Department of Finance

Areas of Interest: Empirical Corporate Finance, Bankruptcy and Financial Distress

Job Market Paper: Wealth Protection in Bankruptcy and Serial Entrepreneurship

I study whether wealth protection in personal bankruptcy provides a second chance to failed entrepreneurs. I exploit windfall wealth from inheritances to proxy for exogenous variation in personalwealth after bankruptcy. Windfallwealth increases reentry to business only among entrepreneurs who did not experience severe losses in personal income or wealth before bankruptcy. Those who respond to windfall wealth by starting new businesses have lower profits, indicating their lower entrepreneurial quality. Overall, the findings suggest that bankruptcy policies increasing wealth protection can promote serial entrepreneurship, but their effectiveness is limited by low entrepreneurial quality and personal experience of severe losses.

Placement: Erasmus School of Economics

2022/2023

Andreas Brøgger

Areas of Interest: Sustainable Investing, ESG, Macro Finance, Asset Pricing, Corporate Finance

Job Market Paper: Skills and Sentiment in Sustainable Investing

We document a significant difference in the returns to sustainable investing across investor types. Investors with strict ESG mandates earn 3.1% less than flexible investors. The mechanism is that flexible investors are able to react on expected ESG improvements. They buy stocks that subsequently experience ESG score increases. After ESG improvements have realized, demand from strict mandate investors pushes up stock prices, resulting in positive returns for flexible investors. These returns are higher when accompanied by rising climate sentiment, as seen during the 2010s. Our channel accounts for 51% of the return difference between strict and flexible ESG investment mandates.

Placement: Rotterdam School of Management

Theis Ingerslev Jensen

Areas of Interest: Empirical asset pricing, subjective expectations, machine learning

Job Market Paper: Subjective Risk and Return

I use subjective risk and return expectations to infer required returns, yielding three new findings for stocks, equity factors, and asset pricing models: (i) For individual stocks, the required compensation for risk is strongly positive. Nevertheless, the realized compensation for risk is weak due to offsetting excessive cash flow expectations for risky stocks. (ii) Required returns cannot explain the realized return of most equity factors. (iii) Recent empirical asset pricing models explain realized returns well but required returns poorly - while the reverse is true for traditional models like the CAPM.

Placement: Yale School of Management

2021/2022

Jakob Ahm Sørensen

Areas of Interest: Empirical asset pricing, macro-finance and corporate finance.

Job Market Paper: Risk Neglect in the Corporate Bond market

I present an equilibrium model for valuing corporate bonds and stocks to distinguish investors’ rational risk aversion from diagnostic expectations. Motivated by the model, I construct a novel empirical measure of credit market sentiment, denoted yield-for-risk, which measures the compensation investors require for credit risk in the cross-section of corporate bonds. I find evidence of diagnostic expectations in the form of risk neglect: Low yield-for-risk predicts low returns to credit and an inversion of the risk-return relationship among both corporate bonds and stocks. Firms exploit this effect by increasing their debt issuance when yield-for-risk is low, especially high-risk firms.

Placement: Bocconi University

Nicola Giommetti

Areas of Interest: asset pricing, valuation, and portfolio allocation with illiquid assets.

Job Market Paper: "Risk Adjustment of Private Equity Cash Flows"

Existing stochastic discount factor methods for the valuation of private equity funds result in unrealistic time discounting. We propose and evaluate a modified method. Valuation has a risk-neutral component plus a risk adjustment, and we fix the risk-neutral component by constraining the subjective term structure of interest rates with market data. We show that (i) our approach allows for economically meaningful measurement and comparison of risk across models, (ii) existing methods estimate implausible performance when time discounting is particularly degenerate, and (iii) our approach results in lower variation of performance across funds.

