December 2024 - Working Paper33320 Machine learning methods in asset pricing are often criticized for their black box nature. We study this issue by predicting corporate bond returns using interpretable machine learning on a high-dimensional bond charac-teristics data set. We achieve state-of-the-art performance while maintaining an...
March 2024 - Working Paper32261 This paper proposes latent factor models for multidimensional panels called 3D-PCA. Factor weights are constructed from a small set of dimension-specific building blocks, which give rise to proportionality restrictions of factor weights. While the set of feasible factors is restricted, factors with...
September 2023 - Working Paper31719 This paper proposes a new approach to the factor zoo conundrum. Instead of applying dimension-reduction methods to a large set of portfolio returns obtained from sorts on characteristics, I construct factors that summarize the information in characteristics across assets and then sort assets into...
April 2022 - Working Paper29916 This paper reviews the literature on idiosyncratic equity volatility since the publication of Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk in 2001. We respond to replication studies by Chiah, Gharghori, and Zhong and by Leippold and Svaton, and we...
March 2022 - Working Paper29833 This paper considers extensions of two-dimensional factor models to higher-dimensional data represented as tensors. I describe decompositions of tensors that generalize the standard matrix singular value decomposition and principal component analysis to higher dimensions. I estimate the model using...
April 2019 - Working Paper25769 Why does the stock market rise and fall? From 1989 to 2017, the real per-capita value of corporate equity increased at a 7.2% annual rate. We estimate that 40% of this increase was attributable to a reallocation of rewards to shareholders in a decelerating economy, primarily at the expense of labor...
December 2018 - Working Paper25381 This paper provides a comprehensive analysis of portfolios of active mutual funds and ETFs through the lens of risk (anomaly) factors. We show that these funds do not systematically tilt their portfolios towards profitable factors, such as high book-to-market (BM) ratios, high momentum, small size,...
July 2018 - Working Paper24858 We propose a new method for estimating latent asset pricing factors that fit the time-series and cross-section of expected returns. Our estimator generalizes Principal Component Analysis (PCA) by including a penalty on the pricing error in expected returns. We show that our estimator strongly...
May 2018 - Working Paper24618 We develop an estimator for latent factors in a large-dimensional panel of financial data that can explain expected excess returns. Statistical factor analysis based on Principal Component Analysis (PCA) has problems identifying factors with a small variance that are important for asset pricing. We...
January 2018 - Working Paper24250 Exchange-traded funds (ETFs) represent one of the most important financial innovations in decades. An ETF is an investment vehicle that trades intraday and seeks to replicate the performance of a specific index. In recent years ETFs have grown substantially in assets, diversity, and market...
August 2016 - Working Paper22572 We document large, longer-term, joint regime shifts in asset valuations and the real federal funds rate-r* spread. To interpret these findings, we estimate a novel macro-finance model of monetary transmission and find that the documented regimes coincide with shifts in the parameters of a policy...
December 2014 - Working Paper20744 A single macroeconomic factor based on growth in the capital share of aggregate income exhibits significant explanatory power for expected returns across a range of equity characteristic portfolios and non-equity asset classes, with risk price estimates that are of the same sign and similar in...
January 2014 - Working Paper19818 Three mutually uncorrelated economic disturbances that we measure empirically explain 85% of the quarterly variation in real stock market wealth since 1952. A model is employed to interpret these disturbances in terms of three latent primitive shocks. In the short run, shocks that affect the...
May 30, 2013 - Chapter
Three shocks, distinguished by whether their effects are permanent or transitory, are identified to characterize the post-war dynamics of aggregate consumer spending, labor earnings, and household wealth. The first shock accounts for virtually all of the variation in consumption; we argue that it...
February 2013 - Working Paper18844 The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns....
April 2011 - Working Paper16996 Three shocks, distinguished by whether their effects are permanent or transitory, are identified to characterize the post-war dynamics of aggregate consumer spending, labor earnings, and household wealth. The first shock accounts for virtually all of the variation in consumption; we argue that it...
January 2009 - Working Paper14698 This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks...
February 2007 - Working Paper12912 We study the role of information in asset pricing models with long-run cash flow risk. When investors can distinguish short- from long-run consumption risks (full information), the model generates a sizable equity risk premium only if the equity term structure slopes up, contrary to the data. In...
March 2006 - Working Paper12109 Evidence of stock return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This paper shows that these seemingly incompatible results can be reconciled if the...
September 2005 - Working Paper11606 The standard, representative agent, consumption-based asset pricing theory based on CRRA utility fails to explain the average returns of risky assets. When evaluated on cross- sections of stock returns, the model generates economically large unconditional Euler equation errors. Unlike the equity...
February 2005 - Working Paper11144 This paper proposes a dynamic risk-based model that captures the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. To model the difference between value and growth stocks, we introduce a cross...
February 2004 - Working Paper10270 Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomic risk, or the...
July 2003 - Working Paper9848 Both textbook economics and common sense teach us that the value of household wealth should be related to consumer spending. At the same time, movements in asset values often seem disassociated with important movements in consumer spending, as episodes such as the 1987 stock market crash and the...
April 2003 - Working Paper9605 We investigate a consumption-based present value relation that is a function of future dividend growth. Using data on aggregate consumption and measures of the dividend payments from aggregate wealth, we show that changing forecasts of dividend growth make an important contribution to fluctuations...
June 1, 2000 - Article
While there's no trend toward increased volatility at the market level, there is a significant trend of increasing "idiosyncratic" volatility at the individual firm level. Is the public correct in feeling that stocks are more volatile now than ever? New research by...
March 2000 - Working Paper7590 This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period 1962-97 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly correlations among individual stocks and the...
May 1999 - Working Paper7144 This paper studies three different measures of monthly stock market volatility: the time-series volatility of daily market returns within the month; the cross-sectional volatility or 'dispersion' of daily returns on industry portfolios, relative to the market, within the month; and the dispersion of...