Traditional value measures performed poorly over the past three decades. We reevaluate the value strategy using a new measure—the ratio of cash-based operating profitability to price (COP/P)—and find a zero-investment portfolio that buys the highest-COP/P stocks and shorts the lowest-COP/P stocks earns monthly returns of 0.78% on a value-weighted basis and 1.04% on an equal-weighted basis. The COP/P effect holds even for large-capitalization stocks and exists even in the post-1990 period, when book-to-market does not predict returns. The COP/P measure subsumes many widely used value measures and the conservative-minus-aggressive investment factor.
{"title":"A New Value Strategy","authors":"Baolian Wang","doi":"10.1093/rapstu/raad014","DOIUrl":"https://doi.org/10.1093/rapstu/raad014","url":null,"abstract":"Traditional value measures performed poorly over the past three decades. We reevaluate the value strategy using a new measure—the ratio of cash-based operating profitability to price (COP/P)—and find a zero-investment portfolio that buys the highest-COP/P stocks and shorts the lowest-COP/P stocks earns monthly returns of 0.78% on a value-weighted basis and 1.04% on an equal-weighted basis. The COP/P effect holds even for large-capitalization stocks and exists even in the post-1990 period, when book-to-market does not predict returns. The COP/P measure subsumes many widely used value measures and the conservative-minus-aggressive investment factor.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"13 6","pages":""},"PeriodicalIF":13.1,"publicationDate":"2023-11-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512352","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen.
{"title":"Is Firm-Level Political Risk Priced in the Equity Option Market?","authors":"Thang Ho, Anastasios Kagkadis, George Wang","doi":"10.1093/rapstu/raad013","DOIUrl":"https://doi.org/10.1093/rapstu/raad013","url":null,"abstract":"Abstract We find a negative relation between firm-level political risk and future delta-hedged equity option returns. A quasi-natural experiment based on Brexit corroborates this finding since after the referendum there is a decrease in the option returns of the positive-Brexit exposure firms. The predictability is driven by the jump risk component of political uncertainty, is more pronounced in periods of high intermediary constraints, and is stronger among high-demand pressure options but weaker among politically active firms. Finally, consistent with a risk-based explanation, investors of options on politically risky firms are compensated with high returns when major unexpected political shocks happen.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"27 5","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-10-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136316802","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We supply external validity by relating our results to the betting-against-beta factor. (JEL G12, G14, G32) Received December 5, 2021; editorial decision February 7, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Investor Demand for Leverage: Evidence from Equity Closed-End Funds","authors":"Robert Dam, Shaun William Davies, S Katie Moon","doi":"10.1093/rapstu/raad012","DOIUrl":"https://doi.org/10.1093/rapstu/raad012","url":null,"abstract":"We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We supply external validity by relating our results to the betting-against-beta factor. (JEL G12, G14, G32) Received December 5, 2021; editorial decision February 7, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"2 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2023-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512347","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We show how the Joslin, Singleton, and Zhu (2011) factor extraction approach to estimating the Gaussian term structure model can be modified to handle the interest rate lower bound without the approximations used in other approaches. This drastically reduces the computation time and produces more robust estimates of the lower bound parameter and the shadow rate. It makes feasible the extensive specification search necessary to allow for unspanned factors as in Joslin, Priebsch, and Singleton (2014), allowing the term structure model to be used to better assess the effects of policy on the term premium and market expectations. (JEL G12, C13, E43) Received June 28, 2022; editorial decision May 12, 2023 by Editor Hui Chen
{"title":"Unconventional Monetary Policies and the Yield Curve: Estimating Non-Affine Term Structure Models with Unspanned Macro Risk by Factor Extraction","authors":"A. Golinski, P. Spencer","doi":"10.1093/rapstu/raad011","DOIUrl":"https://doi.org/10.1093/rapstu/raad011","url":null,"abstract":"\u0000 We show how the Joslin, Singleton, and Zhu (2011) factor extraction approach to estimating the Gaussian term structure model can be modified to handle the interest rate lower bound without the approximations used in other approaches. This drastically reduces the computation time and produces more robust estimates of the lower bound parameter and the shadow rate. It makes feasible the extensive specification search necessary to allow for unspanned factors as in Joslin, Priebsch, and Singleton (2014), allowing the term structure model to be used to better assess the effects of policy on the term premium and market expectations. (JEL G12, C13, E43)\u0000 Received June 28, 2022; editorial decision May 12, 2023 by Editor Hui Chen","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"96 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2023-06-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"89745119","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract In a factor timing context, academic research has focused on identifying a set of predictors that can explain the dynamics of factor portfolios. We propose an alternative approach for timing factor portfolio returns by exploiting the information from their portfolio characteristics. Different combinations of dimension reduction