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THOMAS_MAURER
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Research Papers:
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Pricing Shocks to Conditional Market Beta (with Bo Tang)
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Abstract: We estimate monthly conditional market beta of 10 momentum and 25 size and book-to-market portfolios between 1946 and 2016 using a multivariate GARCH model. In the ICAPM conditional market beta are important determinants of expected returns and covariances of assets. Thus, shocks to conditional market beta imply shocks to the investment opportunity set. We define shocks to conditional market beta as state variables, and document that they carry economically large and statistically significant risk premia. Moreover, we show that shocks to conditional market beta are related to but clearly distinct from the Fama-French-Carhart size, book-to-market and momentum factors.
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Incomplete Asset Market View of the Exchange Rate Determination (with Ngoc-Khanh Tran)
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Abstract: We resolve a long-standing quest to unite the dynamics of the exchange rate with that of country-specific pricing by establishing a necessary and sufficient condition for their unity. Assuming arbitrage-free and perfectly integrated international financial markets, the exchange rate is equal to the ratio of countries' stochastic discount factor projectors if and only if every exchange rate risk is singly traded in markets, i.e., exchange rate risks are completely disentangled. Therefore, exchange rate risk entanglement presents a novel conceptual rationale for the observed perplexing disconnection between the levels of international risk sharing implied by prices (smooth exchange rates) and by quantities data (low cross-country consumption correlations). Our study completely characterizes when and how the influential asset market view of the exchange rate does not pose strong implications on the exchange rate dynamics.
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Optimal Factor Strategy in FX Markets
Internet Appendix
(with Thuy-Duong To and Ngoc-Khanh Tran)
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Abstract: A mean-variance efficient currency trading strategy, which mimics the inverse of the minimum variance stochastic discount factor, earns a remarkable out-of-sample Sharpe ratio of 1.17 before and 0.91 after transaction costs. It substantially outperforms other popular currency strategies across diverse performance measures and sub-samples. Crash risk and popular pricing factors do not explain the superior performance. The strategy predicts future returns, market volatility and illiquidity. A pricing model with the strategy as a single factor outperforms and subsumes the popular ''Dollar''-''Carry'' two factor model and the downside risk and intermediary asset pricing factors. A key feature of the strategy is market timing, i.e., dynamic adjustments of its risk exposure in response to time variations in market prices of risk (but not necessarily market volatility), which enhances its unconditional Sharpe ratio.
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Entangled Risks in Incomplete FX Markets (with Ngoc-Khanh Tran)
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Abstract: We study the implications of risk entanglements on international financial (FX) markets. Risk entanglement is a refinement of incomplete markets that some risks in asset markets cannot be singly traded. We show that in FX markets with entangled risks (i) there exist multiple pricing-consistent exchange rates, (ii) every exchange rate is affected by idiosyncratic risks, and (iii) exchange rates can be smooth while stochastic discount factors (SDFs) are volatile and almost uncorrelated. These results are in stark contrast to the case of complete markets or incomplete markets without risk entanglements.
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Pricing Risks across Currency Denominations (with Thuy-Duong To and Ngoc-Khanh Tran)
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Abstract: We document a novel empirical regularity that investors in low interest rate countries earn substantially higher Sharpe ratios on identical carry trade strategies than investors in high interest rate countries. We further document that the exchange rate volatility markedly increases with the interest rate differential of the two currencies involved. These observations place new and significant restrictions on no-arbitrage models of international asset pricing. Our analysis naturally gives rise to a new non-parametric procedure to estimate country-specific stochastic discount factors (SDFs) from exchange rate data. In support of our approach, out of sample, the estimated SDFs sort linearly with national output gap fluctuations, and price risks in equity markets.
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The Collateral Value of Housing: Evidence from Servicemember Pension Choice (with Benjamin Bennett and Radhakrishnan Gopalan )
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Abstract: We evaluate the effect of personal characteristics and house prices on the choice made by servicemembers -- between 2001-09 -- among pension options that vary in the time-profile of cash flows. Servicemembers' personal discount rates (PDRs) vary through time and are larger during crisis years. Due to the collateral value of housing, an increase in house prices is associated with a lower propensity of servicemembers choosing immediate liquidity. The effect of house prices on pension choices is robust to controlling for macroeconomic factors including GDP growth, per capita income growth, changes in the state coincident index, unemployment rate, interest rates, stock returns and the net percentage of banks tightening loan standards.
