This paper studies the relation between 36 firm-level characteristics and stock returns in 48 countries using instrumented principal components analysis. A non-U.S. country-neutral conditional factor model performs well in describing risk and returns and generates small and statistically insignificant anomaly intercepts when allowing for three or more latent factors. The non-U.S. model performs better in emerging than in developed markets, while showing substantial differences across countries. On average, only 10 characteristics significantly contribute to the models’ performance. Market beta, momentum, and firm size characteristics instrument for systemic exposure in U.S. and non-U.S. models, while investment and book-to-market do not. (JEL G11, G12, G14, G15)
{"title":"Firm Characteristics and Global Stock Returns: A Conditional Asset Pricing Model","authors":"Steffen Windmüller","doi":"10.1093/rapstu/raab024","DOIUrl":"https://doi.org/10.1093/rapstu/raab024","url":null,"abstract":"This paper studies the relation between 36 firm-level characteristics and stock returns in 48 countries using instrumented principal components analysis. A non-U.S. country-neutral conditional factor model performs well in describing risk and returns and generates small and statistically insignificant anomaly intercepts when allowing for three or more latent factors. The non-U.S. model performs better in emerging than in developed markets, while showing substantial differences across countries. On average, only 10 characteristics significantly contribute to the models’ performance. Market beta, momentum, and firm size characteristics instrument for systemic exposure in U.S. and non-U.S. models, while investment and book-to-market do not. (JEL G11, G12, G14, G15)","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512372","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}
Many financial instruments are designed with embedded leverage, such as options and leveraged exchange-traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints, and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find empirically that options and leveraged ETFs provide significant amounts of embedded leverage; this embedded leverage increases return volatility in proportion to the embedded leverage; and higher embedded leverage is associated with lower risk-adjusted returns. The results are statistically and economically significant, and we provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics. (JEL G02, G11, G12, G13, G14, G20)
{"title":"Embedded Leverage","authors":"Frazzini A, Pedersen L, Pontiff J.","doi":"10.1093/rapstu/raab022","DOIUrl":"https://doi.org/10.1093/rapstu/raab022","url":null,"abstract":"<span><div>Abstract</div>Many financial instruments are designed with embedded leverage, such as options and leveraged exchange-traded funds (ETFs). Embedded leverage alleviates investors’ leverage constraints, and, therefore, we hypothesize that embedded leverage lowers required returns. Consistent with this hypothesis, we find empirically that options and leveraged ETFs provide significant amounts of embedded leverage; this embedded leverage increases return volatility in proportion to the embedded leverage; and higher embedded leverage is associated with lower risk-adjusted returns. The results are statistically and economically significant, and we provide extensive robustness tests and discuss the broader implications of embedded leverage for financial economics. (<span style=\"font-style:italic;\">JEL</span> G02, G11, G12, G13, G14, G20)</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-09-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512339","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 model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the " expected market portfolio." We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.
