Open PhD position

We are looking for a candidate PhD student who wants to become a new member of our team. The job advertisement can be found here.

Please contact me directly if you have any questions about the position or the job profile.

Launch of the TBEAR network

How do risk premia for financial assets vary over time and across states of the world? How does this variation affect the behavior of asset prices over time and differences across assets?

While these questions are not new in asset pricing research, the aim of the TBEAR network is to promote theory-based empirical research in asset pricing to approach these questions. For that purpose, we organize annual workshops that bring together leading researchers working at the nexus of empirical and theoretical asset pricing. By presenting and discussing recent research, we expect to gain insights into the sources of risk premia that go beyond their mere statistical description, which has often been the focus of past and current asset pricing research.

The initiative is funded by the German Research Foundation (DFG). Learn more at www.tbear.network.


New paper on "robust" asset pricing tests

Researchers in Finance have proposed numerous factors to explain the cross-section of expected stock returns. This literature has been (rightly) criticized from various angles in recent years.

One strand of these critiques has proposed alternative, more “robust” asset pricing tests. However, there are now so many alternative methods that it is notoriously difficult to know which method should be chosen in applied research. After all, it is impossible that every alternative method is also the best.

In my new paper with Tim A. Kroencke, we critically evaluate these alternatives from the perspective of an applied asset pricing researcher. Surprisingly, we find that the good old Fama/MacBeth-Shanken approach works quite well in realistic settings and, importantly, is much more powerful than many of the “robust” asset pricing tests. Many “robust” methods are clearly superior only in special cases, which have rather limited relevance in empirical research.

Download the paper here. Our MATLAB code, which replicates our results and features a large number of robust asset pricing tests, can be downloaded here.

Comments are greatly appreciated.

New title and content for elephants

We updated our paper on the impact of the weighting matrix in cross-sectional asset pricing tests with GMM, formerly entitled "Elephants and the cross-section of expected returns". The new title is "GMM weighting matrices in cross-sectional asset pricing tests". The new version provides a more thorough analysis of the described issue with GMM estimations of misspecified models. The key take-away from our paper is that factor models, even those with strong factors, can appear to have a very good pricing performance, although the factors are actually unpriced, i.e., the factor exposures are uncorrelated with average returns in the cross-section. The new version can be found here.

"Implied Volatility Duration" accepted for publication in the JFE

My paper "Implied Volatility Duration: A Measure for the Timing of Uncertainty Resolution", coauthored by Christian Schlag and Rüdiger Weber, is accepted for publication in the Journal of Financial Economics.

Open PhD position

I am looking for a gifted student who wants to do independent research under my supervision. The job advertisement (in German) can be found here.

Please contact me directly if you have any questions about the position or the job profile.

New research paper on the value premium online

My new working paper "Fuel is Pumping Premiums: A Consumption-based Explanation of the Value Anomaly", coauthored by Robert Dittmar and Christian Schlag, can be downloaded here. In this paper, we question the standard approach in empirical consumption-based asset pricing to use nondurables and services as a proxy for consumption. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute gasoline consumption by consumption of other nondurable goods or services. As a consequence, gasoline consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in gasoline consumption betas explains a large part of the value premium. Using a textual analysis of individual firms' 10-K reports, we find that the energy-intensity of firms' businesses are strongly positively related to their book-to-market ratios of equity. As a consequence, value stocks are riskier than growth stock because they suffer from the same energy supply shocks that also affect households.

New version of Elephants paper online

In the new version of my paper "Elephants and the Cross-Section of Expected Returns" with Nora Laurinaityte, Christoph Meinerding, and Christian Schlag, we show that there is a flaw in the design of GMM cross-sectional tests. As a result, factors with little explanatory power can seem highly significant and the explanatory power can be spuriously high. We show that this effect is present for weak and for strong factors and that irrelevant factors (betas to these are not related to expected returns in the cross-section) have the potential to drive out relevant ones. We suggest that authors should always report and discuss their estimates of the factor means which happen to be far away from the sample averages in case of a spuriously high pricing performance.

