Time-series efficient factors
with Sina Ehsani
March 2020
Factors in prominent asset pricing models are positively serially correlated. We derive the optimal allocation that transforms an auto-correlated factor to a "time-series efficient" factor. The key determinant of the value of factor timing is the ratio of a factor's auto-correlation to its Sharpe ratio. Time-series efficient factors earn significantly higher Sharpe ratios than the original factors and contain all the information found in the original factors. Momentum strategies profit by timing auto-correlated factors; they pick up factor "inefficiencies." We show that, rather than augmenting models with the momentum factor, each factor can instead be made time-series efficient. An asset pricing model with time-series efficient factors, such as an efficient Fama-French five-factor model, prices momentum. Time-series efficient factors also explain more of the co-variance structure of returns; they describe the cross section better than the standard factors and align more closely with the true SDF.
The earnings announcement return cycle
with Conson Zhang
January 2019
Stocks earn significantly negative abnormal returns before earnings announcements and positive after them. This “earnings announcement return cycle” (EARC) is unrelated to the earnings announcement premium, and it is a feature of stocks
widely covered by analysts. Analysts' forecasts follow the same pattern as returns: analysts' forecasts become more optimistic after an earnings announcement and more pessimistic as the next one draws near. We attribute one-half of the earnings announcement return cycle to this optimism cycle. The EARC may stem from mispricing: both the return and optimism patterns are stronger among high-uncertainty and difficult-to-arbitrage stocks, and the EARC strategy is more profitable on days when it would accommodate larger amounts of arbitrage capital.
Award: Alpha Letters / CQA Prize Winner at CQA Spring 2019
Investor protections and stock market participation: An evaluation of financial advisor oversight
with Brian Melzer and Alessandro Previtero
April 2022
We examine a regulatory change in Canada that increased the oversight of financial advisors in five of its ten provinces. This increased oversight of mutual fund dealers reduced households' use of financial advice and their mutual fund holdings. In lieu of mutual funds, households increased their cash holdings. The results are consistent with a decline in delegated investing caused by a negative shock to the supply of advice. The estimates suggest that having a financial advisor is important in facilitating stock market participation. Investments and advisory channels not affected by the regulation - direct equity and bond holdings and advisors affiliated with banks - show no effects, reducing concerns about confounding economic and financial market changes.