empirically that the average equity correlation is related to investment-specific technology (IST) shocks and to growth options. Average equity correlation forecasts returns on growth stocks and returns on the value factor. A production-based asset-pricing model motivates the findings and provides a novel explanation for the market return predictability by average equity correlation: Innovation, e.g., IST shocks, favors individual growth option accumulation and leads to lower average equity correlations. The expected average equity correlation is related to risks associated with the value premium and growth option dynamics and therefore serves as a leading procyclical state variable.
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.
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.
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.
Work in Progress
Factor Dispersions, with D. Gerchik, V. Ruffo, and G. Vilkov
Implied Impermanent Loss: A Cross-Sectional Analysis of Decentralized Liquidity Pools, with T. Li, S. Naik, A. Papanicolaou
Conference Organizations
2024 FMA European Conference Review Committee
ToDeFi : I initiated and organized this conference after realizing that there are almost no scientific DeFi conferences happening in Europe.
I applied and obtained research funds from various DeFi foundations and DAOs (associated with 0x, ZCash, Tezoz, Algorand, and PoolTogether).
I put together the conference program (presenters, discussants, and a session about career opportunities in DeFi for interested master students)
From 2024 the conference is organized and sponsored together with the Bank of Italy.
Asset Pricing Conference by LTI@UniTo (since 2020 I am part of the organizing committee)
Awards and Scholarships
2023 - CBOE - The Options Institute - S&P Dow Jones Indices Dispersion Research Grant (with G. Vilkov) - video, announcement
2023 - The Avalanche Foundation for "The Impermanent Loss in Yield Farming" (with T. Li, S. Naik, and A. Papanicolaou)
2023 - Fintech Chair Grant sponsored by the Université Paris Dauphine for "The Impermanent Loss in Yield Farming" (with T. Li, S. Naik, and A. Papanicolaou)
2022 - Fintech Chair Grant sponsored by the Université Paris Dauphine for "Yield Farming for Liquidity Provision" (with T. Li, S. Naik, and A. Papanicolaou)
2022 - Grant from The Graph Foundation for "Yield Farming for Liquidity Provision" (with T. Li, S. Naik, and A. Papanicolaou)
2021 - Inquire Europe for "Pandemic Tail Risk" (with M. Breugem, R. Corvino, and R. Marfè) - https://www.inquire-europe.org/research/projects-under-development/
2019 - Jack Treynor Prize sponsored by the Q-Group (The Institute for Quantitative Research in Finance) for "Expected Correlation and Future Market Returns" (with A. Buss and G. Vilkov) - https://www.q-group.org/jack-treynor-prize-winners/
2019 - Best Job Market Paper in Asset Pricing - Second LTI Asset Pricing Conference by the Collegio Carlo Alberto for "Correlations, Value Factor Returns, and Growth Options"
2017 - Research Grant, Canadian Derivatives Institute (CDI) (former: Montreal Institute of Structured Products and Derivatives) for "Expected Stock Returns and the Correlation Risk Premium" (with A. Buss and G. Vilkov)
2017 - Crowell Prize Finalist 2017 for "Option-Implied Correlations, Factor Models, and Market Risk" (with A. Buss and G. Vilkov)
Department Visit
Courant Institute of Mathematical Sciences of New York University – Invited by Prof. Petter Kolm, 09/2017 – 03/2018
Referee
Journal of Financial and Quantitative Analysis
Journal of Banking and Finance
Journal of Empirical Finance
Finance Research Letters
Financial Analysts Journal
Methodology & Computing in Applied Probability
The Economics of Transition