Published and Forthcoming Papers (BibTeX, Google
Scholar, SSRN,
Erdos number=4)
“Time
Series Momentum,” Tobias Moskowitz,
Striking persistence of returns linked to the trading activity of
hedgers and speculators.
“Margin-Based
Asset Pricing and Deviations from the Law of One Price,” Nicolae Garleanu and Lasse Heje Pedersen (2011), The
Review of Financial Studies, 24(6), 1980-2022. Slides.
Understanding the effects of the Fed’s lending programs, the CDS-bond
basis, the failure of the covered interest-rate parity, and more.
“Two
Monetary Tools: Interest Rates and Haircuts,” Adam Ashcraft, Nicolae Garleanu, and Lasse H. Pedersen
(2010), NBER Macroeconomics Annual, 25, 143-180. Slides.
A macro model with credit-supply
frictions: how central bank lending facilities can ease the credit frictions
– with strong empirical evidence from the recent crisis.
“How
Sovereign is Sovereign Credit Risk?,” Francis A. Longstaff, Jun
Pan, Lasse H. Pedersen, and Kenneth J. Singleton
(2010), American Economic Journal: Macroeconomics, 3(2), 75–103.
Sovereign CDS can be explained by, and predicted by,
Featured in the Economic Times.
“When
Everyone Runs for the Exit,” Lasse H. Pedersen (2009), The International Journal
of Central Banking, 5, 177-199.
Understanding the global liquidity crisis
and the quant event. Evidence on the driving mechanisms. (A solicited commentary.)
Featured in The Economist, New York Times and Forbes.
“Market
Liquidity and Funding Liquidity,” Markus Brunnermeier and Lasse H. Pedersen (2009), The Review of Financial
Studies, 22, 2201-2238.
Market liquidity and the funding conditions are mutually reinforcing, giving
rise to liquidity spirals, fragility, flight to quality, and systemic risk.
Featured in The Economist and Barron’s.
“Demand-Based
Option Pricing,” Nicolae Garleanu, Lasse H. Pedersen, and Allen Poteshman
(2009), The Review of Financial Studies, 22 (10), 4259-4299.
How end user demand affects option pricing when dealers cannot perfectly
hedge. New theory and unique data.
Geewax, Terker
& Company First Prize, 2006.
“Carry
Trades and Currency Crashes,” Markus
Brunnermeier, Stefan Nagel, and Lasse
Heje Pedersen (2008), NBER Macroeconomics Annual,
23, 313-348.
How the carry trade is subject to crash
risk during funding liquidity crisis. Results help resolve the “forward
premium puzzle”.
Featured in Forbes.
“Slow
Moving Capital,” Mark
Mitchell, Lasse Heje
Pedersen, and Todd Pulvino (2007), The
American Economic Review, P&P, 97, 215-220.
Empirical evidence: when arbitrageurs lose capital and new capital arrives
slowly, prices become depressed and later rebound.
“Liquidity
and Risk Management,” Nicolae Garleanu, and Lasse Heje Pedersen (2007),
The American Economic Review, P&P, 97, 193-197.
Tighter risk management can lead to illiquidity and lower prices. A
multiplier effects arises with liquidity-adjusted risk management.
“Valuation
in Over-the-Counter Markets,” Darrell Duffie,
Nicolae Garleanu, and Lasse H. Pedersen (2007), The Review of Financial
Studies, 20, 1865-1900.
The effect of search and bargaining on asset prices and the dynamics of
aggregate liquidity shocks.
“Liquidity
and Asset Prices,” Yakov Amihud, Haim
Mendelson, and Lasse Heje Pedersen (2005), Foundations and Trends in Finance,
1, 269-364.
A survey of the literature.
“Asset
Pricing with Liquidity Risk,”
Viral Acharya and Lasse Heje Pedersen (2005), Journal of Financial Economics,
77, 375-410.
How unpredictable changes in liquidity affect security returns; a
liquidity-adjusted CAPM and empirical evidence.
Fama/DFA First Prize for best paper in the
Journal of Financial Economics, 2005.
