Research
"The Term Structure of Equity Risk Premia” with Ravi Bansal, Dongho Song, and Amir Yaron
Accepted, Journal of Financial Economics
Using the 14 years of available dividend strips data we estimate a regime-switching model for the equity term structure with Bayesian methods. Our approach accounts for the fact that this short sample is unrepresentative of the population distribution of regimes---specifically, it has a higher frequency of recessions relative to the population probability. Our estimation shows that (i) the term structure of expected equity dividend strip returns is downward sloping in recessions and upward sloping in expansions, and (ii) the unconditional slope of the term structure of expected equity returns is positive. Our estimation results reveal that the consequence of the sample unrepresentativeness is a downward bias in the estimate of the equity term structure slope. We present a consumption-based regime switching model that matches the conditional and unconditional return slopes and the volatility of equity yields in the data; in the model, as in the data, a high recession frequency biases the equity term structure slope downwards and the equity-yield volatility upwards. In sum, our analysis shows the empirical evidence in dividend strips is consistent with the implications of standard consumption-based models.
"The Temporal Structure of Risk and the Cross-Section of Equity Returns"
I reexamine the relationship between the cross-section of equity returns and the temporal structure of risk through the lens of conditional linear factor models. In the literature, the cross-section has widely varying implications for the term structure of equity dividend risk premia, and I link these different conclusions to identifying assumptions, assumptions about time series dynamics, and VAR model state selection. I propose an estimation methodology based on instrumented principal components analysis that concisely summarizes the information about asset returns and characteristics in a small set of managed portfolios, and derive its term structure implications. I show that this method supports a strongly upward-sloping term structure of risk premia and cross-sectional differences in dividend risk premia.
"Are Creators Better Investors than Managers? Evidence from First-Time Venture Funds" with David Brophy and Emmanuel Yimfor
We study the sources of cross-sectional variation in the performance of first-time venture capital (VC) fund partners (GPs). We find that, relative to GPs with startup experience (creators), GPs with VC experience (managers) are at least 20 percent more likely to invest in successful deals or start a follow-on fund. Our tests do not support the hypotheses that managers have better deal-selection skills. Consistent with a network effect, we show that the higher success rate for managers primarily comes from joining successful syndicates, not from leading successful deals. Our results show that, in industries where proprietary access is an essential component of value-add, industry experience is an important element of success
“The Term Structures of Equity Risk Premia in the Cross-Section of Equities”
Job Market Paper
I provide new evidence on the properties of the term structure of equity risk premia by using replication and no-arbitrage to estimate within-firm variation in expected returns across horizons. I demonstrate that a low dimensional set of returns and state variables provide a close replication of claims to firm capital gains at different horizons. Calculating returns from the no-arbitrage prices of these claims, I show that the term structure of risk premia is unconditionally upward-sloping for commonly used test assets like the market and book-to-market sorted portfolios. I derive nonparametric upper bounds on the prices of the replication errors to argue that these results are robust to the pricing of the basis risk of the replication. My method extends the literature by expanding both the span and scope of the data available to test term structure relationships while using prices of assets that are highly liquid relative to the existing derivative datasets.
"Risk Evolution and Firm Dynamics” with Ravi Bansal and Dana Kiku
Work in Progress
We develop a framework to model the dynamics of growth and risk jointly at the firm, sectoral and aggregate market levels. In the model, risk sectors are cointegrated with the aggregate economy whereas individual firms they comprise are not. We show that these time-series dynamics have important implications for the cross-sectional distribution of growth and risk and are able to match the observed characteristics of the re-balanced and buy-and-hold portfolio strategies. In particular, we show empirically and theoretically that (i) in the cross section, expected growth, risk and risk premia are strongly positively correlated; (ii) the cross-sectional dispersion in expected growth rates, risks and returns declines with the investment horizon due to the stochastic evolution of firms’ risk, and (iii) sectoral profitability is predictable by the scale of the sector. We exploit our dynamic framework to characterize and clarify the relationship between growth and cash-flow duration, the term-structure of risk premia, and the relative riskiness of claims on the existing and future firms.
“Dynamic Firm Risk and Active Manager Skill”
Work in Progress