Placement:

2020/2021
	Benjamin Knox Personal website CV Areas of Interest: Asset Pricing, Insurance, Financial Intermediaries, FinTech, Monetary Policy Job Market Paper: "Asset-Driven Insurance Pricing" We develop a theory that connects insurance premiums, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model's key predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurance premiums are lower when expected investment returns are higher, both in the cross section of insurance companies and in the time series, and both for life insurance companies and the property and casualty industry. Consistent with a causal interpretation of these results, we find insurance premiums move similarly when investment returns change exogenously due to mergers. Placement: Federal Reserve Board in Washington

2020/2021

benjamin_knox

Benjamin Knox

Areas of Interest: Asset Pricing, Insurance, Financial Intermediaries, FinTech, Monetary Policy

Job Market Paper: "Asset-Driven Insurance Pricing"

We develop a theory that connects insurance premiums, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model's key predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurance premiums are lower when expected investment returns are higher, both in the cross section of insurance companies and in the time series, and both for life insurance companies and the property and casualty industry. Consistent with a causal interpretation of these results, we find insurance premiums move similarly when investment returns change exogenously due to mergers.

Placement: Federal Reserve Board in Washington

2019/2020
	Thomas Kjær Poulsen Personal website CV Areas of Interest: Asset pricing, Corporate Finance, Financial Economics Job Market Paper: "Does Debt Explain the Investment Premium?" The investment premium - the finding that firms with low asset growth deliver high average returns - is an integral part of recent factor models. I document empirically that the investment premium (1) reflects leverage, (2) does not exist among zero-leverage firms, and (3) increases with firms' refinancing intensities. This new evidence challenges prominent explanations of the investment premium including the q-theory of investment and behavioral finance. To explain the evidence, I develop a model in which firms make both optimal investment and financing decisions. The model shows that the investment premium reflects both leverage and refinancing intensities consistent with my empirical findings. Placement: BI Norwegian Business School

2019/2020

Thomas

Thomas Kjær Poulsen

Areas of Interest: Asset pricing, Corporate Finance, Financial Economics

Job Market Paper: "Does Debt Explain the Investment Premium?"

The investment premium - the finding that firms with low asset growth deliver high average returns - is an integral part of recent factor models. I document empirically that the investment premium (1) reflects leverage, (2) does not exist among zero-leverage firms, and (3) increases with firms' refinancing intensities. This new evidence challenges prominent explanations of the investment premium including the q-theory of investment and behavioral finance. To explain the evidence, I develop a model in which firms make both optimal investment and financing decisions. The model shows that the investment premium reflects both leverage and refinancing intensities consistent with my empirical findings.

Placement: BI Norwegian Business School

2018/2019
	Stine Louise Daetz Personal Website CV Areas of Interest: Debt and Fixed Income Markets; Credit, Liquidity and Systemic Risk; Monetary Policy and Central Banking; Corporate Finance Job Market Paper: "The Value of Bond Underwriter Relationships" We show that corporate bond issuers benefit from utilizing existing underwriter relationships when rolling over bonds, but at the same time become exposed to underwriter distress. A strong relationship enables the underwriter to credibly certify the issuer resulting in lower direct issuance costs and lower underpricing. However, if the underwriter becomes distressed, this spills over to the issuer's credit risk, because it weakens the relationship and increases the risk of involuntary relationship termination. The credit risk spillover is more pronounced for risky, opaque issuers with high rollover exposure, i.e., those issuers most in need of certification by an underwriter. Placement: Danmarks Nationalbank
	Niels Joachim Gormsen Personal Website CV Areas of Interest: Financial economics, Empirical asset pricing Primary Job Market Paper: “Time Variation in the Equity Term Structure” I document that the term structure of holding-period equity returns is counter-cyclical: it is downward sloping in good times, but upward sloping in bad times. This new stylized fact implies that long-maturity risk plays a central role in asset price fluctuations, consistent with theories of long-run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. I present the theoretical source of the puzzle and suggest a new model as a resolution. My model also shows that the counter-cyclical term structure has implications for real activity, which I verify empirically: in bad times, long-duration firms decrease their investment and capital-to-labor ratio relative to short-duration firms. Placement: University of Chicago (Booth)
	Christian Skov Jensen Personal Website CV Areas of Interest: Asset pricing, Fintech, Financial econometrics, Financial economics Job Market Paper: "Higher-Moment Risk" We show how the market's higher order moments can be estimated ex ante using methods based on Martin (2017). These ex ante higher order moments predict future realized higher order moments, whereas trailing realized moments have little predictive power. Higher-moment risks move together in the sense that skewness becomes more negative when kurtosis becomes more positive. In addition, higher-moment risk is high when volatility is low, suggesting that risk doesn't go away - it hides in the tails. Higher-moment risk has significant implications for investors; for example, the tail loss probability of a volatility-targeting investor varies from 3.6% to 9.7%, entirely driven by changes in higher-moment risk. We empirically analyze the economic drivers of these risks, such as financial intermediary leverage, market and funding illiquidity, and potential bubbles. Placement: Bocconi University Milan
	Andreas Bang Nielsen Personal Website CV Areas of Interest: Credit Risk, Foreign Exchange, Derivatives, Empirical Asset Pricing Job Market Paper: "Forward-Looking Currency Betas" I propose a model-free method to derive forward-looking betas to currency portfolios from cross-pair currency options. Using the dollar factor--an equal-weighted basket of foreign currencies against the U.S. dollar--as the systematic factor, I find that these option-implied betas are significantly better predictors of realized betas and currency excess returns compared to traditional rolling window betas. Constructing portfolios based on option-implied betas leads to a significantly positive relation between ex-ante betas and ex-post portfolio returns, whereas, there is an insignificant relation when historical betas are used. Furthermore, using the option-implied betas, I construct a measure for systematic volatility and provide evidence for a positive cross-sectional relation between returns to selling volatility derivatives and systematic volatility. Placement: Cornerstone Research (US)

