Benjamin Golez
Equity Duration and Predictability
Co-author: Peter Koudijs
Journal of Financial Economics (2025)
Data and Code
After 1945, expected returns have started to dominate the variation in equity price movements, leaving little room for expected dividend growth. An increase in equity duration can help explain this change. Expected returns vary more for payouts further into the future. Furthermore, because expected returns are more persistent than growth rates, they are more important for longer-duration assets. We provide empirical support for this explanation across three datasets: dividend strips, the long time series for the aggregate market, and the cross-section of stocks. A simple present value model with time-varying duration can largely explain the post-1945 dominance of expected returns.
FOMC News and Segmented Markets
Co-authors: Peter Kelly and Ben Matthies
Journal of Accounting and Economics (2025)
A growing body of evidence suggests that FOMC announcements can affect private sector beliefs about near-term macroeconomic conditions. We measure index option trader beliefs about the short-horizon implications of central bank policy using the return of short-term dividend strips around each FOMC announcement (we term this short-term dividend strip return, “SDR”). We find that SDR predicts both future firm-level earnings and firm-level earnings announcement returns. Furthermore, using analyst earnings forecasts, we provide evidence of belief underreaction to FOMC announcements. We develop a stylized framework to show how investor specialization and segmented markets can generate our empirical results.
Fed Information Effects: Evidence from the Equity Term Structure
Co-author: Ben Matthies
Journal of Financial Economics (2025)
Data and Code
Do investors interpret central bank target rate decisions as signals about the current state of the economy? We study this question using a short-term equity asset that entitles the owner to the near-term dividends of the aggregate stock market. We develop a stylized model of monetary policy and the equity term structure and derive tests of Fed information effects using the short-term asset announcement return. Consistent with the existence of information effects, we find that the short-term asset return in a 30-minute window around FOMC announcements loads positively on monetary policy surprises. Furthermore, the announcement return predicts near-term macroeconomic growth.
Holding Period Effects in Dividend Strip Returns
Co-author: Jens Jackwerth
The Review of Financial Studies (2024)
Data and Code
We estimate short-term dividend strip prices from 27 years of S&P 500 index options data (1996-2022). We use option-implied interest rates when estimating strip prices and longer holding period returns to mitigate measurement error. We find that Sharpe ratios for short-term strips are similar to or higher than Sharpe ratios for the market. Short-term strips also have a low market beta and a positive alpha. Over the business cycle, realized term premia (i.e., the difference between market and strip returns) and the term structure of Sharpe ratios move countercyclically, whereas the term structure of alphas moves procyclically.
Friendly Investing and Information Sharing in the Asset Management Industry
Co-authors: Antonino Emanuele Rizzo and Rafael Zambrana
Journal of Financial and Quantitative Analysis (2024)
Do asset managers engage in friendly investing to obtain privileged investment information? We test this hypothesis in the context of mutual fund connections to financial groups. Using brokers as the source of connections, we show that (a) funds overweight and are reluctant to sell the stock of connected financial groups, and (b) funds tend to cast their vote with the management of connected financial groups. The extent of friendly investing drives funds to trade similarly, and it is positively associated with a fund's performance. The lending channel confirms the information flow from financial companies to connected funds.
Horizon Bias and the Term Structure of Equity Returns
Co-authors: Stefano Cassella, Huseyin Gulen, and Peter Kelly
The Review of Financial Studies (2023)
Data and Code
We label the degree to which individuals are more optimistic at long horizons relative to short horizons the horizon bias. We examine whether time-series variation in the horizon bias can explain the time-series variation in the equity term structure. We use analyst earnings forecasts to measure the degree of the horizon bias in the stock market. Consistent with the intuition from a stylized present value model, we find that periods of above-average horizon bias are associated with negative term premia, whereas periods of below-average horizon bias are associated with positive term premia.
Disagreement in the Equity Options Market and Stock Returns
Co-author: Ruslan Goyenko
The Review of Financial Studies (2022)
For data, see https://ruslangoyenko.com/research/
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. The negative effect is stronger for high-beta stocks and stocks that are more difficult to sell short. In the cross-section of all stocks and the subset of the 500 largest companies, high disagreement robustly predicts low monthly and weekly stock returns.
