Steve L. Slezak

An Equilibrium Model of Incentive Contracts in the Presence of Information Manipulation

A heat-assisted ammonium thioglycolate permanent waving system is provided in which heat-containing clamps applied to the hair to assist the action of the ammonium thioglycolate bring the hair up to hair waving temperature and maintain it at such temperature for no more than 6 minutes and in which the ammonium thioglycolate solution is weaker than is used in non-heat-assisted permanent waving for the same type of hair and stronger than has been used in prior heat-assisted permanent waving for the same type of hair.

Delegated Portfolio Management and Rational Prolonged Mispricing

This paper examines how information becomes reflected in prices when investment decisions are delegated to fund managers whose tenure may be shorter than the time it takes for their private information to become public. We consider a sequence of managers, where each subsequent manager inherits the portfolio of their predecessor. We show that the inherited portfolio distorts the subsequent managers incentive to trade on long-term information. This allows erroneous past information to persist, causing mispricing similar to a bubble. We investigate the magnitude of the mispricing. In addition, we examine endogenous information quality. In some cases, information quality increases when the managers expected tenure decreases.

The Optimal Portfolio Weight for Real Estate with Liquidity Risk and Uncertainty Aversion

In this paper we investigate the portfolio implications of liquidity costs and uncertainty aversion across asset classes. In many cases, financial securities such as equities trade in active markets in which equity owners can liquidate their holdings quickly and with little price concession. In contrast, real assets, such as commercial real estate, may take a substantial amount of time to sell and entail significant transactions costs. For this we focus on literature that considers the impact of uncertainty (as opposed to risk) on portfolio choice (Garlappi, Uppal, and Wang, RFS 2007), and extend this to include a measure of the liquidation costs of assets. In particular, our paper examines the optimal relative weight of real estate in a portfolio when both liquidity costs and the uncertainty regarding sample inputs are considered. We find large increases in the ex-post Sharpe ratio result when liquidity costs and uncertainty aversion are incorporated in portfolio selection relative to a naive portfolio that ignores liquidity costs and uncertainty.

Lottery Preferences and the Time Series Variation of the Idiosyncratic Volatility Puzzle

We investigate the empirical implications of investors’ heterogeneous preferences for skewness with respect to the idiosyncratic volatility (IVOL) puzzle (the negative correlation between idiosyncratic volatility and mean returns). We show that the IVOL puzzle is stronger: (1) within those stocks held primarily by agents with preference for lottery-like payoffs and, (2) during economic downturns, when the demand for lottery-like payoffs is high. These results support recent theories that suggest lottery preferences may be a significant source of the IVOL puzzle.

The Inevitable Tension between Long-Term and Short-Term Managerial and Investor Incentives

The paper considers a model in which (1) managers allocate effort to both short- and long-term projects, and (2) there is feedback between the managerial incentive contract and the number of speculators collecting information on each type of project. More weight placed on near-term price results in more speculation based on information about the short-term project, which induces further increases in the weight placed on near-term price. This feedback effect can result in short-term speculation crowding out the collection of long-term information, which in turn results in the withdrawal of incentives aimed at inducing effort in more profitable long-term projects. The paper shows that the equilibrium that obtains depends upon adjustment costs and initial conditions and will, in general, not be efficient. Such outcomes are consistent with concerns about managerial and investor short-termism recently expressed by public policy makers and market participants (e.g., the Aspen Institute). The paper considers the efficacy of various corporate and public policy remedies.

Is Idiosyncratic Risk a Source of Momentum

Recent studies reject the notion that momentum profits are compensation for risk by showing that momentum profits are mostly comprised of idiosyncratic components that cannot be risk (which, according to standard theory, must entail non-diversifiable systematic variation). Recent theoretical papers, however, show that idiosyncratic components of returns (in particular idiosyncratic risk) may affect risk premia. Using EGARCH-M, this paper estimates idiosyncratic risk and idiosyncratic risk premia at the individual security level and shows that idiosyncratic risk premia are responsible for between 70 and 90 percent of momentum profits. A closer examination shows that, although securities in the loser portfolio have higher levels of idiosyncratic risk than those in the winner portfolio (confirming other studies), the idiosyncratic risk premia in the loser portfolio are significantly less than those in the winner portfolio. Further supporting a link between idiosyncratic risk premia and momentum profits, we show that momentum portfolios formed by sorting on past idiosyncratic risk premia (rather than raw returns) generate significantly positive profits.