"Be Fearful When Households Are Greedy: The Household Equity Share and Expected Market Returns"


PRESENTATIONS: AFA Annual Meeting, LA Finance Day, University of San Diego Law and Finance Conference

KEYWORDS: dumb money effect, household financial holdings, return predictability, aggregate stock returns

ABSTRACT: We define the “Household Equity Share” (HEShare), the share of the household sector’s equity and fixed income assets allocated to equities. HEShare negatively forecasts excess returns on the aggregate US stock market, both univariately and controlling for past changes in equity prices and common market return forecasters. The non-household sector’s equity share does not forecast returns, ruling out economy-wide explanations for HEShare’s return predictability. At times, HEShare predicts negative mean excess market returns, suggesting that behavioral factors explain our findings. Under the behavioral interpretation, the household sector’s “mistiming” of the equity market imposes significant portfolio costs.

"Does the Tail Wag the Dog? How Options Affect Stock Price Dynamics"


PRESENTATIONS: Cornell (Dyson), Indiana, Rochester, UC Irvine, UC Riverside, AQR, Citadel, US Treasury Office of Financial Research

KEYWORDS: options, dynamic hedging, return autocorrelation

ABSTRACT: We demonstrate empirically that the existence of options affects the autocorrelation of stock returns in the cross section. When the underlying price rises, option writers must buy more stock to re-hedge. Trading costs cause slow re-hedging, leading to increased return autocorrelation. “Hedging demand” quantifies the sensitivity of the option writers' hedge to underlying price changes. Moving from the lowest to highest quintile of hedging demand increases daily return autocorrelation from -5.0% to -1.6%. The associated trading strategy’s gross alpha is 18% annualized. For causality, we use an instrumental variable, which uses the institutional idiosyncrasy of round number strike prices.


“Skewed Bidding in Pay-Per-Action Auctions for Sponsored Links,” (with Nikhil Agarwal and Susan Athey), American Economic Review: Papers and Proceedings, May 2009.


KEYWORDS: online advertising auctions, pay-per-action advertising

ABSTRACT: Standard Google advertisements use the Pay-Per-Click model: advertisers pay each time a consumer clicks on an advertisement. In 2007, Google launched the “Holy Grail” of online advertising, Per-Per-Action (PPA), where advertisers pay only if a consumer completes the desired action, e.g. buys a hat. Our theoretical analysis shows that (1) PPA is vulnerable to fraud by the advertisers exploiting a general class of auctioneer estimation algorithms and (2) the natural ways to fix this vulnerability significantly impair the risk-sharing benefits of PPA.