Inefficiencies in the Securities Lending Market

SSRN Electronic Journal · 2025-01-01

Optimists, Pessimists and Stock Prices

SSRN Electronic Journal · 2024-01-01 · 3 citations

Optimal Dynamic Asset Allocation with Transaction Costs: The Role of Hedging Demands

National Bureau of Economic Research · 2024-10-01

A number of papers have solved for the optimal dynamic portfolio strategy when expected returns are time-varying and trading is costly, but only for agents with myopic utility.Non-myopic agents benefit from hedging against future shocks to the investment opportunity set even when transaction costs are zero (Merton, 1969(Merton, , 1971)).In this paper, we propose a solution to the dynamic portfolio allocation problem for non-myopic agents faced with a stochastic investment opportunity set when trading is costly.We show that the agent's optimal policy is to trade toward an "aim" portfolio, the makeup of which depends both on transaction costs and on each asset's correlation with changes in the investment opportunity set.The speed at which the agent should trade towards the aim portfolio depends both on the shock's persistence and on the extent to which the shock can be effectively hedged.We illustrate the differences in portfolio makeup that result from considering hedging demands of a long-horizon investor using a set of simplified examples, and using a daily trading strategy based on the estimated relation between retail order imbalance and future returns.

Optimists, Pessimists, and Stock Prices

Annual Review of Financial Economics · 2024-08-19 · 6 citations

We review the academic findings from psychology and economics on disagreement—specifically, the effect of disagreement on asset prices. We discuss measurement of disagreement and how disagreement, coupled with constraints on short selling, can sideline pessimistic investors and result in overpricing. We review the literature on short selling in financial markets, paying particular attention to how and why some issues become hard-to-borrow and what factors go into the determination of borrowing costs, and we discuss the evolution of borrowing costs over the last several decades. We show how an examination of the prices and borrowing costs for constrained stocks can lead to an improved understanding of how disagreement in financial markets arises and is resolved, and we discuss directions for future research.

Optimal Dynamic Asset Allocation with Transaction Costs: The Role of Hedging Demands

SSRN Electronic Journal · 2024-01-01

Declining CO₂ price paths

RePEc: Research Papers in Economics · 2023-08-22 · 21 citations

Pricing greenhouse-gas (GHG) emissions involves making trade-offs between consumption today and unknown damages in the (distant) future. While decision making under risk and uncertainty is the forte of financial economics, important insights from pricing financial assets do not typically inform standard climate–economy models. Here, we introduce EZ-Climate, a simple recursive dynamic asset pricing model that allows for a calibration of the carbon dioxide (CO 2 ) price path based on probabilistic assumptions around climate damages. Atmospheric CO 2 is the “asset” with a negative expected return. The economic model focuses on society’s willingness to substitute consumption across time and across uncertain states of nature, enabled by an Epstein–Zin (EZ) specification that delinks preferences over risk from intertemporal substitution. In contrast to most modeled CO 2 price paths, EZ-Climate suggests a high price today that is expected to decline over time as the “insurance” value of mitigation declines and technological change makes emissions cuts cheaper. Second, higher risk aversion increases both the CO 2 price and the risk premium relative to expected damages. Lastly, our model suggests large costs associated with delays in pricing CO 2 emissions. In our base case, delaying implementation by 1 y leads to annual consumption losses of over 2%, a cost that roughly increases with the square of time per additional year of delay. The model also makes clear how sensitive results are to key inputs.

Optimal Dynamic Asset Allocation with Transaction Costs: The Role of Hedging Demands

SSRN Electronic Journal · 2022-01-01 · 5 citations

The Dynamics of Disagreement

Review of Financial Studies · 2022-10-14 · 37 citations

Abstract In this paper, we infer how the estimates of firm value by “optimists” and “pessimists” evolve in response to information shocks. Specifically, we examine returns and disagreement measures for portfolios of short-sale-constrained stocks that have experienced large gains or large losses. Our analysis suggests the presence of two groups, one of which overreacts to new information and remains biased over about 5 years, and a second group, which underreacts and whose expectations are unbiased after about 1 year. Our results have implications for the belief dynamics that underlie the momentum and long-term reversal effect. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Teaching Slides on Short and Long Horizon Behavioral Factors

SSRN Electronic Journal · 2021-01-01 · 1 citations

Monetary Policy and Reaching for Income

The Journal of Finance · 2021 · 92 citations

• Economics
• Monetary economics
• Financial economics

ABSTRACT Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.