We use options and return data to show that negative stock market returns are significantly more painful to investors when they occur in periods of low volatility. In contrast, popular asset pricing theories imply that the pricing of stock market risk does not vary with volatility, or that it moves in the opposite direction. Our finding suggests that stock market volatility evolves largely independently from the pricing kernel. We embed this assumption into a consumption-based model with a disappointment averse investor. The model captures the dynamics of the pricing kernel and resolves four recent puzzles about stock market risk premia.

We bring investors with preferences for green assets to a general equilibrium setting in which they also prefer consuming green goods. Their preferences for green goods induce consumption premia on expected returns that counterbalance the green premium stemming from their preferences for green assets. Because they provide a hedge when green goods become expensive, brown assets command lower consumption premia, and green investors allocate a larger share of their portfolios towards them. Empirically, the green-minus-brown consumption premia differential reached 30-40 basis points annually, and contributes to explaining the limited impact of green investing on polluting firms’ costs of capital.

We propose an equilibrium asset pricing model in which agents learn about the parameters that drive economic fundamentals and differ in their aversion to uncertainty. We first show that, when agents are averse to parameter uncertainty, learning about the volatility of fundamentals has a first-order effect on portfolio flows: uncertainty-averse agents increase their risky asset holdings in periods of high uncertainty, despite holding conservative portfolios. We then show that subjective risk premia increase following both unexpected good and bad news. These predictions are consistent with observed portfolio flows of retail and institutional investors around dividend surprises. Our model highlights that heterogeneity of preferences and learning about volatility of fundamentals are key channels for understanding the equilibrium dynamics of portfolio holdings and risk premia following news about economic outcomes.

This paper identifies a new currency risk stemming from time-varying linkages among option-based currency volatilities. The network strategy buying net-receivers and selling net-transmitters of transitory shocks to currency volatilities generates significant excess returns. Intuitively, net-receivers are exposed to volatility spillovers and compensate investors with higher average returns. In turn, net-transmitters are resilient to volatility transmission and offer a lower risk premium because they hedge against volatility interdependencies in the foreign exchange market. When volatility linkages are controlled for contemporaneous correlations, the network portfolio is uncorrelated with popular benchmarks. Also, the volatility network factor is priced in a broad currency cross-section.

In this paper we investigate the price, volatility and micro-level effects of central bank swap lines during the 2020 pandemic. These policies lowered the ceiling on covered interest rate parity violations and reduced volatility following settlement of swap line auctions. We then combine dealer-level dollar repo auctions by the Bank of England with a trade repository that includes the universe of FX forward and swap contracts traded in the UK. We find evidence of a substitution channel: dealers that draw on swap lines reduce their demand for dollars at the forward leg in the FX market. We also find evidence that dealers that draw on swap lines increased their net supply of dollars to non-financial institutions, supporting the rationale for swap lines in providing cross-border liquidity to the real economy.

Software companies have steadily become key pillars of the digital economy, representing upwards of 12 percent of U.S. market capitalization. A simple buy-and-hold strategy of pure-play software companies over the past three decades produced annual alphas of over 7.1 percent. We document that these firms are growing at 13.9 percent annually and that both management and analysts systematically underestimate over a third of this growth. We show that these expectation errors appear to largely explain the foregoing outperformance of software companies and that management, analysts, short sellers, and other market participants ignore key performance indicators that describe these pure-play software firms and signal future growth. Together, the study underscores the value of software to the economy and how its economic impact has been significantly under-appreciated for the past two decades.

We analyze the size and power of a large number of "robust" asset pricing tests of the hypothesis that the price of risk of a candidate factor is equal to zero. Different from earlier studies, our approach puts all tests on an equal footing and focuses on sample sizes comparable to standard applications in asset pricing research. Thus, our paper guides researchers on which method to use. A simple test based on bootstrapped confidence intervals stands out as it does not over-reject useless factors and is powerful in detecting useful factors.

In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.

This paper studies the interactions between corporate law and venture capital (VC) exits by acquisitions, an increasingly common source of VC-related litigation. We find that transactions by VC funds under liquidity pressure are characterized by (i) a substantially lower sale price; (ii) a greater probability of industry outsiders as acquirers; (iii) a positive abnormal return for acquirers. These features indicate the existence of fire sales, which satisfy VCs' liquidation preferences but hurt common shareholders, leaving board members with conflicting fiduciary duties and litigation risks. Exploiting an important court ruling that establishes the board’s fiduciary duties to common shareholders as a priority, we find that after the ruling maturing VCs become less likely to exit by fire sales and they distribute cash to their investors less timely. However, VCs experience more difficult fundraising ex-ante, highlighting the potential cost of a common-favoring regime. Overall, the evidence has important implications for optimal fiduciary duty design in VC-backed start-ups.

We propose a novel measure of the ex-ante inflation risk premium (IRP) for each commodity based on a term structure model of commodity futures. Our theory-based IRP, capturing forward-looking information in the futures markets, outperforms well-known characteristics in explaining the cross-section of commodity returns. The IRP factor – the low minus high portfolio constructed from sorting IRP – has the highest Sharpe ratio among existing factors, and none of the latter can explain it, implying it has substantial new information. Moreover, various aggregations of individual commodity IRP predict future stock market returns significantly, even after controlling for major economic predictors. The link between commodities and the stock market is stronger than previously thought.