Published and Accepted 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.
"Investor Expertise and Private Investment Selection" with Emmanuel Yimfor and Ye Zhang
(Conditionally Accepted, Journal of Financial Economics)
Institutional and individual investors evaluate private market opportunities systematically differently, even facing identical choices. In a survey experiment, 593 institutional and 445 individual investors assess venture capital fund profiles with independently randomized GP characteristics. Institutions heavily weight past fund performance, consistent with risk-averse investor demand calibrated to VC markets. Individuals largely ignore performance, favoring educational credentials instead. A follow-up experiment identifies two independent mechanisms: individuals lack awareness that VC performance persists and discount quality signals for funds they perceive as inaccessible. Performance-based selection alone reduces individuals' expected returns by approximately 7%, accounting for 20% of the return gap with professionals.
Working Papers:
"Retail Capital as a Stepping Stone in Venture Capital: Theory and Empirics" with Ran Xing, Emmanuel Yimfor, and Ye Zhang
What are the marginal effects of retail investor entry into private markets? The conventional debate focuses on direct effects: potential benefits (portfolio diversification, access to high-return assets) versus costs (excessive fees, inefficient capital allocation by retail investors). We identify a countervailing mechanism: retail investors fund experimentation with unproven general partners (GPs), enabling institutions to free-ride by poaching proven talent. We document that 34% of value created by institutional investments in private markets comes from GPs who started with retail capital. We formalize this stepping-stone mechanism by extending Berk and Green (2004) to venture capital with heterogeneous investors and uncertain manager skill. New GPs with moderate perceived ability initially raise retail capital to reveal their true skill; after observing performance, skilled GPs graduate to institutional capital while unsuccessful GPs exit. Retail investors pay for information production, but institutions capture benefits through superior manager selection and bargaining power. Our calibrated model shows that retail investor entry increases aggregate welfare when stepping-stone benefits exceed inefficient allocation costs. Policies restricting retail access may harm efficiency by restricting this talent discovery path.
Paper Forthcoming
"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:
“An Empirical Asset Pricing Perspective on the Firm as an Internal Capital Market”
Work in Progress
“The Economics of Weak Equilibrium: Implications for Asset Valuation”
Work in Progress
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.