Research

Job market paper

Market Concentration, Capital Misallocation, and Asset Pricing

Best PhD Paper Award at the 7th Asset Pricing Conference by LTI@UniTo

Superstar firms, which dominate stock markets through their large size and high markups, can deter efficient capital allocation. This paper empirically studies the asset pricing implications of superstar firms through the channel of capital misallocation, measured as the cross-sectional dispersion in the marginal product of capital (MPK). I decompose this measure into misallocation (1) among superstars, (2) among other firms, and (3) between these two groups. I find that only shocks to the third component, termed the "MPK spread", are negatively priced in the cross-section of stock returns. Stocks negatively exposed to these shocks outperform stocks with positive exposure by 4.8% per year. In the long run, a higher MPK spread predicts lower economic growth and aggregate stock returns, while in the short run, it predicts lower innovation growth. Consistent with the ICAPM framework, capital misallocation between superstar and non-superstar firms is a key state variable, and its shocks capture a macroeconomic risk factor.

Working papers

Intermediary Asset Pricing Through the Lens of a Demand System

Joint work with Dongryeol Lee (UCLA)

How does broker-dealers' leverage shift asset prices when their assets under management are relatively small? We explore the channel through which broker-dealers extend leverage to hedge funds using an asset demand system. During recessions, broker-dealers face binding leverage constraints and reduce their borrowing to hedge funds. Then, hedge funds are forced to sell assets and deleverage, creating demand pressures that shift asset prices. We find that hedge funds exert the largest price impact across all stocks among institutions, and their price impact increases substantially during crises as they need to deleverage. On average, a 1% increase in broker-dealer leverage raises the price impact of the average hedge fund by 2% in the following year. These impacts are more pronounced among illiquid stocks. Our findings suggest that hedge funds significantly influence stock prices when broker-dealers' leverage constraints are binding.

Overlapping Factors

Characteristic-based factors, such as value, momentum, and low volatility, are constructed from the same universe of stocks. Therefore, they can contain some of the same stocks. Although the degree of overlap among these factors is not excessive, I find that the overlap matters. Stocks included simultaneously in the same leg across multiple factors, so-called overlapping stocks, earn an average abnormal return of 66 basis points per month. In contrast, pure factor stocks included in a single factor earn on average, across all factors, only 5 basis points per month, despite similar industry composition, institutional ownership, and portfolio turnover. Further, the portfolio of overlapping stocks is priced in the cross-section of stock returns, while the portfolio of all pure factor stocks is not. Exposures to macroeconomic and liquidity risks cannot explain the return difference. Only in the short leg, overlapping stocks are more exposed to investor sentiment and have a higher short interest than pure factor stocks.