Financial Market Misconduct and Public Enforcement: The Case of Libor Manipulation
Co-authors: Priyank Gandhi, Jens Jackwerth and Alberto Plazzi
Management Science (2019)
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.
Four Centuries of Return Predictability
Co-author: Peter Koudijs
Journal of Financial Economics (2018)
Online Appendix
Data and Code
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.
Price Support by Bank-Affiliated Mutual Funds
Co-author: Jose Marin
Journal of Financial Economics (2015)
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.
Expected Returns and Dividend Growth Rates Implied by Derivative Markets
Review of Financial Studies (2014)
Online Appendix
Data
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.
Pinning in the S&P 500 Futures
Co-author: Jens Jackwerth
Journal of Financial Economics (2012)
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.
What Does the Equity Term Structure Tell Us About Trump 2.0's First 100 Days in Office?
Co-authors: Peter Kelly and Ben Matthies
Economics Letters (2025)
We analyze the equity term structure during Trump 2.0’s first 100 days to examine the narrative from the Trump administration that his policies will bring short-term pain in exchange for long-term gain. We find that the price of short-term assets (assets that entitle the owner to the dividends of the aggregate market over the near term) increased in value, whereas the aggregate market itself decreased in value. This differs from the president’s narrative. The evidence from the pre-election period suggests that investors might have initially overestimated the short- and long-term impacts of Trump’s policies.
Funding Illiquidity Implied by S&P 500 Derivatives
Co-authors: Jens Jackwerth and Anna Slavutskaya
Risks (2024)
Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity earn high returns in normal times and low returns in crisis periods when funding liquidity deteriorates. The results are not driven by existing measures of funding illiquidity, market illiquidity, and proxies for tail risk. Our funding illiquidity measure also affects leveraged closed-end mutual funds and, to an extent, asset classes where leveraged investors are marginal investors.
Working Papers
Motivated Beliefs in Macroeconomic Expectations
Co-authors: Stefano Cassella, Huseyin Gulen, and Peter Kelly
last version: May 2022
SSRN
Quadrant Behavioral Finance Conference 2019, TAU Finance Conference 2019, Colorado Finance Summit 2019, ASU Sonoran Winter Finance Conference 2020
Motivated beliefs are an important framework for understanding macroeconomic expectations. We extend popular motivated belief models and show that they predict an upward sloping term structure of optimism (horizon bias). Analyzing professional forecasts over the past fifty years, we find that forecast errors exhibit both optimism bias and horizon bias. Further, consistent with the conceptual framework of Bénabou (2015), we show that time-series variation in the optimism bias is related to theory-based drivers of motivated beliefs like uncertainty and anxiety. Finally, we find that forecasters react more strongly to good than bad news, consistent with motivated beliefs.
Home-Country Media Slant and Cross-Listed Stocks: The Case of Automotive Industry
Co-author: Rasa Karapandza
first version: November 2017
last version: August 2022
SSRN
EFA 2018, Colorado Finance Summit 2018, AFA 2019, News & Finance Conference 2019, SFS Cavalcade 2019
Slides
Is news reported more favorably in companies’ domestic newspapers than abroad? Do cross-country differences in media reporting reflect differences in investor sentiment? We test these hypotheses for the case of the automotive industry across the U.S., Germany, and Japan. Using comprehensive hand-coded news data, we show that companies obtain substantially more media coverage and are presented with a significantly more positive news tone in their home countries than abroad. The media slant increases during crisis periods and it predicts stock price deviations of cross-listed stocks. The predictive relation is strongest for news reported by journalists who have native-sounding names.
News Sentiment
Co-authors: Rasa Karapandza and Fredrik Wisser
Lst version: June 2023
We introduce a novel method for training computer algorithms to measure news sentiment. Our approach leverages human-coded sentiment scores from over 200,000 newspaper articles to teach the computer to select words, word combinations, and their linear weights. In an out-of-sample test, examining newspaper articles about US companies, we show that: (i) our news sentiment metric displays a bimodal distribution similar to that observed in the human-coded sentiment scores, (ii) our news metric outperforms the widely-used bag-of-words approach and recent machine learning models in explaining human-coded news sentiment, and (iii) our news sentiment metric serves as a robust predictor for daily stock returns.