Tax Aware

When Fortune Doesn’t Favor the Bold: Perils of Volatility for Wealth Growth and Preservation

Entrepreneurs and executives holding much of their wealth in a highly appreciated single stock face either the high risk of idiosyncratic volatility and potentially catastrophic losses, or selling stock and facing an immediate, punitive tax burden. This paper evaluates this choice and explains how it relates to classic betting strategies and economic theory, finding tax-efficient techniques might strike the balance between the urgency to diversify concentrated risk and aversion to taxes.

Fixed Income

Sustainable Systematic Credit

Interest in sustainable investing is now expanding into fixed income. This paper assesses how measures of sustainability/ESG might be relevant for corporate bonds and analyzes how ESG measures can be incorporated into an investment process to achieve the joint object of maximizing risk-adjusted returns and a sustainability target.

Factor/Style Investing

Pricing Without Mispricing

We offer a novel test of whether an asset pricing model describes expected returns in the absence of mispricing. Our test assumes such a model assigns zero alpha to investment strategies using decade-old information. Prominent multifactor models do not satisfy this condition – while multifactor betas help capture current expected returns on mispriced stocks, persistence in those betas distorts the stocks' implied expected returns after prices correct.

Factor/Style Investing

What Can Betting Markets Tell Us About Investor Preferences and Beliefs? Implications for Low Risk Anomalies

We relate the low risk anomaly in financial markets to the Favorite-Longshot Bias in betting markets and provide novel evidence to both anomalies. Synthesizing the evidence, we study the joint implications from the two settings for a unifying explanation. Rational theories of risk-averse investors with homogeneous beliefs cannot explain the cross-sectional relationship between diversifiable risk and return in betting markets. Rather, we appeal to models of non-traditional preferences or heterogeneous beliefs.

Factor/Style Investing

What Can Betting Markets Tell Us About Investor Preferences and Beliefs? Implications for Low Risk Anomalies

We relate the low risk anomaly in financial markets to the Favorite-Longshot Bias in betting markets and provide novel evidence to both anomalies. Synthesizing the evidence, we study the joint implications from the two settings for a unifying explanation. Rational theories of risk-averse investors with homogeneous beliefs cannot explain the cross-sectional relationship between diversifiable risk and return in betting markets. Rather, we appeal to models of non-traditional preferences or heterogeneous beliefs.

Factor/Style Investing

Is There a Replication Crisis in Finance?

Several papers argue that financial economics faces a replication crisis because many studies cannot be replicated or are the result of multiple testing of too many factors. We develop and estimate a Bayesian model of factor replication that leads to different conclusions, including finding the majority of asset pricing factors can be replicated.

Tax Aware

Limitation on Trader Fund Losses under the CARES Act of 2020

We explain how hedge fund investors might be affected by a limitation on excess business losses codified in recent tax legislation. In order to allocate business losses a hedge fund now must be a trader fund. After explaining the relationship between hedge fund losses and business losses, we illustrate with simple examples how the new provisions may affect hedge fund investors.

Trading

Game On: Social Networks and Markets

This paper studies how echo-chamber effects and fake news can lead to disagreement and misinformation with effects on investors’ portfolios and market prices. It presents a model how an investment idea can propagate through a social network, generating a trading frenzy with high turnover, a bubble in the price, and high price volatility. The paper also presents empirical evidence on the dramatic events related to the GameStop stock in January 2021 and discusses broader economic implications.

ESG Investing

Does ESG Help or Hurt Returns?

Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing.

Fixed Income

Modeling Corporate Bond Returns

We propose a new conditional factor model for corporate bond returns with four factors and time-varying factor loadings instrumented by observable bond characteristics. We find our factor model excels in describing the risks and returns of corporate bonds, improving over previously proposed models in the literature by a large margin.