Equity Valuation without DCF (coming soon) with Christopher Polk and Thummim Cho

• Conferences: NBER Summer Institute (presenting author), SFS Cavalcade (presenting author), Red Rock (scheduled), AFA (scheduled), Junior Finance Conference on Valuation (scheduled),

We introduce discounted alphas, a novel framework for equity valuation. Our approach circumvents the need for stock-level cost-of-equity estimates required in discounted cash flow (DCF) valuation and identifies economically important variation in fundamental value not captured by best-in-class DCF methods. We find that discretionary buy-and-hold funds tilt toward characteristics that predict underpricing but not short-term alphas and that private equity funds appear to capture substantial CAPM misvaluation, both initially at buyout and subsequently at exit. However, despite these pockets of misvaluation, we find that firm equity values are "almost efficient" by Black's (1986) definition.

Expected interest rates (planned job market paper, coming soon)

Bye Bye Beta: Deposit Duration with Fixed Spreads 

Based on empirical patterns in deposit rates, I value bank deposits as interest rate caps with fixed spreads, rather than as fixed-beta liabilities. This approach generates dramatically time-varying duration: the effect of a 1 ppt increase in interest rates on the value of banks varies from -5-10% in 2006 to +75% when rates were near zero in 2020. Deposits spreads alone create this negative duration at low rates; no assumptions about fixed costs or deposit runoff are needed. The model predicts bank stock price responses to monetary shocks with the correct sign and magnitude, while existing duration measures fail or predict with the wrong sign. These findings imply that bank duration hedging incentives and even monetary policy effectiveness can vary dramatically with the interest rate level.

Deposit Insurance & Bank Lending

Over the past 30 years, bank funding has shifted from small FDIC-insured deposits to large, uninsured deposits. This paper shows that insured deposits fund more lending, particularly business lending, while uninsured deposits are used to purchase more liquid securities. A natural experiment from the 1980 expansion of FDIC insurance limits demonstrates this effect is causal – deposit insurance leads to more business lending and more local business formation. The coefficients are economically large: a 10 ppt increase in the share of assets that are insured leads to a 2-4 ppt increase in loans to businesses as a share of assets and a 4-8% increase in the local number of businesses and employees. The long-term growth of large, uninsured deposits can therefore help explain the secular decline in banks' business lending as a share of balance sheet.

Bank vs Dealer Capital as a Priced Risk

Worshipful Company of International Bankers prize for best MSc dissertation

Recent papers have found that intermediary capital can explain prices across a number of asset classes (He, Kelly, Manela 2017; Adrian, Etula, and Muir 2021). I test intermediaries' explanatory power during the period of Glass-Steagall restrictions, in which commercial banks were ineligible to trade many categories of assets. Surprisingly, I do not find that the capital or assets of dealers eligible to trade asset classes explain those prices better than the ineligible banks. Instead, the ineligible commercial banks appear to explain prices better in the time series and at least as well in the cross-section. These findings provide some support for the idea that the apparent explanatory power of intermediaries arises passively, for example from correlation with time-varying risk preferences, rather than from their interaction with markets.

Awards: LSE Class Teacher Award 2023-24, & 2024-25

Courses:

• FM413: Fixed Income Markets for master's students (2022-2025)

• FM436: Financial Economics for master's students (2022-2025)

• Executive education:

  • • Effective Asset Management (2023-2025)

    • Fixed Income: Markets, Securities, and Institutions (2023)

• FM212: Principles of Finance (2021-2022)

Evaluations:  My latest teaching evaluation is available here

Material: For an example of teaching material I have written, please see my lecture notes on stochastic calculus for Financial Economics students here