Research statement -
List of citations -
My SSRN
page - My NBER
page
Published
and Forthcoming Papers
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), pp. 2097-2137
[pdf]
- [abstract]
- [separate
appendix] - [quarterly data
(xls)] - [annual data (xls)]
Journal of Finance, June 2009,
Vol. 64 (3)
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
Journal of Financial Economics, August 2009, Vol. 93 (2), pp. 292-324
2007-08 Glucksman Institute Research Prize - First Prize
[pdf]
- [abstract]
8. Information
Acquisition and Under-Diversification,
with Laura Veldkamp
Review of Economic Studies,
April 2010
[pdf]
- [abstract]
9.
How
Much Does Household Collateral Constrain Regional Risk Sharing?,
with Hanno Lustig,
Accepted at the Review of Economic Dynamics
[pdf]
- [abstract]-[Separate
appendix for non-separable preferences]
- [data appendix (pdf)]
10. Why Has House Price
Dispersion Gone up?
with Pierre-Olivier Weill
Conditionally accepted at the Review of Economic Studies
[pdf]
- [abstract]-
Published
and Forthcoming Papers
11. 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]
12. Financial Economics, Market Efficiency and Return Predictability, with Ralph
Koijen
Forthcoming at Encyclopedia of Complexity & System Science, Robert Meyers
(Ed.)
[pdf]
13.
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]
14. Mortgage Origination and Securitization in the Financial Crisis, with Dwight Jaffee, Anthony Lynch, and Matthew Richardson, in: Restoring Financial Stability: How to Repair a Failed System, John Wiley and Sons, 2009, edited by V. Acharya and M. Richardson, Chapter 1.
15. What to Do About the Government Sponsored Enterprises?, with Dwight Jaffee, Matthew Richardson, Lawrence White, and Robert Wright, in: Restoring Financial Stability: How to Repair a Failed System, John Wiley and Sons, 2009, edited by V. Acharya and M. Richardson, Chapter 4.
Papers under Submission or Revision
16. The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives, with John Ameriks, Andrew Caplin, and Steven Laufer, November 11, 2009
ABSTRACT: The ``annuity puzzle", conveying the apparently low interest of retirees in longevity insurance, is central to household finance. One possible explanation for low annuitization is ``Public Care Aversion" (PCA), retiree aversion to simultaneously running out of wealth and being in need of long term care. We estimate such aversion using a survey instrument that includes hypothetical questions. In addition to finding that PCA is very significant, our estimates suggest that bequest motives spread deep into the middle class. In terms of financial design, our results indicate that the most effective way to increase take-up rates for annuities is to make special allowance for long term care expenses.
[Survey appendix]
17. The Wealth-Consumption Ratio, with Hanno Lustig and Adrien Verdelhan, August 25, 2009
ABSTRACT: We set up an exponentially affine stochastic discount factor model for bond yields and stock returns in order to estimate the prices of aggregate risk. We use the estimated risk prices to compute the no-arbitrage price of a claim to aggregate consumption. The price-dividend ratio of this claim is the wealth-consumption ratio. Our estimates indicate that total wealth is much safer than stock market wealth. The consumption risk premium is only 2.2 percent, substantially below the equity risk premium of 6.9 percent. As a result, the average US household has more wealth than one might think; most of it is human wealth. Nearly all of the variation in total wealth can be traced back to changes in long-term real interest rates. Contrary to conventional wisdom, we find that events in bond markets, not stock markets, matter most for understanding fluctuations in total wealth.
[data]
18.
Technological Change and the Growing Inequality in
Managerial Compensation,
with Hanno Lustig
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.
Working Papers
19. The Cross-Section and Time Series of Stock and Bond Returns, with Ralph Koijen and Hanno Lustig, September 17, 2009
ABSTRACT: We show that the cross-section of expected returns of stock portfolios sorted along the book-to-market dimension can be explained using a factor, which we call the KLN factor, that is a linear combination of (contemporaneous) forward rates. It has a correlation of 82\% with the Cochrane-Piazzesi (2005, CP) factor, itself a linear combination of the same (lagged) forward rates. Since the CP factor is a strong predictor of future excess bond returns, the high correlation between the KLN and the CP factors suggests a tight link between the cross-section of stock returns and bond risk premia. Inspired by this finding, we develop a parsimonious no-arbitrage stochastic discount factor model that can price both the cross-section of stock and bond returns. Featuring only three priced factors, all of which are yields, the model obtains a mean absolute pricing error of 40 basis points per year across 5 maturity-sorted government bond portfolios, 10 book-to-market-sorted stock portfolios, and the aggregate stock market. The CP factor is responsible for pricing the spread between stock portfolios, the dividend yield prices the mean of stock returns, and the level of the term structure prices the cross-section of bond returns. With two additional risk price parameters, the model also replicates the dynamics of bond yields as well as the time-series predictability of stock and bond returns. The value premium seems related to fundamental economic risk. Since the returns on value stocks are high when CP is high, which typically occurs near the end of a recession, value stocks carry high returns exactly when investors need it the least.
20. Macroeconomic Implications of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium, with Jack Favilukis and Sydney Ludvigson, November 11, 2009
ABSTRACT: We study a two-sector general equilibrium model of housing and non-housing production where heterogeneous households face limited risk-sharing opportunities as a result of incomplete financial markets. The model generates substantial variability in national house price-rent ratios, both because they fluctuate endogenously with the state of the economy and because they rise in response to a relaxation of credit constraints and decline in housing transaction costs (financial market liberalization). We find that a financial liberalization plus an infusion of exogenous capital calibrated to match the increase in foreign ownership of U.S. Treasuries from 2000-2007 generates more than half of the increase in three out of four national house price-rent ratios over this period. A financial market liberalization drives risk premia in both the housing and equity market down, shifts the composition of wealth for all age and income groups towards housing, and leads to a short-run boom in aggregate consumption but a short-run bust in investment. By contrast, an infusion of foreign capital by governmental holders increases risk-premia in both the housing and equity markets. Finally, the model implies that pro-cyclical increases in equilibrium price-rent ratios reflect lower future housing returns, not higher future rents.
21. Attention Allocation Over the Business Cycle, with Marcin Kacperczyk and Laura Veldkamp, October 20, 2009
ABSTRACT: The invisibility of information prevents direct investigation of information-based industries, such as financial services. To surmount this obstacle, we develop a model that uses an observable variable -- the state of the business cycle -- to predict information choices. Information choices, in turn, predict aggregate investment patterns. Because the theory begins and ends with observable variables, we can test it, using data on the portfolios and profits of actively managed mutual funds. The results suggest that some, but not all, fund managers process information in a value-maximizing way for their clients and that these skilled managers outperform others.
[separate appendix (pdf)]
22. 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)]
Work in Progress
23. Optimal Retirement Risk Management, with Ralph Koijen and Motohiro Yogo
Book Project
Exercises in Recursive Macroeconomic Theory, 1st Edition, with Lars Ljungqvist, Thomas Sargent, and Pierre-Olivier Weill