techniques are employed to independently reduce the number of both predictors and portfolios to predict. Characteristic-based models outperform existing methods in terms of exact predictability, as well as investment performance. (JEL G10, G11, C52, C55) Received November 9, 2021; editorial decision March 23, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Factor Timing with Portfolio Characteristics","authors":"Anastasios Kagkadis, Ingmar Nolte, Sandra Nolte, Nikolaos Vasilas","doi":"10.1093/rapstu/raad010","DOIUrl":"https://doi.org/10.1093/rapstu/raad010","url":null,"abstract":"Abstract In a factor timing context, academic research has focused on identifying a set of predictors that can explain the dynamics of factor portfolios. We propose an alternative approach for timing factor portfolio returns by exploiting the information from their portfolio characteristics. Different combinations of dimension reduction techniques are employed to independently reduce the number of both predictors and portfolios to predict. Characteristic-based models outperform existing methods in terms of exact predictability, as well as investment performance. (JEL G10, G11, C52, C55) Received November 9, 2021; editorial decision March 23, 2023 by Editor Jeffrey Pontiff. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-06-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135603088","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sebastien Betermier, David Schumacher, Ali Shahrad
Abstract Why do so few mutual fund families launch so many funds and styles around the world? We argue that launching numerous funds on an increasingly granular style grid allows incumbent families to congest the product space and deter market entry. Key to this argument is the persistently low dimensionality of the mutual fund product space, a fact we establish by analyzing the names of over 40,000 equity funds sold in 91 countries between 1931 and 2015. Over time, the strategy of filling up the style grid has led to the dominance of few families offering large, granular, and similar fund menus. (JEL G15, G23, L1) Received November 23, 2021; editorial decision February 9, 2023 by Editor Marcin Kacperczyk. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Mutual Fund Proliferation and Entry Deterrence","authors":"Sebastien Betermier, David Schumacher, Ali Shahrad","doi":"10.1093/rapstu/raad009","DOIUrl":"https://doi.org/10.1093/rapstu/raad009","url":null,"abstract":"Abstract Why do so few mutual fund families launch so many funds and styles around the world? We argue that launching numerous funds on an increasingly granular style grid allows incumbent families to congest the product space and deter market entry. Key to this argument is the persistently low dimensionality of the mutual fund product space, a fact we establish by analyzing the names of over 40,000 equity funds sold in 91 countries between 1931 and 2015. Over time, the strategy of filling up the style grid has led to the dominance of few families offering large, granular, and similar fund menus. (JEL G15, G23, L1) Received November 23, 2021; editorial decision February 9, 2023 by Editor Marcin Kacperczyk. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-05-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136021476","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We develop a new approach to determine investors’ risk compensations for all distributional moments of a security. Using the concept of entropy, which is a summary of all moments of a risky security, we derive the relationship between expected returns and their compensation for entropy risk. Entropy risk premium (ERP), which is entropy under the physical minus the risk-neutral measure, indicates the hedging cost against changes in risks associated with all moments of the return’s distribution. Applying our model to the commodity markets, we find that ERP carries economically significant information for the cross-section of returns that is different from individual or combined moments. (JEL G12, G13) Received February 5, 2021; editorial decision February 21, 2023 by Editor Zhiguo He. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Never a Dull Moment: Entropy Risk in Commodity Markets","authors":"Fousseni Chabi-Yo, Hitesh Doshi, Virgilio Zurita","doi":"10.1093/rapstu/raad008","DOIUrl":"https://doi.org/10.1093/rapstu/raad008","url":null,"abstract":"Abstract We develop a new approach to determine investors’ risk compensations for all distributional moments of a security. Using the concept of entropy, which is a summary of all moments of a risky security, we derive the relationship between expected returns and their compensation for entropy risk. Entropy risk premium (ERP), which is entropy under the physical minus the risk-neutral measure, indicates the hedging cost against changes in risks associated with all moments of the return’s distribution. Applying our model to the commodity markets, we find that ERP carries economically significant information for the cross-section of returns that is different from individual or combined moments. (JEL G12, G13) Received February 5, 2021; editorial decision February 21, 2023 by Editor Zhiguo He. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-05-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136264428","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I find that short interest significantly and negatively predicts aggregate stock returns in 24 of 32 countries examined. This predictability survives out-of-sample tests, persists outside of recessions, and is not subsumed by other well-known return predictors. The results indicate that short interest contains valuable information for forecasting international market returns that is distinct and more powerful than that of other available predictors. However, the predictive power of short interest varies over time and across regions. It is higher around economic downturns when margin requirements tighten and in regions where short selling is constrained by regulations or equity lending market frictions.
