Working Papers
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Payout-Based Asset Pricing (with Andreas Stathopoulos)
* Conferences: 2024 UW Foster Summer Conference, 2024 U of Michigan New Frontiers in Asset Pricing Mitsui Symposium, 2024 World Symposium on Investment Research, 2024 Valuation Workshop at Wharton, 2024 MFA Meeting
Abstract: Firms’ payout decisions respond to expected returns: everything else equal, firms invest less and pay out more when their cost of capital increases. Given investors’ demand for firm payout, market clearing implies that the dynamics of productivity and payout demand fully determine equilibrium asset prices and returns. We use this logic to propose a payout-based asset pricing framework and we illustrate the analogy between our approach and consumption-based asset pricing in a simple two-period model. Then, we introduce a quantitative payout-based asset pricing model and calibrate the productivity and payout demand processes to match aggregate U.S. corporate output and payout empirical moments. We find that model-implied payout yields and firm returns go a long way in reproducing key attributes of their empirical counterparts.
The Subjective Risk and Return Expectations of Institutional Investors (with Spencer Couts and Johnathan Loudis)
* Conferences: 2024 EFA Meeting, 2024 Alpine Finance Summit, 2024 UW Foster Summer Conference, 2024 Helsinki Finance Summit on Investor Behavior, 2024 Adam Smith Workshop, 2024 FIRS Meeting, 2024 AFA Meeting, 2023 Paris December Finance Meeting, 2023 Tel Aviv University Finance Conference, 2023 INSEAD Finance Symposium, 2023 Valuation Workshop at USC
Abstract: We use the long-term Capital Market Assumptions of major asset managers and institutional investor consultants from 1987 to 2022 to provide three stylized facts about their subjective risk and return expectations on 19 asset classes. First, there is a strong and positive subjective risk-return tradeoff, with most of the variability in subjective expected returns due to variability in subjective risk premia (compensation for market beta) as opposed to subjective alphas. Second, belief variation and the positive risk-return tradeoff are both stronger across asset classes than across institutions. And third, the subjective expected returns of these institutions predict subsequent realized returns across asset classes and over time. Taken together, our findings imply that models with subjective beliefs should reflect a risk-return tradeoff. Additionally, accounting for this subjective risk-return tradeoff when modeling multiple asset classes is even more important than incorporating average belief distortions or belief heterogeneity in our setting.
The Bond, Equity, and Real Estate Term Structures (with Spencer Andrews)
* Conferences: 2022 Finance Down Under; 2021 CFEA, 2021 MFA Meeting, 2021 SBFin Workshop
Abstract: We construct a Stochastic Discount Factor (SDF) that prices bond, equity, and real estate portfolios sorted on cash flow duration. Using this SDF and the dynamics of cash flow yields in these three asset classes, we estimate the bond, equity, and real estate term structures monthly from 1974 to 2019. We find that while (nominally) safe and risky cash flows have risk premia term structures that are upward sloping on average and move together over time, the term structure dynamics are fundamentally different after we remove the safe component of the risky cash flows. Specifically, equity and real estate maturity-matched risk premia, on average, increase over short maturities but decline over long maturities. Moreover, their term structures comove positively with each other but negatively with the bond term structure.
What Moves Equity Markets? A Term Structure Decomposition for Stock Returns
* Conferences: 2023 AFA, 2022 MFA Meeting, 2022 European Winter Finance Summit, 2022 Craig Holden Memorial Finance Conference at Indiana University; 2020 NFA
* Best Paper Award, European Winter Finance Summit (Sudipto Bhattacharya Memorial Prize)
Abstract: Several papers decompose stock returns into cash flow and discount rate news to study equity market fluctuations. This paper develops an alternative return decomposition based on the fact that equity movements originate from variation in the present values of dividends with different maturities. I find that roughly 60% of equity volatility comes from the present value of dividends with maturities beyond 20 years and that cash flow shocks drive volatility in short-term present values whereas discount rate news are responsible for volatility in long-term present values. I also provide three further empirical applications of this new equity term structure decomposition.
An Intertemporal Risk Factor Model (with Fousseni Chabi-Yo and Johnathan Loudis)
* Conferences: 2022 USC Macro-Finance Workshop, 2022 CICF, 2021 MFA Meeting, 2021 LubraFin, 2020 Triangle Macro-Finance Workshop
Abstract: Previous factor models do not represent theoretically relevant risks. To address this issue, we implement a tradable ICAPM capturing market and intertemporal risk. We construct our intertemporal risk factors as long-short portfolios based on stock exposures to dividend yield and realized volatility, and show that they reflect mimicking portfolios for long-term expected returns and volatility. The estimated risk price signs are consistent with the ICAPM and their magnitudes imply moderate risk aversion. Our intertemporal factor model performs well relative to previous models in terms of its tangency Sharpe ratio, and its pricing of single stocks and portfolios prior literature recommends.