{"title":"Active and Passive Investing: Understanding Samuelson’s Dictum","authors":"Nicolae Gârleanu, Lasse Heje Pedersen","doi":"10.1093/rapstu/raab020","DOIUrl":"https://doi.org/10.1093/rapstu/raab020","url":null,"abstract":"We model how investors allocate between asset managers, managers choose portfolios of multiple securities, fees are set, and security prices are determined. Investors are indifferent between higher-cost informed managers and lower-cost uninformed managers, interpreted as passive managers as their portfolio is linked to the \" expected market portfolio.\" We make precise Samuelson's dictum by showing that active investors reduce micro-inefficiencies more than they do macro-inefficiencies. In fact, all inefficiency arises from systematic factors when the number of assets is large. Further, we show how the costs of active and passive investing affect macro- and micro-efficiency, fees, and assets managed by active and passive managers. Our findings help explain the rise of delegated asset management and the resultant changes in financial markets.","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-08-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512327","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 introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single- and multifactor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing that is not captured by well-known factors. The time-varying conditional covariance matrix and forward discounts forecast future realized currency returns. (JEL F31, F37, G12, G15, G17)
{"title":"Pricing Implications of Covariances and Spreads in Currency Markets","authors":"Maurer T, Tô T, Tran N, et al.","doi":"10.1093/rapstu/raab019","DOIUrl":"https://doi.org/10.1093/rapstu/raab019","url":null,"abstract":"<span><div>Abstract</div>We introduce a covariance and spread (i.e., exchange rate forward discount) adjusted carry factor that prices the cross-section of FX market returns, where many other single- and multifactor models fail. Both the covariance matrix of exchange rate growths and forward discounts contain important information for pricing that is not captured by well-known factors. The time-varying conditional covariance matrix and forward discounts forecast future realized currency returns. (<span style=\"font-style:italic;\">JEL</span> F31, F37, G12, G15, G17)</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512360","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 develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on VOV, are priced. The pricing impact of VOV strengthens during market crashes, suggesting that VOV is particularly relevant during market turmoil, when investors demand increased compensation for VOV risk. (JEL G11, G12, G13)
{"title":"Volatility-of-Volatility Risk in Asset Pricing","authors":"Chen T, Chordia T, Chung S, et al.","doi":"10.1093/rapstu/raab018","DOIUrl":"https://doi.org/10.1093/rapstu/raab018","url":null,"abstract":"<span><div>Abstract</div>This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (<span style=\"font-style:italic;\">VOV</span>) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and <span style=\"font-style:italic;\">VOV</span> as factors, the risk premium on <span style=\"font-style:italic;\">VOV</span> is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on <span style=\"font-style:italic;\">VOV</span>, are priced. The pricing impact of <span style=\"font-style:italic;\">VOV</span> strengthens during market crashes, suggesting that <span style=\"font-style:italic;\">VOV</span> is particularly relevant during market turmoil, when investors demand increased compensation for <span style=\"font-style:italic;\">VOV</span> risk. (<span style=\"font-style:italic;\">JEL</span> G11, G12, G13)</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-07-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512358","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 document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that skilled individual investors exploit market inefficiencies (or perhaps conditional risk premiums) to earn abnormal profits, above and beyond any profits available from well-known strategies based on size, value, momentum, or earnings announcements. (JEL G11, G14, G40, G51) Received: October 11, 2020 Editorial decision: January 4, 2021 Editor: Jeffrey Pontiff
{"title":"Can Individual Investors Beat the Market?","authors":"Joshua D Coval, David Hirshleifer, Tyler Shumway","doi":"10.1093/rapstu/raab017","DOIUrl":"https://doi.org/10.1093/rapstu/raab017","url":null,"abstract":"We document persistent superior trading performance among a subset of individual investors. Investors classified in the top performance decile in the first half of our sample subsequently earn risk-adjusted returns of about 6% per year. These returns are not confined to stocks in which the investors are likely to have inside information, nor are they driven by illiquid stocks. Our results suggest that skilled individual investors exploit market inefficiencies (or perhaps conditional risk premiums) to earn abnormal profits, above and beyond any profits available from well-known strategies based on size, value, momentum, or earnings announcements. (JEL G11, G14, G40, G51) Received: October 11, 2020 Editorial decision: January 4, 2021 Editor: Jeffrey Pontiff","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-06-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512332","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 compare the direct issuance costs of inflation-linked debt (the liquidity premium) with nominal government debt (the inflation risk premium) in developed countries. On average, it is cheaper to issue nominal debt at medium maturities (5–10 years) and inflation-linked debt at long maturities (20 or more years), although results vary somewhat