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The Hirshleifer Effect in a Dynamic Setting (with Ngoc-Khanh Tran)
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Abstract: We analyze the value of public information in a competitive endowment economy with multiple consumption and trading dates. We provide a global result that early information releases are desired by all agents, if they disagree about the prospect of the economy and asset markets are complete. Moreover, under disagreements such that agents anticipate modest benefits from risk sharing and sufficiently large benefits from intertemporal consumption smoothing, all agents strictly prefer an early release of information even if they cannot trade in asset markets before the information arrives (incomplete asset markets). Therefore, the well-known Hirshleifer effect reverses in our dynamic setting.
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Public Information and Risk-Sharing in a Pure-Exchange Economy (with Ngoc-Khanh Tran)
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Abstract: We analyze whether the timing of public information releases affects risk-sharing and pricing in a pure exchange economy. Information releases do not matter if agents have time additive preferences, homogeneous beliefs and access to complete markets. In the case of heterogeneity in agents' beliefs, we are able to show analytically that early information releases are Pareto improving but pricing is essentially unaffected. In the case of recursive preferences we provide numerical results suggesting that early information releases improve risk-sharing, and if the EIS is large enough, they have a negative effect on the ex-ante equity premium.
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Asset Pricing Implications of Demographic Change
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Abstract: I solve an overlapping generations model featuring stochastic birth and death rates in general equilibrium. I provide sufficient conditions for the interest rate to be low and the equity premium high during times of high birth and low mortality rates. These qualitative results are consistent with the data. Demographic changes further explain a sizable term premium in long term bonds and a substantial time variation in the real interest rate, equity premium and conditional stock price volatility.
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Is Consumption Growth merely a Sideshow in Asset Pricing?
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Abstract: I study a parsimonious model of a time-varying market risk premium. State pricing is dominated by time preference shocks that may be independent of the consumption process. The model resolves several asset pricing puzzles and provides predictions for how the risk premium varies with measurable financial quantities like the price-earnings ratio and interest rates. Time preference shocks can generate a low level and volatility in the real interest rate and a high stock price volatility and equity premium. The price-earnings ratio has power to predict future stock returns and reveals information about unobservable financial quantities.
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Time Variation in Life Expectancy, Optimal Portfolio Choice and the Cross-Section of Asset Returns
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Abstract: I solve a portfolio optimization problem with stochastic death rates. An agent demands more of an asset that pays off high (low) in states of the world when he expects to live longer (shorter) than an asset with the opposite payoff. Consequently, in equilibrium, an asset with a positive correlation between its returns and changes in the life expectancy pays a lower expected return than an asset with a negative correlation. Empirical evidence supports the model. Out-of-sample evidence suggests that a trading strategy, which exploits the theoretical relationship, pays 3.25% annual unexplained returns according to the CAPM.
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Cointegration in Finance: An Application to Index Tracking
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Abstract: The purpose of this paper is to construct and test two different index tracking strategies - one based upon cointegration analysis of the price processes of assets (CIT strategy), and the other based on a market equilibrium and continuous time portfolio optimisation approach (MIT strategy). Within a broad empirical analysis it is found that both tracking strategies are able to track an index (FTSE100, DJ Industrial, DJ Composite Average) accurately, even if only a relatively small subset of constituent stocks is used. Thereby, it is also suggested that (particularly in the British stock market) the CIT strategy is preferred since there is some (out of sample) evidence indicating that log-price spreads between index and CIT tracking portfolio follow a stationary process. Moreover, regarding the attempt to perform simple enhanced indexation, no empirical evidence was found that would suggest that either of the two tracking strategies was suitable for such an approach.
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Assistant Professor
of Finance

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Contact Address:
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Simon Hall 210
Olin Business School
Washington University
in St. Louis
One Brookings Drive
St. Louis
MO 63130, USA
thomas.maurer@wustl.edu
Mobile: +1 314 629 1058
Skype: +41 33 533 2002
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