We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). Based on the temporal and cross-sectional variation in short-term rates, we form a carry that, together with a market factor, prices these near-money assets in a linear pricing model. The carry depicts heterogeneity in nonpecuniary convenience yields of collateral assets and increases in the safety premium and the liquidity premium reflecting opportunity cost. Our carry helps explain the cross-section of short-term rates, as well as of long-term bond returns after accounting for standard bond pricing factors.
{"title":"Safe Asset Carry Trade","authors":"Benedikt Ballensiefen, Angelo Ranaldo","doi":"10.1093/rapstu/raac015","DOIUrl":"https://doi.org/10.1093/rapstu/raac015","url":null,"abstract":"We provide the first systematic asset pricing analysis of one of the main safe asset categories, the repurchase agreement (repo). Based on the temporal and cross-sectional variation in short-term rates, we form a carry that, together with a market factor, prices these near-money assets in a linear pricing model. The carry depicts heterogeneity in nonpecuniary convenience yields of collateral assets and increases in the safety premium and the liquidity premium reflecting opportunity cost. Our carry helps explain the cross-section of short-term rates, as well as of long-term bond returns after accounting for standard bond pricing factors.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"4 4","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512340","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}
Through textual analyses of 7.7 million patents, we develop a novel intercompany innovation similarity measure which enables us to find that technologically connected firms cross-predict one another’s returns. Investors impound information about firms’ technological connectedness, although not immediately and fully. Buying (shorting) shares of technological peers earning high (low) returns during the previous month yields a 1.29% monthly return. Firms’ return predictability increases with patent complexity or limited technological disclosures but decreases with better information transparency. Results suggest that investor inattention explains technology momentum. Unlike momentum stemming from simpler, class-based technological links, our Big Data text-based return predictability remains active.
{"title":"The Effect of Innovation Similarity on Asset Prices: Evidence from Patents’ Big Data","authors":"Ron Bekkerman, Eliezer M Fich, Natalya Khimich","doi":"10.1093/rapstu/raac014","DOIUrl":"https://doi.org/10.1093/rapstu/raac014","url":null,"abstract":"Through textual analyses of 7.7 million patents, we develop a novel intercompany innovation similarity measure which enables us to find that technologically connected firms cross-predict one another’s returns. Investors impound information about firms’ technological connectedness, although not immediately and fully. Buying (shorting) shares of technological peers earning high (low) returns during the previous month yields a 1.29% monthly return. Firms’ return predictability increases with patent complexity or limited technological disclosures but decreases with better information transparency. Results suggest that investor inattention explains technology momentum. Unlike momentum stemming from simpler, class-based technological links, our Big Data text-based return predictability remains active.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"14 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-08-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512351","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}
Predicted stock issuers (PSIs) are firms with expected high-investment and low-profit profiles that earn extremely low returns. We evaluate alternative explanations for this empirical phenomenon. Our results show top-PSI firms are cash-strapped, have lottery-like payoffs, high volatility, high beta, low liquidity, and high shorting costs. Over the next 2 years, top-PSI firms earn return on assets of − 30% per year, report disappointing earnings, and experience strongly negative forecast revisions. They perform poorly in down markets and are six times more likely to delist for performance-related reasons. Overall, we find substantial support for mispricing, some support for nonstandard preferences, and virtually no support for the risk explanation.
{"title":"Why Do Predicted Stock Issuers Earn Low Returns?","authors":"Charles M C Lee, Ken Li","doi":"10.1093/rapstu/raac013","DOIUrl":"https://doi.org/10.1093/rapstu/raac013","url":null,"abstract":"Predicted stock issuers (PSIs) are firms with expected high-investment and low-profit profiles that earn extremely low returns. We evaluate alternative explanations for this empirical phenomenon. Our results show top-PSI firms are cash-strapped, have lottery-like payoffs, high volatility, high beta, low liquidity, and high shorting costs. Over the next 2 years, top-PSI firms earn return on assets of − 30% per year, report disappointing earnings, and experience strongly negative forecast revisions. They perform poorly in down markets and are six times more likely to delist for performance-related reasons. Overall, we find substantial support for mispricing, some support for nonstandard preferences, and virtually no support for the risk explanation.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"7 2","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-07-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512336","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}
This paper investigates the firm-level, asset pricing implications of government expenditures. Higher government sales dependency (GD), unconditional on political partisanship cycles, significantly predicts positive future returns, and a GD-weighted portfolio substantially improves the tangency portfolio’s ex post Sharpe ratio. Conditionally, the results are stronger during Republican presidencies. Higher returns do not stem from political connections or political and regulatory risks. The underlying economic channel is higher expected cash flow from increased profitability. Atypical provisions of government contracts and information asymmetry likely drive higher profit margins. A risk versus a mispricing analysis elicits more convincing evidence for mispricing as an explanation for abnormal returns.