based on whether survey-based or statistical inflation expectations are used. Issuance costs exhibit pronounced time and cross-country variation. Lower inflation-linked debt issuance costs are associated with more countercyclical inflation and higher proportions of inflation-linked debt. International inflation-linked zero-coupon yields are available as an Internet Appendix to this paper. (JEL E31, E43, G12, G15, H30, H63) Received November 22, 2018; editorial decision March 9, 2021 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":"When and Where Is It Cheaper to Issue Inflation-Linked Debt?","authors":"Andrey Ermolov","doi":"10.1093/rapstu/raab016","DOIUrl":"https://doi.org/10.1093/rapstu/raab016","url":null,"abstract":"I compare the direct issuance costs of inflation-linked debt (the liquidity premium) with nominal government debt (the inflation risk premium) in developed countries. On average, it is cheaper to issue nominal debt at medium maturities (5–10 years) and inflation-linked debt at long maturities (20 or more years), although results vary somewhat based on whether survey-based or statistical inflation expectations are used. Issuance costs exhibit pronounced time and cross-country variation. Lower inflation-linked debt issuance costs are associated with more countercyclical inflation and higher proportions of inflation-linked debt. International inflation-linked zero-coupon yields are available as an Internet Appendix to this paper. (JEL E31, E43, G12, G15, H30, H63) Received November 22, 2018; editorial decision March 9, 2021 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":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-06-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512345","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}
The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the Review of Asset Pricing Studies, (2) the Review of Corporate Finance Studies, and (3) the Review of Financial Studies. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs several smaller, specialized conferences and financially supports and co-sponsors other independent conferences. Its governing board is the SFS Council.
{"title":"The Annual Report of the Society for Financial Studies for 2019–2020","authors":"Chan K, Ellul A, Goldstein I, et al.","doi":"10.1093/rapstu/raab001","DOIUrl":"https://doi.org/10.1093/rapstu/raab001","url":null,"abstract":"<span>The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the <span style=\"font-style:italic;\">Review of Asset Pricing Studies</span>, (2) <span style=\"font-style:italic;\">the Review of Corporate Finance Studies</span>, and (3) <span style=\"font-style:italic;\">the Review of Financial Studies</span>. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs several smaller, specialized conferences and financially supports and co-sponsors other independent conferences. Its governing board is the SFS Council.</span>","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-05-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512337","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 focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts. (JEL F31, F34, G15) Received September 9, 2019; editorial decision March 25, 2021 by Editor: Nikolai Roussanov. 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":"Global Risk in Long-Term Sovereign Debt","authors":"Nicola Borri, Kirill Shakhnov","doi":"10.1093/rapstu/raab015","DOIUrl":"https://doi.org/10.1093/rapstu/raab015","url":null,"abstract":"This paper focuses on emerging market government bonds issued in local currency with different maturities. Foreign investors face interest rate, currency, and credit risks. We consider the entire term structure of carry trade returns and find that, while the default premium does not contribute to carry trade strategies, the contribution of interest rate risk, captured by the term premium, is large and increases with maturity. We introduce default risk in an otherwise standard affine model; we show that the volatility of the permanent component of the SDFs must be different across emerging markets in order to match these stylized facts. (JEL F31, F34, G15) Received September 9, 2019; editorial decision March 25, 2021 by Editor: Nikolai Roussanov. 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":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-05-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512328","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 contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflation and wage earnings rationalizes the moments of consumption and dividend growth, market return, the price-dividend ratio, real and nominal term structures, the low predictive power of the price-dividend ratio for consumption and dividends, and the dynamics of the price-dividend ratio, unlike a nested model with learning from consumption alone. (JEL E3, G12, G14)
{"title":"What Information Drives Asset Prices?","authors":"Anisha Ghosh, George M Constantinides","doi":"10.1093/rapstu/raab012","DOIUrl":"https://doi.org/10.1093/rapstu/raab012","url":null,"abstract":"We contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflation and wage earnings rationalizes the moments of consumption and dividend growth, market return, the price-dividend ratio, real and nominal term structures, the low predictive power of the price-dividend ratio for consumption and dividends, and the dynamics of the price-dividend ratio, unlike a nested model with learning from consumption alone. (JEL E3, G12, G14)","PeriodicalId":21144,"journal":{"name":"Review of Asset Pricing Studies","volume":null,"pages":null},"PeriodicalIF":13.1,"publicationDate":"2021-05-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138512357","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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