SSRN Author: Thiago de Oliveira SouzaThiago de Oliveira Souza SSRN Content
https://privwww.ssrn.com/author=1222545
https://privwww.ssrn.com/rss/en-usWed, 11 Nov 2020 01:13:01 GMTeditor@ssrn.com (Editor)Wed, 11 Nov 2020 01:13:01 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0New: Externalities, Incentives, Government Failure, and the Coronavirus OutbreakThis paper derives and simulates a compartmental model of the Coronavirus outbreak in which individuals have self-interested reactions to the threat of infection, proportional to the heterogeneous risk of complications that they face. As long as high-risk individuals perceive infection as sufficiently undesirable, the externalities created by the free circulation of low-risk individuals are positive and potentially reduce the total number of infections by approximately 100 million in the U.S. (including every high-risk individual). In this case, the social interaction of low-risk individuals should be subsidized, according to the same market failure arguments used to justify broad confinement mandates, which constitute government failures.
https://privwww.ssrn.com/abstract=3727809
https://privwww.ssrn.com/1960451.htmlTue, 10 Nov 2020 20:43:28 GMTREVISION: On the Dynamics of Changing Correlations: Identification and Stock ReturnsRiskier firms have lower prices - and higher book-to-market - exclusively due to the present value identity. For a small subset of firms, book equity is a good proxy for expected cash flows. This is why (i) the difference between the value and size premiums significantly decreases and becomes negative with the price of risk; (ii) among portfolios formed in low price of risk states, SMB returns explain none of the variation in HML returns; (iii) for the remaining portfolios, a strong factor structure exists; (iv) only among these portfolios, SMB returns span HML returns; and (v) the same SMB portfolios span the (stock) market portfolio. The hypothesis of (even indirect) stable economic relations between risk and market capitalization ("size") or book-to-market is theoretically inconsistent with the present value identity and inconsistent with the empirical evidence under fairly general conditions. There are no "missing factors" which size or book-to-market proxy for: Regressions that ...
https://privwww.ssrn.com/abstract=3073777
https://privwww.ssrn.com/1960106.htmlTue, 10 Nov 2020 09:40:29 GMTREVISION: On the Dynamics of Changing Correlations: Identification and Stock ReturnsRiskier firms have lower prices - and higher book-to-market - exclusively due to the present value identity. For a small subset of firms, book equity is a good proxy for expected cash flows. This is why (i) the difference between the value and size premiums significantly decreases and becomes negative with the price of risk; (ii) among portfolios formed in low price of risk states, SMB returns explain none of the variation in HML returns; (iii) for the remaining portfolios, a strong factor structure exists; and (iv) only among these portfolios, SMB returns span HML returns. The hypothesis of (even indirect) stable economic relations between risk and market capitalization ("size") or book-to-market is theoretically inconsistent with the present value identity and inconsistent with the empirical evidence under fairly general conditions. There are no "missing factors" which size or book-to-market proxy for: Regressions that rely on size-related portfolios do not produce valid ...
https://privwww.ssrn.com/abstract=3073777
https://privwww.ssrn.com/1947799.htmlMon, 05 Oct 2020 09:23:39 GMTREVISION: A Critique of Momentum AnomaliesThis paper is the second in a series of critiques of the assumption that stable economic relations exist between certain "firm characteristics" and expected returns. The paper explains why this is not the case for past returns and provides theoretical, empirical, and simulated evidence that the stylized facts involving momentum are consistent with traditional risk-based asset pricing, thereby solving the apparent theoretical puzzle. For example, riskier assets tend to be in the loser portfolio after (large) increases in the price of risk: The time-varying correlation between past returns and risk, which determines the risk of momentum portfolios, decreases with the price of risk. Hence, their premiums are approximately negative quadratic functions of the price of risk, theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has the negative slope and positive intercept documented empirically and considered the main momentum puzzle.
