Research Papers
Journal Articles 1. Housing Collateral, Consumption Insurance and Risk Premia: an Empirical Perspective, with Hanno Lustig, 2. Stock Market Development and Economic Growth in Belgium, with Frans Buelens and Ludo Cuyvers, 3. Inside Information and the Own Company Stock Puzzle, with Laura Veldkamp, 4. Learning Asymmetries in Real Business Cycles, with Laura Veldkamp, 5. Reconciling the Return Predictability Evidence, with Martin Lettau, 6. The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street, with Hanno Lustig, 7. Information Immobility and the Home Bias Puzzle, with Laura Veldkamp 8. Mortgage Timing, with Ralph Koijen and Otto van Hemert 9. Information Acquisition and Under-Diversification, with Laura Veldkamp 10. How Much Does Household Collateral Constrain Regional Risk Sharing?, with Hanno Lustig, 11. Long-Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk, with Ralph Koijen, Hanno Lustig, and Adrien Verdelhan, American Economic Review P&P, May 2010, Vol. 100 (2), pp. 552-556 12. Why Has House Price Dispersion Gone up? with Pierre-Olivier Weill 13. Technological Change and the Growing Inequality in Managerial Compensation, with Hanno Lustig and Chad Syverson, 14. The Joy of Giving or Assisted Living? Using Strategic Surveys to Separate Bequest and Precautionary Motives, with John Ameriks, Andrew Caplin, and Steven Laufer, 15. Predictability of Stock Returns and Cash Flows, with Ralph Koijen, Book and Conference Volume Contributions 16. 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 17. Financial Economics, Market Efficiency and Return Predictability, with Ralph Koijen 18. 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. 19. 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. 20. Towards a New Architecture for U.S. Mortgage Markets: The Future of the Government Sponsored Enterprises, with Viral Acharya, Stanley Kon, Matthew Richardson, Sabri Oncu, and Lawrence White, in: Regulating Wall Street, John Wiley and Sons, 2010, edited by V. Acharya, T. Cooley, M. Richardson, and I. Walter. 21. Consumer Financial Protection, with Thomas Cooley, Xavier Gabaix, Samuel Lee, Thomas Mertens, Vicki Morowitz, Shelle Sanatana, Anjolein Schmeits, and Robert Whitelaw, in: Regulating Wall Street, John Wiley and Sons, 2010, edited by V. Acharya, T. Cooley, M. Richardson, and I. Walter. 22. International Capital Flows and House Prices: Theory and Evidence, with Jack Favilukis, David Kohn, and Sydney Ludvigson, in: Housing and the Financial Crisis, NBER, Cambridge, MA. Chapter 8, December 16, 2011
Papers under Submission or Revision 23. The Wealth-Consumption Ratio, with Hanno Lustig and Adrien Verdelhan, November 10, 2010 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. 24. Attention Allocation Over the Business Cycle, with Marcin Kacperczyk and Laura Veldkamp, November 15, 2011 ABSTRACT: This
paper provides a novel framework for analyzing the investment
management industry. At its core, this is an information-processing
industry. If they are skilled, active fund managers choose what stocks
or macro trends to research (allocate their attention) and use that
information to pick stocks or time the market. The difficulty in
testing any attention theory is that information choices are not
observable. Our main contribution is to overcome this difficulty by
specifying an equilibrium theory with a rich set of predictions and
testing these predictions in the data. Although its key ingredient is
attention, the theory is testable because it links cyclical
fluctuations (observable) to optimal attention allocation
(unobservable) to optimal investment strategies and returns
(observable). Consistent with the theory, we find that in recessions,
funds' portfolios (1) co-vary more with aggregate payoff-relevant
information, (2) exhibit more cross-sectional dispersion, and (3)
generate higher returns. The results suggest that some, but not all,
fund managers process information in a value-maximizing way and that
these skilled managers outperform others. 25. The Cross-Section and Time Series of Stock and Bond Returns, with Ralph Koijen and Hanno Lustig, December 10, 2010 ABSTRACT: We propose an arbitrage-free stochastic discount factor (SDF) model that jointly prices the cross-section of returns on portfolios of stocks sorted on book-to-market dimension, the cross-section of government bonds sorted by maturity, the dynamics of bond yields, and time series variation in expected stock and bond returns. Its pricing factors are motivated by a decomposition of the pricing kernel into a permanent and a transitory component. Shocks to the transitory component govern the level of the term structure of interest rates and price the cross-section of bond returns. Shocks to the permanent component govern the dividend yield and price the average equity returns. Third, shocks to the relative contribution of the transitory component to the conditional variance of the SDF govern the Cochrane-Piazzesi (2005, CP) factor, a strong predictor of future bond returns, price the cross-section of book-to-market sorted stock portfolios. Because the CP factor is a strong predictor of economic activity one- to two-years ahead, shocks to the importance of the transitory component signal improving economic conditions. Value stocks are riskier and carry a return premium because they are more exposed to such shocks. 26. Macroeconomic Implications of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium, with Jack Favilukis and Sydney Ludvigson, January 6, 2011 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. 27. Too-Systemic-To-Fail: What Option Markets Imply About Sector-wide Government Guarantees, with Bryan Kelly and Hanno Lustig, December 15, 2011
ABSTRACT: Investors
in option markets perceive the financial sector to be
too-systemic-to-fail. They price in a substantial collective government
bailout guarantee, which puts a floor on the value of the financial
sector as a whole, but not on its individual members. The guarantee
makes put options on the financial sector index cheap relative to put
options on its member banks. The basket-index put spread rises fourfold
from 0.8 cents per dollar insured before the financial crisis to 3.8
cents during the crisis for deep out-of-the-money options. The spread
peaks at 12 cents per dollar, or 70% of the value of the index put.
