Nber Property Pricing Conference
I spent Fri at the NBER Asset Pricing conference inwards Palo Alto. All the papers were actually good, together with the discussions were peculiarly thoughtful. Here are a few highlights that weblog readers mightiness like.
There's no meliorate means to wake upward than amongst a practiced puzzle. Emanuel Moench presented his newspaper amongst David Lucca,The Pre-FOMC Announcement Drift.(If these links don't operate for you, virtually papers tin hold upward flora amongst google.)
Here are average cumulative returns on the S&P 500 inwards the twenty-four hr menstruum preceding scheduled FOMC announcements (when the Fed says what it volition do amongst involvement rates). The greyish shaded areas are 2 criterion fault confidence intervals. The S&P500 drifts upward one-half a per centum inwards the twenty-four hr menstruum before FOMC announcements! In fact, 80% of the full provide on the S&P500 over this menstruum was earned on these days.
So what the heck is this? Obviously, at that topographic point was unopen to disssection that it is spurious. Stocks are thence volatile that it's slowly to uncovering three days that trace of piece of occupation concern human relationship for 80% of its full return, permit solitary a few hundred. But they did non fish.
I am notwithstanding a lilliputian worried -- at that topographic point are ii large positive outliers inwards the distribution of returns (Figure 2) together with a missing left tail. If nosotros had ii to a greater extent than such outliers on the negative side, would those confidence intervals larn bigger? Did options markets know that the left tail is missing? The blueprint is at that topographic point for international stocks earlier U.S.A. of America announcements, but non inwards bond markets. But Annette Vissing-Jorgenson, setting the vogue for the day, dissected it every which means together with didn't larn rid of it, thence give-and-take moved on.
It's non volatility (higher volatility mightiness generate a higher hateful return) -- realized volatility is lower inwards these periods than other periods. And book is lower likewise -- run into at left.
This observation generated what I'll telephone telephone the consensus of the room: Lots of equity traders sit down out or hedge their positions inwards advance of this day. (Confirmed yesteryear people inwards the room who verbalise to such traders.) Anyone trading on the morn earlier an FOMC statement is suspected of beingness "informed," which makes markets less liquid. So the opportunity is concentrated together with held yesteryear a narrower group.
Emanuel answered that they did regressions including these together with all sorts of liquidity measures, which didn't larn rid of the puzzle. But when yous do that, yous assess how much expected provide premium corresponds to illiquidity yesteryear the correlation of returns amongst liquidity on other days, together with at that topographic point are all sorts of reasons to mean value this mensuration underestimates the effect. Anyway, equally a fan of facts linking trading to pricing, it's a peachy paper. (And a practiced hint to PhD students: brand sexy graphs similar these.)
Annette also brought upward the issue, should journals set out papers that simply pose well-documented puzzles, without offering (usually lame -- my view) theory or explanation? I mean value this newspaper makes a hearty illustration for "yes!"
Xiaoji Lin presented his newspaper amongst Jack Favilukis Wage Rigidity: H5N1 Solution to Several Asset Pricing Puzzles. How tin I brand a full general equilibrium model amongst adjustment costs together with wage rigidity sexy for a blog?
Well, this i is. "Standard" real-business cycle models drive the economic scheme amongst productivity shocks. When at that topographic point is a practiced such shock, investment together with output become up, together with people operate harder. But, the marginal production of project goes upward (that's why they operate harder), thence reward become up. Since reward become up, profits don't become upward that much, together with equity isn't that risky. By putting gummy reward inwards the model, straight off reward are similar a bond payment, thence the firms profits are leveraged, making them to a greater extent than risky. This helps to fit a wide attain of property pricing facts. I'm peculiarly impressed that the model generates a spread of value vs. growth firms (hard to do) together with a value premium.
The impulse-responses at left demonstrate the basic idea. You're looking at responses to technology shocks (growth inwards technology follows an AR(1), thence at that topographic point is unopen to technology momentum.) You run into reward rise chop-chop inwards the "standard" model to gibe the higher productivity. You run into profits much to a greater extent than affected inwards the middle when reward can't adjust.
