Working Papers

Is Firm-Level Political Risk Priced in the Equity Option Market? (with Anastasios Kagkadis and George Wang) 

Abstract: We document a political risk premium of about 0.30% per month in the equity option market. High-political risk firms exhibit delta-hedged option returns that are significantly lower than those of low-political risk firms. The effect holds both in a cross-sectional and in a time-series context. A quasi-natural experiment based on Brexit corroborates the result showing that after the referendum there is a decrease in the option returns of the firms with exposure to Brexit risk. Further, the political risk-option return relation is more pronounced among firms with high option demand, high information asymmetry, and high default probability, while it is mitigated for politically active firms. The demand pressure for the options of politically risky firms is driven by the call purchases of public customers and the put purchases of firm proprietary investors. Hence, it appears that due to its heterogeneous nature firm-level political risk is treated differently by different investor groups.  

Bear Factor and Hedge Fund Performance (with Anastasios Kagkadis and George Wang)

Abstract: We show that a simple and intuitive variable, the return of a bear spread portfolio orthogonalized with respect to the market (H-Bear factor), can serve as an important pillar for explaining the cross-section of hedge fund returns. Low H-Bear exposure funds (bear risk insurance sellers) outperform high H-Bear exposure funds (bear risk insurance buyers) by 0.58% per month on average, outperform even during market crashes, but underperform when bear market risk materializes. Overall, we identify a new risk dimension that affects hedge fund performance, and we show that this risk factor is distinct from the already popular realized tail risk. 

Climate Change News Sensitivity and Mutual Fund Performance

Abstract: In the presence of rising concern about climate change that potentially affects risk and return of investors’ portfolio companies, active investors might have dispersed climate change risk exposures. We compute mutual fund covariance with market-wide climate change news index and find that high (positive) climate news beta funds outperform low (negative) climate news beta funds by 0.24% per month on a risk-adjusted basis. High climate news beta funds tilt their holdings toward stocks with high potential to hedge against climate change news. In the cross section, such stocks yield higher excess returns, which are driven by greater pricing pressure and superior financial performance over our sample period.