research

 

 

My research has evolved around the following subject areas.

 

Empirical Asset Pricing

 

These studies look at the pricing of assets in a global setting using different risk-return models. My PhD dissertation and the RFS-2003 paper were testing the consumption based asset pricing model with incomplete markets and consumption heterogeneity. The next set of projects evolved around the examination of industry risk in the pricing of equity returns across countries. My JIFMIM-2000 with Pavel Fedorov from Morgan Stanley focused solely on the newly emerging Russian market. It established the existence of differences across various industries in terms of their integration with the world market. In the subsequent MS-2004 paper with Francesca Carrieri and Vihang Errunza, we explicitly find some evidence for global industry specific risk across several industries. These findings prompted us to further examine the diversification benefits resulting from cross-country versus cross-industry investing. Finally, in the JFQA-2014 paper with Ruslan Goyenko, we analyze the impact of changes in the liquidity of US Treasury bills on global equity returns.

 

Observe that the cross-country variance of consumption growth (blue series) increases when the world aggregate consumption (pink series) drops.

 

Foreign Listings

 

The series of papers on this subject with Michael Schill dates back to our PhD studies at the University of Washington. After attending a couple of seminars on ADRs, we wondered why almost everyone in the profession examines foreign listing on US exchanges but not in other countries. This question has prompted us to hand-collect the first global sample of foreign listed securities based on which we conducted several projects that could not be completed having data on foreign listings in only one market. We discovered the following. First, in the RFS-2004 paper, we find that firms, similar to investors, have preference for listings in familiar markets. Second, contrary to the conventional wisdom, we show in the RFS-2009 and JBF-2012 papers that firms with foreign listing placements do not experience permanent cost of capital gains, even if they are placed in the United States. Finally, in the JFQA-2016 paper we observe that the history of foreign listings shows big waves over time in their origin and destination countries. Using a gravity model, we find that cross-listing waves in a given host country coincide with both its own economic and financial outperformance and that of proximate home markets.

 

Below is the annualized 24-month moving average cumulative risk-adjusted return of cross-listed firms from 10 years before to 10 years after the listing. Note that the average return (cost of capital) of these firms in Period 4 is similar to that in Period 1.

 

Fund Performance

 

Two papers on mutual funds with Susan Christoffersen look primarily at the impact of external factors (such as location) on fund performance and turnover in a cross-section and over time. The first paper, JFE-2009, shows that funds in US financial centers on average perform better than in smaller towns. Yet this outperformance comes only thanks to those managers who stay in financial centers at least several years. In the follow-up JFI-2011 paper, we observe that fund trading is also quite different across locations and manager characteristics, but these differences do not explain the performance patterns found in the earlier work. The recent JFQA paper with Saurin Patel focuses on the impact of fund organizational structure on its performance. We find that team-managed funds on a risk-adjusted basis perform better than single-managed funds across a variety of metrics. In the subsequent WP we also find that this performance discrepancy is particularly strong among funds located in large metropolitan areas. Moreover, team-managed funds appear to engage much less in such illegal trading activity as portfolio pumping.

 

Observe that average mutual fund returns increase with city population size.

 

Statistical Issues and Market Anomalies

 

Together with Wayne Ferson, my dissertation advisor, and Tim Simin, we completed several projects that question the validity of statistical inferences in several well-known settings in financial economics. The first paper, JFM-2000, illustrates that sorting of stocks on some firm-specific attribute and two-stage regression methodology used to document the importance of size and book-to-market effects for the cross-section of returns can lead to these types of findings even if returns are unrelated to the attribute risk. Our JF-2003 and JFQA-2008 papers look at statistical inferences in cases of simple predictive regressions of stock returns and conditional asset pricing models, respectively. We find that the predictive power for stock returns of many standard predictors such as dividend yield, short-term interest rates, etc., is grossly overstated due to the highly autocorrelated nature of these instruments. This problem is smaller when testing conditional asset pricing models with time-varying intercepts and betas.

 

Here are the results of the regression of monthly S&P 500 index returns on various known predictors, one at a time. Note that the majority of these predictors are highly autocorrelated.