London Business School
Regent's Park, Sussex Place
London NW1 4SA
NBER Working Papers and Publications
|March 2015||The CAPM Strikes Back? An Investment Model with Disasters|
with Hang Bai, Kewei Hou, Lu Zhang: w21016
Value stocks are more exposed to disaster risk than growth stocks. Embedding disasters into an investment-based asset pricing model induces strong nonlinearity in the pricing kernel. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples in which disasters are not materialized, and its relative success in samples in which disasters are materialized. The relation between pre-ranking market betas and average returns is flat in simulations, despite a strong positive relation between true market betas and expected returns. Evidence in the long U.S. sample from 1926 to 2014 lends support to the model’s key predictions.
|December 2014||Growth, Slowdowns, and Recoveries|
with Francesco Bianchi, Gonzalo Morales: w20725
We construct and estimate an endogenous growth model with debt and equity financing frictions to understand the relation between business cycle fluctuations and long-term growth. The presence of spillover effects from R&D imply an endogenous relation between productivity growth and the state of the economy. During the 2008 recession, technology utilization dropped precipitously, while R&D investment and long-term TFP growth were less affected. The opposite occurred during the 2001 re- cession. Contractionary shocks to external equity and debt financing are important for explaining the dynamics of the 2001 and 2008 recessions, respectively. Equity financing shocks are more important for explaining R&D investment while debt financing shocks are more important for physical investment.