2018/2019

Stine Louise Daetz

Areas of Interest: Debt and Fixed Income Markets; Credit, Liquidity and Systemic Risk; Monetary Policy and Central Banking; Corporate Finance

Job Market Paper: "The Value of Bond Underwriter Relationships"

We show that corporate bond issuers benefit from utilizing existing underwriter relationships when rolling over bonds, but at the same time become exposed to underwriter distress. A strong relationship enables the underwriter to credibly certify the issuer resulting in lower direct issuance costs and lower underpricing. However, if the underwriter becomes distressed, this spills over to the issuer's credit risk, because it weakens the relationship and increases the risk of involuntary relationship termination. The credit risk spillover is more pronounced for risky, opaque issuers with high rollover exposure, i.e., those issuers most in need of certification by an underwriter.

Placement: Danmarks Nationalbank

Niels

Niels Joachim Gormsen

Areas of Interest: Financial economics, Empirical asset pricing

Primary Job Market Paper: “Time Variation in the Equity Term Structure”

I document that the term structure of holding-period equity returns is counter-cyclical: it is downward sloping in good times, but upward sloping in bad times. This new stylized fact implies that long-maturity risk plays a central role in asset price fluctuations, consistent with theories of long-run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. I present the theoretical source of the puzzle and suggest a new model as a resolution. My model also shows that the counter-cyclical term structure has implications for real activity, which I verify empirically: in bad times, long-duration firms decrease their investment and capital-to-labor ratio relative to short-duration firms.

Placement: University of Chicago (Booth)

Christian

Christian Skov Jensen

Areas of Interest: Asset pricing, Fintech, Financial econometrics, Financial economics

Job Market Paper: "Higher-Moment Risk"

We show how the market's higher order moments can be estimated ex ante using methods based on Martin (2017). These ex ante higher order moments predict future realized higher order moments, whereas trailing realized moments have little predictive power. Higher-moment risks move together in the sense that skewness becomes more negative when kurtosis becomes more positive. In addition, higher-moment risk is high when volatility is low, suggesting that risk doesn't go away - it hides in the tails. Higher-moment risk has significant implications for investors; for example, the tail loss probability of a volatility-targeting investor varies from 3.6% to 9.7%, entirely driven by changes in higher-moment risk. We empirically analyze the economic drivers of these risks, such as financial intermediary leverage, market and funding illiquidity, and potential bubbles.