https://privwww.ssrn.com/abstract=3228116
https://privwww.ssrn.com/1946046.htmlTue, 29 Sep 2020 15:40:14 GMTREVISION: A Critique of Momentum AnomaliesThis paper is the second in a series of critiques of the assumption that stable economic relations exist between certain "firm characteristics" and expected returns. The paper explains why this is not the case for past returns and provides theoretical, empirical, and simulated evidence that the stylized facts involving momentum are consistent with traditional risk-based asset pricing, thereby solving the apparent theoretical puzzle. For example, riskier assets tend to be in the loser portfolio after (large) increases in the price of risk: The time-varying correlation between past returns and risk, which determines the risk of momentum portfolios, decreases with the price of risk. Hence, their premiums are approximately negative quadratic functions of the price of risk, theoretically truncated at zero. The best linear (CAPM) function describing this relation unconditionally has the negative slope and positive intercept documented empirically and considered the main momentum puzzle.
https://privwww.ssrn.com/abstract=3228116
https://privwww.ssrn.com/1916633.htmlThu, 02 Jul 2020 09:04:23 GMTREVISION: On the Dynamics of Changing Correlations: Identification and Stock ReturnsRiskier firms have lower prices (and higher book-to-market) exclusively due to the present value identity (while book equity is only a relatively bad proxy for expected cash flows). This theoretically explains (i) why the difference between the value and the size premiums significantly decreases and becomes negative as the price of risk increases, (ii) why the SMB returns explain none of the variation in the HML returns for portfolios formed in low price of risk states while a strong factor structure exists for the remaining portfolios, and (iii) why only among these portfolios formed in high price of risk states, the SMB returns span (without being spanned by) the HML returns. The hypothesis that there are (even indirect) stable economic relations between risk and market capitalization ("size") or book-to-market - often treated as an axiom in Finance - is theoretically inconsistent with the present value identity, especially for market capitalization, and also with the empirical ...
https://privwww.ssrn.com/abstract=3073777
https://privwww.ssrn.com/1916631.htmlThu, 02 Jul 2020 09:03:38 GMTREVISION: The X-value factor and the solution of the value premium puzzleX-value normalizes stock prices by the recursive out-of-sample expectation of each firm's net income, estimated by industry from its financials, while ignoring book equity. The resulting X-value factor is unspanned by the five Fama/French factors individually or in different combinations, and spans the value and investment premiums with a Sharpe ratio of 0.57 (compared to 0.39 for value). This evidence supports the value premium theory in which book equity is exclusively a proxy for expected cash flows - unrelated to risk - and contradicts theories that supposedly determine the "missing factor" for which book-to-market is a proxy.
https://privwww.ssrn.com/abstract=3360010
https://privwww.ssrn.com/1915848.htmlWed, 01 Jul 2020 08:56:09 GMTREVISION: The X-value factor and the solution of the value premium puzzleX-value normalizes stock prices by the recursive out-of-sample expectation of each firm's net income, estimated by industry from its financials, while ignoring book equity. The resulting X-value factor is unspanned by the five Fama/French factors individually or in different combinations (each factor and the market; all factors together; all except value). X-value spans the value and investment premiums with a Sharpe ratio of 0.57 (compared to 0.39 for value). This evidence supports the value premium theory in which book equity is exclusively a proxy for expected cash flows - unrelated to risk - and contradicts almost every other theory.
https://privwww.ssrn.com/abstract=3360010
https://privwww.ssrn.com/1892633.htmlMon, 04 May 2020 08:39:17 GMTREVISION: Macro-Finance and Factor Timing: Time-Varying Factor Risk and Price of Risk PremiumsThis paper unifies macro-finance and multifactor asset pricing theories to show that, in sample and out of sample: (i) Larger cross-sectional book-to-market medians and spreads - price of risk proxies - predict larger market (in sample), size, value, and investment premiums; (ii) the investment and profitability spreads - factor risk (quantity) proxies - only forecast the investment and profitability premiums, respectively, especially when conditioned on the price of risk. This predictability generates "factor timing" strategies with substantial economic gains, supports the hypothesis of time-varying price of risk in macro-finance theories, and contradicts the hypothesis that the investment and profitability "factors" have constant risks.
