We present a novel methodology for estimating/testing the Bansal and Yaron (2004) and related long-run risks (LRR) models based on the observation that the latent state variables are known functions of observables. The large standard error of the estimated elasticity of intertemporal substitution explains the controversy on its magnitude. The model requires higher persistence of consumption and dividend growth to explain the cross-section of returns than that observed in the data. The model matches the unconditional moments of consumption and dividend growth, but implies a higher risk-free rate and lower volatility of the price/dividend ratio, risk-free rate, and market return than those observed in the data. Contrary to the model implications, the conditional variance of the LRR variable fails to capture the large time variation in the equity premium.

Short sale constraints prior to seasoned equity offers, imposed by Rule 10b-21 in 1988, are believed to compromise pricing efficiency and contribute to the large temporal increase in offer price discounting. This study provides additional insights by examining shelf-registered offers, which were exempt from pre-issue short sale constraints until 2004. The results suggest that pre-issue short sale constraints do not influence the level of discounting in seasoned equity offers. Moreover, this study reports that the recent temporal increase in discounting is due to a greater prevalence of overnight shelf offers, which are associated with relatively large offer price discounts.

I address the “decimalization” debate, i.e., whether trading on cent ticks rather than fractions of a dollar reduces trading costs without diminishing liquidity. I use Toronto Stock Exchange data following their switch to decimal trading on April 15, 1996. For stocks whose minimum tick was reduced from one-eighth of a dollar to five cents, decimalization reduced spreads, while liquidity was not adversely affected. Investors' trading costs and liquidity providers' profits declined on average, but trading volume did not increase. For stocks whose minimum tick size declined from 5 cents to 1 cent, decimalization had little impact on market quality.Journal of Economic LiteratureClassification Numbers: G12, G15

We use the U.S. Department of Housing and Urban Development’s Housing Choice Voucher program as a setting to evaluate the interaction of homeownership and race on the wealth accumulation of low-income households. Using a within-treatment difference-in-differences framework, we establish that low-income households that receive assistance in owning a home experience increased wealth accumulation relative to their tenure as renters. These wealth gains are not present among low-income minority households. Our findings provide evidence that homeownership is a driver of wealth formation for low-income households and that homeownership does not inherently reduce racial disparities in wealth. (JEL G51, J15, R21).

An extensive literature studies interactions of stock market anomalies using double-sorted portfolios. But given hundreds of known candidate anomalies, examining selected interactions is subject to a data mining critique. In this paper, we conduct a comprehensive analysis of all possible double-sorted portfolios constructed from 102 underlying anomalies. We find hundreds of statistically significant anomaly interactions, even after accounting for multiple hypothesis testing. An out-of-sample trading strategy that invests in the top backward-looking double-sort strategy generates equal-weighted (value-weighted) monthly average returns of 4% (2.7%) at an annualized Sharpe ratio of 2 (1.38), on par with state-of-the-art anomaly-based machine learning strategies.

Investment advisory firms and brokerage firms hire analysts to uncover profitable securities investment opportunities. Then these firms sell the information (either directly or indirectly) to others. Why? Given that the information has value, why do these firms not keep the information to themselves and trade solely for their own accounts? Because of competition, information is more valuable when fewer people trade on the information. This paper shows that selling information is a strategic response by competing informed traders. Specifically, it is a means for informed traders to commit to trade aggressively, thereby inducing other informed traders to trade less aggressively. Journal of Economic Literature Classification Numbers: G10, D82.

The crisis is not yet over; the housing market continues to deteriorate and there are spill-overs into other markets. Growth is declining, with potentially self re-enforcing mechanisms between financial markets and the real economy coming into play. A local problem became a global crisis because of poor risk management, lack of transparency and excessive leverage. Not only does the capital base need re-building, but also incentive schemes need reconsideration.

We construct a panel of S&P 500 Index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one of crisis-related factors incorporating price jumps, volatility jumps, and liquidity (along with the market) explains the cross-sectional variation in returns. Our hypothesis is not rejected, even when the factor premia are constrained to equal the corresponding premia in the cross-section of equities. The alphas of short-maturity out-of-the-money puts become economically and statistically insignificant. (JEL G11, G13, G14)