Placement: Bocconi University Milan

Andreas

Andreas Bang Nielsen

Areas of Interest: Credit Risk, Foreign Exchange, Derivatives, Empirical Asset Pricing

Job Market Paper: "Forward-Looking Currency Betas"

I propose a model-free method to derive forward-looking betas to currency portfolios from cross-pair currency options. Using the dollar factor--an equal-weighted basket of foreign currencies against the U.S. dollar--as the systematic factor, I find that these option-implied betas are significantly better predictors of realized betas and currency excess returns compared to traditional rolling window betas. Constructing portfolios based on option-implied betas leads to a significantly positive relation between ex-ante betas and ex-post portfolio returns, whereas, there is an insignificant relation when historical betas are used. Furthermore, using the option-implied betas, I construct a measure for systematic volatility and provide evidence for a positive cross-sectional relation between returns to selling volatility derivatives and systematic volatility.

Placement: Cornerstone Research (US)

2017/2018
	Sven Klingler Personal website CV Areas of Interest: Asset Pricing, Financial Frictions, Hedge Funds, Limits of Arbitrage Job Market Paper: High Funding Risk, Low Return I develop a simple model where hedge fund managers with a higher exposure to a common funding shock deliver lower subsequent returns. Empirically, I find that hedge funds with a higher loading on a simple funding risk measure generate lower returns than hedge funds with a lower loading on that measure. In line with the model predictions, I find that (i) this underperformance is driven by a high loading on adverse funding shocks, (ii) a higher loading on funding risk predicts lower fund flows, and (iii) the results are significantly weaker for funds that have a lockup provision. Placement: Assistant professor at BI Oslo
	Davide Tomio Personal website CV Areas of Interest: Market Microstructure, Asset Pricing, Empirical Finance Job Market Paper: Arbitraging Liquidity This paper shows theoretically and empirically how arbitrage activity contributes to the convergence of liquidity across markets. Based on simple arbitrage arguments, I show theoretically how arbitrageurs’ market and limit orders create a co-movement across markets of bid prices, ask prices, and bid-ask spreads. Empirically, I document how the intensity of arbitrage activity is related to the co-movement of market liquidity between securities linked by arbitrage. I focus on Canadian stocks cross-listed in the United States and also consider commonality across stocks and corporate bonds linked by capital structure arbitrage. Placement: Assistant professor at Darden School of Business, University of Virginia

2017/2018

Sven Klingler

Areas of Interest: Asset Pricing, Financial Frictions, Hedge Funds, Limits of Arbitrage

Job Market Paper: High Funding Risk, Low Return

I develop a simple model where hedge fund managers with a higher exposure to a common funding shock deliver lower subsequent returns. Empirically, I find that hedge funds with a higher loading on a simple funding risk measure generate lower returns than hedge funds with a lower loading on that measure. In line with the model predictions, I find that (i) this underperformance is driven by a high loading on adverse funding shocks, (ii) a higher loading on funding risk predicts lower fund flows, and (iii) the results are significantly weaker for funds that have a lockup provision.

Placement: Assistant professor at BI Oslo

Davide Tomio

Areas of Interest: Market Microstructure, Asset Pricing, Empirical Finance

Job Market Paper: Arbitraging Liquidity

This paper shows theoretically and empirically how arbitrage activity contributes to the convergence of liquidity across markets. Based on simple arbitrage arguments, I show theoretically how arbitrageurs’ market and limit orders create a co-movement across markets of bid prices, ask prices, and bid-ask spreads. Empirically, I document how the intensity of arbitrage activity is related to the co-movement of market liquidity between securities linked by arbitrage. I focus on Canadian stocks cross-listed in the United States and also consider commonality across stocks and corporate bonds linked by capital structure arbitrage.

