The Response of Equity Yields to a Long-Run Shock

with Martijn Boons, Anthony M. Diercks and Andrea Tamoni

Highlights:

• A positive long-run (TFP) shock steepens the equity yield curve.
• It increases short-term yields more than long-term yields.
• This is driven by an increase in short-run expected dividend growth.
• Risk premia are mostly unaffected.

Presented at: 2024 Annual Conference of the Swiss Society for Financial Market Research (scheduled), EasternFA 2024 (scheduled), University of Iowa.

Asset Pricing with the Awareness of New Priced Risks

with Christian Heyerdahl-Larsen and Philipp Illeditsch

Highlights:

• We propose a new asset-pricing model designed to fit output data during recessions.
• A recession follows after the introduction of a new risk source.
• The model implies a hump-shape patterns of risk premia and return volatilities during crises.
• We show that this hump shape shows up in data.

Presented at: The 8th Young Scholars Finance Consortium (scheduled), MFA 2024 (scheduled), The 6th World Symposium on Investment Research, University of British Columbia, University of Iowa.

Uninformed but Predictable: Corporate Trading and Price Discovery in Over-the-counter FX Markets

with Umang Khetan

Highlights:

• We measure liquidity shocks experienced by uninformed investors using month-end settlement breaks.
• One standard-deviation increase in total uninformed volume rises return volatility by 38%.
• This effect dissipates within a trading day.
• Uninformed liquidity shocks also increase dealer-to-dealer trading volumes and client-level spreads.

Presented at: WFA 2022, 17th Central Bank Conference on the Microstructure of Financial Markets, 4th Future of Financial Information Conference, University of Iowa, 2021 FMA New Ideas Session.

Recessions, Bank Distress & Managerial Incentives to Innovate

with Jiawei (Brooke) Wang

Highlights:

• More CEO option pay awarded in bad times lead to firms producing more patents in future.
• We measure shocks to CEO option using identified multi-year option plan, following Shue and Townsend (2015).
• Risk-averse managers are choosing to innovate more in bad times, which is when conventional projects are riskier due to the overall higher systematic risk in markets.
• Not all firms can effectively leverage these incentives: the effect is found only among financially unconstrained firms with higher Z scores.

Presented at: 28th Finance Forum, University of Iowa, Silicon Prairie Finance Conference 2023, 6th Erasmus Corporate Governance Conference.

Uncertain firm profits and (indirectly) priced idiosyncratic volatility

with Xuhui (Nick) Pan and Bharat Raj Parajuli

Highlights:

• The negative relation between idiosyncratic volatility (IVOL) and expected returns exists only among firms with low profitability and high uncertainty about profitability.
• We propose a theory where agents cannot disentangle systematic from idiosyncratic shocks that rationalizes this phenomenon.
• High idiosyncratic noise lowers signal accuracy, which decreases the factor loading on the priced systematic risk and yields the negative IVOL-return relation.
• As found in data, the model predicts the negative relation to be the strongest among underperforming firms with highly uncertain profitability.

Presented at: University of Iowa, University of Oklahoma.

Preference Shocks and Contemporaneous Cash-flow Risk

Highlights:

• I propose a theory with preference shocks and contemporaneous cash-flow risk designed to explain asset-pricing patterns related to business cycle.
• Contemporaneous cash-flow risk of equities drives the cross section of risk premia in bad times.
• In this model, empirically-observed quantities of contemporaneous cash-flow risk have a significant effect on conditional risk premia of assets and return volatility.

Presented at: MFA 2020, University of Iowa, Melbourne University, Aarhus University, NOVA University, Vrije University, Oxford Finance Job Market Workshop, 31st AFBC, Macquarie University, 9th FMCG, EFMA.