Publications
Taking the Cochrane-Piazzesi Term Structure Model Out of Sample: More Data, Additional Currencies, and FX Implications, with Robert J. Hodrick, Critical Finance Review, 2021, vol. 10 (1), 83-123.
We examine the statistical term structure model of Cochrane and Piazzesi (2005) and its affine counterpart, developed in Cochrane and Piazzesi (2008), in several out-of-sample analyzes. The model’s one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currency’s term structure, but we reject equality of the coefficients across the two samples. We derive some implications of the affine model for the predictability of cross-currency investments, but we find little support for these predictions in either pre-2004 or post-2003 data. The models’ forecasts fail to beat historical average return forecasts of excess rates of return for bonds and currencies in recursive out-of-sample analyses.
Beta Bubbles, with Petri Jylhä and Matti Suominen, The Review of Asset Pricing Studies, 2018, vol. 8 (1), 1-35. Editor’s choice. Best Paper Award.
We show that an increase in a stock’s breadth of institutional ownership or turnover is followed by a significant but temporary increase in its CAPM beta estimate and a decrease in its CAPM alpha. The increasing effect of breadth of ownership on beta estimates strengthens if we classify institutional investors by their historical trading horizon and look at the effect of changes in the ownership breadth of short-horizon institutional investors. These transitory, trading activity-driven components of beta estimates that we find contribute to the empirical failure of the CAPM and the large returns to longshort portfolios that bet against beta. In addition, the relations between ownership breadth, turnover and betas that we document help explain the puzzling fact that on average betas increase after seasoned equity offerings and stock splits, and decrease after stock repurchases.
Working Papers
Failure to Share Natural Disaster Risk, Accepted, The Review of Financial Studies
I test whether asset prices reflect risk-exposures of financial intermediaries in a setting well suited to tackling concerns about omitted risk factors. I analyze catastrophe bonds whose cash flows are linked to natural disasters and find that 71\% of security-level variation in expected returns can be explained by a theoretically-motivated measure of intermediaries' marginal utility. Assuming natural disasters are independent of aggregate wealth, this result is inconsistent with any alternative explanation based on unobserved macroeconomic risks. I also show that the aggregate premium decreases and becomes less sensitive to the occurrence of disasters when intermediaries' access to outside capital improves.
Is Physical Climate Risk Priced? Evidence from Regional Variation in Exposure to Heat Stress, with Viral V. Acharya, Tim Johnson, and Suresh Sundaresan. Jack Treynor Prize (2022).
We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal bond, corporate bond and equity markets. We find consistent evidence across asset classes that local exposure to heat stress is associated with higher yield spreads for bonds and higher conditional expected returns for stocks. These results are observed robustly starting in 2013–15. The fact that heat stress premium is (a) positive, (b) economically substantial, and (c) present across comprehensive samples of multiple asset classes is consistent with macroeconomic models where climate change has a direct negative impact on aggregate consumption.
Green Labeling with Livia Yi
We use a natural experiment in U.S. municipal bond markets to study why issuers choose green-labeled bonds and whether the label adds value beyond regular capital markets. Labels attract more (fewer) ESG (non-ESG) funds but have limited effects on yields and issuance sizes. Labeled governments are more inclined to make subsequent sustainability pledges, indicating social signaling rather than financial benefits as primary motivation. While labeled issuers improve environmental performance after issuance, there is no differential improvement compared to unlabeled issuers. Our findings suggest that, historically, financing green projects through green bonds has had no incremental environmental impact beyond regular markets.
Do firms mitigate climate impact on employment? Evidence from US heat shocks with Viral V Acharya and Abhishek Bhardwaj
Using establishment-level data, we show that firms operating in multiple counties in the United States respond to heat-related damages by reallocating employment from affected to unaffected locations. This reallocation is also observed as an increase in job postings in unaffected locations, and at the extensive margin as opening of new establishments. The reallocation response intensifies with heat-related damage severity being acute, chronic and compound (with other natural disasters), and is especially pronounced among larger, financially stable firms with ESG-oriented investors. This firm-driven reallocation affects how heat shocks impact aggregate outcomes at the county level, including employment growth, wage growth, labor force participation, and establishment entry rate. Specifically, mitigation behavior by multi-establishment firms acts as a “heat insulator” for the economy, reducing the impact of heat shocks on aggregate employment and wage growth while redistributing economic activity across locations.