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, Revise and Resubmit, The Review of Financial Studies
I test whether asset prices reflect risk-exposures of financial intermediaries in a setting that is well suited to tackling concerns about omitted risk factors. I analyze catastrophe bonds whose cash flows are linked to occurrences of 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 has recently decreased when the intermediaries' access to outside capital has improved.
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 and corporate bonds as well as in equity markets. We find consistent evidence across asset classes that local exposure to heat stress is associated with higher yield spreads for bonds, especially for lower-quality and longer-maturity bonds, as well as higher conditional expected returns for stocks. These results are observed robustly starting in 2013–15, and are 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 the U.S. municipal bond markets to study the causal effects of green bond labeling and socially responsible capital on financial and environmental outcomes. Comparing bonds financing similar projects, we find that labeled bonds attract significantly more capital from ESG-focused mutual funds. Despite the strong demand effect, evidence of the green label affecting bond yields is limited, suggesting high price elasticity. Aligned with political incentives, labeled governments are more inclined to make subsequent sustainability pledges, and issuers in Democratic states are more likely to adopt the green label. While labeled issuers improve their environmental performance after the issuance, there is no differential improvement compared to unlabeled issuers. Our findings suggest that at least historically, financing green projects through green bonds has had no incremental environmental impact compared to what would have been achieved through regular capital markets.