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Working Paper
Very long-run discount rates
We provide direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. We exploit a unique feature of housing markets in the U.K. and Singapore, where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 99 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices reflects the present value of perpetual rental income starting at ...
Conference Paper
Credit default swap spreads and systemic financial risk
Working Paper
The Decline of the Variance Risk Premium: Evidence from Traded and Synthetic Options
Equity index options historically displayed sharply negative returns and CAPM alphas. This could reflect investor risk preferences or intermediary frictions. We document that over the past 15 years, option alphas have become indistinguishable from zero. We also introduce synthetic options, that, under some conditions, reflect risk preferences of the average equity investor, independent of option-market frictions. Synthetic options never, over the last 100 years, had negative alpha, indicating that equity investors never required high compensation for market downturns. An intermediary-based ...
Working Paper
The Inherent Nonlinearity in Learning: Implications for Understanding Stock Returns
Financial markets (and more generally the real economy) display a wide range of important nonlinearities. This paper focuses on stock returns, which are skewed left– generating crashes– and have volatility that moves over time, is itself skewed, is strongly related to the level of prices, and displays long memory. This paper shows that such behavior is actually almost inevitable when prices are formed by investors acquiring information about the true, but latent, value of stocks. It studies a general model of filtering in which agents receive signals about the fundamental value of the ...