{"title":"Asset Pricing Implications of Firms’ Government Sales Dependency","authors":"Bharat Raj Parajuli","doi":"10.1093/rapstu/raac011","DOIUrl":"https://doi.org/10.1093/rapstu/raac011","url":null,"abstract":"This paper investigates the firm-level, asset pricing implications of government expenditures. Higher government sales dependency (GD), unconditional on political partisanship cycles, significantly predicts positive future returns, and a GD-weighted portfolio substantially improves the tangency portfolio’s ex post Sharpe ratio. Conditionally, the results are stronger during Republican presidencies. Higher returns do not stem from political connections or political and regulatory risks. The underlying economic channel is higher expected cash flow from increased profitability. Atypical provisions of government contracts and information asymmetry likely drive higher profit margins. A risk versus a mispricing analysis elicits more convincing evidence for mispricing as an explanation for abnormal returns.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"3 2","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-04-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512344","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 that structured equity derivatives can cause significant price pressure of the underlying stock upon an event of dramatic payoff change. Moreover, one event causes another: the event cascade amplifies the magnitude of the impact. We find that a single event accounts for a -6.4% return on the event day, and it increases the probability of a subsequent event by 21.3%. Given the negative price impact, traders try to liquidate ahead of each other, exacerbating the degree of price pressure. Our results uncover the chain-reaction and (mis)coordination mechanism in complex derivatives markets that can provoke substantial price shocks.
{"title":"Liquidation Cascade and Anticipatory Trading: Evidence from the Structured Equity Product Market","authors":"J. Auh, Wonho Cho","doi":"10.1093/rapstu/raac010","DOIUrl":"https://doi.org/10.1093/rapstu/raac010","url":null,"abstract":"\u0000 We show that structured equity derivatives can cause significant price pressure of the underlying stock upon an event of dramatic payoff change. Moreover, one event causes another: the event cascade amplifies the magnitude of the impact. We find that a single event accounts for a -6.4% return on the event day, and it increases the probability of a subsequent event by 21.3%. Given the negative price impact, traders try to liquidate ahead of each other, exacerbating the degree of price pressure. Our results uncover the chain-reaction and (mis)coordination mechanism in complex derivatives markets that can provoke substantial price shocks.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"24 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-04-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85672465","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 develop a model of information and portfolio choice in which ex ante identical investors choose to specialize because of fixed attention costs required in learning about securities. Without this friction, investors would invest in all securities and would be indifferent across a wide range of information choices. When securities’ dividends depend on an aggregate (macro) risk factor and idiosyncratic (micro) shocks, fixed attention costs lead investors to specialize in either macro or micro information. Our results favor Samuelson’s dictum that markets are more micro than macro efficient. We derive testable predictions from our model and find empirical support for our predictions in specialization by U.S. equity mutual funds.
{"title":"Investor Information Choice with Macro and Micro Information","authors":"Paul Glasserman, Harry Mamaysky","doi":"10.1093/rapstu/raac009","DOIUrl":"https://doi.org/10.1093/rapstu/raac009","url":null,"abstract":"We develop a model of information and portfolio choice in which ex ante identical investors choose to specialize because of fixed attention costs required in learning about securities. Without this friction, investors would invest in all securities and would be indifferent across a wide range of information choices. When securities’ dividends depend on an aggregate (macro) risk factor and idiosyncratic (micro) shocks, fixed attention costs lead investors to specialize in either macro or micro information. Our results favor Samuelson’s dictum that markets are more micro than macro efficient. We derive testable predictions from our model and find empirical support for our predictions in specialization by U.S. equity mutual funds.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"10 2","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-03-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512373","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}
This paper explains that anticipated market liquidity is an important concern for arbitrageurs considering entry into a market, a concern that can generate self-fulfilling asset prices. In the model, fixed investment costs turn a market illiquid and generate an arbitrage opportunity. The worst-case return on pledged collateral constrains arbitrageurs’ leverage. The interaction between this return and arbitrageurs’ capital makes entry decisions complementary and can create multiple equilibria. When arbitrageurs enter with capital, the market becomes more liquid; the worst-case return rises; and more arbitrageurs enter with capital. When arbitrageurs withhold capital, the market stays illiquid; the worst-case return falls; and other arbitrageurs stay out.