Placement: Assistant professor at Darden School of Business, University of Virginia

2016/2017
	Kay Sun Park Personal website Areas of Interest: Empirical and Theoretical Corporate Finance, International Finance Job Market Paper: Capital Structure Redux: Maturity, Leverage, and Flexibility We investigate how a firm jointly determines the amount of debt and its maturity in a dynamic capital structure. We find a firm with high volatility of earnings optimally issues debts of shorter maturity which helps it maintain its financial flexibility. Using simultaneous equations of leverage and maturity regression, we find that higher leverage is led by shorter maturity. Our results support the dynamic capital structure model in which a firm decides its leverage as a trade-off between bankruptcy costs and tax benefits, as well as optimally adjusting the maturity of its debt by taking account of their financial flexibility versus the costs of new debt issuance. These findings can explain why financial institutions with high volatility of earnings before the 2007-2009 financial crisis had higher leverage as well as huge short-term financing. Placement: Research Fellow at Incheon Development Institute in South Korea
	Aleksandra Rzeźnik Personal website Areas of Interest: Empirical Asset Pricing, Liquidity, Institutional Investors, Real Estate Job Market Paper: Mutual fund flight-to-liquidity This paper examines the liquidity choices of mutual funds during times of market uncertainty. I find that when markets are uncertain, mutual funds actively increase the liquidity of their portfolio - often referred to as a ‘flight-to-liquidity.’ In aggregate, mutual fund behaviour has implications for the market; the market driven flight-to-liquidity places upward pressure on the liquidity premium. I examine the underlying mechanisms driving fund behaviour. I show that market volatility is associated with lower fund performance and withdrawals, which causes funds to adjust the composition of their portfolio towards more liquid assets in order to meet potential redemptions. This causal chain is consistent with Vayanos (2004), who argues that fund managers are investors with time-varying liquidity preferences due to threat of withdrawal. Aggregated over funds, the effect is substantial: a one standard deviation increase in my measure of flight-to-liquidity yields a 0.63 standard deviation increase in the excess return required for holding illiquid securities. Placement: Assistant professor at WU Vienna University of Economics and Business in Austria
	Desi Volker Personal website Areas of Interest: Financial economics, Macro-finance, Empirical asset pricing, Monetary economics, Fixed income Job Market Paper: Monetary Policy Uncertainty and Interest Rates This paper studies the effect of the uncertainty surrounding the future path of monetary policy on interest rates. I proxy uncertainty with the cross-sectional dispersion in one year ahead fed funds rate forecasts from survey data. Within a flexible dynamic term structure model with observable and latent factors, I provide evidence in support of a link between uncertainty and interest rate dynamics. In particular I show that: (i) uncertainty is an important contributor to the variation in conditional yield volatilities and has a slope effect on the volatility term structure; (ii) monetary policy uncertainty risk is priced and affects expected excess returns at short horizons; and (iii) it can be interpreted as a pure volatility risk factor as it is weakly spanned by the cross-section of yields Placement: Federal Reserve Bank of New York in the United States

2016/2017

Kay Sun Park

Areas of Interest: Empirical and Theoretical Corporate Finance, International Finance

Job Market Paper: Capital Structure Redux: Maturity, Leverage, and Flexibility

We investigate how a firm jointly determines the amount of debt and its maturity in a dynamic capital structure. We find a firm with high volatility of earnings optimally issues debts of shorter maturity which helps it maintain its financial flexibility. Using simultaneous equations of leverage and maturity regression, we find that higher leverage is led by shorter maturity. Our results support the dynamic capital structure model in which a firm decides its leverage as a trade-off between bankruptcy costs and tax benefits, as well as optimally adjusting the maturity of its debt by taking account of their financial flexibility versus the costs of new debt issuance. These findings can explain why financial institutions with high volatility of earnings before the 2007-2009 financial crisis had higher leverage as well as huge short-term financing.

Placement: Research Fellow at Incheon Development Institute in South Korea

Aleksandra Rzeźnik

Areas of Interest: Empirical Asset Pricing, Liquidity, Institutional Investors, Real Estate

Job Market Paper: Mutual fund flight-to-liquidity

This paper examines the liquidity choices of mutual funds during times of market uncertainty. I find that when markets are uncertain, mutual funds actively increase the liquidity of their portfolio - often referred to as a ‘flight-to-liquidity.’ In aggregate, mutual fund behaviour has implications for the market; the market driven flight-to-liquidity places upward pressure on the liquidity premium. I examine the underlying mechanisms driving fund behaviour. I show that market volatility is associated with lower fund performance and withdrawals, which causes funds to adjust the composition of their portfolio towards more liquid assets in order to meet potential redemptions. This causal chain is consistent with Vayanos (2004), who argues that fund managers are investors with time-varying liquidity preferences due to threat of withdrawal. Aggregated over funds, the effect is substantial: a one standard deviation increase in my measure of flight-to-liquidity yields a 0.63 standard deviation increase in the excess return required for holding illiquid securities.

