Chair of Finance
Research Working Papers
- The Rate of Market Efficiency (with Jose M. Marin — Revise and Resubmit in The Journal of Finance)
In this paper we introduce a new methodology to measure market efficiency. We introduce the concepts of Model Performance Ratio (MPR) and Rate of Market Efficiency (RME). The former ranks alternative asset pricing models; the later, allows for measurement and comparisons of market efficiency over time and across markets. We apply the new methodology to the case of publicly available accounting information and find that: (i) the single factor model (CAPM) is undoubtedly the best performing pricing model out of a total of five multifactor specifications; (ii) market inefficiency is a broad phenomena; (iii) markets have become more efficient over time; (iv) there is heterogeneity in efficiency across equity markets, but it tends to disappear when microcap stocks are excluded from the analysis. The documented increase in market efficiency is in sharp contrast with the evolution of thinking about market efficiency and the rise of behavioral finance. The dominance of the CAPM casts serious doubts on the current approach in the anomalies literature, that rests in suitably enlarged multifactor specifications within the Fama and French paradigm.
- The Forward-looking Disclosures of Corporate Managers: Theory and
Evidence (with Reint Gropp & Julian Opferkuch)
We consider an infinitely repeated game where an informed long-lived manager has to raise funds from short-lived investors for the financing of a project. In order to signal project quality to investors, the manager can make a (possibly costly) forward-looking disclosure about the success potential of her project. We find the following: If a manager’s disclosures are associated with costs, she will never release statements that convey no information to external investors. Further, the managers of firms that are highly transparent and feature significant disclosure related costs will always refrain from public disclosures. On the other hand, a disclosure policy where a manager always releases accurate forward-looking statements can be sustained more easily for firms that are opaque and profitable. Under certain conditions, this is the manager’s only possible disclosure policy. Using an index which captures the quantity of forward looking disclosures in public firms’ 10-K reports, we find that for opaque firms, our index is positively correlated with a firm’s profitability and financing needs. For transparent firms, we find only a weak relation between our index and firm fundamentals. We also find that the overall level of forward-looking disclosures significantly declined between 2001 and 2009, which might have been a result of the Sarbanes-Oxley Act from 2002.
Published and Forthcoming Papers
- Out-of-Sample Equity Premium Predictability and Sample Split Invariant Inference (with Gueorgui I. Kolev — forthcoming in The Journal of Banking and Finance)
For a comprehensive set of 21 equity premium predictors we find dramatic disagreement between out-of-sample predictability results depending on the choice of the sample split date. To resolve this issue we propose reporting in graphical form the out-of-sample predictability criteria for every possible sample split, and two out-of-sample tests that are invariant to the sample split choice. We provide Monte Carlo evidence for the validity of the bootstrap based inference we propose. We find that many investors making decisions in real time could have benefited from conditional predictions. The in-sample, and the sample split invariant out-of-sample mean and maximum tests that we propose, are in broad agreement. We also show how one can construct sample split invariant out-of-sample predictability tests that simultaneously control for data mining across many variables.
- Stock Returns and Future Tense Language in 10-K Reports (The Journal of Banking & Finance, Volume 71, October 2016)) Covered by the Wall Street Journal
This paper shows that firms talking less about the future in their annual reports generate positive abnormal returns of about 5% annually. I measure how much companies talk about the future in their annual 10-K reports by the frequency of the verbs will, shall, and going to. The evidence favors a risk-based interpretation: Firms that use less future tense in their report offer higher returns since they are riskier. These results are consistent with finance theories stating that investors need to be rewarded for holding stocks of firms that put less information about the future in the marketplace.
- Revealing the Hidden Language of Complex Networks (with Ömer Nebil Yaveroğlu, Noël Malod-Dognin, Darren Davis, Zoran Levnajic, Vuk Janjic, Aleksandar Stojmirovic & Nataša Pržulj — Nature Scientific Reports, 2014)
Sophisticated methods for analysing complex networks promise to be of great benefit to almost all scientific disciplines, yet they elude us. In this work, we make fundamental methodological advances to rectify this. We discover that the interaction between a small number of roles, played by nodes in a network, can characterize a network’s structure and also provide a clear real-world interpretation. Given this insight, we develop a framework for analysing and comparing networks, which outperforms all existing ones. We demonstrate its strength by uncovering novel relationships between seemingly unrelated networks, such as Facebook, metabolic, and protein structure networks. We also use it to track the dynamics of the world trade network, showing that a country’s role of a broker between non-trading countries indicates economic prosperity, whereas peripheral roles are associated with poverty. This result, though intuitive, has escaped all existing frameworks. Finally, our approach translates network topology into everyday language, bringing network analysis closer to domain scientists.
- Consequences of increased longevity on wealth, fertility, and population growth (with Aleksandar Bogojevic & Antun Balaž — Physica A, 2008)
We present, solve and numerically simulate a simple model that describes the consequences of increased longevity for fertility rates, population growth and the distribution of wealth in developed societies. We look at the consequences of the repeated use of life extension techniques and show that they represent a novel commodity whose introduction will profoundly influence key aspects of the economy and society in general. In particular, we uncover two phases within our simplified model, labeled as ‘mortal’ and ‘immortal’. Within the life extension scenario it is possible to have sustainable economic growth in a population of stable size, as a result of dynamical equilibrium between the two phases.
- Valuing Mortgage Insurance Contracts in Emerging Market Economies (with Ashok Bardhan & Branko Urošević — The Journal of Real Estate Finance and Economics, 2006)
We develop a new option-based method for the valuation of mortgage insurance contracts in closed form in an economy where agents are risk neutral. While the proposed valuation method is general and can be used in any market, it may be particularly useful in emerging market economies where other existing methods may be either inappropriate or are too difficult to implement because of the lack of relevant data. As an application, we price a typical Serbian government-backed mortgage insurance contract.