REVISION: Shaping Liquidity: On the Causal Effects of Voluntary Disclosure
Date Posted: Apr 15, 2013
Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms seek to actively shape their information environments by voluntarily disclosing more information than is mandated by market regulations and that such efforts have a sizeable and beneficial effect on liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear m
REVISION: Shaping Liquidity: On the Causal Effects of Voluntary Disclosure
Date Posted: Apr 15, 2013
Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms seek to actively shape their information environments by voluntarily disclosing more information than is mandated by market regulations and that such efforts have a sizeable and beneficial effect on liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear m
REVISION: Shaping Liquidity: On the Causal Effects of Voluntary Disclosure
Date Posted: Apr 15, 2013
Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms seek to actively shape their information environments by voluntarily disclosing more information than is mandated by market regulations and that such efforts have a sizeable and beneficial effect on liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear m
REVISION: Shaping Liquidity: On the Causal Effects of Voluntary Disclosure
Date Posted: Apr 15, 2013
Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms seek to actively shape their information environments by voluntarily disclosing more information than is mandated by market regulations and that such efforts have a sizeable and beneficial effect on liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear m
REVISION: Systemic Risk and the Macroeconomy: An Empirical Evaluation
Date Posted: Apr 04, 2013
We propose a unique criterion to evaluate the empirical success of systemic risk measures, based on their predictive ability for low quantiles of the conditional distribution of macroeconomic outcomes. We also propose a general methodology to construct systemic risk indices that capture the joint information content of a large cross-section of systemic risk measures. After constructing more than 20 measures of systemic risk extending mostly back to the 1960s (some to the 1920s), we first describ
REVISION: Firm Volatility in Granular Networks
Date Posted: Mar 31, 2013
We propose a model of firm volatility based on customer-supplier connectedness. We assume that customers' growth rate shocks influence the growth rates of their suppliers, larger suppliers have more customers, and the strength of a customer-supplier link depends on the size of the customer firm. When the size distribution becomes more dispersed, economic activity is concentrated among a smaller number of firms, the typical supplier becomes less diversified and its volatility increases. The mode
REVISION: Tail Risk and Hedge Fund Returns
Date Posted: Nov 20, 2012
We document large, persistent exposures of hedge funds to downside tail risk. For instance, the hardest hit hedge funds in the 1998 crisis also suffered predictably worse returns than their peers in 2007-2008. Using the conditional tail risk factor derived by Kelly (2012), we find that tail risk is a key driver of hedge fund returns in both the time-series and cross-section. A positive one standard deviation shock to tail risk is associated with a contemporaneous decline of 2.88% per year in the
REVISION: Tail Risk and Asset Prices
Date Posted: Nov 20, 2012
I propose a new measure of time-varying tail risk that is directly estimable from the cross section of returns. I exploit firm-level price crashes every month to identify common fluctuations in tail risk across stocks. My tail measure is highly correlated with tail risk measures extracted from S&P 500 index options, but is available for a longer sample since it is calculated from equity data. I show that tail risk has strong predictive power for aggregate market returns: A one standard deviation
New: The Volatility Factor Structure
Date Posted: Nov 12, 2012
Firm-level volatility obeys a strong factor structure. The factor structure is distinct from the common variation in the returns themselves - after removing common factors in returns, residuals are uncorrelated, yet idiosyncratic volatility possess the same factor structure as total volatility. In fact, idiosyncratic volatility dominates firms' total variation - less that 5% of variation in daily returns is accounted for by common factors. The volatility factor structure holds not only for retur
REVISION: Market Expectations in the Cross Section of Present Values
Date Posted: Sep 11, 2012
Returns and cash flow growth for the aggregate U.S. stock market are highly and robustly predictable. Using a single factor extracted from the cross section of book- to-market ratios, we find an out-of-sample return forecasting R-squared as high as 13% at the annual frequency (0.9% monthly). We document similar out-of-sample predictability for returns on value, size, momentum and industry-sorted portfolios. We present a model linking aggregate market expectations to disaggregated valuation ratio
REVISION: The Three-Pass Regression Filter: A New Approach to Forecasting Using Many Predictors
Date Posted: Jun 13, 2012
