Stefanos Delikouras

Geography of Firms and Propagation of Local Economic Shocks

We use information from 10-K filings to identify economic connections among U.S. states. These connections provide a measure of economic distance that does not merely reflect physical proximity or industry connections. At the firm level, there is excess comovement in the returns and liquidity of firms headquartered in economically connected states. At the aggregate level, the economic connections create spillover effects whereby economic shocks in a state affect its connected states and the U.S. economy. For example, a one percent production shock in California (Texas) is related to a 6.71 (5.62) percent change in annual U.S. GDP growth, relative to the average GDP growth. Collectively, the network of publicly-traded firms generates a channel that facilitates the propagation of local shocks across the U.S. economy.

Where's the Kink? Disappointment Events in Consumption Growth and Equilibrium Asset Prices

I propose a consumption-based asset pricing model with disappointment aversion to investigate the link between downside consumption risk and expected returns across asset markets. I find that the disappointment model can explain 95% of the cross-sectional variation in size/book-to-market portfolios and more than 80% of the variation in the joint sample of stocks, bonds, and commodity futures. I also show that the performance of the disappointment model is comparable to that of the Fama-French three-factor specification, regardless of the sample frequency (annual, quarterly). Overall, my results indicate that disappointment aversion considerably improves the fit of consumption-based asset pricing models.Received November 27, 2014; editorial decision September 18, 2016 by Editor Stefan Nagel.

Under-Reaction to Political Information and Price Momentum

This study examines whether momentum in stock prices is induced by changes in the political environment. We find that momentum profits are concentrated among politically sensitive firms and industries. During the 1939 to 2011 period, a trading strategy with a long position in winner portfolios (industries or firms) that are politically unfavored and a short position in losers that are politically favored eliminates all momentum profits. Further, our political sensitivity based factor (POL) explains 23-25% (38-40%) of monthly stock (industry) momentum alphas, and generates large increases in time-series R2s for the momentum factor. This incremental explanatory power is especially strong around Presidential elections when the level of political activity is high. Collectively, our results suggest that investor underreaction to political information generates momentum in stock and industry returns.

Do Dollar-Denominated Emerging Market Corporate Bonds Insure Foreign Exchange Risk?

Dollar-denominated emerging market debt is marketed to investors as a way of exposing investors emerging market fixed income securities without exposure to exchange rate risk. However, the development literature suggests that dollarization of debt leads to increased probability of financial distress, which would indirectly expose these securities to exchange rate risk. We empirically examine the exposure of dollar-denominated corporate bonds to exchange rate risk in 14 emerging markets. We find that nearly three-fourths of bonds have yield spreads with statistically significant exposure to innovations in exchange rates, exchange rate volatility, or both. In a reduced-form bond pricing model with default risk, we find economically significant exposures of credit spreads to exchange rates and exchange rate volatility.

Income Hedging, Dynamic Style Preferences, and Return Predictability

We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. Then, we show that the aggregate HML demand predicts HML returns. Exploiting the state-level variation in income risk, we demonstrate that state-level hedging demands predict state-level HML returns. A long-short portfolio that exploits this hedging-induced predictability earns an annualized risk-adjusted return of 6%.

Consumption-Income Sensitivity and Portfolio Choice

Contrary to the predictions of traditional life-cycle models, households do not engage in perfect consumption smoothing. Similarly, weak evidence of income hedging runs against standard portfolio theory. We link these two puzzles by proposing a model in which investors derive utility from consumption and income status. In contrast to the traditional life-cycle model, status conscious investors use financial assets to either over- or under-hedge income fluctuations, depending on whether they treat consumption and status as complements or substitutes. We confirm the predictions of the status preference model using data from the PSID, and find that status preferences empirically affect the income hedging motive in household portfolio decisions.

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.

Status Preferences, Consumption-Income Sensitivity, and Portfolio Choice

Contrary to the predictions of traditional life-cycle models, households do not engage in perfect consumption smoothing. Similarly, weak evidence of income hedging runs against standard portfolio theory. We link these two puzzles by proposing a model in which investors derive utility from consumption and income status. In contrast to the traditional life-cycle model, status conscious investors use financial assets to either over- or under-hedge income fluctuations, depending on whether they treat consumption and status as complements or substitutes. We confirm the predictions of the status preference model using data from the PSID, and find that status preferences empirically affect the income hedging motive in household portfolio decisions.

License to Spend: Consumption-Income Sensitivity and Portfolio Choice

Contrary to the predictions of traditional life-cycle models, households do not engage in perfect consumption smoothing. Similarly, weak evidence of income hedging runs against standard portfolio theory. We link these two puzzles by proposing a model in which investors derive utility from consumption and income status. In contrast to the traditional life-cycle model, status conscious investors use financial assets to either over- or under-hedge income fluctuations, depending on whether they treat consumption and status as complements or substitutes. We confirm the predictions of the status preference model using data from the PSID, and find that status preferences empirically affect the income hedging motive in household portfolio decisions.

Consuming, Saving, and Spending Most of Income

This paper extends the traditional life-cycle hypothesis to allow for rewards from consumption and savings. In the new model, the utility function depends both on consumption and savings, resulting in differing marginal propensities to consume (DMPC) from current income, current wealth, and future income. Specifically, consumption is financed mostly by current income. The model explains various empirical regularities not captured by the traditional life-cycle model including the hypersensitivity of consumption to current income shocks, and the drop in individual consumption at the time of retirement.