NYSE Award for best paper on equity trading, Western Finance Association, 2003.
Glucksman First-Place Award for best
research paper in finance, NYU Stern, 2002-2003.
“Predatory
Trading,” Markus K. Brunnermeier and Lasse Heje Pedersen (2005), The Journal of Finance, 60,
1825-1863.
When a large trader liquidates, “predators” also sell, leading
to price over-shooting and systemic risk.
Nominated for the Smith-Breeden Prize for best paper in The Journal of
Finance, 2005.
Barclays Global Investors Award for the best conference paper at the
European Finance Association, 2003.
“Over-the-Counter
Markets,” Darrell Duffie, Nicolae Garleanu, and Lasse Heje Pedersen (2005), Econometrica,
73, 1815-1847.
Marketmakers' bid-ask spread is narrower
for sophisticated investors with better search options (NB: reverse of information-based
models).
Referenced in Nobel Prize Committee’s Scientific Background, 2010.
“Adverse
Selection and the Required Return,” Nicolae Garleanu
and Lasse Heje Pedersen
(2004), The Review of Financial Studies, 17, 643-665.
Bid-ask spreads due to asymmetric information affect required returns
differently than exogenous trading costs - paper shows explicitly how.
“Modeling
Sovereign Yield Spreads: A Case Study of Russian Debt,” Darrell Duffie, Lasse H. Pedersen, and Ken Singleton (2003), The Journal
of Finance, 58, 119-159.
A model of credit risk accounting for both default and restructuring. The
study of Russian debt develops a new estimation method.
Nominated for the Smith-Breeden Prize for best paper in The Journal of
Finance, 2003.
“Securities
Lending, Shorting, and Pricing,” Darrell Duffie, Nicolae
Garleanu, and Lasse Heje Pedersen (2002), Journal of Financial Economics,
66, 307-339.
Short sellers search for stock owners and pay a lending fee. The lending fee
increases the stock's price.
NYSE Award for best paper on equity trading, Western Finance Association, 2002.
Working Papers
“Embedded
Leverage,” Andrea Frazzini and Lasse Heje Pedersen (2011).
“Monitoring
Leverage,” John Geanakoplos and Lasse Heje Pedersen (2011).
“Betting
Against Beta,” Andrea Frazzini and Lasse Heje Pedersen (2010). Slides.
Excel.
A model of leverage and margin constraints
help explain the relation between risk and return in each of the major asset
classes, including why high beta equals low alpha.
Solicited, Journal of Financial Economics.
“Leverage
Aversion and Risk Parity,”
Cliff Asness, Andrea Frazzini,
and Lasse Heje Pedersen
(2011).
A Risk Parity portfolio that over-weights
safer asset classes outperforms the market. RP+BAB: This across-asset-class
evidence complements the within-asset-class evidence on Betting Against Beta.
“Measuring
Systemic Risk,” Viral Acharya, Lasse Heje Pedersen, Thomas Philippon,
and Matt Richardson (2010).
An economic model of how to measure and manage systemic risk with empirical
support from the recent crisis.
Associated real time systemic risk
rankings here.
“Dynamic
Trading with Predictable Returns and Transaction Costs,” Nicolae Garleanu and Lasse Heje Pedersen (2008). Slides.
Closed-form optimal trading strategy: updated portfolio is a combination of
existing portfolio, optimal portfolio absent trading costs, and future optimal
portfolio, illuminating the role of alpha decay and with equilibrium
implications.
Revise and Resubmit, The Journal of Finance.
“Value
and Momentum Everywhere,”
Value and momentum effects appear across global markets in equities, commodities
and bonds. There is an intriguing val-mom correlation
structure. Liquidity and long-run consumption risks play a role.
Revise and Resubmit, The Journal of Finance. Featured in the New York Times and Marketwatch.
“Corporate
Bond Specialness,” Amrut Nashikkar and Lasse Heje Pedersen (2007).
Shorting costs are high for corporate bonds that are of worse credit, more
expensive relative to the CDS, have equity on special, smaller issues, and more
illiquid.