https://privwww.ssrn.com/abstract=3296418
https://privwww.ssrn.com/1892621.htmlMon, 04 May 2020 08:35:55 GMTNew: Externalities, Incentives, Government Failure, and the Coronavirus OutbreakThis paper derives and simulates a compartmental model of the Coronavirus outbreak in which individuals have self-interested reactions to the threat of infection, proportional to the heterogeneous risk of complications that they face. As long as high-risk individuals perceive infection as sufficiently undesirable, the externalities created by the free circulation of low-risk individuals are positive and potentially reduce the total number of infections by approximately 100 million in the U.S. (including every high-risk individual). In this case, the social interaction of low-risk individuals should be subsidized, according to the same market failure arguments used to justify broad confinement mandates, which constitute government failures.
https://privwww.ssrn.com/abstract=3583160
https://privwww.ssrn.com/1892152.htmlFri, 01 May 2020 14:04:43 GMTNew: Observable Implications of the Conditional CAPMTests of the conditional CAPM are often based on the joint (internally inconsistent) hypothesis that the stock portfolio used in the tests is the theoretical, mean-variance efficient, market portfolio. I derive a new test based exclusively on the theory in the conditional CAPM. According to this test, the conditional CAPM explains asset pricing anomalies, such as the unconditional alphas and betas of momentum, value, and size portfolios. In contrast, the unconditional CAPM theory is rejected by portfolios with negative unconditional betas and positive unconditional alphas, under the same assumptions. Hence, relaxing this joint assumption does not render the CAPM untestable.
https://privwww.ssrn.com/abstract=3542827
https://privwww.ssrn.com/1877139.htmlWed, 18 Mar 2020 19:04:15 GMTNew: The X-Value FactorValue normalizes size by book equity, which is a (relatively bad) proxy for expected cash flows. X-value normalizes size by the recursive out-of-sample expectation of each firm’s net income, based on its financials, with coefficients estimated by industry. Unlike value (but similarly constructed), the resulting X-value factor is unspanned by the Fama/French factors – market, size, value, investment, and profitability – individually or in different combinations (each factor and the market; all factors together; all except value). X-value spans the value and investment premiums with a Sharpe ratio of 0.57 (compared to 0.39 for value).
https://privwww.ssrn.com/abstract=3540903
https://privwww.ssrn.com/1876644.htmlTue, 17 Mar 2020 16:22:05 GMTREVISION: On the Dynamics of Changing CorrelationsRiskier firms have lower prices (and higher book-to-market) exclusively due to the present value identity (while book equity is only a relatively bad proxy for expected cash flows). This is why (i) the difference between the value and the size premiums significantly decreases and becomes negative with the price of risk, (ii) the SMB returns explain none of the variation of the HML returns for portfolios formed in low price of risk states while a strong factor structure exists for the remaining portfolios, and (iii) among these portfolios, the SMB returns span (without being spanned by) the HML returns. The hypothesis of at least indirect stable economic relations between risk and market capitalization ("size") or book-to-market - largely treated as an axiom in Finance - is theoretically inconsistent with the present value identity, especially for market capitalization, and also inconsistent with this empirical evidence under very general conditions. Inevitably, regressions that rely ...
https://privwww.ssrn.com/abstract=3073777
https://privwww.ssrn.com/1867984.htmlWed, 19 Feb 2020 09:17:37 GMTREVISION: On the Dynamics of Changing CorrelationsRiskier firms have lower prices (and higher book-to-market) exclusively due to the present value identity (while book equity is only a relatively bad proxy for expected cash flows). This is why (i) the difference between the value and the size premiums significantly decreases and becomes negative with the price of risk, (ii) the SMB returns explain none of the variation of the HML returns for portfolios formed in low price of risk states while a strong factor structure exists for the remaining portfolios, and (iii) among these portfolios, the SMB returns span (without being spanned by) the HML returns. The hypothesis of at least indirect stable economic relations between risk (or mispricing) and market capitalization ("size") or book-to-market - largely treated as an axiom in Finance - is theoretically inconsistent with the present value identity, especially for market capitalization, and also inconsistent with this empirical evidence under very general conditions. Inevitably, ...
