Factors, Risk and the Economy
Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Jules van Binsbergen, University of Pennsylvania
The Cross-Section of Stock Returns and the Timing of Cash Flows
AbstractWe propose a duration-based explanation for the return to major equity risk factors, including value, profitability, investment, low risk, and payout factors. Both in the US and globally, firms that according to these factors have high expected returns also have a short cash-flow duration, meaning that these firms are expected to earn most of their cash flows in the near future. The returns to the factors can thus be explained by a simple model where near-future cash flows have high risk-adjusted returns, which is consistent with the evidence on the equity term structure. We find evidence for such a model using a novel dataset of single-stock dividend futures that allow us to study fixed-maturity equity claims for a cross-section of firms.
Macroeconomic Tail Risks and Asset Prices
AbstractI document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premia inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability while preserving the model's consistency with option moments.
Factor Momentum and the Momentum Factor
AbstractMomentum in individual stock returns emanates from momentum in factor returns. Most factors are positively autocorrelated: the average factor earns a monthly return of 1 basis point following a year of losses and 53 basis points following a positive year. Factor momentum explains all forms of individual stock momentum. Stock momentum strategies indirectly time factors: they profit when the factors remain autocorrelated, and crash when these autocorrelations break down. Our key result is that momentum is not a distinct risk factor; it aggregates the autocorrelations found in all other factors.
- G1 - General Financial Markets