SSRN Author: Valery PolkovnichenkoValery Polkovnichenko SSRN Content
https://www.ssrn.com/author=294284
https://www.ssrn.com/rss/en-usSat, 21 Mar 2020 01:09:19 GMTeditor@ssrn.com (Editor)Sat, 21 Mar 2020 01:09:19 GMTwebmaster@ssrn.com (WebMaster)SSRN RSS Generator 1.0REVISION: On the (Im)Possibility of Estimating Expected Return from Risk-Neutral VarianceI investigate the possibility of estimating expected return on a stock from a linear equation with known coefficients using only risk-neutral variance of return and reach a negative conclusion. The formula is not viable because: (i) its coefficients are indeterminate (unknown) and are not identified jointly; (ii) its approximation error, when the relative risk aversion exceeds one, has the same order of magnitude as the expected excess return it is intended to estimate; (iii) it requires one-factor structure (perfect/high correlation) of the time-series of conditional idiosyncratic variances for all stocks, which is rejected empirically and is hard to justify theoretically. For some stocks, risk-neutral variance determines upper or lower bound on expected return, independently of the risk aversion in the underlying economy.
https://www.ssrn.com/abstract=3357656
https://www.ssrn.com/1877581.htmlFri, 20 Mar 2020 08:09:55 GMTREVISION: Composition of Cash Flow Shocks, Firm Investment, and Cash HoldingsWe empirically examine the effect of exposure to temporary and persistent cash flow shocks on firm investment and its link with cash holdings. Theoretical models demonstrate that an expectation channel drives a wedge between the investment effects of temporary and persistent cash flow shocks, and the channel is stronger for firms with more prominent persistent shocks. We identify temporary and persistent cash flow shocks for individual firms using filtering methods and find strong evidence of the expectation channel as well as the predicted cross-sectional variation in its strength. Our results underscore the importance of distinguishing between persistent and temporary cash flow shocks in the analyses of corporate policies.
https://www.ssrn.com/abstract=2852545
https://www.ssrn.com/1842533.htmlMon, 18 Nov 2019 10:16:31 GMTREVISION: The Long and Short of Cash Flow Shocks and Debt FinancingWe investigate how debt financing responds to exposure to long-lived and temporary cash flow shocks. We identify these shocks using filtering methods that we demonstrate are highly effective for corporate finance data using Monte-Carlo simulations. The long-lived and temporary shocks we identify for our sample of US firms have distinct economic roots. Consistent with predictions from theoretical models, we find that firms with higher relative exposure to long-lived cash flow shocks maintain higher leverage. Firms also issue more debt following cash flow increases arising from long-lived as opposed to temporary shocks. This link between cash flow shocks and debt financing is economically large and long-lived. It is primarily driven by profitable firms and stronger among less financially constrained firms.
https://www.ssrn.com/abstract=3222960
https://www.ssrn.com/1842532.htmlMon, 18 Nov 2019 10:15:33 GMTREVISION: On the (Im)Possibility of Estimating Expected Return from Risk-Neutral VarianceI investigate the possibility of estimating expected return on a stock from a linear equation using only risk-neutral variance of return, as proposed recently by Martin and Wagner (2019), and reach a negative conclusion. Such linear equations have indeterminate coefficients and are identified by setting arbitrary slope or intercept. Risk-neutral variance is a sufficient statistic for expected return under the additional strong and unconventional restrictions on the cross-section and time-variation of certain second moments of returns. Empirical tests strongly reject an integral component of these restrictions as well as their direct implication of stock-specific constant intercepts. For some stocks, risk-neutral variance determines upper or lower bound on expected return, independently of the risk aversion in the underlying economy. Combining moments under the risk-neutral and physical distribution, rather than relying on one type exclusively, appears to be a promising path forward ...
https://www.ssrn.com/abstract=3357656
https://www.ssrn.com/1842530.htmlMon, 18 Nov 2019 10:13:23 GMTNew: Ambiguity Aversion and Portfolio Efficiency TestsTesting portfolio alpha against a linear factor model can be interpreted as a mean-variance efficiency test of the optimal portfolio of factors. For ambiguity neutral investor, adding active portfolio with statistically significant alpha always implies efficiency gain relative to the optimal portfolio of factors. In contrast, for ambiguity averse investor, the efficiency gain must be above a threshold which depends on the uncertainty about the factors' and active portfolio's expected returns. Building on the theoretical framework developed in Garlappi, Uppal and Wang (2007), we propose a new method to test portfolio efficiency relative to a factor model by using asset exclusion conditions from the optimal portfolio of the ambiguity averse investor. The asset exclusion threshold is an F-statistic that is non-redundant with significance of alpha under the ambiguity-neutral test. Active portfolios with statistically significant alpha but weak efficiency gain may be excluded from the ...
https://www.ssrn.com/abstract=3357088
https://www.ssrn.com/1780846.htmlThu, 18 Apr 2019 15:41:25 GMTREVISION: On the (Im)Possibility of Estimating Expected Return from Risk-Neutral VarianceLinear equations for expected return on a stock in terms of risk-neutral variance of return form a continuum with indeterminate coefficients. The equations can be identified by setting arbitrary slope or intercept. Risk-neutral variance is a sufficient statistic for expected return under the additional strong restrictions on the cross-section and time-variation of certain second moments of returns. Empirical tests strongly reject an integral component of these restrictions as well as their direct implication of stock-specific constant intercepts, casting doubt on general feasibility of estimating expected returns solely from risk-neutral variances. For some stocks, risk-neutral variance determines upper or lower bound on expected return, independently of the risk aversion in the underlying economy. Combining moments under the risk-neutral and physical distribution, rather than relying on one type exclusively, appears to be a promising path forward.
https://www.ssrn.com/abstract=3357656
https://www.ssrn.com/1780845.htmlThu, 18 Apr 2019 15:37:28 GMT