The new version of the paper can be downloaded here.

"Vol-of-vol" accepted for publication in the JFQA

My paper Volatility-of-Volatility Risk, coauthored by Darien Huang, Christian Schlag, and Ivan Shaliastovich, is accepted for publication in the Journal of Financial and Quantitative Analysis.

New versions of "Up- and Down"- and "Predictability"-papers online

We revised our paper "Up- and Downside Variance Risk Premia in Global Equity Markets". It can be downloaded here.

We also revised our paper "Predictability and the Cross-Section of Expected Returns: A Challenge for Asset Pricing Models". It can be found here.

Teaching award for AEAP

My course on "Advanced Empirical Asset Pricing" in the winter term 2017/2018 won the teaching award for the best course in the Master's programme of the Faculty of Economics and Business Administration. I would like to thank my students for the positive feedback and the great semester. I really enjoyed it.

The price impact of Asian elephants

My new paper, coauthored by Nora Laurinaityte, Christoph Meinerding, and Christian Schlag, shows that the population growth of captive Asian elephants explains the cross-section of expected returns with a cross-sectional R^2 of 93% and a t-statistic of 4.0 for the market price of risk... NOT! We rather show that standard GMM cross-sectional asset pricing tests can generate spurious explanatory power for factor models when the weight on certain moment conditions is set inappropriately. In fact, by shifting the weights in the GMM, any desired level of cross-sectional fit can be attained at the price of not matching the factor means. We run placebo tests with factors that by construction do not explain the cross-section of expected returns and obtain spuriously high cross-sectional R^2's. Finally, we document examples of factor models proposed in the literature that suffer from this bias. The paper can be downloaded here.

"IVD and the ERP" wins Best Paper Award

Our working paper Implied Volatility Duration and the Early Resolution Premium was honored with the Best Paper Award of the 24th Annual Meeting of the German Finance Association (DGF) at Ulm University. We are very happy about this award and keen on comments and suggestions for the new version of the paper that is coming soon.

New version of paper on the early resolution premium online

The revised version of our paper "Implied Volatility Duration and the Early Resolution Premium" is now available and can be downloaded here.

New research on investors' preferences regarding the timing of uncertainty resolution

My new working paper "Implied Volatility Duration and the Early Resolution Premium", coauthored by Christian Schlag and Ruediger Weber, deals with investors' preferences regarding the timing of resolution of uncertainty. We argue that our new measure, called "Implied Volatility Duration" quantifies for a particular stock when uncertainty about the stock's cash-flows are resolved. By looking at the cross-section of stock returns, we find that stocks that exhibit late resolution of uncertainty have to pay an annual premium of seven percent. This phenomenon has a risk-based explanation and we rationalize it in a general equilibrium model featuring a rational agent with recursive preferences. The paper can be downloaded here.

Paper about intertemporal substitution accepted for publication

My paper "Intertemporal Substitution in Consumption: A Literature Review" discusses several recent advances of the theory of intertemporal substitution and highlights challenges for the estimation of the elasticity. The article may give researchers a hint at what could be a reasonable choice of the elasticity when modeling preferences of agents in models of macroeconomics and finance.

The article has now been accepted for publication in the "Journal of Economic Surveys".

Asset Pricing Paper accepted for publication

My paper "High Order Smooth Ambiguity Preferences and Asset Prices", coauthored by Clemens Voelkert, is accepted for publication in the Review of Financial Economics after the second round.

"Up- and Downside Variance Risk Premia in Global Equity Markets" accepted for publication

My paper Up- and Downside Variance Risk Premia in Global Equity Markets, joint work with Matthias Held, Julia Kapraun, and Marcel Omachel, was accepted for publication in the Journal of Banking and Finance. Moreover, the working paper Fuel is Pumping Premiums, joint with Robert Dittmar and Christian Schlag, has a new title. The new title is Non-substitutable Consumption Growth Risk. There will be new versions of this paper and the Elephants paper soon.