Assistant Professor of Finance
Safe Minus Risky: Do Investors Pay a Premium for Stocks that Hedge Stock Market Downturns? (with Nishad Kapadia, Barbara Ostdiek, and James Weston), 2019, JFQA Internet Appendix.
Stocks that hedge against sustained market downturns — periods from peak to trough in S&P500 levels at the business cycle frequency — should have low expected returns, but they do not. We use ex-ante firm characteristics and covariances to construct a tradeable Safe Minus Risky (SMR) portfolio that hedges market downturns out-of-sample. Although downturns correspond to significant declines in GDP growth, SMR has significant positive average returns and four factor alphas (both about 0.75% per month). Risk-based models do not explain SMR’s returns, but mispricing does. Risky stocks are overpriced when sentiment is high, resulting in subsequent returns of -1% per month.
The entire annual return of a typical stock accrues on the four days (on average) on which its stock price experiences jumps, or large idiosyncratic movements relative to its volatility, Stock prices drift down by about 2% before jumps. These patterns are likely due to a premium for idioysncratic jump risk. A trading strategy that buys stocks with high ex-ante jump probability earns high average returns and alphas. Returns for the strategy are higher when/where costs of arbitrage are high.
Financial Integration and Credit Democratization: Linking Banking Deregulation to Economic Growth (with Elizabeth Berger, Alexander W. Butler, and Edwin Hu), 2020. Forthcoming, JFI.
We document a positive effect of financial integration on economic growth. Using US state-by-state financial deregulations, we find that economic growth occurred in states where bank deregulation solved a capital immobility problem. We use a matching method that constructs synthetic counterfactual states to identify the channels that link bank deregulation to financial integration, and thereby to economic growth. Our results reveal a correlation between financial integration and subsequent banking sector changes including improved bank efficiency, better lending and borrowing rates, and an expansion in loan recipients. We show that financial integration democratizes lending and spurs economic growth.
The Disappearing Earnings Announcement Premium (with Amanda Heitz and Ganapathi Narayanamoorthy), 2020.
The earnings announcement premium, whereby a stock earns abnormal returns over its earnings announcement period, has been the subject of extensive research. We provide the first evidence that this premium has disappeared in the US in recent years. We theorize that the increased filings of material information (Form 8-K) due to a regulatory change is responsible for this disappearance. Information traditionally contained in earnings announcements is now preempted by 8-K filings, and the announcement premium has shifted to 8-K filing dates. These results are consistent with our information uncertainty resolution model and inconsistent with attention-based behavioral explanations.
Ubiquitous Comovement (with William Grieser and Jung Hoon Lee), 2019.
Rational and behavioral asset pricing theories offer conflicting interpretations of the covariance structure of asset returns. Return comovement beyond what prespecified empirical factor models can explain is often interpreted in favor of frictions or behavioral explanations. However, we show that randomly grouped assets exhibit "excess" comovement that is ubiquitous and indistinguishable from the comovement of economically motivated groupings advanced in the literature. Our finding is consistent with the presence of a latent factor that could be derived from multiple sources of systematic variation, including rational sources. We propose new statistical tests that account for latent factors when detecting excess comovement.
Wage stickiness and firm-specific human capital induce operating leverage that contributes to the risk exposure of the firm. This leverage produces momentum in returns as well as a positive relationship between profits and subsequent returns. I demonstrate these relationships in the context of a partial equilibrium production model. I empirically show that momentum and profitability returns are more pronounced in the presence of labor-induced operating leverage. A novel implication of the model is that recession-resistant stocks earn higher returns during subsequent expansions. This prediction holds empirically and is distinct from other anomalies.
Industry Networks and the Geography of Firm Behavior (with William Grieser and James LeSage) 2020.
We consider the role of local geographical peers in the determination of firm behavior. We exploit intransitivity in local peer-firm networks and spatial econometric techniques to circumvent well-known challenges in estimating and interpreting empirical models of peer effects. We find that geography network effects play a highly significant causal role in explaining corporate investment decisions, and a much more modest role in explaining financial policy and firm performance. We then implement a novel structured network regression to separately identify geography, product market, and supply-chain network effects. We find that local externalities in firm behavior operate almost exclusively within industry boundaries, and that geography effects outside of industry are only present (yet moderately so) for corporate investment decisions.