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Asset Return Dynamics

Paper Session

Friday, Jan. 3, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Seaport A
Hosted By: American Finance Association
  • Chair: Doron Avramov, IDC Herzliya

Geographic Lead-Lag Effects

Christopher Parsons
,
University of Washington
Riccardo Sabbatucci
,
Stockholm School of Economics
Sheridan Titman
,
University of Texas-Austin

Abstract

We document lead-lag effects in stock returns between co-headquartered firms operating in different sectors. Such geographic lead-lags yield risk-adjusted returns of 5-6% per year, about half that observed for industry lead-lag effects. However, while industry lead-lag effects are strongest among small, thinly traded stocks with low analyst coverage, geographic lead-lags are unrelated to these proxies for investor scrutiny. We propose an explanation linking this to the structure of the investment analyst business, which is organized by sector, rather than by geographic region. In particular, our findings suggest that in lead-lag relationships, analysts common to both the leading and lagging firm are important, irrespective of the number of analysts covering each individually.

A Model-Free Term Structure of United States Dividend Premiums

Stephan Florig
,
Karlsruhe Institute of Technology
Maxim Ulrich
,
Karlsruhe Institute of Technology
Christian Wuchte
,
Karlsruhe Institute of Technology

Abstract

We construct a model-free term structure of dividend risk premiums from option prices and aggregate analyst forecasts. Applying the method to 2004 - 2017 U.S. data, we find it is hump-shaped. Its level increases in business cycle contractions and decreases during expansions. The on average negative dividend term premium steepens in con- tractions and flattens in expansions, driven by strong variations in short-horizon div- idend premiums. Buying the next year of S&P 500 dividends whenever the one-year dividend risk premium is positive has earned twice the Sharpe ratio of the index.

Asset Pricing of International Equity under Cross-Border Investment Frictions

Thummim Cho
,
London School of Economics
Argyris Tsiaras
,
University of Cambridge

Abstract

We develop a tractable asset pricing model of international equity markets to investigate the impact of frictions in cross-border financial investments on equity return dynamics and cross-border equity holdings across countries. We characterize the equilibrium of the model analytically at the limit as one country becomes large relative to all other countries. Our results clarify the distinct impact of cross-border holding costs, cash-flow fundamentals comovement, and preferences on cross-border portfolio holdings, return comovement, and risk premia. The model offers a unified explanation for key empirical regularities in the cross-section of equity markets regarding cross-country return correlations, CAPM pricing errors, and equity portfolio home bias, which we document using aggregate return and portfolio holdings data from the U.S. and a cross-section of 40 other countries. Overall, our results suggest that asset pricing tests for international equity markets should take into account differences across countries in the degree of cross-border frictions.

Frequency Dependent Risk

Andreas Neuhierl
,
University of Notre Dame
Rasmus Varneskov
,
Copenhagen Business School

Abstract

We provide a nonparametric framework for studying state vector dynamics and its associated risk prices. In a setting where the stochastic discount factor (SDF) decomposes into permanent and transitory components, we analyze their contribution to the unconditional asset return premium using frequency domain techniques. We show analytically that the co-spectrum between returns and the SDF only displays frequency dependencies through the state vector. Moreover, we demonstrate that state vector dynamics and its risk prices can be uncovered by studying the covariance between asset returns. Empirically, we find low and high-frequency risk to be differentially priced for US equities.
Discussant(s)
Tobias Moskowitz
,
Yale University
Jules van Binsbergen
,
University of Pennsylvania
Nancy Xu
,
Boston College
Markus Pelger
,
Stanford University
JEL Classifications
  • G1 - General Financial Markets