Uncertainty premia in REIT returns

We provide a systematic study of how financial and real estate uncertainty affect the aggregate return performance of the U.S. REIT market from 1994 to 2017. A temporal causality analysis reveals a negative uncertainty impact on REIT returns. The asset pricing analysis confirms the predictive relation and suggests that REITs are statistically significantly exposed to changes in market-wide uncertainty, for which investors require a return compensation. We also identify economic state variables to explain time-varying uncertainty exposures as well as periodic hedging characteristics of REITs. Finally, we find evidence that the source of uncertainty matters for compensating expected REIT returns.     

Valuation with share repurchases and personal taxes

We derive a consistent valuation approach that integrates the interdependent effects of cash dividends, share repurchases and active debt management while considering personal taxes. The valuation approach is based on the assumption that a predetermined proportion of the flow to equity is used for share repurchases instead of cash dividends. Additionally, we examine the effects of share repurchases on the cost of equity by deriving appropriate adjustment formulae. Furthermore, we run simulations to investigate the valuation differences caused by the distribution of excess cash via cash dividends or share repurchases. The results show that share repurchases have a significant positive effect on equity market value.     

A Leland model for delta hedging in central risk books

Using a tractable extension of the model of Leland (1985), we study how a delta-hedging strategy can realistically be implemented using market and limit orders in a centralized, automated market-making desk that integrates trading and liquidity provision for both options and their underlyings. In the continuous-time limit, the optimal limit-order exposure can be computed explicitly by a pointwise maximization. It is determined by the relative magnitudes of adverse selection, bid–ask spreads, and volatilities. The corresponding option price—from which the option can be replicated using market and limit orders—is characterized via a nonlinear PDE. Our results highlight the benefit of tactical liquidity provision for contrarian trading strategies, even for a trading desk that is not a competitive market maker. More generally, the paper also showcases how reduced-form models are competitive with “brute force” numerical approaches to market microstructure. Both the estimation of microstructure parameters and the simulation of the optimal trading strategy are made concrete and reconciled with real-life high frequency data.     

Comparing Internet and phone survey mode effects across countries and research contexts*

We compare Internet and telephone survey responses across 27 European Union nations and two research contexts: one, a choice experiment of willingness to pay to avoid power outages, and the other, a public acceptance of energy infrastructure question. The various forms of survey mode effects and the challenges of survey mode choice are documented and developed in the context of statistical theory and an application to an economics survey. We find evidence that survey mode effects vary across research contexts, and to a lesser extent, across nations. We suggest that the degree of measurement bias may be varying between research contexts, for example based on the availability of a perceived socially correct response within a given context. Future survey-based research should evaluate the choice of survey mode in a context- and region-specific manner.     

Hours risk and wage risk: repercussions over the life cycle*

We decompose earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks, we formulate a life-cycle model of consumption and labor supply. For estimation, we use data on married American men from the Panel Study of Income Dynamics. Permanent wage shocks explain 31 percent of total risk, permanent hours shocks 21 percent. Progressive taxation attenuates cross-sectional earnings risk, but its life-cycle insurance impact is much smaller. At the mean, a one-standard-deviation hours shock raises lifetime income by 11 percent, a wage shock by 13 percent.     

Martingale Schrödinger bridges and optimal semistatic portfolios

Finance and Stochastics - In a two-period financial market where a stock is traded dynamically and European options at maturity are traded statically, we study the so-called martingale...     

Linguistic cues of chief executive officer personality and its effect on performance

Chief Executive Officer (CEO) personality belongs to the most important constructs for business practice and research, but its measurement remains a major obstacle. Therefore, I propose a language-based approach of freely available, large-scale corporate documents to study linguistic hints regarding CEOs' personality dimensions by applying a validated, closed-based approach developed to a sample of Fortune 500 companies. I compare the results to validated, machine learning-trained open-based results obtained from conference calls of 3000 CEOs of S&P 1500 companies. In order to provide a basis for comparison, I supplement these linguistic personality profiles with a sample of convicted criminal CEOs that provide an archetype of extreme linguistic cases. Finally, after controlling for commonly used content analytical constructs (e.g., entrepreneurial orientation, market orientation) to capture CEOs' cognitive state, I link these cross-sectional linguistic profiles to longitudinal firm-level performance data. The analysis indicates that the linguistic manifestations of CEO personality explain a great share of firm performance in conjunction with observable individual, industry, and firm-level data. While there appear to be complementarities between open-based and closed-based language approaches, the analysis also indicates that the open-based linguistic trait of neuroticism is negatively related to various measures of firm performance. In particular, these measures appear to be more robust against genre effects and language that are unique among CEOs (self-selection effects). Therefore, the approach sheds light on the important role of validation procedures in the realm of computer-aided content analysis (CATA) and the conducive and detrimental effects of CEO personality cues on firm performance. The paper discusses practical implications for stakeholders and shareholders wishing to infer personality cues of key decision-makers from large-scale corporate documents and theoretical implications for the advancement of the upper echelon research.     

Closed-loop Nash competition for liquidity

We study a multiplayer stochastic differential game, where agents interact through their joint price impact on an asset that they trade to exploit a common trading signal. In this context, we prove that a closed-loop Nash equilibrium exists if the price impact parameter is small enough. Compared to the corresponding open-loop Nash equilibrium, both the agents' optimal trading rates and their performance move towards the central-planner solution, in that excessive trading due to lack of coordination is reduced. However, the size of this effect is modest for plausible parameter values.