Alexandros Kostakis

On monetary policy and stock market anomalies

This study utilizes a macro-based VAR framework to investigate whether stock portfolios formed on the basis of their value, size and past performance characteristics are affected in a differential manner by unexpected US monetary policy actions during the period 1967-2007. Full sample results show that value, small capitalization and past loser stocks are more exposed to monetary policy shocks in comparison to growth, big capitalization and past winner stocks. Subsample analysis, motivated by variation in the realized premia and parameter instability, reveals that monetary policy shocks’ impact on these portfolios is significant and pronounced only during the pre-1983 period.

Dividend policy, managerial ownership and debt financing: A non-parametric perspective

This paper examines the relation between dividend policy, managerial ownership and debt-financing for a large sample of firms listed on NYSE, AMEX and NASDAQ. In addition to standard parametric estimation methods, we use a semi-parametric approach, which helps capture more effectively non-linearities in the data. In line with the alignment effect of managerial ownership, our results support a negative relationship between managerial ownership and dividends when managerial ownership is at relatively low levels. However, this negative relationship turns into a positive one at very high levels of managerial ownership. We also find that the nature of the relationship between managerial ownership and dividends may be more complex than it has been previously thought, and it also differs significantly across firms with different levels of debt/financial constraints. The results are consistent with the view that agency theory provides useful insights but cannot fully explain how firms determine their dividend policy.

Do Stock Returns Really Decrease with Default Risk? New International Evidence

This study constructs a unique dataset of bankruptcy filings for a large sample of non-U.S. firms in 14 developed markets and sheds new light on the cross-sectional relation between default risk and stock returns. Using the flexible approach of Campbell et al. (2008) to estimate default risk probabilities, this is the first study to offer conclusive evidence supporting the existence of an economically and statistically significant positive default risk premium in international markets. This finding is robust to different portfolio weighting schemes, data filters, sample periods and holding period definitions, and holds using both in-sample estimates of default probabilities during the period 1992-2010 and out-of-sample estimates during the period 2000-2010. We also show that the magnitude of the default risk premium is contingent upon a series of firm characteristics.

Risk-Neutral Skewness and Stock Outperformance

We examine whether the option market leads the stock market with respect to positive in addition to negative price discovery. We document that out-of-themoney (OTM) option prices, which determine the Risk-Neutral Skewness (RNS) of the underlying stock return’s distribution, can embed positive information regarding the underlying stock. A long-only portfolio of stocks with the highest RNS values yields significant positive alpha in the post-ranking week during the period 1996-2014. This outperformance is mainly driven by stocks that are relatively underpriced but are also exposed to greater downside risk. These findings are consistent with a trading mechanism where investors choose to exploit perceived stock underpricing via OTM options due to their embedded leverage, rather than directly buying the underlying stock to avoid exposure to its potential downside. Due to the absence of severe limits-to-arbitrage for the long-side, the price correction signalled by RNS is very quick, typically overnight.This study examines whether out-of-the-money (OTM) option prices, which determine the Risk-Neutral Skewness (RNS) of the underlying stock return distribution, contain information with respect to subsequent stock outperformance. A long-only portfolio containing the stocks with the highest values of RNS, or the biggest increases in RNS (∆RNS) relative to the previous trading day, yields significant risk-adjusted performance in the post-ranking week during the period 1996-2014. This outperformance is mainly driven by stocks that are relatively underpriced and are exposed to greater downside risk. These findings are consistent with a trading mechanism, according to which investors may choose to exploit perceived stock underpricing by buying (selling) OTM call (put) options due to their embedded leverage, rather than directly buying the underlying stock, to avoid exposure to its potential downside risk. In this case, the option market leads the stock market with respect to positive price discovery, but due to the absence of severe limits-to-arbitrage for the long-side, the price correction signalled by RNS is very quick, typically overnight. JEL classification: G12, G13, G14.

A Single-Factor Consumption-Based Asset Pricing Model

We propose a single-factor asset pricing model based on an indicator function of consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment-aversion preferences, and it is located approximately 1 standard deviation below the conditional mean of consumption growth. Our single-factor model can explain the cross section of expected returns for size, value, reversal, profitability, and investment portfolios at least as well as the Fama–French multifactor models. Our results show strong empirical support for asymmetric preferences and question the effectiveness of the smooth utility framework, which is traditionally used in consumption-based asset pricing.We propose a single-factor asset pricing model based on an indicator function of aggregate consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment aversion preferences, and it is located approximately one standard deviation below the conditional mean of consumption growth. Our single-factor model can sufficiently explain the cross-section of expected returns for various portfolio sorts as well as the premia of the five Fama and French (2015) factors. Overall, our results show strong empirical support for asymmetric preferences over gains and losses (first-order risk aversion), and question the effectiveness of the smooth utility framework (second-order risk aversion), which is traditionally used in consumption-based asset pricing.

Financial constraints and asset pricing: comprehensive evidence from London Stock Exchange

This study provides comprehensive evidence on the pricing of financial constraints (FC) risk on London Stock Exchange during the period 1988–2013. Utilizing a large number of proxies for FC, we find that investors are not compensated with higher premia for holding shares of financially constrained firms. To the contrary, in most of the cases, the most constrained firms significantly underperform, both statistically and economically, the least constrained ones. Focussing on the Whited–Wu index to construct a zero-cost FC factor that goes long the most constrained firms and sells short the least constrained ones, we find that this factor carries a significantly negative premium and it is priced in the cross-section over and above the commonly used risk factors.

Idiosyncratic Risk, Risk-Taking Incentives and the Relation Between Managerial Ownership and Firm Value

In addition to its well-documented alignment effect, managerial ownership can also have value-destroying effects by shifting risk to managers and encouraging risk-substitution; that is, managers with relatively unhedged personal portfolios tend to pass up profitable projects with high idiosyncratic (firm-specific) risk in favor of less-profitable projects that have greater aggregate (market) risk. Using parametric and semi-parametric estimation methods, we examine how managerial ownership influences firm value in light of the trade-off between the alignment and the risk-substitution effects. We find that risk-substitution offsets the alignment effect of managerial ownership in firms that are exposed to severe risk-substitution problems, leading to a weak (or non-existent) association between managerial ownership and firm value. We identify a plausible channel for these effects by showing that firms exposed to risk-substitution exhibit more “conservative” investment and financing policies. We also show that the risk-substitution problem is partially mitigated by the inclusion of stock options in managerial compensation packages. Finally, our findings suggest that semi-parametric methods may prove useful for future studies aiming at capturing nonlinear features in the data.

An Examination of Herding Behavior in REITS

This study examines the existence of herding effects in the US REITs market, constructing a survivorship-bias-free dataset of daily returns during the period January 2004-December 2009. Apart from documenting the existence of herding behavior by conducting comprehensive tests, we also explore new channels through which this may be intensified. Deterioration of investors’ sentiment and adverse macro-shocks to REITs funding conditions are found to be significantly related to the emergence of herding behavior. Contrary to common belief, however, the recent financial crisis did not seem to contribute to this phenomenon. Similarly, no asymmetric herding effects are documented during days of negative market returns.