The rise in the put spread cannot be attributed to an increase in
idiosyncratic risk because the correlation of stock returns increased
during the crisis. Sector-wide tail risk, partially absorbed by the
government's collective guarantee for the financial sector, lowers the
index put prices but not the individual put prices, and hence can
explain the basket-index spread. A structural model quantitatively
matches these facts and indicates that as much as half of the value of
the financial sector during the crisis. The model solves the problem of
how to measure systemic risk in a world where the government distorts
market prices. 28. Time-Varying Fund Manager Skill, with Marcin Kacperczyk and Laura Veldkamp, November 15, 2011
ABSTRACT:
Mutual fund managers can outperform the market by picking stocks or
timing the market successfully. Previous work has estimated picking and
timing skill, assuming that each manager is endowed with a fixed amount
of each and found some evidence of picking skills and little evidence
of timing skills among successful managers. This paper estimates skill
separately in booms and recessions and finds that the extent to which
managers focus on stock picking or market timing fluctuates with the
state of the economy. Stock picking is more prevalent in booms, while
market timing dominates in recessions. We use this finding to develop a
new methodology for detecting managerial skill. The results suggest
that some but not all managers have skill. We describe the
characteristics of the skilled managers and show that skilled managers
significantly outperform the market.
Working Papers and Work in Progress 29. 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. 30. Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice, with Ralph Koijen and Motohiro Yogo, August 5, 2011 ABSTRACT: We
develop a pair of risk measures for the universe of health and
longevity products that includes life insurance, annuities, and
supplementary health insurance. Health delta measures the differential
payoff that a policy delivers in poor health, while mortality delta
measures the differential payoff that a policy delivers at death.
Optimal
portfolio choice simplifies to the problem of choosing a combination of
health and longevity products that replicates the optimal exposure to
health and mortality delta. For each household in Health and
Retirement
Study, we calculate the health and mortality delta implied by its
ownership of life insurance, annuities including defined-benefit plans,
supplementary health insurance, and long-term care insurance. For the
median household aged 51 to 58, the welfare cost of market
incompleteness and suboptimal portfolio choice is 28 percent of total
wealth. 31. Foreign Ownership of U.S. Debt: Good or Bad?, with Jack Favilukis and Sydney Ludvigson, December 15, 2011
ABSTRACT:
The last 20 years have been marked by a sharp rise in international
demand for U.S. reserve assets, or safe stores-of-value. This paper
analyzes the welfare consequences of these fluctuations in
international capital flows in a two-sector general equilibrium model
with uninsurable idiosyncratic and aggregate risks. The model implies
that the young benefit from a capital inflow due to lower interest
rates, which reduce the costs of home ownership and of borrowing
against higher expected future income. Middle-aged savers are hurt
because they are crowded out of the safe bond market and exposed to
greater systematic risk in equity and housing markets. Although they
are partially compensated for this in equilibrium by higher risk
premia, they still suffer from lower expected rates of return on their
savings. By contrast, retired individuals, who are drawing down assets
and who receive social security income that is least sensitive to the
current aggregate state, benefit handsomely from the rise in asset
values that accompanies a capital inflow. Under the veil of
ignorance, newborns gain from foreign purchases of the safe asset and
would be willing to forgo up to 1% oflifetime consumption in order to avoid a large capital outflow.
ABSTRACT:
We construct a new consumption measure as a residual from the budget
constraint. Consumption is that part of income from labor, transfers
and taxes, and from financial assets, housing, and debt and of assets
that is not reinvested. Our measurement relies on detailed data of
income and of the composition of households' asset portfolio from
Swedish registries, collected by the government as part of the tax
assessment process. As such, the registries are essentially free from
measurement error. The richness of the data allow us to impute a
household-specific portfolio return, which is important to arrive at an
accurate consumption measure with our method. The data allow us to
match households that are surveyed with a standard European-wide
Household Budget Survey with our data set, allowing a detailed
comparison of the two consumption measures. We find that the
survey-based measures understate consumption for home-owners, for
high-income, and for high-wealth households. They appear unbiased for
renters and slightly understate consumption for the youngest and
poorest in our sample. Taken together, the survey understates
consumption inequality. Sep arately, Swedish car registry data on car
transactions clearly indicate reporting biases in the survey.
Book Projects Guaranteed
To Fail: Freddie, Fannie, and the Debacle of U.S. Mortgage Finance, V. Acharya, M. Richardson, S. Van Nieuwerburgh, and L. White, Princeton University Press, March 2011
Exercises in Recursive Macroeconomic Theory, 1st Edition, with Lars Ljungqvist, Thomas Sargent, and Pierre-Olivier Weill |