Andrew L. Detzel

The Asset-Pricing Implications of Government Economic Policy Uncertainty

Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ 2013 Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty EPU in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns 6.1% annualized. Furthermore, innovations in EPU earn a significant negative risk premium in the Fama-French 25 size-momentum portfolios. Among the Fama-French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities. This paper was accepted by Wei Jiang, finance.

Do Limits to Arbitrage Explain the Benefits of Volatility-Managed Portfolios?

We investigate whether transaction costs, arbitrage risk, and short-sale constraints explain the abnormal returns of volatility-managed equity portfolios. Even using five cost-mitigation strategies, after accounting for transaction costs, volatility management of common asset-pricing factors besides the market return generally produces zero abnormal returns and significantly reduces Sharpe ratios. In contrast, abnormal returns of the volatility-managed market portfolio are profitable after transaction costs and concentrated in the most easily arbitraged stocks, those with low arbitrage risk and short-sale constraints. Moreover, the managed-market strategy only provides superior performance when sentiment is high, consistent with prior theory that sentiment traders under-react to volatility.

Bitcoin: Learning, Predictability and Profitability via Technical Analysis

We document that 1to 20-week moving averages (MAs) of daily prices predict Bitcoin returns inand out-of-sample. Trading strategies based on MAs generate substantial alpha, utility and Sharpe ratios gains, and significantly reduce the severity of drawdowns relative to a buy-and-hold position in Bitcoin. We explain these facts with a novel equilibrium model that demonstrates, with uncertainty about growth in fundamentals, rational learning by investors with different priors yields predictability of returns by MAs. We further validate our model by showing the MA strategies are profitable for tech stocks during the dotcom era when fundamentals were hard to interpret. JEL classification: G11, G12, G14

There are Two Very Different Accruals Anomalies

We document that several well known asset-pricing implications of accruals differ for investment and non-investment-related components. Exposure to an investment-accruals factor explains the cross-section of returns better than the accruals themselves, and this factor’s returns are negatively predicted by sentiment. The opposite results hold for non-investment accruals. Further tests show cash profitability only subsumes long-term non-investment accruals in the cross-section of returns and economy-wide investment accruals negatively predict stock-market returns while other accruals do not. These results challenge existing accruals-anomaly theories and help resolve mixed evidence by showing that the anomaly is two separate phenomena: a risk-based investment accruals premium and a mispricing of non-investment accruals.

Monetary Policy Surprises, Investment Opportunities, and Asset Prices

I propose an asset pricing model with the market return and a mimicking portfolio for monetary policy shocks measured on days of FOMC announcements. This economically motivated two-factor model prices portfolios formed on size, value, momentum, investment, and operating profitability with an R2 of 80% and an average annual pricing error of 0.96%-performing as well as the standard four- and five-factor models designed to price these assets. These results are consistent with intertemporal asset pricing theory and recent evidence that monetary policy shocks have a large impact on asset prices via an impact on expected future aggregate returns.