Asset Pricing Program Meeting, Fall 2019

Lettau, Ludvigson, and Manoel provide a comprehensive analysis of portfolios of active mutual funds, ETFs and hedge funds through the lens of risk (anomaly) factors. The researchers show that that these funds do not systematically tilt their portfolios towards profitable factors, such as high book-to-market (BM) ratios, high momentum, small size, high profitability and low investment growth. Strikingly, there are virtually no high-BM funds in the sample while there are many low-BM "growth" funds. Portfolios of "growth" funds are concentrated in low BM-stocks but "value" funds hold stocks across the entire BM spectrum In fact, most "value" funds hold a higher proportion of their portfolios in low-BM ("growth") stocks than in high-BM ("value") stocks. While there are some micro/small/mid-cap funds, the vast majority of mutual funds hold very large stocks. But the distributions of mutual fund momentum, profitability and investment growth are concentrated around market average with little variation across funds. The characteristics distributions of ETFs and hedge funds do not differ significantly from the those of mutual funds. Lettau, Ludvigson, and Manoel conclude that the characteristics of mutual fund portfolios raises a number of questions about why funds do not exploit well-known return premia and how their portfolio choices affects asset prices in equilibrium.

Smith, Zidar, and Zwick use administrative tax data to estimate top wealth in the United States. The researchers build on the capitalization approach in Saez and Zucman (2016) while accounting for heterogeneity within asset classes when mapping income flows to wealth. The researchers' approach incorporates four quantitatively relevant sources of eterogeneity: (1) higher fixed income returns at the top, (2) realized capital gains that do not represent corporate stock sales, (3) industry variation in returns to pass-through business wealth, and (4) geographic variation in property tax rates. Overall, wealth concentration is very high: the top 1% holds as much wealth as the bottom 90%. However, the "P90-99" class holds more wealth than either group after accounting for heterogeneity. Relative to a top 0.1% wealth share of more than 20% under equal returns, Smith, Zidar, and Zwick estimate a top 0.1% wealth share of [15%] and find that the rise since 1980 in top wealth shares falls by [half]. Top portfolios depend less on fixed income and public equity, depend more on private equity and housing, and more closely match the composition reported in the SCF and estate tax returns. The researchers' adjustments reduce mechanical revenue estimates from a wealth tax and top capital income shares in distributional national accounts, which depend on well-measured estimates of top wealth. Though the capitalization approach has advantages over other methods of estimating top wealth, the researchers emphasize that considerable uncertainty remains inherent to the approach by showing the sensitivity of estimates to different assumptions.

Morelli, Ottonello, and Perez study the role of global financial intermediaries in international lending. The researchers construct a model of the world economy, where heterogeneous borrowers issue risky securities purchased by financial intermediaries. Aggregate shocks transmit internationally through financial intermediaries' net worth. The strength of this transmission is governed by the degree of frictions intermediaries face financing their risky investments. Morelli, Ottonello, and Perez provide direct empirical evidence on this mechanism showing that, around Lehman Brothers' collapse, emerging-market bonds held by more-distressed global banks experienced larger price contractions. A quantitative analysis of the model shows that global financial intermediaries play a relevant role driving borrowing-cost and consumption fluctuations in emerging-market economies, both during debt crises and in regular business cycles. The portfolio of financial intermediaries and the distribution of bond holdings in the world economy are key to determine aggregate dynamics.

Violations of no-arbitrage conditions measure the shadow cost of constraints on intermediaries, and the risk that these constraints tighten is priced. The researchers demonstrate in an intermediary-based asset pricing model that violations of no-arbitrage such as covered interest rate parity (CIP) violations, along with intermediary wealth returns, can be used to price assets. They describe a "forward CIP trading strategy" that bets on CIP violations becoming smaller, and show that its returns help identify the price of the risk that the shadow cost of intermediary constraints increases. This risk contributes substantially to the volatility of the stochastic discount factor, and appears to be priced consistently in US treasury, emerging market sovereign bond, and foreign exchange portfolios.