Tepper School of Business
Carnegie Mellon University
5000 Forbes Ave
Pittsburgh, PA 15213
PhD Candidate in Financial Economics
I will be joining the Department of Finance at Arizona State University in the summer of 2014.
Asset Pricing / Macro-Finance, Options, Portfolio Choice
"Tails, Fears, and Equilibrium Option Prices" [JOB MARKET PAPER]
I present a parsimonious consumption-based asset pricing model that explains the pricing of equity index options. The model has two key ingredients, a recursive utility function that overweights left-tail outcomes and a process for endowment volatility that allows for shocks with different persistence levels. The utility function produces a high price for tail risks and allows the model to replicate the implied volatility smirk in times of high uncertainty, during which extreme events are more likely. In times of low uncertainty the smirk arises due to mean reversion in volatility, which results in substantial volatility feedback and a conditional return distribution that is strongly left-skewed. The presence of multiple shock frequencies gives the variance premium the ability to predict returns over short horizons and the price-dividend ratio the ability to predict returns over long horizons, as in the data. Consistent with recent empirical evidence, the equity and variance premiums in the model arise predominantly from a high price of tail risk.
"Optimal Volatility Timing: A Life-Cycle Perspective"
with Jan Schneemeier (University of Chicago)
We study the role of time-varying stock return volatility in a consumption and portfolio choice problem for a life-cycle investor facing short-selling and borrowing constraints. Faced with a benchmark investment strategy that conditions on age and wealth only, we find that an investor is willing to pay a fee of up to 1% - 1.5% of total life time consumption in order to optimally condition on volatility. Tilts in the optimal asset allocation in response to volatility shocks are considerably more pronounced than tilts in response to wealth shocks, and almost as important as life-cycle effects. Lastly, we find that the correlation between volatility and permanent labor income shocks may explain the low equity share of young households in the data.
WORK IN PROGRESS
"Cross-Sectional Asset Pricing in General Equilibrium"
with Lars-Alexander Kuehn
We build a general equilibrium model that features heterogenous firms which are subject to
investment frictions as well as aggregate and idiosyncratic productivity shocks. We solve for the endogenous pricing kernel of a representative Epstein-Zin investor by aggregating dividends and wealth across firms. Our goal is to provide a micro foundation for cross-sectional differences in expected returns.