Theses Doctoral

Essays on Empirical Asset Pricing

Ayala, Andres

This dissertation is composed of three essays which examine different topics in empirical asset pricing.
Chapter 1 is the result of joint work with Andrew Ang and William Goetzmann. First, we document that American university and college endowments have shifted their asset allocations from stocks to alternative investments. By the end of the sample, the average endowment holds close to one third of its portfolios in private equity and hedge funds. What are the expectations of future returns that can explain these changes in portfolio holdings? Fitting a simple asset allocation model using Bayesian methods, we estimate that at the end of 2012, the average university expects its private equity investments to outperform a portfolio of conventional assets by 3.9% per year and hedge funds to outperform by 0.7% per year. These out-performance beliefs have increased over time, reaching their peak at the end of our sample. There is also significant cross-sectional heterogeneity in our results. Private institutions, universities with large endowments and high spending rates, and those that rely more on their asset holdings to meet operational budgets tend to expect higher alphas from alternative investments.
Chapter 2 examines to what extent commodity prices have contributed to the inflation volatility experienced by the Chilean economy in recent years. First, I show that oil is the commodity that is most correlated with future inflation and inflationary expectations. Next, I use a Gaussian affine term structure model with observable macroeconomic factors to quantitatively study how shocks to oil prices affect bond yields and inflation expectations. I find a statistically significant but economically modest effect. An increase in the price of oil of 20% raises one-year inflation expectations by 25 basis points, while five-year expectations increase only by 8 basis points. The results suggest that central banks could benefit from paying attention to commodity prices when setting monetary policy.
Finally, Chapter 3 studies both theoretically and empirically whether market expectations on the health of the financial sector affect stock returns. Prior literature shows that the ratio of intermediary equity to GDP predicts future market returns and is a priced risk factor in the cross-section of stock returns. Here, I extend this work and show that expectations of large declines in the capital of financial institutions can also help explain equity returns. Specifically, I show that different measures of intermediary equity tail-risk are priced in the cross-section. Firms that load on this financial tail-risk factor have lower expected returns. Motivated by these facts, I develop an intermediary asset pricing model where the financial sector's net worth is subject to large negative exogenous shocks. I calibrate the model to U.S. data and find that stocks that do well when disaster risk is high earn significantly lower returns, thus providing theoretical support to my findings. In addition, the model is able to match key asset pricing moments like the equity premium and the volatility of stock returns.


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More About This Work

Academic Units
Thesis Advisors
Ang, Andrew
Ph.D., Columbia University
Published Here
October 22, 2017