https://privwww.ssrn.com/abstract=3073777
https://privwww.ssrn.com/1867454.htmlMon, 17 Feb 2020 13:27:41 GMTREVISION: Price of Risk Fluctuations and the Size PremiumThis paper empirically describes how the risk premiums of size portfolios vary with macro-economic fluctuations in the price of risk at the portfolio formation dates, thereby explaining the lack of robustness involving the unconditional size premium: Only portfolios formed in "bad" states - with price of risk among the largest 30% - earn significantly positive premiums (7.5% per year on average). Inevitably, the subsample in which the premium is absent dominates and easily distorts the unconditional evidence that supports the size premium literature. Conditional tests contradict the (unconditional) conclusions that the size premium is consistent with the ICAPM or non-existent after 1981.
https://privwww.ssrn.com/abstract=2797164
https://privwww.ssrn.com/1862723.htmlSun, 02 Feb 2020 03:54:21 GMTREVISION: Macro-Finance and Factor Timing: Time-Varying Factor Risk and Price of Risk PremiumsIncreases in the book-to-market spread - theoretically a price of risk proxy - predict larger market premiums in sample and larger size, value, and investment premiums also out of sample. Increases in the investment or profitability spreads - which are factor risk proxies if these firm characteristics are correlated with risks - exclusively forecast larger investment or profitability premiums, respectively, also out of sample, especially when conditioned on the price of risk. This evidence generates "factor timing" strategies with substantial out-of-sample economic gains, supports the standard macro-finance hypothesis of time-varying price of risk, and supports the hypothesis that investment and profitability are risk proxies.
https://privwww.ssrn.com/abstract=3296418
https://privwww.ssrn.com/1859702.htmlWed, 22 Jan 2020 10:44:26 GMTREVISION: The X-Value FactorValue normalizes size by book equity, which is a (relatively bad) proxy for expected cash flows. X-value normalizes size by the recursive out-of-sample expectation of each firm's net income, based on its financials, with coefficients estimated by industry. Unlike value (but similarly constructed), the resulting X-value factor is unspanned by the Fama/French factors, market, size, value, investment and profitability, individually or in different combinations (each factor and the market; all factors together; all except value). X-value spans the value and investment premiums with a Sharpe ratio of 0.57 (compared to 0.39 for value).
https://privwww.ssrn.com/abstract=3360010
https://privwww.ssrn.com/1844464.htmlMon, 25 Nov 2019 11:53:46 GMTREVISION: Macro-Finance and Factor Timing: Time-Varying Factor Risk and Price of Risk PremiumsThis paper confirms the standard macro-finance hypothesis of time-varying price of risk: Increases in the book-to-market spread - theoretically a price of risk proxy - predict larger market premiums in sample and larger size, value, and investment premiums also significantly out of sample. The paper validates the hypothesis that investment and profitability are risk proxies, too: Increases in the investment (or profitability) spread - a factor risk proxy under this assumption - exclusively forecast larger investment (or profitability) premiums, also significantly out of sample, especially after controlling for the price of risk. This predictability generates "factor timing" strategies with substantial out-of-sample economic gains.
https://privwww.ssrn.com/abstract=3296418
https://privwww.ssrn.com/1842853.htmlTue, 19 Nov 2019 09:22:08 GMTREVISION: Dissecting Market Expectations in the Cross-Section of Book-to-Market RatiosI find no evidence that partial least squares based on disaggregated book-to-market ratios produces a model of market premiums with persistently positive out-of-sample R2, as originally documented for market returns. This is consistent with time variation in predictability, for example, and does not necessarily invalidate the method. The two main drivers of the original performance are: (i) The sample period and (ii) the use of market returns as forecasting targets. Two other drivers are using, as regressors, (iii) the book-to-market ratios of the specific portfolios double-sorted by size and book-to-market (iv) divided by their standard deviations.<br>
https://privwww.ssrn.com/abstract=3449526
https://privwww.ssrn.com/1842170.htmlFri, 15 Nov 2019 14:39:28 GMT