Placement: Assistant professor at WU Vienna University of Economics and Business in Austria

Desi Volker

Areas of Interest: Financial economics, Macro-finance, Empirical asset pricing, Monetary economics, Fixed income

Job Market Paper: Monetary Policy Uncertainty and Interest Rates

This paper studies the effect of the uncertainty surrounding the future path of monetary policy on interest rates. I proxy uncertainty with the cross-sectional dispersion in one year ahead fed funds rate forecasts from survey data. Within a flexible dynamic term structure model with observable and latent factors, I provide evidence in support of a link between uncertainty and interest rate dynamics. In particular I show that: (i) uncertainty is an important contributor to the variation in conditional yield volatilities and has a slope effect on the volatility term structure; (ii) monetary policy uncertainty risk is priced and affects expected excess returns at short horizons; and (iii) it can be interpreted as a pure volatility risk factor as it is weakly spanned by the cross-section of yields

Placement: Federal Reserve Bank of New York in the United States

2015/2016
	Mamdouh Medhat Personal website Areas of Interest: Asset pricing, Asset pricing implications of corporate finance theory, Credit risk Job Market Paper: Liquidity Risk and Distressed Equity I show theoretically and empirically that solvency and liquidity can help rationalize low distressed equity returns. In my model, levered firms facing financing constraints optimally choose liquidity reserves and optimally default when insolvent. I find empirical evidence consistent with the model's predictions: (1) In all solvency levels, the average firm holds enough liquid assets to cover its short-term liabilities; less solvent firms have (2) a higher fraction of their total assets in liquid assets and therefore (3) lower conditional betas and (4) lower returns; (5) the profits of strategies are concentrated among low liquidity firms; and (6) the profits of liquidity strategies are concentrated among low solvency firms. My results suggest that solvency and liquidity are essential to understanding the distress puzzle. Placement: Assistant professor Cass Business School London

2015/2016

Mamdouh medhat

Mamdouh Medhat

Areas of Interest: Asset pricing, Asset pricing implications of corporate finance theory, Credit risk

Job Market Paper: Liquidity Risk and Distressed Equity

I show theoretically and empirically that solvency and liquidity can help rationalize low distressed equity returns. In my model, levered firms facing financing constraints optimally choose liquidity reserves and optimally default when insolvent. I find empirical evidence consistent with the model's predictions: (1) In all solvency levels, the average firm holds enough liquid assets to cover its short-term liabilities; less solvent firms have (2) a higher fraction of their total assets in liquid assets and therefore (3) lower conditional betas and (4) lower returns; (5) the profits of strategies are concentrated among low liquidity firms; and (6) the profits of liquidity strategies are concentrated among low solvency firms. My results suggest that solvency and liquidity are essential to understanding the distress puzzle.

Placement: Assistant professor Cass Business School London

Other PhD Placements

2023/2024
	Kristoffer Halskov Personal website CV Areas of Interest: Empirical Asset Pricing, Machine Learning, Climate Finance, Power Markets Job Market Paper: A Deep Structural Model for Empirical Asset Pricing This paper proposes a new type of modelling framework that use machine learning techniques to estimate the parameters of structural models: Deep Structural Models (DSMs). I implement a DSM with a simple Merton (1974) model as a foundation, and show that the DSM jointly estimates expected equity returns and (co)variances with higher predictive power than leading benchmark models. I form long-short and mean variance efficient portfolios with significantly higher average excess returns, alphas, and Sharpe ratios, compared to those formed on the basis of a state-of-the-art machine learning model. Economically, the DSM suggests that systematic risk compensation is the largest contributor to the average expected equity return of firms, while mispricing is the primary driver of the dispersion of expected returns. Finally, the DSM provides evidence that firm leverage is the main reason for an increased equity premium during economic recessions. Placement: Alipes Capital

2023/2024

Kristoffer Halskov