Working
Papers
Momentum and Long-Run Risks (Job Market
Paper)
I model the cross section of equity securities inside a
long-run risks economy of Bansal and Yaron (2004).
Consistent with the implications of the model, I show a new
empirical stylized fact: momentum portfolios have
time-varying long-run consumption betas and time-varying
expected returns. The time variation is driven by
interactions between security-level expected returns,
long-run risk factor realizations during the formation
period and the momentum selection mechanism. Adjusting
portfolio realized returns for model-implied time-varying
expected returns eliminates the majority of momentum
profits. Simulations of a firm-level model produce a
substantial momentum effect while simultaneously generating
a large equity premium and matching other relevant moments
of the data such as transitions of securities across
momentum portfolios.
Estimation of Consumption Asset Pricing Models with
External Habit: A Small Sample Study of the Efficient
Method of Moments (Second Year Paper)
I estimate the Campbell and Cochrane (1999) external habit
model using the efficient method of moments (EMM) in a
Monte Carlo environment. A solution of the model is
required to carry out the EMM procedure; a version of the
parameterized expectations algorithm (PEA) of Den Hann and
Marcet (1990) is used, and its properties in solving the
external habit model are examined in detail. I find that
the EMM procedure generally performs well (except when
using a VAR as an auxiliary model), and produces close to
unbiased coefficients. However, long simulated samples need
to be used in solving the structural model inside the EMM
procedure.
Research in Progress
Long-Run Consumption Risk in
International Equity Markets (with Amir Yaron)
We study various possible measures of long-run risks for
the local investors in foreign countries. These measures
can be based on purely local notions of consumption, a
global aggregate or a combination such that local growth
processes are co-integrated with global consumption. We
then show that the value premium, while found
internationally, is not perfectly correlated across
countries. To the extent that long-run risk exposures
explain the value premium, its cross-country correlations
are driven by correlations of the long-run risk state
variables. We empirically investigate this possibility.
In related work, I perform an “out of sample” study of the
cross-sectional long run risks model in Zurek (2007) using
financial market and aggregate economic data for the eight
Pacific-Basin countries (Hong Kong, Indonesia, Japan,
Korea, Malaysia, Singapore, Taiwan and Thailand). As in
Zurek (2007), I argue that momentum portfolios have
time-varying exposures to aggregate consumption risk. One
implication of such time variation is that momentum
strategies should only be profitable following formation
periods when aggregate consumption growth prospects are
positive. It has been documented that developing economies
experience smaller average momentum profits than in the
U.S. One of the goals of the study is to determine whether
this reduction in magnitude of profits relative to the U.S.
arises as a result of losses following periods of negative
aggregate growth prospects using various measures of the
long-run risk
component.
Estimation
of Long-Run Risk Models by Filtering
Long-run risk models have recently become increasingly
popular in consumption-based asset pricing. However, since
the model’s debut in Bansal and Yaron (2004) and until
recently, relatively little attention has been devoted to
the model’s estimation. I explore maximum likelihood
estimation of the model augmented with a square root
process for the stochastic volatility component by
decomposing the likelihood function using a Monte Carlo
particle filter as described by Fernandez-Villaverde and
Rubio-Ramirez (2006). I focus on differences in inference
between simulated method of moments and full information
maximum likelihood estimates of the model.
