Conference Agenda

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.

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.

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.