Research Papers

Research statement - List of citations - My SSRN page - My NBER page
 

Published and Forthcoming Papers - Refereed

 1. Housing Collateral, Consumption Insurance and Risk Premia: an Empirical Perspective, with Hanno Lustig, 
Journal of Finance, June 2005, Vol. 60 (3), pp.1167-1219 -
Nominated for the 2005 Smith Breeden Prize for the Best Paper in the Journal of Finance
[pdf] [abstract] [annual data file(xls, updated August  2005)] - [quarterly data file(xls, updated August  2005)] - [data appendix(pdf)]

 2. Stock Market Development and Economic Growth in Belgium, with Frans Buelens and Ludo Cuyvers,
Explorations in Economic History, January 2006, Vol. 43 (1), pp. 13-38
[pdf] [abstract]

 3. Learning Asymmetries in Real Business Cycles, with Laura Veldkamp,  
Journal of Monetary Economics, May 2006, Vol. 53(4)
[pdf] [abstract]

4. Reconciling the Return Predictability Evidence, with Martin Lettau,
Review of Financial Studies, July 2008, Vol. 21(4), pp. 1607-1652
[pdf] - [abstract]

 5. The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street, with Hanno Lustig,
Review of Financial Studies, September 2008, Vol. 21(5)
[pdf] - [abstract]  - [separate appendix] - [quarterly data (xls)] - [annual data (xls)]

6.  Information Immobility and the Home Bias Puzzle, with Laura Veldkamp
Forthcoming at the Journal of Finance
2005 FMA Competitive Paper Award in Investments - First Prize
2005-06 Glucksman Institute Research Prize - First Prize
[pdf] - [abstract]  - [separate appendix]

7. Mortgage Timing, with Ralph Koijen and Otto van Hemert
2007-08 Glucksman Institute Research Prize - First Prize
Forthcoming at the Journal of Financial Economics
[pdf] - [abstract]

Published and Forthcoming Papers - Non-Refereed

8. Inside Information and the Own Company Stock Puzzle,  with Laura Veldkamp,
Journal of the European Economic Association P&P, Vol. 4(2-3), April-May 2006
[pdf] - [abstract]

9. Financial Economics, Market Efficiency and Return Predictability, with Ralph Koijen
Forthcoming at Encyclopedia of Complexity & System Science, Robert Meyers (Ed.)
[pdf]

10. Annuity Valuation Given Long-term Care Concerns and Bequest Motives, with with John Ameriks, Andrew Caplin, and Steven Laufer,
in Recalibrating Retirement Spending and Saving, John Ameriks and Olivia S. Mitchell, Editors, Pension Research Council, September 2008
[pdf]

 Papers under Revision

11.  Why Has House Price Dispersion Gone up? with Pierre-Olivier Weill , September 3, 2007
Revise and resubmit Review of Economic Studies (second round)

ABSTRACT: We investigate the 30 year increase in the level and dispersion of house prices across U.S. metropolitan areas in a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. In our equilibrium, house prices compensate for cross-sectional wage differences. Feeding in our model the 30 year increase in cross-sectional wage dispersion that we document based on metropolitan-level data, we generate the observed increase in house price level and dispersion. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large.

12. The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives, with John Ameriks, Andrew Caplin, and Steven Laufer, February 27, 2008
Revise and resubmit Journal of Finance (second round)

ABSTRACT: Strong bequest motives can explain low retirement spending, yet so equally can strong precautionary motives. Separating these motives is vital not only to guide innovations in household finance for retirees, but also for public policy in the areas of health care and estate taxation. Rather than to downplay bequest motives, as has been the recent tradition, we develop a rich model of spending in retirement that allows for both motives. A "Medicaid aversion" parameter plays a key role in determining precautionary savings in the model. We implement a "strategic" survey to resolve the identification problem between bequest and precautionary motives. Our estimates suggest that bequest motives are more prevalent than currently believed, and that they are not the sole province of the very wealthy, but instead spread deep into the middle class. We also find Medicaid aversion to be widespread, and to play a critical role in the low spending of many retirees.

