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Moritz Rodenkirchen1, Alexander Pasler1, Patrick Weiss2
1Vienna University of Economics and Business (WU), Austria; 2Reykjavik University, Iceland
Discussant: Jan Harren (University of Muenster)
We propose a regression discontinuity design to determine whether
there is a difference in the expected returns of green versus brown secu-
rities (greenium). We analyze daily changes in option-implied expected
returns following the outcome of close vote ecology-related shareholder
proposals to estimate the causal impact of a small change in investors’
aggregate greenness perception on expected returns. Upon proposals’
passage, expected returns with a forecast horizon of 365 (730) days drop
by approximately 9.3% (6.9%) relative to proposals’ failure, indicating
the existence of a negative greenium in US equity markets. Our results
are robust to the introduction of a battery of fixed effects and when ac-
counting for multiple periods around shareholder proposal voting dates.
10:00am - 10:30am
The aggregated equity risk premium
Vitor Azevedo1, Christoph Riedersberger1, Mihail Velikov2
1RPTU Kaiserslautern-Landau; 2Penn State University
Discussant: Moritz Rodenkirchen (Vienna University of Economics and Business (WU))
We propose a new approach for predicting the equity risk premium (ERP) that first estimates expected returns on individual stock before market-level aggregation. Our model combines firm-level return predictions from neural networks trained on a two-dimensional feature set of post-publication firm-level characteristics and aggregate macroeconomic variables. This method achieves an out-of-sample R² of 2.74% from 2000-2021, with strong economic significance in trading strategies after transaction costs. While the market generated a return of 376% over this period, a simple market-timing strategy based on our model's forecast signs yields a net cumulative return of 768%. Our results challenge the conventional wisdom that the ERP is unpredictable out-of-sample, suggesting that valuable market-wide information can be extracted from the cross-section of individual stocks.
10:30am - 11:00am
The fed and the wall street put
Jan Harren1, Mete Kilic2, Zhao Zhang3
1University of Muenster, Germany; 2University of Southern California, USA; 3International Monetary Fund, USA
Discussant: Christoph Riedersberger (RPTU Kaiserslautern-Landau)
We study the trading behavior of financial intermediaries around Federal Open Market Committee (FOMC) announcements in the S&P 500 index options market using intraday data. Proprietary trading firms are net sellers of options on FOMC days, in contrast to other days, with their trading activity concentrated in the morning, well before the announcement. Larger option sales by proprietary trading firms in the morning predict both a more accommodative monetary policy shock later in the day and a subsequent decline in option prices after the policy announcement, rendering morning trades profitable. We decompose monetary policy shocks into three components. Our analyses suggest that some financial institutions may hold an informational advantage regarding the Fed’s projected future policy actions.
