Job Market Paper:

Estimating Conditional Asset Pricing Models: Efficiency and Robustness 

This paper revisits the efficient estimation of conditional beta pricing models with constant betas and traded risk factors. Using the theory of redundant moments of Breusch, Qian, Schmidt, and Wyhowski (1999), we prove that contemporaneous conditional homoskedasticity of returns given the risk factors is sufficient for equilibrium pricing conditions to be redundant in the sense that they do not improve the semi-parametric efficiency bound for beta. With jointly elliptical returns and risk factors, we prove that conditional homoskedasticity is also a necessary condition for redundancy. Our theory allows us to show that, under joint ellipticity, the optimal tuning parameter for the generalized Principal Components Analysis loadings estimator of Lettau and Pelger (2018) is the multivariate excess kurtosis coefficient of the joint distribution of the returns and risk factors. This explains their finding that the optimal tuning parameter is zero when factors are strong and regression errors are normally distributed. A caveat for assuming the constancy of betas is the non-trivial risk of model misspecification. Motivated by Nagel and Singleton (2011), we proceed to evaluate the trade off between constant and state-dependent risk price models with an objective function that balances the level of unconditional pricing errors and the volatility of conditional pricing errors. We use it to estimate various conditional and unconditional Fama and French (1993) three factor models. Our results suggest that state-dependent risk prices help to deliver substantial reductions in both the level and volatility of conditional pricing errors, with nonparametric specifications delivering the best pricing performance.

Publications:

Pseudo-true SDFs in Conditional Asset Pricing Models. (with Bertille Antoine and Eric Renault), Journal of Financial Econometrics, 2018. (Online with forthcoming comments by Lars Hansen, Sydney Ludvigson, Patrick Gagliardini, Cesare Robotti and Raymond Kan)

Bernanke’s No-Arbitrage Argument Revisited: Can Open Market Operations in Real Assets Eliminate the Liquidity Trap? (with Gauti Eggertsson), in M. Woodford, editor, Monetary Policy through Asset Markets: Lessons from Unconventional Measures and Implications for an Integrated World , Santiago: Central Bank of Chile, 2016.

Master’s Thesis:

A Spatial Investigation of Urban Labor Markets. Master’s Thesis, Tufts University. 2013. (Linda Datcher Loury Award for Best Master’s Thesis)