Nominal Rigidities and Asset Pricing Winner of the Top Finance Graduate Award Best Finance PhD Award in Honor of Prof. Greenbaum (Finalist)
Cubist Systematic Strategies PhD Candidate Award for Outstanding Research
Best PhD Student Paper Award, FMA European Conference 2014
This paper examines the asset-pricing implications of nominal rigidities. I find that firms that adjust their product prices infrequently earn a cross-sectional return premium of more than 4% per year. Merging confidential product price data at the firm level with stock returns, I document that the premium for sticky-price firms is a robust feature of the data and is not driven by other firm and industry characteristics. The consumption-wealth ratio is a strong predictor of the return differential in the time series, and differential exposure to systematic risk fully explains the premium in the cross section. The sticky-price portfolio has a conditional market beta of 1.3, which is 0.4 higher than the beta of the flexible-price portfolio. The frequency of price adjustment is therefore a strong determinant of the cross section of stock returns. To rationalize these facts, I develop a multi-sector production-based asset-pricing model with sectors differing in their frequency of price adjustment.
Online AppendixWFA 2014, NBER SI Impulse and Propagation Mechanisms 2014, NBER SI EFG-PD 2014, SED 2014, EFA 2014, EEA 2014, Duke Conference on Macroeconomics and Finance 2014, CEPR European Summer Symposium in Financial Markets, Mannheim Macro Conference 2014, Jerusalem Finance Conference 2014, 6th Joint French Macro Workshop, Warwick Frontiers of Finance 2014, FMA Europe 2014Are Sticky Prices Costly? Evidence from the Stock Market
(with Yuriy Gorodnichenko)
Media Coverage: Econbrowser, The Economist, Economist's View, WCEG, DeLongrevise and resubmit American Economic Review
We show that after monetary policy announcements, the conditional volatility of stock market returns rises more for firms with stickier prices than for firms with more flexible prices. This differential reaction is economically large as well as strikingly robust to a broad array of checks. These results suggest that menu costs - broadly defined to include physical costs of price adjustment, informational frictions, etc. - are an important factor for nominal price rigidity. We also show that our empirical results are qualitatively and, under plausible calibrations, quantitatively consistent with New Keynesian macroeconomic models where firms have heterogeneous price stickiness. Since our framework is valid for a wide variety of theoretical models and frictions preventing firms from price adjustment, we provide "model-free" evidence that sticky prices are indeed costly.
Online AppendixNBER EFG 2013, NBER SI EFG-PD 2013, ESNASM 2013, Barcelona Summer Forum 2013, BU/ Boston Fed Conference 2013.Other versions: NBER,SSRN Deep-Rooted Antisemitism Shapes Households' Investments
(with Francesco D'Acunto and Marcel Prokopczuk)Media Coverage: Oekonomenstimme, ZU Daily
We use historical anti-Jewish sentiment to proxy for current distrust in financial
markets. Households in German counties where Jews were persecuted more as far
back as in the Middle Ages are less likely to invest in stocks today. A one-standard-
deviation increase in Jewish persecution leads to a 7.5% to 12% drop in the average
stock market participation. Results are similar if the votes for the Nazi party
proxy for historical anti-Jewish sentiment. For identification, we exploit the forced
migrations of Ashkenazi Jews out of the Rhine Valley after the 11th century. The
distance of a county from the Rhine Valley serves as an instrument for the existence
of a Jewish community during the Black Death (1349) and hence the likelihood of
early Jewish persecution. Distrust in finance reduces the demand for stocks, and
it has transmitted across generations independently from antisemitism: the effect
of historical anti-Jewish sentiment on current antisemitism declines with education,
whereas its effect on stockholdings does not.
UBC Summer Finance Conference, SunTrust Finance Conference 2014.Other versions: BEHL,SSRN The Term Structure of Equity Returns: Risk or Mispricing? Finalist of the 2013 Dr. Richard A. Crowell Memorial Prize
The term structure of equity returns is downward sloping. High duration stocks, whose cashflows are concentrated in the future, earn lower returns than low duration stocks. I provide evidence consistent with temporary overpricing of short sale constrained, high duration stocks. Using institutional ownership as a proxy for short sale constraints, I find that low returns of high duration stocks are contained within short sale constrained portfolios: the spread in Fama & French alphas between low and high duration portfolios is 1.52% per month for the most constrained stocks. This difference is monotonically decreasing with less binding short sale constraints to an insignificant 0.29% per month for the least short sale constrained stocks. These effects are stronger after periods of high investor sentiment, leading support to sentiment-based overpricing when short sale constraints keep sophisticated investors out of the market. These findings are independent of size and book to market.
Conditional Risk Premia in Currency Markets and Other Asset Classes
(with Martin Lettau and Matteo Maggiori)Winner of the 2013 AQR Insight Award
Media Coverage: AQR Announcement,WSJ, Reuters Journal of Financial Economics (forthcoming)
The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential
between high and low interest rate currencies is higher conditional on bad market returns,
when the market price of risk is also high, than it is conditional on good market returns.
Correctly accounting for this variation is crucial for the empirical performance of the model.
The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns,
thus offering a unified risk view of these asset classes. In contrast,
popular models that have been developed for a specific asset class fail to jointly price other asset classes.
Online Appendix, DataAEA 2012, EFA 2012, EEA 2012, ESNAWM 2013, AQR 2013, NBER AP 2013, Finance Cavalcade 2013, Imperical College FX Conference 2013.Other versions: NBER,CEPR,SSRN American Option Valuation: Implied Calibration of GARCH Pricing--Models
(with Marcel Prokopczuk)
SEW Eurodrive Award for Best Undergraduate Thesis in Business Economics Journal of Futures Markets (2011), 31(10): 971--994.
This article analyzes the issue of American option valuation when the underlying
exhibits a GARCH-type volatility process. We propose the usage of Rubinstein's
Edgeworth binomial tree (EBT) in contrast to simulation-based methods being
considered in previous sudies. The EBT-based valuation approach makes an implied
calibration of the pricing model feasible. By empirically analyzing the pricing
performance of American index and equity options, we illustrate the superiority
of the proposed approach.
FMA EM 2010.