Lots of give-and-take here. Of class "stickiness" is an abstraction for all the interesting things that labor/macro people set inwards their models. One practiced comment, reward are non "smoothed," they're "screwed" -- workers don't larn the introduce value of the marginal production increase (or experience it if a decrease) equally they mightiness nether an intertemporal smoothing contract. That probable has a large termination on the value of stocks.
The final i I'll nurture (they were all great, simply running out of steam here) Erkko Etula together with Tyler Muir presented their newspaper amongst Tobias Adrian on "Financial Intermediaries together with the Cross Section of Asset Returns"
They gear upward shocks to broker-dealer leverage from the current of funds, together with and thence gear upward a single-factor property pricing model, expected excess provide = beta on broker-dealer leverage shocks times lambda. Here it prices the size together with value portfolios, momentum portfolios, together with bond portfolios! All amongst a single, economically motivated factor!
Much give-and-take (of course). One possibility, which I called the "AQR theory of property pricing." Suppose yous facial expression at the portfolio of i trader, who is invested inwards value, momentum, small, together with term risk. The the wealth, together with (if borrowing is pretty constant) leverage of that agent volition hold upward a practiced pricing component subdivision for those anomalies. So simply because leverage plant good does non necessarily testify the commons causal story, that these broker-dealers are "marginal," they brand it to problem sometimes together with and thence foremost selling securities inwards "fire sales," etc. If they sell, later all, somebody else must buy, thence they're "marginal" too. Much practiced give-and-take on the facts too, amongst peachy graphs yesteryear Bryan Kelly showing that it is a fleck unstable over dissimilar samples.
Lubos Pastor presented his newspaper amongst Pietro Veronesi "Political Uncertainty together with Risk Premia" amongst a peachy give-and-take yesteryear Nick Bloom showing us the latest of his dubiety index. Welcome to the Krugman-thinks-you're-a-moron club, Nick.
Snehal Banerjee presented his newspaper amongst Jeremy Graveline, "Trading inwards Derivatives When the Underlying is Scarce", actually interesting (especially to me, given writing on the three com / palm issue) amongst Nicolae Garleanu discussing.
Chris Polk, presented his newspaper Dong Lou "Comomentum: Inferring Arbitrage Capital from Return Correlations" amongst a peachy give-and-take yesteryear Robert Novy-Marx. They uncovering that momentum plant when the pairwise correlations of momentum stocks are low, indicating the merchandise is "less crowded," together with conversely.
All cool stuff, but but the bird is landing. (Thanks to glamorous Southwest airlines for onboard wifi.)
Here are average cumulative returns on the S&P 500 inwards the twenty-four hr menstruum preceding scheduled FOMC announcements (when the Fed says what it volition do amongst involvement rates). The greyish shaded areas are 2 criterion fault confidence intervals. The S&P500 drifts upward one-half a per centum inwards the twenty-four hr menstruum before FOMC announcements! In fact, 80% of the full provide on the S&P500 over this menstruum was earned on these days.
So what the heck is this? Obviously, at that topographic point was unopen to disssection that it is spurious. Stocks are thence volatile that it's slowly to uncovering three days that trace of piece of occupation concern human relationship for 80% of its full return, permit solitary a few hundred. But they did non fish.
I am notwithstanding a lilliputian worried -- at that topographic point are ii large positive outliers inwards the distribution of returns (Figure 2) together with a missing left tail. If nosotros had ii to a greater extent than such outliers on the negative side, would those confidence intervals larn bigger? Did options markets know that the left tail is missing? The blueprint is at that topographic point for international stocks earlier U.S.A. of America announcements, but non inwards bond markets. But Annette Vissing-Jorgenson, setting the vogue for the day, dissected it every which means together with didn't larn rid of it, thence give-and-take moved on.
This observation generated what I'll telephone telephone the consensus of the room: Lots of equity traders sit down out or hedge their positions inwards advance of this day. (Confirmed yesteryear people inwards the room who verbalise to such traders.) Anyone trading on the morn earlier an FOMC statement is suspected of beingness "informed," which makes markets less liquid. So the opportunity is concentrated together with held yesteryear a narrower group.