{"title":"Self-Fulfilling Asset Prices","authors":"Alexander Zentefis","doi":"10.2139/ssrn.3153784","DOIUrl":"https://doi.org/10.2139/ssrn.3153784","url":null,"abstract":"\u0000 This paper explains that anticipated market liquidity is an important concern for arbitrageurs considering entry into a market, a concern that can generate self-fulfilling asset prices. In the model, fixed investment costs turn a market illiquid and generate an arbitrage opportunity. The worst-case return on pledged collateral constrains arbitrageurs’ leverage. The interaction between this return and arbitrageurs’ capital makes entry decisions complementary and can create multiple equilibria. When arbitrageurs enter with capital, the market becomes more liquid; the worst-case return rises; and more arbitrageurs enter with capital. When arbitrageurs withhold capital, the market stays illiquid; the worst-case return falls; and other arbitrageurs stay out.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"21 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-03-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82031781","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}
This paper explains that anticipated market liquidity is an important concern for arbitrageurs considering entry into a market, a concern that can generate self-fulfilling asset prices. In the model, fixed investment costs turn a market illiquid and generate an arbitrage opportunity. The worst-case return on pledged collateral constrains arbitrageurs’ leverage. The interaction between this return and arbitrageurs’ capital makes entry decisions complementary and can create multiple equilibria. When arbitrageurs enter with capital, the market becomes more liquid; the worst-case return rises; and more arbitrageurs enter with capital. When arbitrageurs withhold capital, the market stays illiquid; the worst-case return falls; and other arbitrageurs stay out.
{"title":"Self-Fulfilling Asset Prices","authors":"Alexander K Zentefis","doi":"10.1093/rapstu/raac008","DOIUrl":"https://doi.org/10.1093/rapstu/raac008","url":null,"abstract":"This paper explains that anticipated market liquidity is an important concern for arbitrageurs considering entry into a market, a concern that can generate self-fulfilling asset prices. In the model, fixed investment costs turn a market illiquid and generate an arbitrage opportunity. The worst-case return on pledged collateral constrains arbitrageurs’ leverage. The interaction between this return and arbitrageurs’ capital makes entry decisions complementary and can create multiple equilibria. When arbitrageurs enter with capital, the market becomes more liquid; the worst-case return rises; and more arbitrageurs enter with capital. When arbitrageurs withhold capital, the market stays illiquid; the worst-case return falls; and other arbitrageurs stay out.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"12 1","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-03-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512370","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}
At a given point in time, bitcoin prices are different on exchanges located in different countries, or against different currencies. While existing literature attributes the largest price differences to frictions, like market segmentation, trading platforms advertize how to execute trades based on this information. We provide a novel risk-based explanation of these price differences for a sample containing the most reputable exchanges and after accounting for all transaction costs and limitations to trade. Bitcoin prices for more expensive pairs are riskier because they depreciate more in bad times for cryptocurrency investors, when aggregate liquidity and investor sentiment are lower.
{"title":"The Cross-Section of Cryptocurrency Returns","authors":"Nicola Borri, Kirill Shakhnov","doi":"10.1093/rapstu/raac007","DOIUrl":"https://doi.org/10.1093/rapstu/raac007","url":null,"abstract":"At a given point in time, bitcoin prices are different on exchanges located in different countries, or against different currencies. While existing literature attributes the largest price differences to frictions, like market segmentation, trading platforms advertize how to execute trades based on this information. We provide a novel risk-based explanation of these price differences for a sample containing the most reputable exchanges and after accounting for all transaction costs and limitations to trade. Bitcoin prices for more expensive pairs are riskier because they depreciate more in bad times for cryptocurrency investors, when aggregate liquidity and investor sentiment are lower.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":"8 2","pages":""},"PeriodicalIF":13.1,"publicationDate":"2022-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512333","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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