Published Work:
"The Term Structure of Equity Risk Premia” with Ravi Bansal, Dongho Song, and Amir Yaron
Journal of Financial Economics (2021)
We estimate a regime-switching model for the equity term structure with Bayesian methods. Our approach accounts for the data sample being unrepresentative of the population distribution of regimes. We find that the term structure of expected equity dividend strip returns is downward sloping in recessions and upward sloping in expansions, and the unconditional term structure of expected equity returns is positively sloped. Our estimation shows that the sample unrepresentativeness induces a downward bias in the estimate of the equity term structure slope. We present a regime-switching consumption-based asset-pricing model that matches the empirical findings.
Working Papers:
"Investor Expertise and Private Investment Selection" with Emmanuel Yimfor and Ye Zhang
(Revise and Resubmit, Journal of Financial Economics)
Individual investors own 50% of global assets but only 16% of private market assets. As regulations expand individual investor access to private markets, we examine how they select venture capital funds compared to professional investors. In a survey experiment with 593 professional and 445 individual investors, we find that while both groups prioritize returns, they differ systematically in how they evaluate general partners (GPs). Professional investors heavily weight track records and avoid first-time funds, while individual investors show no response to past performance and instead weakly emphasize educational backgrounds and location. We develop a risk-averse benchmark model to evaluate these behaviors, finding that professional investors' preferences are consistent with a fund selection strategy aligned with historical VC performance, while individual investors' selections deviate significantly from this benchmark. Using historical transition probabilities between performance quartiles, we estimate that these selection differences alone could result in returns that are 12.44% lower. Our estimates suggest that fund selection accounts for about 20% of the total performance gap when considering fund access constraints. Using observational data, we confirm that funds with more individual investors achieve significantly worse exit performance and have weaker performance persistence. The systematic differences in how individual investors select funds could lead to substantially lower returns, even if they had equal access to investment opportunities.
"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
Work In Progress:
“The Economics of Weak Equilibrium: Implications for Asset Valuation”
Work in Progress
I develop a novel framework for the investigation of data arising from agents engaging in constrained optimization of objectives in economies in general equilibrium and investigate its implications for asset pricing and firm investment policy. My approach builds on recent developments in the mathematics of multi-objective optimization and functional learning in vector reproducing kernel Hilbert spaces. Instead of seeking solutions for general equilibria of a specific model, a process which is frequently intractable or computationally infeasible, I characterize the solutions to all models in a more general class which contains the models of interest in recent studies in macro-finance and asset pricing as special cases. In essence, I characterize all the potential equilibria of models in which agents’ constrained choices reflect the decisions of a Pareto planner for their potential future selves and their beliefs about the structure of the economy are optimally learned from observable data produced by the economy.
"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.
Permanent Working Papers:
“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.