Emanuel answered that they did regressions including these together with all sorts of liquidity measures, which didn't larn rid of the puzzle. But when yous do that, yous assess how much expected provide premium corresponds to illiquidity yesteryear the correlation of returns amongst liquidity on other days, together with at that topographic point are all sorts of reasons to mean value this mensuration underestimates the effect. Anyway, equally a fan of facts linking trading to pricing, it's a peachy paper. (And a practiced hint to PhD students: brand sexy graphs similar these.)
Annette also brought upward the issue, should journals set out papers that simply pose well-documented puzzles, without offering (usually lame -- my view) theory or explanation? I mean value this newspaper makes a hearty illustration for "yes!"
Xiaoji Lin presented his newspaper amongst Jack Favilukis Wage Rigidity: H5N1 Solution to Several Asset Pricing Puzzles. How tin I brand a full general equilibrium model amongst adjustment costs together with wage rigidity sexy for a blog?
Well, this i is. "Standard" real-business cycle models drive the economic scheme amongst productivity shocks. When at that topographic point is a practiced such shock, investment together with output become up, together with people operate harder. But, the marginal production of project goes upward (that's why they operate harder), thence reward become up. Since reward become up, profits don't become upward that much, together with equity isn't that risky. By putting gummy reward inwards the model, straight off reward are similar a bond payment, thence the firms profits are leveraged, making them to a greater extent than risky. This helps to fit a wide attain of property pricing facts. I'm peculiarly impressed that the model generates a spread of value vs. growth firms (hard to do) together with a value premium.
Lots of give-and-take here. Of class "stickiness" is an abstraction for all the interesting things that labor/macro people set inwards their models. One practiced comment, reward are non "smoothed," they're "screwed" -- workers don't larn the introduce value of the marginal production increase (or experience it if a decrease) equally they mightiness nether an intertemporal smoothing contract. That probable has a large termination on the value of stocks.
The final i I'll nurture (they were all great, simply running out of steam here) Erkko Etula together with Tyler Muir presented their newspaper amongst Tobias Adrian on "Financial Intermediaries together with the Cross Section of Asset Returns"
They gear upward shocks to broker-dealer leverage from the current of funds, together with and thence gear upward a single-factor property pricing model, expected excess provide = beta on broker-dealer leverage shocks times lambda. Here it prices the size together with value portfolios, momentum portfolios, together with bond portfolios! All amongst a single, economically motivated factor!
Much give-and-take (of course). One possibility, which I called the "AQR theory of property pricing." Suppose yous facial expression at the portfolio of i trader, who is invested inwards value, momentum, small, together with term risk. The the wealth, together with (if borrowing is pretty constant) leverage of that agent volition hold upward a practiced pricing component subdivision for those anomalies. So simply because leverage plant good does non necessarily testify the commons causal story, that these broker-dealers are "marginal," they brand it to problem sometimes together with and thence foremost selling securities inwards "fire sales," etc. If they sell, later all, somebody else must buy, thence they're "marginal" too. Much practiced give-and-take on the facts too, amongst peachy graphs yesteryear Bryan Kelly showing that it is a fleck unstable over dissimilar samples.
Lubos Pastor presented his newspaper amongst Pietro Veronesi "Political Uncertainty together with Risk Premia" amongst a peachy give-and-take yesteryear Nick Bloom showing us the latest of his dubiety index. Welcome to the Krugman-thinks-you're-a-moron club, Nick.
Snehal Banerjee presented his newspaper amongst Jeremy Graveline, "Trading inwards Derivatives When the Underlying is Scarce", actually interesting (especially to me, given writing on the three com / palm issue) amongst Nicolae Garleanu discussing.
Chris Polk, presented his newspaper Dong Lou "Comomentum: Inferring Arbitrage Capital from Return Correlations" amongst a peachy give-and-take yesteryear Robert Novy-Marx. They uncovering that momentum plant when the pairwise correlations of momentum stocks are low, indicating the merchandise is "less crowded," together with conversely.
All cool stuff, but but the bird is landing. (Thanks to glamorous Southwest airlines for onboard wifi.)
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