13.  How Much Does Household Collateral Constrain Regional Risk Sharing?, with Hanno Lustig, July 8, 2008
Revise and resubmit Review of Economic Dynamics (second round)

ABSTRACT: The covariance of regional consumption varies cross-sectionally and over time. Household-level borrowing frictions can explain this aggregate phenomenon. When the value of housing falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Using panel data from 23 US metropolitan areas, we find that in times and regions where collateral is scarce, consumption growth is about twice as sensitive to income growth. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match the data.
[Separate appendix for non-separable preferences] - [data appendix (pdf)]

14. Information Acquisition and Under-Diversification, with Laura Veldkamp,  November 13, 2008
Revise and resubmit Review of Economic Studies (second round)

ABSTRACT: The primary function of financial services providers is information discovery. This information is then used to manage investors' portfolios. Little is known about the optimal research strategy in an economy with multiple risky assets. This paper investigates which assets an investor, be it a portfolio manager or individual investor, should research. The optimal assets to acquire information about are assets the investor expects to hold. But the assets the investor holds depend on the information he observes. We add an information acquisition choice to a standard $n$-asset portfolio problem and solve jointly for the optimal research and investment strategy. Our results show that returns to specialization in information acquisition can explain why investors often do not hold diversified portfolios.

15. The Wealth-Consumption Ratio, with Hanno Lustig and Adrien Verdelhan, July 23, 2008
Revise and resubmit  Review of Financial Studies (second round) 

ABSTRACT: We propose a new method to measure the wealth-consumption ratio. We estimate an exponentially affine model of the stochastic discount factor on bond yields and stock returns and use that discount factor to compute the no-arbitrage price of a claim to aggregate US consumption. We find that total wealth is much safer than stock market wealth. The consumption risk premium is only 2.2%, substantially below the equity risk premium of 6.9%. As a result, our estimate of the wealth-consumption ratio is much higher than the price-dividend ratio on stocks throughout the post-war period. The high wealth-consumption ratio implies that the average US household has a lot of wealth, most of it human wealth. The wealth-consumption ratio also has lower volatility than the price-dividend ratio on equity. A variance decomposition of the wealth-consumption ratio shows that future returns account for most of its variation. The predictability is mostly for future interest rates, not future excess returns. We conclude that the properties of total wealth are more similar to those of a long-maturity bond portfolio than those of a stock portfolio. Many dynamic asset pricing models require total wealth returns as inputs, but equity returns are commonly used as a proxy. The differences we find between the risk-return characteristics of equity and total wealth suggest that equity is special.
[separate appendix (pdf)] - [data]

Working Papers

16. IT, Corporate Payouts, and Growing Inequality in Managerial Compensation, with Hanno Lustig and Chad Syverson, October 26, 2008

ABSTRACT: Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increase in the importance of  organizational capital in production, (2) the increase in managerial income inequality, and (3) the increase in payouts to the owners. There is a unified explanation for these changes: The arrival and gradual adoption of information technology since the 1970s has stimulated the accumulation of organizational capital in existing firms. Since owners are better diversified than managers, the optimal division of rents from this organizational capital has the owners bear most of the cash-flow risk. In our model, the IT revolution benefits the owners and the managers in large successful firms, but not the managers in small firms. The resulting increase in managerial compensation inequality and the increase in payouts to owner's compare favorably to those we establish in the data.

17. Can Housing Collateral Explain Long-Run Swings in Asset Returns?, with Hanno Lustig, November 5, 2007

ABSTRACT: To explain the low-frequency variation in US equity and debt returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these borrowing constraints. Borrowing enables risk sharing and decreases the rate of return that households require for holding equity. Feeding the historical time series of US housing collateral into the model replicates four features of long-run asset returns. (1) It produces a fifteen percent equity premium during the 1930s and a slow decline of the equity premium from eleven percent in the 1960s to four percent in 2003. (2) It generates large unexpected capital gains for equity holders, especially in the 1990s. (3) The risk-free rate and the housing collateral ratio are strongly positively correlated at low frequencies. (4) The model mimics the slow decline in the volatility of stock returns and the riskless interest rate.
[separate appendix (pdf)]

18. Exploring the Link between Housing and the Value Premium, with Hanno Lustig, June 30, 2006

ABSTRACT: This paper shows that an equilibrium model in which heterogeneous households face housing collateral constraints can quantitatively replicate the cross-sectional variation in risk premia on stock portfolios sorted by book-to-market value. A value premium arises because (1) cash flows to growth stocks are situated farther into the future than the cash flows on value stocks, and (2) claims to farther-out cash flows are less risky because they are only subject to low-frequency housing collateral shocks and not to temporary consumption growth shocks. In contrast to many other equilibrium asset pricing models, our model endogenously generates a downward sloping term structure of equity risk premia; a necessary condition for a value premium (Lettau and Wachter, 2006). Our calibration shows that we not only generate the right sign, but also the right magnitude for the returns spread between value and growth stocks.

19. The Bond Risk Premium and the Cross-Section of Stock Returns, with Ralph Koijen and Hanno Lustig, in progress

Book Project

Exercises in Recursive Macroeconomic Theory, 1st Edition, with Lars Ljungqvist, Thomas Sargent, and Pierre-Olivier Weill