Asset Pricing: Portfolio Choice and Asset Allocation
Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)
- Chair: Russell Wermers, University of Maryland
Tactical Target Date Funds
AbstractWe propose target date funds modified to exploit
stock return predictability driven by the variance risk premium. The
portfolio rule of these tactical target date funds (TTDFs) is extremely
simplified relative to the optimal one, making it easy to implement and
communicate to investors. We show that saving for retirement in TTDFs
generates economically large welfare gains, even after we introduce turnover
restrictions and transaction costs, and after taking into account parameter
uncertainty. Crucially, we show that this predictability is uncorrelated
with individual household risk, confirming that households are in a prime
position to exploit it.
Reach for Yield by United States Public Pension Funds
AbstractThis paper studies whether U.S. public pension funds reach for yield by taking more investment risk in a low interest rate environment. To perform our analysis, we first present a simple theoretical model relating funds’ risk-taking behavior to the level of risk-free rates, the extent of their underfunding, and the fiscal condition of their state sponsors. To test the model implications empirically, we create a new methodology for inferring funds’ risk from limited public information on their annual returns and portfolio weights for the interval 2002-2016. In order to better measure the extent of underfunding, we revalue funds’ liabilities using discount rates that better reflect their risk. In line with our model implications, we find that funds on average took more risk when risk-free rates were lower. This was the case especially for funds that were more underfunded or affiliated with state or municipal sponsors with weaker public finances. We estimate that up to one-third of the funds’ total risk was related to underfunding and low interest rates at the end of our sample period.
When Can the Market Identify Old News?
AbstractWhy do investors react to old information? We provide survey evidence to experimentally document that active finance professionals are more susceptible to old information when it comes as a recombination of content from multiple sources. To evaluate the market implications of this mechanism, we exploit a comprehensive dataset of news passing through the Bloomberg terminal. Recombination of old information prompts larger price moves and subsequent reversals than direct reprints of old stories. Furthermore, while overall reactions to old information have declined over time, differential reactions to recombination stories have risen. Altogether, we document investors' increased sophistication in discarding simple reprints but continuing susceptibility to recombination of old information.
University of New Brunswick
University of Chicago
U.S. Office of Financial Research
University of Waterloo
- G1 - General Financial Markets