{"title":"Short Interest and Aggregate Stock Returns: International Evidence","authors":"Arseny Gorbenko","doi":"10.1093/rapstu/raad007","DOIUrl":"https://doi.org/10.1093/rapstu/raad007","url":null,"abstract":"\u0000 I find that short interest significantly and negatively predicts aggregate stock returns in 24 of 32 countries examined. This predictability survives out-of-sample tests, persists outside of recessions, and is not subsumed by other well-known return predictors. The results indicate that short interest contains valuable information for forecasting international market returns that is distinct and more powerful than that of other available predictors. However, the predictive power of short interest varies over time and across regions. It is higher around economic downturns when margin requirements tighten and in regions where short selling is constrained by regulations or equity lending market frictions.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"41 8 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2023-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74386372","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract The value effect and the idiosyncratic volatility (IVol) discount arise because growth firms and high IVol firms beat the CAPM during periods of increasing aggregate volatility (market volatility and average IVol), that makes their risk low. All else equal, growth options’ value increases with volatility, an effect that is stronger for high IVol firms, for which growth options take a larger fraction of the firm value and firm volatility responds more to aggregate volatility changes. The factor model with the market factor, the market volatility risk factor, and the average IVol factor explains the value effect and the IVol discount. (JEL G12, G13, E44) Received August 5, 2021; editorial decision February 7, 2023 by Editor Hui Chen. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Idiosyncratic Volatility, Growth Options, and the Cross-Section of Returns","authors":"Alexander Barinov, Georgy Chabakauri","doi":"10.1093/rapstu/raad006","DOIUrl":"https://doi.org/10.1093/rapstu/raad006","url":null,"abstract":"Abstract The value effect and the idiosyncratic volatility (IVol) discount arise because growth firms and high IVol firms beat the CAPM during periods of increasing aggregate volatility (market volatility and average IVol), that makes their risk low. All else equal, growth options’ value increases with volatility, an effect that is stronger for high IVol firms, for which growth options take a larger fraction of the firm value and firm volatility responds more to aggregate volatility changes. The factor model with the market factor, the market volatility risk factor, and the average IVol factor explains the value effect and the IVol discount. (JEL G12, G13, E44) Received August 5, 2021; editorial decision February 7, 2023 by Editor Hui Chen. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"119 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-04-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136329585","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We propose a dynamic equilibrium model with stochastic interest rates in which agents hold heterogeneous valuations for the same asset and take on positions against each other. The model shows that interest rate uncertainty and investor heterogeneity are key determinants of price dispersion. Higher search intensity reduces price dispersion, while raising volume, leading to a negative volatility-volume relation. The sensitivity of volatility to volume is high when liquidity is low, interest rate variations are high and investors' valuations are more heterogeneous. Evidence supports our model's predictions and shows that search frictions play an important role in driving the volatility-volume relation.
{"title":"Stochastic Interest Rates, Heterogeneous Valuations, and the Volatility-Volume Relation with Search Frictions","authors":"Sheen X. Liu, Junbo Wang, Chunchi Wu","doi":"10.1093/rapstu/raad004","DOIUrl":"https://doi.org/10.1093/rapstu/raad004","url":null,"abstract":"\u0000 We propose a dynamic equilibrium model with stochastic interest rates in which agents hold heterogeneous valuations for the same asset and take on positions against each other. The model shows that interest rate uncertainty and investor heterogeneity are key determinants of price dispersion. Higher search intensity reduces price dispersion, while raising volume, leading to a negative volatility-volume relation. The sensitivity of volatility to volume is high when liquidity is low, interest rate variations are high and investors' valuations are more heterogeneous. Evidence supports our model's predictions and shows that search frictions play an important role in driving the volatility-volume relation.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"70 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2023-02-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76215032","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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