ABSTRACT: Using comprehensive data on London Interbank Offer Rate (Libor) submissions from 2001 through 2012, we provide evidence consistent with banks manipulating Libor to profit from Libor-related positions and to signal their creditworthiness during distressed times. Evidence of manipulation is stronger for banks that were eventually sanctioned by regulators and disappears for all banks in the aftermath of the Libor investigations that began in 2010. Our findings suggest that the threat of large penalties and the loss of reputation that accompany public enforcement can be effective in deterring financial market misconduct.

ABSTRACT: We combine annual stock market data for the most important equity markets of the last four centuries: the Netherlands and UK (1629–1812), UK (1813–1870), and US (1871–2015). We show that dividend yields are stationary and consistently forecast returns. The documented predictability holds for annual and multi-annual horizons and works both in- and out-of-sample, providing strong evidence that expected returns in stock markets are time- varying. In part, this variation is related to the business cycle, with expected returns increasing in recessions. We also find that, except for the period after 1945, dividend yields predict dividend growth rates.

ABSTRACT: Fund managers are double agents; they serve both fund investors and owners of management firms. This conflict of interest may result in trading to support securities prices. Tests of this hypothesis in the Spanish mutual fund industry indicate that bank-affiliated mutual funds systematically increase their holdings in the controlling bank stock around seasoned equity issues, at the time of bad news about the controlling bank, before anticipated price drops, and after non-anticipated price drops. The results seem mainly driven by bank managers’ incentives. Ownership of asset management companies thus matters and can distort capital allocation and asset prices.

ABSTRACT: The dividend-price ratio is a noisy proxy for expected returns when expected dividend growth is time-varying. This paper uses a new and forward-looking measure of dividend growth extracted from S&P 500 futures and options to correct the dividend-price ratio for changes in expected dividend growth. Over January 1994 through June 2011, dividend growth implied by derivative markets reliably forecasts future dividend growth, and the corrected dividend-price ratio predicts S&P500 returns substantially better than the standard dividend-price ratio, in-sample and out-of-sample. Time-varying expected dividend growth is important to explain price movements, especially because it is highly correlated with expected returns.

ABSTRACT: We show that Standard & Poor’s (S&P) 500 futures are pulled toward the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning) and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning).  These effects are driven by the interplay of market makers’ rebalancing of delta hedges due to the time decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors.  The associated shift in notional futures value is at least $115 million per expiration day.

Working papers
Home-country media slant and equity prices
(with Rasa Karapandza)
last version: June 2019
2018 EFA, 2018 Colorado Finance Summit, 2019 AFA,  2019 News & Finance Conference, 2019 SFS Cavalcade

ABSTRACT: We study the relation between national newspaper reporting and investor beliefs in the context of the automotive industry across the U.S., Germany, and Japan. Using large-scale hand-coded media data, we show that news about companies is systematically more positive in companies’ home countries than abroad. Home-country media slant increases substantially during bad times for companies. Abnormally high home-media news tone predicts low monthly stock returns. Daily cross-country difference in news tone predicts price deviations of cross-listed stocks. The effects are strongest when news tends to confirm investor prior beliefs and weakest when investors are likely distracted by sports events.

Horizon bias and the term structure of equity returns
(with Stefano Cassella, Huseyin Gulen, and Peter Kelly)
last version: January 2020
2019 Quadrant Behavioral Finance Conference, 2019 TAU Finance Conference, 2019 Colorado Finance Summit, 2020 ASU Sonoran Winter Finance Conference 

ABSTRACT: Ample evidence suggests that individuals are overly optimistic about future outcomes. In this paper, we extend the optimal expectations model of Brunnermeier and Parker (2005) to a multi-period setting and cast the novel prediction that optimism grows with the forecast horizon. We provide empirical evidence that professional forecasters and individuals exhibit horizon bias for forecasts of a wide variety of macroeconomic variables, in the United States and abroad. We then assess the extent to which horizon bias can help us rationalize the puzzling empirical facts regarding the term structure of equity returns. Using analysts’ earnings forecasts, we confirm that, like forecasts of other macroeconomic variables, beliefs about long-term growth are unconditionally more optimistic than beliefs about short-term growth. As predicted by a simple present value model, we also find that regimes of above-average horizon bias are associated with negative term premia, whereas regimes of low horizon bias are associated with positive term premia. Finally, we explore the time-series variation in horizon bias. In our model, the level of horizon bias depends on the perceived skewness of plausible outcomes. We confirm that the beliefs of long versus short growth expectations correlate with the market-wide implied skewness, and that the interaction between horizon bias and skewness generates strong and robust forecasts of next period’s realized equity term premium.

Disagreement in the equity options market and stock returns
(with Ruslan Goyenko)
last version: September 2019

ABSTRACT: We estimate investor disagreement from synthetic long and short stock trades in the equity options market. We show that high disagreement predicts low stock returns after positive earnings surprises and high stock returns after negative earnings surprises. These effects are symmetric for stocks, for which short sale constraints are less likely to be binding. For speculative high beta stocks, the negative effect is asymmetrically stronger. In the cross-section of all stocks and in the subset of 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.

Equity duration and predictability
(with Peter Koudijs)
first draft: January 2020

ABSTRACT: One of the most puzzling findings in asset pricing is that expected returns dominate variation in the dividend-to-price ratio, leaving little room for dividend growth rates. Even more puzzling is that this dominance only emerged after 1945. We develop a present value model to argue that a general increase in equity duration can explain these findings. As cash flows to investors accrue further into the future, shocks to highly persistent expected returns become relatively more important than shocks to growth rates. We provide supportive empirical evidence from dividend strips, the time-series, and the cross-section of stocks.