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Tradability of Output, Business Cycles, and Asset Prices
I examine the effect of a firm's tradability, the proportion of output that is exported abroad, on its stock returns. There are three novel empirical findings: (1) firms with higher tradability have more cyclical asset returns; (2) firms with higher tradability have more cyclical earnings growth; (3) returns of a portfolio long on firms with the highest tradability and short on firms with the lowest tradability can predict the real exchange rate. The empirical patterns are consistent with the relative price adjustment of tradable and non-tradable goods to business cycles driven by endowment ...
Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis
Using a novel dataset on central bank interventions to financial institutions, we examine the impact of capital injection announcements on systemic risk for the banking sector in the U.S. and the euro area between 2008 and 2013. We propose a new measure of options-based systemic risk called downside correlation risk premium (DCRP), which quantifies the compensation investors demand for being exposed to the risk of large correlated drops in bank stock prices. DCRP is calculated using options that provide a hedge against large drops in the price of a bank index and its individual components. We ...
Firm characteristics and empirical factor models: a data-mining experiment
"A three-factor model using the standardized-unexpected-earnings and cashflow-to-price factors explains 15 well-known asset pricing anomalies." Our data-mining experiment provides a backdrop against which such claims can be evaluated. We construct three-factor linear pricing models that match return spreads associated with as many as 15 out of 27 commonly used firm characteristics over the 1971-2011 sample. We form target assets by sorting firms into ten portfolios on each of the chosen characteristics and form candidate pricing factors as long-short positions in the extreme decile ...
Differences in Stock Returns of U.S. Firms with High and Low Tradability
In this note, I summarize the methodology and findings of my research paper and draw out the policy implications. The effects of GDP growth appear to matter more but the link between exchange rates and stock returns is also economically and statistically significant. The policy implications are that the spread in returns between U.S. firms with high and low tradability could provide a hedge against recessions. At the same time, stock returns are also informative about future exchange rate movements.
Taxonomy of Studies on Interconnectedness
This note provides a taxonomy of existing studies in the literature on interconnectedness, focusing specifically on empirical measures.