“Auctions
with Endogenous Selling,” Nicolae Garleanu and Lasse Heje Pedersen (2000).
The effect of market structure on volume, prices, and welfare with
applications to real-world auctions.
“Density-Based Inference in Affine Jump-Diffusions,” Jun Liu, Jun Pan, and Lasse
Heje Pedersen (2000).
A closed-form approximation to the density of affine jump diffusions with
applications to finance.
Work in Progress
“Carry,” Ralph
Koijen, Tobias Moskowitz, Lasse H. Pedersen, and Evert Vrugt
(2011).
“Global Market and Funding Liquidity Risk Across Asset
Classes,”
“Too Big to Report,” Andrea Frazzini and Lasse Heje Pedersen (2010).
“Crowded Trades and Liquidity Risk,” Tobias Moskowitz and Lasse Heje Pedersen (2008).
Policy Papers, Op-Eds, and blogs
“A Tax on Systemic Risk,” Viral Acharya, Lasse H. Pedersen,
Thomas Philippon, and Matt Richardson (2010), in NBER
publication on Quantifying Systemic Risk, ed. by Joseph Haubrich
and Andrew Lo.
“Taxing Systemic Risk,” Viral Acharya, Lasse H. Pedersen,
Thomas Philippon, and Matt Richardson (2010), in
Regulating
Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance,
ed. by Acharya, Cooley, Richardson, and Walter,
Wiley, 2010, chap. 5.
“Regulating Systemic Risk,” Viral Acharya,
Lasse Heje Pedersen, Thomas
Philippon, and Matt Richardson (2009), in Restoring Financial
Stability: How to Repair a Failed System, ed. by Viral Acharya and Matt Richardson, Wiley, chap. 13, 283-304. Summary.
“Hedge Funds in the Aftermath of the Financial
Crisis” Stephen
Brown, Marcin Kacperczyk,
Alexander Ljungqvist, Anthony Lynch, Lasse Heje Pedersen, and Matthew
Richardson (2009), in Restoring
Financial Stability: How to Repair a Failed System, ed. by Viral Acharya and Matt Richardson, Wiley, chap. 6, 157-178. Summary.
”Saving
free markets from market failure: institutions and liquidity are
crucial,” Lasse Heje Pedersen, Forbes,
9/29/2009.
Chinese version, sina.com.cn: 佩德森：避免自由市场失灵
“A
proposal to prevent wholesale financial failure,” Lasse H. Pedersen and Nouriel Roubini, Financial Times, 1/30/2009.
“Liquidity
risk and the current crisis,”
Lasse H. Pedersen, Stern
on Finance and VoxEU.
books
“Liquidity,” Yakov Amihud,
Haim Mendelson, and Lasse Heje Pedersen, Oxford
University Press, forthcoming.
RESEARCH IN PICTURES: (see also slides on frictional finance: pdf, ppt)
Market
liquidity risk increases the required return:
Haircuts/ margin requirements increase the required
return:
and cause deviations from the Law of One Price such as
the CDS-bond basis:
A second monetary tool can help: a reduction of
haircuts via central bank lending facilities:
Market liquidity and funding liquidity risk interact in liquidity spirals:
When this happens, everyone runs for the exit, and
prices drop and rebound:
Slow moving capital can make this a long process with risks and opportunities:
Liquidity risk also helps explain currency crashes and carry trade profits
(i.e., the deviation of the Uncovered Interest-Rate Parity):
… and, together with the demand pressure, it
explains option prices:
… and sheds some light on the significant
returns of value and momentum across all major asset classes, especially their
interesting global correlation structure:
Illiquidity changes the optimal portfolio choice and trading strategy, implying
partial trading towards a target that emphasizes signals with slow alpha decay:
Search frictions contribute to illiquidity; easier
access to counterparties decreases bid-ask spreads and increases prices:
Search illiquidity affects the resiliency to a
liquidity shock: low meeting frequencies implies a larger price drop, a slower
recovery, and higher returns:
Search frictions also raise lending fees, which in
turn raise security prices – so having more short sellers may initially
elevate prices:
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H. Pedersen's homepage