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), 2015. R&R, JFQA Internet Appendix.
Stocks that hedge against sustained stock market downturns -- peaks to troughs in S&P 500 index levels at the business cycle frequency -- should earn low returns, but they do not. A tradeable Safe Minus Risky portfolio that delivers returns of 4.6% per month during stock market downturns, also earns large unconditional mean returns and alpha. There appear to be no costs to hedging 'bad times', only benefits. Sentiment predicts returns to SMR.
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.
Credit Be Dammed: The Impact of Banking Deregulation on Economic Growth (with Elizabeth Berger, Alexander W. Butler, and Edwin Hu), 2016.
We document substantial variation in the effect of state-level bank branching deregulation in the United States on economic growth. We examine the sources of this variation by testing multiple channels that may link deregulation and economic growth. Using a matching method that utilizes synthetic counterfactual states, we find support for the hypothesis that economic growth was associated with states where deregulation solved a capital immobility or “dammed” credit problem. We do not find support for other channels, which posit that banks became more efficient, financed more innovative businesses, or learned by observing prior deregulations.
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.