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Working Paper
Investing in the Batteries and Vehicles of the Future: A View Through the Stock Market
A large number of companies operating in the EV and battery supply chain have listed on a major U.S. stock exchange in recent years. This paper investigates 1) how these companies’ stock returns are related to systematic risk factors that can explain movements in the stock market and 2) how these companies’ idiosyncratic returns are related to one another. To do so, I compile a unique data set of intradaily stock returns that spans the supply chain, including companies focused on the mining of battery and EV-related critical minerals, advanced battery technology, lithium-ion battery ...
Discussion Paper
Are Stocks Cheap? A Review of the Evidence
We surveyed banks, we combed the academic literature, we asked economists at central banks. It turns out that most of their models predict that we will enjoy historically high excess returns for the S&P 500 for the next five years. But how do they reach this conclusion? Why is it that the equity premium is so high? And more importantly: Can we trust their models?
Working Paper
Pricing Poseidon: Extreme Weather Uncertainty and Firm Return Dynamics
We investigate the uncertainty dynamics surrounding extreme weather events through the lens of option and stock markets by identifying market responses to the uncertainty regarding both potential hurricane landfall and subsequent economic impact. Stock options on firms with establishments exposed to the landfall region exhibit increases in implied volatility of 5-10 percent, reflecting impact uncertainty. Using hurricane forecasts, we show that landfall uncertainty and potential impact uncertainty are reflected in prices before landfall. We find no evidence that markets incorporate better ...
Working Paper
End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly ...
Working Paper
End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly ...
Journal Article
The equity risk premium: a review of models
The authors estimate the equity risk premium (ERP)?the expected return on stocks in excess of the risk-free rate?by combining information from twenty models for the period 1960-2013. They begin their analysis by categorizing the models into five classes: trailing historical mean, dividend discount, cross-sectional estimation, regression analysis using valuation ratios or macroeconomic variables, and surveys. They find that an optimal weighted average of all models places the one-year-ahead ERP in June 2012 at 12.2 percent, close to levels reached in the mid- and late 1970s, when the ERP was ...
Working Paper
On the Origins of the Multinational Premium
How do foreign direct investment (FDI) dynamics relate to the risk premium of a firm? To answer this question, we compare the stock returns of US firms with different FDI and mergers and acquisitions (M&A) exposure to study the evolution of stock returns as firms expand into foreign markets. We document three empirical regularities. First, there are cross-sectional risk premia associated with both multinational activity and mergers and acquisitions. Second, firm-level stock returns decline when a firm undertakes M&A activity and with merger deepening. Third, future multinational acquirers ...
Report
The equity risk premium: a review of models
We estimate the equity risk premium (ERP) by combining information from twenty models. The ERP in 2012 and 2013 reached heightened levels?of around 12 percent?not seen since the 1970s. We conclude that the high ERP was caused by unusually low Treasury yields.
Report
Changing Risk-Return Profiles
We show that realized volatility in market returns and financial sector stock returns have strong predictive content for the future distribution of market returns. This is a robust feature of the last century of U.S. data and, most importantly, can be exploited in real time. Current realized volatility has the most information content on the uncertainty of future returns, whereas it has only limited content about the location of the future return distribution. When volatility is low, the predicted distribution of returns is less dispersed and probabilistic forecasts are sharper.
Discussion Paper
A Retrospective on the Life Insurance Sector after the Failure of Silicon Valley Bank
Following the Silicon Valley Bank collapse, the stock prices of U.S banks fell amid concerns about the exposure of the banking sector to interest rate risk. Thus, between March 8 and March 15, 2023, the S&P 500 Bank index dropped 12.8 percent relative to S&P 500 returns (see right panel of the chart below). The stock prices of insurance companies tumbled as well, with the S&P 500 Insurance index losing 6.4 percent relative to S&P 500 returns over the same time interval (see the center panel below). Yet, insurance companies’ direct exposure to the three failed banks (Silicon Valley Bank, ...