We forecast a single time series using many predictor variables with a new estimator called the three-pass regression filter (3PRF). It is calculated in closed form and conveniently represented as a set of ordinary least squares regressions. 3PRF forecasts converge to the infeasible best forecast when both the time dimension and cross section dimension become large. This requires only specifying the number of relevant factors driving the forecast target, regardless of the total number of common
REVISION: Too-Systemic-To-Fail: What Option Markets Imply About Sector-Wide Government Guarantees
Date Posted: Mar 23, 2012
A conspicuous amount of aggregate tail risk is missing from the price of financial sector crash insurance during the 2007-2009 crisis. The difference in costs of out-of-the-money put options for individual banks, and puts on the financial sector index, increases four fold from its pre-crisis level. At the same time, correlations among bank stocks surge, suggesting the high put spread cannot be attributed to a relative increase in idiosyncratic risk. We show that this phenomenon is uniqueto the f
REVISION: Too-Systemic-To-Fail: What Option Markets Imply About Sector-Wide Government Guarantees
Date Posted: Mar 23, 2012
A conspicuous amount of aggregate tail risk is missing from the price of financial sector crash insurance during the 2007-2009 crisis. The difference in costs of out-of-the-money put options for individual banks, and puts on the financial sector index, increases fourfold from its pre-crisis level. At the same time, correlations among bank stocks surge, suggesting the high put spread cannot be attributed to a relative increase in idiosyncratic risk. We show that this phenomenon is unique to the f
REVISION: Dynamic Equicorrelation
Date Posted: Feb 07, 2012
A new covariance matrix estimator is proposed under the assumption that at every time period all pairwise correlations are equal. This assumption, which is pragmatically applied in various areas of finance, makes it possible to estimate arbitrarily large covariance matrices with ease. The model, called DECO, involves first adjusting for individual volatilities and then estimating correlations. A quasi-maximum likelihood result shows that DECO provides consistent parameter estimates even when the
REVISION: Too-Systemic-To-Fail: What Option Markets Imply About Sector-Wide Government Guarantees
Date Posted: Nov 07, 2011
A conspicuous amount of aggregate tail risk is missing from the price of financial sector crash insurance during the 2007-2009 crisis. The difference in costs of out-of-the-money put options for individual banks, and puts on the financial sector index, increases fourfold from its pre-crisis level. At the same time, correlations among bank stocks surge, suggesting the high put spread cannot be attributed to a relative increase in idiosyncratic risk. We show that this phenomenon is unique to th
REVISION: A Practical Guide to Volatility Forecasting through Calm and Storm
Date Posted: Sep 07, 2011
We present a volatility forecasting comparative study within the ARCH class of models. Our goal is to identify successful predictive models over multiple horizons and to investigate how predictive ability is influenced by choices for estimation window length, innovation distribution, and frequency of parameter re-estimation. Test assets include a range of domestic and international equity indices and exchange rates. We find that model rankings are insensitive to forecast horizon and suggestions
REVISION: Testing Asymmetric-Information Asset Pricing Models
Date Posted: Jul 18, 2011
Modern asset pricing theory is based on the assumption that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using three natural experiments that capture plausibly exogenous variation in information asymmetry on a stock-by-stock basis for a large set of U.S. companies. Consistent with predictions derived from an asymmetric-information rational expectations model with multiple assets and multiple
REVISION: Testing Asymmetric-Information Asset Pricing Models
Date Posted: Jul 16, 2011
Modern asset pricing theory is based on the assumption that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using three natural experiments that capture plausibly exogenous variation in information asymmetry on a stock-by-stock basis for a large set of U.S. companies. Consistent with predictions derived from an asymmetric-information rational expectations model with multiple assets and multiple
New: Testing Asymmetric-Information Asset Pricing Models
Date Posted: Feb 18, 2009
Theoretical asset pricing models routinely assume that investors have heterogeneous information. We provide direct evidence of the importance of information asymmetry for asset prices and investor demands using plausibly exogenous variation in the supply of information caused by the closure or restructuring of brokerage firms' research operations. Consistent with predictions derived from a Grossman and Stiglitz-type model, share prices and uninformed investors' demands fall as information asymme
New: The Value of Research
Date Posted: Dec 29, 2008
We estimate the value added by sell-side equity research analysts and explore the links between analyst research, informational efficiency, and asset prices. We identify the value of research from exogenous changes in analyst coverage. On announcement that a stock has lost all coverage, share prices fall by around 110 basis points or $8.4 million on average. The share pricereaction is attenuated the more analysts continue to cover the stock, suggesting that there are diminishing returns to cover